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Eradication of infectious diseases involves reducing worldwide incidence to zero, thereby obviating the need for further control measures. Elimination of infectious diseases involves reducing morbidity to a level at which they are no longer considered major public health problems. Elimination still requires a basic level of control and surveillance. Global disease eradication and elimination campaigns are initiated, primarily by WHO, to concentrate and mobilize resources from both affected and donor countries. WHO provides recommendations for disease eradication and elimination to its governing body, the World Health Assembly, based on two general criteria--scientific feasibility and the level of political support by endemic and donor countries. Formal campaigns were initiated for dracunculiasis and leprosy in 1991, and for polio and lymphatic filariasis in 1988 and 1997, respectively. Regional or subregional campaigns are also underway against measles, onchocerciasis, and Chagas' disease. Disease eradication and elimination efforts are normally implemented by national governments of the affected countries. Developing countries typically receive assistance from bilateral and multilateral donors, nongovernmental organizations, and the private sector. Developing costs and time frames for these efforts is difficult due to challenges in gathering and verifying data from countries with minimal health infrastructure. Unpredictable and unstable country conditions, such as civil unrest, further complicate efforts to project how much these efforts will cost and how much time is needed. The appendix at the end of this statement provides a breakdown of costs and time frames for eradicating or eliminating each disease. WHO's cost and time frame estimates, with the exception of measles, addressed all five of the relevant factors. However, the completeness of the data underlying the estimates varies by disease. Generally, estimates for those diseases with long-standing eradication or elimination campaigns are more complete, as the underlying data are based on actual experience in endemic countries. For the other diseases, WHO is still gathering data and refining its assumptions. Estimates for diseases with target dates of 5 years or longer are more speculative due to incomplete data and the difficulty in predicting sustained commitment and stable country conditions. We will briefly discuss the estimates for each disease and the barriers to be overcome. WHO's cost estimate of $40 million for eradicating dracunculiasis included data on each of the five key factors and appears to be sound. Community-based programs to control this disease have been underway since 1980. Continuing civil unrest in some endemic areas of Africa precluded meeting the original 1995 target date for eradication. WHO now expects that all countries except Nigeria and Sudan will be free of dracunculiasis by 2005 at the latest, assuming safe access and appropriate funding. WHO's cost estimate includes certification costs that will continue until 2011. The Centers for Disease Control and Prevention (CDC) and officials from the Carter Center believe that some country-level eradication goals may be met even sooner than WHO estimated. The main barrier to eradication is ongoing civil strife in the endemic region. Experts also point to the need for continued national and donor support. WHO's cost estimate of $1.6 billion for eradicating polio is generally sound. It includes well-developed data on all five factors based on experience in controlling the disease. Many countries began polio vaccinations in the 1970s and 1980s. Most experts agreed that global interruption of the wild polio virus will occur by 2002 or shortly thereafter. Global certification is to take place about 3 years after the last case is reported--probably around 2005. However, some experts have raised concerns about the ability of less developed countries to maintain the required level of polio vaccinations and surveillance until eradication is achieved. In addition, WHO is concerned about the ability of some countries to detect and report acute flaccid paralysis, a key component of polio surveillance. According to WHO, unless sufficient resources are mobilized to improve detection capability, eradication cannot be certified. WHO's cost estimate of $225 million for eliminating leprosy includes well-developed data on all key elements and appears to be sound. The current elimination strategy is based on the multidrug therapy begun in 1981. Endemic countries have made great progress toward eliminating leprosy since that time, but some challenges remain. WHO noted that it is possible that some countries with concentrated pockets of leprosy might need to continue campaigns beyond the target year 2000 to reach the global leprosy elimination target of less than 1 case per 10,000 people. In addition, ongoing civil strife in endemic areas and difficult country conditions may preclude meeting all targets. Also, since leprosy patients are often ostracized and hidden, case identification is difficult. However, experts generally agreed that WHO's cost and time frame estimates appeared reasonable. WHO's estimate of $4.9 billion for global measles eradication by 2010 is speculative. While vaccine costs are well known, we found several areas in which the current estimates may be low or based on incomplete data. Essentially, data are incomplete regarding the number of children to be vaccinated, administrative costs, the number of mass campaigns that may be needed, and the costs of surveillance in less developed countries. Finally, the estimate does not include certification costs. WHO officials noted that they used information from their previous experience with polio eradication in developing the measles estimate. The vaccine administration and surveillance costs for polio are adjusted upward to account for difficulties in administering an injectable rather than an oral vaccine. Many international health experts believe that measles is the next candidate for a formal global eradication effort, pointing to some successes in controlling measles in the Americas as well as support from developing countries where measles is a major cause of mortality among children. However, experts also point out that there are some challenges to eradicating measles by 2010. Measles is highly contagious, requiring higher routine vaccination rates than smallpox and polio. In addition, outbreaks can occur even in areas of high routine vaccination coverage. Furthermore, costly mass campaigns are necessary to catch those still susceptible after routine vaccination because the vaccine is not 100-percent effective. Finally, some industrialized countries do not perceive measles to be a major public health problem and have not initiated measles elimination efforts. More than half of the estimated cost of measles eradication is expected to be incurred by developed countries. WHO and CDC estimate the cost of eradicating measles in less developed countries at up to $1.8 billion. WHO's estimate of $143 million for eliminating onchocerciasis is speculative. It incorporates data on all key cost elements, but data on the size of the target population are incomplete. The control programs for West Africa and Latin America have been ongoing for a period of time and are likely to reach their elimination targets within or near the costs and target dates estimated by WHO. However, WHO is still mapping disease prevalence for the 19 African countries in the most recent control program. WHO's earlier estimates may have underestimated the population eligible for treatment upon which the cost and time frame estimates were based. For example, the latest estimate for those to be treated in this area is 42 million, compared to the original estimate of 35 million. Also, WHO does not yet have a reliable estimate on the number to be treated in the Democratic Republic of the Congo (formerly Zaire). Although WHO included data on all cost factors, the $391 million estimated for eliminating Chagas' disease is speculative for two reasons--not all countries have submitted estimates, and countries that are targeted for elimination of Chagas' disease by 2010 only submitted estimates through 2005. The first regional program began in the southern portion of South America in 1991. Data from this region are more complete, and the program appears to be on track for completion by 2005. However, the efforts in the Central American and Andean countries only began last year and are targeted for completion by 2010. Costs and time frames in these countries are less certain because three countries have not submitted cost estimates or prevalence and incidence data, and all countries submitted cost data only through 2005. The $228 million estimated for eliminating lymphatic filariasis is very speculative. While all cost factors were addressed in the estimates, the data are very preliminary. WHO has limited historical data on costs because formal campaigns have only recently begun in some of the 73 countries in which lymphatic filariasis is known to be endemic. Also, WHO has not yet completed its assessments to establish the number of people to be treated in endemic countries and to determine whether there are other endemic countries. The United States currently spends about $391 million a year on these diseases. This includes about $300 million on polio and measles prevention programs and leprosy treatment in the United States and about another $91 million abroad for all the diseases under discussion except leprosy. Most of this amount would be saved if eradication and elimination goals were met and efforts to combat the diseases were ceased or reduced. The overall savings to the United States if polio were eradicated are estimated to be at least $304 million a year. This includes about $230 million in public and private expenditures--including administration--for controlling polio within U.S. borders and about $74 million for the global eradication efforts. CDC estimates that an additional $20 million will be spent in the United States each year due to a 1996 CDC recommendation to administer two doses of the more expensive injectable vaccine before the two doses of oral vaccine. The overall savings to the United States as a result of eradicating measles are estimated at about $61.7 million a year, including about $50 million for domestic vaccine costs and about $11.7 million for global measles efforts. The $50 million only includes the cost of the vaccine and not administration expenses. Immunization against measles is included in the vaccine for mumps and rubella, and the United States would continue administering the mumps and rubella vaccine even if measles were eradicated. Additional savings would be realized from preventing periodic measles epidemics in the United States. CDC estimates that the last measles epidemic of 1989-1991 cost $150 million. The United States spends about $25 million a year for the other five diseases. The U.S. Department of Health and Human Services spends about $20 million a year to treat a small number of leprosy patients in the United States. The U.S. Agency for International Development (USAID) funds the dracunculiasis effort at $500,000 a year and the onchocerciasis control programs at $3.5 million a year. CDC spends more than $1 million for overseas efforts against dracunculiasis, Chagas' disease, and lymphatic filariasis. The United States does not currently track domestic costs related to Chagas' disease. However, U.S. blood banks may begin screening donated blood for the disease due to a significant number of infected Latin American immigrants in certain areas. An American Red Cross official estimated that this would cost about $25 million a year. International public health experts identified several diseases that pose health threats to the United States and that are technically possible to eradicate with existing vaccines: rubella, mumps, hepatitis B, and Hib. CDC suggested rubella and mumps could be considered as part of the measles eradication effort, since vaccinations against all three are often administered in one trivalent shot. CDC estimated that the United States spends about $255.5 million a year in administering this vaccination. Rubella is considered a significant health burden in the form of birth defects and is being discussed as an eradication initiative for the Americas. However, health experts generally believe that the costs to eradicate mumps would be difficult to justify because the global burden is considered low. The primary challenges in eradicating rubella and mumps are diagnostic difficulties and the additional costs that would be incurred. Hepatitis B is considered a possible candidate because the vaccine is effective and relatively inexpensive, and a good diagnostic tool is available. Hepatitis B is viewed as a major public health threat, causing almost 1.2 million deaths per year, usually from liver cancer or chronic liver disease. CDC estimates that the U.S. public and private sectors spend from $308 million to $383 million a year for hepatitis B vaccines alone. The major barrier to an eradication initiative is that some people are chronic carriers and would have to die before the disease could be considered eradicated. Hib is a bacterial infection that is the most common cause of childhood meningitis. About 400,000 to 700,000 children in developing countries die each year from the disease. U.S. public and private sectors spend about $162 million a year on Hib vaccines. According to CDC, Hib has potential for eradication, but more needs to be known about the vaccine before this disease could be an eradication candidate. WHO told us that rubella, hepatitis B, and Hib could be eventual candidates for eradication due to their associated public health burdens and the success in controlling these diseases in some parts of the world. However, they noted that, due to the high costs associated with eradication efforts, it is important to limit the number of ongoing efforts, and they do not support adding campaigns at this time. As the first and only disease to be eradicated through human intervention, smallpox is used as evidence that disease eradication is technically feasible. According to some experts, the smallpox effort yielded lessons that have since been applied to other efforts, such as the role of surveillance and the ability to garner resources for massive campaigns. It also showed that eradication can be cost-effective. Using 1967 estimated smallpox costs as a baseline measure and adjusting for annual birth rates, we estimated the cumulative present value global savings in 1997 dollars for the period 1978-1997 at $168 billion. For the United States, cumulative savings from smallpox eradication are estimated at almost $17 billion. The United States spent about $610 million in 1997 dollars for domestic smallpox control in 1968 and about $130 million in 1997 dollars during 1968-1977 on the overseas eradication effort. We estimated the annual real rate of return for the United States at about 46 percent a year since smallpox was eradicated. Smallpox had characteristics that experts consider desirable for eradication. The disease was easily diagnosed, and all infection resulted in visible symptoms. The vaccine was effective in only one dose, stable in heat, and inexpensive. Polio and measles share many of the desirable eradication characteristics of smallpox. Both diseases are caused by viral agents, are found only in humans, and have effective interventions available that provide long-lasting immunity. However, certain differences exist that may limit the usefulness of smallpox as a model for other eradication efforts. Smallpox was less infectious than either polio or measles and required less immunization coverage. Polio and measles require mass campaigns in addition to routine coverage to interrupt virus transmission. Polio and measles are also difficult to diagnose without laboratory confirmation. The vast majority of polio infections show no symptoms, and the typical paralytic manifestations of polio can be due to other causes. Dracunculiasis differs from smallpox in that is a parasitic disease and not vaccine preventable. However, like smallpox, it is vulnerable to eradication because the interventions are inexpensive and effective, and the infection is easily diagnosed. Mr. Chairman, this concludes our prepared remarks. 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Pursuant to a congressional request, GAO discussed the World Health Organization's (WHO) estimates for eradicating or eliminating seven infectious diseases--dracunculiasis, polio, leprosy, measles, onchoceriasis, Chagas' disease, and lymphatic filariasis--worldwide, focusing on: (1) the soundness of WHO's cost and timeframe estimates; (2) U.S. spending related to these diseases in fiscal year 1997 and any potential cost savings to the United States as a result of eradication or elimination; (3) other diseases that international health experts believe pose a risk to Americans and could be eventual candidates for eradication; and (4) U.S. costs and savings from smallpox eradication and whether experts view smallpox eradication as a model for other diseases. GAO noted that: (1) WHO and other experts it contacted generally agreed on five factors necessary to estimate the cost of eradicating or eliminating a disease: (a) product costs; (b) information on disease incidence, prevalence, and the size of the target populations; (c) administrative and delivery costs; (d) disease monitoring and surveillance costs; and (e) primarily for eradication, the costs of certifying that countries are free of the disease; (2) GAO focused its assessment on the accuracy and completeness of the underlying data for these five factors; (3) WHO's estimates and GAO's analysis did not include an assessment of opportunity or indirect costs that may be incurred as a result of eradication campaigns; (4) the soundness of WHO's cost and timeframes varied by disease; (5) generally, the estimates were most sound for those diseases closest to meeting eradication or elimination goals, including dracunculiasis, polio, and leprosy; (6) estimates for these three diseases were based on firm data about target populations and intervention costs from ongoing initiatives; (7) for the other diseases, WHO's estimates are more speculative because underlying data are incomplete or unavailable; (8) WHO officials acknowledged this fact and said that estimates are continuously revised as better data become available; (9) the United States spent about $391 million in 1997 to combat these diseases; (10) the United States spent $300 million on polio and measles prevention and on leprosy treatment in this country; (11) about another $91 million went for overseas programs, primarily the polio eradication campaign; (12) savings to the United States from eradicating or eliminating these diseases would result primarily from not having to vaccinate U.S. children against polio and measles; (13) experts GAO contacted identified four other diseases that pose health threats to the United states and could be possible candidates for eradication; (14) WHO told GAO that, while it may be technically possible to eradicate these diseases with existing vaccines, the international community cannot support too many eradication initiatives at one time; (15) the United States has saved almost $17 billion as a result of the eradication of smallpox in 1977; (16) the savings were due to the cessation of vaccinations and related costs of surveillance and treatment; (17) experts generally agreed that the primary lesson from smallpox is that a disease can actually be eradicated; and (18) however, smallpox had unique characteristics that made it particularly vulnerable to eradication and therefore has limitations as a model for current efforts.
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An underground storage tank is defined as a tank and any underground piping connected to the tank that has at least 10 percent of its combined volume underground. When the UST program was established, Congress and EPA excluded about 2 million tanks meeting this definition from coverage based upon their size, content, location, or regulation under other programs or laws. For example, certain tanks used to store heating fuel or small tanks used on farms and residences were excluded. Under EPA's UST program, a tank owner must notify a designated state or local agency of any tank storing petroleum or hazardous substances. EPA and the states track and regulate these underground tanks, updating its databank as new tanks become active. Most regulated tanks store fuel for vehicles and are located at gas stations. Although tank owners and operators are ultimately responsible for cleaning up contamination from leaks, the Congress created a trust fund in 1986 to help EPA and the states cover cleanup costs which tank owners and operators could not afford or were reluctant to pay. In instances where owners and operators would not pay, EPA or the relevant state could proceed with the cleanup and later seek reimbursement from the owners and operators. EPA derives about $70 million annually from the trust fund, most of which it distributes to states to implement its cleanup program. The trust fund is replenished primarily by revenue generated from a $0.001 per gallon tax on gasoline, diesel, and aviation fuel. At the end of fiscal year 2000, the balance in the fund was about $1.5 billion. States receiving support from the trust fund must spend it on cleanup and related activities, and cannot use the money for inspections or enforcement of leak detection and prevention requirements. States can keep any reimbursements from owners and operators for states' cleanup costs and use these extra funds on future cleanups. EPA also awards states annual grants of about $187,000 each to help states cover some of the program's inspection and enforcement costs, and spends about $6 million annually on its own headquarters and regional program implementation, management, and oversight activities. In addition to setting equipment requirements for active tanks, EPA has established operational and maintenance requirements to help ensure that these tanks remain safe. These requirements specify actions that tank owners and operators are to take to prevent the spills, overfilling, and corrosion that typically cause leaks, such as periodic system testing. EPA has taken further steps to improve the UST program. For example, in recent years, MTBE --a gasoline additive designed to reduce emissions and raise octane--has been detected with increasing frequency in groundwater used for drinking water supplies. MTBE is a potential carcinogen and the effects of exposure include headaches, eye, nose and throat irritation, cough, nausea, dizziness, and disorientation. In recent years, water suppliers have incurred increasing costs to clean up MTBE contamination. In November 1998, EPA convened a panel of experts to help investigate reported releases of this fuel additive into some groundwater, including releases from tanks. In 1999, the agency also convened a focus group of nine industry representatives who provided comments on the current status of the tank program and leak prevention methods. Using information from these two groups and a variety of other sources, in October 2000, EPA announced a set of four program initiatives intended to: Achieve faster cleanups Evaluate the performance of tank systems Promote tank cleanups at abandoned and idled properties that are contaminated. At the time of our review, EPA had just begun to assemble working groups to define the initiatives' time frames and implementation details. The Congress has introduced several legislative proposals to help states increase their capacity to inspect tanks and to enforce federal requirements intended to prevent problems with leaking tanks. For example, S. 2962, which was introduced in July 2000, would have allowed states, among other things, to spend a portion of the funds they receive from the tank cleanup trust fund on inspections and enforcement of leak detection and prevention requirements. Although most tanks have been upgraded with the federally required equipment to help prevent leaks, spills, and corrosion, the states and EPA regions report operations and maintenance problems that could lead to spills, leaks, and health risks. Consequently, some upgraded tanks still pose potential health risks. State and EPA officials believe that the tanks without the equipment are generally empty and inactive, but further investigation is needed to determine whether these tanks should be removed to guard against contamination or undergo cleanup. States also noted that owners, operators, installers, and inspectors need more training to help solve the operations and maintenance problems. As a result, EPA has included improved training and tank compliance in its program initiatives. Based on state responses to our survey, we estimate that about 89 percent of the 693,107 regulated tanks, or 616,865 tanks, had been upgraded with the federally required equipment by of the end of fiscal year 2000. Compliance rates among the states varied, as the following figure illustrates. In comparison, EPA data indicated that about 70 percent of the tanks that its regions regulate on tribal lands had also been upgraded, but this varied among the regions as well. For example, four regions reported upgrades in more than 90 percent of their tanks, while a fifth region reported that only 36 percent out of its 736 tanks complied with federal requirements. The accuracy of the states' tank compliance estimates varies, however, because some are based on more reliable data than others are. For example, 29 states base their estimates on periodic physical inspections of all of their tanks. Other states base their overall compliance rate estimate on inspections of only a subset of their tanks or on information provided by owners and operators that certifies that their tanks had been upgraded. The accuracy of EPA compliance data for tanks on tribal lands also varies. For example, one region reported it lacked data to know the actual location of some of the 300 tanks it was supposed to regulate on tribal lands and therefore could not verify whether these tanks had been upgraded. We estimate that the remaining 11 percent, or about 76,000, of the regulated tanks may not be upgraded. Seventeen states and the three EPA regions we visited reported that they believe that most of these tanks were either empty or inactive, while five states reported that at least half of their non-upgraded tanks were still in use. EPA program managers surmised that many states most likely assume that the empty or inactive tanks pose less risk and therefore allocate fewer resources to their care. However, states also reported that they generally do not discover tank leaks or contamination around tanks until the empty tanks are removed from the ground during replacement or closure. Therefore, unless EPA and the states address the issue of empty or inactive tanks in a timely manner, this potential source of contamination may be overlooked. We estimate that 29 percent of regulated tanks, or 201,001 tanks, are not being operated and maintained properly. Operations and maintenance problems varied across the states, as the following map illustrates. States reported a variety of operations and maintenance problems that surfaced during routine inspections of underground storage tanks: 19 states reported frequent problems with the equipment intended to 15 states reported that leak detection equipment was frequently turned off or improperly maintained, and 7 states reported frequent problems with the equipment to prevent spills and overfilling. States also reported that the majority of operational compliance problems occurred at tanks owned by small, independent businesses; non-retail and commercial companies, such as cab companies; and local governments. EPA and the states attribute operations and maintenance problems to insufficient training for all staff implementing tank requirements, including owners, operators, installers, removers, and inspectors. Owners and operators are responsible for making sure that they and their staffs acquire adequate training. However, the owners and operators from these smaller businesses and local government operations may find it more difficult to afford adequate training for themselves and their staff, especially given the high employee turnover, or give training a lower priority. States and EPA must also ensure that their own inspectors receive proper training. However, 47 states reported the need for additional training for their staff, and 41 requested additional technical assistance from the federal government to provide such training. EPA's expert and industry panels also called on the agency to take additional measures to address the problems surrounding tank operations, maintenance, and staff training. The expert panel concluded that releases were more likely to occur in smaller, independently owned tanks because owners and employees may have less training in performing operational and maintenance activities. The panel recommended the creation of expanded programs to train and to license tank staff. The industry group also identified the need to better address operations and maintenance problems and to provide better training. The group discussed various training methods that EPA could pursue, such as developing instructional videos for operators and inspectors, and suggested the establishment of a national program to certify tank staff and inspectors. To date, EPA has provided states with a number of training sessions and helpful tools designed to address these issues, including operations and maintenance checklists and manuals, and other publications and guidance. EPA has also publicized its training initiatives and operations and maintenance guides, which companies and the states have found to be successful. For example, the American Petroleum Institute now offers recommended practices on underground storage tank management and is in the process of developing operations and maintenance training for members. The state of California now requires training courses for all tank owners, operators, installers, and inspectors. EPA has entered a cooperative agreement with a university in another state to provide similar training. One of EPA's tank program initiatives is intended to improve training and tank compliance with federal equipment, operational, and maintenance requirements. With this initiative, EPA wants to encourage EPA regions and the states to improve the quality of their tank compliance data so that the agency can compile an accurate and consistent compliance measure, get states to commit to annual targets so that substantially more tanks will be in compliance with federal requirements by the end of 2005, and provide owners, operators, and inspectors with the technical assistance, improved guidance, and training needed to achieve compliance. EPA program managers said the agency is currently working out the details of how it will implement and achieve this initiative. At the time of our review, the agency had set up a working group of state and EPA representatives whose initial tasks, among other things, will be the establishment of compliance targets. Twenty-two states and one of the three EPA regions we visited do not know the extent to which their tanks comply with federal requirements, because limited staff and resources inhibit the physical inspection of all affected tanks. Most states and industry stakeholders support establishing a federal requirement for periodic inspections, but the states would need more inspectors to ensure compliance. Likewise, only 24 states have the authority to prohibit fuel delivery to a non-compliant tank--the most effective enforcement tool. The law governing the tank program does not give EPA clear authority to regulate fuel delivery. Most states reported that they need either additional enforcement authority or resources. EPA plans to address inspection and enforcement issues under its initiatives, and the Congress could consider actions to allocate additional funds to help states with their tank inspection and enforcement activities. According to EPA's program managers, only physical inspections can confirm whether tanks have been upgraded and are being properly operated and maintained. The managers stated that tanks should ideally be inspected on an annual basis to ensure that problems are being identified and resolved quickly. However, if a state or region lacks the resources to inspect tanks annually, all tanks should be inspected at a minimum of at least once every 3 years. Twenty-nine states reported that they inspected all of their tanks on a regular basis, but only 19 states--and two of the three EPA regions we visited--inspected all tanks at least once every 3 years. Twenty-two states do not inspect all of their tanks on a regular basis, and therefore, some tanks may never be inspected. These states typically target tanks for inspection based on factors such as a tank's proximity to groundwater or the number of complaints lodged against it. Overall, we estimated that states and EPA inspected about 185,000 tanks in fiscal year 2000. However, 17 states inspected only 10 percent of their tanks or less that year. The possibility of a tank inspection provides tank owners and operators incentive to comply with federal requirements. If tank owners and operators did not think that their tanks would be subject to inspection, some might be less concerned about ensuring compliance, although others might comply for fear of being held liable for any damage from spills and contamination. Nevertheless, broader and more frequent inspection coverage would provide EPA and the states with more complete compliance data, which could then be used to better target their enforcement actions and improve tank compliance. However, states and EPA would need to hire additional staff to conduct more frequent inspections--every tank at least once every 3 years. For example, based on current staffing levels, inspectors in 11 states would have to visit more than 300 facilities a year to inspect all of their tanks within this time frame. However, this number exceeds EPA's estimate of 200 facility visits that a qualified inspector can make in one year. Most states use their own employees to conduct inspections. Therefore, an increase in the number of inspectors may be dependent on whether their state legislatures consent to granting them additional hiring authority and funding. A few states supplement their programs by delegating inspection responsibilities to local government employees, such as local fire department personnel. Three states allow tank owners and operators to hire licensed or state-certified private inspectors who report the results of their inspections back to the state. EPA has issued a guidebook to states on the use of such third party inspectors. However, program managers caution that this approach raises the potential for a conflict of interest on the part of the inspectors. For example, the managers said that inspectors may not readily identify tank violations for fear that tank owners or operators may not rehire them for future inspections. Officials in 40 states said that they would support a federal mandate requiring states to periodically inspect all underground storage tanks. Some states expect that such a mandate would provide them the leverage they need to obtain additional staff and funding from their state legislatures. EPA's industry panel likewise supported a requirement for periodic--annual if possible--inspections and a set of inspection standards to promote consistency across the states. EPA's program managers stated that the most effective enforcement programs employ a variety of authorities or tools, including the ability to (1) levy a fine against a violator; (2) issue field citations to owners or operators at the time of the inspection for less serious violations; and (3) prohibit fuel deliveries to non-compliant tanks. Some states have also filed civil and criminal actions for more egregious violations, although these tend to be more time-consuming and costly. Only 8 of the 49 states that are responsible for enforcement activities reported having all three tools--levying fines, issuing citations, and prohibiting deliveries--at their disposal. As the following figure illustrates, 30 states reported that they did not have the authority to issue field citations and 27 reported that they did not have the authority to prohibit fuel deliveries. These variances indicate that a tank owner or operator in one state could be fined for a violation, while an owner or operator in another state could be forced to cease operations for a similar violation. In total, 27 states said they needed additional enforcement authorities, while 46 said they could use additional enforcement resources. EPA regions can levy fines or issue citations but cannot prohibit fuel delivery to non-compliant tanks. According to the program managers, EPA believes, and we agree, that the law governing the tank program does not give it clear authority to regulate fuel distributors. They also noted that the regional enforcement of tanks located on tribal land was more difficult because of the agency's focus on respecting tribal sovereignty. For example, program managers in two regions stated that they could not impose any sanctions against tribal owners; they could only issue notices of compliance problems. Managers at EPA headquarters confirmed that regional program managers needed to obtain headquarters approval before any enforcement action could be taken against a tribal owner. The expert panel and industry group raised similar concerns about the effectiveness of program enforcement. The expert panel recommended that the states be granted the authority to prohibit fuel deliveries to non- compliant tanks and obtain additional resources. The industry group, which maintained that the fear of being shut down provided an incentive for owners and operators to comply with federal requirements, saw a need for more uniform and consistent enforcement across the regions and states. EPA is developing several initiatives to encourage states to improve their tank programs. A state must first demonstrate that it has the capabilities and enforcement procedures in place to ensure effective program compliance before EPA will approve a state program. EPA regions oversee the states and conduct annual reviews of their activities, focusing their efforts on more problematic states, such as those that inspect fewer tanks. The regions also have the opportunity, to some extent, to use the state grants as a means to influence state program implementation. According to EPA program managers, regions can also conduct inspections in states and, if necessary, take enforcement action. Program managers acknowledged that UST-specific resources are limited, problems with inspections and program enforcement continue, and more work is necessary. In EPA's initiative to improve tank compliance with federal requirements, the agency has said that it will attempt to obtain state commitments to increase their inspection and enforcement activities if they do not meet their compliance targets through 2005. However, EPA does not plan to address the variation in enforcement authorities among states. EPA has announced that it may elect to supplement enforcement in those states that fall significantly below their targets, although the agency may be constrained by available resources. The Congress may wish to consider whether it can help address EPA and state resource limitations to develop better inspection and enforcement programs. The Congress could provide states more funds from the general treasury. The Congress could also increase the trust fund allotments it grants to states and give the states the flexibility to use some of these funds on inspections and enforcement rather than cleanup--an action the Congress has considered taking in the past. Officials in 40 states said that they would welcome such funding flexibility. The Congress may have to include some safeguards, however, to ensure that this reallocation of funds does not interfere with tank cleanup progress. Despite the equipment requirements, a number of states reported that some of the upgraded tanks leaked last year, while other states did not know whether this was happening with their tanks. EPA has launched studies to determine the extent of the leaks, the effectiveness of the current equipment, and whether the existing equipment standards should be strengthened. States and other stakeholders believe that further equipment requirements are needed and support EPA's efforts. In fiscal year 2000, EPA and the states confirmed a total of more than 14,500 leaks or releases from tanks subject to federal regulation, although they were uncertain whether the releases occurred before or after the tanks had been upgraded. According to our survey, 14 states said they had traced newly discovered leaks or releases to upgraded tanks that year, while another 17 states said that they seldom or never detected such leaks. Twenty states, however, could not confirm whether or not their upgraded tanks leaked. States that reported leaks attributed them to poor operations and maintenance, although 33 states suggested that improper equipment installation may have caused some leaks . The remaining states were uncertain about the possible causes of continuing leaks. EPA is concerned that upgraded tanks may still be leaking and recognizes the need to collect better data to determine the extent and cause of this problem, including whether the current equipment requirements are sufficient to prevent leaks. Several states and three EPA regions have studies underway to try to determine the extent and source of leaks. Researchers studying tanks in California's Santa Clara County suspected that 13 of the 16 tanks they reviewed had undetected leaks after the tanks had been upgraded, although they could not conclusively determine whether the leaks and releases came from tanks before or after they had been upgraded. To resolve this problem, California launched a new statewide study to trace leaks coming from newly installed upgraded tanks, which the state expects to be completed by the end of June 2002. Researchers with the Santa Clara study concluded that tanks with upgraded equipment do not provide complete protection against leaks, and tank monitoring systems, even when properly operated and maintained, cannot guarantee the detection of leaks. Other stakeholders expressed similar concerns about leaking tanks. The expert panel recommended that the agency evaluate the performance of current tank system design and equipment requirements and revise them where necessary to better prevent leaks. The industry group also called on EPA to strengthen the requirements, such as require additional leak containment systems and double-walled tanks. In response, EPA, as one of its four tank program initiatives, plans to undertake a nationwide effort to assess the adequacy of existing equipment requirements to prevent leaks and releases. The states and EPA cannot ensure that all active tanks have the required leak-, spill-, and overfill-protection equipment installed, nor can they guarantee that the installed equipment is being properly operated and maintained. While the states and EPA regions focus most of their limited resources on monitoring active tanks, empty or inactive tanks require attention to ensure that no soil and groundwater contamination has occurred. Half of the states have not physically inspected all of their tanks and several others have not conducted frequent enough inspections to ensure the tanks' compliance with program requirements. Moreover, most states and EPA lack authority to use the most effective enforcement tools and many state officials acknowledged that additional enforcement tools and resources were needed to ensure tank compliance. EPA has the opportunity to correct these limitations within its own regions and to help states correct them through its new tank program initiatives. However, the agency has yet to define many of the implementation details, so it is difficult to determine whether the proposed actions will be sufficient to ensure more inspection coverage and more effective enforcement, especially within the states. The Congress has an opportunity to help alleviate the states' resource shortages by providing additional funding for inspections and enforcement or more flexibility to use existing funds to improve these activities. To better ensure that underground storage tanks meet federal equipment, operations, and maintenance requirements to prevent leaks and contamination that pose threats to public health, we are making four recommendations to the Administrator, EPA. First, we recommend that EPA address the remaining non-upgraded tanks by working with the states to (1) review available information and determine those empty or inactive tanks that pose the greatest potential health and environmental risks, 2) set up time tables for the owners, states, or EPA to remove or close these tanks in accordance with federal procedures, and (3) take enforcement actions against owners and operators who continue to operate tanks without the required equipment. Second, we recommend that EPA supplement the agency's more general training support, such as providing manuals and materials, by having each region work with each of the states in its jurisdiction to determine specific training needs and tailored ways to meet them. Third, we recommend that EPA negotiate with each state to reach a minimum frequency for physical inspections of all its tanks. Periodic physical inspections of all tanks will provide states better data on non- compliant tanks, and that, in turn, will help states better enforce federal requirements. Fourth, we recommend that EPA present to the Congress an estimate of the total additional resources the agency and states need to conduct the training, inspection, and enforcement actions necessary to ensure tank compliance with federal requirements. EPA can base the estimate on the information regions obtain from their annual state reviews and grant negotiations. The Congress may consider taking the following actions to strengthen EPA's and the states' ability to inspect tanks and enforce federal requirements. First, the Congress may want to increase the resources available to the UST program and base the amount of the increase on a consideration of the Administrator's estimate of additional resources needed. One way to do this would be to increase the amount of funds the Congress provides from the trust fund and to authorize states to spend a limited portion of these monies on training, inspection, and enforcement activities to detect and prevent leaks, as long as this does not interfere with tank cleanup progress. Second, the Congress may want to (1) authorize EPA to establish a federal requirement for the physical inspections of all tanks on a periodic basis, (2) authorize EPA to prohibit the delivery of fuel to tanks that do not comply with federal requirements, and (3) establish a federal requirement that states have authority to similarly prohibit fuel deliveries. We provided a draft of this report to EPA for review and comment. We subsequently met with the Deputy Director and staff of the Office of Underground Storage Tanks who generally agreed with our conclusions and that our recommendations had merit. The agency noted that implementation of the recommendations would depend on a variety of factors, including the willingness of state legislatures to grant the state tank programs the necessary authorities and support. In terms of obtaining additional enforcement tools, EPA agrees that prohibiting the delivery of fuel to non-compliant tanks can be a valuable and effective enforcement tool. The agency does not believe that it currently has the authority to require those state programs that operate under their own laws to incorporate this tool. The agency was also reluctant to make the process of awarding state grants too dependent on the states meeting additional federal requirements, such as minimum frequencies of inspections, because this could seriously jeopardize some states' ability to qualify for grants, thus taking critical resources from these programs. EPA noted that it has recently begun an initiative to try to obtain more complete data from all of the states on, among other things, tank compliance with federal requirements. The agency is establishing compliance performance measures and asking states to provide data on their performance against these measures in their mid-year program reports to EPA, the first of which are due by the end of May 2001. The agency also suggested a number of technical changes that we incorporated. In addition to the state survey and work in the EPA regions, we (1) reviewed key tank studies and reports published by EPA, local governments, industry, and private organizations, (2) reviewed available EPA and state data on compliance rates, inspections, and enforcement actions, and (3) obtained the views of EPA's tank program managers and key environmental association and industry officials. We conducted our work between June 2000 and April 2001 in accordance with generally accepted government auditing standards. Unless you announce its contents earlier, we plan no further distribution of this report until 3 days after the date of this letter. At that time, we will send copies of the report to appropriate congressional committees and interested Members of Congress. We will also send copies of this report to the Honorable Christine Todd Whitman, Administrator, EPA, and the Honorable Mitchell E. Daniels, Jr., Director, Office of Management and Budget. In addition, we will make copies available to others on request. If you or your staff have any questions about this report, please contact me at (202) 512-3841. Key contributors to this report were Jim Donaghy, Eileen Larence, Gerald Laudermilk, Ingrid Jaeger, and Fran Featherston.
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The states and the Environmental Protection Agency (EPA) cannot ensure that all active underground storage tanks have the required leak-, spill-, and overfill-protection equipment installed, nor can they guarantee that the installed equipment is being properly operated and maintained. Although the states and EPA regions focus most of their limited resources on monitoring active tanks, empty or inactive tanks can also potentially contaminate soil and groundwater. Half of the states have not physically inspected all of their tanks, and several others have not done inspections often enough to ensure the tanks' safety. Moreover, most states and EPA lack authority to use the most effective enforcement tools, and many state officials acknowledge that additional enforcement tools and resources were needed to ensure tank safety. EPA has the opportunity to correct these limitations within its own regions and to help states correct them through its new tank program initiatives. However, the agency has yet to define many of the implementation details, so it is difficult to determine whether the proposed actions will ensure more inspection coverage and more effective enforcement, especially within the states. Congress could help alleviate the states' resource shortages by providing additional funding for inspections and enforcement or greater flexibility to use existing funds to improve these activities.
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The 8(a) program, administered by SBA's Office of Minority Enterprise Development, is one of the federal government's primary vehicles for developing small businesses that are owned by minorities and other socially and economically disadvantaged individuals. Firms that enter the program are eligible to receive contracts that federal agencies designate as 8(a) contracts without competition from firms outside the program. During fiscal year 1995, 6,002 firms participated in the 8(a) program. SBA data show that during fiscal year 1995, 6,625 new contracts and 25,199 contract modifications, totaling about $5.82 billion were awarded to 8(a) firms. To be eligible for the 8(a) program, a firm must be a small business that is at least 51-percent owned and controlled by one or more socially and economically disadvantaged persons. A business is small if it meets the SBA standard for size established for its particular industry. Members of certain ethnic groups, such as black and hispanic Americans, are presumed to be socially disadvantaged. To be economically disadvantaged as well, socially disadvantaged individuals cannot have personal net worth (excluding equity in a personal residence and ownership in the firms) exceeding $250,000. In addition, the firm must be an eligible business and possess a reasonable prospect for success in the private sector. Firms can participate in the 8(a) program for a maximum of 9 years. The Business Opportunity Development Reform Act of 1988 marked the third major effort by the Congress to improve SBA's administration of the 8(a) program and to emphasize its business development aspects. The legislation affirmed that the measure of success for the 8(a) program would be the number of firms that leave the program without being unreasonably reliant on 8(a) contracts and that are able to compete on an equal basis in the mainstream of the American economy. Over the years, reports by GAO, SBA's Inspector General, and others have identified continuing problems with SBA's administration of the program and/or with the program's ability to develop firms that could successfully compete in the marketplace after leaving the program. To help develop firms and better prepare them to compete in the commercial marketplace after they leave the program, the act requires that 8(a) program contracts be awarded competitively to 8(a) firms when the total contract price, including the estimated value of contract options, exceeds $5 million for manufacturing contracts or $3 million for all other contracts. Of the approximately $3.13 billion in new 8(a) contracts awarded in fiscal year 1995, about $610 million, or 19.5 percent of the total dollar amount, was awarded competitively. In comparison, in fiscal year 1994, about $380 million, or 18.5 percent of the $2.06 billion in new 8(a) contracts, was awarded competitively. Between fiscal years 1991 and 1995, the total dollar value of new 8(a) contract awards increased by about 96 percent, while the value of contracts awarded competitively increased by about 190 percent. Appendix I shows the number and the dollar value of 8(a) contracts awarded competitively in fiscal years 1991 through 1995. SBA's June 1995 revisions to the 8(a) program regulations closed a major loophole involving the competitive award of indefinite delivery, indefinite quantity (IDIQ) contracts. IDIQ contracts are used when an agency does not know the precise quantity of supplies or services to be provided under a contract. As the agency identifies a specific need for goods or services, it modifies the IDIQ contract to reflect the actual costs associated with providing that quantity of goods or services, up to the maximum amount specified in the contract. Before the June 1995 revisions, SBA's 8(a) program regulations required that an agency, when determining whether an IDIQ contract should be offered on a competitive or noncompetitive (sole-source) basis, consider only the guaranteed minimum value of the contract rather than the estimated total contract amount. According to SBA, IDIQ contracts were often improperly used simply to avoid the need for competition, and wide differences often occurred between the guaranteed minimum values of IDIQ contracts and the amount eventually spent by agencies under the contracts. To avoid this problem, the June 1995 regulations require that for all 8(a) program contracts SBA accepts after August 7, 1995, including IDIQ contracts, the procuring agency must consider the total estimated value of the contract, including the value of contract options, when determining whether the contract should be awarded competitively. The concentration of 8(a) contract dollars among relatively few firms is a long-standing condition that continued in fiscal year 1995. SBA data show that in fiscal year 1995, 50 firms--less than 1 percent of the 6,002 total firms in the 8(a) program during the fiscal year--received about $1.46 billion, or about 25 percent of the $5.82 billion in total 8(a) contracts awarded. In fiscal year 1994, 50 firms--about 1 percent of the 5,155 firms then in the program--also received about 25 percent of the $4.37 billion in total 8(a) contract dollars awarded during the fiscal year. Twelve firms that were among the top 50 in fiscal year 1995 were also among the top 50 firms in the previous year. Furthermore, 22 firms that were among the top 50 in fiscal year 1994 were also among the top 50 firms in fiscal year 1993. Appendix II contains a table that shows the range of total contracts dollars awarded to the top 50 firms for fiscal years 1992 through 1995. While 8(a) contract dollars continue to be concentrated in a relatively few firms, many economically disadvantaged firms do not receive any 8(a) program contracts. SBA data show that of the 6,002 firms in the program during fiscal year 1995, 3,267 firms, about 54 percent, did not receive any program contracts during the fiscal year. In comparison, in fiscal year 1994, 56 percent of the 8(a) firms did not receive any program contracts. As we testified in April 1995, a key reason for the continuing concentration of contract dollars among a relatively few firms is the conflicting objectives confronting procuring officials, according to SBA officials. In SBA's view, the primary objective of procuring officials is to accomplish their agency's mission at a reasonable cost; for these officials, the 8(a) program's business development objectives are secondary. At the same time, the agency's procurement goals for the 8(a) program are stated in terms of the dollar value of contracts awarded. According to SBA, the easiest way for agencies to meet these goals is to award a few large contracts to a few firms, preferably firms with which the agencies have had experience and whose capabilities are known. In addition, according to SBA the concentration of firms receiving 8(a) contracts is no different than the concentration among firms that occurs in the normal course of federal procurement. However, while this may be true for federal procurement overall, the Congress in amending the 8(a) program in 1988 sought to increase the number of competitive small businesses owned and controlled by socially and economically disadvantaged individuals through the fair and equitable distribution of federal contracting opportunities. In 1995, SBA made several efforts to increase the award of 8(a) contracts to firms that had never received contracts. SBA required its district offices to develop action plans to increase the number of 8(a) contract opportunities offered to a greater percentage of 8(a) firms. These action plans were to include specific initiatives for marketing the program to federal procurement offices in their jurisdictions. In addition, the Departments of Defense and Veterans Affairs agreed to give special emphasis to 8(a) firms that had never received contracts. Although SBA has not assessed the impact of these activities on increasing contract awards, SBA officials believe that these steps have helped in getting 8(a) contracts to firms that had never received them. At the same time, in the view of SBA officials, the fact that some firms do not receive any 8(a) contracts may not be a problem because not all firms enter the program to receive 8(a) contracts. Rather, some firms, according to SBA officials, seek 8(a) certification in order to qualify as disadvantaged firms for other federal programs, such as the highway construction program funded by the Department of Transportation, or state and city programs that set aside contracts for disadvantaged firms. To increase the program's emphasis on business development and the viability of firms leaving the program, the act directed SBA to establish target levels of non-8(a) business for firms during their last 5 years in the program. The non-8(a) target levels increase during each of the 5 years, from a minimum of 15 percent of a firm's total contract dollars during its fifth year to a minimum of 55 percent in the firm's ninth or final program year. SBA field offices, as part of their annual reviews of firms, are responsible for determining whether firms achieve these target levels. In April 1995, we testified that SBA data showed that while 72 percent of the firms in their fifth year that had 8(a) sales met or exceeded the minimum 15-percent non-8(a) target established for the fifth year, only 37 percent of the firms in their ninth or final program year that had 8(a) sales met or exceeded the minimum 55-percent target established for that year. The data also showed that of the 1,038 firms in the fifth through the ninth year of their program term that had 8(a) sales, 37 percent did not meet the minimum targets. SBA data for fiscal year 1995 showed that of the 8(a) firms in their fifth year that had 8(a) sales during the fiscal year, about 85 percent met or exceeded the minimum non-8(a) business target of 15 percent established for that year. In comparison, of the 8(a) firms in their ninth or final program year that had 8(a) sales during the fiscal year, 58 percent met or exceeded the minimum non-8(a) business target of 55 percent established for that year. Appendix III shows the extent to which firms met their target levels for fiscal year 1995. In a September 1995 report, SBA's Inspector General (IG) discussed SBA's problems in enforcing the business-mix requirements. According to the IG, over one-third of the 8(a) firms in the last 5 years of their program term did not meet the business-mix requirements, yet they accounted for about $1.4 billion (63 percent) of total 8(a) contract revenues of all firms subject to the requirements. The IG noted that SBA's regulations identify a range of remedial actions that the agency can take to improve firms' compliance with the requirements, including reducing or eliminating sole-source 8(a) contract awards, and that SBA personnel have the discretion of selecting which remedial actions to impose. The IG found, however, that SBA personnel often took minimal or no action when firms did not meet the requirements, and firms continued to obtain 8(a) contracts even though they were not complying with the regulations to develop non-8(a) business. To address this problem, the IG recommended that SBA limit the dollar value of new 8(a) contracts awarded to firms that do not meet their non-8(a) business target levels. SBA concurred with this recommendation and in March 1996 stated that it was exploring two options--eliminating all new 8(a) contracts to firms that do not meet their non-8(a) business levels, or placing a limit on the dollar value of 8(a) contracts awarded to such firms. In September 1996, an SBA official told us that the agency could not propose regulations implementing such restrictions until the Department of Justice finalizes its regulations regarding federal affirmative action programs. The IG's September 1995 report also concluded that SBA could not measure the success of the 8(a) program as defined by the Congress, namely the number of firms that leave the program without being unreasonably reliant on 8(a) contracts and that are able to compete on an equal basis in the mainstream of the American economy. The IG reported that SBA's procedures did not provide for compiling and reporting data on the (1) number of companies that met their business-mix requirements while in the program and (2) companies that remained in business after they no longer had 8(a) revenues. As a result, the IG concluded that neither SBA nor the Congress could determine whether the 8(a) program was accomplishing its intended purpose or whether any changes to the program were needed. To address these problems, the IG recommended that SBA annually compile data on the numbers of firms that leave the 8(a) program that are unreasonably reliant on 8(a) contracts and those that are not. The IG also recommended that SBA (1) track former 8(a) firms after they have completed all 8(a) contracts to determine whether they are still in business and (2) annually determine how many of the firms that are still in business were unreasonably reliant on 8(a) contracts when they left the program. With regard to this recommendation, the IG noted that responses to a questionnaire it sent to former 8(a) firms that had been out of the program for approximately 1.5 to 5.5 years showed that many firms still had substantial revenues from carryover 8(a)contracts. For example, 23 percent of the respondents reported that more than 50 percent of their total revenues were from 8(a) contracts. In March 1996, SBA stated that it would begin to annually compile data on the number of firms leaving the 8(a) program that met or did not meet the business-mix requirements and, as a result, were or were not unreasonably reliant on 8(a) program contracts. SBA also stated that it was currently tracking 8(a) graduates to determine their current status and levels of revenues. Finally, SBA announced that it was developing a more thorough survey to track graduates and was considering using external data sources, such as Dun and Bradstreet, for this information. As of September 1996, SBA had not developed this survey. According to an SBA official, work on this project has been delayed by several factors, including the furloughs of SBA staff and the turnover of a top SBA official. SBA's regulations provide that any firm that (1) substantially achieves its business development goals and objectives before completing its program term and (2) has demonstrated the ability to compete in the marketplace without 8(a) program assistance may be graduated from the 8(a) program. According to the regulations, factors SBA is to consider in deciding whether to graduate a firm include the firm's sales, net worth, working capital, overall profitability, access to credit and capital, and management capacity and capability. SBA may also consider whether the firm's business and financial profile compares positively with the profiles of non-8(a) firms in the same area or a similar line of business. A determination of whether a firm should be graduated is a part of SBA's annual review of each firm. A firm has the option to appeal SBA's determination that it graduate from the 8(a) program. After graduating, a firm is no longer eligible to receive 8(a) contracts. According to SBA data, during fiscal year 1995, SBA graduated three firms from the program--the first graduations in the program's history, according to SBA officials. The data also show that during fiscal year 1995, SBA terminated another 160 firms from the program for various reasons, including failure to comply with program requirements, and 250 more firms left the program because their program terms had expired during the fiscal year. According to SBA officials, SBA usually does not require that a firm graduate because of anticipated appeals and the difficulty in enforcing the graduation requirement, especially if the firm disagrees with SBA's decision. SBA's IG has identified companies that should have been, but were not, graduated from the 8(a) program. For example, the IG reported in September 1994 that its examination of 50 of the larger 8(a) firms found that most of these firms were larger and more profitable than firms not in the program. Specifically, the IG's review showed that 32 of the 50 8(a) firms exceeded their respective industries' averages for the following five performance factors: business assets, revenues, gross profits, working capital, and net worth. The IG concluded that allowing such firms to continue in the program deprived other truly economically disadvantaged firms of 8(a) assistance and understated the 8(a) program's overall success because firms that had demonstrated success were not graduated. In May 1995, as a result of the IG's review, SBA established requirements for its field staff to (1) compare annually five financial performance factors of 8(a) firms with the industry averages for companies in the same line of business and (2) consider graduation from the program for any 8(a) firm that meets or exceeds three of the averages. However, a February 1996 evaluation by SBA of annual reviews conducted by SBA field staff of 8(a) firms raises questions about the ability of the field staff to conduct such analysis. SBA noted that the staffs' financial analyses are very poor, staff members do not fully understand the concepts of economic disadvantage, financial condition of the firm, and access to capital, and the annual reviews contained few comparisons of the condition of 8(a) firms with similar businesses. To address this problem, SBA recommended that field staff receive training in financial analysis and guidance on the concept of continuing economic disadvantage. As of September 1996, SBA planned to provide this training during a national meeting planned for October or November 1996. I would now like to provide some overall statistics regarding SBA's disposition of applications made to the 8(a) program during fiscal year 1995, and the amount of management and technical assistance provided during the year. SBA data show that during fiscal year 1995, SBA processed 1,306 8(a) program applications. SBA approved 696 of the applications and initially denied the remaining 610. Among the reasons cited for denying the 610 applications were the following: The firm lacked potential for success (367 applications). The socially and economically disadvantaged individual did not own or control the firm (364 applications). The individual who owned and controlled the firm was not socially or economically disadvantaged (263 applications). The firm was a type of business that is not eligible to participate in the program (78 applications). Of the 610 applications that SBA initially denied, 323 were reconsidered and 189 were subsequently approved, bringing to 885 the total number of applications approved during fiscal year 1995. In comparison, SBA ultimately approved 1,107 of the 1,536 applications it processed in fiscal year 1994, and 540 of the 819 applications it processed in fiscal year 1993. As small businesses, 8(a) firms are eligible to receive management and technical assistance from various sources to aid their development. SBA's primary source of such assistance has been its 7(j) program. Authorized by section 7(j) of the Small Business Act, as amended, the 7(j) program provides seminars and individual assistance to 8(a) firms. The 8(a) firms are also eligible to receive assistance from SBA's Executive Education Program, which is designed to provide the owners/managers of 8(a) firms with executive development training at a university. SBA may also provide 7(j) assistance to socially and economically disadvantaged individuals whose firms are not in the 8(a) program, firms located in areas of high unemployment, and firms owned by low-income individuals. In fiscal year 1995, SBA spent about $7.6 million for 7(j) assistance to 4,604 individuals. This figure included individuals from 1,785 8(a) firms that received an aggregate of 9,452 days of assistance, and 190 firms that received executive training under SBA's Executive Education Program. In fiscal year 1996, SBA changed the focus of the 7(j) program to provide only executive-level training. The individual assistance and seminar training previously provided will be provided by SBA's Small Business Development Centers and Service Corps of Retired Executives. This concludes my prepared statement. I would be glad to respond to any questions that 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 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed the Small Business Administration's (SBA) 8(a) Minority Business Development Program, focusing on SBA progress in: (1) requiring the competitive award of high-value 8(a) contracts; (2) distributing 8(a) contracts to a larger number of firms; (3) ensuring that firms rely less on 8(a) contracts as they move through the 8(a) program; and (4) graduating from the program firms that have demonstrated that they can survive without 8(a) contracts. GAO noted that: (1) while the dollar amount of 8(a) contracts awarded competitively during fiscal year (FY) 1995 increased over FY 1994, the percentage of contract dollars awarded competitively remained at about 19 percent; (2) SBA revisions closed a major loophole that allowed the use of indefinite delivery, indefinite quantity contracts to avoid competition; (3) although SBA made several efforts to more widely distribute 8(a) contracts, the concentration of 8(a) program dollars to relatively few firms continued in FY 1995; (4) during FY 1995, a larger percentage of 8(a) firms in their final year of the program achieved the required level of non-8(a) business than was reported for previous years; (5) during FY 1995, SBA graduated 3 firms from the 8(a) program, the first graduations in the program's history, and terminated another 160 firms for various reasons, and 250 firms left the program; (6) during FY 1995, SBA approved 885 8(a) applications; and (7) SBA provided management and technical assistance to 8(a) firms through its 7(j) program.
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As has been the case for the previous 11 fiscal years, 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 basis consolidated financial statements. The underlying material weaknesses in internal control, as summarized on the following page, which generally have existed for years, contributed to our disclaimer of opinion on the U.S. government's accrual basis consolidated financial statements for the fiscal years ended 2008 and 2007. In summary, the material weaknesses that contributed to our disclaimer of opinion on the accrual basis consolidated financial statements were the federal government's inability to: satisfactorily determine that property, plant, and equipment and inventories and related property, primarily held by the DOD, were properly reported in the accrual basis 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 total net cost of operations, most notably related to DOD, and adequately reconcile disbursement activity at certain agencies; adequately account for and reconcile intragovernmental activity and balances ensure that the federal government's accrual basis consolidated financial statements were (1) consistent with the underlying audited agency financial statements, (2) properly balanced, and (3) in conformity with generally accepted accounting principles (GAAP); and identify and either resolve or explain material differences that exist between certain components of the budget deficit reported in Treasury's records, which are used to prepare the Reconciliation of Net Operating Cost and Unified Budget Deficit and Statement of Changes in Cash Balance from Unified Budget and Other Activities, and related amounts reported in federal agencies' financial statements and underlying financial information and records. Due to the material weaknesses and the additional limitations on the scope of our work, as discussed in our audit report, there may also be additional issues that could affect the accrual basis consolidated financial statements that have not been identified. In addition to the material weaknesses that contributed to our disclaimer of opinion, which are discussed above, we found three other material weaknesses in internal control as of September 30, 2008. 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 cost-effectively reduce improper payments, identify and resolve information security control weaknesses and manage information security risks on an ongoing basis, and effectively manage its tax collection activities. Further, our audit report discusses certain significant deficiencies in internal control at the governmentwide level. These significant deficiencies involve the following areas: implementing effective credit reform estimation and related financial reporting processes for loans receivable and loan guarantee liabilities at certain federal credit agencies, and preparing the Statement of Social Insurance for certain programs. Individual federal agency financial statement audit reports identify additional control deficiencies, which were reported by agency auditors as either material weaknesses or significant deficiencies at the individual agency level. We do not consider these additional control deficiencies to represent material weaknesses or significant deficiencies at the governmentwide level. Also, due to the issues noted throughout our audit report, additional material weaknesses and significant deficiencies may exist that were not identified and reported. Three major impediments to our ability to render an opinion on the U.S. government's accrual basis consolidated financial statements continued to be: (1) serious financial management problems at DOD, (2) the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government's ineffective process for preparing the consolidated financial statements. Extensive efforts by DOD officials and cooperative efforts between agency chief financial officers, Treasury officials, and OMB officials will be needed to resolve these serious obstacles to achieving an opinion on the U.S. government's accrual basis consolidated financial statements. Essential to further improving financial management governmentwide and ultimately to achieving an opinion on the U.S. government's consolidated financial statements is the resolution of serious weaknesses in DOD's business operations. Reported weaknesses in DOD's business operations, including financial management, adversely affect the reliability of financial data, and the economy, efficiency, and effectiveness of its operations, and prevent DOD from producing auditable financial statements. DOD continues to dominate GAO's list of high-risk programs designated as vulnerable to waste, fraud, abuse, and mismanagement, bearing responsibility, in whole or in part, for 15 of 30 high-risk areas. Eight of these areas are specific to DOD and include DOD's overall approach to business transformation, as well as business systems modernization and financial management. The National Defense Authorization Act (NDAA) for Fiscal Year 2008, codified Chief Management Officer (CMO) responsibilities at a high level in the department--assigning them to the Deputy Secretary of Defense-- and establishing a full-time Deputy CMO (DCMO) and designating CMO responsibilities within the military services. While both of these positions are now in place at DOD, the CMO is not a separate, full-time position, and the DCMO, although full-time, does not have decision-making authority. Importantly, DOD has taken steps toward developing and implementing a framework for addressing the department's long-standing financial management weaknesses with the goals of enabling the department to (a) provide timely, reliable, and accurate financial management information to decisionmakers; (b) sustain improvements; and (c) achieve financial statement auditability. Specifically, this framework, which is discussed in both the department's Enterprise Transition Plan (ETP) and the Financial Improvement and Audit Readiness (FIAR) Plan, includes the department's Standard Financial Information Structure (SFIS) and Business Enterprise Information System (BEIS). DOD intends this framework to define and put into practice a standard DOD-wide financial management data structure as well as enterprise-level capabilities to facilitate reporting and comparison of financial data across the department. DOD's most recent FIAR plan update indicates that it has implemented SFIS in legacy accounting systems for several components, including the Air Force and Marine Corps. We recently analyzed DOD's FIAR Plan, and found the plan does not yet provide the department or its components with clear, consistent, and specific guidance for implementing, measuring, and sustaining corrective actions, and for reporting incremental progress. Our report made several recommendations designed to increase the FIAR Plan's effectiveness as a strategic and management tool for guiding, monitoring, and reporting on financial management improvement efforts and increasing the likelihood of meeting the department's goal of financial statement auditability. DOD management concurred with our recommendations and has begun initiatives to address our concerns. While further improvement is needed, DOD's recent FIAR plans indicate many continuing efforts to achieve financial statement auditability, as well as new initiatives, including the following: Focusing on improvements in end-to-end business processes, or segments, that underlie the amounts reported on the financial statements. Updating auditability assertion criteria to require that only personnel with sufficient objectivity assess the readiness of a segment for audit. Ensuring sustainability of corrective actions and auditability by fully implementing the requirements of OMB Circular No. A-123, Appendix A, which requires an annual assessment and statement of assurance regarding the continued effectiveness of internal control over financial reporting. Forming working groups to address issues in areas such as real property cost management and imputed cost, and Fund Balance with Treasury. Implementing the Defense Agencies Initiative, with the goal of achieving an auditable standardized system for smaller other defense organizations. A recent notable success for the department was the U.S. Army Corps of Engineers (USACE), Civil Works' ability to achieve an unqualified audit opinion for fiscal year 2008. This accomplishment was the result of a sustained commitment on the part of management to improve USACE's business systems, processes, and controls. In contrast to this success, however, other DOD components' recent assertions of audit readiness have failed to withstand auditor scrutiny. We are encouraged by DOD's efforts and will continue to monitor DOD's efforts to transform its business operations and address its financial management challenges. In the near future, we plan to review DOD's: process and controls over budgetary execution and accounting; component enterprise resource planning efforts for adherence to budget and schedule and the identification of common issues among these efforts that have impeded successful implementation; integration of strategic plans within the department that are intended to address, monitor, and report progress and status of financial management weaknesses; component design and implementation of financial improvement plans; and component corrective plans and actions designed to bring financial reporting segments to audit readiness. Federal agencies are unable to adequately account for and reconcile intragovernmental activity and balances. OMB and Treasury require the CFOs of 35 executive departments and agencies to reconcile, on a quarterly basis, selected intragovernmental activity and balances with their trading partners. In addition, these agencies are required to report to Treasury, the agency's inspector general, and GAO on the extent and results of intragovernmental activity and balances reconciliation efforts as of the end of the fiscal year. 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. A substantial number of the agencies did not adequately perform the required reconciliations for fiscal years 2008 and 2007. For these fiscal years, based on trading partner information provided to Treasury through agencies' closing packages, Treasury produced a "Material Difference Report" for each agency showing amounts for certain intragovernmental activity and balances that significantly differed from those of its corresponding trading partners as of the end of the fiscal year. Based on our analysis of the "Material Difference Reports" for fiscal year 2008, we noted that a significant number of CFOs were unable to adequately explain the differences with their trading partners or did not provide adequate documentation to support responses on the CFO Representations. For both fiscal years 2008 and 2007, amounts reported by federal agency trading partners for certain intragovernmental accounts were not in agreement by significant amounts. In addition, there are hundreds of billions of dollars of unreconciled differences between the General Fund and federal agencies related to appropriation and other intragovernmental transactions. The ability to reconcile such transactions is hampered because only some of the General Fund is reported in the Department of the Treasury's financial statements. As a result of the above, the federal government's ability to determine the impact of these differences on the amounts reported in the accrual basis consolidated financial statements is significantly impaired. In 2006, OMB issued Memorandum No. M-07-03, Business Rules for Intragovernmental Transactions (Nov. 13, 2006), and Treasury issued the Treasury Financial Manual Bulletin No. 2007-03, Intragovernmental Business Rules (Nov. 15, 2006). This guidance added criteria for resolving intragovernmental disputes and major differences between trading partners for certain intragovernmental transactions and called for the establishment of an Intragovernmental Dispute Resolution Committee. OMB is currently working with the Chief Financial Officers Council to create the Intragovernmental Dispute Resolution Committee. OMB is also using a "Watch List" that lists federal agencies with large intragovernmental imbalances. The Watch List was developed to facilitate reductions in some of the largest intragovernmental imbalances, bring federal agency reporting into alignment with the Intragovernmental Business Rules, bring the appropriate representatives together from the respective agencies, and document the issues and resolutions. Treasury is also taking steps to help resolve material differences in intragovernmental activity and balances. For example, Treasury is requiring federal agencies to provide documentation on how and when the agencies are resolving certain of their unresolved material differences. Resolving the intragovernmental transactions problem remains a difficult challenge and will require a strong commitment by federal agency leadership to fully implement the required business rules and continued strong leadership by OMB and Treasury. While further progress was demonstrated in fiscal year 2008, the federal government continued to have inadequate systems, controls, and procedures to ensure that the consolidated financial statements are consistent with the underlying audited agency financial statements, properly balanced, and in conformity with U.S. GAAP. Treasury's process for compiling the consolidated financial statements demonstrated that amounts in the Statement of Social Insurance were consistent with the underlying federal agencies' audited financial statements and that the Balance Sheet and the Statement of Net Cost were also consistent with federal agencies' financial statements prior to eliminating intragovernmental activity and balances. However, Treasury's process did not ensure that the information in the remaining three principal financial statements was fully consistent with the underlying information in federal agencies' audited financial statements and other financial data. During fiscal year 2008, 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 implement their corrective action plans. Under the Federal Financial Management Improvement Act of 1996 (FFMIA), as a part of the CFO Act agencies' financial statement audits, auditors are required to report whether agencies' financial management systems comply substantially with (1) federal financial management systems requirements, (2) applicable federal accounting standards, and (3) the U.S. Government Standard General Ledger (SGL) at the transaction level. These factors, if implemented successfully, help provide a solid foundation for improving accountability over federal government operations and routinely producing sound cost and operating performance information. Over a decade has passed since FFMIA was enacted and the majority of agencies still do not have reliable, useful, and timely financial information with which to make informed decisions and ensure accountability on an ongoing basis. In fiscal year 2008, auditors reported 14 out of 24 CFO Act agencies' financial management systems were not in substantial compliance with one or more of the three FFMIA requirements and the lack of compliance with federal financial management systems requirements was the most frequently cited deficiency of the three FFMIA requirements. In addition, on January 9, 2009, OMB issued a revised Circular No. A-127, Financial Management Systems, which redefines federal financial management systems requirements. We are concerned that the revised circular substantially reduces the scope and rigor of compliance testing for agency financial management systems, omits compliance with the SGL from the compliance indicators, and eliminates existing federal financial management systems requirements for the financial portion of mixed systems. Without independent auditor assessments of the financial portion of mixed systems' capabilities and compliance with these requirements, the Congress and agency management cannot be assured that data in these systems and not included in agency financial statements are reliable, resulting in increased risk of making operating, budget, and policy decisions based on faulty data reported in the financial portion of mixed systems--such as benefit payment, logistics, and acquisition systems-- which are the source of data for the core financial system. Because of the importance of such data to routinely providing reliable, useful, and timely financial information for managing day-to-day operations, we believe it is important to retain financial management systems requirements for the financial portion of mixed systems and require auditors to assess compliance against such requirements. Further, the revised circular raised additional concerns because it does not definitively establish responsibilities for the agency, service provider, and auditor for assessing compliance with FFMIA when utilizing a shared service provider under OMB's financial management line of business (line of business) initiative. To reduce the cost and improve the outcome of federal financial management systems implementations, OMB continues to move forward on the line of business initiative, by leveraging common standards and shared solutions. OMB anticipates that the line of business initiative will help achieve the goals of improving the cost, quality, and performance of financial management operations. As we reported in May 2009, although OMB has made progress in implementing the line of business initiative, the initiative focuses mainly on core financial systems and extensive work remains before the goals of the initiative are achieved. For example, as we previously recommended in 2006, OMB has yet to finalize a financial management system concept of operations, which provides the foundation to guide line of business-related activities. In addition, development of a migration timeline reflecting agencies' commitment for migrating to shared service providers has not yet been completed. Consistent and effective implementation of FFMIA will be needed to improve the capability of agencies' financial management systems to produce reliable, useful, and timely information for management to efficiently and effectively manage the day-to-day operations of the federal government and ultimately provide accountability to taxpayers and the Congress--a key goal of the CFO Act and FFMIA. The Emergency Economic Stabilization Act of 2009 (EESA), which authorized the Troubled Asset Relief Program (TARP); the Housing and Economic Recovery Act of 2008 (HERA); and the American Recovery and Reinvestment Act of 2009 (Recovery Act), enabled the federal government to take certain unprecedented actions involving hundreds of billions of dollars to stabilize the financial markets and promote economic recovery. The nature and magnitude of these actions have created new challenges for federal accountability, financial reporting, and debt management. Such challenges will require utmost attention to ensure (1) that sufficient internal controls and transparency are established and maintained for all stabilization and recovery initiatives; (2) that all related financial transactions are reported on time, accurately, and completely; and (3) these initiatives are effectively and efficiently financed. According to data provided by Treasury, as of June 26, 2009, the federal government had disbursed about $339 billion of the approximate $700 billion limit on TARP funds for a number of initiatives, which included among other things, preferred stock purchases of certain financial institutions, loans to automotive companies, and funding to certain financial institutions to facilitate home loan modifications. Under HERA, the federal government placed the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) into conservatorship. As of July 2, 2009, the Federal Housing Finance Agency had reported that the federal government had provided about $85 billion of capital to the entities through the first quarter of calendar year 2009 under senior preferred stock purchase agreements. In addition, according to Treasury, the federal government held about $146 billion of the entities' mortgage-backed securities as of May 31, 2009. Regarding TARP, we have reported on actions needed and the status of efforts to address transparency and accountability issues, and have made related recommendations to help ensure these issues are adequately addressed. In our most recent report on TARP, we acknowledged Treasury's efforts to continue to improve the integrity, accountability, and transparency of TARP transactions; however, we concluded that some areas require ongoing attention. Among the challenges is the need to properly measure and report each related purchase and loan transaction. The challenges of estimating and managing costs and measuring and reporting asset and liability values under TARP and other recent initiatives are likely to be even greater than those associated with more traditional federal lending activities given the fact that little, if any, historical information is available for certain transactions from which to base expected future cash flows. While contractual provisions may set forth required payments for certain transactions such as preferred stock purchases and debt obligations, for a substantial number of federal transactions under TARP and HERA there is a significant amount of uncertainty regarding the extent to which actual repayments to the federal government will be made. There is simply little or no history for certain of these large and unprecedented transactions. Moreover, the instability and dramatic changes in financial markets, such as occurred within the last year, make it very difficult to estimate the values of these assets and liabilities with any level of certainty. Therefore, it is critically important for adequate internal controls to be in place to help ensure that the cost of all TARP and other loans and loan guarantees are properly measured and reported and losses to the federal government minimized. Regarding Recovery Act programs, major accountability and reporting challenges stem from the fact that nearly half of the approximate $580 billion of additional federal spending associated with the Recovery Act will flow to nonfederal entities. In our April 2009 report on the Recovery Act, we reported that certain states and the District of Columbia are taking various approaches to ensure that internal controls exist to manage risk including assessing known risks associated with spending under the Recovery Act and developing plans to address those risks. However, officials in most of the states we reviewed and the District of Columbia expressed concerns about the lack of Recovery Act funding provided for accountability and oversight. Such concerns are important given that the Recovery Act includes many programs that are new or new to the recipient and, even for existing programs, the sudden increase in funds is outside of normal cycles and processes. Given that the majority of Recovery Act funding was initially projected to be made available to states and localities in 2009, 2010, and 2011, with lesser amounts available beyond that, actions taken now would significantly improve the ability of nonfederal entities to provide effective accountability over federal funding under the Recovery Act. We made several recommendations to OMB in April 2009 to help improve accountability and oversight of Recovery Act spending, including modifying the single audit process to be a more timely and effective audit and oversight tool for the Recovery Act. We are also issuing our July 2009 report on the Recovery Act today. Going forward, it will be important for qualified personnel at all levels of government to implement proper controls and accountability measures to help ensure separate tracking and clear reporting of this spending from the federal level to the nonfederal recipients. Over $200 billion of the Recovery Act stimulus effort takes the form of tax expenditures--reductions in tax liabilities that result from preferential tax provisions such as tax exclusions, credits, and deductions. GAO has long been concerned that tax expenditures represent a substantial federal commitment yet lack the level of transparency and accountability associated with federal outlays. As we move forward, the federal government needs to ensure that adequate information is obtained and analyzed about these provisions to inform judgments about the success of the entire stimulus package. The nature and magnitude of the aforementioned actions to stabilize the financial markets and promote economic recovery have also created debt management challenges. As this Subcommittee knows, the Congress has assigned to Treasury the primary responsibility to borrow funds needed to finance any gap between cash in and cash out subject to a statutory limit. Since the onset of the current recession in December 2007, the gap between revenues and outlays has grown--even before any policy response. Because Treasury must borrow the funds disbursed, actions taken to stabilize financial markets--including aid to the auto industry-- increase borrowing and so add to the federal debt. In addition, the revenue decreases and spending increases enacted in the Recovery Act also add to borrowing. Further, all of this takes place in the context of the longer-term fiscal outlook, which will present Treasury with continued management challenges even after the return of financial stability and economic growth. The federal government faced large and growing structural deficits--and hence rising debt--even before the instability in financial markets and the economic downturn. The current debt limit, which has been raised 8 times since 2001, is at $12.1 trillion. As you can see from table 1 below, it likely will have to be raised again this year. These immediate challenges, however, have eliminated the window for planning before the impending further ramp up in debt. As shown in figure 1, the President's budget projects debt held by the public growing from 40.8 percent of gross domestic product (GDP) in fiscal year 2008 to 60 percent by the end of fiscal year 2009 and 67 percent by the end of fiscal year 2010. The near-term debt management challenge can be seen through several measures. At the end of May 2009, Treasury's outstanding marketable securities stood at $6,454 billion--an increase of $657 billion since December 31, 2008, and an increase of $1,918 billion since December 2007. Interest rates have dropped dramatically since the start of the financial crisis, particularly for short-term debt. Although these relatively low interest rates have reduced Treasury's borrowing costs to date, the amount of debt that must be rolled over in the short-term presents challenges. As shown in figure 2, as of May 31, 2009, approximately $3,137 billion will mature in 2009 and 2010 and will have to be refinanced; this is 49 percent of the total outstanding marketable securities. Another 29 percent matures in 2011 through 2015. If the economy improves, Treasury may have to refinance significant amounts of debt at higher rates. Treasury's primary debt management goal is to finance the federal government's borrowing needs at the lowest cost over time. Issuing debt through regular and predictable offerings lowers borrowing costs because investors and dealers value liquidity and certainty of supply. The mix of securities, which changes regularly as new debt is issued, is important because it can have a significant influence on the government's interest payments. Longer-term securities typically carry higher interest rates--or cost to the government--primarily due to concerns about future inflation. However, they can also offer the Treasury certainty about what its payments will be. We believe the large share of the debt that must be rolled over in the next few years is cause for concern. Market experts generally believe that Treasury needs to increase the average maturity of its debt portfolio. Large and growing borrowing needs put a premium on understanding both current and future demand for U.S. Treasury securities. To support Congress' oversight of the use of TARP funds, we have work under way looking at how Treasury has financed borrowing associated with the financial market instability and analyzing additional ideas for debt management that might assist Treasury going forward. We encourage Treasury to explore a range of borrowing options that could support its lowest-cost-over-time borrowing objective and to take a strategic approach to the analysis of various options--recognizing that the federal government faces a long-term sustained increase in borrowing needs. As I noted, the actions to restore financial market stability and economic growth take place within the context of the already serious longer-term fiscal condition of the federal government. While policymakers have been understandably focused on dealing with these financial market and economic growth challenges, attention also needs to be given to the long- term challenges of addressing the federal government's large and growing structural deficits and debt. As discussed in the Financial Report, the federal government is on an unsustainable long-term fiscal path. The Statement of Social Insurance, for example, shows that projected scheduled benefits exceed earmarked revenues for social insurance programs (e.g., Social Security and Medicare) by approximately $43 trillion in present value terms over the 75-year projection period. GAO also prepares long-term fiscal simulations that are based on the Social Security and Medicare Trustees' projections, but provide a more comprehensive analysis of fiscal sustainability because they include revenue and expenditure projections for all other government programs. Our most recent long-term fiscal simulation was issued in March 2009. Figures 3, 4, and 5 below show the results of GAO's March 2009 simulations. A quantitative measure of the long-term fiscal challenge measure is called the "fiscal gap." The fiscal gap is the amount of spending reduction or tax increases that would be needed today to keep debt as a share of GDP at or below today's ratio. The fiscal gap is an estimate of the action needed to achieve fiscal balance over a certain time period such as 75 years. Another way to say this is that the fiscal gap is the amount of change needed to prevent the kind of debt explosion implicit in figure 5. The fiscal gap can be expressed as a share of the economy or in present value dollars. Under GAO's alternative simulation, closing the fiscal gap would require spending cuts or tax increases, or some combination of the two, equal to 8.1 percent of the entire economy over the next 75 years, or about $63 trillion in present value terms. To put this in perspective, closing the gap solely through revenue increases would require an increase in today's federal tax revenues of about 44 percent, or to do it solely through spending reductions would require a reduction in today's federal program spending (i.e., in all spending except for interest on the debt held by the public, which cannot be directly controlled) of about 31 percent to be maintained over the entire 75-year period. The Financial Report provides useful information on the government's financial position at the end of the fiscal year and changes that have occurred over the course of the year. However, in evaluating the nation's fiscal condition, it is critical to look beyond the short-term results and consider the overall long-term financial condition and long-term fiscal challenge of the government--that is, the sustainability of the federal government's programs, commitments, and responsibilities in relation to the resources expected to be available. 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. However, it is appropriate to consider the need for further revisions to the current federal financial reporting model, which could affect both consolidated and agency reporting. While the current reporting model recognizes some of the unique needs of the federal government, a broad reconsideration of the federal financial reporting model could address the following types of questions: Do traditional financial statements convey information transparently? What is the role of the balance sheet in the federal government reporting model? What kind of information is most relevant and useful for a sovereign nation? How should items that are unique to the federal government, such as social insurance commitments and the power to tax, be reported? In addition, further enhancements to accounting and financial reporting standards are needed to effectively convey the long-term financial condition of the U.S. government and annual changes therein. For example, the federal government's financial reporting should be expanded to disclose the reasons for significant changes during the year in scheduled social insurance benefits and funding. It should also include (1) a Statement of Fiscal Sustainability that provides a long-term look at the fiscal sustainability of all federal programs including social insurance programs, and (2) other sustainability information, including intergenerational equity and an analysis of changes in sustainability during the year. Recently, the Federal Accounting Standards Advisory Board (FASAB) unanimously approved a proposed new standard on fiscal sustainability reporting. Also, FASAB is currently considering possible changes to accounting for social insurance. In addition, there is a need for a combined report on the performance and financial accountability of the federal government as a whole. This report would include, among other things, key outcome-based national indicators (e.g., economic, security, social, and environmental), which could be used to help assess the nation's and other governmental jurisdictions' position and progress. Engaging in a reevaluation of the federal financial reporting model could stimulate discussion that would bring about a new way of thinking about the federal government's financial and performance reporting needs. To understand various perceptions and needs of the stakeholders for federal financial reporting, a wide variety of stakeholders from the public and private sector should be consulted. Ultimately, the goal of such a reevaluation would be reporting enhancements that can help the Congress deliberate on strategies to address the federal government's challenges, including its long-term fiscal challenge. In closing, it is important that the progress that has been made in improving federal financial management activities and practices be sustained by the new administration. Across government, financial management improvement initiatives are under way, and if effectively implemented, they have the potential to greatly improve the quality of financial management information as well as the efficiency and effectiveness of agency operations. However, the federal government still has a long way to go before realizing strong federal financial management. 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 needed. 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 agencies need to improve the government's financial management systems to achieve this goal. The nature and magnitude of actions the federal government has taken to stabilize the financial markets and promote economic recovery have created new challenges involving accountability, financial reporting, and debt management. A great amount of attention will need to be devoted to ensuring (1) that sufficient internal controls and transparency are established and maintained for all stabilization and recovery initiatives; (2) that all related financial transactions are reported on time, accurately, and completely; and (3) these initiatives are effectively and efficiently financed. Importantly, the recent increase in federal debt that has resulted largely from the federal government's response to the crisis in financial markets and the economic downturn must be viewed within the context of the nation's unsustainable long-term fiscal path. The longer action is delayed to address long-term fundamental fiscal problems, the greater the likelihood that actions to address such problems will be disruptive and destabilizing. The federal government faces increasing pressures to address the fiscal problems of Social Security and Medicare, yet a shrinking window of opportunity for phasing in adjustments. GAO is committed to sustained attention to this critically important matter. Given the federal government's current financial condition and the nation's serious long-term fiscal challenge, the need for the Congress and federal policymakers and management to have reliable, useful, and timely financial and performance information is greater than ever. Sound decisions on the current and future direction of vital federal government programs and policies are more difficult without such information. We also will continue to stress the need for development of more meaningful financial and performance reporting on the federal government. 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 agency top leadership accountable for resolving the remaining problems and that they support improvement efforts. Madam Chairwoman and Ranking Member Bilbray, 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, and Gary T. Engel, Director, Financial Management and Assurance, at (202) 512-2600, as well as Susan J. Irving, Director, Federal Budget Analysis, Strategic Issues, at (202) 512-6806. Key contributions to this testimony were also made by staff on the Consolidated Financial Statement audit team. Ernst & Young, LLP Urbach Kahn & Werlin LLP Leonard G. Birnbaum and Company, LLP For fiscal year 2008, only the Consolidated Balance Sheet and the related Statement of Custodial Activity of the Department of Homeland Security were subject to audit; the auditor was unable to express an opinion on these two financial statements. The auditors reported no material weaknesses, no noncompliance with FFMIA, and no noncompliance with laws and regulations, except for a potential matter of noncompliance with respect to the Anti-Deficiency Act. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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GAO annually audits the consolidated financial statements of the U.S. government (CFS). The 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. Except for the 2008 and 2007 Statements of Social Insurance, GAO has been unable to provide assurance on the reliability of the CFS due primarily to inadequate systems and lack of sufficient, reliable evidence to support certain material information in the CFS. Unless these weaknesses are adequately addressed, they will, among other things, (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 of the CFS for fiscal year 2008 and discusses federal financial management challenges and the long-term fiscal outloo For the second consecutive year, GAO rendered an unqualified opinion on the Statement of Social Insurance; however, three major impediments continued to prevent GAO from rendering an opinion on the federal government's accrual basis consolidated financial statements: (1) serious financial management problems at the Department of Defense, (2) the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government's ineffective process for preparing the consolidated financial statements. In addition, as of September 30, 2008, the federal government did not maintain effective internal controls over financial reporting and compliance with significant laws and regulations due to numerous material weaknesses. Moreover, financial management system problems continue to hinder federal agency accountability. The federal government still has a long way to go, but over the years, progress has been made in improving federal financial management. For example, audit results for many federal agencies have improved; federal financial system requirements have been developed; and accounting and reporting standards have continued to evolve to provide greater transparency and accountability over the federal government's operations, financial condition, and fiscal outlook. In addition, the federal government issued a summary financial report which is intended to make the information in the Financial Report of the U.S. Government more understandable and accessible to a broader audience. The federal government's response to the financial markets crisis and economic downturn has created new federal accountability, financial reporting, and debt management challenges. Such challenges will require utmost attention to ensure (1) that sufficient internal controls and transparency are established and maintained for all market stabilization and economic recovery initiatives; (2) that all related financial transactions are reported on time, accurately, and completely; and (3) these initiatives are effectively and efficiently financed. Moreover, while policymakers are currently understandably focused on efforts directed toward market stabilization and economic growth, once stability in financial markets and the economic downturn are addressed, attention will have to be turned with the same level of intensity to the serious longer-term challenges of addressing the federal government's large and growing structural deficits and debt. Finally, the federal government should consider the need for further revisions to the current federal financial reporting model to recognize its unique needs. A broad reconsideration of issues, such as the kind of information that may be relevant and useful for a sovereign nation, could lead to reporting enhancements that might help provide the Congress and the President with more useful financial information to deliberate and monitor strategies to address the nation's long-term fiscal challenges.
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FCIC was established in 1938 to temper the economic impact of the Great Depression, and was significantly expanded in 1980 to protect farmers from the financial losses brought about by drought, flood, or other natural disasters. RMA administers the program in partnership with private insurance companies, which share a percentage of the risk of loss and the opportunity for gain associated with each insurance policy written. RMA acts as a reinsurer--reinsurance is sometimes referred to as insurance for the insurance companies--for a portion of all policies the federal crop insurance program covers. In addition, RMA pays companies a percentage of the premium on policies sold to cover the administrative costs of selling and servicing these policies. In turn, insurance companies use this money to pay commissions to their agents, who sell the policies, and fees to adjusters when claims are filed. FCIC insures agricultural commodities on a crop-by-crop and county-by- county basis, considering farmer demand and the level of risk associated with the crop in a given region. Major crops, such as grains, are covered in almost every county where they are grown, while specialty crops such as fruit are covered in only some areas. Participating farmers can purchase different types of crop insurance and at different levels. RMA establishes the terms and conditions that the private insurance companies selling and servicing crop insurance policies are to use through the SRA. The SRA provides for the cost allowance intended to cover administrative and operating expenses the companies incur for the policies they write, among other things. The SRA also establishes the minimum training, quality control review procedures, and performance standards required of all insurance providers in delivering any policy insured or reinsured under the Federal Crop Insurance Act, as amended. Under the crop insurance program, participating farmers are assigned (1) a "normal" crop yield based on their actual production history and (2) a price for their commodity based on estimated market conditions. Farmers can then select a percentage of their normal yield to be insured and a percentage of the price they wish to receive if crop losses exceed the selected loss threshold. In addition, under the crop insurance program's "prevented planting" provision, insurance companies pay farmers who were unable to plant the insured crop because of an insured cause of loss that was general to their surrounding area, such as weather conditions causing wet fields, and that had prevented other farmers in that area from planting fields with similar characteristics. These farmers are entitled to claims payments that generally range from 50 to 70 percent, and can reach as high as 85 percent, of the coverage they purchased, depending on the crop. RMA is responsible for protecting against fraud, waste, and abuse in the federal crop insurance program. In this regard, RMA uses a broad range of tools, including RMA's compliance reviews of companies' procedures, companies' quality assurance reviews of claims, data mining, and FSA's inspections of farmers' fields. For example, insurance companies must conduct quality assurance reviews of claims that RMA has identified as anomalous or of those claims that are $100,000 or more to determine whether the claims the companies paid comply with policy provisions. Congress enacted ARPA, amending the Federal Crop Insurance Act, in part, to improve compliance with, and the integrity of, the crop insurance program. Among other things, ARPA provided RMA authority to impose sanctions against producers, agents, loss adjusters, and insurance companies that willfully and intentionally provide false or inaccurate information to FCIC or to an insurance company--previously, RMA had authority to impose sanctions only on individuals who willfully and intentionally provided false information. It also provided RMA with authority to impose sanctions against producers, agents, loss adjusters, and insurance companies for willfully and intentionally failing to comply with any other FCIC requirement. In addition, it increased the percentage share of the premium the government pays for most coverage levels of crop insurance, beginning with the 2001 crop year. The percentage of the premium the government pays declines as farmers select higher levels of coverage. However, ARPA raised the percentage of federal subsidy for all levels of coverage, particularly for the highest levels of coverage. For example, the government now pays more than one-half of the premium for farmers who choose to insure their crop at 75-percent coverage. RMA has taken a number of steps to improve its procedures to prevent and detect fraud, waste, and abuse, such as data mining, expanded field inspections and quality assurance reviews. In particular, RMA now develops a list of farmers each year whose operations warrant an on-site inspection during the growing season because data mining uncovered patterns in their past claims that are consistent with the potential for fraud and abuse. The list includes, for example: farmers, agents, and adjusters linked in irregular behavior that suggests collusion; farmers who for several consecutive years received most of their crop insurance payments from prevented planting indemnity payments; farmers who appear to have claimed the production amounts for multiple fields as only one field's yield, thereby creating an artificial loss on their other field(s); and farmers who, in comparison with their peers, file unusually high claims for lost crops over many years. Since RMA began performing this data mining in 2001, it has identified about 3,000 farmers annually who warrant an on-site inspection because of anomalous claims patterns. In addition, RMA annually performs about 100 special analyses to identify areas of potential vulnerability and trends in the program. RMA also provides the names of farmers from its list of suspect claims for inspection to the appropriate FSA state office for distribution to FSA county offices, as well as to the insurance companies selling the policies to farmers. As a result of these inspections and other information, RMA reported total cost savings of $312 million from 2001 to 2004, primarily in the form of estimated payments avoided. For example, according to RMA, claims payments to farmers identified for an inspection decreased nationwide from $234 million in 2001 to $122 million in 2002. According to RMA, some of the farmers on the list for filing suspect claims bought less insurance and a few dropped crop insurance entirely, but most simply changed their behavior regarding loss claims. However, as we testified in 2006, RMA was not effectively using all of the tools it had available and that some farmers and others continued to abuse the program, as the following discussion indicates. Inspections during the growing season were not being used to maximum effect. FSA was not providing RMA with inspection assistance in accordance with USDA guidance. For example, between 2001 and 2004, farmers filed claims on about 380,000 policies annually, and RMA's data mining identified about 1 percent of these claims as questionable and needing FSA's inspection. Under USDA guidance, FSA should have conducted all of the 11,966 requested inspections, but instead conducted only 64 percent of them; FSA inspectors said that they did not conduct all requested inspections primarily because they did not have sufficient resources. Moreover, between 2001 and 2004, FSA offices in nine states did not conduct any of the field inspections RMA had requested in one or more of the years. Until we brought this matter to their attention in September 2004, FSA headquarters officials were unaware that the requested inspections in these nine states had not been conducted. Furthermore, FSA might not have been as effective as possible in conducting field inspections because RMA did not provide it with information on the nature of the suspected abusive behavior or the results of follow-up investigations. Finally, these inspections did not always occur in a timely fashion during the growing season. Because of these problems, the insurance companies and RMA could not always determine the validity of a claim. USDA has implemented some of our recommendations to improve inspection practices. For example, we recommended that RMA more consistently inform FSA of the suspect claim patterns that it should investigate. RMA amended its crop insurance policy manual to provide information more frequently to FSA on suspect claims, as we recommended, so that FSA can conduct timelier field inspections to detect potential abuse. Specifically, RMA now provides a list twice a year--in the fall for crops such as wheat, and in the spring for crops such as corn and soybeans. However, FSA disagreed with our recommendation that it conduct all inspections called for under agency guidance, citing insufficient resources as the reason. Nevertheless, we believe that conducting these inspections would achieve potentially substantial savings for the crop insurance program by identifying cases of fraudulent claims. RMA's data analysis of the largest farming operations was incomplete. RMA's data mining analysis excluded comparisons of the largest farming operations--including those organized as partnerships and joint ventures. These entities may include individuals who are also members of one or more other entities. Because it did not know the ownership interests in the largest farming operations, RMA could not readily identify potential fraud. For example, farmers who are members of more than one farming operation could move production from one operation to another to file unwarranted claims, without RMA's knowledge that these farmers participate in more than one farming operation. RMA could not make these comparisons because it had not been given access to similar data that FSA maintains. However, ARPA required the Secretary of Agriculture to develop and implement a coordinated plan for RMA and FSA to reconcile all relevant information received by either agency from a farmer who obtains crop insurance coverage. Using FSA data, we examined the extent to which (1) farming operations report all members who have a substantial beneficial interest in the operation, (2) these farming operations file questionable crop insurance claims, and (3) agents or claims adjusters had financial interests in the claim. By comparing RMA's and FSA's databases, we found that 21,310 farming entities, or about 31 percent of all farming entities, did not report one or more members who held a beneficial interest of 10 percent or more in the farming operation holding the policy. RMA should be able to recover a portion of these payments because, according to RMA regulations, if the policyholder fails to disclose an ownership interest in the farming operation, the policyholder must repay the amount of the claims payment that is proportionate to the interest of the person who was not disclosed. According to our analysis, RMA should be able to recover up to $74 million in claims payments for 2003. USDA has since implemented our recommendation that FSA and RMA share information on policyholders to better identify fraud, waste, and abuse. In addition, of the 21,310 entities failing to disclose ownership interest in 2003, we found 210 entities with suspicious insurance claims totaling $11.1 million. Finally, we identified 24 crop insurance agents who sold policies to farming entities in which the agents held a substantial beneficial interest but failed to report their ownership interest to RMA as required. USDA has since implemented our recommendation that FSA and RMA share information on policyholders to better identify fraud, waste, and abuse. RMA, however, has not implemented our recommendation to recover claims payments to ineligible farmers or to entities that failed to fully disclose ownership interest. RMA was not effectively overseeing insurance companies' quality assurance programs. RMA guidance requires insurance companies to provide oversight to properly underwrite the federal crop insurance program, including implementing a quality control program, conducting quality control reviews, and submitting an annual report to FCIC. However, RMA was not effectively overseeing insurance companies' quality assurance programs, and for the claims we reviewed, it did not appear that most companies were rigorously carrying out their quality assurance functions. For example, 80 of the 120 insurance files we reviewed claimed more than $100,000 in crop losses or met some other significant criteria; RMA's guidance states that the insurance provider must conduct a quality assurance review for such claims. However, the insurance companies conducted reviews on only 59 of these claims, and the reviews were largely paper exercises, such as computational verifications, rather than comprehensive analysis of the claim. RMA did not ensure that companies conducted all reviews called for under its guidance and did not examine the quality of the companies' reviews. RMA agreed with our recommendation to improve oversight of companies' quality assurance programs, but we have not yet followed up with the agency to examine its implementation. RMA has infrequently used its new sanction authority to address program abuses. RMA had only used its expanded sanction authority granted under ARPA on a limited basis. It had identified about 3,000 farmers with suspicious claims payments--notable policy irregularities compared with other farmers growing the same crop in the same county-- each year since the enactment of ARPA. While not all of these policies with suspicious claims were necessarily sanctionable, RMA imposed only 114 sanctions from 2001 through 2004. According to RMA officials, RMA requested and imposed few sanctions because it had not issued regulations to implement its expanded authority under ARPA. Without regulations, RMA had not established what constitutes an "FCIC requirement" and not explained how it would determine that a violation had occurred or what procedural process it would follow before imposing sanctions. RMA agreed with our recommendation that it promulgate regulations to implement its expanded authority, and has developed draft regulations. Once final, these regulations will allow the agency to fully use this authority to sanction program violators. While RMA can improve its day-to-day oversight of the federal crop insurance program in a number of ways, the program's design, as laid out in RMA's regulations or as required by statute, hinders the agency's efforts to administer certain program provisions in order to prevent fraud, waste, and abuse, as the following discussion indicates. RMA's regulations allow farmers the option of insuring their fields individually rather than combined as one unit. Farmers can insure production of a crop on an individual field (optional units) or all their fields as one unit. Farmers may want to insure fields separately out of concern that they could experience losses in a certain field because of local weather conditions, such as hail or flooding. If farmers instead insure their entire crop in a single basic insurance unit, the hail losses might not cause the production yield of all units combined to be below the level guaranteed by the insurance and, therefore, would not warrant an indemnity payment. Although insurance on individual fields provides farmers added protection against loss, this optional unit coverage increases the potential for fraud and abuse in the crop insurance program. Insuring fields separately enables farmers to "switch" production among fields--reporting production of a crop from one field that is actually produced on another field--either to make false insurance claims based on low production or to build up a higher yield history on a particular field in order to increase that field's eligibility for higher future insurance guarantees. We reported that of the 2,371 farmers identified as having irregular claims in 2003, 12 percent were suspected of switching production among their fields. According to a 2002 RMA study, losses per unit (e.g., a field) increase as the number of separately insured optional units increases. However, according to an RMA official, gathering the evidence to support a yield- switching fraud case requires considerable resources, especially for large farming operations. RMA disagreed with our recommendation to reduce the insurance guarantee or eliminate optional unit coverage for farmers who consistently have claims that are irregular in comparison with other farmers growing the same crop in the same location. It stated that our recommendation represents a disproportionate response, considering the small number of producers who engage in yield switching each year, and that the adoption of our recommendation would not be cost effective. Nevertheless, we continue to believe that RMA could tailor an underwriting rule so that it would target only a few producers each year and would entail few resources. Such a tool would provide RMA another means to discourage producers from abusing the program. Minimal risk sharing on some policies, as set by statute, may not provide insurance companies with a strong incentive to carry out their responsibilities under the program. In some cases, insurance companies have little incentive to rigorously challenge questionable claims. Insurance companies participating in the crop insurance program share a percentage of the risk of loss or opportunity for gain on each insurance policy they write, but the federal government ultimately bears a high share of the risk. Under the SRA, insurance companies are allowed to assign policies to one of three risk funds--assigned risk, developmental, or commercial. The SRA provides criteria for assigning policies to these funds. For the assigned risk fund, the companies cede up to 85 percent of the premium and associated liability for claims payments to the government and share a limited portion of the gains or losses on the policies they retain. For the developmental and commercial funds, the companies cede a smaller percent of the premium and associated liability for claims payments to the government. Economic incentives to control program costs associated with fraud, waste, and abuse are commensurate with financial exposure. Therefore, for policies placed in the assigned risk fund, companies have far less financial incentive to investigate suspect claims. For example, in one claim file we reviewed, an insurance company official characterized the farmer as filing frequent, questionable claims; however, the company paid a claim of over $500,000. The official indicated that if the company had vigorously challenged the claim, the farmer would have defended his claim just as vigorously, and the company would have potentially incurred significant litigation expenses, which RMA does not specifically reimburse. With this cost and reimbursement structure, in the company's opinion, it was less costly to pay the claim. RMA and insurance companies have difficulty determining potential abuse associated with statutory coverage for prevented planting. Under the Federal Crop Insurance Act, as amended, RMA must offer prevented planting coverage. RMA allows claims for prevented planting if farmers cannot plant owing to an insured cause of loss that is general in the surrounding area and that prevents other farmers from planting acreage with similar characteristics. Claims for prevented planting are paid at a reduced level, recognizing that farmers do not incur all production costs associated with planting and harvesting a crop. However, determining whether farmers can plant their crop may be difficult. Annually, RMA pays about $300 million in claims for prevented planting. Statutorily high premium subsidies may inhibit RMA's ability to control program abuse. ARPA increased premium subsidies--the share of the premium paid by the government--but this increase may hamper RMA's ability to control program fraud, waste, and abuse. Premium subsidies are calculated as a percentage of the total premium, and farmers pay only between 33 to 62 percent of the policy premium, depending on coverage level. High premium subsidies shield farmers from the full effect of paying higher premiums. Because premium rates are higher in riskier areas and for riskier crops, the subsidy structure transfers more federal dollars to those who farm in riskier areas or produce riskier crops. In addition, by regulation, premium rates are higher for farmers who choose to insure their fields separately under optional units, rather than all fields combined, because the frequency of claims payments is higher on the separately insured units. Again, however, because of high premium subsidies, farmers pay only a fraction of the higher premium. Thus, the subsidy structure creates a disincentive for farmers to insure all fields combined. Over one-half (56 percent) of the crop insurance agents responding to the survey conducted for our 2005 report believed that charging higher premiums for farmers with a pattern of high or frequent claims would discourage fraud, waste, and abuse in the crop insurance program. In our 2006 testimony, we stated that Congress may wish to consider allowing RMA to reduce premium subsidies--and hence raise the insurance premiums--for farmers who consistently have claims that are irregular in comparison with other farmers growing the same crop in the same location. To date, no action has been taken. From 1997 through 2006, USDA paid over $10.9 billion to companies that participate in the federal crop insurance program in cost allowances and underwriting gains, as table 1 shows. The $10.9 billion in total payments to the companies represents 42 percent of the government's cost of the crop insurance program--about $26 billion--over this period. That is, more than 40 cents of every dollar the government spent on the federal crop insurance program went to the companies that deliver the program, while less than 60 cents went to farmers. While we provide 10 years of data to offer a broad perspective and to even out annual losses and gains, the most recent 5 years of data--2002 to 2006--show similar results. As discussed earlier, USDA pays both underwriting gains and cost allowances, as negotiated in the SRA. Since the crop insurance program was revised under ARPA--that is, from 2002 through 2006--USDA has paid the insurance companies a total of $2.8 billion in underwriting gains. In terms of profitability, these underwriting gains represent an average annual rate of return of 17.8 percent over this 5-year period. According to industry statistics, the benchmark rate of return for U.S. insurance companies selling private property and casualty insurance was 6.4 percent during this period. RMA officials told us that this benchmark rate can be considered a starting point for measuring the appropriateness of the underwriting gains in the crop insurance program. However, they stated that this program should have a somewhat higher rate of return because of the (1) high volatility of underwriting gains for this program compared with the relatively steady gains associated with the property and casualty insurance industry, and (2) lack of investment opportunities when participating in the program because premiums are paid to the companies at harvest, not when farmers purchase a policy. But these officials also said that current rates of return are excessive. USDA renegotiated the financial terms of its SRA with the companies beginning with the 2005 planting season. In 2005, USDA paid the insurance companies underwriting gains of $916 million--a rate of return of 30.1 percent. In 2006, USDA paid them underwriting gains of $886 million--a rate of return of 24.3 percent. The companies received these underwriting gains despite drought conditions in parts of the country in 2005 and 2006. Adverse weather conditions, such as drought, normally suggest that insurance companies would earn lower profits because of greater producer losses. In addition to underwriting gains, RMA pays companies a cost allowance to cover program delivery expenses. The allowance is calculated as a percentage of total premiums on the insurance policies that they sell. Because the cost allowance is not tied to specific expenses, the companies can use the payments in any way they choose. From 2002 through 2006, USDA paid the insurance companies over $4 billion in cost allowances. Because the cost allowance is a percentage of the premiums, it also increases when the value of policies companies sell increases, as it does when crop prices rise. For example, USDA expects the value of policies, and thereby the cost allowances paid to companies, to increase by about 25 percent from 2006 through 2008. USDA expects these higher policy values, and ultimately higher cost allowances, because of external factors, including higher crop prices, particularly for corn and soybeans. Consequently, the companies and their affiliated sales agents will receive substantially higher cost allowances without any corresponding increase in expenses for selling and servicing the policies. Substantially higher cost allowances provide these companies and their agents with a kind of windfall. Greater insurance coverage results in higher premiums and ultimately higher cost allowances; yet, the purpose of this allowance is to reimburse program delivery expenses. In this context, USDA has requested the authority to renegotiate the SRA in its proposals for the Farm Bill. Specifically, USDA recommends renegotiating the SRA financial terms and conditions once every 3 years. According to USDA, the crop insurance program's participation has grown significantly since the implementation of ARPA. Because higher participation rates have resulted in more stable program performance, the reinsured companies have enjoyed historically large underwriting gains in the last 2 years of the program. Granting USDA authority to renegotiate periodically would also permit USDA to renegotiate the SRA if the reinsured companies experience an unexpected adverse impact. In conclusion, Mr. Chairman, federal crop insurance plays an invaluable role in protecting farmers from losses due to natural disasters, and the private insurance companies that participate in the program are integral to the program's success. Nonetheless, as we mentioned before, we identified crop insurance as an area for oversight to ensure that program funds are spent as economically, efficiently, and effectively as possible. Furthermore, a key reason that we identified crop insurance, as well as other farm programs, for oversight is that we cannot afford to continue business as usual, given the nation's current deficit and growing long-term fiscal challenges. RMA has made progress in addressing fraud, waste, and abuse, but the weaknesses we identified in program management and design continue to leave the crop insurance program vulnerable to potential abuse. Furthermore, as our work on underwriting gains and losses has shown, RMA's effort to limit cost allowances and underwriting gains by renegotiating the SRA has had minimal effect. In fact, it offers insurance companies and their agents a windfall. We believe that the crop insurance program should be delivered to farmers at a reasonable cost that does not over-compensate insurance companies participating in the program. A reduced cost allowance for administrative and operating expenses and a decreased opportunity for underwriting gains would potentially save hundreds of millions of dollars annually, yet still provide sufficient funds for the companies to continue delivering high-quality service while receiving a rate of return that is closer to the industry benchmark. Congress has an opportunity in its reauthorization of the Farm Bill to provide USDA with the authority to periodically renegotiate the financial terms of the SRA with the insurance companies so that the companies' rate of return is more in line with private insurance markets. Such a step can help position the nation to meet its fiscal responsibilities. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other 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 Lisa Shames, Acting Director, Natural Resources and Environment, (202) 512-3841 or [email protected]. Key contributors to this testimony were James R. Jones, Jr., Assistant Director; Thomas M. Cook; and Carol Herrnstadt Shulman. Climate Change: Financial Risks to Federal and Private Insurers in Coming Decades Are Potentially Significant. GAO-07-760T. Washington, D.C.: April 19, 2007. Climate Change: Financial Risks to Federal and Private Insurers in Coming Decades Are Potentially Significant. GAO-07-285. Washington, D.C.: March 16, 2007. Suggested Areas for Oversight for the 110th Congress. GAO-07-235R. Washington, D.C.: November 17, 2006. Crop Insurance: More Needs to Be Done to Reduce Program's Vulnerability to Fraud, Waste, and Abuse. GAO-06-878T. Washington, D.C.: June 15, 2006. Crop Insurance: Actions Needed to Reduce Program's Vulnerability to Fraud, Waste, and Abuse. GAO-05-528. Washington, D.C.: September 30, 2005. Crop Insurance: USDA Needs to Improve Oversight of Insurance Companies and Develop a Policy to Address Any Future Insolvencies. GAO-04-517. Washington, D.C.: June 1, 2004. Crop Insurance: USDA Needs a Better Estimate of Improper Payments to Strengthen Controls Over Claims. GAO/RCED-99-266. Washington, D.C.: September 22, 1999. Crop Insurance: USDA's Progress in Expanding Insurance for Specialty Crops. GAO/RCED-99-67. Washington, D.C.: April 16, 1999. Crop Insurance: Opportunities Exist to Reduce Government Costs for Private-Sector Delivery. GAO/RCED-97-70. Washington, D.C.: April 17, 1997. Crop Insurance: Federal Program Faces Insurability and Design Programs. GAO/RCED-93-98. Washington, D.C.: May 24, 1993. Crop Insurance: Program Has Not Fostered Significant Risk Sharing by Insurance Companies. GAO/RCED-92-25. Washington, D.C.: January 13, 1992. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The U.S. Dept. of Agriculture's (USDA) Risk Management Agency (RMA) administers the federal crop insurance program in partnership with private insurers. In 2006, the program cost $3.5 billion, including millions in losses from fraud, waste, and abuse, according to USDA. The Agricultural Risk Protection Act of 2000 granted RMA authority to renegotiate the terms of RMA's standard reinsurance agreement with companies once over 5 years. This testimony is based on GAO's 2005 report, Crop Insurance: Actions Needed to Reduce Program's Vulnerability to Fraud, Waste, and Abuse, as well as new analyses this Committee requested on underwriting gains and administrative and operating expenses USDA paid companies. GAO discusses (1) USDA's processes to address fraud, waste, and abuse; (2) extent the program's design makes it vulnerable to abuse; and (3) reasonableness of underwriting gains and other expenses. USDA agreed with most of GAO's 2005 recommendations to improve program integrity. RMA agreed that GAO's new analyses were technically accurate. GAO reported that RMA did not use all available tools to reduce the crop insurance program's vulnerability to fraud, waste, and abuse. RMA has since taken some steps to improve its procedures. In particular, USDA's Farm Service Agency (FSA) inspections during the growing season were not being used to maximum effect. Between 2001 and 2004, FSA conducted only 64 percent of the inspections RMA requested. Without inspections, farmers may falsely claim crop losses. However, FSA said it could not conduct all requested inspections, as GAO recommended, because of insufficient resources. RMA now provides information more frequently so FSA can conduct timelier inspections. RMA's data analysis of the largest farming operations was incomplete. In 2003, about 21,000 of the largest farming operations did not report all of the individuals or entities with an ownership interest in these operations, as required. Therefore, RMA was unaware of ownership interests that could help it prevent potential program abuse. FSA and RMA now share information to identify such individuals or entities. USDA should be able to recover up to $74 million in improper payments made during 2003. RMA was not effectively overseeing insurance companies' efforts to control program abuse. According to GAO's review of 120 cases, companies did not complete all the required quality assurance reviews of claims, and those that were conducted were largely paper exercises. RMA agreed to improve oversight of their reviews, but GAO has not followed up to examine its implementation. RMA's regulations to implement the crop insurance program, as well as some statutory requirements, create design problems that hinder its efforts to reduce abuse. For example, the regulations allow farmers to insure fields individually rather than together. As such, farmers can "switch" reporting of yield among fields to make false claims or build up a higher yield history on a field to increase its eligibility for higher insurance guarantees. RMA did not agree with GAO's recommendation to address the problems associated with insuring individual fields. Statutorily high premium subsidies may also limit RMA's ability to control program abuse: the subsidies shield farmers from the full effect of paying higher premiums associated with frequent claims. From 2002 through 2006, USDA paid the insurance companies underwriting gains of $2.8 billion, which represents an average annual rate of return of 17.8 percent. In contrast, according to insurance industry statistics, the benchmark rate of return for companies selling property and casualty insurance was 6.4 percent. USDA renegotiated the financial terms of its standard reinsurance agreement with the companies in 2005, but their rate of return was 30.1 percent in 2005, and 24.3 percent in 2006. It also paid the companies a cost allowance of $4 billion to cover administrative and operating costs for 2002 through 2006. USDA recommended that Congress provide RMA with authority to renegotiate the financial terms and conditions of its standard reinsurance agreement once every 3 years.
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The history of government reform has demonstrated that new policies, whether based in law or in administrative directives, are not self-implementing. In our work on state and local privatization initiatives, we reported that reforms such as privatization are most likely to be sustained when there is a committed political leader to champion the initiative. In the six governments we visited, a political leader (the governor or mayor), or in one case, several leaders working in concert (state legislators and the governor), played a crucial role in fostering privatization. These leaders built internal and external support for privatization, sustained momentum for their privatization initiatives, and adjusted implementation strategies when barriers to privatization arose. H.R. 716 does not, and probably cannot, provide for effective political leadership. It has been executive branch policy for more than 30 years to encourage competition between the federal workforce and the private sector for providing commercial goods and services. However, this policy has been embodied only in an administrative directive, Office of Management and Budget (OMB) Circular A-76. While we have consistently endorsed the concept of encouraging such competition, its effectiveness in practice has been questioned both in the executive branch and in dozens of congressional hearings. H.R. 716 would give the force of law to general reliance on the private sector for commercial goods and services, and thus would provide a stronger foundation, but not a substitute, for political leadership. To implement their privatization initiatives, the governments we visited reported the need to establish an organizational and analytical structure. A key aspect of this structure is an office to guide and support the privatization initiative and provide the analytical framework to evaluate the costs, benefits, and risks of privatizing a particular activity. Many of the frameworks established by the six governments shared common elements, such as criteria for selecting activities to privatize, methods for cost comparisons, and procedures for monitoring the performance of privatized activities. ensuring compliance by agencies; and providing guidance, information, and assistance to both private and public sectors. OMB is given wide latitude as to what regulations it will issue and what they will contain. This grant of broad authority affords OMB flexibility in implementing the legislation. However, given the wide latitude that OMB is afforded by the bill, issues will inevitably arise during implementation that will have to be dealt with by OMB. These issues could include such questions as Whether government corporations, federally funded research and development centers, state governments, or even the U.S. Postal Service should be included within the definition of "private sector sources" and thus eligible to compete for the government's contracts. Whether public buildings would need to be sold to the private sector in order to house federal employees. How OMB will incorporate congressional views when significant or highly sensitive conversions are proposed. Given concerns such as these, Congress will need to oversee OMB's performance of its responsibilities. The strategic and annual performance plans and annual report that OMB is to produce under the Government Performance and Results Act, provide a mechanism for such accountability. OMB could include in its strategic plan an objective and strategy for implementing the bill's requirements. The strategy could be developed in consultation with Congress and could describe major priorities as well as specific milestones for implementing the bill's provisions. In addition, OMB through its annual performance plan could provide a schedule for changing current policies and systems that would be necessary to accomplish the bill's purposes. Such a schedule would provide greater direction for agencies as they go through the process of identifying potential activities to be included in their annual performance plans. It could also provide a firm basis for Congress to assess OMB and agency activities as they relate to the bill's requirements. management responsibilities, which have been expanded significantly in recent years. Such a plan might be an appropriate vehicle for addressing such resource issues. The experiences of other governments as well as of major private firms indicate that, when the outsourcing of functions is contemplated, answers to fundamental questions about the purpose and mission of an organization should precede any major outsourcing activities. The bill has significant implications for the ongoing implementation of the Results Act; the Act focuses on what activities the government should or should not be performing from the perspective of overall contributions to missions and goals, while the bill addresses how and by whom those activites should be performed. Under the provisions of the Results Act, agencies are required to set their strategic direction through multiyear strategic plans, develop annual goals, and report on performance against those goals. Agency strategic plans and performance measures are intended to provide Congress with a vehicle for asking fundamental questions about federal functions and their performance. In our recent reports on the implementation of the act, we have found that many agencies are not yet well positioned to specify their plans and strategies in terms of tangible results. If enacted, the bill's implementation will occur as agencies are going through their first cycle of planning, measuring, and reporting on program performance, as called for under the Results Act. The bill would amend the Results Act by requiring, among other things, that agencies include in the annual performance plans and reports that they submit to Congress (1) inventories of functions that are and are not subject to the Freedom From Government Competition Act's provisions and (2) a schedule for converting to private sector performance those functions capable of, but not currently, being performed by the private sector. Requiring agencies to specify the activities they would perform directly, and those they would convert to private sector performance, is consistent with the Result Act's strategic planning requirements. key provision of H.R. 716 requires OMB to create a methodology for making determinations on what types of activities should and should not remain in government. This provision, if integrated with the strategic planning and annual performance planning requirements of the Results Act, could avoid the potential situation of agencies inadvertently replacing unneeded federal functions with unneeded private sector contractors--a concern we have expressed regarding Department of Defense depots. By making clear that, as part of their strategic planning and performance measurement activities, agencies should review potential outsourcing candidates in light of their contribution to mission accomplishment, the bill could reduce the possibility of such an outcome. Encouraging the magnitude of change that this bill contemplates will require incentives if it is to be effective. We believe that integrating the bill's requirements with those of the Results Act is one of the best incentives Congress could use to ensure successful implementation. The Act should, if successfully implemented, expand opportunities for congressional oversight of agency performance, including, for example, closer scrutiny of agency budget requests for specific activities in the context of expectations about program performance. Another incentive could be to allow government agencies to use savings gained from eliminating duplication and unnecessary non-core functions to further improve operations or satisfy other priorities such as modernization.However, such proposals need to be carefully examined as they raise questions of congressional oversight and the allocation of scarce financial resources. the union-management team performed the activity at the desired level of performance for less than it had bid, the team would receive a share of the savings at the end of the year. The city, after tracking performance over a period of years, could place a moratorium on bidding for areas for which city employees had demonstrated performance excellence and in which they had consistently outbid private competitors. In addition, Indianapolis built community support by taking some cost savings achieved through outsourcing and managed competitions and allocated it to hiring additional police, lowering tax rates, and increasing infrastructure projects. According to the Deputy Mayor, this approach built community support and provided further incentives for managed competition and outsourcing. In contrast, Georgia's Governor instituted a budget redirection program that required all agencies to prioritize their current programs and activities and identify those programs that could be eliminated or streamlined. The agencies were required to make at least 5 percent of their total state-funded budgets available for redirection to higher priorities. According to a Georgia Privatization Commission official, agencies were given a 6-month notice that their budgets would be cut by 5 percent. State officials said these budget cuts required managers to rethink how they could perform the same activities for a lower cost. This action provided the incentive for agencies to contract out more activities, such as vehicle maintenance and management services for a war veterans facility. In our state and local work, we found that all five states and the city of Indianapolis used some combination of legislative changes and resource cuts as part of their privatization initiatives. These actions were taken to encourage greater use of privatization. Georgia, for example, enacted legislation to reform the state's civil service and to reduce the operating funds of state agencies. Virginia reduced the size of the state's workforce and enacted legislation to establish an independent state council to foster privatization efforts. These actions, officials told us, reduced obstacles to privatization and sent a signal to managers and employees that political leaders were serious about implementing it. provide any products or services that can be provided by the private sector, and it prohibits agencies from providing any goods or services to any other governmental entity. This could conflict with the "Economy Act of 1932" (31 U.S. 1535-1536), which authorizes interagency orders for goods and services, as well as with the General Services Administration's (GSA) authority to provide agencies with goods and services. GSA was created, and still exists, to provide goods and services to agencies, such as office space, consolidated purchasing, air fare contracts, and excess property disposal. Its role under H.R. 716 is unclear. In addition, the bill does not contain language limiting judicial review of management actions taken under its provisions. The possibly unintended effect of subjecting management decisions to judicial review could slow implementation and increase costs due to litigation. In the governments we visited, reliable and complete cost data on government activities were deemed essential in assessing the overall performance of activities targeted for privatization, in supporting informed privatization decisions, and in making these decisions easier to implement and justify to potential critics. Most of the governments we surveyed used estimated cost data because obtaining complete cost and performance data, by activity, from their accounting systems was difficult. However, Indianapolis, and more recently Virginia have used activity based costing (ABC) to obtain more precise and complete data on the cost of each separate program activity. consistent with current efforts aimed at improving federal financial management. In the past, when competitive contracting has been done at the federal level under the provisions of Circular A-76, the absence of workload data and adequate cost accounting systems has made the task all the more difficult. Given that most agencies do not have cost accounting systems in place at this point, the bill's requirement to use past performance and cost data will be difficult for many federal activities to meet. Efforts are under way to develop the type of cost and performance data that would be necessary to compare public versus private proposals, as could occur under the provisions of H.R. 716. The Federal Accounting Standards Advisory Board (FASAB) has developed standards that are designed to provide information on the costs, management, and effectiveness of federal agencies. These standards require agencies to develop measures of the full costs of carrying out a mission or of producing products and services. Such information, when available, would allow for comparing the costs of various programs and activities with their performance outputs and results. To help agencies meet these standards, the Joint Financial Management Improvement Program (JFMIP) plans to issue guidance to facilitate the acquisition and development of managerial cost accounting systems needed to accumulate and assign cost data consistent with governmentwide data. We found that governments we visited needed to develop strategies to help their workforces make the transition to a private-sector environment. Such strategies, for example, might seek to involve employees in the privatization process, provide training to help prepare them for privatization, and create a safety net for displaced employees. Among the six governments we visited, four permitted at least some employee groups to submit bids along with private-sector bidders to provide public services. All six governments developed programs or policies to address employee concerns with privatization, such as the possibility of job loss and the need for retraining. The bill's findings section states that it is in the public interest for the private sector to utilize government employees who are adversely affected by conversions of functions to the private sector. The legislation does not create any new benefit or competitive job right that does not already exist. It does, however, assign to the Director of OMB the function of providing information on available benefits and assistance directly to federal employees. This would be a new and possibly burdensome function for OMB--a function that probably could be better handled by the Office of Personnel Management, which already has responsibility and experience in this area. Involving employees in the privatization process by letting them compete for the right to provide the service was a strategy used by state and local governments to gain employee cooperation during the privatization process. H.R. 716 neither encourages nor prohibits public-private competitions. However, it does give implicit authority to OMB to implement such a program, by requiring that the implementing regulations include standards and procedures for determining whether it is a private sector source or an agency that provides certain goods or services for the best value. While the question of how such determinations would be made is left up to OMB, competitive contracting has been the traditional method for making such determinations both at the federal level and the state and local level. When a government's direct role in the delivery of services is reduced through privatization, we found that, at least among the state and local governments we visited, the need for aggressive monitoring and oversight grew. Oversight was needed not only to evaluate compliance with the terms of the privatization agreement, but also to evaluate performance in delivering goods and services in order to ensure that the government's interests were fully protected. Indianapolis officials said their efforts to develop performance measures for activities enhanced their monitoring efforts. However, officials from most governments said that monitoring contractors' performance was the weakest link in their privatization processes. The essential foundation for effective oversight is good cost and performance data. H.R. 716's analytical requirements call for the consideration of all direct and indirect costs, qualifications, and past performance as well as other technical considerations. These requirements, along with the authority and flexibility given to OMB in implementing the legislation, provide the necessary foundation for effective performance monitoring and oversight, but they do not resolve capacity problems. Converting government activities to private-sector performance will increase the contracting workload on federal agencies. Conversion to contract performance requires considerable contract management capability. An agency must have adequate capacity and expertise to successfully carry out the solicitation process and effectively administer, monitor, and audit contracts once they are awarded. In past reports on governmentwide contract management, we identified major problem areas, such as ineffective contract administration, insufficient oversight of contract auditing, and lack of high-level management attention to and accountability for contract management. Some federal agencies have recognized the problem and have taken actions intended to improve their contract management capacity. The Department of Energy (DOE) and The National Aeronautics and Space Administration (NASA) provide examples of the challenges agencies face in overseeing contractors. DOE--the largest civilian contracting agency in the federal government--contracted out about 91 percent of its $19.2 billion in fiscal year 1995 obligations. We designated DOE contracting in 1990 as a high-risk area, vulnerable to waste, fraud, abuse, and mismanagement, because DOE's missions rely heavily on contractors and DOE has a history of weak contractor oversight; however, it has been working to improve its contract management practices. As we recently reported in our high-risk report on DOE, changing the way DOE does business has not come easily or quickly. DOE has taken various actions in the past to improve its contracting, and a recent contract reform effort that has received high priority and visibility appears promising; however, much remains to be done to ensure effective oversight of contractors. NASA's contracting reforms demonstrate what can be accomplished when an agency places high priority on contractor oversight. NASA spends about 90 percent of its budget on contracts with businesses and other organizations. NASA's procurement budget is one of the largest among federal civilian agencies, totaling about $13 billion annually in recent years. NASA first identified its contract management as vulnerable to waste and mismanagement in the late 1980s. Since then, it has grappled with a variety of contract management problems. NASA has made considerable progress in developing ways to better influence contractors' performance and to improve oversight of field centers' procurement activities. It has, for example, established a process for collecting cost, schedule, and technical information for all major NASA contracts to assist management in the tracking of contractor performance, and it also has restructured its policy on award fees to emphasize contract cost control and the performance of contractors' end products. In conclusion, Mr. Chairman, striking a proper balance between the public- and private-sector provision of goods and services to the American people is among the most enduring issues in American politics and public policy. The Freedom From Government Competition Act would redirect current policy, which does not now have the weight of legislative authority and significantly affect the operation and management of the federal government. We believe that Congress is the proper forum to address such fundamental questions, and we hope that our testimony today has been helpful by raising some issues for the Subcommittee to consider in its deliberations on the proposed act. That concludes my prepared statement. I would be pleased to answer any questions 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 H.R. 716, the Freedom From Government Competition Act, as a potential vehicle for competitive contracting, using the results of GAO's recent work on privatization initiatives at the state and local government levels. GAO noted that: (1) on the basis of GAO's literature review, privatization experiences and lessons learned by state and city governments in implementing privatization efforts, the views of a panel of privatization experts, and GAO's work in Georgia, Massachusetts, Michigan, New York, and Virginia, as well as the city of Indianapolis, GAO identified six lessons that were generally common to all six governments; (2) in general, the governments found that they needed to: (a) have committed political leaders to champion the privatization initiative; (b) establish an organizational and analytical structure to implement the initiative; (c) enact legislative changes and/or reduce resources available to government agencies to encourage greater use of privatization; (d) develop reliable and complete cost data on government activities to assess their performance, support informed privatization decisions, and make these decisions easier to implement and justify to potential critics; (e) develop strategies to help their workforces make the transition to a private-sector environment; and (f) enhance monitoring and oversight to evaluate compliance and performance and ensure that the government's interests are fully protected; (3) H.R. 716 provides a tool but not a substitute for a political champion; (4) H.R. 716 would establish a flexible implementation structure; (5) implementation of H.R. 716 would be helped by integrating it with agencies' strategic and performance planning activities; (6) incentives may be needed for implementing change; (7) the relationship of H.R. 716 to other relevant laws is unclear; (8) reliable and complete cost information is needed for privatization decisions; (9) H.R. 716 recognizes federal workforce transition needs; (10) effective monitoring and oversight of contractor performance are essential to successful privatization; and (11) the Freedom From Government Competition Act would redirect current policy, which does not now have the weight of legislative authority and significantly affect the operation and management of the federal government.
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The federal government's financial condition and long-term fiscal outlook present enormous challenges to the nation's ability to respond to emerging forces reshaping American society, the United States' place in the world, and the future role of the federal government. Over the next few decades as the baby boom generation retires and health care costs continue to rise, federal spending on retirement and health programs--Social Security, Medicare, Medicaid, and other federal pension, health, and disability programs--will grow dramatically. Absent policy changes on the spending and/or revenue sides of the budget, a growing imbalance between expected federal spending and tax revenues will mean escalating and eventually unsustainable federal deficits and debt that will threaten our future economy, standard of living, and, ultimately, our national security. Ultimately, the nation will have to decide what level of federal benefits and spending it wants and how it will pay for these benefits. GAO's long-term simulations illustrate the magnitude of the fiscal challenges associated with an aging society and the significance of the related challenges the government will be called upon to address. Indeed, the nation's long-term fiscal outlook is daunting under many different policy scenarios and assumptions. For instance, under a fiscally restrained scenario, if discretionary spending grew only with inflation over the next 10 years and all existing tax cuts expire when scheduled under current law, spending for Social Security and health care programs would grow to consume over 80 percent of federal revenue by 2040. (See fig. 1.) On the other hand, if discretionary spending grew at the same rate as the economy in the near term and if all tax cuts were extended, by 2040 federal revenues may just be adequate to pay only some Social Security benefits and interest on the growing federal debt. (See fig. 2.) Addressing the projected fiscal gaps shown here will require policymakers to examine the advisability, affordability, and sustainability of existing programs, policies, functions, and activities throughout the entire federal budget--spanning discretionary spending, mandatory spending, including entitlements, and tax policies and programs. Neither slowing the growth of discretionary spending nor allowing tax cuts to expire--nor both options combined--would by themselves eliminate our long-term fiscal imbalance. Additional economic growth is critical and will help to ease the burden, but the projected fiscal gap is so great that it is wholly unrealistic to expect that we will grow our way out of the problem. The President's 2007 budget released last week included some proposals to reduce the growth in Medicare spending. Whether or not these proposals are adopted, they should serve to raise public awareness of the importance of health care costs to both today's budget and tomorrow's. This could also serve to jump start discussion about appropriate ways to control a major driver of our long-term fiscal outlook--health care spending. Clearly, tough choices will be required. Changes in existing budget processes and financial, fiscal, and performance metrics will be necessary to facilitate these choices. Early action to change existing programs and policies would yield the highest fiscal dividends and provide a longer period for prospective beneficiaries to make adjustments in their own planning. The longer we wait, the more painful and difficult the choices will become and the less transition time we will have. By waiting, an important window is lost during which today's relatively large workforce can increase saving and begin preparing for the necessary changes in fiscal policy, Social Security, and health care as well as other reforms that may be necessary parts of the solution to this coming fiscal crunch. However, the long-term challenge is fast becoming a short-term one as the retirement of the baby boomers' generation will begin as early as 2008 and since overall workforce growth has already begun to slow. While our long-term fiscal imbalance cannot be eliminated with a single strategy, reducing the tax gap is one approach that could help address the looming fiscal challenges facing the nation. The tax gap is an estimate of the difference between the taxes--including individual income, corporate income, employment, estate, and excise taxes--that should have been timely and accurately paid and what was actually paid for a specific year. The estimate is an aggregate of estimates for the three primary types of noncompliance: (1) underreporting of tax liabilities on tax returns; (2) underpayment of taxes due from filed returns; and (3) nonfiling, which refers to the failure to file a required tax return altogether or timely. Estimates for each type of noncompliance include estimates for some or all of the five types of taxes that IRS administers. IRS develops its tax gap estimates by measuring the rate of taxpayer compliance--the degree to which taxpayers fully and timely complied with their tax obligations. That rate is then used, along with other data and assumptions, to estimate the dollar amount of taxes not timely and accurately paid. For instance, IRS most recently estimated that for tax year 2001, 83.7 percent of owed taxes were paid voluntarily and timely, which translated into an estimated gross tax gap of $345 billion. IRS developed these estimates using compliance data collected through the National Research Program (NRP). Using its recently collected compliance data, IRS has estimated that underreporting of income represented over 80 percent of the tax gap for 2001 (an estimated $285 billion out of a gross tax gap estimate of $345 billion), as indicated in table 1. Within the underreporting estimate, IRS attributed about $197 billion, or about 57 percent of the total tax gap, to individual income tax underreporting, including underreporting of business income, such as sole proprietor, informal supplier, and farm income (about $109 billion); nonbusiness income, such as wages, interest, and capital gains (about $56 billion); overstated credits (about $17 billion); and overstated income adjustments, deductions, and exemptions (about $15 billion). Underreporting of corporate income tax contributed an estimated $30 billion, or about 10 percent, to the 2001 tax gap, which included both small corporations (those reporting assets of $10 million or less) and large corporations (those reporting assets of over $10 million). Employment tax underreporting accounted for an estimated $54 billion, or about 16 percent, of the 2001 tax gap and included several taxes that must be paid by self-employed individuals and employers. Self-employed individuals are generally required to calculate and remit Social Security and Medicare taxes to the U.S. Treasury each quarter. Employers are required to withhold these taxes from their employees' wages, match these amounts, and remit withholdings to Treasury at least quarterly. Underreported self-employment and employer-withheld employment taxes, respectively, contributed an estimated $39 billion and $14 billion to IRS's tax gap estimate. The employment tax underreporting estimate also includes underreporting of federal unemployment taxes (about $1 billion). Taxpayers who do not file their tax returns on time or at all and otherwise do not pay their tax liabilities accounted for the remainder of the 2001 tax gap--around $61 billion. For example, nonfiling and underpayment noncompliance by individual taxpayers alone contributed an estimated $48 billion to this portion of the tax gap. IRS has concerns with the certainty of the overall tax gap estimate in part because some areas of the estimate rely on old data and IRS has no estimates for other areas of the tax gap. For example, IRS used data from the 1970s and 1980s to estimate underreporting of corporate income taxes and employer-withheld employment taxes. For large corporate income tax underreporting, IRS based its estimate on the amount of tax recommended from operational examinations rather than the tax ultimately assessed as part of the total tax liability. According to IRS officials, IRS relies on the amount of tax recommended because it is difficult to determine the true tax liability of large corporations due to complex and ambiguous tax laws that create opportunities for differing interpretations and that complicate the determination. These officials further stated that because these examinations are not randomly selected and are not focused on identifying all tax noncompliance, the estimate produced from the examination data is not representative of the tax gap for all large corporations. They also explained that due to these complexities and the costs and burdens of collecting complete and accurate data, IRS has not systematically measured large corporation tax compliance through statistically valid studies, even though the officials acknowledged that such studies would be useful in estimating the related tax gap. IRS has no estimates for corporate income, employment, and excise tax nonfiling or for excise tax underreporting. For these types of noncompliance, IRS maintains that the data are either difficult to collect, imprecise, or unavailable. In addition, it is inherently difficult for IRS to observe and measure some types of underreporting or nonfiling, such as tracking cash payments that businesses make to their employees, as businesses and employees may not report these payments to IRS in order to avoid paying employment and income taxes, respectively. IRS's overall approach to reducing the tax gap consists of improving service to taxpayers and enhancing enforcement of the tax laws. Recently, IRS has taken a number of steps that may improve its ability to reduce the tax gap. Favorable trends in staffing of IRS enforcement personnel; examinations performed through correspondence, as opposed to more complex face-to-face examinations; and the use of some enforcement sanctions such as liens and levies are encouraging. Also, IRS has made progress with respect to abusive tax shelters through a number of initiatives and recent settlement offers that have resulted in billions of dollars in collected taxes, interest, and penalties. In addition, IRS has successfully prosecuted a number of taxpayers who have committed criminal violations of the tax laws. Given its persistence and size, we need not only to consider expanding current approaches but also explore new legislation to help IRS in reducing the tax gap. Although IRS has made a number of changes in its methodologies for measuring the tax gap over the past three decades, which makes comparisons difficult, regardless of methodology the voluntary compliance rate that underpins the gap has tended to range from around 81 percent to around 84 percent. Thus, although the dollar amounts of the tax gap have changed, IRS has consistently reported a persistent, relatively stable portion of the taxes that should have been timely and accurately paid were not paid. As we have reported in the past, closing the entire tax gap may not be feasible nor desirable, as it could entail more intrusive recordkeeping or reporting than the public is willing to accept or more resources than IRS is able to commit. However, given its size, even small or moderate reductions in the net tax gap could yield substantial returns, which could improve the government's fiscal position. For example, based on IRS's most recent estimate, each 1 percent reduction in the net tax gap would likely yield nearly $3 billion annually. Thus, a 10 percent to 20 percent reduction of the net tax gap would translate into from roughly $30 billion to $60 billion in additional revenue annually. However, reducing the tax gap will be challenging and it must be attacked on multiple fronts and with multiple strategies, some of which follow. A critical step toward reducing the tax gap is to understand the sources and nature of taxpayer noncompliance. Regularly measuring compliance, including the reasons why taxpayers are not compliant, can offer many benefits, including helping IRS identify new or growing types of noncompliance, identify changes in tax laws and regulations that may improve compliance, understand the effectiveness of its programs to promote and enforce compliance, more effectively target examinations of tax returns, and determine its resource needs and allocations. Likewise, regularly measuring compliance can provide IRS with information against which to set goals for improving compliance and measure progress in achieving such goals. In our July 2005 report on reducing the tax gap, we made recommendations to IRS to develop plans to periodically measure tax compliance; take steps to improve its data on the reasons why taxpayers do not comply; and establish long-term, quantitative goals for voluntary compliance levels with an initial focus on individual income tax underreporting and total tax underpayment. Taken together, these steps can help IRS build a foundation to understand how its taxpayer service and enforcement efforts affect compliance and make progress on reducing the tax gap. The Commissioner of Internal Revenue agreed with our recommendations, highlighted challenges associated with them, and commented on various steps IRS would take to implement each recommendation. We are encouraged that according to IRS's Fiscal Year 2007 Congressional Budget Justification, IRS has recently established a voluntary compliance goal, with a target of 85 percent voluntary compliance by 2009, and plans to periodically measure progress against this goal. Efforts to simplify the tax code and otherwise alter current tax policies may help reduce the tax gap by making it easier for individuals and businesses to understand and voluntarily comply with their tax obligations. Among the many causes of tax code complexity is the growing number of preferential provisions in the tax code, such as exemptions and exclusions from taxation, deductions, credits, deferral of tax liability, and preferential tax rates. Tax expenditures--as they are known by statute--can be a tool to further some federal goals and objectives, such as financing higher education or funding research and development. However, their aggregate number contributes to the complexity that taxpayers face in doing their taxes and planning their financial decisions. As figure 3 shows, the number of tax expenditures reported by the Department of the Treasury has more than doubled since 1974. Figure 4 shows the Revenue Loss Estimates for the Five Largest Tax Expenditures Reported for Fiscal Year 2005. The multiple tax preferences for education assistance illustrate the consequences of the proliferation of tax expenditures. In our July 2005 report on postsecondary tax preferences, we found that hundreds of thousands of taxpayers do not appear to make optimal decisions when selecting education-related tax preferences. One explanation of these taxpayers' choices may be the complexity of postsecondary tax preferences, which experts have commonly identified as difficult for tax filers to use. Also, many argue that complexity creates opportunities for tax evasion, through vehicles such as tax shelters. Simplification may reduce opportunities for taxpayers to avoid taxes through the creation of complex and abusive tax shelters. Another area of the tax system that may deserve additional exploration, although not directly related to the tax gap, is whether the federal income- based tax system is sustainable and administrable in a global economy and how we should tax the income of U.S. multinational corporations that is earned outside of the United States. Every year, U.S.-based multinational corporations transfer hundreds of billions of dollars of goods and services between their affiliates in the United States and their foreign subsidiaries. Such transactions may be a part of normal business operations for corporations with foreign subsidiaries. However, it is generally recognized that given the variation in corporate tax rates across countries, an incentive exists for corporations with foreign subsidiaries to reduce their overall tax burden by maximizing the income they report in countries with low income tax rates, and minimizing the income they report in or repatriate to countries with high income tax rates. Various studies have suggested that U.S.-based multinational corporations appear to engage in transactions such as these that shift income from their affiliates in high-tax countries to subsidiaries in low-tax countries to take advantage of the differences in tax rates in foreign countries. The growth in multinational corporate transactions and structures has also introduced increasing complexity in administering the tax code. The loss of highly skilled technical employees at IRS who can examine compliance issues arising from globalization, such as transfer pricing, underscores the challenge that IRS faces in ensuring it has sufficient staff with adequate skills to address these complex issues. Providing quality services to taxpayers is an important part of any overall strategy to improve compliance and thereby reduce the tax gap. One method of improving compliance through service is to educate taxpayers about confusing or commonly misunderstood tax requirements. For example, if the forms and instructions taxpayers use to prepare their taxes are not clear, taxpayers may be confused and make unintentional errors. One method to ensure that forms and instructions are sufficiently clear is to test them before use. However, we reported in 2003 that IRS had tested revisions to only five individual forms and instructions from July 1997 through June 2002, although hundreds of forms and instructions had been revised in 2001 alone. In terms of enforcement, IRS will need to use multiple strategies and techniques to identify and deter noncompliance. As figure 5 shows, one pair of tools have been shown to lower levels of noncompliance-- withholding tax from payments to taxpayers and having third parties report information to IRS and the taxpayers on income paid to taxpayers. For example, 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. Similarly, most wages, salaries, and tip compensation are reported by employers to employees and IRS through Form W-2. Findings from NRP indicate that around 98.8 percent of these types of income are accurately reported on individual returns. In the past, we have identified a few specific areas where additional withholding or information reporting requirements could serve to improve compliance: Requiring tax withholding and more or better information return reporting on payments made to independent contractors. Past IRS data have shown that independent contractors report 97 percent of the income that appears on information returns, while contractors that do not receive these returns report only 83 percent of income. We have also identified other options for improving information reporting for independent contractors, including increasing penalties for failing to file required information returns, lowering the $600 threshold for requiring such returns, and requiring businesses to separately report on their tax returns the total amount of payments to independent contractors. IRS's Taxpayer Advocate Service recently recommended allowing independent contractors to enter into voluntary withholding agreements. Requiring information return reporting on payments made to corporations. Unlike payments made to sole proprietors, payments made to corporations for services are generally not required to be reported on information returns. IRS and GAO have contended that the lack of such a requirement leads to lower levels of compliance for small corporations. Although Congress has required federal agencies to provide information returns on payments made to contractors since 1997, payments made by others to corporations are generally not covered by information returns. The Taxpayer Advocate Service has recommended requiring information reporting on payments made to corporations, and the Administration, in its fiscal year 2007 budget, has proposed requiring additional information reporting on certain goods and service payments by federal, state, and local governments. Requiring more data on information returns dealing with capital gain income. Past IRS studies have indicated that much of the noncompliance associated with capital gains is a result of taxpayers overstating an asset's "basis," the amount of money originally paid for the asset. Currently, financial institutions are required to report the sales prices, but not the purchase prices, of stocks and bonds on information returns. Without information on purchase prices, IRS cannot use efficient and effective computer-matching programs to check for compliance and must use much more costly means to examine taxpayer returns in order to verify capital gain income. The Taxpayer Advocate Service has recommended requiring financial institutions to track cost basis information and report it to IRS and taxpayers. Although withholding and information reporting are highly effective in encouraging compliance, such additional requirements generally impose costs and burdens on the businesses that must implement them. However, continued reexamination of opportunities to expand information reporting and tax withholding could increase the transparency of the tax system. Opportunities to expand information reporting and tax withholding could be especially relevant toward improving compliance in areas that are particularly complex or challenging to administer, such as with net income and losses passed through from "flow-through" entities such as S corporations and partnerships to their shareholders and partners. Another enforcement tool that can potentially deter noncompliance is the use of penalties for filing inaccurate or late tax and information returns. Congress has placed a number of civil penalty provisions in the tax code. However, as with civil penalties related to other federal agencies, inflation may have weakened the deterrent effect of IRS penalties. For example, the Treasury Inspector General for Tax Administration has noted that the $50 per partner per month penalty for a late-filed partnership tax return, established by Congress in 1978, would equate to $17.22 in 2004 dollars. In its fiscal year 2007 budget, the administration has proposed expanding penalty provisions applicable to paid tax return preparers to include non- income tax returns and related documents. In addition, Congress recently increased certain penalties related to tax shelters and other tax evasion techniques. Given Congress's recent judgment that some tax penalties were too low and concerns that inflation may have weakened the effectiveness of the civil penalty provisions in the tax code, additional increases may need to be considered to ensure that all penalties are of sufficient magnitude to deter tax noncompliance. Leveraging technology to improve IRS's capacity to receive, process, and utilize taxpayer returns could help IRS better determine how to allocate its resources to reduce the tax gap and would seem to be a prudent investment. IRS has invested heavily in modernizing its technology and those investments have paid off. Telephone service has improved and taxpayers are much more likely to get through to IRS and obtain assistance from IRS than before IRS upgraded its technology. Further, electronic filing has grown substantially. Tax information submitted to IRS electronically enables faster, more accurate processing and quicker interactions between IRS and taxpayers. Electronically filed returns are processed as they are received, therefore giving IRS access to more timely and accurate tax information, which can be used for better data analysis capability and quicker focus on issues that need resolution. IRS estimates it saves $2.15 on every individual tax return that is processed electronically. According to IRS data, electronic filing has allowed IRS to use more than a 1,000 fewer staff years to process paper returns, resources that can then be dedicated to other service or enforcement work. However, IRS's Business Systems Modernization project, through which the agency is modernizing its outdated technology, is far from complete. IRS needs to continue to strengthen management of this effort and make prudent technology investments to maximize the efficiencies that can be gained in IRS operations and services to taxpayers. Sound resource allocation is another tool for addressing the tax gap. The more effectively IRS can allocate its resources, the more progress should result. The new NRP data, for example, are to be used to better identify which tax returns to examine so that fewer compliant taxpayers are burdened by unnecessary audits and IRS can increase the amount of noncompliance that is addressed through its enforcement activities. As part of its attempt to make the best use of its enforcement resources, given budget constraints, IRS has developed rough measures of return on investment in terms of tax revenue that is directly assessed from uncovering noncompliance. Developing such measures is difficult because of incomplete information on all the costs and all the tax revenue ultimately collected from specific enforcement efforts, as well as on the indirect tax revenues generated when current enforcement actions prompt voluntary compliance improvements in the future. Continuing to develop the return on investment measures could help officials make more informed decisions about allocating resources, particularly during periods of budget constraints. Even with better data, however, officials will need to make judgments that take into account intangibles, such as how to achieve an equitable enforcement presence across the various taxpayer groups. Our nation's fiscal imbalance and challenges have created an imprudent and unsustainable path that needs to be addressed. While our long-term fiscal imbalance is too large to be corrected by one strategy, reducing the tax gap can help address the looming fiscal challenges. Collecting the billions of dollars that already should be paid, for example, would help ease the many difficult decisions that need to be made about our spending programs as well as the rest of the tax system. However, the tax gap itself has been large and pervasive over the years and therefore, reducing the gap will not only require expansions of current efforts, but also new and innovative solutions. While IRS takes the lead in continuing to find ways to significantly reduce the tax gap, support from Congress will be essential since legislation will likely be needed to implement many of the tax gap reduction ideas offered today. We look forward to continuing to work with Congress and IRS on these issues. Chairman Gregg, Senator Conrad and members of the committee, this concludes my testimony. I would be happy to answer any questions you may have at this time. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information on this testimony, please contact Michael Brostek on (202) 512-9110 or [email protected]. Individuals making key contributions to this testimony include Tom Short, Assistant Director; Jeff Arkin; Elizabeth Fan; and Cheryl Peterson. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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The Internal Revenue Service's (IRS) most recent estimate of the difference between what taxpayers timely and accurately paid in taxes and what they owed was $345 billion. IRS estimates it will eventually recover some of this tax gap, resulting in an estimated net tax gap of $290 billion. The tax gap arises when taxpayers fail to comply with the tax laws by underreporting tax liabilities on tax returns; underpaying taxes due from filed returns; or nonfiling, which refers to the failure to file a required tax return altogether or in a timely manner. The Chairman and Ranking Minority Member of the Senate Committee on the Budget asked GAO to present information on the causes of and possible solutions to the tax gap. This testimony addresses the nature and extent of the tax gap and the significance of reducing the tax gap, including some steps that may assist with this challenging task. For context, this testimony also addressed GAO's most recent simulations of the long-term fiscal outlook and the need for a fundamental reexamination of major spending and tax policies and priorities. Our nation's fiscal policy is on an imprudent and unsustainable course. As long-term budget simulations by GAO show, over the long term we face a large and growing structural deficit due primarily to known demographic trends, rising health care costs, and lower federal revenues as a percentage of the economy. GAO's simulations indicate that the long-term fiscal challenge is too big to be solved by economic growth alone or by making modest changes to existing spending and tax policies. Rather, a fundamental reexamination of major policies and priorities will be important to recapture our future fiscal flexibility. Underreporting of income by businesses and individuals accounted for most of the estimated $345 billion tax gap for 2001, with individual income tax underreporting alone accounting for $197 billion, or over half of the total gap. Corporate income tax and employment tax underreporting accounted for an additional $84 billion of the gap. Reducing the tax gap would help improve fiscal sustainability. Given the tax gap's persistence and size, it will require considering not only options that have been previously proposed but also new administrative and legislative actions. Even modest progress would yield significant revenue; each 1 percent reduction would likely yield nearly $3 billion annually. Reducing the tax gap will be a challenging long-term task, and progress will require attacking the gap with multiple strategies over a sustained period. These strategies could include efforts to regularly obtain data on the extent of, and reasons for, noncompliance; simplify the tax code; provide quality service to taxpayers; enhance enforcement of tax laws by utilizing enforcement tools such as tax withholding, information reporting, and penalties; leverage technology; and optimize resource allocation.
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Some context for my remarks is appropriate. The threat of terrorism was significant throughout the 1990s; a plot to destroy 12 U.S. airliners was discovered and thwarted in 1995, for instance. Yet the task of providing security to the nation's aviation system is unquestionably daunting, and we must reluctantly acknowledge that any form of travel can never be made totally secure. The enormous size of U.S. airspace alone defies easy protection. Furthermore, given this country's hundreds of airports, thousands of planes, tens of thousands of daily flights, and the seemingly limitless ways terrorists or criminals can devise to attack the system, aviation security must be enforced on several fronts. Safeguarding airplanes and passengers requires, at the least, ensuring that perpetrators are kept from breaching security checkpoints and gaining access to secure airport areas or to aircraft. Additionally, vigilance is required to prevent attacks against the extensive computer networks that FAA uses to guide thousands of flights safely through U.S. airspace. FAA has developed several mechanisms to prevent criminal acts against aircraft, such as adopting technology to detect explosives and establishing procedures to ensure that passengers are positively identified before boarding a flight. Still, in recent years, we and others have often demonstrated that significant weaknesses continue to plague the nation's aviation security. Our work has identified numerous problems with aspects of aviation security in recent years. One such problems is FAA's computer-based air traffic control system. The ATC system is an enormous, complex collection of interrelated systems, including navigation, surveillance, weather, and automated information processing and display systems that link hundreds of ATC facilities and provide information to air traffic controllers and pilots. Failure to adequately protect these systems could increase the risk of regional or nationwide disruption of air traffic--or even collisions. In five reports issued from 1998 through 2000, we pointed out numerous weaknesses in FAA's computer security. FAA had not (1) completed background checks on thousands of contractor employees, (2) assessed and accredited as secure many of its ATC facilities, (3) performed appropriate risk assessments to determine the vulnerability of the majority of its ATC systems, (4) established a comprehensive security program, (5) developed service continuity controls to ensure that critical operations continue without undue interruption when unexpected events occur, and (6) fully implemented an intrusion detection capability to detect and respond to malicious intrusions. Some of these weaknesses could have led to serious problems. For example, as part of its Year 2000 readiness efforts, FAA allowed 36 mainland Chinese nationals who had not undergone required background checks to review the computer source code for eight mission-critical systems. To date, we have made nearly 22 recommendations to improve FAA's computer security. FAA has worked to address these recommendations, but most of them have yet to be completed. For example, it is making progress in obtaining background checks on contractors and accrediting facilities and systems as secure. However, it will take time to complete these efforts. Control of access to aircraft, airfields, and certain airport facilities is another component of aviation security. Among the access controls in place are requirements intended to prevent unauthorized individuals from using forged, stolen, or outdated identification or their familiarity with airport procedures to gain access to secured areas. In May 2000, we reported that our special agents, in an undercover capacity, obtained access to secure areas of two airports by using counterfeit law enforcement credentials and badges. At these airports, our agents declared themselves as armed law enforcement officers, displayed simulated badges and credentials created from commercially available software packages or downloaded from the Internet, and were issued "law enforcement" boarding passes. They were then waved around the screening checkpoints without being screened. Our agents could thus have carried weapons, explosives, chemical/biological agents, or other dangerous objects onto aircraft. In response to our findings, FAA now requires that each airport's law enforcement officers examine the badges and credentials of any individual seeking to bypass passenger screening. FAA is also working on a "smart card" computer system that would verify law enforcement officers' identity and authorization for bypassing passenger screening. The Department of Transportation's Inspector General has also uncovered problems with access controls at airports. The Inspector General's staff conducted testing in 1998 and 1999 of the access controls at eight major airports and succeeded in gaining access to secure areas in 68 percent of the tests; they were able to board aircraft 117 times. After the release of its report describing its successes in breaching security, the Inspector General conducted additional testing between December 1999 and March 2000 and found that, although improvements had been made, access to secure areas was still gained more than 30 percent of the time. Screening checkpoints and the screeners who operate them are a key line of defense against the introduction of dangerous objects into the aviation system. Over 2 million passengers and their baggage must be checked each day for articles that could pose threats to the safety of an aircraft and those aboard it. The air carriers are responsible for screening passengers and their baggage before they are permitted into the secure areas of an airport or onto an aircraft. Air carriers can use their own employees to conduct screening activities, but mostly air carriers hire security companies to do the screening. Currently, multiple carriers and screening companies are responsible for screening at some of the nation's larger airports. Concerns have long existed over screeners' ability to detect and prevent dangerous objects from entering secure areas. Each year, weapons were discovered to have passed through one checkpoint and have later been found during screening for a subsequent flight. FAA monitors the performance of screeners by periodically testing their ability to detect potentially dangerous objects carried by FAA special agents posing as passengers. In 1978, screeners failed to detect 13 percent of the objects during FAA tests. In 1987, screeners missed 20 percent of the objects during the same type of test. Test data for the 1991 to 1999 period show that the declining trend in detection rates continues. Furthermore, the recent tests show that as tests become more realistic and more closely approximate how a terrorist might attempt to penetrate a checkpoint, screeners' ability to detect dangerous objects declines even further. As we reported last year, there is no single reason why screeners fail to identify dangerous objects. Two conditions--rapid screener turnover and inadequate attention to human factors--are believed to be important causes. Rapid turnover among screeners has been a long-standing problem, having been identified as a concern by FAA and by us in reports dating back to at least 1979. We reported in 1987 that turnover among screeners was about 100 percent a year at some airports, and according to our more recent work, the turnover is considerably higher. From May 1998 through April 1999, screener turnover averaged 126 percent at the nation's 19 largest airports; 5 of these airports reported turnover of 200 percent or more, and one reported turnover of 416 percent. At one airport we visited, of the 993 screeners trained at that airport over about a 1-year period, only 142, or 14 percent, were still employed at the end of that year. Such rapid turnover can seriously limit the level of experience among screeners operating a checkpoint. Both FAA and the aviation industry attribute the rapid turnover to the low wages and minimal benefits screeners receive, along with the daily stress of the job. Generally, screeners are paid at or near the minimum wage. We reported last year that some of the screening companies at 14 of the nation's 19 largest airports paid screeners a starting salary of $6.00 an hour or less and, at 5 of these airports, the starting salary was the then- minimum wage--$5.15 an hour. It is common for the starting wages at airport fast-food restaurants to be higher than the wages screeners receive. For instance, at one airport we visited, screeners' wages started as low as $6.25 an hour, whereas the starting wage at one of the airport's fast- food restaurants was $7 an hour. The demands of the job also affect performance. Screening duties require repetitive tasks as well as intense monitoring for the very rare event when a dangerous object might be observed. Too little attention has been given to factors such as (1) improving individuals' aptitudes for effectively performing screener duties, (2) the sufficiency of the training provided to screeners and how well they comprehend it, and (3) the monotony of the job and the distractions that reduce screeners' vigilance. As a result, screeners are being placed on the job who do not have the necessary aptitudes, nor the adequate knowledge to effectively perform the work, and who then find the duties tedious and dull. We reported in June 2000 that FAA was implementing a number of actions to improve screeners' performance. However, FAA did not have an integrated management plan for these efforts that would identify and prioritize checkpoint and human factors problems that needed to be resolved, and identify measures--and related milestone and funding information--for addressing the performance problems. Additionally, FAA did not have adequate goals by which to measure and report its progress in improving screeners' performance. FAA is implementing our recommendations. However, two key actions to improving screeners' performance are still not complete. These actions are the deployment of threat image projection systems--which place images of dangerous objects on the monitors of X-ray machines to keep screeners alert and monitor their performance--and a certification program to make screening companies accountable for the training and performance of the screeners they employ. Threat image projection systems are expected to keep screeners alert by periodically imposing the image of a dangerous object on the X-ray screen. They also are used to measure how well screeners perform in detecting these objects. Additionally, the systems serve as a device to train screeners to become more adept at identifying harder-to-spot objects. FAA is currently deploying the threat image projections systems and expects to have them deployed at all airports by 2003. The screening company certification program, required by the Federal Aviation Reauthorization Act of 1996, will establish performance, training, and equipment standards that screening companies will have to meet to earn and retain certification. However, FAA has still not issued its final regulation establishing the certification program. This regulation is particularly significant because it is to include requirements mandated by the Airport Security Improvement Act of 2000 to increase screener training--from 12 hours to 40 hours--as well as expand background check requirements. FAA had been expecting to issue the final regulation this month, 2 1/2 years later than it originally planned. We visited five countries--Belgium, Canada, France, the Netherlands, and the United Kingdom--viewed by FAA and the civil aviation industry as having effective screening operations to identify screening practices that differ from those in the United States. We found that some significant differences exist in four areas: screening operations, screener qualifications, screener pay and benefits, and institutional responsibility for screening. First, screening operations in some of the countries we visited are more stringent. For example, Belgium, the Netherlands, and the United Kingdom routinely touch or "pat down" passengers in response to metal detector alarms. Additionally, all five countries allow only ticketed passengers through the screening checkpoints, thereby allowing the screeners to more thoroughly check fewer people. Some countries also have a greater police or military presence near checkpoints. In the United Kingdom, for example, security forces--often armed with automatic weapons--patrol at or near checkpoints. At Belgium's main airport in Brussels, a constant police presence is maintained at one of two glass-enclosed rooms directly behind the checkpoints. Second, screeners' qualifications are usually more extensive. In contrast to the United States, Belgium requires screeners to be citizens; France requires screeners to be citizens of a European Union country. In the Netherlands, screeners do not have to be citizens, but they must have been residents of the country for 5 years. Training requirements for screeners were also greater in four of the countries we visited than in the United States. While FAA requires that screeners in this country have 12 hours of classroom training before they can begin work, Belgium, Canada, France, and the Netherlands require more. For example, France requires 60 hours of training and Belgium requires at least 40 hours of training with an additional 16 to 24 hours for each activity, such as X-ray machine operations, that the screener will conduct. Third, screeners receive relatively better pay and benefits in most of these countries. Whereas screeners in the United States receive wages that are at or slightly above minimum wage, screeners in some countries receive wages that are viewed as being at the "middle income" level in those countries. In the Netherlands, for example, screeners received at least the equivalent of about $7.50 per hour. This wage was about 30 percent higher than the wages at fast-food restaurants in that country. In Belgium, screeners received the equivalent of about $14 per hour. Not only is pay higher, but the screeners in some countries receive benefits, such as health care or vacations--in large part because these benefits are required under the laws of these countries. These countries also have significantly lower screener turnover than the United States: turnover rates were about 50 percent or lower in these countries. Finally, the responsibility for screening in most of these countries is placed with the airport authority or with the government, not with the air carriers as it is in the United States. In Belgium, France, and the United Kingdom, the responsibility for screening has been placed with the airports, which either hire screening companies to conduct the screening operations or, as at some airports in the United Kingdom, hire screeners and manage the checkpoints themselves. In the Netherlands, the government is responsible for passenger screening and hires a screening company to conduct checkpoint operations, which are overseen by a Dutch police force. We note that, worldwide, of 102 other countries with international airports, 100 have placed screening responsibility with the airports or the government; only 2 other countries--Canada and Bermuda--place screening responsibility with air carriers. Because each country follows its own unique set of screening practices, and because data on screeners' performance in each country were not available to us, it is difficult to measure the impact of these different practices on improving screeners' performance. Nevertheless, there are indications that for least one country, practices may help to improve screeners' performance. This country conducted a screener testing program jointly with FAA that showed that its screeners detected over twice as many test objects as did screeners in the United States. Mr. Chairman, this concludes my prepared statement. I will be pleased to answer any questions that you or Members of the Committee may have. For more information, please contact Gerald L. Dillingham at (202) 512- 2834. Individuals making key contributions to this testimony included Bonnie Beckett, J. Michael Bollinger, Colin J. Fallon, John R. Schulze, and Daniel J. Semick. Responses of Federal Agencies and Airports We Surveyed About Access Security Improvements (GAO-01-1069R, Aug. 31, 2001). Aviation Security: Additional Controls Needed to Address Weaknesses in Carriage of Weapons Regulations (GAO/RCED-00-181, Sept. 29, 2000). FAA Computer Security: Actions Needed to Address Critical Weaknesses That Jeopardize Aviation Operations (GAO/T-AIMD-00-330, Sept. 27, 2000). FAA Computer Security: Concerns Remain Due to Personnel and Other Continuing Weaknesses (GAO/AIMD-00-252, Aug. 16, 2000). Aviation Security: Long-Standing Problems Impair Airport Screeners' Performance (GAO/RCED-00-75, June 28, 2000). Computer Security: FAA Is Addressing Personnel Weaknesses, But Further Action Is Required (GAO/AIMD-00-169, May 31, 2000). Security: Breaches at Federal Agencies and Airports (GAO-OSI-00-10, May 25, 2000). Combating Terrorism: How Five Foreign Countries Are Organized to Combat Terrorism (GAO/NSIAD-00-85, Apr. 7, 2000). Aviation Security: Vulnerabilities Still Exist in the Aviation Security System (GAO/T-RCED/AIMD-00-142, Apr. 6, 2000). Aviation Security: Slow Progress in Addressing Long-Standing Screener Performance Problems (GAO/T-RCED-00-125, Mar. 16, 2000). Computer Security: FAA Needs to Improve Controls Over Use of Foreign Nationals to Remediate and Review Software (GAO/AIMD-00-55, Dec. 23, 1999). FBI: Delivery of ATF Report on TWA Flight 800 Crash (GAO/OSI-99-18R, Aug. 13, 1999). Aviation Security: FAA's Actions to Study Responsibilities and Funding for Airport Security and to Certify Screening Companies (GAO/RCED- 99-53, Feb. 25, 1999). Air Traffic Control: Weak Computer Security Practices Jeopardize Flight Safety (GAO/AIMD-98-155, May 18, 1998). Aviation Security: Progress Being Made, but Long-Term Attention Is Needed (GAO/T-RCED-98-190, May 14, 1998). Aviation Security: Implementation of Recommendations Is Under Way, but Completion Will Take Several Years (GAO/RCED-98-102, Apr. 24, 1998). Combating Terrorism: Observations on Crosscutting Issues (T-NSIAD- 98-164, Apr. 23, 1998). Aviation Safety: Weaknesses in Inspection and Enforcement Limit FAA in Identifying and Responding to Risks (GAO/RCED-98-6, Feb. 27, 1998). Aviation Security: FAA's Procurement of Explosives Detection Devices (GAO/RCED-97-111R, May 1, 1997). Aviation Security: Commercially Available Advanced Explosives Detection Devices (GAO/RCED-97-ll9R, Apr. 24, 1997). Aviation Security: Posting Notices at Domestic Airports (GAO/RCED-97- 88R, Mar. 25, 1997). Aviation Safety and Security: Challenges to Implementing the Recommendations of the White House Commission on Aviation Safety and Security (GAO/T-RCED-97-90, Mar. 5, 1997). Aviation Security: Technology's Role in Addressing Vulnerabilities (GAO/T-RCED/NSIAD-96-262, Sept. 19, 1996). Aviation Security: Urgent Issues Need to Be Addressed (GAO/T- RCED/NSIAD-96-251, Sept. 11, 1996). Terrorism and Drug Trafficking: Technologies for Detecting Explosives and Narcotics (GAO/NSIAD/RCED-96-252, Sept. 4, 1996). Aviation Security: Immediate Action Needed to Improve Security (GAO/T-RCED/NSIAD-96-237, Aug. 1, 1996).
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A safe and secure civil aviation system is a critical component of the nation's overall security, physical infrastructure, and economic foundation. Billions of dollars and myriad programs and policies have been devoted to achieving such a system. Although it is not fully known at this time what actually occurred or what all the weaknesses in the nation's aviation security apparatus are that contributed to the horrendous events on September 11, 2001, it is clear that serious weaknesses exist in our aviation security system and that their impact can be far more devastating than previously imagined. As reported last year, GAO's review of the Federal Aviation Administration's (FAA) oversight of air traffic control (ATC) computer systems showed that FAA had not followed some critical aspects of its own security requirements. Specifically, FAA had not ensured that ATC buildings and facilities were secure, that the systems themselves were protected, and that the contractors who access these systems had undergone background checks. Controls for limiting access to secure areas, including aircraft, have not always worked as intended. GAO's special agents used fictitious law enforcement badges and credentials to gain access to secure areas, bypass security checkpoints at two airports, and walk unescorted to aircraft departure gates. Tests of screeners revealed significant weaknesses as measured in their ability to detect threat objects located on passengers or contained in their carry-on luggage. Screening operations in Belgium, Canada, France, the Netherlands, and the United Kingdom--countries whose systems GAO has examined--differ from this country's in some significant ways. Their screening operations require more extensive qualifications and training for screeners, include higher pay and better benefits, and often include different screening techniques, such as "pat-downs" of some passengers.
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The ability to find, organize, use, share, appropriately dispose of, and save records--the essence of records management--is vital for the effective functioning of the federal government. In the wake of the transition from paper-based to electronic processes, records are increasingly electronic, and the volumes of electronic records produced by federal agencies are vast and rapidly growing, providing challenges to NARA as the nation's recordkeeper and archivist. Besides sheer volume, other factors contributing to the challenge of electronic records include their complexity and their dependence on software and hardware. Electronic records come in many forms: text documents, e-mails, Web pages, digital images, videotapes, maps, spreadsheets, presentations, audio files, charts, drawings, databases, satellite imagery, geographic information systems, and more. They may be complex digital objects that contain embedded images (still and moving), drawings, sounds, hyperlinks, or spreadsheets with computational formulas. Some portions of electronic records, such as the content of dynamic Web pages, are created on the fly from databases and exist only during the viewing session. Others, such as e-mail, may contain multiple attachments, and they may be threaded (that is, related e-mail messages are linked into send-reply chains). In addition, the computer operating systems and the hardware and software that are used to create electronic documents can become obsolete. If they do, they may leave behind records that cannot be read without the original hardware and software. Further, the storage media for these records are affected by both obsolescence and decay. Media may be fragile, have limited shelf life, and become obsolete in a few years. For example, few computers today have disk drives that can read information stored on 8- or 5 1/4-inch diskettes, even if the diskettes themselves remain readable. Another challenge is the growth in electronic presidential records. The Presidential Records Act gives the Archivist of the United States responsibility for the custody, control, and preservation of presidential records upon the conclusion of a President's term of office. The act states that the Archivist has an affirmative duty to make such records available to the public as rapidly and completely as possible consistent with the provisions of the act. In response to these widely recognized challenges, the Archives began a research and development program to develop a modern archive for electronic records. In 2001, NARA hired a contractor to develop policies and plans to guide the overall acquisition of an electronic records system. In December 2003, the agency released a request for proposals for the design of ERA. In August 2004, NARA awarded two firm-fixed-price contracts for the design phase totaling about $20 million--one to Harris Corporation and the other to Lockheed Martin Corporation. On September 8, 2005, NARA announced the selection of Lockheed Martin Corporation to build the ERA system. The contract with Lockheed is a cost-plus-award- fee contract with a total value through 2012 of about $317 million. As of April 2009, the life-cycle cost for ERA through March 2012 was estimated at $551.4 million; the total life-cycle cost includes not only the development contract costs, but also program management, research and development, and program office support, among other things. Through fiscal year 2008, NARA had spent about $237 million on ERA, including about $112 million in payments to Lockheed Martin. The purpose of ERA is to ensure that the records of the federal government are preserved for as long as needed, independent of the original hardware or software that created them. ERA is to provide the technology to ensure that NARA's electronic records holdings can be widely accessed with the technology currently in use. The system is to enable the general public, federal agencies, and NARA staff to search and access information about all types of federal records, whether in NARA custody or not, as well as to search for and access electronic records stored in the system. Using various search engines, the system is to provide the ability to create and execute searches, view search results, and select assets for output or presentation. NARA currently plans to deliver ERA in five separate increments: * Increment 1, also known as the ERA base, included functions focused on the transfer of electronic records into the system. * Increment 2 includes the Executive Office of the President (EOP) system, which was designed to handle electronic records from the White House at the end of the previous administration. The EOP system uses an architecture based on a commercial off-the-shelf product that supplies basic requirements, including rapid ingest of records and immediate and flexible search of content. Increment 2 also includes basic case management for special access requests. * According to NARA's 2010 ERA expenditure plan, Increment 3 is to include new Congressional and Public Access systems. It is also to augment the base system with commercial off-the-shelf technology to increase flexibility and scalability. NARA plans to complete this increment by June 2010. * Increments 4 and 5 are to provide additional ERA functionality, such as backup and restore functions and wider search capabilities, and provide full system functionality by 2012. NARA's progress in developing ERA includes achieving initial operating capability for the first two of its five planned increments. However this progress came after NARA had experienced significant project delays and increased costs. NARA also deferred functions planned for Increment 1 to later increments. As we reported in 2007, the initial operating capability for Increment 1 was originally scheduled to be achieved by September 2007. However, the project experienced delays due to factors such as low productivity of contractor software programmers, difficulties in securing an acceptable contract to prepare the site that was to house the system, and problems with software integration. These delays put NARA's initial plan to use ERA to receive the electronic presidential records of the Bush Administration in January 2009 at risk. In response, NARA and Lockheed Martin agreed to a revised schedule and strategy that called for the concurrent development of two separate systems, which could later be reintegrated into a single system: * First, they agreed to continue development of the original system but focused the first increment on the transfer of electronic records into the system. Other initially planned capabilities were deferred to later increments, including deleting records from storage, searching item descriptions, and ingesting records redacted outside of the system. NARA now refers to this as the "base" ERA system. Initial operating capability for this increment was delayed to June 2008. * Second, NARA conducted parallel development of a separate increment dedicated initially to receiving electronic records from the outgoing Bush Administration in January 2009. This system, referred to as the Executive Office of the President (EOP) system, uses a different architecture from that of the ERA base: it was built on a commercial product that was to provide the basic requirements for processing presidential electronic records, such as rapid ingestion of records and the ability to search content. NARA believed that if it could not ingest the Bush records in a way that supported search and retrieval immediately after the transition, it risked not being able to effectively respond to requests from Congress, the new administration, and the courts for these records--a critical agency mission. As we reported earlier this year, NARA certified that it achieved initial operating capability for Increment 1 in June 2008, following its revised plan. According to NARA's 2010 expenditure plan, this increment cost $80.45 million to deliver, compared to a planned cost of $60.62 million. NARA also reported that it completed Increment 2 on time in December 2008 at a cost of $10.4 million (compared to a planned cost of $11.1 million). However, it was not functioning as intended because of delays in ingesting records into the system. Specifically, before the transition, NARA had estimated that the Bush electronic records would be fully ingested into EOP, where they would be available for search and retrieval, by May 2009. However, as of April 27, only 2.3 terabytes of data were fully ingested into the EOP system. This constituted about 3 percent of all Bush Administration unclassified electronic records. NARA later estimated that ingest of all 78.4 terabytes of unclassified records would not be complete until October 2009. In its recently released 2010 expenditure plan, NARA reported that the Bush records were fully ingested into EOP by September 2009. NARA officials attributed EOP ingest delays, in part, to unexpected difficulties. For example, according to NARA officials, once they started using the EOP system, they discovered that records from certain White House systems were not being extracted in the expected format. As a result, the agency had to develop additional software tools to facilitate the full extraction of data from White House systems prior to ingest into EOP. In addition, in April 2009, NARA discovered that 31 terabytes of priority data that had been partially ingested between December 2008 and January 2009 were neither complete nor accurate because they were taken from an incomplete copy of the source system. Because the records had not been ingested into the EOP system, NARA had to use other systems to respond to requests for presidential records early in 2009. As of April 24, 2009, NARA had received 43 special access requests for information on the Bush Administration. Only one of these requests used EOP for search, and no responsive records were found. To respond to 24 of these requests, NARA used replicated systems based on the software and related hardware used by the White House for records and image management. NARA's current expenditure plan reports that after completing ingest of the Bush electronic records in September 2009, it retired the replicated systems. In fiscal 2010, NARA plans to complete Increment 3 and begin work on Increment 4. According to its 2010 expenditure plan, Increment 3 will cost $42.2 million and be completed in the fourth quarter of fiscal year 2010. It is to provide new systems for congressional records and public access, as well as improvements to the existing base system and the incorporation of several deferred functions, such as the ability to delete records and search and view their descriptions. Fiscal year 2010 work on Increment 4 is to consist primarily of early planning, analysis, and design. Despite the recent completion of the first two ERA increments, NARA faces several risks that could limit its ability to successfully complete the remaining three increments by 2012. These risks include the lack of specific plans describing the functions to be delivered in future increments, inconsistent application of earned value management (a key management technique), and the lack of a tested contingency plan for the ERA system. First, NARA's plans for ERA have lacked sufficient detail. For several years, NARA's appropriations statute has required it to submit an expenditure plan to congressional appropriations committees before obligating multi-year funds for the ERA program, and to, among other conditions, have the plan reviewed by GAO. These plans are to include a sufficient level and scope of information for Congress to understand what system capabilities and benefits are to be delivered, by when and at what costs, and what progress is being made against the commitments that were made in prior expenditure plans. However, several of our reviews have found that NARA's plans lacked sufficient detail. Most recently, we reported in July that NARA's 2009 plan did not clearly show what functions had been delivered to date or what functions were to be included in future increments and at what cost. For example, the fiscal year 2009 plan did not specifically identify the functions provided in the two completed increments. In addition, while the plan discussed the functions deferred to later increments, it did not specify the cost of adding those functions at a later time. Additionally, NARA's 2009 plan lacked specifics about the scope of improvements planned for Increment 3. For example, it described one of the improvements as extend storage capacity but did not specify the amount of extended storage to be provided. Also, NARA's plan did not specify when these functions will be completed or how much they would cost. NARA officials attributed the plan's lack of specificity to ongoing negotiations with Lockheed Martin. Another risk is NARA's inconsistent use of earned value management (EVM). NARA's 2009 expenditure plan stated that, in managing ERA, the agency used EVM tools and required the same of its contractors. EVM, if implemented appropriately, can provide objective reports of project status, produce early warning signs of impending schedule delays and cost overruns, and provide unbiased estimates of a program's total costs. We recently published a set of best practices on cost estimation that addresses the use of EVM. Comparing NARA's EVM data to those practices, we determined that NARA fully addressed only 5 of the 13 practices. For example, we found weaknesses within the EVM performance reports, including contractor reports of funds spent without work scheduled or completed, and work completed and funds spent where no work was planned. In addition, the program had not recently performed an integrated cost-schedule risk analysis. This type of analysis provides an estimate of the how much the program will cost upon completion and can be compared to the estimate derived from EVM data to determine if it is likely to be sound. NARA officials attributed these weaknesses, in part, to documentation that did not accurately reflect the program's current status. Another significant risk is the lack of a contingency plan for ERA. Contingency planning is a critical component of information protection. If normal operations are interrupted, network managers must be able to detect, mitigate, and recover from service disruptions while preserving access to vital information. Therefore, a contingency plan details emergency response, backup operations, and disaster recovery for information systems. Federal guidance recommends 10 security control activities related to contingency planning, including developing a formal contingency plan, training employees on their contingency roles and responsibilities, and identifying a geographically separate alternative processing site to support critical business functions in the event of a system failure or disruption. An internal NARA review found weaknesses in all 10 of the required contingency planning control activities for ERA. As of April 2009, NARA had plans to address each weakness, but had not yet addressed 10 of the 11 weaknesses. In addition, NARA reported that the backup and restore functions for the commercial off-the-shelf archiving product used at the ERA facility in West Virginia tested successfully, but there were concerns about the amount of time required to execute the process. In lab tests, the restore process took about 56 hours for 11 million files. This is significant because, while the backup is being performed, the replication of data must be stopped; otherwise it could bring the system to a halt. Subsequently, NARA officials stated that they have conducted two successful backups, but the restore process had not been fully tested to ensure that the combined backup and restore capability can be successfully implemented. To help mitigate the risks facing the ERA program, we previously recommended that NARA, among other things: include more details in future ERA expenditure plans on the functions and costs of completed and planned increments; * strengthen its earned value management process following best * develop and implement a system contingency plan for ERA. In its 2010 expenditure plan, NARA reported that it had taken action to address our recommendations. For example, NARA reported that a test of the ERA contingency plan was completed on August 5, 2009, and the plan itself finalized on September 16, 2009. We have not yet fully reviewed this plan or the results of the reported test. However, if NARA fully implements our recommendations, we believe the risks can be significantly reduced. In summary, despite earlier delays, NARA has made progress in developing the ERA system, including the transfer of Bush administration electronic records. However, future progress could be at risk without more specific plans describing the functions to be delivered and the cost of developing those functions, which is critical for the effective monitoring of the cost, schedule, and performance of the ERA system. Similarly, inconsistent use of key project management disciplines like earned value management would limit NARA's ability to effectively manage this project and accurately report on its progress. Mr. Chairman, this concludes my testimony today. I would be happy to answer any questions you or other members of the subcommittee may have. If you or your staff have any questions about matters discussed in this testimony, please contact David A. Powner at (202) 512-9286 or [email protected]. The other key contributor to this testimony was James R. Sweetman, Jr., Assistant Director. 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 2001, the National Archives and Records Administration (NARA) has been working to develop a modern Electronic Records Archive (ERA) system, a major information system that is intended to preserve and provide access to massive volumes of all types and formats of electronic records. The system is being developed incrementally over several years, with the first two pieces providing an initial set of functions and additional capabilities to be added in future increments. NARA plans to deploy full system functionality by 2012 at an estimated life-cycle cost of about $550 million. NARA originally planned to complete the first segment of ERA in September 2007. However, software and contracting problems led the agency and its contractor Lockheed Martin to revise the development approach. The revised plan called for parallel development of two different increments: a "base" ERA system with limited functionality and an Executive Office of the President (EOP) system to support the ingestion and search of records from the outgoing Bush Administration. GAO was asked to summarize NARA's progress in developing the ERA system and the ongoing risks the agency faces in completing it. In preparing this testimony, GAO relied on its prior work and conducted a preliminary review of NARA's fiscal year 2010 ERA expenditure plan. NARA has completed two of five planned increments of ERA, but has experienced schedule delays and cost overruns, and several functions planned for the system's initial release were deferred. Although NARA initially planned for the system to be capable of ingesting federal and presidential records in September 2007, the two system increments to support those records did not achieve initial operating capability until June 2008 and December 2008, respectively. In addition, NARA reportedly spent about $80 million on the base increment, compared to its planned cost of about $60 million. Finally, a number of functions originally planned for the base increment were deferred to later increments, including the ability to delete records and to ingest redacted records. In fiscal year 2010, NARA plans to complete the third increment, which is to include new systems for Congressional records and public access, and begin work on the fourth. GAO's previous work on ERA identified significant risks to the program and recommended actions to mitigate them. Specifically, GAO reported that NARA's plans for ERA lacked sufficient detail to, for example, clearly show what functions had been delivered to date or were to be included in future increments and at what cost. Second, NARA had been inconsistent in its use of earned value management (EVM), a project management approach that can provide objective reports of project status and early warning signs of cost and schedule overruns. Specifically, GAO found that NARA fully employed only 5 of 13 best practices for cost estimation that address EVM. Further, NARA lacked a contingency plan for ERA to ensure system continuity in the event that normal operations were disrupted. For example, NARA did not have a fully functional backup and restore process for the ERA system, a key component of contingency planning for system availability. To help mitigate these risks, GAO recommended that NARA: (1) include details in future ERA expenditure plans on the functions and costs of completed and planned increments; (2) strengthen its earned value management process following best practices; and (3) develop and implement a system contingency plan for ERA. NARA reported in its most recent expenditure plan that it had taken actions to address these recommendations.
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Of the four agencies that received over $40 billion in funding for science- related activities under the Recovery Act, DOE received the largest amount of funds. Table 1 shows Recovery Act funding, obligations, and expenditures for these agencies. Of the $35.2 billion it received under the Recovery Act for science-related projects and activities, DOE reported that it had obligated $34.6 billion (98 percent) and spent $18.9 billion (54 percent) as of September 30, 2011. This is an increase from March 10, 2011, when DOE reported that it had obligated $33.1 billion and spent $12.5 billion. Table 2 shows Recovery Act funding, obligations, and expenditures for DOE's program offices. Our Recovery Act recommendations have focused primarily on the following four DOE programs and projects: The EECBG program, which provides grants to states, territories, tribes, and local communities for projects that improve energy efficiency, reduce energy use, and reduce fossil fuel emissions. The Office of Environmental Management, which cleans up contaminated sites across the country where decades of nuclear weapons research, development, and production left a legacy of dangerously radioactive, chemical, and other hazardous wastes. The LGP, which guarantees loans for energy projects that (1) use either new or significantly improved technologies as compared with commercial technologies already in use in the United States and (2) avoid, reduce, or sequester emissions of air pollutants or man-made greenhouse gases. The Weatherization Assistance Program, which enables low-income families to reduce their utility bills by making long-term energy- efficiency improvements to their homes by, for example, installing insulation, sealing leaks, and modernizing heating or air conditioning equipment. Table 3 shows Recovery Act funding, obligations, and expenditures for these DOE programs as of September 30, 2011. The Recovery Act provided about $3.2 billion for DOE's EECBG, funding the program for the first time since it was authorized in the Energy Independence and Security Act (EISA) of 2007. DOE awarded this funding as follows: About $1.94 billion as formula grants to more than 2,000 local communities--including cities, counties, and tribal communities. About $767 million as formula grants to the states, five territories, and the District of Columbia. About $40 million for Administrative and Training/Technical Assistance. About $453 million through competitive grants to local communities. Our April 2011 report on the EECBG program focused on the approximately $2.7 billion awarded through formula grants. In that report, we found that more than 65 percent of EECBG funds had been obligated for three types of activities: (1) energy-efficiency retrofits (36.8 percent), which includes activities such as grants to nonprofit organizations and governmental agencies for retrofitting their existing facilities to improve energy efficiency; (2) financial incentive programs (18.5 percent), which includes activities such as rebates, subgrants, and revolving loans to promote recipients' energy-efficiency improvements; and (3) energy-efficiency and conservation programs for buildings and facilities (9.8 percent), which includes activities such as installing storm windows or solar hot water technology. We also found that DOE did not always collect information on the various methods that recipients use to monitor contractors and subrecipients. As a result, DOE does not always know whether the monitoring activities of recipients are sufficiently rigorous to ensure compliance with federal requirements. In addition, DOE officials have experienced challenges in assessing the extent to which the EECBG program is reducing energy use and increasing energy savings. Most recipients report estimates to comply with program reporting requirements, and DOE takes steps to assess the reasonableness of these estimates but does not require recipients to report the methods or tools used to develop estimates. In addition, while DOE provides recipients with a software tool to estimate energy savings, DOE does not require that recipients use the most recent version. Based on these findings, we recommended that DOE (1) explore a means to capture information on recipients' monitoring activities and (2) solicit information on recipients' methods for estimating energy-related impact metrics and verify that recipients who use DOE's estimation tool use the most recent version. DOE generally agreed with our recommendations and has taken steps to implement them. DOE took action on our first recommendation by collecting additional information related to subrecipient monitoring, in order to help ensure that they comply with the terms and conditions of the award. These changes will help improve DOE's oversight of recipients. DOE implemented our second recommendation by making changes to the way it collects data to apply a unified methodology to the calculation of impact metrics. DOE officials also said the calculation of estimated impact metrics will now be performed centrally by DOE by applying known national standards to existing recipient-reported performance metrics. The Recovery Act provided about $6 billion to expand and accelerate cleanup activities at numerous contaminated sites across the country.This funding substantially boosted the Office of Environmental Management's annual appropriation for cleanup, which has generally been between $6 billion and $7 billion. As of September 30, 2011, DOE had obligated all of the $6 billion in Recovery Act funding. DOE officials told us that they planned to have 92 percent of the funds spent by September 30, 2011, and DOE had expended about 88 percent (nearly $5.3 billion) by that time. As of May 2011, DOE had selected 109 projects for Recovery Act funding at 17 DOE sites in 12 states. DOE designated 80 percent of this funding to speed cleanup activities at four large sites: the Hanford Site in Washington State, Idaho National Laboratory, the Oak Ridge Reservation in Tennessee, and the Savannah River Site in South Carolina. DOE generally chose to use Recovery Act funds for cleanup projects that could be started and finished quickly. The majority of the projects selected also had existing contracts, which allowed the department to update and validate new cost and schedule targets within a short time frame. DOE generally funded four types of projects: (1) decontaminating or demolishing facilities, (2) removing contamination from soil and groundwater, (3) packaging and disposing of transuranic and other wastes, and (4) supporting the maintenance and treatment of liquid tank wastes. According to DOE officials, as of the end of May 2011, DOE had completed 28 Recovery Act projects. In July 2010, we reported that DOE has faced challenges in both managing Recovery Act projects and measuring how Recovery Act funding has affected cleanup and other goals. that one-third of Recovery Act-funded environmental cleanup projects did not meet cost and schedule targets, which DOE attributed to technical, regulatory, safety, and contracting issues. DOE took steps aimed at strengthening project management and oversight for Recovery Act projects, such as increasing project reporting requirements and placing tighter controls on when funds are disbursed to sites. By October 2010, DOE had made improvements in both cost and schedule performance. GAO, Recovery Act: Most DOE Cleanup Projects Appear to Be Meeting Cost and Schedule Targets, but Assessing Impact of Spending Remains a Challenge, GAO-10-784 (Washington, D.C., July 29, 2010). very different and potentially misleading information. Second, DOE had not yet developed a clear means of measuring how cleanup work funded by the act would affect environmental risk or the land and facilities requiring DOE cleanup. Third, it is unclear to what extent Recovery Act funding will reduce the costs of cleaning up the DOE sites over the long term. DOE's estimate of $4 billion in life-cycle cost savings resulting from Recovery Act funding was not calculated in accordance with Office of Management and Budget's guidance on benefit-cost analysis or DOE's guidance on life-cycle cost analysis. Our analysis indicated that those savings could be 80 percent less than DOE estimated. Without clear and consistent measures, it will be difficult to say whether or how Recovery Act funding has affected DOE's cleanup goals. DOE officials define footprint reduction as the "physical completion of activities with petition for regulatory approval to follow." longer relevant since the Office of Management and Budget now requires contractor and subcontractor jobs to be reported online. In February 2009, the Recovery Act amended the LGP, authorizing DOE to also guarantee loans for some projects using commercial technologies. Projects supported by the Recovery Act must employ renewable energy systems, electric power transmission systems, or leading-edge biofuels that meet certain criteria; begin construction by the end of fiscal year 2011; and pay wages at or above market rates. The Recovery Act originally provided nearly $6 billion to cover the credit subsidy costs for projects meeting those criteria.reduction of $3.5 billion of this funding to be used for other purposes. According to our analysis of DOE data, as of September 30, 2011, DOE's LGP had obligated about 78 percent of the remaining $2.5 billion in Recovery Act funds, leaving $552 million unobligated. The Recovery Act required that borrowers begin construction of their projects by September 30, 2011, to receive funding, and the unobligated funds expired and are no longer available to DOE. GAO-10-627. Consequently, we reported that DOE's program management could improve its ability to evaluate and implement the LGP by implementing the following four recommendations: (1) develop relevant performance goals that reflect the full range of policy goals and activities for the program, and to the extent necessary, revise the performance measures to align with these goals; (2) revise the process for issuing loan guarantees to clearly establish what circumstances warrant disparate treatment of applicants; (3) develop an administrative appeal process for applicants who believe their applications were rejected in error and document the basis for conclusions regarding appeals; and (4) develop a mechanism to systematically obtain and address feedback from program applicants and, in so doing, ensure that applicants' anonymity can be maintained. In response to our recommendations, DOE stated that it recognizes the need for continuous improvement to its LGP as those programs mature but neither explicitly agreed nor disagreed with our recommendations. In one instance, DOE specifically disagreed with our findings: the department maintained that applicants are treated consistently within solicitations. Nevertheless, the department stated that it is taking steps to address concerns identified in our report. For example, with regard to appeals, DOE indicated that its process for rejected applications should be made more transparent and stated that the LGP continues to implement new strategies intended to reduce the need for any kind of appeals, such as enhanced communication with applicants and allowing applicants an opportunity to provide additional data to address deficiencies DOE has identified in applications. DOE directly addressed our fourth recommendation by creating a mechanism in September 2010 for submitting feedback--including anonymous feedback--through its website. We tested the mechanism and were satisfied that it worked. We have an ongoing mandate under the 2007 Revised Continuing Appropriations Resolution to review DOE's execution of the LGP and to report our findings to the House and Senate Committees on Appropriations. We are currently conducting ongoing work looking at the LGP, which will examine the status of the applications to the LGP's nine solicitations and will assess the extent to which has DOE adhered to its process for reviewing loan guarantees for loans to which DOE has closed or committed. We expect to issue a report on LGP in early 2012. The Recovery Act provided $5 billion for the Weatherization Assistance Program, which DOE is distributing to each of the states, the District of Columbia, five territories, and two Indian tribes. The $5 billion in funding provided by the Recovery Act represents a significant increase for a program that has received about $225 million per year in recent years. During 2009, DOE obligated about $4.73 billion of the $5 billion in Recovery Act weatherization funding to recipients, while retaining the remaining funds to cover the department's expenses. Initially, DOE provided each recipient with the first 10 percent of its allocated funds, which could be used for start-up activities, such as hiring and training staff, purchasing equipment, and performing energy audits of homes. Before a recipient could receive the next 40 percent, DOE required it to submit a plan for how it would use its Recovery Act weatherization funds. By the end of 2009, DOE had approved the weatherization plans of all 58 recipients and had provided all recipients with half of their funds. In our May 2010 report,buildings can improve production numbers quickly, state and local officials have found that expertise with multifamily projects is limited and that they lack the technical expertise for weatherizing large multifamily buildings. We also found that state agencies are not consistently dividing weatherization costs for multifamily housing with landlords. In addition, we found that determination and documentation of client income eligibility varies between states and local agencies and that DOE allows applicants to self-certify their income. We also found that DOE has issued guidance requiring recipients of Recovery Act weatherization funds to implement a number of internal controls to mitigate the risk of fraud, waste, and abuse, but that the internal controls to ensure local weatherization agencies comply with program requirements are applied inconsistently. we found that although weatherizing multifamily In our May 2010 report, we made eight recommendations to DOE to clarify its weatherization guidance and production targets. DOE generally concurred with the recommendations, has fully implemented two of them and taken some steps to address a third. For example, we recommended that DOE develop and clarify weatherization program guidance that considers and addresses how the weatherization program guidance is impacted by the introduction of increased amounts of multifamily units. DOE has issued several guidance documents addressing multi-family buildings that, among other things, provide guidance on conducting energy audits on multi-family units. We also recommended that DOE develop and clarify weatherization program guidance that establishes best practices for how income eligibility should be determined and documented and that does not allow the self-certification of income by applicants to be the sole method of documenting income eligibility. In response to our recommendation, DOE issued guidance that clarified the definition of income and strengthened income eligibility requirements. For example, the guidance clarified that self-certification of income would only be allowed after all other avenues of documenting income eligibility are exhausted. Additionally, for individuals to self-certify income, a notarized statement indicating the lack of other proof of income is required. Finally, DOE agreed with our recommendation that it have a best practice guide for key internal controls, but DOE officials stated that there were sufficient documents in place to require internal controls, such as the grant terms and conditions and a training module, and that because the guidance is located in on the website, a best practice guide would be redundant. Therefore, DOE officials stated that they do not intend to fully implement our recommendation. Nonetheless, DOE distributed a memorandum dated May 13, 2011, to grantees reminding them of their responsibilities to ensure compliance with internal controls and the consequences of failing to do so. We will continue to monitor DOE's progress in implementing the remaining recommendations. We expect to issue a report on the use of Recovery Act funds for the Weatherization Assistance Program and the extent to which program recipients are meeting Recovery Act and program goals, such as job creation and energy and cost savings, as well as the status of DOE's response to our May 2010 recommendations by early 2012. Of the over $1.4 billion Commerce received under the Recovery Act for science-related projects and activities, Commerce reported that it had obligated nearly all of it (98 percent) and spent $894 million (62 percent) as of September 30, 2011. Table 6 shows Recovery Act funding, obligations, and expenditures for Commerce. As part of our February 2010 report,Recovery Act grants from Commerce's National Institute of Standards and Technology had to delay or recast certain scheduled engineering or construction-related activities to fully understand, assess, and comply with the Recovery Act reporting and other requirements. In contrast, Commerce's National Oceanic and Atmospheric Administration officials said federal requirements did not impact the processing of Recovery Act acquisitions. we found that some recipients of Of the $1 billion NASA received under the Recovery Act for science- related projects and activities, NASA reported that it had obligated nearly $1 billion (100 percent) and spent $948 million (95 percent) as of September 30, 2011. Table 4 shows Recovery Act funding, obligations, and expenditures for NASA. In a March 2009 report, we found that NASA large-scale projects had experienced significant cost and schedule growth, but the agency had undertaken an array of initiatives aimed at improving program management, cost estimating, and contractor oversight. However, we also noted that until these practices became integrated into NASA's culture, it was unclear whether funding would be well spent and whether the achievement of NASA's mission would be maximized. In our most recent update of that report, we found that, although cost and schedule growth remained an issue, Recovery Act funding enabled NASA to mitigate the impact of cost increases being experienced on some projects and to address problems being experienced by other projects. In several cases, NASA took advantage of the funding to build additional knowledge about technology or design before key milestones. In our July 2010 report,agencies', use and oversight of noncompetitive contracts awarded under the Recovery Act. We found that most of the funds that NASA had obligated under Recovery Act contract actions, about 89 percent, were obligated on existing contracts. We found that officials at several agencies said the use of existing contracts allowed them to obligate funds quickly. Of the funds NASA obligated for new actions, over 79 percent were obligated on contracts that were competed. We also found that NASA undertook efforts to provide oversight and transparency of Recovery Act-funded activities. For example, NASA issued guidance to the procurement community on the implementation of the Recovery Act, prohibited the commingling of funds, and increased reporting to senior management. we reviewed NASA's, as well as other Of the $3 billion it received under the Recovery Act for projects and activities, NSF reported that it had obligated nearly all of the $3 billion (almost 100 percent) and spent $1.4 billion (46 percent) as of September 30, 2011. Table 5 shows Recovery Act funding, obligations, and expenditures for NSF. In our October 2010 report, we reviewed the effectiveness of new and expanded activities authorized by the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science Act of 2007 (America COMPETES Act). The act authorized NSF's Science Master's Program, later funded by the Recovery Act. This program, along with 24 new programs and 20 existing programs, was funded to increase federal investment in basic scientific research and science, technology, engineering, and mathematics (STEM) education in the United States. The Science Master's Program awarded 21 grants in fiscal year 2010, totaling $14.6 million. We found that evaluating the effectiveness of federal basic research and STEM education programs such as those authorized by the act can be inherently difficult. We also found that NSF was taking steps to evaluate the long-term effectiveness of their funded projects. As part of its broader initiative to pilot and review new approaches to the evaluation of its programs, NSF developed goals and metrics for activities in its education portfolio to reflect its increased expectations for evaluation of its funded projects. Chairman Broun, Ranking Member Tonko, and Members of the Subcommittee, this completes my prepared statement. As noted, we are continuing to monitor agencies' use of Recovery Act funds and implementation of programs. I would be happy to respond to any questions you may have at this time. For further information regarding this testimony, please contact me at (202) 512-3841. Tanya Doriss, Kim Gianopoulos, Carol Kolarik, Holly Sasso, Ben Shouse and Jeremy Williams made key contributions to this testimony. Recovery Act Education Programs: Funding Retained Teachers, but Education Could More Consistently Communicate Stabilization Monitoring Issues. GAO-11-804. Washington, D.C.: September 2011. Recovery Act: Status of Department of Energy's Obligations and Spending. GAO-11-483T. Washington, D.C.: March 17, 2011. Recovery Act: Energy Efficiency and Conservation Block Grant Recipients Face Challenges Meeting Legislative and Program Goals and Requirements. GAO-11-379. Washington, D.C.: April 2011. NASA: Assessments of Selected Large-Scale Projects. GAO-11-239SP. Washington, D.C.: March 3, 2011. Recovery Act: Opportunities to Improve Management and Strengthen Accountability over States' and Localities' Uses of Funds. GAO-10-999. Washington, D.C.: September 2010. Recovery Act: Contracting Approaches and Oversight Used by Selected Federal Agencies and States. GAO-10-809. Washington, D.C.: July 15, 2010. Recovery Act: Most DOE Cleanup Projects Appear to Be Meeting Cost and Schedule Targets, but Assessing Impact of Spending Remains a Challenge. GAO-10-784. Washington, D.C.: July 2010. Department of Energy: Further Actions Are Needed to Improve DOE's Ability to Evaluate and Implement the Loan Guarantee Program. GAO-10-627. Washington, D.C.: July 2010. Recovery Act: States' and Localities' Uses of Funds and Actions Needed to Address Implementation Challenges and Bolster Accountability. GAO-10-604. Washington, D.C.: May 2010. Recovery Act: Increasing the Public's Understanding of What Funds Are Being Spent on and What Outcomes Are Expected. GAO-10-581. Washington, D.C.: May 27, 2010. Recovery Act: Factors Affecting the Department of Energy's Program Implementation. GAO-10-497T Washington, D.C.: March 4, 2010. Recovery Act: Project Selection and Starts Are Influenced by Certain Federal Requirements and Other Factors. GAO-10-383. Washington, D.C.: February 10, 2010. Recovery Act: GAO's Efforts to Work with the Accountability Community to Help Ensure Effective and Efficient Oversight. GAO-09-672T. Washington, D.C.: May 5, 2009. American Recovery and Reinvestment Act: GAO's Role in Helping to Ensure Accountability and Transparency for Science Funding. GAO-09-515T. Washington, D.C.: March 19, 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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The American Recovery and Reinvestment Act of 2009 (Recovery Act) is intended to preserve and create jobs and promote economic recovery, among other things. The Congressional Budget Office estimated in 2011 that the Recovery Act would cost $840 billion, including more than $40 billion in science-related activities at the Department of Energy (DOE), Department of Commerce, the National Aeronautics and Space Administration (NASA), and the National Science Foundation (NSF). These activities support fundamental research, demonstrate and deploy advanced energy technologies, purchase scientific instrumentation and equipment, and construct or modernize research facilities. The Recovery Act assigned GAO with a range of responsibilities, such as bimonthly reviews of how selected states and localities used funds, including for science-related activities. This statement updates the status of science-related Recovery Act funding for DOE, Commerce, NASA, and NSF and provides the status of prior recommendations from GAO's Recovery Act reports. This testimony is based on prior GAO work updated with agency data as of September 30, 2011. As of September 30, 2011, DOE, Commerce, NSF, and NASA had obligated about 98 percent of the more than $40 billion appropriated for science-related activities identified at those agencies. They had spent $22 billion, or 54 percent of appropriated funds. DOE received the majority of this funding, and the four agencies vary in the amount of Recovery Act funds they have obligated and spent for their programs, as well as the challenges they have faced in implementing the Recovery Act. For example: 1) Loan Guarantee Program for Innovative Technologies. As of September 30, 2011, DOE had obligated about 78 percent of the nearly $2.5 billion provided for this program, which among other things guarantees loans for projects using new or significantly improved technologies as compared with commercial technologies already in use in the United States and reported spending about 15 percent of those funds. In a July 2010 report (GAO-10-627), GAO made four recommendations for DOE to improve its evaluation and implementation of the program. DOE has begun to take steps to address our recommendations but has not fully addressed them, and GAO continues to believe DOE needs to make improvements to the program. 2) Weatherization Assistance Program. As of September 30, 2011, DOE had obligated the full $5 billion of Recovery Act funding provided for the Weatherization Assistance Program, which enables low-income families to reduce their utility bills by making long-term energy-efficiency improvements to their homes, and reported spending about 72 percent of those funds. In a May 2010 report (GAO-10-604), GAO made eight recommendations to DOE to clarify guidance and production targets. To date, DOE has implemented two of those recommendations: (1) it issued guidance on multi-family buildings and (2) clarified the definition of income and strengthened income eligibility requirements. 3) Commerce, NASA, and NSF. As of September 30, 2011, Commerce, NASA, and NSF each had obligated nearly all of their science-related Recovery Act funding. Commerce spent about 62 percent, NASA spent about 95 percent, and NSF spent about 46 percent of this funding. GAO has reported several times on the use of these funds and the challenges agencies faced. In a February 2010 report (GAO-10-383), GAO found that some recipients of Commerce's Recovery Act grants faced challenges complying with Recovery Act reporting and other federal requirements and had to delay or recast certain scheduled activities as a result. In a March 2009 report (GAO-09-306SP), GAO found that NASA's large-scale projects, including those that received Recovery Act funds, had experienced significant cost and schedule delays. In a March 2011 report, (GAO-11-239SP), GAO found that Recovery Act funds allowed NASA to reduce the impact of cost increases on some projects and to address problems being experienced by others. In GAO's October 2010 report (GAO-11-127R), it found that NSF's program to increase investment in science, technology, engineering, and mathematics education took steps to evaluate the long-term effectiveness of its projects and developed goals and metrics for that evaluation.
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Congress established the Smithsonian in 1846 to administer a large bequest left to the United States by James Smithson, an English scientist, for the purpose of establishing, in Washington, D.C., an institution "for the increase and diffusion of knowledge among men." In accepting Smithson's bequest on behalf of the nation, Congress pledged the "faith of the United States" to carry out the purpose of the trust. To that en act establishing the Smithsonian provided for the administration of the trust, independent of the government itself, by a Board of Regents a nd a Secretary, who were given broad discretion in the use of the trust funds. The Board of Regents currently consists of nine private citizens as well as members of all three branches of the federal government, including the Chief Justice of the United States, the Vice President, and six congressional members, three from the Senate and three from the House of Representatives. The three senators are appointed by the President of the Senate, the three representatives are appointed by the Speaker of the House, and nine citizens are appointed by joint resolution of Congress--two from the District of Columbia and seven from the states. Culture, authorized by Congress in 2003. Beyond this, in May 2008, Congress established a commission to study the potential creation of a National Museum of the American Latino and whether the museum should be located within the Smithsonian. In addition to its stewardship duties, the Board of Regents is vested with governing authorities over the Smithsonian. It considers matters such as the Smithsonian's budgets and planning documents, new programs and construction proposals, appointments to Smithsonian advisory boards, and a variety of other issues facing the Smithsonian. Although the Smithsonian is a trust instrumentality of the United States with a private endowment, about two-thirds of its operating revenues in fiscal year 2008 came from federal appropriations. In fiscal year 2008, the Smithsonian's operating revenues equaled about $1 billion, while its federal appropriations equaled about $678.4 million--$107.1 million for facilities capital, which provides funds for construction and revitalization projects, and $571.3 million for salaries and expenses, which includes funding for the program activities of each museum and research center, rents, utilities, and facilities' operations, maintenance, and security costs. The Smithsonian's fiscal year 2008 appropriation was subject to an across- the-board rescission of 1.56 percent, which according to the Smithsonian resulted in an appropriation of $105.4 million for facilities capital and $562.4 million for salaries and expenses. The remaining operating revenues came from the Smithsonian's private trust funds. For fiscal year 2008, the Smithsonian was also appropriated an additional $15 million for facilities capital (reduced to $14.8 million by the rescission), referred to as the Legacy Fund, to be provided if the Smithsonian received matching private donations of at least $30 million; however, according to a Smithsonian official, the Smithsonian did not meet the matching donations requirement and therefore has not received these funds. In fiscal year 2009, the Smithsonian was appropriated $123 million for facilities capital and $593.4 million for salaries and expenses. The Smithsonian was also appropriated an additional $15 million for the Legacy Fund, with the same requirements as for fiscal year 2008, except that funds were made available for individual projects in incremental amounts as matching funds were raised. The Smithsonian was also appropriated an additional $25 million for facilities capital under the American Recovery and Reinvestment Act of 2009. In fiscal year 2010, the Smithsonian was appropriated $125 million for facilities capital and $636.16 million for salaries and expenses. Of the $30 million appropriated for the Legacy Fund in fiscal years 2008 and 2009, the approximately $29.8 million unobligated balance was rescinded, and $29.8 million was appropriated under a new requirement--the Legacy Fund is now directed to the Arts and Industries Building for the purpose of facilitating the reopening of this building. The Appropriations Act makes funds available in incremental amounts as private funding becomes available. Private donations, including major in-kind donations, that contribute significantly to the building's reopening will be matched dollar for dollar. The Smithsonian has implemented 9 reforms recommended by the Board of Regents' Governance Committee since May 2008--in addition to the 30 reforms it had implemented as of May 2008--bringing the total number of reforms implemented to 39 of 42 reforms. The Smithsonian has not completed implementation of 3 reforms--2 related to improving policies on broader Smithsonian operations (to develop a contracting policy and conduct a comprehensive review of financial reporting and internal controls) and one related to communication and stakeholder relationships (to enhance the role of the Smithsonian advisory boards). Figure 1 summarizes the status of the Smithsonian's implementation of the Governance Committee's recommended reforms as of May 2008 and December 1, 2009. As shown in Figure 1, the Smithsonian has implemented 9 Governance Committee reforms since May 2008, including the following: The Smithsonian (1) developed a database to identify potential conflicts of interest; (2) implemented a policy requiring the former Smithsonian Business Ventures (SBV)--now reorganized and renamed Smithsonian Enterprises--to follow Smithsonian policies except in the case of a few documented exceptions; (3) developed an event expense policy covering regent and other Smithsonian events; (4) completed a review of the Smithsonian's internal controls for travel and expense reimbursement and implemented a number of additional accountability measures for travel and expense reimbursement; (5) held two regent annual public forums; (6) developed a Board orientation process; (7) completed a review and revision of the Board of Regents committees' charters; (8) completed a review of appointment procedures to Board of Regents committees, which included clarifying the process for appointing nonregents to committees and making this process publicly available on the Smithsonian's Web site; and (9) implemented a reform calling for a regular assessment of the Board, its committees, and its members. While the Smithsonian has made considerable progress in implementing the Governance Committee's reforms, work remains on 3 reforms recommended by the Governance Committee: 2 related to policies on broader Smithsonian operations and 1 related to communication and stakeholder relationships. According to Smithsonian officials, generally, the Board of Regents is responsible for setting the policies, and the Smithsonian administration is responsible for implementing those policies. While the Board of Regents has approved policies or plans related to the 2 policy-related reforms, the Smithsonian has not completed its implementation of these reforms. In our May 2008 report, we raised concerns about challenges associated with these efforts, stating that effectively implementing the new policies and procedures developed during these reviews was likely to depend on effectively training staff and establishing accountability, both of which could be challenging because of a level of standardization and requirements that did not previously exist. The following provides a brief summary of the Smithsonian's efforts regarding these reforms: Operational policies--contracting: The Smithsonian has taken steps toward but not fully implemented the governance reform related to improving contracting policies and procedures. The Smithsonian has issued a new contracting policy and is currently writing formal procurement and contracting procedure manuals that implement this policy and provide the rules and procedures for day-to-day procurement and contracting activities. According to the Smithsonian's Chief Financial Officer (CFO), two of seven parts of the manual are completed and in use and the rest are scheduled to be completed by the end of fiscal year 2010. Completing these manuals is important because a lack of agency-specific policies and procedures can result in an increased risk of improper or wasteful contract payments. Operational policies--financial reporting and internal controls: The Smithsonian has taken steps to implement its reform to conduct a comprehensive review of the Smithsonian's financial reporting and internal controls. The Smithsonian conducted an initial review of financial reporting and internal controls which led to a plan--approved by the Audit and Review Committee in March 2009--to reduce the risk level of five processes identified by the Smithsonian as high risk by the end of fiscal year 2012. The work laid out in the plan for accomplishing this goal includes such tasks as writing new policies and procedures, training staff on responsibilities and procedures for which they are accountable, and testing and validating controls through policy compliance reviews or personal property inventories. The CFO reported to the Audit and Review Committee that effective execution of the plan will require a commitment to increasing staffing and other resources over time. During the discussion with the CFO, members of the Audit and Review committee expressed concern that providing these resources may be challenging for the Smithsonian, given limited available resources and other priorities, such as collections care and research. Communication and stakeholder relationships--role of advisory boards: The Smithsonian has taken steps to implement its reform to enhance the role of its 30 advisory boards, which include a national advisory board as well as advisory boards that focus on individual museums, research centers, or programs, but has not resolved all issues. The primary purpose of advisory boards is to provide advice, support, and expertise to the directors of museums, research centers, and programs, as well as to the Board of Regents and Secretary. We discuss the Smithsonian's efforts regarding this reform later in this testimony, when we discuss the Smithsonian's actions toward implementing our related May 2008 recommendation. For more information on the Smithsonian's efforts related to these reforms, see our newly issued report on this subject. The Smithsonian has implemented one of the four recommendations we made in 2008 to strengthen its governance reform efforts, and it has taken steps to implement the other three recommendations. (See fig. 2.) Assessment--actions in the event of persistent neglect of duties: The Smithsonian implemented GAO's recommendation to evaluate what actions it can take in the event of persistent neglect of duties by a regent. In July 2009, the Board of Regents Governance and Nominating Committee implemented this recommendation by considering a staff paper that described actions that could be taken in the event of persistent neglect of duties, and approving an approach that included initial counseling and potential referral to the full Board of Regents for appropriate action. Structure and composition: The Board of Regents has not fully implemented GAO's recommendation to develop and make public its process for the selection, use, and evaluation of nonregents. The Board of Regents implemented part of the recommendation by posting on its Web site the process for selecting nonregent committee members. However, the Board of Regents did not make a final decision regarding the use of nonregents on committees when in July 2009, its Governance and Nominating Committee tabled a proposed bylaw to give nonregent members of committees the same roles and responsibilities as regents. Committee members cited issues such as the lack of statutory authority of nonregent committee members and uncertainty over whether certain ethical and disclosure obligations of regents should apply to nonregent committee members, and requested that Smithsonian staff provide the regents with further information on potential implications of this bylaw. According to the chief of staff to the Board of Regents, subsequently, the Smithsonian concluded that existing governance requirements in committee charters require that all committee members, including nonregent members, file annual financial disclosures, and the Smithsonian plans to apply this requirement to these individuals. The Board of Regents official also stated that the Governance and Nominating Committee plans to further discuss this issue at its March 2010 meeting. Communication and stakeholder relationships: The Board of Regents took steps to improve its relationship with stakeholders, including advisory boards. For example, the Chair of the Board of Regents now sends a quarterly email to all advisory board chairs providing information on the most recent Board of Regents' meeting and asking to be contacted directly with any concerns. According to a Smithsonian official, when a concern is brought to the Chair's attention, it is either responded to immediately or tracked by the Office of the Board of Regents until responded to. In addition, the Smithsonian conducted a workshop of advisory board chairs in April 2009 as part of its strategic planning process, which was organized through the regents and led by the Chair of the Board of Regents and the Secretary of the Smithsonian. According to a Smithsonian official, the input provided by these advisory board chairs was considered as the strategic plan was developed. However, due to limitations of the efforts thus far--such as their informal nature and focus on dissemination of information from the regents rather than two-way communication--several advisory board chairs with whom we spoke expressed concern that the Board of Regents still lacked a sufficient understanding of Smithsonian museums and other entities to govern as effectively as possible. Assessment--evaluation: The Board of Regents has not yet conducted a comprehensive evaluation of its reforms but plans to do so in fiscal year 2010. For more information on the Smithsonian's efforts related to these recommendations, see our newly issued report on this subject. Both the Smithsonian and the Board of Regents concurred with the findings of that report. The Smithsonian has fully implemented four of the five recommendations we made in our September 2007 report on the Smithsonian's facilities, security, and funding challenges. It has not implemented the fifth recommendation regarding submitting a report to Congress and the Office of Management and Budget (OMB) on its funding strategy, but plans to do so. (See fig. 3.) Furthermore, although the Smithsonian has implemented our recommendation to more comprehensively analyze funding strategies to meet the needs of its facilities projects and is planning to launch a national fundraising campaign, it is unclear what amount of funds will be raised through such a campaign and, more specifically, what amount will be dedicated to facilities. In September 2007, we found that the Smithsonian faced challenges related to communicating security-related information to museum and facility directors and omitted private funds from its capital plan, reducing stakeholders' ability to comprehensively assess the funding and scope of facilities projects. We also found the Smithsonian did not have a viable strategy to address its growing cost estimate for facilities projects, increasing the risks faced by its facilities and collections, and likely decreasing its ability to meet its mission. Security of facilities--communicating information on security staff levels and all-hazards risk assessment: The Smithsonian implemented our recommendations to communicate information to museum and facility directors on (1) daily security staff levels and (2) its all-hazards risk assessment. Planning of capital projects--capital plan: The Smithsonian implemented our recommendation to include the full scope of planned projects and information on planned funding sources--federal and private funds--for each project in its capital plan. In September 2008, the Smithsonian created a facilities capital plan for fiscal years 2008 through 2017 that includes a description of planned projects and their funding sources. Funding of capital projects--analyzing funding strategies: The Smithsonian implemented our recommendation to analyze nonfederal funding strategies in a more comprehensive manner. In November 2007, the Board of Regents concurred with a more comprehensively analyzed and prioritized list of nonfederal funding strategies, which included establishing a national campaign to raise private sector funds for Smithsonian programs and facilities, among other strategies. According to Smithsonian officials, in the wake of the Board of Regents' September 2009 approval of a new strategic plan for the Smithsonian, the Board of Regents Advancement Committee is developing a plan for a national fundraising campaign in concert with Smithsonian staff, who, among other things, are determining what staff resources are necessary and are coordinating with the Smithsonian museums, programs, and other entities on goals for the plan. The Board of Regents Advancement Committee expects to approve a full national fundraising campaign plan no later than September 2010. While these steps implement our recommendation, it is unclear at this time how much in funds will be raised and, more specifically, what amount will be dedicated to facilities. Funding of capital projects--reporting to Congress and OMB: According to a Smithsonian official, the Smithsonian has not submitted a report to Congress and OMB on its fundraising efforts but plans to do so in the future as part of its communications strategy related to the national fundraising campaign. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information about this statement, please contact Mark L. Goldstein, Director, Physical Infrastructure Issues, at (202) 512-2834 or at [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement include David Sausville (Assistant Director), Brian Hartman, Susan Michal-Smith, Alwynne Wilbur, and Carrie Wilks. 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 Smithsonian Institution (Smithsonian) is the world's largest museum complex. Its funding comes from its own private trust fund assets and federal appropriations. The Smithsonian Board of Regents, the Smithsonian's governing body, is responsible for the long-term stewardship of the Smithsonian. In recent years, GAO and others have documented (1) significant governance and accountability breakdowns at the Smithsonian, which could ultimately put funding and the organization's credibility at risk, and (2) the deterioration of the Smithsonian's facilities and the threat this deterioration poses to the Smithsonian's collections. This testimony discusses (1) the Smithsonian's status in implementing governance reforms recommended by its Governance Committee and by GAO in a 2008 report (GAO-08-632)--as discussed in a GAO report being released today (GAO-10-190R)--and (2) the Smithsonian's progress in implementing facilities and funding recommendations GAO made in a 2007 report (GAO-07-1127). The work for this testimony is based on GAO-10-190R and an analysis of documentary and testimonial evidence from Smithsonian officials. GAO is not making recommendations in this testimony and did not make new recommendations in GAO-10-190R . The Smithsonian and the Board of Regents concurred with the findings of GAO-10-190R . Since May 2008 the Smithsonian has implemented 9 reforms recommended by the Board of Regents Governance Committee--in addition to the 30 it had implemented prior to May 2008--and 1 of 4 GAO recommendations, but work remains on 3 reforms and 3 recommendations. The 9 Governance Committee reforms implemented since May 2008 include efforts such as revising policies related to travel and expense reimbursement and event expenses, creating a regents' annual public forum, completing a review and revision of Board of Regents committees' charters, and developing an assessment process for the Board of Regents. The Smithsonian has not completed implementation of 3 Governance Committee reforms related to the Smithsonian's contracting policy, a comprehensive review of financial reporting and internal controls, and enhancing the role of advisory boards. Regarding GAO's May 2008 recommendations, the Smithsonian implemented GAO's recommendation to evaluate what actions it can take in the event of persistent neglect of duties by a regent, but has not completed implementation of the following three recommendations: (1) The Board of Regents has not fully implemented GAO's recommendation to develop and make public its process for the selection, use, and evaluation of nonregents. The Board of Regents posted on its Web site the process for selecting nonregent committee members but did not make a final decision regarding a proposed bylaw to give nonregent members of committees the same roles and responsibilities as regents. (2) The Board of Regents took steps to improve its relationship with stakeholders, including advisory boards. However, because of limitations of the efforts thus far--such as the informal nature of the Board of Regents' efforts and their focus on the dissemination of information from the regents rather than two-way communication--several advisory board chairs with whom GAO spoke expressed concern that the Board of Regents still lacked a sufficient understanding of Smithsonian museums and other entities to govern as effectively as possible. (3) The Board of Regents has not yet conducted a comprehensive evaluation of its reforms but plans to do so in fiscal year 2010. The Smithsonian has implemented four of GAO's five 2007 recommendations related to facilities and funding. These include recommendations related to improving the Smithsonian's security communications and the comprehensiveness of its capital plan. Furthermore, the Smithsonian has implemented GAO's recommendation to more comprehensively analyze nonfederal funding options to meet the needs of its facilities projects. The Smithsonian is planning to launch a national fund-raising campaign to raise private sector funds for its programs and facilities. It is unclear how much in funds will be raised or dedicated to facilities through such a campaign. The Smithsonian has not implemented GAO's recommendation to submit a report to Congress and the Office of Management and Budget on its funding strategy, but it plans to do so as part of its national fund-raising campaign.
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According to OMB, its predominant mission is to assist the President in overseeing the preparation of the federal budget and to supervise budget administration in executive branch agencies. In helping to formulate the President's spending plans, OMB is responsible for evaluating the effectiveness of agency programs, policies, and procedures; assessing competing funding demands among agencies; and setting funding priorities. OMB also is to ensure that agency reports, rules, testimony, and proposed legislation are consistent with the President's budget and with administration policies. In addition, OMB is responsible for overseeing and coordinating the administration's procurement, financial management, information, and regulatory policies. In each of these areas, OMB's role is to help improve administrative management, to develop better performance measures and coordinating mechanisms, and to reduce unnecessary burden on the public. To drive improvement in the implementation and management of IT projects, the Congress enacted the Clinger-Cohen Act in 1996 to further expand the responsibilities of OMB and the agencies under the Paperwork Reduction Act. The act requires that agencies engage in capital planning and performance- and results-based management. OMB is required by the Clinger-Cohen Act to establish processes to analyze, track, and evaluate the risks and results of major capital investments in information systems made by executive agencies. OMB is also required to report to the Congress on the net program performance benefits achieved as a result of major capital investments in information systems that are made by executive agencies. In response to the Clinger-Cohen Act and other statutes, OMB developed section 300 of Circular A-11. This section provides policy for planning, budgeting, acquisition, and management of federal capital assets and instructs agencies on budget justification and reporting requirements for major IT investments. Section 300 defines the budget exhibit 300, also called the Capital Asset Plan and Business Case, as a document that agencies submit to OMB to justify resource requests for major IT investments. The exhibit 300 consists of two parts: the first is required of all assets; the second applies only to information technology. Among other things, the exhibit 300 requires agencies to provide information summarizing spending and funding plans; performance goals and measures; project management plans, goals, and progress; and security plans and progress. This reporting mechanism, as part of the budget formulation and review process, is intended to enable an agency to demonstrate to its own management, as well as OMB, that it has employed the disciplines of good project management, developed a strong business case for the investment, and met other Administration priorities in defining the cost, schedule, and performance goals proposed for the investment. The types of information included in the exhibit 300, among other things, are to help OMB and the agencies identify and correct poorly planned or performing investments (i.e., investments that are behind schedule, over budget, or not delivering expected results) and real or potential systemic weaknesses in federal information resource management (e.g., project manager qualifications). According to OMB's description of its processes, agencies' exhibit 300 business cases are reviewed by OMB analysts from its four statutory offices--Offices of E-Government and Information Technology (e-Gov), Information and Regulatory Affairs (OIRA), Federal Financial Management, and Federal Procurement Policy--and its Resource Management Offices (RMO). In addition to other responsibilities under various statutes, e-Gov and OIRA develop and oversee the implementation of governmentwide policies in the areas of IT, information policy, privacy, and statistical policy. OIRA and e-Gov analysts also carry out economic and related analyses, including reviewing exhibit 300s. Each of about 12 analysts is responsible for overseeing IT projects for a specific agency or (more commonly) several agencies. OMB's RMOs are staffed with program examiners, whose responsibility is to develop and support the President's Budget and Management Agenda. RMOs work as liaisons between federal agencies and the presidency. In formulating the budget, they evaluate agency requests for funding and evaluate agency management and financial practices. RMOs also evaluate and make recommendations to the President when agencies seek new legislation or the issuance of Presidential executive orders that would help agencies to fulfill their organizational objectives. According to OMB officials, the OIRA and e-Gov analysts, along with RMO program examiners, evaluate agency exhibit 300 business cases as part of the development of the President's Budget. The results of this review are provided to agencies through what is called the "passback" process. That is, OMB passes the requests back to agencies with its evaluation, which identifies any areas requiring remediation. The final step in the budget process, occurring after the Congress has appropriated funds, is apportionment, through which OMB formally controls agency spending. According to the Antideficiency Act, before the agency may spend its funding resources, appropriations must be apportioned by periods within the fiscal year (typically by quarters) or among the projects to be undertaken. Although apportionment is a procedure required to allow agencies to access their appropriated funds, OMB can also use apportionment to impose conditions on agency spending, such as changes in agency practices; it is one of several mechanisms that the Clinger-Cohen Act authorizes OMB to use to enforce an agency head's accountability for the agency's IT investments. The President's Budget for Fiscal Year 2005 included about 1,200 IT projects, totaling about $60 billion. Of this total number of projects, OMB reported in the budget that slightly over half--621 projects, representing about $22 billion--were on a Management Watch List. According to OMB's March 2004 testimony, this list consists of mission-critical projects that needed to improve performance measures, project management, IT security, or overall justification. OMB officials described this assessment as based on evaluations of exhibit 300s submitted to justify inclusion in the budget. According to OMB's testimony, the fiscal year 2005 budget required agencies to successfully correct identified project weaknesses and business case deficiencies; otherwise, they risked OMB placing limits on their spending. OMB officials testified in March 2004 that they would enforce these corrective actions through the apportionment process. OMB continued its use of a Management Watch List in the recently released President's Budget for Fiscal Year 2006. The President's Budget for Fiscal Year 2006 includes 1,087 IT projects, totaling about $65 billion. Of this total number of projects, OMB reported in the budget that 342 projects, representing about $15 billion, are on the fiscal year 2006 Management Watch List. Our objectives were to describe and assess OMB's processes for (1) placing projects on its Management Watch List and (2) following up on corrective actions established for projects on the list. To examine OMB's processes for developing the list, we requested a copy of the Management Watch List; we reviewed related OMB policy guidance, including its Circular A-11 and Capital Programming Guide, as well as the Analytical Perspectives for the President's Budget submissions for fiscal years 2005 and 2006; and we interviewed OMB analysts and their managers, including the Deputy Administrator of OIRA and the Chief of the Information Technology and Policy Branch, to identify the processes and criteria they have in place to determine which IT projects to include on the Management Watch List. To examine OMB's follow-up procedures on corrective actions established for IT projects on the list, we reviewed related policy guidance, including section 300 of Circular A-11 and OMB's Capital Programming Guide. We analyzed OMB's apportionment documentation, specifically the Standard Form 132 (Apportionment and Reapportionment Schedule), which documented special apportionments that specified conditions that had to be met before the agencies could receive funds. In addition, we interviewed OMB officials and analysts and reviewed testimony and laws affecting the management of IT investments, such as the Clinger-Cohen Act. We conducted our work at OMB headquarters in Washington, D.C., from August 2004 through March 2005, in accordance with generally accepted government auditing standards. According to OMB officials, including the Deputy Administrator of OIRA and the Chief of the Information Technology and Policy Branch, OMB staff identified projects for the Management Watch List through their evaluation of the exhibit 300s that agencies submit for major IT projects as part of the budget development process. This evaluation is carried out as part of OMB's responsibility for helping to ensure that investments of public resources are justified and that public resources are wisely invested. The OMB officials added that their analysts evaluate agency exhibit 300s by assigning scores to each exhibit 300 based on guidance presented in OMB Circular A-11. According to this circular, the purpose of the scoring is to ensure that agency planning and management of capital assets are consistent with OMB policy and guidance. As described in Circular A-11, the scoring of a business case consists of individual scoring for 10 categories, as well as a total composite score of all the categories. The 10 categories are project (investment) management, enterprise architecture, performance-based management system (including the earned value life-cycle costs formulation, and support of the President's Management Agenda. According to Circular A-11, scores range from 1 to 5, with 5 indicating investments whose business cases provided the best justification and 1 the least. For investments with average scores of 3 or below, OMB may ask agencies for remediation plans to address weaknesses in their business cases. OMB officials said that, for fiscal year 2005, an IT project was placed on the Management Watch List if its exhibit 300 business case received a total composite score of 3 or less, or if it received a score of 3 or less in the areas of performance goals, performance-based management systems, or security and privacy, even if its overall score was a 4 or 5. OMB reported that agencies with weaknesses in these three areas were to submit remediation plans addressing the weaknesses. According to OMB management, individual analysts were responsible for evaluating projects and determining which projects met the criteria to be on the Management Watch List for their assigned agencies. To derive the total number of projects on the list that were reported for fiscal year 2005, OMB polled the individual analysts and compiled the numbers. OMB officials said that they did not aggregate these projects into a single list describing projects and their weaknesses. According to these officials, they did not construct a single list of projects meeting their watch list criteria because they did not see such an activity as necessary in performing OMB's predominant mission: to assist in overseeing the preparation of the federal budget and to supervise agency budget administration. Further, OMB officials stated that the limited number of analysts involved enabled them to explore governmentwide issues using ad hoc queries and to develop approaches to address systemic problems without the use of an aggregate list. They pointed at successes in improving IT management, such as better compliance with security requirements, as examples of the effectiveness of their current approach. Nevertheless, OMB has not fully exploited the opportunity to use its Management Watch List as a tool for analyzing IT investments on a governmentwide basis. According to the Clinger-Cohen Act, OMB is required to establish processes to analyze, track, and evaluate the risks and results of major IT capital investments by executive agencies, which aggregation of the Management Watch List would facilitate. Without aggregation, the list's visibility was limited at more senior levels of OMB, constraining its ability to conduct analysis of IT investments on a governmentwide basis and limiting its ability to identify and report on the full set of IT investments requiring corrective actions. OMB did not develop a structured, consistent process or criteria for deciding how to follow up on corrective actions that it asked agencies to take to address weaknesses associated with projects on the Management Watch List. Instead, OMB officials, including the Deputy Administrator of OIRA and the Chief of the Information Technology and Policy Branch, said that the decision on whether and how to follow up on a specific project was typically made jointly between the OIRA analyst and the RMO program examiner who had responsibility for the individual agency, and that follow- up on specific projects was driven by a number of factors, only one of which was inclusion on the Management Watch List. These officials also said that the decision for follow-up was generally driven by OMB's predominant mission to assist in budget preparation and to supervise budget administration, rather than strictly by the perceived risk of individual projects. According to these officials, those Management Watch List projects that did receive specific follow-up attention received feedback through the passback process, through targeted evaluation of remediation plans designed to address weaknesses, and through the apportioning of funds so that the use of budgeted dollars was conditional on appropriate remediation plans being in place. These officials also said that follow-up of some Management Watch List projects was done through quarterly e-Gov Scorecards. OMB officials also stated that those Management Watch List projects that did receive follow-up attention were not tracked centrally, but only by the individual OMB analysts with responsibility for the specific agencies. For example, if an agency corrected a deficiency or weakness in a specific area of the exhibit 300 for a Management Watch List project, that change was not recorded centrally. Accordingly, OMB could not readily tell us which of the 621 watch list projects for fiscal year 2005 were followed up on, nor could it use the list to describe the relationship between its follow-up activities and the changes in the numbers of projects on the watch list between fiscal year 2005 (621 projects) and fiscal year 2006 (342). Further, because OMB did not trace follow-up centrally, senior management could not report which projects received follow-up attention and which did not. OMB does not have specific criteria for prioritizing follow-up on Management Watch List projects. Without specific criteria, OMB staff may be agreeing to commit resources to follow up on projects that did not represent OMB's top priorities from a governmentwide perspective. For example, inconsistent attention to OMB priorities, such as earned value management, could undermine the objectives that OMB set in these areas. In addition, major projects with significant management deficiencies may have continued to absorb critical agency resources. In order for OMB management to have assurance that IT program deficiencies are addressed, it is critical that corrective actions associated with Management Watch List projects be monitored. Follow-up activities are instrumental in ensuring that agencies address and resolve weaknesses found in exhibit 300s, which may indicate underlying weaknesses in project planning or management. Tracking these follow-up activities is essential to enabling OMB to determine progress on both specific projects and governmentwide trends. In addition, tracking is necessary for OMB to fully execute its responsibilities under the Clinger-Cohen Act, which requires OMB to establish processes to analyze, track, and evaluate the risks and results of major capital investments made by executive agencies for information systems. Without tracking specific follow-up activities, OMB could not know whether the risks that it identified through its Management Watch List were being managed effectively; if they were not, funds were potentially being spent on poorly planned and managed projects. By scoring agency IT budget submissions and identifying weaknesses that may indicate investments at risk, OMB is identifying opportunities to strengthen investments. This scoring addresses many critical IT management areas and promotes the improvement of IT investments. However, OMB has not developed a single, aggregate list identifying the projects and their weaknesses, nor has it developed a structured, consistent process for deciding how to follow up on corrective actions. Aggregating the results at a governmentwide level would help OMB take full advantage of the effort that it puts into reviewing business cases for hundreds of IT projects. A governmentwide perspective could enable OMB to use its scoring process more effectively to identify management issues that transcend individual agencies, to prioritize follow-up actions, and to ensure that high-priority deficiencies are addressed. OMB's follow-up on poorly planned and managed IT projects has been largely driven by its focus on the imperatives of the overall budget process. Although this approach is consistent with OMB's predominant mission, it does not fully exploit the insights developed through the scoring process, and it may leave unattended weak projects consuming significant budget dollars. The Management Watch List described in the President's Budget for Fiscal Year 2005 contained projects representing over $20 billion in budgetary resources that could have remained at risk because of inadequate planning and project management. Because of the absence of a consistent and integrated approach to follow-up and tracking, OMB was unable to use the Management Watch List to ascertain whether progress was made in addressing governmentwide and project-specific weaknesses and where resources should be applied to encourage additional progress. Thus, there is an increased risk that remedial actions were incomplete and that billions of dollars were invested in IT projects with planning and management deficiencies. In addition, OMB's ability to report to the Congress on progress made in addressing critical issues and areas needing continued attention is limited by the absence of a consolidated list and coordinated follow-up activities. In order for OMB to take advantage of the potential benefits of using the Management Watch List as a tool for analyzing and following up on IT investments on a governmentwide basis, we are recommending that the Director of OMB take the following four actions: Develop a central list of projects and their deficiencies. Use the list as the basis for selecting projects for follow-up and for to guide follow-up, develop specific criteria for prioritizing the IT projects included on the list, taking into consideration such factors as the relative potential financial and program benefits of these IT projects, as well as potential risks. Analyze the prioritized list to develop governmentwide and agency assessments of the progress and risks of IT investments, identifying opportunities for continued improvement. Report to the Congress on progress made in addressing risks of major IT investments and management areas needing attention. In written comments on a draft of this report, OMB's Administrator of the Office of E-Government and Information Technology expressed appreciation for our review of OMB's use of its Management Watch List. She noted that the report was narrowly focused on the Management Watch List and the use of exhibit 300s in that context. She added that the report did not address the more broad budget and policy oversight responsibilities that OMB carries out or the other strategic tools available to OMB as it executes those responsibilities. We agree that our review described and assessed OMB's processes for (1) placing the 621 projects representing about $22 billion on its Management Watch List and (2) following up on corrective actions established for projects on the list. The Administrator commented that OMB's oversight activities include the quarterly President's Management Agenda Scorecard assessment. We acknowledge these activities in the report in the context of the e-Gov scorecard, which measures the results of OMB's evaluation of the agencies' implementation of e-government criteria in the President's Management Agenda. We also agree with the Administrator that OMB is not the sole audience of an exhibit 300. As we state in the report, an exhibit 300 justification is intended to enable an agency to demonstrate to its own management, as well as to OMB, that it has employed the disciplines of good project management, developed a strong business case for the investment, and met other Administration priorities in defining the cost, schedule, and performance goals proposed for the investment. The Administrator disagreed with our finding that OMB did not have specific criteria for prioritizing follow-up on exhibit 300s that have been included on the Management Watch List. She explained that OMB establishes priorities on a case-by-case basis within the larger context of OMB's overall review of agency program and budget performance. However, our review showed that OMB did not develop a structured, consistent process or criteria for deciding how it should follow up on corrective actions that it asked agencies to take to address the weaknesses of the projects on the Management Watch List. Accordingly, we continue to believe that OMB should specifically consider those factors that it had already determined were critical enough that they caused an investment to be included in the Management Watch List. Without consistent attention to those IT management areas already deemed as being of the highest priority by OMB, the office risks focusing on areas of lesser importance. We agree with the Administrator's separate point that agencies have the responsibility for ensuring that investments on the Management Watch List are successfully brought up to an acceptable level. The follow-up that we describe in our report consists of those activities that would allow OMB to ascertain that the deficient investments have, in fact, been successfully strengthened. We note in the report that the quarterly President's Management Agenda Scorecard plays a role in this activity (in the report, we refer to the e-Gov Scorecard, which contributes to the Management Agenda Scorecard). Finally, the Administrator disagrees with our assessment that an aggregated governmentwide list is necessary to perform adequate oversight and management, and that OMB does not know whether risks are being addressed. However, our review indicated that OMB was unable to easily determine which of the 621 investments on the Management Watch List remained deficient or how much of the $22 billion cited in the President's Budget remained at risk. In our assessment we observed that OMB had expended considerable resources in the scoring of all exhibit 300s and the identification of investments requiring corrective action, but that it never committed the additional resources that would be required to aggregate the partial management watch lists held by each individual analyst. Because no complete Management Watch List was formed, OMB lost the opportunity to analyze the full set of deficient investments as a single set of data. This undermined its ability to assess governmentwide trends and issues. In addition, the lack of a complete Management Watch List necessarily inhibited OMB's ability to track progress overall and to represent the full set of investments requiring corrective action. We continue to believe that these activities could be facilitated by an aggregate Management Watch List. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the report date. At that time, we will send copies to other interested congressional committees and to the Director of the Office of Management and Budget. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at www.gao.gov. Should you or your offices have questions on matters discussed in this report, please contact me at (202) 512-9286, or Lester P. Diamond, Assistant Director, at (202) 512-7957. We can also be reached by e-mail at [email protected], or [email protected], respectively. Key contributors to this report were William G. Barrick, Barbara Collier, Sandra Kerr, and Mary Beth McClanahan.
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For the President's Budget for Fiscal Year 2005, the Office of Management and Budget (OMB) stated that of the nearly 1,200 major information technology (IT) projects in the budget, it had placed approximately half--621 projects, representing about $22 billion--on a Management Watch List, composed of mission-critical projects with identified weaknesses. GAO was asked to describe and assess OMB's processes for (1) placing projects on its Management Watch List and (2) following up on corrective actions established for projects on the list. For the fiscal year 2005 budget, OMB developed processes and criteria for including IT investments on its Management Watch List. In doing so, it identified opportunities to strengthen investments and promote improvements in IT management. However, it did not develop a single, aggregate list identifying the projects and their weaknesses. Instead, OMB officials told GAO that to identify IT projects with weaknesses, individual OMB analysts used scoring criteria that the office established for evaluating the justifications for funding that federal agencies submit for major projects. These analysts, each of whom is typically responsible for several federal agencies, were then responsible for maintaining information on these projects. To derive the total number of projects on the list that OMB reported for fiscal year 2005, OMB polled its individual analysts and compiled the result. However, OMB officials told GAO that they did not compile a list that identified the specific projects and their identified weaknesses. The officials added that they did not construct a single list because they did not see such an activity as necessary. Thus, OMB has not fully exploited the opportunity to use the list as a tool for analyzing IT investments on a governmentwide basis. OMB had not developed a structured, consistent process for deciding how to follow up on corrective actions that its individual analysts asked agencies to take to address weaknesses associated with projects on its Management Watch List. According to OMB officials, decisions on follow-up and monitoring of progress were typically made by the staff with responsibility for reviewing individual agency budget submissions, depending on the staff's insights into agency operations and objectives. Because it did not consistently require or monitor follow-up activities, OMB did not know whether the project risks that it identified through its Management Watch List were being managed effectively, potentially leaving resources at risk of being committed to poorly planned and managed projects. In addition, because it did not consistently monitor the follow-up performed on projects on the Management Watch List, OMB could not readily tell GAO which of the 621 projects received follow-up attention. Thus, OMB was not using its Management Watch List as a tool in setting priorities for improving IT investments on a governmentwide basis and focusing attention where it was most needed.
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Under the national military strategy, the military services are required to maintain enough ammunition for wartime needs and for peacetime needs, such as training. The Defense Planning Guidance lays out general guidelines for the services to determine how much ammunition they need to conduct operations under the strategy. Ammunition that exceeds these requirements is to be shared among the services or disposed of through sale to other nations, recycling, or demilitarization. In 1977, the Army, through its Operations Support Command (formerly Industrial Operations Command), assumed single manager responsibility for managing, storing, and disposing of the services' ammunition. The Command's Defense Ammunition Center provides the Command and the military services a variety of ammunition related services, including training, technical assistance, and logistics support. The Army demilitarizes excess ammunition at its ammunition depots, plants, and centers. The Army has used open burning and detonating processes as well as the more environmentally friendly processes to demilitarize excess ammunition. Open burning and detonating processes, which may release airborne gases, particles, and other contaminants that are carried downwind of the demilitarization sites, have been the topic of public concerns regarding possible health risks to civilian populations. Environmentally friendly processes use demilitarization technologies that do not release contaminants into the atmosphere. The government-owned locations that demilitarize excess ammunition using environmentally friendly processes are shown in figure 1. During the 1980s, the amount of excess ammunition needing to be demilitarized was generally stable, holding at about 100,000 tons. However, in the early 1990s, with the end of the Cold War and other worldwide changes, a general reshaping of military resources and budgets began as the United States shifted from a strategy of preparing for a global war to a strategy of preparing for regional conflicts and crises. As a consequence, the services' ammunition requirements were significantly reduced, and by 1993 the Operation Support Command's reported backlog of ammunition awaiting demilitarization was 354,000 tons. Because excess and needed ammunition were being stored together, the Command was concerned that the excess ammunition could impede access to needed ammunition and hinder the Command's ability to effectively support contingency operations. To address this concern, Congress increased the amount of funding available for ammunition demilitarization from $35 million in fiscal year 1993 to almost $71 million in fiscal year 1994 and to an average of nearly $92 million annually in fiscal years 1995-2000. In addition, the Command set a goal of reducing the backlog to 100,000 tons by 2004. In October 1998, the Army extended its goal to reduce the demilitarization stockpile to less than 100,000 tons in fiscal year 2004 to the end of fiscal year 2010. On May 10, 1993, the Chairman of the Senate Appropriations Subcommittee on Defense requested that DOD increase its use of environmentally safe destruction processes and technologies and phase out its use of open burning and detonating destruction processes as soon as possible. The Chairman also requested that DOD look to the private sector for environmentally friendly processes that could be used to help demilitarize excess ammunition. In 1994, the Senate Appropriations Committee directed the Army to accelerate, where possible, the award of contracts that make use of environmentally friendly demilitarization processes. The Operations Support Command enacted a variety of initiatives to help the demilitarization program respond to the congressional requests. These initiatives included optimizing work assigned to government facilities; increasing the use of environmentally friendly technology at government facilities to recover, recycle, and reclaim usable elements of ammunition; and awarding contracts to commercial firms that used environmentally friendly processes to demilitarize portions of the stockpile. DOD's reported stockpile of excess ammunition has grown, and it does not include all excess ammunition; as a result, the government's financial liability for demilitarizing excess ammunition is understated. To reduce the stockpile, the Operations Support Command enacted a variety of initiatives, and for fiscal years 1993 through 2000, it demilitarized 745,000 tons of excess ammunition from the stockpile. Despite these efforts, the reported stockpile grew from 354,000 tons in 1993 to 493,000 tons at the end of 2000 and is projected to be at 403,000 tons in 2004 (see fig. 2). According to the Operations Support Command, there are multiple factors that affect the number of tons in the reported stockpile from year to year. These factors include transferring ammunition from the stockpile to meet critical needs of the military services, the amount of demilitarization funding received from Congress, and the amount of excess ammunition that gets turned in to the stockpile. For example, the increase in the stockpile in fiscal year 1999 was largely due to the 289,000 tons entering the stockpile that year. According to the Command, the downward trend for fiscal years 2001 through 2004 is due to a combination of forecasted increases in demilitarization funding and forecasted decreases in quantities of ammunition becoming excess. Several factors outside the Command's control contributed to the growth of the stockpile: downsizing of forces, which resulted in the need for less ammunition; replacing weapon delivery systems, which created obsolete ammunition; replacing older ammunition with newer, better versions, which created obsolete ammunition; transferring certain ammunition that was not planned for the stockpile (such as non-self-destruct antipersonnel land mines) to the stockpile; and reducing reliance on open burning and detonating processes to demilitarize ammunition in conjunction with public pressure to use more environmentally friendly methods. The Operations Support Command recognized that these factors would prevent it from meeting its goal of reducing the stockpile to 100,000 tons by 2004. Current Command projections show that the stockpile will instead be at about 403,000 tons by 2004. In October 1998, the Army extended its goal to reduce the demilitarization stockpile to less than 100,000 tons in fiscal year 2004 to the end of fiscal year 2010. In addition, the Operations Support Command's reported stockpile does not include all excess ammunition needing demilitarization. The reported stockpile only includes excess ammunition located at storage sites belonging to the Command (see fig. 1). Our analysis of the services' inventory records showed that there are additional quantities of excess ammunition needing demilitarization that were not included in the demilitarization stockpile. Specifically, we identified additional demilitarization liabilities associated with 94,030 tons of ammunition located overseas and 54,770 tons of unusable or unneeded ammunition at other military storage sites in the United States. Army Materiel Command officials explained that, in managing the demilitarization program, the Army estimates what ammunition is expected to require demilitarization in a reasonable time. Therefore, to plan and budget, it uses the quantities in the reported demilitarization stockpile plus forecasts of excess ammunition it expects the services to turn in to the stockpile. The officials agreed that the services' inventory records showed additional quantities of excess ammunition needing demilitarization that were not included in the demilitarization stockpile and estimated that if all known and forecasted excess ammunition were recognized, the demilitarization liability for the Army could be as much as 2.9 million tons. The Command estimates the cost to demilitarize a ton of ammunition to be about $1,034. Using this estimate, the disposal liability could potentially be as great as $3 billion, but DOD's financial statement does not reflect any demilitarization liability even though federal financial accounting standards require recognition and reporting of liabilities associated with disposal. DOD's omission of its demilitarization liability is representative of the needed financial management reforms on which we testified before the Government Management, Information, and Technology Subcommittee of the House Committee on Government Reform, stating that DOD still faces significant challenges to implement the federal accounting standards requiring recognition and reporting of liabilities associated with disposal. In recent years, the Operations Support Command has worked to allocate 50 percent of its excess ammunition demilitarization budget to contractors that used environmentally friendly demilitarization processes. However, at the same time the Command retained and underutilized environmentally friendly demilitarization capabilities at government facilities. The Army could have benefited from examining whether it was maximizing its demilitarization capabilities with the most cost-effective mix of public and private environmentally friendly capabilities. We noted that in some instances the Army incurred additional costs in contracting with the private sector for ammunition demilitarization and retained underutilized environmentally friendly demilitarization processes at its facilities. From 1993 to 1996 the Operations Support Command awarded 18 demilitarization contracts to private firms to demilitarize 76,527 tons of ammunition at a cost of about $48.2 million. During this 4-year period, the private sector received about 16 percent of the Command's demilitarization budget. Although congressional instructions did not specify how much demilitarization work should go to the private sector, in February 1996, the Army Materiel Command required that the demilitarization budget for 1997 be split 50/50 between government facilities and private companies. Army Materiel Command officials said the directive was issued to force the Operations Support Command to move a larger portion of its demilitarization workload to private firms and that the 50/50 split seemed appropriate (even though the government facilities having environmentally friendly processes were being underused at the time). The Operations Support Command adopted this policy for fiscal year 1997 and subsequent years. While the actual ratio varied each year, over time the Command planned to spend its ammunition demilitarization funds equally between government facilities and private firms. For fiscal years 1997 and 1998, the Command awarded 21 contracts to private companies to demilitarize 56,739 tons of ammunition at a cost of about $45.8 million. During this 2-year period, the private sector received about 25 percent of the Command's demilitarization budget. To eliminate the administrative burden associated with awarding and monitoring 21 contracts, beginning in fiscal year 2000 the Operations Support Command awarded two 5-year contracts, potentially worth an estimated total of $300 million, to General Dynamics Armament Systems and PB/Nammo Demil LLC. Subsequently, General Dynamics Armament Systems was awarded a task order under the contract to demilitarize 12,000 tons of ammunition at a price of $34.8 million for the first year and PB/Nammo Demil LLC was awarded a task order under the contract to demilitarize 12,000 tons of ammunition at a price of $25.9 million for the first year. PB/Nammo Demil LLC entered into agreements with three government facilities for a portion of this work. In addition, the firm subcontracted with other companies in the United States and overseas for the remainder of the work. According to Army Materiel Command and Operations Support Command officials, when implementing congressional direction to involve the private sector in environmentally friendly demilitarization of excess ammunition, the Army did not emphasize cost-effectiveness in terms of dollars saved and costs avoided. As a result, the Army incurred additional costs in contracting with the private sector for ammunition demilitarization. For example, according to the contracts, the Command is required to pay for packaging, crating, handling, and transportation costs to move ammunition from a government facility to the contractor demilitarization site. The Command considers these costs necessary to doing business with contractors. Since 1997 the Operations Support Command paid from $8 million to $14 million a year for packaging, crating, and handling excess ammunition and for transporting the ammunition, mostly from government facilities to contractor sites for demilitarization using environmentally friendly demilitarization processes. According to Command officials, a small percentage was spent to move excess ammunition from one government facility to another, but the majority of these expenditures were for moving ammunition from government sites to contractor sites. In some cases, government facilities with excess ammunition in storage had environmentally friendly demilitarization processes and facilities that could have been used to demilitarize the ammunition without incurring the shipping cost, leaving the funds available to demilitarize additional ammunition. For example, at one facility we visited, the Command paid $50,000 during fiscal year 2000 to ship excess ammunition from a storage site at the McAlester Army Ammunition Plant to contractor demilitarization sites when the McAlester plant had environmentally friendly capabilities to demilitarize the ammunition. The Command could have avoided $50,000 in shipping costs by allocating this work to McAlester. Other costs were incurred under the Operations Support Command's two contracts awarded in May 1999 that could have been avoided had the work been assigned to a government facility. For example, in one instance where the Command contracted for ammunition demilitarization, the contractor, in turn, entered into agreements with three government facilities to have them perform the demilitarization work. In essence, the government paid a contractor to have the ammunition demilitarized by government employees. This occurred when the contractor entered into three separate agreements for demilitarization services with government facilities at McAlester, Oklahoma; Crane, Indiana; and Tooele, Utah. The total value of the agreements for the first year was $8.6 million (including about $1.9 million to upgrade the demilitarization capabilities at the three government facilities). In addition, information provided by the contractor and by one government facility indicates that one government facility could have demilitarized the ammunition for less cost than was incurred by the Command's contract with this firm. The Operations Support Command attributed the decision not to use the available environmentally friendly capacity at government facilities for demilitarization purposes to the Army Materiel Command's interpretation of congressional instructions to use the private sector to destroy excess ammunition and the Materiel Command's mandate that 50 percent of the demilitarization budget go to private firms. While increasing reliance on contracted demilitarization, the Operations Support Command has retained environmentally friendly processes that are not being fully utilized. Projections for fiscal year 2001 show that 16,550 tons of incineration capacity at four government facilities will not be used. These same projections show that government facilities will operate at only 20 percent of their overall capacity to recover and reuse 81,100 tons of excess ammunition (see table 1). Currently, the Army is conducting a congressionally mandated study of potential alternative disposal methods that do not release contaminants into the atmosphere. The study will address the possibility of phasing out open burning and detonating processes in favor of environmentally friendly processes, technologies currently in existence and under development, and the cost and feasibility of constructing facilities employing these technologies. According to Operations Support Command officials, the results of this study, which will not be available until September 2001, could potentially lead to expanding the government's environmentally friendly capabilities. DOD's conventional ammunition policies and procedures require the military services to routinely check excess ammunition awaiting demilitarization before purchasing new ammunition. Available information indicates that the stockpile may contain ammunition that may be usable for training purposes, but more analysis is required to evaluate the condition of the ammunition. Although neither the services nor the Operations Support Command systematically compares the contents of the excess ammunition stockpile to the training needs of the active and reserve forces, the Command checks the stockpile for such items if a critical shortage occurs or if the needed ammunition cannot be purchased. For example, in the last 2 years quantities of 155-millimeter, 105-millimeter, and 30-millimeter ammunition have been pulled from the stockpile and given to the active forces. The Department of Defense Single Manager of Conventional Ammunition (Implementing Joint Conventional Ammunition Policies and Procedures) 5160.65-M requires the military services to routinely check all alternative sources before purchasing ammunition for its weapon systems. Excess ammunition awaiting demilitarization in the stockpile is an alternative source. However, the Command believes that a routine comparison of planned purchases to the stockpile is unnecessary because (1) when the excess ammunition has been offered to these groups before it was placed in the stockpile, they declined it, and (2) it would have to spend money to conduct an evaluation of the condition of the excess ammunition. Also, a Command official responsible for managing the stockpile stated that a 1996 Army analysis of the excess ammunition in the stockpile found that there were no items in the stockpile that could be used for training. According to a Defense Ammunition Center official, the services' needs may change over time and usable excess ammunition potentially could be recalled from the stockpile to prevent concurrent procurement and demilitarization. Our analysis showed that the Army has recently purchased 10 types of ammunition, particularly small caliber ammunition, when quantities of the same items were also in the stockpile and identified in the Army's records as being of sufficient quality (either new or in like-new condition) for training purposes. Examples of excess ammunition that the Army purchased in fiscal year 2000 for training exercises at the same time there were quantities in the stockpile reported to be in usable condition are shown in table 2. A disposal liability of potentially up to $3 billion is not reflected in DOD's financial statements. If all excess ammunition is not accurately reflected in DOD's financial statements and made available for congressional budget deliberations, then DOD and Congress cannot clearly understand the present and future financial liability associated with demilitarizing the excess ammunition. Additionally, indications are that the allocation of 50 percent of the excess ammunition demilitarization budget to contractors may have increased the cost of demilitarizing excess ammunition. Also, excess capacity involving environmentally friendly demilitarization processes exists at government facilities. While it may be appropriate to rely on the private sector to enhance demilitarization capabilities, the continued use of the private sector to demilitarize excess ammunition at the same time the government facilities have excess capacity raises the question of whether the Army is sponsoring too much capacity. At the same time, an on-going study effort examining the potential to expand environmentally friendly demilitarization capabilities at government facilities raises additional questions about the appropriate mix of public/private sector capacity needed to demilitarize excess ammunition. Whether excess ammunition in the demilitarization stockpile could be used for training needs is unclear because the Command does not systematically compare the contents of its stockpile to the training needs of the active and reserve forces. DOD requires such a comparison before purchasing ammunition. Records indicate that the Army is buying ammunition when potentially usable ammunition is available in the stockpile, suggesting that checking the stockpile could be cost-effective by avoiding concurrent procurement and demilitarization and could put the Army in a better position of buying what it actually needs. To improve the financial reporting, economy, and efficiency of demilitarizing excess ammunition, we recommend that the Secretary of Defense require the Secretary of the Army to 1. identify and include the total liability (domestic and overseas) associated with demilitarizing excess ammunition in the Department's annual consolidated balance sheet; 2. develop a plan in consultation with Congress that includes procedures for assessing the appropriate mix of public/private sector capacity needed to demilitarize excess ammunition and the cost-effectiveness of using contractors versus government facilities to demilitarize excess ammunition, with specific actions identified for addressing the capacity issue; and 3. comply with DOD's policy to routinely compare planned purchases of ammunition for training with usable ammunition in the stockpile and require the single manager for conventional ammunition to prepare periodic reports to the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics, documenting such comparisons and showing the quantities and types of ammunition reclaimed from the stockpile. The Director of Strategic and Tactical Systems in the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics provided written comments to a draft of this report. DOD's comments are reprinted in appendix II. DOD also provided separate technical comments that we have incorporated in this report where appropriate. DOD generally agreed with our recommendations and pointed out that it is taking actions that it believes will address our recommendations. However, additional actions will likely be needed to fully address the recommendations. In commenting on our recommendation for dealing with the liability associated with demilitarizing excess ammunition, DOD stated that determining an accurate demilitarization liability is a difficult task and that it believes that a reasonable estimate of the demilitarization stockpile plus the forecast of new generations expected to be added to the stockpile for the next 5 years should meet the intent of our recommendation. However, this proposal does not recognize a liability for excess ammunition overseas (even though a portion of the demilitarization budget each year is used to demilitarize ammunition overseas) nor does the proposal recognize any demilitarization liability for excess Army-owned war reserve ammunition, excess retail ammunition, and excess ammunition not stored at an Army installation. Therefore, we believe DOD should recognize the total liability associated with demilitarizing excess ammunition rather than its proposal to recognize only a portion of its demilitarization liability and have revised our recommendation accordingly. In commenting on our recommendation for a plan and procedures for assessing the public/private sector mix of demilitarization capacity, DOD stated that the Army is preparing a report to Congress, due September 30, 2001, on the feasibility of replacing open burning and detonation with closed disposal technologies. DOD said that this report could also be used to address the mix of public/private sector capacity needed to demilitarize excess ammunition. DOD also stated that the Army has a computer-modeling tool that can be used to identify the costs associated with changing the public/private sector percentages. We recognize that the report and computer-modeling tool can provide information that the Army can use to determine the mix of public/private sector capacity needed to demilitarize excess ammunition, but DOD's response does not address the substance of our recommendation which is to state how it plans to rationalize the public/private mix and minimize excess capacity at government facilities. Accordingly, we have made no change to our recommendation. Our draft report included a recommendation that DOD determine the feasibility of establishing a process to periodically compare planned purchases of ammunition for training with usable ammunition in the stockpile. DOD stated that an existing regulation and procedures require the Army to screen excess ammunition for use prior to procurement. However, our work showed that the Operations Support Command checks the stockpile for ammunition only if a critical shortage occurs or if the needed ammunition cannot be purchased. This suggests the need for additional oversight to ensure such assessments occur on a more frequent basis. Therefore, we have revised our recommendation to require the Army to comply with DOD's policy to routinely compare planned purchases of ammunition for training with usable ammunition in the stockpile and to require the single manager for conventional ammunition to prepare periodic reports documenting such analyses and showing the quantities and types of ammunition reclaimed from the stockpile. We are sending copies of this report to the appropriate congressional committees; the Honorable Donald H. Rumsfield, Secretary of Defense; the Acting Secretary of the Army, Joseph W. Westphal; the Acting Secretary of the Navy, Robert B. Pirie, Jr.; the Acting Secretary of the Air Force, Lawrence J. Delaney; and the Director, Office of Management and Budget Mitchell E. Daniels, Jr. Please contact me at (202) 512-8412 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix III. To determine the extent to which the excess ammunition stockpile has been reduced and whether the liability associated with excess ammunition has been fully identified, we reviewed the composition of the Army's reported stockpile of excess ammunition and obtained inventory records showing the condition and location of the services' ammunition. We also reviewed policies and procedures governing the demilitarization of excess ammunition and the requirements for reporting the financial liability of ammunition awaiting demilitarization. We met with officials and performed work at the U.S. Army Operations Support Command, Rock Island Arsenal, Rock Island, Illinois; the U.S. Army Defense Ammunition Center, McAlester, Oklahoma; Army, Navy, Marine Corps, and Air Force Headquarters, Washington, D.C.; and the Office of the Under Secretary of Defense (Acquisition and Technology), Washington, D.C. To assess the extent that the Army used contractors to demilitarize excess ammunition and its impact on the utilization of environmentally friendly demilitarization processes at government facilities, we met with officials at the Operations Support Command; McAlester Army Ammunition Plant, McAlester, Oklahoma; and PB Nammo Demil LLC, New York, N.Y. We selected the McAlester plant because it was one of three government facilities having an agreement with PB Nammo Demil LLC to perform demilitarization work. We reviewed the Command's contracts with private firms and assessed packaging, crating, and handling expenses associated with transporting ammunition to contractor sites. We also obtained and reviewed contractor agreements with government facilities to have them perform the demilitarization work and evaluated information provided by the contractor and by one government facility to determine if the government facility could have demilitarized the ammunition for less cost than was incurred by the Command's contract with this firm. We obtained Army data on the government facilities' capabilities to demilitarize excess ammunition and compared the Army's demilitarization plans to these capabilities. This allowed us to identify and calculate excess capacity situations. We also obtained information from the Army Materiel Command and the Operations Support Command involving an on-going study of the possibility of phasing out open burning and detonating processes in favor of environmentally friendly processes, technologies currently in existence and under development, and the cost and feasibility of constructing facilities employing these technologies. To determine the feasibility of using excess ammunition for training needs, we met with officials at the U.S. Defense Ammunition Center and discussed the Center's capability to compare the contents of the excess ammunition stockpile to the services' needs for ammunition to perform training operations. We compared the services' fiscal year 2000 training ammunition purchases to ammunition awaiting disposal to verify that ammunition matching the services' training needs is located in the stockpile. We did not look at opportunities to dispose of excess ammunition in the stockpile through sale to other nations. We used the same computer programs, reports, records, and statistics that DOD and the military services had used to manage excess ammunition. For example, we used Operations Support Command's inventory records to show the reported amounts of excess ammunition in the stockpile. We did not independently determine the reliability of all these sources. For historical perspective and illustrations of past problems, we reviewed the results of prior Defense studies and audit reports. We performed our review from August 2000 through February 2001 in accordance with generally accepted government auditing standards. The following are GAO's comments on the Department of Defense's (DOD) letter dated March 26, 2001. 1. DOD's comment and our evaluation are included in the body of the report. 2. The examples of costs that could have been avoided that we cite in our report relate to contracts awarded for fiscal year 2000. The examples illustrate the need for DOD to develop a plan that includes procedures for assessing the appropriate mix of public/private sector capacity by considering the cost-effectiveness of using contractors versus government facilities to demilitarize excess ammunition. Such a plan would help better ensure that cost-effective decisions are made. Our report also recognized that factors beyond the Army's control have affected its efforts to demilitarize excess ammunition. Further, our recommendation states that the plan should be developed in consultation with Congress. 3. Our analysis suggests the Army has excess environmentally friendly demilitarization capacity considering the capacity available at government facilities and under contract. This suggests the need to rationalize the capacity being supported by DOD. 4. The example cited by DOD illustrates the need for it to examine why the Army continues to incur costs to maintain 24,000 tons of capacity at this site with only 2,200 tons of ammunition available on site to be demilitarized. 5. Our analysis indicates that in recent years DOD's funding plan for ammunition demilitarization has significantly exceeded its funding level. The intent behind the plan called for in our recommendation is not to arbitrarily restrict use of the private sector percentages. Rather, we believe there is a need for DOD to develop a plan and business case analysis of the appropriate mix of public/private sector capacity by considering the cost-effectiveness of using contractors versus government facilities to demilitarize excess ammunition. 6. Our report focuses on excess capacity involving environmentally friendly demilitarization process that exists at government facilities and highlights that the Army has not determined the most cost-effective mix of public/private sector capacity for environmentally friendly demilitarization methods. Our report recognizes DOD's efforts to decrease emphasis on open burning and detonating methods. 7. Our report does not state that there is no apparent benefit to using private industry. Our report stresses the need for a greater emphasis on cost effectiveness in deciding the appropriate mix of public and private environmentally friendly capabilities instead of assigning a predetermined amount of demilitarization funds to the private sector as the Army presently does. 8. The applicable section of the report was modified to include DOD's position that its regulations and procedures require the Army to screen excess ammunition for use prior to procurement. 9. Our analysis was based upon data from the Army's Defense Ammunition Center, which we shared with the Army during the course of our review. Our report emphasized that potentially usable ammunition was available in the stockpile and recognized that further analysis was needed to determine the usability of the excess ammunition. In addition to those named above, Jimmy Palmer, Joanna McFarland, and John Brosnan made key contributions to this report.
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This report reviews the Department of Defense's (DOD) management practices for demilitarizing excess ammunition. Specifically, GAO evaluates (1) the extent to which the excess ammunition stockpile has been reduced and whether the liability associated with excess ammunition has been fully identified, (2) the Army's reliance on contracted demilitarization and the impact of doing so on government facilities that use similar environmentally friendly processes, and (3) the feasibility of using excess ammunition for U.S. training needs. GAO found that DOD's reported stockpile of excess ammunition has grown rather than decreased, rising from 354,000 tons in 1993 to 493,000 tons at the end of 2000. In addition, the reported stockpile does not include all excess ammunition, which understates DOD's ultimate liability for demilitarizing ammunition. In recent years, the Army has devoted 50 percent of its excess ammunition demilitarization budget to contractors that use environmentally friendly demilitarization processes. Although a congressional directive resulted in greater emphasis on contractor demilitarization, the Army began and later expanded this effort without considering the effect it would have on government facilities. With increased contractor demilitarization, the Army has retained and underutilized environmentally friendly demilitarization capabilities in government facilities. Finally, some excess ammunition potentially could be used to meet training needs, but further analysis by the Army is needed to fully evaluate the potential.
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DOE is responsible for a diverse set of missions, including nuclear security, energy research, and environmental cleanup. These missions are managed by various organizations within DOE and largely carried out by management and operating (M&O) contractors at DOE sites. According to federal budget data, NNSA is one of the largest organizations in DOE, overseeing nuclear weapons and nonproliferation- related missions at its sites. With a $10.5 billion budget in fiscal year 2011--nearly 40 percent of DOE's total budget--NNSA is responsible for providing the United States with safe, secure, and reliable nuclear weapons in the absence of underground nuclear testing and maintaining core competencies in nuclear weapons science, technology, and engineering. Under DOE's long-standing model of having unique M&O contractors at each site, management of its sites has historically been decentralized and, thus, fragmented. Since the Manhattan Project produced the first atomic bomb during World War II, NNSA, DOE, and predecessor agencies have depended on the expertise of private firms, universities, and others to carry out research and development work and efficiently operate the facilities necessary for the nation's nuclear defense. DOE's relationship with these entities has been formalized over the years through its M&O contracts--agreements that give DOE's contractors unique responsibility to carry out major portions of DOE's missions and apply their scientific, technical, and management expertise. Currently, DOE spends 90 percent of its annual budget on M&O contracts, making it the largest non-Department of Defense contracting agency in the government. The contractors at DOE's NNSA sites have operated under DOE's direction and oversight but largely independently of one another. Various headquarters and field-based organizations within DOE and NNSA develop policies and NNSA site offices, collocated with NNSA's sites, conduct day-to-day oversight of the M&O contractors, and evaluate the contractors' performance in carrying out the sites' missions. As we have reported since 1999, NNSA has not had reliable enterprise- wide budget and cost data, which potentially increases risk to NNSA's programs. Specifically: In July 2003 and January 2007, we reported that NNSA lacked a planning and budgeting process that adequately validated contractor- prepared cost estimates used in developing annual budget requests. Establishing this process was required by the statute that created NNSA--Title 32 of the National Defense Authorization Act for Fiscal Year 2000. In particular, NNSA had not established an independent analysis unit to review program budget proposals, confirm cost estimates, and analyze budget alternatives. At the request of the Subcommittee on Energy and Water Development, Senate Committee on Appropriations, we are currently reviewing NNSA's planning and budgeting process, the extent to which NNSA has established criteria for evaluating resource trade-offs, and challenges NNSA has faced in validating its budget submissions. We expect to issue a report on this work later this year. In June 2010, we reported that NNSA could not identify the total costs to operate and maintain essential weapons activities' facilities and infrastructure. Furthermore, we found that contractor-reported costs to execute the scope of work associated with operating and maintaining these facilities and infrastructure likely significantly exceeded the budget for this program that NNSA justified to Congress. We reported in February 2011 that NNSA lacked complete data on (1) the condition and value of its existing infrastructure, (2) cost estimates and completion dates for planned capital improvement projects, (3) shared-use facilities within the nuclear security enterprise, and (4) critical human capital skills in its M&O contractor workforce that are needed to maintain the Stockpile Stewardship Program. As a result, NNSA does not have a sound basis for making decisions on how to most effectively manage its portfolio of projects and other programs and will lack information that could help justify future budget requests or target cost savings opportunities. uncertainty over future federal budgets.to compare or quantify total savings across sites because guidance for estimating savings is unclear and the methods used to estimate savings vary between sites. We found that it was difficult The administration plans to request $88 billion from Congress over the next decade to modernize the nuclear security enterprise and ensure that base scientific, technical, and engineering capabilities are sufficiently supported and the nuclear deterrent can continue to be safe, secure, and reliable. To adequately justify future presidential budget requests, NNSA must accurately identify these base capabilities and determine their costs. Without this information, NNSA risks being unable to identify return on its investment or opportunities for cost savings or to make fully informed decisions on trade-offs in a resource-constrained environment. NNSA, recognizing that its ability to make informed enterprise-wide decisions is hampered by the lack of comprehensive data and analytical tools, is considering the use of computer models--quantitative tools that couple data from each site with the functions of the enterprise--to integrate and analyze data to create an interconnected view of the enterprise, which may help to address some of the critical shortcomings we identified. In July 2009, NNSA tasked its M&O contractors to form an enterprise modeling consortium. NNSA stated that the consortium is responsible for leading efforts to acquire and maintain enterprise data, enhance stakeholder confidence, integrate modeling capabilities, and fill in any gaps that are identified. The consortium has identified areas in which enterprise modeling projects could provide NNSA with reliable data and modeling capabilities, including capabilities on infrastructure and critical skills needs. In addition, we recently observed progress on NNSA's development of an Enterprise Program Analysis Tool that should give NNSA greater insight into its sites' cost reporting. The Tool also includes a mechanism to identify when resource trade-off decisions must be made, for example, when contractor-developed estimates for program requirements exceed the budget targets provided by NNSA for those programs. A tool such as this one could help NNSA obtain the basic data it needs to make informed management decisions, determine return on investment, and identify opportunities for cost saving. A basic tenet of effective management is the ability to complete projects on time and within budget. However, for more than a decade and in numerous reports, we have found that NNSA has continued to experience significant cost and schedule overruns on its major projects, principally because of ineffective oversight and poor contractor management. Specifically: In August 2000, we found that poor management and oversight of the National Ignition Facility construction project at Lawrence Livermore National Laboratory had increased the facility's cost by $1 billion and delayed its scheduled completion date by 6 years. Among the many causes for the cost overruns or schedule delays, DOE and Livermore officials responsible for managing or overseeing the facility's construction did not plan for the technically complex assembly and installation of the facility's 192 laser beams. They also did not use independent review committees effectively to help identify and correct issues before they turned into costly problems. Similarly, in April 2010, we reported that weak management by DOE and NNSA had allowed the cost, schedule, and scope of ignition-related activities at the National Ignition Facility to increase substantially., Since 2005, ignition-related costs have increased by around 25 percent--from $1.6 billion to over $2 billion--and the planned completion date for these activities has slipped from the end of fiscal year 2011 to the end of fiscal year 2012 or beyond. We have issued several reports on the technical issues, cost increases, and schedule delays associated with NNSA's efforts to extend, through refurbishment, the operational lives of nuclear weapons in the stockpile. For example, in December 2000, we reported that refurbishment of the W87 strategic warhead had experienced significant design and production problems that increased its refurbishment costs by over $300 million and caused schedule delays of about 2 years. Similarly, in March 2009 we reported that NNSA and the Department of Defense had not effectively managed cost, schedule, and technical risks for the B61 nuclear bomb and the W76 nuclear warhead refurbishments. For the B61 life extension program, NNSA was only able to stay on schedule by significantly reducing the number of weapons undergoing refurbishment and abandoning some refurbishment objectives. In the case of the W76 nuclear warhead, NNSA experienced a 1-year delay and an unexpected cost increase of nearly $70 million as a result of its ineffective management of one the highest risks of the program-- the manufacture of a key material known as Fogbank, which NNSA did not have the knowledge, expertise, or facilities to manufacture. In October 2009, we reported on shortcomings in NNSA's oversight of the planned relocation of its Kansas City Plant to a new, more modern facility. Rather than construct a new facility itself, NNSA chose to have a private developer build it. NNSA would then lease the building through the General Services Administration for a period of 20 years. However, when choosing to lease rather than construct a new facility itself, NNSA allowed the Kansas City Plant to limit its cost analysis to a 20-year life cycle that has no relationship with known requirements of the nuclear weapons stockpile or the useful life of a production facility that is properly maintained. As a result, NNSA's financing decisions were not as fully informed and transparent as they could have been. If the Kansas City Plant had quantified potential cost savings to be realized over the longer useful life of the facility, NNSA may have made a different decision as to whether to lease or construct a new facility itself. We reported in March 2010 that NNSA's plutonium disposition program was behind schedule in establishing a capability to produce the plutonium feedstock necessary to operate its Mixed-oxide Fuel Fabrication facility currently being constructed at DOE's Savannah River Site in South Carolina. In addition, NNSA had not sufficiently assessed alternatives to producing plutonium feedstock and had only identified one potential customer for the mixed-oxide fuel the facility would produce. In its fiscal year 2012 budget justification to Congress, NNSA reported that it did not have a construction cost baseline for the facility needed to produce the plutonium feedstock for the mixed-oxide fuel, although Congress had already appropriated over $270 million through fiscal year 2009 and additional appropriation requests totaling almost $2 billion were planned through fiscal year 2016. NNSA stated in its budget justification that it is currently considering options for producing necessary plutonium feedstock without constructing a new facility. GAO, Nuclear Weapons: National Nuclear Security Administration's Plans for Its Uranium Processing Facility Should Better Reflect Funding Estimates and Technology Readiness, GAO-11-103 (Washington, D.C.: Nov. 19, 2010). Senate Committee on Appropriations. We plan to issue our report next month. As discussed above, NNSA remains on our high-risk list and remains vulnerable to fraud, waste, abuse, and mismanagement. DOE has recently taken a number of actions to improve management of major projects, including those overseen by NNSA. For example, DOE has updated program and project management policies and guidance in an effort to improve the reliability of project cost estimates, better assess project risks, and better ensure project reviews that are timely, useful and identify problems early. However, DOE needs to ensure that NNSA has the capacity--that is, the people and other resources--to resolve its project management difficulties and that it has a program to monitor and independently validate the effectiveness and sustainability of its corrective measures. This is particularly important as NNSA embarks on its long- term, multibillion dollar effort to modernize the nuclear security enterprise. Another underlying reason for the creation of NNSA was a series of security issues at the national laboratories. Work carried out at NNSA's sites may involve plutonium and highly enriched uranium, which are extremely hazardous. For example, exposure to small quantities of plutonium is dangerous to human health, so that even inhaling a few micrograms creates a long-term risk of lung, liver, and bone cancer and inhaling larger doses can cause immediate lung injuries and death. Also, if not safely contained and managed, plutonium can be unstable and spontaneously ignite under certain conditions. NNSA's sites also conduct a wide range of other activities, including construction and routine maintenance and operation of equipment and facilities that also run the risk of accidents, such as those involving heavy machinery or electrical mishaps. The consequences of such accidents could be less severe than those involving nuclear materials, but they could also lead to long-term illnesses, injuries, or even deaths among workers or the public. Plutonium and highly enriched uranium must also be stored under extremely high security to protect it from theft or terrorist attack. In numerous reports, we have expressed concerns about NNSA's oversight of safety and security across the nuclear security enterprise. With regard to nuclear and worker safety: In October 2007, we reported that there had been nearly 60 serious accidents or near misses at NNSA's national laboratories since 2000. These incidents included worker exposure to radiation, inhalation of toxic vapors, and electrical shocks. Although no one was killed, many of the accidents caused serious harm to workers or damage to facilities. For example, at Los Alamos in July 2004, an undergraduate student who was not wearing required eye protection was partially blinded in a laser accident. Accidents and nuclear safety violations also contributed to the temporary shutdown of facilities at both Los Alamos and Livermore in 2004 and 2005. In the case of Los Alamos, laboratory employees disregarded established procedures and then attempted to cover up the incident, according to Los Alamos officials. Our review of nearly 100 reports issued since 2000 found that the contributing factors to these safety problems generally fell into three key categories: (1) relatively lax laboratory attitudes toward safety procedures; (2) laboratory inadequacies in identifying and addressing safety problems with appropriate corrective actions; and (3) inadequate oversight by NNSA. We reported in January 2008 on a number of long-standing nuclear and worker safety concerns at Los Alamos.included, among other things, the laboratory's lack of compliance with safety documentation requirements, inadequate safety systems, radiological exposures, and enforcement actions for significant violations of nuclear safety requirements that resulted in civil penalties totaling nearly $2.5 million. In October 2008, we reported that DOE's Office of Health, Safety, and Security--which, among other things, develops, oversees, and helps enforce nuclear safety policies at DOE and NNSA sites--fell short of fully meeting our elements of effective independent oversight of nuclear safety.independently was limited because it had no role in reviewing technical analyses that help ensure safe design and operation of nuclear facilities, and the office had no personnel at DOE sites to provide independent safety observations. With regard to security: In June 2008, we reported that significant security problems at Los Alamos had received insufficient attention. The laboratory had over two dozen initiatives under way that were principally aimed at reducing, consolidating, and better protecting classified resources but had not implemented complete security solutions to address either classified parts storage in unapproved storage containers or weaknesses in its process for ensuring that actions taken to correct security deficiencies were completed. Furthermore, Los Alamos had implemented initiatives that addressed a number of previously identified security concerns but had not developed the long-term strategic framework necessary to ensure that its fixes would be sustained over time. Similarly, in October 2009, we reported that Los Alamos had implemented measures to enhance its information security controls, but significant weaknesses remained in protecting the information stored on and transmitted over its classified computer network. A key reason for this was that the laboratory had not fully implemented an information security program to ensure that controls were effectively established and maintained. In March 2009, we reported about numerous and wide-ranging security deficiencies at Livermore, particularly in the ability of Livermore's protective force to assure the protection of special nuclear material and the laboratory's protection and control of classified matter. Livermore's physical security systems, such as alarms and sensors, and its security program planning and assurance activities were also identified as areas needing improvement. Weaknesses in Livermore's contractor self-assessment program and the NNSA Livermore Site Office's oversight of the contractor contributed to these security deficiencies at the laboratory. According to one DOE official, both programs were "broken" and missed even the "low-hanging fruit." The laboratory took corrective action to address these deficiencies, but we noted that better oversight was needed to ensure that security improvements were fully implemented and sustained. We reported in December 2010 that NNSA needed to improve its contingency planning for its classified supercomputing operations. All three NNSA laboratories had implemented some components of a contingency planning and disaster recovery program, but NNSA had not provided effective oversight to ensure that the laboratories' contingency and disaster recovery planning and testing were comprehensive and effective. In particular, NNSA's component organizations, including the Office of the Chief Information Officer, were unclear about their roles and responsibilities for providing oversight in the laboratories' implementation of contingency and disaster recovery planning. In March 2010, the Deputy Secretary of Energy announced a new effort-- the 2010 Safety and Security Reform effort--to revise DOE's safety and security directives and reform its oversight approach to "provide contractors with the flexibility to tailor and implement safety and security programs without excessive federal oversight or overly prescriptive departmental requirements." We are currently reviewing the reform of DOE's safety directives and the benefits DOE hopes to achieve from this effort for, among others, the House Committee on Energy and Commerce. We expect to issue our report next month. Nevertheless, our prior work has shown that ineffective NNSA oversight of its contractors has contributed to many of the safety and security problems across the nuclear security enterprise and that NNSA faces challenges in sustaining improvements to safety and security performance. NNSA faces a complex task in planning, budgeting, and ensuring the execution of interconnected activities across the nuclear security enterprise. Among other things, maintaining government-owned facilities that were constructed more than 50 years ago and ensuring M&O contractors are sustaining critical human capital skills that are highly technical in nature and limited in supply are difficult undertakings. Over the past decade, we have made numerous recommendations to DOE and NNSA to improve their management and oversight practices. DOE and NNSA have acted on many of these recommendations, and we will continue to monitor progress being made in these areas. In the current era of tight budgets, Congress and the American taxpayer have the right to know whether investments made in the nuclear security enterprise are worth the cost. However, NNSA currently lacks the basic financial information on the total costs to operate and maintain its essential facilities and infrastructure, leaving it unable to identify return on investment or opportunities for cost savings. NNSA is now proposing to spend decades and tens of billions of dollars to modernize the nuclear security enterprise, largely by replacing or refurbishing aging and decaying facilities at its sites across the United States. Given NNSA's record of weak management of its major projects, we believe that careful federal oversight will be critical to ensure this time and money are spent in as an effective and efficient manner as possible. With regard to the concerns that DOE's and NNSA's oversight of the laboratories' activities have been excessive and that safety and security requirements are overly prescriptive and burdensome, we agree that excessive oversight and micromanagement of contractors' activities is not an efficient use of scarce federal resources. Nevertheless, in our view, the problems we continue to identify in the nuclear security enterprise are not caused by excessive oversight, but instead result from ineffective oversight. Given the critical nature of the work the nuclear security enterprise performs and the high-hazard operations it conducts--often involving extremely hazardous materials, such as plutonium and highly enriched uranium, that must be stored under high security to protect them from theft--careful oversight and stringent safety and security requirements will always be required at these sites It is also important in an era of scarce resources that DOE and NNSA ensure that the work conducted by the nuclear security enterprise is primarily focused on its principal mission--ensuring the safety and reliability of the nuclear weapons stockpile. DOE has other national laboratories capable of conducting valuable scientific research on issues as wide-ranging as climate change or high-energy physics, but there is no substitute for the sophisticated capabilities and highly-skilled human capital present in the nuclear security enterprise for ensuring the credibility of the U.S. nuclear deterrent. Chairman Turner, Ranking Member Sanchez, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions you may have at this time. If you or your staff have any questions about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our 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 Allison Bawden, Ryan T. Coles, and Jonathan Gill, Assistant Directors, and Patrick Bernard, Senior Analyst. 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 National Nuclear Security Administration (NNSA), a separately organized agency within the Department of Energy (DOE), is responsible for managing its contractors' nuclear weapon- and nonproliferation-related national security activities in laboratories and other facilities, collectively known as the nuclear security enterprise. GAO designated DOE's management of its contracts as an area at high risk of fraud, waste, and abuse. Progress has been made, but GAO continues to identify problems across the nuclear security enterprise, from projects' cost and schedule overruns to inadequate oversight of safety and security at NNSA's sites. Laboratory and other officials have raised concerns that federal oversight of the laboratories' activities has been excessive. With NNSA proposing to spend tens of billions of dollars to modernize the nuclear security enterprise, it is important to ensure scarce resources are spent in an effective and efficient manner. This testimony addresses (1) NNSA's ability to produce budget and cost data necessary to make informed management decisions, (2) improving NNSA's project and contract management, and (3) DOE's and NNSA's safety and security oversight. It is based on prior GAO reports issued from August 2000 to January 2012. DOE and NNSA continue to act on the numerous recommendations GAO has made in improving budget and cost data, project and contract management, and safety and security oversight. GAO will continue to monitor DOE's and NNSA's implementation of these recommendations. NNSA has successfully ensured that the nuclear weapons stockpile remains safe and reliable in the absence of underground nuclear testing, accomplishing this complicated task by using state-of-the-art facilities as well as the skills of top scientists. Nevertheless, NNSA does not have reliable enterprise-wide management information on program budgets and costs, which potentially increases risk to NNSA's programs. For example, in June 2010, GAO reported that NNSA could not identify the total costs to operate and maintain essential weapons activities facilities and infrastructure. In addition, in February 2011, GAO reported that NNSA lacks complete data on, among other things, the condition and value of its existing infrastructure, cost estimates and completion dates for planned capital improvement projects, and critical human capital skills in its contractor workforce that are needed for its programs. As a result, NNSA does not have a sound basis for making decisions on how to most effectively manage its portfolio of projects and other programs and lacks information that could help justify future budget requests or target cost savings opportunities. NNSA recognizes that its ability to make informed decisions is hampered and is taking steps to improve its budget and cost data. For more than a decade and in numerous reports, GAO found that NNSA has continued to experience significant cost and schedule overruns on its major projects. For example, in 2000 and 2009, respectively, GAO reported that NNSA's efforts to extend the operational lives of nuclear weapons in the stockpile have experienced cost increases and schedule delays, such as a $300 million cost increase and 2-year delay in the refurbishment of one warhead and a nearly $70 million increase and 1-year delay in the refurbishment of another warhead. NNSA's construction projects have also experienced cost overruns. For example, GAO reported that the cost to construct a modern Uranium Processing Facility at NNSA's Y-12 National Security Complex experienced a nearly seven-fold cost increase from between $600 million and $1.1 billion in 2004 to between $4.2 billion and $6.5 billion in 2011. Given NNSA's record of weak management of major projects, GAO believes careful federal oversight of NNSA's modernization of the nuclear security enterprise will be critical to ensure that resources are spent in as an effective and efficient manner as possible. NNSA's oversight of safety and security in the nuclear security enterprise has also been questioned. As work carried out at NNSA's sites involves dangerous nuclear materials such as plutonium and highly enriched uranium, stringent safety procedures and security requirements must be observed. GAO reported in 2008 on numerous safety and security problems across NNSA's sites, contributing, among other things, to the temporary shutdown of facilities at both Los Alamos and Lawrence Livermore National Laboratories in 2004 and 2005, respectively. Ineffective NNSA oversight of its contractors' activities contributed to many of these incidents as well as relatively lax laboratory attitudes toward safety procedures. In many cases, NNSA has made improvements to resolve these safety and security concerns, but better oversight is needed to ensure that improvements are fully implemented and sustained. GAO agrees that excessive oversight and micromanagement of contractors' activities are not an efficient use of scarce federal resources, but that NNSA's problems are not caused by excessive oversight but instead result from ineffective departmental oversight.
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The nation's surface transportation systems facilitate mobility through an extensive network of infrastructure and operators, as well as through the vehicles and vessels that permit passengers and freight to move within the system. Maintaining the systems is critical to sustaining America's economic growth. This is especially important given that projected increases in freight tonnage will likely place pressures on these systems. According to the Federal Highway Administration, domestic and international freight tonnage across all surface modes will increase 41 percent, from 14.4 billion tons in 1998 to 20.3 billion tons in 2010. According to the forecasts, by 2010, 15.6 billion tons are projected to move by truck, a 44 percent increase; 3 billion tons by rail, a 32 percent increase; and 1.5 billion tons by water, a 27 percent increase. Some freight may be moved by more than one mode before reaching its destination, such as moving by ship for one segment of the trip, then by truck to its final destination. Over 95 percent of the U.S. overseas freight tonnage is shipped by sea. The United States accounts for 1 billion metric tons, or nearly 20 percent of the world's oceanborne trade. As the world's leading maritime trading nation, the United States depends on a vast marine transportation system. In addition to the economic role it plays, the system also has an important role in national defense; serves as an alternative transportation mode to roads and rails; and provides recreational value through boating, fishing, and cruises. Traditionally, federal participation in the maritime industry has been directed mainly at projects related to "waterside" issues, such as keeping navigation channels open by dredging, icebreaking, or improving the system of locks and dams; maintaining navigational aids such as lighthouses or radio systems; and monitoring the movement of ships in and out of the nation's coastal waters. Federal participation has generally not extended to "landside" projects related to ports' capabilities, such as building terminals or piers and purchasing cranes or other equipment to unload cargo. These traditional areas of federal assistance are under pressure, according to a congressionally mandated report issued by the Department of Transportation in 1999, which cites calls to modernize aging structures and dredge channels to new depths to accommodate larger ships. Since this report, and in the aftermath of September 11, the funding focus has further expanded to include greater emphasis on port security. Many of the security improvements will require costly outlays for infrastructure, technology, and personnel. For example, when the Congress recently made $92.3 million in federal funding available for port security as part of a supplemental appropriations bill, the Transportation Security Administration received grant applications totaling almost $700 million. With growing system demands and increased security concerns, some stakeholders have suggested a different source of funding for the marine transportation system. For example, U.S. public port authorities have advocated increased federal funding for harbor dredging. Currently, funding for such maintenance is derived from a fee on passengers and the value of imported and domestic cargo loaded and unloaded in U.S. ports. Ports and shippers would like to see funding for maintenance dredging come from the general fund instead, and there was legislation introduced in 1999 to do so. Regarding funding for security, ports are seeking substantial federal assistance to enhance security in the aftermath of the events of September 11. In other work we have conducted on port security, port and private-sector officials have said that they believe combating terrorism is the federal government's responsibility and that, if additional security is needed, the federal government should provide or pay for it. Unlike the funding approach used for the aviation and highway transportation systems, which are primarily funded by collections from users of the systems, the commercial marine transportation system relies heavily on general tax revenue. For all three transportation systems, most of the revenue collected from users of the systems was deposited into trust fund accounts. Figure 1 summarizes the expenditure and assessment comparisons across the three transportation systems. During fiscal years 1999 through 2001, federal agencies expended an average of $3.9 billion each year on the marine transportation system with about 80 percent of the funding coming from the general revenues. During the same period, federal agencies expended an average of $10 billion each year on the aviation system and $25 billion each year on the highway system. The vast majority of the funding for these expenditures came from trust fund accounts. (See app. II.) Federal agencies collected revenue from assessments on users of all three transportation systems during fiscal years 1999 through 2001. Collections from assessments on system users during this period amounted to an average of $1 billion each year from marine transportation system users, $11 billion each year from aviation system users, and $34 billion each year from highway system users. Most of the collections for the three systems were deposited into trust funds that support the marine, aviation, and highway transportation systems. (See app. III.) Trust funds that support the marine transportation system include the Harbor Maintenance Trust Fund and the Inland Waterways Trust Fund. Trust funds that support the aviation and highway transportation systems include the Airport and Airway Trust Fund and the Highway Trust Fund. The federal government assesses customs duties on goods imported into the United States and the majority of these collections are deposited into the U.S. Treasury's general fund to be used for the support of federal activities. As can be seen in figure 2, the amounts from customs duties levied on imported goods carried through the marine transportation system are more than triple the combined amounts collected from customs duties levied on the goods carried through the aviation and highway systems. During fiscal years 1999 through 2001, customs duties on imported goods shipped through the transportation systems averaged $15.2 billion each year for the marine transportation system, $3.7 billion for the aviation system, and $928 million for the highway system. (See app. IV for details on customs duty collections by year.) Some maritime stakeholders, particularly port owners and operators, have proposed using a portion of the customs duties for infrastructure improvements to the marine transportation system. They point out that the marine transportation system is generating billions of dollars in revenue, and some of these funds should be returned to maintain and enhance the system. However, unlike transportation excise taxes, customs duties are taxes on the value of imported goods paid by importers and ultimately their consumers--not on the users of the system--and have traditionally been viewed as revenues to be used for the support of the general activities of the federal government. Notwithstanding the general trend, a portion of revenues from customs duties are currently earmarked for agriculture and food programs, migratory bird conservation, aquatic resources, and reforestation. It should be noted, however, that in these cases, some relationship exists between the goods being taxed and the uses for which the taxes are earmarked. Designating a portion of the remaining customs fees for maritime uses would not represent a new source of capital for the federal government, but rather it would be a draw on the general fund of the U.S. Treasury. This could lead to additional deficit financing, unless other spending were cut or taxes were increased. Some maritime industry stakeholders have suggested that substantial new investments in the maritime infrastructure by federal, state, and local governments and by the private sector may be required because of an aging infrastructure, changes in the shipping industry, and increased concerns about security. These growing and varied demands for increased investments in the maritime transportation system heighten the need for a clear understanding about the federal government's purpose and role in providing funding for the system and for a sound investment approach to guide federal participation. In examining federal investment approaches across many national activities, we have found that issues such as these are best addressed through a systematic framework. As shown in figure 2, this framework has the following four components that potentially could be applied to all transportation systems: Set national goals for the system. These goals, which would establish what federal participation in the system is designed to accomplish, should be specific and measurable. Define clearly what the federal role should be relative to other stakeholders. This step is important to help ensure that federal participation supplements and enhances participation by others, rather than simply replacing their participation. Determine which funding tools and other approaches, such as alternatives to investment in new infrastructure, will maximize the impact of any federal investment. This step can help expand the capacity to leverage funding resources and promote shared responsibilities. Ensure that a process is in place for evaluating performance periodically so that defined goals, roles, and approaches can be reexamined and modified, as necessary. An initial decision for Congress when evaluating federal investments concerns the goals of the marine transportation system. Clearly defined national goals can serve as a basis for guiding federal participation by charting a clear direction, establishing priorities among competing issues, specifying the desired results, and laying the foundation for such other decisions as determining how assistance will be provided. At the federal level, measuring results for federal programs has been a longstanding objective of the Congress. The Government Performance and Results Act of 1993 has become the primary legislative framework through which agencies are required to set strategic and annual goals that are based on national goals, measure performance, and report on the degree to which goals are met and on what actions are needed to achieve or modify goals that have not been met. Establishing clear goals and performance measures for the marine transportation system is critical to ensuring both a successful and a fiscally responsible effort. Before national goals for the system can be established, however, an in- depth understanding of the relationship of the system to other transportation modes is required. Transportation experts highlight the need to view the system in the context of the entire transportation system in addressing congestion, mobility, and other challenges and, ultimately, investment decisions. For example, congestion challenges often occur where modes connect or should connect, such as ports where freight is transferred from one mode to another. The connections require coordination of more than one mode of transportation and cooperation among multiple transportation providers and planners. A systemwide approach to transportation planning and funding, as opposed to focus on a single mode or type of travel, could improve the focus on outcomes related to customer or community needs. Meaningful goal setting also requires a comprehensive understanding of the scope and extent of issues and priorities facing the marine transportation system. However, there are clear signs that certain key issues and priorities are not yet understood well enough to establish meaningful goals for the system. For example, a comprehensive analysis of the issues and problems facing the marine transportation system has not yet been completed. In setting goals for investment decisions, leading organizations usually perform comprehensive needs assessments to obtain a clear understanding of the extent and scope of their issues, problems, and needs and, ultimately, to identify resources needed. These assessments should be results-oriented in that they determine what is needed to obtain specific outcomes rather than what is needed to maintain or expand existing capital stock. Developing such information is important for ensuring that goals are framed in an adequate context. The call by many ports for federal assistance in dredging channels or harbors to 50 feet is an example. Dredging to 50 feet allows a port to accommodate the largest of the container ships currently being constructed and placed in service. However, developing the capacity to serve such ships is no guarantee that companies with such ships will actually choose to use a port. Every port's desire to be competitive by having a 50-foot channel could thus lead to a situation in which the nation as a whole has an overcapacity for accommodating larger ships. The result, at least for the excess capacity, would signal an inefficient use of federal resources that might have been put to better use in other ways. Establishing the roles of the federal, state, and local governments and private entities will help to ensure that goals can be achieved. The federal government is only one of many stakeholders in the marine transportation system. While these various stakeholders may all be able to share a general vision of the system, they are likely to diverge in the priorities and emphasis they place on specific goals. For example, the federal government, with its national point of view, is in a much different position than a local port intensely involved in head-to-head competition with other ports for the business of shipping companies or other businesses. For a port, its own infrastructure is paramount, while the federal government's perspective is focused on the national and broader public interest. Since there are so many stakeholders involved with the marine transportation system, achieving national goals for the system hinges on the ability of the federal government to forge effective partnerships with nonfederal entities. Decision makers have to balance national goals with the unique needs and interests of all nonfederal stakeholders in order to leverage the resources and capabilities that reside within state and local governments and the private sector. Future partnering among key maritime stakeholders may take on a different form as transportation planners begin focusing across transportation modes in making investment decisions instead of making investment decisions for each mode separately. The Alameda Corridor Program in the Los Angeles area provides an example of how effective partnering allowed the capabilities of the various stakeholders to be more fully utilized. Called the Alameda Corridor because of the street it parallels, the program created a 20-mile, $2.4 billion railroad express line connecting the ports of Los Angeles and Long Beach to the transcontinental rail network east of downtown Los Angeles. The express line eliminates approximately 200 street-level railroad crossings, relieving congestion and improving freight mobility for cargo. This project made substantial use of local stakeholders' ability to raise funds. While the federal government participated in the cost, its share was only about 20 percent of the total cost, most of which was in the form of a loan rather than a grant. Just as partnerships offer opportunities, they also pose risks based upon the different interests reflected by each stakeholder. While gaining the opportunity to leverage the resources and capabilities of partners, each of these nonfederal entities has goals and priorities that are independent of the federal government. For the federal government, there is concern that state and local governments may not share the same priorities for use of the federal funds. This may result in nonfederal entities replacing or "supplanting" their previous levels of commitment in areas with new federal resources. For example, in the area of port security, there is a significant funding need at the local level for overtime pay for police and security guards. Given the degree of need, if more federal funding was made available, local interests might push to apply federal funding in this way, thereby transferring a previously local function to the federal arena. In moving toward federal coverage of basic public services, the Congress and federal officials would be substantially expanding the federal role. When evaluating federal investments, a careful choice of the approaches and funding tools that would best leverage federal funds in meeting identified goals should be made. A well-designed funding approach can help encourage investment by other stakeholders and maximize the application of limited federal dollars. An important step in selecting the appropriate approach is to effectively harness the financial capabilities of local, state, and private stakeholders. The Alameda Corridor Program is a good example. In this program, state and local stakeholders had both a financial incentive to relieve congestion and the commitment and ability to bring financial resources to bear. Some other ports may not have the same level of financial incentives or capabilities to undertake projects largely on their own. For example, in studying the extent to which Florida ports were able to implement a set of security requirements imposed by the state, we found that some ports were able to draw on more financial resources than others, based on such factors as size, economic climate, and funding base. While such information would be valuable in crafting federal assistance, it currently is largely unavailable. Relatively little is known about the extent of state, local, and private-sector funding resources across the country. The federal government has a variety of funding tools potentially available for use such as grants, direct loans, loan guarantees, tax expenditures, and user fees. Through cost sharing and other arrangements, the federal government can use these approaches to help ensure that federal funds supplement--and not supplant--funds from other stakeholders. For example, an effective use of funding tools, with appropriate nonfederal matches and incentives, can be valuable in implementing a national strategy to support federal port investments, without putting the government in the position of choosing winners or losers. Federal approaches can take other forms besides those that relate specifically to making funding available. These following approaches allow increased output without making major capital investments: Demand management. Demand management is designed to reduce travel at the most congested times and on the most congested routes. One demand management strategy involves requiring users to pay more to use congested parts of the system during such periods, with the idea that the charge will provide an incentive for some users to shift their use to a less congested time or to less congested routes or transportation modes. On inland waterways, for example, congestion pricing for locks--that is, charging a toll during congested periods to reflect the additional cost of delay that a vessel imposes on other vessels--might be a way to space out demand on the system. Many economists generally believe that such surcharges or tolls enhance economic efficiency by making operators take into account the external costs they impose on others in deciding when, where, and how to travel. Technology improvements. Instead of making extensive modifications to infrastructure such as locks and dams, it may be possible to apply federal investments to technology that makes the existing system more efficient. For example, technological improvements may be able to help barges on the inland waterways navigate locks in inclement weather, thereby reducing delays on the inland waterway system. Maintenance and rehabilitation. Enhancing capacity of existing infrastructure through increased maintenance and rehabilitation is an important supplement to, and sometimes a substitute for, building new infrastructure. Maintenance and rehabilitation can improve the speed and reliability of passenger and freight travel, thereby optimizing capital investments. Management and operation improvements. Better management and operation of existing infrastructure may allow the existing transportation system to accommodate additional travel without having to add new infrastructure. For example, the U.S. Army Corps of Engineers is investigating the possibility of automating the operation of locks and dams on the inland waterways to reduce congestion at bottlenecks. Regardless of the tools selected, results should be evaluated and lessons learned should be incorporated into the decision-making process. Evaluating the effectiveness of existing or proposed federal investment programs could provide decision makers with valuable information for determining whether intended benefits have been achieved and whether goals, responsibilities, and approaches should be modified. Such evaluations are also useful for better ensuring accountability and providing incentives for achieving results. Leading organizations that we have studied have stressed the importance of developing performance measures and linking investment decisions and their expected outcomes to overall strategic goals and objectives.Hypothetically, for example, one goal for the marine transportation system might be to increase throughput (that is, the volume of cargo) that can be transported through a particular lock and dam system on the nation's inland waterways. A performance measure to gauge the results of an investment for this goal might be the increased use (such as number of barges passing through per hour) that results from this investment and the economic benefits associated with that increase. In summary, Mr. Chairmen, the projected increases in freight tonnage will likely place pressures on the nation's surface transportation systems. Maintaining these systems is critical to sustaining America's economic growth. Therefore, there is a need to view various transportation modes from an integrated standpoint, particularly for the purposes of developing and implementing a federal investment strategy and alternative funding approaches. In such an effort, the framework of goals, roles, tools, and evaluation can be particularly helpful--not only for marine transportation funding, but for other modes as well. Mr. Chairmen, this concludes my testimony. I will be happy to respond to any questions you or other Members may have. To determine the amount of federal expenditures to support the commercial marine, aviation, and highway transportation systems and the amount of collections from federal assessments on the users of these systems for fiscal years 1999, 2000, and 2001, we reviewed prior GAO reports and other relevant documents, and interviewed officials from the Office of Management and Budget and various industry representatives. On the basis of this determination, we contacted 15 federal agencies and asked them to provide information on the expenditures and collectionsthat were specific to the transportation systems, relying on each agency to identify expenditures and collections related to activities that support the transportation systems. In addition, we also received data from the U.S. Customs Service on the amount of duty collected on commodities imported by the transportation modes. The U.S. Customs Service provided estimates, developed by the U.S. Census Bureau, on the percent of collections that were attributable to water, sea, and land transportation modes. We applied these percentages to the total customs duties collected for fiscal years 1999, 2000, and 2001 provided by the U.S. Customs Service to compute the amount of total customs duties collected by the marine, aviation, and highway transportation systems each year. We performed limited reasonableness tests on the data by comparing the data with the actual trust fund outlays contained in the budget of the U.S. government for fiscal years 2001, 2002, and 2003. Although we had each agency validate the data provided, we did not verify agency expenditures and collections. To identify initial considerations that could help the Congress in addressing whether to change the scope or nature of federal investments in the marine transportation system, we conducted a review of prior GAO reports and other relevant studies to identify managerial best practices in establishing strategic plans and federal investment approaches. We also interviewed U.S. Army Corps of Engineers and Department of Transportation officials to obtain information on the current state of the commercial marine transportation system, the ability of the system to keep pace with growing demand, and activities that are under way to assess the condition and capacity of the infrastructure. Our work was carried out from January 2002 to September 2002 in accordance with generally accepted government auditing standards. Federal agencies spent an average of $3.9 billion annually on the marine transportation system, $10 billion annually on the aviation system, and $25 billion annually on the highway system. Whereas the primary source of funding for the marine transportation system is general tax revenues, the vast majority of federal funding invested in both the aviation and highway systems came from assessments on users of the systems. During the three- year period, general revenues were the funding source for 80 percent of the expenditures for the marine transportation system. In contrast, assessments on system users were the funding source for 88 percent of the amount spent on the aviation system and nearly 100 percent of the amount spent on the highway system. Federal agencies collected an average of $1 billion annually from users of the marine transportation system, $11.1 billion annually from users of the aviation system, and $33.7 billion annually from users of the highway system. For all three transportation systems, most of the collections were deposited into trust fund accounts. During the three-year period, 85 percent of the amounts collected from marine transportation system users, 94 percent of the amounts collected from aviation system users, and nearly 100 percent of the amounts collected from highway system users were deposited into trust fund accounts.
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This testimony discusses challenges in defining the federal role with respect to freight transportation issues. There are concerns that the projected increases in freight tonnage for all transportation modes will place pressures on the marine, aviation, and highway transportation systems. As a result, there is growing awareness of the need to view various transportation modes, and freight movement in particular, from an integrated standpoint, particularly for the purposes of developing and implementing a federal investment strategy and considering alternative funding approaches. The federal approach for funding the marine transportation system relies heavily on general revenues, although the approach for funding the aviation and highway systems relies almost exclusively on collections from users of the systems. During fiscal years 1999 through 2001, customs duties on imported goods transported through the transportation systems averaged $15 billion each year for the marine transportation system, $4 billion each year for the aviation system, and $900 million each year for the highway system. Customs duties are taxes on the value of imported goods and have traditionally been viewed as revenues to be used for the support of the general activities of the federal government. Diverse industry stakeholders believe that substantial new investments in the maritime infrastructure may be required from public and private sources because of an aging infrastructure, changes in the shipping industry, and increased concerns about security. A systematic framework would be helpful to decision makers as they consider the federal government's purpose and role in providing funding for the system and as they develop a sound investment approach to guide federal participation. In examining federal investment approaches across many national activities, GAO has identified four key components of such a framework--establishing national goals, defining the federal role, determining appropriate funding tools, and evaluating performance--which could potentially be applied to all transportation systems.
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In January 2001, we reported on Department of Defense management challenges and noted that the Department has had serious weaknesses in its management of logistics functions and, in particular, inventory management. We have identified inventory management as a high-risk area since 1990. In 1999, we reported on the Air Force's specific problems in managing spare parts and noted an increase in the percentage of some of its aircraft that were not mission capable due to supply problems. (See appendix I for examples from our reports on management weaknesses related to the Air Force.) Also, the Secretary of the Air Force reported that the readiness of the Air Force has declined since 1996 and attributed this overall decline, in part, to spare parts shortages. Table 1 shows the percentage of all aviation systems that were mission capable and the percentage of aircraft that were not mission capable due to supply problems from fiscal year 1996 through the first quarter of fiscal 2001. As table 1 shows, the percentage of all Air Force systems reported as not mission capable due to supply problems steadily increased from fiscal year 1996 through fiscal year 2000. The Air Force requested additional funding to address concerns with spare parts shortages. The Air Force states in the Department of Defense Quarterly Readiness Report to the Congress for July through September 2000 that funding Congress provided in earlier years has begun to improve the availability of spares, citing a 58-percent reduction in parts that have been ordered but not received since December 1998. The Secretary also expressed cautious optimism that recent congressional funding would improve the availability of spare parts and aircraft mission-capable rates. In the most recent quarterly readiness report (Oct. through Dec. 2000), the Air Force cautions that although as of early December 2000 overall mission-capable rates had improved from average fiscal year 2000 rates, this improvement had come at the cost of the increased use of the practice of removing parts from one aircraft for use on another, that is, cannibalization. Because of concerns that spare parts shortages were causing readiness problems, the Air Force received in fiscal 1999 an additional $904 million in obligation authority from the Department of Defense to buy more spare parts. This amount consisted of $387 million to buy spare parts attributable to the Kosovo operation, $135 million to buy engine-related spare parts for the Oklahoma City Air Logistics Center, and $382 million to overcome the accumulated shortfall of spare parts inventories. Also in 1999, the Department of Defense announced plans to provide $500 million to the Defense Logistics Agency to purchase spare parts for all the services over fiscal years 2001-2004. Of that $500 million, $213.8 million is to be for parts to be used on Air Force aircraft. According to a Department of Defense official, the Air Force was provided the first $50 million in fiscal 2001 to pass on to the Defense Logistics Agency to pay for Air Force parts ordered in fiscal year 2000. The Air Force and the other military services received additional funds in fiscal year 1999 that, unlike the funds cited above, were placed largely in operations and maintenance accounts. In a separate report issued earlier this year, we indicated current financial information did not show the extent to which these funds were used for spare parts. However, the Department plans to annually develop detailed financial management information on spare parts funding uses but does not plan to provide it to Congress. We, therefore, recommended to the Secretary of Defense that the information to be developed annually by the Department and the services on the quantity and funding of spare parts be routinely provided to Congress as an integral part of the Department's annual budget justification; the Department agreed to do so. The aviation systems that we reviewed are vital to the Air Force achieving its missions. The E-3 provides surveillance of the airspace and manages the flight of all aircraft in an assigned battlefield area. The Air Force first received E-3s in 1977, and an Air Force official told us that it is the oldest aircraft in the Air Force in terms of operational hours flown. The C-5 is the Air Force's largest cargo aircraft, carrying cargo such as Army tanks, and is one of the largest aircraft in the world. About 70 percent of the oversized cargo required in the critical first 30 days of one major war scenario would be the type of cargo the C-5 carries. The Air Force first received operational C-5 aircraft in 1970, and according to Air Force officials, one of the reasons for the lower than expected mission-capable rates in recent years for the C-5 aircraft is its age. The F-100-220 engine powers many of the Air Force's F-15 and F-16 fighter aircraft and, according to an Air Force official, will become increasingly critical to operations as some older engines are replaced with the F-100-220. For each of these systems, we judgmentally selected for review 25 parts, a total of 75, with the highest number of hours or incidents of unavailability for given time periods. Air Force spare parts are classified as either consumables or reparables. Consumable items, which are mostly managed by the Defense Logistics Agency, are those items that are discarded when they fail because they cannot be cost-effectively repaired. The Defense Supply Center Richmond is the lead center for managing aviation consumable spare parts. Reparable items, managed by the Air Force Materiel Command, are items that can be cost-effectively repaired. The Command's mission is to research, develop, test, acquire, deliver, and logistically support Air Force weapon systems. The shortages of spare parts for the three aircraft systems we reviewed have not only affected readiness but also have created inefficiencies in maintenance processes and procedures and may adversely affect the retention of military personnel. Two aircraft we reviewed, the E-3 and C-5, did not meet their mission-capable goals in fiscal years 1996-2000 and were not mission capable due to supply problems from 7.3 percent to 18.1 percent during the same period. The number of usable spare F-100-220 engines that the Air Force had on hand fell short of its goal by as few as 6 and as many as 104 engines during the same period. The Air Force did not achieve its mission-capable goals during fiscal years 1996-2000 for any of the three Air Force aircraft systems we reviewed, in part, due to spare parts shortages. Table 2 shows the mission-capable goals and actual rates for the E-3 aircraft for fiscal years 1996-2000, and table 3 shows the rates at which the E-3 was not mission capable due to supply problems during the same period. The goal for the E-3 was lowered to 73 percent from March through September 2000 based on an Air Force assessment of its ability to achieve its mission-capable goal. The Air Force recognized that it had failed to achieve historical performance levels to the point that falling short of the standard had become the norm. Citing constraints regarding spare parts, maintenance personnel, and repair equipment, the Air Force lowered mission-capable goals for the E-3 and other aircraft with the intent of providing maintenance personnel with more achievable targets. The mission-capable goal for the E-3 aircraft rose to 81 percent in fiscal year 2001, and it is planned to return to 85 percent in fiscal year 2002. The goal was 12 percent or less from March through September 2000 and was raised based on an Air Force assessment of the aircraft's ability to achieve the not mission capable due to supply problems goal for the E-3 and other aircraft. The Air Force recognized that it had failed to achieve historical performance levels to the point that falling short of the standard had become the norm. Citing constraints regarding spare parts, maintenance personnel, and repair equipment, the Air Force raised its goal for not mission capable due to supply problems for the E-3 and other aircraft with the intent of providing maintenance personnel with more achievable targets. The not mission capable due to supply problems goal changed to 8 percent in fiscal year 2001, and it is planned to return to 6 percent in fiscal year 2002. The reported rate for total not mission capable due to supply problems in fiscal year 2000, 11.3 percent, equated to about 3 or 4 E-3s of the total of 32 aircraft being not mission capable due to supply problems. The C-5 also did not achieve its goals during fiscal years 1996-2000. Table 4 shows the C-5's mission-capable goals and actual mission-capable rates for those years, and table 5 shows the rates at which the C-5 was not mission capable due to supply problems as well as its goals during the same period. The reported rate for total not mission capable due to supply problems in fiscal year 2000, 18.1 percent, equated to almost 23 C-5s of the fleet of 126 aircraft being not mission capable, at least in part, due to supply problems. With regard to the F-100-220 engine, the Air Force never met its goal, called the war readiness engine goal, during fiscal years 1996-2000 (see table 6). The goal can change each fiscal year for the number of usable-- ready to be installed in an aircraft--spare engines the Air Force would like to have on hand to meet wartime needs. In some cases, it has had F-15s or F-16s grounded due to the lack of the engine. When the number of usable spare engines is shown as a negative number, there are not enough engines for all the aircraft required for peacetime operations; in other words, aircraft that would otherwise be available to fly are grounded because they lack engines. During fiscal years 1996 through 2000, this occurred in five different quarters. To compensate for a lack of spare parts, maintenance personnel sometimes remove usable parts from aircraft for which spare parts are unavailable to replace broken parts on others. Maintenance personnel at Seymour-Johnson Air Force Base said that this practice is necessary to attempt to maintain mission-capable rates when spare parts are not available. As we have previously reported, the result of this practice is that maintenance personnel spend a large amount of time cannibalizing parts and performing double work. According to a Naval Postgraduate School thesis, there is also the potential for breaking the needed part or causing collateral damage while removing the part. Additionally, a part removed from another aircraft will likely not last as long as a part from the supply system and will require maintenance sooner. Additionally, our past work shows that spare parts shortages may affect retention. In August 1999, we reported on the results of our December 1998 through March 1999 survey of about 1,000 Army, Navy, Air Force, and Marine Corps active duty personnel that were selected based on their work in jobs in which the Department of Defense believed were experiencing retention problems. More than half of the respondents stated that they were dissatisfied and intended to leave the military. The majority of factors were associated with work circumstances such as the lack of parts and materials needed to successfully complete daily job requirements. Both officers and enlisted personnel ranked the availability of needed equipment, parts, and materials among the top 2 of 44 quality-of-life factors that caused their dissatisfaction. Spare parts shortages on the three systems we reviewed occurred for various reasons. In addition, an internal Department of Defense study found similar reasons for spare parts shortages. Both the Air Force and the Defense Logistics Agency have encountered a variety of problems in contracting for spare parts needed for repairs. Ten (about 13 percent) of the parts we reviewed were unavailable, at least in part, because of contracting issues. These issues included lengthy price negotiations, a contract requirement to have a minimum number of units before beginning repairs, failure of a contractor to meet the delivery date, and termination of a contract. For example, the Defense Logistics Agency did not have a straight pin for the F-100-220 engine in stock because the sole-source company wanted a price that the Agency was unwilling to pay. This resulted in extended negotiations with the company before an award could be made. By the end of April 2000, the lack of this part had caused F-100-220 engines to be not mission capable in nine cases. In another case, to obtain an acceptable price for a contract for the repair of a temperature indicator for the E-3 aircraft, the Air Force was required to provide a minimum of 10 regulators for repair. By the time 10 units were accumulated and shipped, the demand for the part had exceeded the supply. Through March 2000, E-3 aircraft were not mission capable over 19 operational days due to the lack of this part. Also, a contract for an axle beam fitting for the C-5 aircraft had to be terminated because the contractor requested too many delivery schedule extensions. As of July 2000, the equivalent of one C-5 aircraft was not mission capable for 124 operational days. Twelve (16 percent) of the parts we reviewed were unavailable for reasons other than those we have already cited. In one case, the Air Force used an incorrect replacement rate for an engine core, and as a result, the repair of parts was not timely. Through April 2000, F-100-220 engines were not mission capable due to the lack of this part in 33 cases. Also, the limited repair facility capacity for certain spare parts, such as electric generators, created shortages of the parts. By the end of March 2000, E-3 aircraft had been not mission capable for almost 10 operational days due to the lack of this part. In another case, because maintenance facilities prioritize repairs based on current Air Force requirements, a receiver transmitter was not repaired in time to avoid a shortage because higher priority items had to be repaired first. As a result, over 15 operational days of not mission capable time had been accumulated on E-3s by the end of March 2000. In another case, the required part, a vaneaxial fan, was on hand, but E-3 aircraft had accumulated over 15 operational days of not mission capable time by the end of March 2000 because of the time it took to ship the part overseas. In some cases, no spare parts had been purchased when an aircraft was being modified or the technical data for the modification was incomplete. At the end of March 2000, over 10 operational days of not mission capable time had accumulated for E-3 aircraft due to the lack of a control indicator that fell into this category. An internal study conducted by the Department of Defense found similar reasons for Air Force reparable spare parts shortages. The study examined parts causing aircraft to be not mission capable and found that there were two reasons for the shortages. The first reason was an insufficient inventory of certain reparable parts. The second was that although there were enough parts in the system, other constraints prevented a repair facility from repairing the parts in a timely manner. The study states that this may have happened for several reasons. The parts may not have been returned from units to the repair facility, a repair facility may have lacked capacity in certain key areas such as manpower or testing equipment, the consumable parts required to fix the reparable item may not have been available, or the item managers may not have requested the repair facility to repair a part because of a lack of funding.The study contained a recommendation that the Air Force provide $609 million for fiscal years 2002 to 2007 to improve the availability of reparable spare parts. According to a Department of Defense official, the Air Force plans to provide the funds. The Air Force and the Defense Logistics Agency have overall initiatives under way or planned to improve the availability of spare parts. The initiatives are intended to improve the efficiency of the supply system and increase the requirements for spare parts. The initiatives generally address the specific reasons for shortages identified by our review, with the exception of changes in the location of repairs that is not a recurring problem. The Air Force has developed a Supply Strategic Plan that includes a management framework and specific goals and outcome- oriented measures for its initiatives. We have made various recommendations to address this issue. The Air Force has actions under way to respond to address these recommendations; therefore, we are not making any additional recommendations at this time. We will be reviewing the strategic plan's initiatives, once they are more developed, to evaluate their likely effectiveness and to assess whether additional initiatives are needed. The Air Force is regularly monitoring which spare parts are unavailable for the longest period of time and undertakes ad hoc actions to resolve the problems causing the shortage. In 1999, the Air Force developed the Supply Strategic Plan to help create an integrated process for supply planning, to facilitate the exchange of information throughout the supply system, and to improve measures of effectiveness for the supply system. The plan, which was updated in January 2001, establishes five goals for the Air Force supply community to achieve by 2010. Manage assets effectively Organize, train, and equip supply personnel Support Department of Defense operations Establish and implement fuel policy Each goal has associated objectives to be achieved in the next 4 to 7 years and tasks to be completed in the next 1 to 4 years. In support of the Supply Strategic Plan, the Air Force Deputy Chief of Staff, Installations and Logistics, Directorate of Supply, established in 1999 the Supply Foundation Project, which includes 10 objectives with associated initiatives for each. The Directorate views the project as a comprehensive means of improving the supply system. The first objective is to improve spare parts management. The intent is to determine the baseline for formulating a spare parts policy; to determine the overall trend for spare parts, that is, are shortages increasing or decreasing; and to develop and implement initiatives to reduce the shortages of spare parts. Within the objective of improving spare parts management, the Directorate has initiatives within the goal of managing assets under way or under study. Improve the process for determining requirements for spare parts Improve the process for funding the parts Increase the stock of certain parts Increase the parts contained in readiness spares packages (deployment kits for maintaining aircraft) Coordinate with the Defense Logistics Agency to ensure that it buys the most critically needed parts from the Air Force portion of the $500 million provided by the Department of Defense for fiscal years 2001 to 2004 Reduce the time that customers wait for parts For each of these initiatives, the Air Force has established short-term and long-term milestones and accountability for implementation by assigning program responsibility to specific offices and individuals. The measures for success include achieving goals such as (1) increasing the issuance of parts when requested, (2) increasing the stock of certain parts, (3) improving total rates for aircraft not mission capable for supply reasons, and (4) lowering cannibalization rates. (See appendix IV for a complete listing of these Air Force initiatives.) In addition to the initiatives contained in the Air Force Supply Strategic Plan, the Air Force Materiel Command also has actions under way and planned to separately address more specific aspects of spare parts management and policies. According to Air Force officials, these actions are being coordinated with the Air Force Deputy Chief of Staff, Installations and Logistics, Directorate of Supply. As part of its Constraints Analysis Program, the Air Force Materiel Command identified six major problems that had prevented it from providing timely support to the warfighter. These problems were unavailability of consumable parts; unreliability of parts; poor management of the suppliers of parts; inadequate workload planning; ineffective inventory management; and inefficient policies regarding which parts are repaired and, if repair is needed, where the repairs should be made. The Command focused its initial efforts on studying ways to resolve the problems with supplier management, parts reliability, and unavailability of consumable parts. Implementation plans are being developed for actions for each of these problems while the remaining problems are being studied. The Command is also developing (1) a model to forecast the repair facilities' demands for consumable spare parts and electronically transmit this data to the Defense Logistics Agency and (2) a pilot program to have contractors bypass the supply system and fill the supply bins for maintenance personnel directly. Among the efforts the Defense Logistics Agency has under way to improve the availability of spare parts are its Aviation Investment Strategy and Aging Aircraft Program. The Defense Logistics Agency's major initiative to resolve aircraft spare parts shortages is its Aviation Investment Strategy. This fiscal year 2000 initiative focuses on replenishing consumable aviation repair parts with identified availability problems that affect readiness. Of the $500 million that the Defense Department budgeted for this purpose, $213.8 million was the Air Force portion. As of December 2000, $95.3 million had been targeted for Air Force spare parts and $22.3 million worth of parts had been delivered. The goal of the Defense Logistics Agency's Aging Aircraft Program is to consistently meet the goals for spare parts availability for the Army, Navy, and Air Force aviation weapon systems. The program's focus will be to (1) provide inventory control point personnel with complete, timely, and accurate information on current and projected parts requirements; (2) reduce customers' wait times for parts for which sources or production capabilities no longer exist; and (3) create an efficient and effective program management structure and processes that will achieve the stated program goals. The Agency plans to spend about $20 million during fiscal years 2001-2007 on this program. We recommended in November 1999 that the Secretary of the Air Force develop a management framework for implementing best practice initiatives based on the principles embodied in the Government Performance and Results Act. The Department of Defense concurred with our recommendation and stated that the Air Force is revising its Logistics Support Plan to more clearly articulate the relationships, goals, objectives, and metrics of logistics initiatives. As a part of the Supply Strategic Plan, the Air Force included initiatives intended to improve the availability of spare parts. We also recommended in January 2001 that the Department develop an overarching plan that integrates the individual service and defense agency logistics reengineering plans to include an investment strategy for funding reengineering initiatives and details on how the Department plans to achieve its final logistics system end state. Since the Air Force and the Department of Defense are taking actions on our previous recommendations to improve overall logistics planning, we are not making new recommendations at this time. The Acting Deputy Under Secretary of Defense for Logistics and Materiel Readiness, in commenting on a draft of this report, indicated that the Department of Defense generally concurred with the report. The Department's comments are reprinted in their entirety in appendix V. To determine the impact of the shortages of spare parts, we reviewed data on the Air Force's mission-capable goals and actual rates and goals and actual rates for aircraft not mission capable due to supply problems for selected months from the Office of the Secretary of the Air Force, Installations and Logistics Directorate. We did not independently verify these data. From these data, we selected three systems for review that had experienced difficulties in achieving mission-capable goals or in the case of the F-100-220 engine readiness goals for the number of usable engines on hand. We also reviewed data on cannibalizations provided by the Air Combat Command, Hampton, Virginia; the Office of the Secretary of the Air Force, Installations and Logistics Directorate, Washington, D.C.; and Seymour-Johnson Air Force Base, Goldsboro, North Carolina. Using the data, we discussed with maintenance personnel the impact of cannibalizations on spare parts shortages. We also used data from studies conducted by the Department of Defense regarding spare parts shortages and their impacts. Lastly, we drew relevant information from our recently issued reports. To determine the reasons for these part shortages, we visited the air logistics centers at Tinker Air Force Base (E-3), Oklahoma City, Oklahoma; Warner-Robins Air Force Base (C-5), Robins, Georgia; Kelly Air Force Base (F-100-220 aircraft engine), San Antonio, Texas; and the Defense Supply Center Richmond, Richmond, Virginia. To identify specific reasons, we discussed the specific parts shortages with those who manage these items at these locations. We also reviewed our related work on Air Force and Department of Defense inventory management practices to identify systemic management problems that are contributing to spare parts shortage. To determine what overall actions are planned or under way to address overall spare parts shortages for Air Force aircraft and the management framework for implementing the overall initiatives, we visited the Air Force headquarters, the Joint Chiefs of Staff Logistics Directorate, and the Office of the Secretary of Defense, located in the Washington, D.C. area; the Defense Logistics Agency located at Fort Belvoir, Virginia, and the Defense Supply Center located in Richmond, Virginia; the Air Force Materiel Command, Dayton, Ohio; and the air logistics centers at Tinker Air Force Base, Oklahoma (E-3), Warner-Robins Air Force Base, Georgia (C-5), and Kelly Air Force Base, Texas (F-100-220). We discussed with officials at each of these locations Air Force initiatives regarding spare parts, their progress and results to date, the planned completion dates for some initiatives, and additional steps needed to address spare parts shortages. We also compared the reasons for the shortages we found with the overall initiatives under way or planned to determine if there were any areas that were not being addressed. We did not review these plans or the specific initiatives. Our review was performed from February 2000 to April 2001 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of Defense; the Secretary of the Air Force; the Director, Office of Management and Budget; and the Director, Defense Logistics Agency. We will also make copies available to others upon request. Please contact me at (202) 512-8412 if you or your staff have any questions regarding this report. Key contributors to this report were Lawson Gist Jr., John Beauchamp, Willie Cheely Jr., and Nancy Ragsdale. Our high-risk reports over the past several years have noted that Department of Defense inventory and financial management weaknesses have contributed to parts not being available when needed. In January 2001, we reported on Department of Defense management challenges and noted it has had serious weaknesses in its management of logistics functions and, in particular, inventory management. Although not specifically identified with the systems we reviewed, these management weaknesses directly or indirectly contribute to the shortages of spare parts the Air Force is facing, as the following examples show. We reported in January 2001 that nearly half of the Department's inventory exceeded war reserve or current operating requirements and that the Department had inventory on order that would not have been ordered based on current requirements. Purchasing items that exceed requirements use funds that could be used to purchase needed parts. We reported in April 1999 that because the Air Force had reduced the supply activity group's budget by $948 million between fiscal year 1997 and 1999 to reflect efficiency goals and because these goals were not achieved, fewer items than projected were available for sale to customers. As a result, military units had funds to purchase spare parts, but the supply group did not always have sufficient funds to buy new spare parts or pay for repair of broken parts that customers needed. We also reported that because of poor management practices, over $2 billion worth of spare parts in the Air Force's "suspended inventory category," which cannot be issued because of questionable condition, was not reviewed for years. As a result, the Air Force is vulnerable to incurring unnecessary repair and storage costs and reducing its readiness. Better management of these parts could increase the number of spare parts available. In addition, the Department of Defense's long-standing financial management problems may also contribute to the Air Force's spare parts shortages. As we recently reported, existing weaknesses in inventory accountability information can affect supply responsiveness. Lacking reliable information, the Department of Defense has little assurance that all items purchased are received and properly recorded. The weaknesses increase the risk that responsible inventory item managers may request funds to obtain additional, unnecessary items that may be on hand but not reported. Parts production problem, contracting issue Changes in location of repair Changes in location of repair Actual demands were greater than anticipated and parts production problem Actual demands were greater than anticipated Actual demands were greater than anticipated and other--repair facility capacity/priority and incomplete technical order Parts production problem and component reliability Other-repair facility capacity/priority and test equipment software problem Actual demands were greater than anticipated Parts production problems and contracting issues Changes in location of repairs, actual demands were greater than anticipated, and parts production problems Actual demands were greater than anticipated Other--shipping time Actual demands were greater than anticipated and other--repair facility capacity/priority Actual demands were greater than anticipated Changes in location of repairs Other - shipping time Other--no spares purchased for modifications Changes in location of repairs and other--repair facility capacity/priority Contracting issues and other--incomplete technical data for modification Changes in location of repairs and actual demands exceeded anticipated Actual demands were greater than anticipated Actual demands were greater than anticipated and other--suitable substitute not linked to master Changes in location of repairs Reason for shortage Component reliability Component reliability Parts production problem Changes in location of repairs Changes in location of repairs and parts production problems Actual demands were greater than anticipated Changes in location of repairs and parts production problems Contracting issue and parts production problem Actual demands were greater than anticipated Component reliability Changes in location of repairs Actual demands were greater than anticipated Actual demands were greater than anticipated and parts production problems Component reliability Reason for shortage Component reliability and parts production problem Changes in location of repairs Changes in location of repairs and component reliability Component reliability, contracting issue, and parts production problem Changes in location of repairs and parts production problem Actual demands were greater than anticipated Component reliability and parts production problems Changes in location of repairs Contracting issues Component reliability Parts production problem Parts production problem Actual demands were greater than anticipated Actual demands were greater than anticipated Contracting issue and parts production problem Reason for shortage Contracting issue Contracting issue Actual demands were greater than anticipated and parts production problem Actual demands were greater than anticipated Actual demands were greater than anticipated Actual demands were greater than anticipated Component reliability Component reliability Component reliability and other--information system problem Actual demands were greater than anticipated Changes in location of repairs Component reliability and other--information system problem Changes in location of repairs Changes in location of repairs and other--information system problem Component reliability Changes in location of repairs and demands were not anticipated Actual demands were greater than anticipated Changes in location of repairs and demands were not anticipated Changes in location of repairs Changes in location of repairs Contracting issue The spare parts with the same name have different stock numbers. Defense Inventory: Opportunities Exist to Expand the Use of Defense Logistics Agency Best Practices (NSIAD-00-30, Jan. 26, 2000). Air Force Depot Maintenance: Analysis of Its Financial Operations (AIMD/NSIAD-00-38, Dec. 10, 1999). Defense Inventory: Improvements Needed to Prevent Excess Purchases by the Air Force (NSIAD-00-5, Nov. 1, 1999). Air Force Depot Maintenance: Management Changes Would Improve Implementation of Reform Initiatives (NSIAD-99-63, June 25, 1999). Department of Defense: Status of Financial Management Weaknesses and Actions Needed to Correct Continuing Challenges (T-AIMD/NSIAD-99-171, May 4, 1999). Defense Inventory: Status of Inventory and Purchases and Their Relationship to Current Needs (NSIAD-99-60, Apr. 16, 1999). Defense Inventory: DOD Could Improve Total Asset Visibility Initiative With Results Act Framework (NSIAD-99-40, Apr. 12, 1999). High Risk Series: An Update (GAO/HR-99-1, Jan 1999). Air Force Supply: Management Analysis of Activity Group's Financial Reports, Prices, and Cash Management (AIMD/NSIAD-98-118, June 8, 1998). Defense Depot Maintenance: Use of Public-Private Partnering Arrangements (NSIAD-98-91, May 7, 1998). Defense Inventory: Management of Surplus Usable Aircraft Parts Can Be Improved (NSIAD-98-7, Oct. 2, 1997).
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Spare parts shortages on the three Air Force systems GAO reviewed have undermined the performance of assigned missions and the economy and efficiency of maintenance activities. Specifically, the Air Force did not meet its mission-capable goals for the E-3 or C-5 aircrafts during fiscal years 1996-2000, nor did it have enough F-100-220 engines to meet peacetime and wartime goals during that period. These shortages may also affect personnel retention. GAO recently reported that the lack of parts and materials to successfully complete daily job requirements was one of six major factors causing job dissatisfaction among military personnel. Item managers at the maintenance facilities often indicated that spare parts shortages were caused by the inventory management system underestimating the need for spare parts and by delays in the Air Force's repair process as a result of the consolidation of repair facilities. Other reasons included difficulties with producing or repairing parts, reliability of spare parts, and contracting issues. The Air Force and the Defense Logistics Agency have planned or begun many initiatives to alleviate shortages of the spare parts for the three systems GAO reviewed.
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DISA was included in our review because of its unique role in DOD's information processing and the Year 2000 process. DISA is responsible to the ASD/C3I for maintaining DIST as the Department's enterprise inventory database and its primary tool for performing oversight of the Year 2000 correction efforts. In assessing DIST's effectiveness in facilitating Year 2000 efforts, we interviewed DIST managers and a representative from the contractor. Since the services have different approaches to entering data in DIST, we spoke to officials at various organizational levels regarding ease of use and how they are entering information. In addition, we analyzed the contents and capabilities of DIST to gauge its accuracy, performance, reliability, and usefulness as a Year 2000 enterprise inventory database. In conducting this analysis, we relied on our previous work on DIST which was conducted as part of a review on Defense's migration strategy--a DOD effort focused on improving and modernizing automated information systems. We also reviewed Air Force and Army comparisons of DIST inventories against their own inventories. In addition, we assessed whether DIST conformed to system inventory-related guidance included in our Year 2000 Assessment Guide, and DOD's Year 2000 Guidance Package and Year 2000 Management Plan. We specifically focused on the Assessment Phase of the Year 2000 process described below, during which agencies are to develop an enterprise inventory. We conducted our work from November 1996 through July 1997 in accordance with generally accepted government auditing standards. The Department of Defense provided written comments on a draft of this report. These comments are discussed in the "Agency Comments and Our Evaluation" section and are reprinted in appendix I. Under DOD's Year 2000 Management Plan, DISA is responsible for enhancing and maintaining DIST as a Year 2000 enterprise inventory tool. In February 1997, we published the Year 2000 Computing Crisis: An Assessment Guide, which addresses common issues affecting most federal agencies and presents a structured approach and a checklist to aid them in planning, managing, and evaluating their Year 2000 programs. The guidance is consistent with DOD's Year 2000 Management Plan. The guide describes five phases--supported by program and project management activities--with each phase representing a major Year 2000 program activity or segment. The phases and a description of what each entails follow. Awareness: Define the Year 2000 problem and gain executive-level support and sponsorship. Establish a Year 2000 program team and develop an overall strategy. Ensure that everyone in the organization is fully aware of the issue. Assessment: Assess the Year 2000 impact on the enterprise. Identify core business areas and processes, inventory and analyze systems supporting the core business areas, and rank their conversion or replacement. Develop contingency plans to handle data exchange issues, lack of data, and bad data. Identify and secure the necessary resources. Renovation: Convert, replace, or eliminate selected platforms, applications, databases, and utilities. Modify interfaces. Validation: Test, verify, and validate converted or replaced platforms, applications, databases, and utilities. Test the performance, functionality, and integration of converted or replaced platforms, applications, databases, utilities, and interfaces in an operational environment. Implementation: Implement converted or replaced platforms, applications, databases, utilities, and interfaces. Implement data exchange contingency plans, if necessary. In addition to following the five phases described, a Year 2000 program should also be planned and managed as a single, large information system development effort. Agencies should promulgate and enforce good management practices at the program and project levels. As discussed in our Year 2000 Assessment Guide, agencies need to ensure that they have complete and accurate enterprisewide inventories of their information systems during the assessment phase of the Year 2000 correction effort. This inventory helps the agency analyze the systems supporting its core business processes and rank its conversion or replacement based on key factors, such as business impact and the anticipated date the systems would experience Year 2000-related date problems. The inventory also plays a very critical role in the later stages of the Year 2000 process, which include renovation, validation, and implementation. For example, the inventory can be used in monitoring the status of each system included in DOD's Year 2000 efforts, assessing whether the most mission-critical systems are receiving appropriate attention, determining needs for testing facilities, and identifying areas that may require additional resources. The inventory can also assist in identifying and coordinating interfaces between and among systems. Even if all systems within one organization were made Year 2000 compliant, an external interfacing system on which the system is dependent for data or information processing can still introduce and propagate Year 2000-related errors. Having an accurate and reliable enterprisewide systems inventory is also fundamental to having a good information technology investment process. In today's environment of rapidly changing information technology and the demands for government organizations to operate effectively and more efficiently, agencies need to ensure that their information technology projects are being implemented at acceptable costs, within reasonable and expected time frames, and are contributing to tangible, observable improvements in mission process. In order to make the kinds of trade-off decisions that would produce these benefits, good visibility into their information system environment is indispensable. The enterprisewide inventory of information systems provides this visibility. In addition, Defense will need a reliable and complete system inventory in order to successfully implement the recently passed Clinger-Cohen Act of 1996, which aims to ensure that agencies strengthen their information technology investment processes. Among other things, this act requires that agencies (1) provide their senior managers with timely and accurate information on system costs and (2) have the capability to meet performance requirements, timeliness, as well as other conditions. As discussed in our Year 2000 Assessment Guide, system inventories serve as a useful Year 2000 decision-making tool, by offering added assurance that all systems are identified and linked to a specific business area or process, and that all enterprisewide cross boundary systems are considered. Thus, good inventories include information for each system on (1) links to core business areas or process, (2) systems platforms,languages, and database management systems, (3) operating system software and utilities, (4) telecommunications, (5) internal and external interfaces, (6) systems owners, and (7) the availability and adequacy of source code and associated documentation. Defense has designated the Defense Integration Support Tools database to be the departmentwide automated information systems inventory for use in making information technology decisions and managing the Year 2000 effort. DIST was originally designed to track Defense migration systems for the Corporate Information Management initiative but has evolved into a multipurpose tool. DIST presently contains over 9,000 systems and has a total capacity of 40,000. Each system is provided with its own identification number and should be accompanied by a host of informative data elements, including information on hardware platforms, operating systems, applications languages, communications, and interfaces. Early in its Year 2000 effort, DOD recognized the value of having a reliable enterprisewide system inventory and the potential beneficial role its DIST database could have in the initiative. For example, in November 1996, the Under Secretary for Defense (Comptroller) and the Assistant Secretary of Defense for Command, Control, Communications and Intelligence issued a joint memorandum to senior Defense managers stating that they considered DIST to be "the backbone tool for managing the Department's Information Technology investment strategies, identifying functional information systems interfaces and data exchange requirements, and managing the efforts to fix the Year 2000 problem." In its Year 2000 Management Plan, Defense reaffirmed that DIST will be the official repository for the DOD components and added that the reason components are required to report every quarter on their systems and are encouraged to report significant progress on their systems is "to give DOD the visibility necessary to ensure a thorough and successful transition to Year 2000 compliance for all DOD systems." It also stated that this reporting "will also keep other functional , that your systems interface with or exchange data with, informed as to the status of your Year 2000 compliance progress." Finally, Defense noted that the DIST needed to be up-to-date so that it could keep the Congress informed on the Department's efforts to achieve Year 2000 compliance. Defense has recognized that DIST is currently not a reliable and accurate management tool that can have a beneficial impact on the Year 2000 effort or on other initiatives to improve and manage information systems. As a result, the ASD/C3I and DISA have undertaken initiatives to improve the reliability of DIST data and to increase their user friendliness. These efforts will address a wide range of problems associated with data integrity and the ability of users to have direct and quick access to the database. During our review, DOD officials and users told us that updating DIST was traditionally a low priority for the services and components largely because DIST is an antiquated and labor-intensive system. A number of officials also told us that they have grown frustrated with DIST because it contains erroneous data and that they are now reluctant to use DIST because they do not have confidence in the accuracy or reliability of the data it contains. Our analysis of DIST as well as comments by officials in DOD components have revealed significant data integrity problems associated with DIST's ability to transfer information to other information systems. The following examples below illustrate the magnitude and range of problems pervading the database. DIST managers, service-level Year 2000 teams, and component Year 2000 teams acknowledge that the database contains duplicate, outdated, and erroneous information. The Air Force's Year 2000 team compared its own Year 2000 database to DIST and found over 1,100 systems that were shown on DIST but not on its database. The Army's Year 2000 team found a discrepancy of over 200 systems when it compared its system inventory to the DIST. The Army team also stated that it does not trust the data in DIST and that it would continue to update and rely on its own Year 2000 database instead of DIST. Air Force, Army, and DIST Year 2000 focal point representatives agree that until DIST is purged of duplicate, outdated, and erroneous information, the service-level databases contain the most accurate inventories for those agencies. Many systems in DIST do not have complete status and descriptive information. Each entry in DIST is supposed to include over 140 data elements, such as name, size, system manager, software, hardware, and interfaces. But for many systems, managers responsible for the systems have merely entered "placeholder" information, that is, the bare minimum of information required to get the system into the database. In some cases, this may mean that only the system name appears in the database. At present, DIST contains an undetermined amount of these incomplete entries. However, a February 1997 Defense analysis of migration systems listed in DIST illustrated that there are high levels of incomplete data. The analysis, which was conducted on the 223 migration systems included in DIST, found that 55 percent of the migration systems did not identify interfaces with other systems, 77 percent did not disclose the computer installations where the system 68 percent did not indicate the computer hardware on which the system 61 percent did not disclose the system software, and 26 percent did not identify the organization responsible for the system. When we analyzed DIST as part of our review of Defense's migration effort, we also found that the database contained a high number of inaccurate system implementation and termination dates. For example, for three functional areas--clinical health, civilian personnel, and transportation--DIST showed that 92 legacy systems were terminated by April 1996, while functional managers told us that only 43 had actually been terminated. And, DIST showed that 53 legacy systems were scheduled for future termination, but functional managers told us 91 were slated for termination. Our migration review also found that DOD had not ensured that the data definitions used in DIST were fully compatible with data maintained in other Defense information systems that track and report on systems. Without standard definitions and formats, data cannot be easily transferred to DIST from other systems that may be used by the DOD Principal Staff Assistants, program managers, and other decisionmakers. Although DOD has progressed in populating the DIST database, component officials told us that they have been confused about what is to be entered. Since Year 2000 efforts began, for example, components were unsure what qualifies as a system. The Office of the ASD/C3I has just recently addressed the issue in a memo and its DOD Year 2000 Management Plan. The plan now states that mission-critical systems, migration systems, legacy systems, systems with an annual operating budget over $2 million, and any system that interfaces with the previous criteria must be reported to DIST. All other systems must be accounted for in a "one-line entry" to the ASD/C3I office. This new criteria will prompt DOD systems managers to revisit their Year 2000 project plans and apply this new criteria for reporting. Component and service officials indicated that inputing information into DIST is time consuming and difficult, and the rules for entering and updating data are unclear. For example, database tables that would provide information on hardware manufacturers, series, and models are not up-to-date. Yet, as late as May 1997, no new entries on these hardware data elements were allowed to be made to the database. Also, while DOD components are required to enter Year 2000-related information on weapons systems into DIST, the database itself was not designed to apply to weapon systems or embedded systems. Without guidance on what data elements are applicable to what type of system, it is difficult to decide what information to enter on weapon systems and embedded systems. Component and service officials indicated that DIST cannot be easily queried and does not provide timely feedback. For example, components and services cannot directly query DIST for information. Instead, they have to request that a query be made by DIST managers. The lack of user friendliness and querying capabilities has compounded the level of distrust in DIST by service and component-level managers responsible for addressing the Year 2000 problem and further diminished the incentive to keep the database updated. DIST also does not contain key scheduling and tracking information, such as when critical systems within the services' and components' Year 2000 programs will be in the various phases and whether a system is behind schedule. Managers of interfacing systems need to know this information to coordinate key Year 2000 activities such as the start of system renovation, testing, and implementation of the modified system and to determine, as well as whether software bridges will be necessary. Because the data in DIST are incomplete, inaccurate, and difficult to use, a number of Defense components and military services have developed and are relying on their own system inventories to manage and oversee their Year 2000 efforts. During our review, however, officials from the Navy informed us that they will be using DIST for their Year 2000 efforts because they do not have a servicewide inventory of their own. DIST managers are planning to implement new releases in September and October 1997 to make DIST a more user friendly tool and enable the services and components to directly query the database. They are also planning to increase the accuracy of the tool by developing a purging methodology to validate the data in DIST. The new DIST releases, which DISA has made partially available and plans to make fully available by October 1997, are designed to make it easier to input changes into DIST through the use of such features as on-line help pages, navigational buttons, and expanded tables on hardware and software types. The new versions are also designed to make it easier to send and receive database information. While the services and components will be able to directly query the database for some types of information, they will not be able to enter or obtain data related to the Year 2000 problem, such as progress-related information that we believe is necessary for effective system management and departmentwide oversight of Year 2000 program status. The purging methodology is the first step of a systematic program of improving the quality and accuracy of DIST data. Its purpose is to identify duplicate, inactive, and incomplete data. DIST managers cautioned that the purge has to be done carefully. While some older systems may be obsolete, they may be attached to smaller, feeder systems which are not obsolete. These smaller systems may not be readily identifiable on the database. Other systems that may appear obsolete on the database may actually be older legacy systems with no recent updates. At the end of January of 1997, DIST officials told us that it would take 90 days just to determine the methodology for the purge. However, as of July 1997, the methodology to purge the DIST database and ensure the validity of information it contains had not been completed. DISA officials told us that their inability to obtain funds to make the needed improvements was the reason for delays in completing DIST modifications. Although the ASD/C3I recently provided $2.5 million in funding for the upgrades, this delay has resulted in the database not being valid and usable for managing corrective actions while most of DOD is in the assessment phase, a phase which the Department as a whole planned to complete during June 1997. DOD's unwillingness to fund needed improvements to DIST until recently is inconsistent with both its previously stated importance of DIST to DOD's Year 2000 program, and the ability of DIST to be the primary tool of DOD's future information technology efforts. Efforts to improve DIST may be further slowed by the failure of the military services and their components to input information on all of their systems into the database. The DOD Comptroller and the ASD/C3I recognized that earlier calls for the services and components to enter information into DIST did not succeed in completing the inventory. Consequently, they have set deadlines for entering this information and warned the services and components that if their systems were not entered into the database, they would risk losing funding for them. However, this deadline has been changed several times--from January 15, 1997, to March 5, 1997, to April 18, 1997. A DISA spokesperson recently reported that a new deadline would be established because they have not completed the DIST upgrade. Accordingly, as the June 1997 deadline for completion of the Year 2000 assessment phase for the Department passed, the database still remained incomplete. We believe that if DIST improvement efforts are not expedited, the inventory will be of little use to the services and components during the remaining critical stages of the Year 2000 correction efforts as well. The potential consequences of not having this inventory for the assessment phase and the remaining phases of the Year 2000 effort are significant. First, without having a complete and reliable DIST during the assessment phase, DOD organizations that plan to use DIST would not have it as a management tool for ranking systems based on their importance to their mission and, in turn, ranking systems for correction. Many DOD components can utilize their own inventories, assuming they are accurate and reliable, to do this, but the Navy will not be able to since it does not have a servicewide inventory and it was planning to use DIST for this purpose. Second, the Department as a whole will be constrained in its ability to ensure that all systems owned by the military services and components are being made Year 2000 compliant. While the Department can use individual service and component inventories for this purpose, there is a chance that some systems which fall between the boundaries of ownership of the components may not be reflected in any inventory. Third, without an enterprisewide inventory, Defense cannot adequately ensure that all interfaces are properly identified and corrected. Fourth, for DIST to be an effective enterprise inventory, it is necessary to add data fields that provide DOD, the components, and the individual organizations with a much needed mechanism to track the progress of both the overall program and, if necessary, individual programs. Such a mechanism is needed to quickly identify schedule delays, enact timely corrective measures, and if necessary, trigger contingency plans. Finally, in not having a single, enterprisewide inventory, the Department will not be able to readily identify areas that may need additional resources, such as testing facilities. The concerns we raised above demonstrate that if immediate attention is not given to ensuring that DIST is reliable, complete, and accurate, the Department's Year 2000 efforts will be at risk of failing. In addition, without a good enterprisewide system inventory, Defense will not be in a position to make the trade-off decisions necessary to ensure that information technology projects are being implemented at acceptable costs, within reasonable and expected time frames, and are contributing to tangible, observable improvements in mission process. Given the fact that Defense has a major effort ongoing to improve its information systems, and that the Year 2000 problem will likely call on the Department to divert resources from other information technology-related initiatives, decisive action is needed to provide the resources and schedule priorities needed to accomplish DIST improvements, and to ensure that the currency and accuracy of DIST information is maintained in the future. In order to ensure that DIST can be effectively used for Year 2000 efforts, we recommend that you direct your staff assigned to oversee implementation of the DOD Year 2000 Management Plan and the Director of the Defense Information Systems Agency to ensure that all duplicate, inactive, and incomplete entries be identified and expedite development and implementation of the purging methodology, expand Year 2000 information included in DIST for individual systems to include key program activity schedules that managers of interfacing systems need to ensure that their system interfaces are maintained during the renovation phase. This expansion should also include information that will enable the Office of the ASD/C3I, component, and organizational-level Year 2000 program officials to quickly identify schedule delays, promptly correct them, and if necessary, trigger contingency plans. After the new criteria for reporting information systems are applied by system managers, we recommend that your staff, and the Director of DISA, in conjunction with the services and components, act to ensure that the DIST database is kept up-to-date and accurate, identify instances of noncompliance so that responsible command organizations can take corrective actions, and move forward with any other initiatives needed to make DIST an effective management tool. The Department of Defense provided written comments on a draft of this report. These comments are summarized below and reprinted in appendix I. The Assistant Secretary of Defense for Command, Control, Communications and Intelligence concurred with our recommendations. In concurring with our recommendations Defense stated that it planned to perform statistical sampling of DIST data to validate accuracy, and that it would rely on the DOD Inspector General to validate DIST data accuracy during its Year 2000 audits. It stated that the services and components were responsible for entering their automated information systems into DIST or be at risk of losing funding for their systems. Also, DISA has instituted a data quality program for DIST which includes purging of duplicative and obsolete data and will assist users in completing systems entries as necessary. These actions will help to enable DIST to become an effective tool for both DOD management oversight and for the components day-to-day management of the department's Year 2000 system correction efforts and beyond. However, in order to ensure complete validation of DIST, we believe that the Office of the ASD/C3I and DISA need to supplement these actions with efforts that involve fully comparing service inventories (and command inventories in the case of the Navy) to DIST and reconciling differences identified. Further, these offices must play a more active role in ensuring that data fields necessary to track Year 2000 progress are included in DIST upgrades and that this information is also reconciled with the services and components specific Year 2000 project status databases. We appreciate the courtesy and cooperation extended to our audit team by your representatives and DISA officials and staff. Within 60 days of the date of this letter, we would appreciate receiving a written statement on actions taken to address these recommendations. We are providing copies of this letter to the Chairman and Ranking Minority Member of the Senate Committee on Governmental Affairs; the Chairmen and Ranking Minority Members of the Subcommittee on Oversight of Government Management, Restructuring and the District of Columbia, Senate Committee on Governmental Affairs, and the Subcommittee on Government Management, Information and Technology, House Committee on Government Reform and Oversight; the Honorable Thomas M. Davis, III, House of Representatives; the Secretary of Defense; the Deputy Secretary of Defense; the Acting Under Secretary of Defense (Comptroller); the Director of the Defense Information Systems Agency; and the Director of the Office of Management and Budget. If you have any questions on matters discussed in this letter, please call me at (202) 512-6240 or Carl M. Urie, Assistant Director, at (202) 512-6231. George L. Jones, Senior Information Systems Analyst David R. Solenberger, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) efforts to improve the Defense Integration Support Tools (DIST) database, which serves as the DOD inventory of automated information systems and is intended to be used as a tool to help DOD components in addressing year 2000 date problems. GAO noted that: (1) a critical step in solving the year 2000 problem is to conduct an enterprisewide inventory of information systems for each business area to establish the necessary foundation for year 2000 program planning; (2) a thorough inventory also ensures that all systems are identified and linked to a specific business area or process, and that all enterprisewide cross-boundary systems are considered; (3) in addition, the inventory can play a critical role in the later stages of year 2000 correction; (4) for DOD, this inventory is particularly important given the tens of thousands of systems and the many interfaces between systems owned by the services and DOD agencies and considering that these systems vary widely in their importance in carrying out DOD missions; (5) in such a complex system environment, the inventory helps facilitate information technology resource and trade-off decisions; (6) the Office of the Assistant Secretary for Command, Control, Communications and Intelligence (ASD/C3I) and Defense Information Systems Agency (DISA) have recognized that, at present, DIST, the Department's enterprisewide inventory, is not a reliable and accurate tool for managing DOD's year 2000 effort; (7) as a result, the Office of the ASD/C3I and DISA have initiated efforts to: (a) improve the integrity of DIST inventory information; (b) facilitate access to information within the database; and (c) ensure that services and components input information needed to complete the inventory; (8) however, given the pace at which these efforts have been proceeding, GAO does not believe that DIST will be usable and reliable in time to have a beneficial impact on year 2000 correction efforts; (9) without a complete inventory, the Department as a whole cannot adequately assess departmentwide progress toward correcting the year 2000 problem and address crosscutting issues--such as whether system interfaces are being properly handled and whether there is a need for additional testing facilities; and (10) thus, the Office of the ASD/C3I and DISA need to expedite efforts to complete the DIST inventory before substantial renovation efforts begin in the services and components, and ensure that the information in DIST is accurate, complete, reliable, and usable.
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States have contracted out social services for decades. Federally funded social service programs generally support the financial, employment, and other public assistance needs of children and families. In recent years, the amount of contracting for state-administered social services has increased and the nature of privatization has changed significantly. State governments have increased their spending on privatized services, and strong support from state political leaders and high-level program managers has helped prompt new privatization initiatives. Recent changes in social service privatization have also been spurred by changes in federal legislation. As a result of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (P.L. 104-193), for example, states are now permitted under TANF to privatize eligibility determinations, a function traditionally performed by state governments. To help ensure program accountability in federally funded social service programs, the Department of Health and Human Services (HHS) has responsibility for overseeing state performance. With the fundamental changes in the magnitude and nature of social service privatization, states continue to face new challenges--utilizing competitive markets, developing performance-based contracts, and enhancing program accountability--that program officials, contracting experts, and others believe warrant continued focus. When contracting for social services, states often seek to achieve fair and open competition among those who submit contract proposals. To protect opportunities for all qualified contractors to compete openly and fairly for government business, states may, among other things, limit certain activities of former government employees seeking employment with private organizations and prohibit financial, programmatic, and other conflicts of interest. Studies have specified that state ethics policies should apply to a broad range of public employees, including legislators, political appointees, program managers, and others involved in the contracting process, while minimizing to the extent possible the limits placed on the discretion of state employees to choose public or private employment. State governments and social service contractors often work in tandem to provide diverse program services. In response to state RFPs, contractors submit proposals they believe address state needs. Contractors recruit and hire qualified specialists to maximize their competitive positions, while at the same time government employees exercise their prerogatives in an open labor market to pursue private sector careers where they can apply their talents in return for pay and benefits commensurate with their experience and expertise. In this way, social service contractors make use of a flexible labor pool in their attempts to meet state service needs. While these practices may benefit states and social service contractors, from another perspective, the movement of government employees to work for contractors may also reduce the capacity of states to manage public services and may confer unfair advantages to certain offerors. Although many child support enforcement and TANF senior program managers left their positions from 1993 to 1998, about a quarter of them left to take positions with social service contractors. State employees generally joined contractors to increase their income. The states we examined were able to fill vacancies created by the loss of child support enforcement and TANF program managers and other staff with minimal disruption. However, Texas child support enforcement officials expressed concern over their losses in mid-level information technology (IT) personnel and related impacts on program services. Nationally, many senior program directors in both the child support enforcement and TANF programs left their positions in the last 5 years. About a quarter of these officials took positions with social service contractors. According to federal and state program officials, of the 41 states in which the child support enforcement director left that position, 11 directors went to work for social service contractors. Similarly, of the senior TANF program managers who left their positions in 40 states, 10 joined the staffs of social service contractors. According to state program officials we interviewed, senior program directors most often leave their jobs to retire, fill other government positions, or respond to changes in a state's administration. Contractors told us that they recruit more from state child support enforcement programs than from TANF-supported programs. According to contractor officials, child support enforcement demands a high degree of technical expertise, particularly with respect to state information systems. Through such hiring practices, contractors believe they are in a better position to meet state program needs. State officials noted that personnel who leave the government for social service contractors generally do so to improve their salaries and benefits. Benefits such as stock option and profit-sharing plans offered by some companies are appealing and often critical to employees in weighing a decision to leave public service for private sector careers. Although pay and benefit considerations were often cited as the leading reasons state personnel left their positions for the private sector, we also found one instance in which state law resulted in state employees leaving their government jobs to become private sector employees. In 1995, Maryland's legislature required two locations--Baltimore City and Queen Anne's County--to privatize all child support enforcement services. The legislation also required that the selected contractor offer employment to state employees affected by the privatization. Of the over 300 employees who were affected, 213 accepted employment with the selected contractor, while many of the remaining employees retired or accepted jobs elsewhere. Some state officials we interviewed reported that they experienced limited impacts on program management after losing program management staff. We were told that the loss of senior officials in their states caused minimal disruption to the administration of the child support enforcement and TANF programs. These officials also reported that when they lost middle management and staff-level state employees to contractors, such losses did not cause disruption to program administration, as agencies were able to train new employees. Child support enforcement officials in Texas said that about 80 percent of their IT personnel, such as systems analysts and programmers, left state government jobs to join various firms that contract with the child support enforcement program and other program areas. The director of Texas' child support enforcement program indicated that the movement of IT personnel to the private sector has often been driven by private sector salaries that are up to about 40 percent higher than salaries for comparable government positions. The loss of these employees resulted in longer-term program impacts than did the loss of senior program managers in other states. In those instances when Texas could not replace the IT personnel it had lost, state officials said they had to contract for IT services at a cost higher than would have been incurred if such services had been performed by government employees. According to state child support enforcement program officials, the net loss of IT personnel resulted in poor or reduced service to the public, because without timely upgrades to automated systems, program personnel could not easily access case information, update files, or respond to customer inquiries. Among the proposals we reviewed, we found that child support enforcement and TANF-related proposals listing former state employees from any state as key personnel resulted in contract awards about as frequently as did proposals that did not list such employees. Of the 59 child support enforcement and TANF contract proposals submitted in the four states we reviewed, 34 listed at least one former state employee as key contract personnel. Twenty-five of these proposals did not list any former state employees as key contract personnel. Those proposals that did not list former state employees as key personnel were awarded contracts about as often as those proposals that did. Slightly under two-thirds of the proposals from each group, that is, those listing state employees and those not, resulted in contracts being awarded. Thirty-eight percent of the proposals that listed former state employees, and 36 percent of those that did not, did not result in contract awards. When we examined the child support enforcement and TANF programs separately, we still found that, in each program, proposals not listing former state employees resulted in contract awards about as often as proposals listing such employees. These comparisons are summarized in figure 1. Even when contractors listed former state employees as key personnel from the state offering the contract, the difference in the proportion of contracts awarded among these proposals and the proportion awarded among proposals not listing such employees was not statistically significant. Of the 18 proposals that listed employees from the same state that offered the contract, 14 resulted in contract awards. By comparison, of the 41 proposals that did not list such employees, 25 resulted in contract awards. Many states, in an effort to help ensure open and fair competition among contractors, have established ethics policies. However, more than one-third of the states lack one or more of the key ethics provisions, such as those prohibiting certain postemployment activities and conflicts of interest, which ABA and other organizations recommend as critical to state efforts aimed at protecting competitive contracting. In addition, the states we examined also differ widely in their approaches to enforce ethics policies. To address the disparities in state ethics policies, model laws prepared by organizations such as ABA offer frameworks that states can use to strengthen their ethics policies. Also, the Medicaid statute may offer a model in that it requires participating states to have in place conflict-of-interest provisions applicable to those involved in the program equivalent to federal conflict-of-interest requirements. Many state ethics policies aimed at helping ensure open and fair contracting have shortcomings relative to the provisions widely recommended for protecting the integrity of the competitive contracting process. In some states, ethics provisions apply only to a limited number of state employees, leaving others who may be involved in the contracting process uncovered by them. In other states, ethics provisions differ as to the type of activity prohibited and the period of time covered by the prohibition. Moreover, more than one-third of the states lack one or more ethics provisions, such as restrictions against certain employment activities by former state employees and prohibitions intended to deter the misuse of public office for private gain. The weaknesses in state ethics policies are demonstrated in the examples summarized here: State ethics provisions applicable to a limited number of employees. Oregon has provisions restricting the employment activities of former state employees. However, these restrictions apply only to a limited group of former state employees who held positions specifically listed in the law and not to the full range of positions that may involve contracting. (Or. Rev. Stat. 244.045 (1997)) State postemployment restrictions have gaps. South Carolina's ethics provisions apply only to former state employees that accept employment from an organization regulated by the state agency where they formerly worked or if this employment involves a matter in which they participated directly and substantially. (S.C. Code Ann. 8-13-755 (1997)) Hawaii's ethics provisions place some employment limitations on former employees and legislators but also expressly provide that those limitations do not prohibit a state agency from contracting with them to act on behalf of the state. (Haw. Rev. Stat. Ann. 84-18 (1998)) Length of states' postemployment prohibitions varies. Kansas' ethics provisions prohibit former state officers or employees from accepting employment with a person or business if they participated in the making of any contract with that person or business. The prohibition lasts for 2 years from the time the contract is completed or from the time the state employment ended, whichever is sooner. (Kan. Stat. Ann. 46-233 (1997)) In contrast, Kentucky's provisions prohibit for 6 months after termination of state service certain former officials from participating in or benefiting from any contract involving the agency where they were employed. The provisions also prohibit such individuals from accepting employment, compensation, or other economic benefits from any person or business that contracts with the state on a matter in which the former official was directly involved during the past 3 years of state service. (Ky. Rev. Stat. Ann. 11A.040 (1998)) According to a 1996 study completed by the Council of State Governments and the American Society for Public Administration, 17 states lacked one or more of the ethics provisions ABA and other organizations believe are necessary to promote open and fair competitive contracting, as summarized in table 1. Of these 17 states, 9 did not restrict postemployment activities of former state employees with organizations that compete for government contracts. For example, Arkansas does not prohibit postemployment activities of former state employees that could have a bearing on social service contracting. Eight states lacked provisions limiting the direct involvement of former public employees in competitive contracting. State enforcement approaches to help ensure compliance with ethics provisions differed widely among the four states we reviewed. In these states, enforcement involved a variety of officials and organizations, such as the department or agency that contracted for services, ethics commissions, legislative and state auditors, inspectors general, and attorneys general. In Maryland, for example, the state placed representatives from the Attorney General's office in major state agencies to provide technical assistance and help ensure that state agencies comply with applicable contracting policies. Two of the four states lacked enforcement elements that officials in those states believe are necessary to help ensure compliance with applicable ethics policies. In Massachusetts, the state Inspector General believes that social services contracting has a high level of risk, often associated with unfair contractor advantages, conflicts of interest, and personal gain through public office. According to officials from the Attorney General's office, program staff have sometimes been ineffective in enforcing compliance with applicable ethics provisions. As a result, the Attorney General has had to prosecute contractors for violations of state ethics laws that Attorney General representatives believe could have otherwise been prevented. Arkansas lacks a statewide mechanism to enforce and resolve allegations of unethical activity. Unlike Massachusetts, the Attorney General in Arkansas does not have statewide responsibility to investigate illegal activities associated with state contracting. Instead, prosecuting attorneys in each county may investigate and resolve allegations associated with state contracting. Moreover, the Director of Arkansas' Ethics Commission said the Commission has very narrow enforcement responsibilities as well. The Commission focuses predominantly on campaign finance issues and is not involved with monitoring the contracting process. The lack of some states' ethics provisions may result in conflicts of interest that adversely influence state contract award processes. According to Arkansas and Massachusetts officials we interviewed, these situations have arisen in their states. Arkansas has contracted out the full range of child support enforcement services, including locating absent parents and collecting support payments, in selected counties. Arkansas has contracted with an established network of providers, some employees of whom had formerly worked for the state's child support enforcement program. According to the state's child support enforcement General Counsel, the lack of a comprehensive ethics policy undermined potential contractors' confidence in the fairness of the contracting process. As a result, organizations that had not competed before were discouraged from submitting proposals. This situation, in turn, left the state with no choice but to contract with organizations with which it had long-standing relationships. At the same time, allegations have surfaced regarding the influence exerted by a state legislator to have a child support enforcement full-service contract awarded to an organization in which the legislator has a financial interest. In Massachusetts, state employee conflicts of interest had some adverse impact in contracting supported by TANF block grant funds. Officials in the Department of Transitional Assistance who administer TANF-funded programs had to recompete a contract because state employees were found to have a conflict of interest with respect to one of the competing contractors. Under similar circumstances, the state also had to terminate a contract that had previously been awarded. Final resolution of both these ethics issues required the state to award the contract at a time later than originally anticipated. ABA and Common Cause, a nonpartisan organization that studies government policies, have developed comprehensive model laws that address state ethics policies related to open and fair contracting and include restrictions regarding postemployment activities, conflicts of interest, and other safeguards. States seeking to strengthen their ethics policies may adopt the provisions included in these model laws. Although states are contracting extensively for child support enforcement and TANF-related services, federal laws for these two programs, as recently amended by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, do not require that states establish or comply with ethics policies like those in ABA's model law. This is not true, however, with respect to Medicaid. The Congress incorporated conflict-of-interest provisions into state Medicaid plan requirements in 1979, when legislation was enacted authorizing greater use of health maintenance organizations. As a condition of state participation in Medicaid, states must have or enact provisions that require anyone involved in Medicaid-related contracting to be subject to conflict-of-interest requirements similar to, or at least as stringent as, those applicable to federal employees. The federal ethics provisions applicable to Medicaid also include employment restrictions and prohibitions on employees knowingly participating personally and substantially in matters in which they, family members, or certain business associates have a financial interest. More recently, section 4724(c) of the Balanced Budget Act of 1997 (P.L. 105-33) broadened the Medicaid state plan requirement to include additional conflict-of-interest safeguards. Specifically, it required states to have in place restrictions at least as stringent as those applicable to the federal contracting process related to the disclosure of contractor bid, proposal, and source selection information that might undermine open and fair competition. The Medicaid provisions allow states to tailor their ethics policies to their specific circumstances, relying on model laws and other enforcement approaches as they so choose, and offer some assurance that basic safeguards will be in place when a state is contracting for Medicaid services. Several states have established practices to help ensure that contract awardees are held accountable for program results, which provides added assurance that these states will receive the services for which they paid. These practices include performance measures states use when they assess contractor progress toward achieving program results. However, program officials in most states indicated that they rely on traditional accountability strategies, such as audits, that focus more on compliance with program rules than on results. The Government Performance and Results Act of 1993 and results-oriented state initiatives have helped establish frameworks to better focus program management on accountability for results. In addition to an integrated network of comprehensive ethics policies and enforcement approaches, contracting experts and program managers believe states need effective approaches for holding contractors accountable for program results. Effective accountability mechanisms, while difficult to develop, can help states ensure that they base contract payments on performance. Our earlier reviews of privatization have concluded that managers need to supplement current practices that assess compliance with program rules with a greater focus on results. Our earlier work on social service privatization also found that monitoring contractors' performance toward achieving program results was among the most challenging aspects of the privatization process. This examination of program accountability found that assessing compliance with program requirements, while a significant component of accountability, can constrain the available resources state auditors are able to apply toward assessing longer-term program results. Faced with these priorities and related resource constraints, officials in Texas' child support enforcement program, for example, have relied on compliance reviews of administrative processes and other approaches in an effort to monitor performance relative to results specified in applicable contracts. In recent audit cycles, the state's auditors have reviewed compliance with allowable expenditures and reporting requirements. Assessing program results can play a critical role in reviewing contractor performance. Such assessments could incorporate various techniques, such as monitoring outcomes and reviewing qualitative information. In Maryland's oversight of its TANF-supported welfare-to-work programs, for example, the state has developed a planning process that sets forth long-term goals and objectives for its Department of Human Resources--which administers TANF--and each program it manages and oversees. In addition, program officials, through Strategic Management Assessment Review Teams, periodically assess progress providers have made toward achieving program results, such as program enrollment and completion, employment, and job retention. Generally, contractors are paid on the basis of their performance in each of these program dimensions. Assessing program results enables states to determine whether contractors have in fact achieved intended outcomes. Under the Results Act, HHS developed a framework for establishing performance measures and assessing program results in the child support enforcement program. HHS' Office of Child Support Enforcement (OCSE), in conjunction with the states, established a 5-year strategic plan that included program goals and performance measures for evaluating the magnitude of increases in paternities established, support orders obtained, and collections received. OCSE and the states developed these measures after considering key dimensions indicative of state performance in providing child support enforcement services. Subsequently, these and other measures were included in modifications to the program's incentive funding structure. Such frameworks can enhance state strategies to improve accountability for program results in privatized social service programs supported with federal funds. Beyond the Results Act requirements applicable to federally administered programs, some states, such as Oregon and Minnesota, established their own strategies for assessing program results. Toward this end, state legislatures or executive branch agencies have developed program goals and measures for assessing performance. Moreover, one recent study concluded that 47 states have established performance-based budgeting systems intended to improve the effectiveness of state programs. These state initiatives, combined with a greater orientation toward program results in HHS, provide additional management tools that can be used to optimize the anticipated benefits from privatizing child support enforcement, welfare-to-work, and other social service programs. Social service contracting presents many significant challenges to state governments, including the need to achieve competitive contracting and accountability for program results. These challenges, coupled with the magnitude of federal funds that support privatized social service programs, amplify the call for adequate protections against ethics violations that can potentially undermine competition. While our work in selected states suggests that contract awards were not related to the "revolving door," there is room to strengthen state ethics policies and enforcement approaches to help strengthen open and fair competition. Without comprehensive ethics policies and effective enforcement approaches intended to safeguard competitive contracting, states may not benefit as fully from competition when they privatize social services. Similarly, an insufficient capacity to assess progress toward achieving program results weakens state assurances that contractors will provide federally funded services efficiently and effectively. Faced with these challenges, states can take steps to mitigate threats to competition. By relying on comprehensive models for guidance, states can develop or refine their ethics policies and adopt effective enforcement approaches to strengthen competition in privatized social services. States have been required by statute, in fact, to adopt and apply certain conflict-of-interest requirements to state officials with regard to Medicaid. While the Results Act provides a framework for reorienting program management toward accountability for results, states could take additional measures to help ensure that they obtain desired results from their contracting efforts. Together, fortified ethics policies, effective enforcement approaches, and accountability strategies focused on program results can optimize the states' capacity to achieve the benefits of social service privatization. We received comments on a draft of this report from HHS, the four states in which we conducted detailed work, and a recognized expert in social service privatization. The comments generally concurred with our findings and conclusions. We also received a number of technical comments that we incorporated where appropriate. We are providing copies of this report to the Honorable Donna E. Shalala, the Secretary of HHS; and the Honorable Olivia A. Golden, HHS' Assistant Secretary for Children and Families. We will also send copies to state child support enforcement and TANF directors and to other interested parties on request. If you or your staffs have any questions about this report, please contact David D. Bellis, Assistant Director, or Mark E. Ward, Senior Evaluator, at (202) 512-7215. Other major contributors are Gregory Curtis, Joel I. Grossman, Craig H. Winslow, and James P. Wright. This appendix provides additional details on the methods we used to meet the objectives of our study. To help us understand state ethics laws and their enforcement, we reviewed GAO reports, journal articles, and studies on contracting, as well as state ethics laws and policies. To estimate the extent of national movement by former state employees to positions at social service contractors, we obtained information from federal and state program managers in the child support enforcement and Temporary Assistance for Needy Families (TANF) programs. We supplemented these data by interviewing officials of public employee unions and other organizations. In addition, we interviewed state government officials in four states to determine how their states responded to the loss of personnel and the impact this loss had on state programs. To aid us in determining the extent to which state employees left government positions for employment with contractors and the effect this movement had on contract awards, we examined the proposals submitted in response to eight recently issued requests for proposal (RFP) in the four selected states. We selected two full-service child support enforcement RFPs--one in Arkansas and one in Maryland--and two child support enforcement RFPs for automated systems--one in Massachusetts and one in Texas. We also chose one TANF welfare-to-work RFP in each of the four states. We reviewed all proposals submitted in response to RFPs for these contracts to identify former government employees who had worked in either state child support enforcement or welfare-to-work programs and were subsequently listed as key personnel designated to perform specific functions in direct support of the contract, pending selection of contract awardees. Sometimes states awarded more than one contract for each RFP. In addition, the projected contract costs among the contracts we reviewed varied widely. To supplement the information we obtained from our review of proposals, we interviewed state officials to obtain their perspectives on how the movement of former state employees to organizations competing for contracts affected contract awards. We did not evaluate the merits of state contract award decisions, nor did we independently assess whether states or contractors complied with applicable ethics policies. We examined state ethics laws, policies, and enforcement approaches and their federal counterparts to determine the extent to which state ethics laws and policies parallel generally accepted ethics standards, as defined by the American Bar Association, contracting experts, and others. We also interviewed state officials to identify any allegations of state ethics violations and their resolution. In addition, we examined state and federal policies and practices for holding contractors accountable for program results. We also interviewed state program officials in the four selected states to identify the practices they used to hold contractors accountable for program results. Finally, we interviewed Department of Health and Human Services officials regarding their oversight of state and local social service contracting in the context of applicable federal policies. We focused on the child support enforcement and TANF programs in four states--Arkansas, Maryland, Massachusetts, and Texas. We selected these two programs because each receives a significant level of federal funds and each makes widespread or long-term use of contracting. We chose these four states because they offered variation in the strength of their respective ethics provisions. In addition, these four states were using contractors to provide child support enforcement services or to design related automated systems. All four states contracted out TANF-funded welfare-to-work services. Table I.1 summarizes the selected states, number of proposals submitted in response to each RFP, and number of contracts awarded. Welfare Reform: States Are Restructuring Programs to Reduce Welfare Dependence (GAO/HEHS-98-109, June 18, 1998). Child Support Enforcement Privatization: Challenges in Ensuring Accountability for Program Results (GAO/T-HEHS-98-22, Nov. 4, 1997). Social Service Privatization: Expansion Poses Challenges in Ensuring Accountability for Program Results (GAO/HEHS-98-6, Oct. 20, 1997). Managing for Results: Analytic Challenges in Measuring Performance (GAO/HEHS/GGD-97-138, May 30, 1997). Welfare Reform: Three States' Approaches Show Promise of Increasing Work Participation (GAO/HEHS-97-80, May 30, 1997). Privatization: Lessons Learned by State and Local Governments (GAO/GGD-97-48, Mar. 14, 1997). Child Support Enforcement: Early Results on Comparability of Privatized and Public Offices (GAO/HEHS-97-4, Dec. 16, 1996). Child Support Enforcement: Reorienting Management Toward Achieving Better Program Results (GAO/HEHS/GGD-97-14, Oct. 25, 1996). Employment Training: Successful Projects Share Common Strategy (GAO/HEHS-96-108, May 7, 1996). District of Columbia: City and State Privatization Initiatives and Impediments (GAO/GGD-95-194, June 28, 1995). Welfare to Work: Measuring Outcomes for JOBS Participants (GAO/HEHS-95-86, Apr. 17, 1995). Office of Government Ethics: Need for Additional Funding for Regulation Development and Oversight (GAO/T-GGD-92-17, Mar. 4, 1992). Ethics Enforcement: Process by Which Conflict of Interest Allegations Are Investigated and Resolved (GAO/GGD-87-83BR, May 21, 1987). 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 states' social service contracting, focusing on: (1) the extent to which state government employees have moved to positions at social service contractors and the impact such movement has had on the management of publicly provided social services; (2) determining the relative success in winning contracts by contractors who hired state employees and contractors who did not; (3) state ethics laws, policies, and enforcement approaches that address the employment of former state employees and other related issues; and (4) state practices for holding contractors accountable for achieving program results through contracted services. GAO noted that: (1) since 1993, 11 of 42 state child support enforcement directors who left their government positions accepted managerial positions with contractors providing child support enforcement services, according to federal and state program officials; (2) similarly, since 1993, federal and state officials indicated that 10 of the 41 high-level Temporary Assistance for Needy Families (TANF) managers who left state services accepted positions with social service contractors; (3) when the four states GAO examined lost child support enforcement and TANF managers and other staff, officials indicated that they experienced short-term difficulties because they were required to train staff selected to fill the managerial vacancies; (4) although, nationwide, these 21 directors and managers left the government to accept positions with social service contractors, GAO's review of 59 contract proposals in four states found that proposals listing former state employees as key personnel did not result in contract awards any more frequently than did proposals not listing such employees; (5) this was the case for both the child support enforcement and TANF-related programs; (6) GAO's analysis also showed that proposals listing former employees from the same state in which the bidding took place resulted in contracts about as frequently as did proposals not listing such employees; (7) most states have established some ethics policies designed to help ensure open and fair contracting by adopting provisions determined by the American Bar Association (ABA) and other organizations to be critical in prohibiting certain postemployment practices and conflicts of interest; (8) however, more than one-third of the states have ethics policies that lack one or more of these provisions; (9) among the four states GAO examined, enforcement approaches to help ensure compliance with applicable ethics provisions differed widely; (10) to address these inconsistencies, model laws prepared by ABA and others offer possible frameworks for strengthening state ethics policies; (11) once contracts have been awarded, several states have instituted mechanisms aimed at holding contractors accountable for program results; (12) these mechanisms include measures states apply when they assess contractor performance; and (13) while these states have established practices to assess contractor progress toward achieving program results, many others generally rely on basic accountability measures that focus on compliance with program rules rather than on results.
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With the terrorist attacks of September 11, 2001, the threat of terrorism rose to the top of the country's national security and law enforcement agendas. In response to these growing threats, the Congress passed and the President signed the Homeland Security Act of 2002, which created DHS. We have previously identified IT management as critical to the transformation of the new department. Not only does DHS face considerable challenges in integrating the many systems and processes that provide management with information for decision making, but it must sufficiently identify its future needs in order to build effective systems that can support the national homeland security strategy in the coming years. To jump start this planning process and also begin to identify opportunities for improved effectiveness and economy, OMB issued two memorandums in July 2002 to selected agencies telling them to "cease temporarily" and report on new IT infrastructure and business systems investments above $500,000. On March 1, 2003, DHS assumed operational control of nearly 180,000 employees from 22 incoming agencies and offices. In establishing the new department, the Congress articulated a seven-point mission for DHS: Prevent terrorist attacks within the United States. Reduce the vulnerability of the United States to terrorism. Minimize the damage and assist in the recovery from terrorist attacks. Carry out all functions of entities transferred to the department, including by acting as a focal point regarding natural and man-made crises and emergency planning. Ensure that the functions of the agencies within the department that are not directly related to securing the homeland are not diminished or neglected. Ensure that the overall economic security of the United States is not diminished by efforts aimed at securing the homeland. Monitor connections between illegal drug trafficking and terrorism, coordinate efforts to sever such connections, and otherwise contribute to efforts to interdict illegal drug trafficking. To help DHS accomplish its mission, the Homeland Security Act of 2002 establishes four mission-related directorates, the (1) Border and Transportation Security directorate, (2) Emergency Preparedness and Response directorate, (3) Science and Technology directorate, and (4) Information Analysis and Infrastructure Protection directorate. In addition to these directorates, the U.S. Secret Service and the U.S. Coast Guard remain intact as distinct entities within DHS; Immigration and Naturalization Service adjudications and benefits programs report directly to the deputy secretary as the Bureau of Citizenship and Immigration Services, and the Management directorate is responsible for budget, human capital, and other general management issues. According to the most recent President's budget, DHS expects to make about $4 billion in IT investments in fiscal year 2004--the third largest IT investment budget in the federal govenment. In addition, as we have testified, information management and technology are among the critical success factors that the new department should emphasize in its initial implementation phase. For example, DHS currently has several ongoing IT projects that are critical to the effective implementation of its mission, such as the Integrated Surveillance Intelligence System, which is to provide "24 by 7" border coverage through ground-based sensors, fixed cameras, and computer-aided detection capabilities; Student Exchange Visitor Information System, which is expected to manage information about nonimmigrant foreign students and exchange visitors from schools and exchange programs; Automated Commercial Environment project, which is to be a new trade United States Visitor and Immigrant Status Indicator Technology (US- VISIT), a governmentwide program intended to improve the nation's capacity for collecting information on foreign nationals who travel to the United States, as well as control the pre-entry, entry, status, and exit of these travelers. Moreover, as all of the programs and agencies are brought together in the new department, it will be an enormous undertaking to integrate their diverse communication and information systems. Among the IT challenges that the new department will have to face and overcome are developing, maintaining, and implementing an enterprise architecture, and establishing and enforcing a disciplined IT investment management process (which includes establishing an effective selection, control, and evaluation process). The department's ability to overcome these challenges is complicated by the IT management problems that its major components had when they transferred to DHS. Specifically, as we previously reported, we still have numerous outstanding IT management recommendations that require action at component agencies, such as the Customs Service and the Coast Guard. Figure 1 illustrates the timing of OMB's July 2002 memorandums. These memorandums instructed selected agencies to (1) cease temporarily new IT infrastructure and business systems (i.e., financial management, procurement, and human resources systems) investments above $500,000 pending a review of the investment plans of all proposed DHS component agencies; (2) identify and submit to OMB information on any current or planned spending on these types of initiatives; and (3) participate in applicable IT investment review groups co-chaired by OMB and the Office of Homeland Security. According to OMB, its goal in issuing these memorandums was to seek opportunities for improved effectiveness and economy. In addition, according to officials from OMB's Office of Information and Regulatory Affairs, another purpose was to obtain an inventory of current and planned IT infrastructure and business systems investments for organizations to be moved to DHS, which was expected to help in the administration's transition planning. Although OMB directed selected agencies to temporarily cease these investments, it did not necessarily mean that work was to be stopped on all IT infrastructure and business systems projects at the applicable agencies. First, the memorandums only pertained to funding for new development efforts and not to existing systems in a "steady state" using operations and maintenance funding. Second, the cessation did not apply if funds pertaining to a development or acquisition contract had already been obligated. Third, agencies could request an expedited review to obtain the approval to proceed if they had an emergency or critical need. The following are examples of how OMB's direction to temporarily cease IT investments would apply in certain circumstances. If an agency had an existing procurement system in a steady state in which no major modifications or modernization efforts were planned, there would have been no effect on the funding of this system. If an agency had an ongoing contract with available obligations for the development of a financial management system, there would have been no effect on this contract, but new obligations for development or modernization efforts would have been required to be approved by the review group. If an agency wanted to award a contract over $500,000 for a new or modernized IT infrastructure item such as a local area network, it would have been required to obtain approval from the investment review group before proceeding. Our testimony of October 2002, stated that it was not possible to assess the full effect of the July memorandums on the selected agencies at that time. Except for emergency requests, according to representatives from OMB's Office of Information and Regulatory Affairs, the review group had not taken any action at the time of our review on the agencies' submissions in response to the July memorandums because neither they nor OMB had completed their reviews of these documents. The July memorandums called on the Homeland Security IT Investment Review Group to assess individual IT investments as part of considering whether to consolidate or integrate component agency efforts. In fulfilling this role, the review group relied on an informal process, which was not documented. Although the review group reviewed the few investments that component agencies submitted, according to OMB and DHS IT officials, the group generally addressed broader issues related to the transition to the new department. In particular, these officials noted that the review group concentrated on longer term IT strategic issues, such as those related to the development of an enterprise architecture, associated with the transition to the proposed department. The investment review group was tasked with (1) reviewing component agency IT investment submissions that met the criteria in the memorandums, and (2) making recommendations related to these submissions, including looking for opportunities to consolidate and integrate component agency investments. According to OMB IT representatives, the group generally met once a week but did not have a documented process for performing reviews of the few component agency investments that were submitted for review. These officials reported that in the review process that was implemented, (1) agencies requested approval of selected IT investments, (2) OMB and the investment review group reviewed the agency submission, and (3) the review group made a recommendation. Once this recommendation was made, the normal budget execution process was implemented. Moreover, according to these representatives, the investment review group used the principles contained in section 300 of OMB Circular A-11 and section 8(b) of OMB Circular A-130 as the criteria for evaluating submitted investments. In addition, in commenting on a draft of this report, representatives from OMB's Office of Information and Regulatory Affairs and Office of the General Counsel stated that although the activities of the Homeland Security IT Investment Review Group were generally conducted on an informal basis, the group relied on the already-existing processes documented in these circulars to fulfill its responsibilities. According to OMB IT representatives, when the establishment of DHS became closer in time, the focus of the review group shifted from reviewing individual investments to addressing the IT strategic issues involved with establishing the department. In particular, according to DHS officials, the review group created six working groups to address, respectively, business architecture, networks, information security, Web management, directory services (e.g., e-mail capability), and technical reference model issues. In addition, according to these officials, the investment review group took into account transition work being performed by other entities. For example, the review group worked with a liaison from the Chief Financial Officers Council, which was looking at financial management system matters related to the new department. The July 2002 memorandums resulted in some changes to agency IT infrastructure and business systems investments. Specifically, according to OMB and DHS IT officials, the review group recommended approval with conditions the five IT investments submitted to it and four component agencies reported that they changed other initiatives as a result of the memorandums. However, it is not known whether, or the extent to which, savings have resulted from the memorandums. In particular, OMB did not track the savings associated with the July memorandums because, according to OMB IT representatives, budgetary savings had not occurred when the review group was in place. Nevertheless, OMB and DHS IT officials cited other benefits that resulted from the memorandums, such as the identification of ongoing component agency efforts or resources that were important to the operation of the department at its inception. Four component agencies submitted five IT investment requests to be reviewed by the review group. According to OMB and DHS IT officials, all of these requests were recommended for approval with conditions. In addition, four component agencies reported that on their own initiative that they terminated, delayed, or changed other initiatives as a result of the July memorandums. (See table 1.) The July memorandums stated that initial estimates indicated that potential savings of between $100 million and $200 million (IT infrastructure) and $65 million and $85 million (business systems) could be achieved over a 2- year period as a result of consolidating and integrating component agency investments. OMB reported to congressional committees that these estimates were based primarily on best practices in the federal government and private industry. However, an OMB IT representative stated that these estimates were a rough approximation and that no documentation existed to support how they were derived. The July memorandums also stated that the review group would track these savings. Moreover, OMB reported to congressional committees that this tracking would include a breakout of the savings, the cause of the savings, and the time period in which the savings would be generated. However, a tracking process was not established because, according to an OMB IT representative, no budgetary savings had occurred at the time that the investment review group was in place since no investment was terminated by the group. According to this representative, OMB still believes that budgetary savings will occur and expects that DHS will track these savings. Moreover, this representative stated that OMB will be actively working with DHS as part of its budgetary and management processes to ensure that such savings occur. DHS's CIO agreed that savings are expected to result from the department's consolidation and integration of systems. Moreover, he stated that DHS will be tracking such savings and has established a mechanism for doing so. Specifically, the CIO pointed to DHS's establishment of IT commodity councils--groups that are responsible for a collection of related materials or services--that would perform this function. According to the Director of Strategic Sourcing and Acquisition Systems, the councils have established project teams that are responsible for tracking savings. According to this official, each project is in the process of developing their project plans, departmental requirements, and savings targets. Until savings resulting from the consolidation and integration of systems and services are identified, tracked, and reported, it will remain unknown whether OMB's July memorandums and the subsequent establishment of DHS have achieved the potential economies identified by OMB. In addition, DHS IT officials stated that they were not aware of any plans to report budgetary savings resulting from the consolidation and integration of systems to applicable congressional committees. Such savings information is an important element for the Congress to consider when deliberating DHS budget requests and overseeing its IT management. Moreover, the Chairman of the House Committee on Government Reform has previously expressed concern that there has been a tremendous push for additional IT spending at DHS component agencies without ensuring appropriate management or accountability. Although budgetary savings have not yet been identified, DHS IT officials, including the CIO, cited other benefits to the July memorandums. In particular, DHS IT officials estimated that several million dollars in costs have been avoided as a result of the Secret Service decision. (A Secret Service IT official provided an explanation of how this estimate was derived, but we could not validate this amount because it was not clearly supported by the documentation provided.) In addition, the CIO stated that the investment review group evolved into the department's CIO Council, which is responsible for developing, promulgating, implementing, and managing a vision and direction for information resources and telecommunications management. Further, the DHS chief technology officer reported that the review group provided the new department with a head start on day one operations by, for example, deciding to use the Immigration and Naturalization Service's network backbone for the department. Finally, these and DHS component agency IT officials stated that the memorandums facilitated the department's long-term IT planning efforts, including the development of an enterprise architecture. Once DHS became operational and the investment review group established by the July memorandums no longer existed, the department established an IT investment management process that includes departmental reviews of component agency IT investments meeting certain criteria. As part of the selection phase of this process, DHS's CIO reported that he approved the department's IT portfolio as part of the fiscal year 2005 budget cycle. In addition, as of January 26, 2004, the department's highest level investment management board had performed control reviews of nine investments that had reached key decision points. In each of these cases, the project was allowed to proceed although additional documentation was required and/or conditions were set. Finally, the department's investment management process is still evolving as the department attempts to deal with a large number of IT investments eligible for departmental reviews. In May 2003, DHS issued an investment review management directive and IT capital planning and investment control guide, which provide the department's entities with requirements and guidance on documentation and review of IT investments. In particular, the management directive establishes four levels of investments, the top three of which are subject to review by department-level boards--the Investment Review Board (IRB), Management Review Council, and Enterprise Architecture Board. Appendix I provides a description of these department-level boards and the investments that they are responsible for. The directive also establishes a five-phase acquisition process that calls for these investments to be reviewed at key decision points, such as program authorization. In addition, the IT capital planning and investment control guide lays out a process for selecting, controlling, and managing investments. Figure 2 provides an overview of the review process outlined in the management directive and capital planning and investment control guide. As part of the selection phase of its capital planning and investment control process, DHS reviewed component agency IT investments for its fiscal year 2005 budget submission. Specifically, according to DHS IT officials, (1) the CIO approved the department's IT portfolio and (2) all of the major IT systems submitted to OMB for the fiscal year 2005 budget were assessed and scored by an investment review team. In addition, beginning in May 2003, DHS's top-level board (the IRB) began reviewing the department's highest priority projects. As of January 26, 2004, the department had performed 12 control reviews of nine investments. Table 2 summarizes the results of these reviews. Although DHS is making progress in reviewing component agency projects, its investment management process continues to evolve. In particular, as of January 2, 2004, the department had identified about 100 IT programs that were eligible for review by its two top-level departmental boards and, according to IT officials, is having difficulty in bringing all of these programs before the boards in a timely manner. Moreover, DHS has not established a process to ensure that control reviews of component agency IT investments are performed in a timely manner. Specifically, although DHS's capital planning and investment control guide states that the Office of the CIO will maintain a control review schedule for all initiatives in the department's IT investment portfolio, as of January 2, 2004, this schedule has not been developed. According to the DHS IRB coordinator and IT officials, DHS has requested information from its component entities related to the schedules and priorities of its level 1, or top-level, investments. These officials stated that such information can then be used to develop a master milestone calendar for control reviews. Control review schedules, or master milestone calendars, are important to ensure that DHS is reviewing its highest priority IT investments in a timely manner so as to be able to affect changes to component agency approaches or even terminate a poorly managed or strategically unnecessary investment, if appropriate. DHS's CIO also stated that the department's CIO Council is developing a peer review process for major IT projects that is expected to include defining a life-cycle management process and a quarterly reporting process. The CIO stated that the new process is expected to be instituted by the end of March 2004. OMB took a prudent step in issuing its July memorandums directing federal agencies that were expected to be part of the new department to temporarily cease funding for new IT infrastructure and business systems investments in anticipation of the establishment of DHS. Although documentation of the implementation of the memorandums was lacking, OMB and DHS IT officials outlined an approach that included both reviewing specific IT investments and the beginning of planning for the transition to the new department. Further, DHS component agencies identified actions that they took, such as putting initiatives on hold, and other benefits that resulted from the memorandums. Nevertheless, according to OMB IT representatives, budgetary savings as a result of the July memorandums had not occurred at the time that the review group was in place. Although DHS has begun to establish a mechanism to track such savings in the future, until savings resulting from the consolidation and integration of systems and services are identified, tracked, and reported, it will remain unknown whether OMB's July memorandums and the subsequent establishment of DHS have achieved the millions of dollars in potential economies identified by OMB. The Congress would benefit from such information in its deliberations on the department's budget and in its oversight of DHS's management of IT. Finally, DHS has begun to perform high-level oversight of component agency IT investments, although much remains to be accomplished and the process for this oversight is still evolving. Accordingly, DHS continues to face challenges in providing robust and constructive oversight of component agency IT investments. A significant challenge remaining is determining the current status and upcoming major milestones of IT investments subject to departmental review in order to schedule timely control reviews. To demonstrate its progress in consolidating and integrating its systems and services, we recommend that the Secretary of Homeland Security direct the Chief Information Officer to periodically report to appropriate congressional committees, the budgetary savings that have resulted from the department's IT consolidation and integration efforts, including a breakout of the savings, the cause of the savings, and the time period in which the savings have been, or will be, generated. To ensure that IT investments subject to departmental review undergo timely control reviews, we recommend that the Secretary of Homeland Security direct the Chief Information Officer to develop a control review schedule for IT investments subject to departmental oversight (i.e., level 1, 2, and 3 investments). We received oral comments on a draft of this report from OMB and DHS. Representatives from OMB's Office of Information and Regulatory Affairs and Office of the General Counsel generally agreed with the findings of the report. These representatives also provided a technical comment that we included in the report, as appropriate. In addition, DHS's Office of the CIO capital planning and investment control officials stated that the report was factually accurate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of Homeland Security and the Director, Office of Management and Budget. Copies will also be available at no charge on the GAO Web site at www.gao.gov. If you have any questions on matters discussed in this report, please contact me at (202) 512-9286 or Linda J. Lambert, Assistant Director, at (202) 512-9556. We can also be reached by e-mail at [email protected] and [email protected], respectively. Another key contributor to this report was Niti Bery. Deputy Secretary (Chair) Chief Information Officer (CIO) This board also reviews all level 1 and 2 IT investments and makes recommendations to the Investment Review Board and Management Review Council DHS also plans to employ a Joint Requirements Council to serve as a working group to make recommendations to the Investment Review Board and Management Review Council on cross-cutting IT investments. The Joint Requirements Council, whose membership includes the Chief Technology Officer, Director of Strategic Sourcing and chief operating officers of DHS's component entities, met for the first time on January 7, 2004. 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. 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In July 2002, the Office of Management and Budget (OMB) issued two memorandums directing agencies expected to be part of the Department of Homeland Security (DHS) to temporarily cease funding for new information technology (IT) infrastructure and business systems investments and submit information to OMB on current or planned investments in these areas. GAO was asked to (1) explain OMB's implementation of these memorandums, (2) identify any resulting changes to applicable IT investments, and (3) ascertain if DHS has initiated its own investment management reviews and, if so, what the results of these reviews have been. The July 2002 memorandums established an investment review group cochaired by OMB and the Office of Homeland Security to review submitted investments and estimated that millions of dollars potentially could be saved as a result of consolidating and integrating component agency investments. The investment review group relied on an informal, undocumented process to fulfill its responsibilities. Nevertheless, according to OMB and DHS IT officials, the review group both reviewed five component agency investments that were submitted and addressed long-term IT strategic issues related to the transition to the new department. OMB and DHS IT officials cited some changes to agency IT infrastructure and business systems investments because of the July memorandums. In addition, DHS IT officials cited other benefits that resulted from the memorandums. However, it is not known whether, or the extent to which, savings have resulted from the memorandums. In particular, OMB did not track savings associated with the July memorandums because, according to OMB IT staff, anticipated budgetary savings had not occurred at the time the review group was in place. DHS's chief information officer stated that the department plans to track savings related to the consolidation and integration of systems and has established a mechanism for doing so. However, until such savings are identified, tracked, and reported it will remain unknown whether the July memorandums and the subsequent establishment of DHS have achieved the potential economies identified by OMB. Once DHS became operational and the investment review group no longer existed, the department established its own IT investment management process, which is still evolving. As part of this process, between May 2003 and late January 2004, the DHS's highest level investment management board performed reviews of nine investments that had reached key decision points. Even with this progress, the department has identified about 100 IT programs that are eligible for review by its two top department-level boards. However, DHS has not established a process to ensure that key reviews of such IT investments are performed in a timely manner.
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The two main fee basis care delivery methods--preauthorized care and emergency care--are approved using two different processes.Preauthorizing fee basis care involves a multistep process conducted by the VAMC that regularly serves a veteran. The preauthorization process is initiated by a VA provider who submits a request for fee basis care to the VAMC's fee basis care unit, which is an administrative department within each VAMC that processes VA providers' fee basis care requests and verifies that fee basis care is necessary. Once approved by the VAMC Chief of Staff or his or her designee, the veteran is notified of the approval and can choose any fee basis provider willing to accept VA payment at predetermined rates. (See fig. 1.) VA's fee basis care spending increased from about $3.04 billion in fiscal year 2008 to about $4.48 billion in fiscal year 2012. VA's fee basis care spending hit its highest level of about $4.56 billion in fiscal year 2011. Across the 5 fiscal years we reviewed, VA spent a total of about $20.29 billion on fee basis care. (See fig. 4.) The overall increase in fee basis care spending from fiscal year 2008 to fiscal year 2012 can be attributed to increases in the number of veterans who received fee basis care. The slight decline in fee basis care spending between fiscal year 2011 and fiscal year 2012 is likely due to VA's adoption of Medicare rates for its fee basis care program. Medicare reimbursement rates are typically lower for most health care services than VA's previous fee basis care reimbursement rates. VA's fee basis care utilization also increased from fiscal year 2008 to fiscal year 2012--although the number of unique veterans receiving care from fee basis providers has increased less rapidly for the last 3 fiscal years. fee basis providers from fiscal year 2008 to fiscal year 2012.basis care utilization hit its highest point of the 5-year period in fiscal year 2012 when about 976,000 unique veterans received care from fee basis providers, about 155,000 more veterans than in fiscal year 2008. (See fig. 5.) According to VA officials, the increase in the number of unique veterans receiving care from fee basis providers from fiscal year 2008 to fiscal year 2012 was likely due to VA's use of fee basis care to meet goals for the maximum amount of time veterans wait for VAMC-based appointments. Fee basis utilization in this report does not include pharmacy-only fee basis care. Pharmacy-only fee basis care consists of reimbursements to veterans for medications that they paid for as part of emergency care that was reimbursed by VA under 38 U.S.C. SS 1728 (emergency care generally for service-connected conditions) or 38 U.S.C. SS 1725 (Veterans Millennium Health Care and Benefits Act emergency care for non-service-connected conditions). A total of 11,750 unique veterans received such reimbursement from fiscal year 2008 through fiscal year 2012. To determine the fee basis utilization numbers in this figure, we counted each individual veteran once per fiscal year by identifying the number of unique Social Security numbers present in each fiscal year's fee basis data. Utilization totals in this figure have been rounded to the nearest thousand veterans. In addition, fee basis care spending and utilization also varied by fee basis care category. (See app. I for more information.) VA spent about $11.22 billion on outpatient fee basis care and about $9.07 billion on inpatient fee basis care from fiscal year 2008 through fiscal year 2012. During this 5-year period, inpatient fee basis care spending increased steadily from about $1.41 billion in fiscal year 2008 to about $2.15 billion in fiscal year 2012, while outpatient fee basis care spending declined in fiscal year 2012. As a result, by fiscal year 2012, the difference in inpatient and outpatient fee basis care spending was only about $180 million, compared to a $590 million disparity in fiscal year 2011 when outpatient fee basis care spending was at its highest level. (See fig. 6.) Significantly more veterans received care from outpatient fee basis care providers than from inpatient fee basis care providers. Specifically, from fiscal year 2008 through fiscal year 2012, a total of about 2.35 million unique veterans received care from outpatient fee basis providers and a total of about 472,000 unique veterans received care from inpatient fee basis providers. (See fig. 7.) Preauthorized fee basis care accounted for the majority of outpatient fee basis spending and utilization from fiscal year 2008 through fiscal year 2012--about $7.36 billion and about 80 percent of unique veterans receiving outpatient fee basis care. VA spent the least on outpatient fee basis care for compensation and pension exams and emergency care for service-connected veterans. In addition, preauthorized fee basis care accounted for the majority of inpatient fee basis care spending from fiscal year 2008 through fiscal year 2012. Preauthorized inpatient fee basis care accounted for about $4.60 billion and about 57 percent of unique veterans receiving inpatient fee basis care. VA spent the least on inpatient fee basis care associated with emergency care for service- connected veterans. (See App. II.) During our review of six VAMCs, we identified three common factors that affected these facilities' utilization of fee basis care--clinical service availability, veteran travel distances, and VA wait time goals. In addition, officials from the six VAMCs reported several methods they use to reduce either the cost of referring veterans to fee basis providers or the number of veterans their facilities refer to fee basis providers. VAMCs have limitations on the services they can offer due to a variety of factors, including the size of their facilities and the types of providers they can recruit, which can affect fee basis care utilization. VA officials from the six VAMCs we examined reported that the types of clinical services offered at their facilities affected veterans' utilization of fee basis care. For example, officials from the Alexandria VAMC explained that their facility does not meet VA's requirements for providing orthopedic surgery services to veterans and does not provide these services. As a result, they refer veterans who need these services to fee basis providers. Similarly, officials from the Biloxi VAMC explained that they do not have the ability to offer radiation therapy for cancer treatment at their medical center. As a result, they refer veterans who need radiation therapy to fee basis providers and reported that their VAMC has little control over increases in fee basis spending for these services. In some cases, a VAMC may not be able to provide some services to veterans because they do not have the right mix of clinical specialists to accommodate complications that may arise during surgery. For example, for a VAMC to offer joint replacement surgery, the facility must be equipped with an orthopedic specialist capable of performing the surgery and a number of additional providers to assist in the event of an emergency complication during surgery. For joint replacement surgeries, these additional providers include a thoracic surgeon and a neurologist who both must be available within 15 minutes by phone or 60 minutes in person, if needed. If these criteria for additional providers are not met, the VAMC is not authorized to perform joint replacement surgeries even if the VAMC has an orthopedic specialist capable of performing the surgery. When VAMCs are unable to provide services due to these requirements, they may rely on fee basis care to obtain these services for veterans. In other cases, VAMCs are unable to recruit specialists and as a result cannot offer some clinical services to veterans. When such recruiting challenges arise, VAMCs may rely on fee basis care to ensure veterans can receive medical services. For example, officials from the Las Vegas VAMC explained that they have difficulty recruiting several types of specialists--including vascular surgeons, pulmonologists, and gastroenterologists. These officials explained that they are exploring ways to provide relocation incentives to help recruit specialists; however, they noted recruiting is difficult because recent medical school graduates often want the opportunity to conduct medical research in addition to patient care and the Las Vegas VAMC does not have a research program. The distance that veterans have to travel to receive medical care is also a critical factor influencing whether they are treated in VAMCs or referred to fee basis providers. Traveling long distances for medical care is often impractical for veterans, particularly those receiving ongoing outpatient medical care, such as dialysis or radiation therapy for cancer. The decision about whether a veteran can physically tolerate the travel to a VAMC or should be referred to a fee basis provider in the community is a clinical judgment VA providers make in consultation with VAMC fee basis care unit staff. Officials from all six of the VAMCs we reviewed reported that utilization of fee basis care was affected by the distance that veterans must travel to receive VAMC-based care. For example, the Biloxi VAMC serves veterans from four states along the Gulf Coast, including many who live more than 300 miles from the facility. Officials from the Biloxi VAMC explained that the significant travel distance that some veterans face when traveling from their homes to the VAMC for care is burdensome and may not be appropriate for all veterans. As a result, these officials said that their VAMC frequently refers veterans to fee basis providers within the veterans' own communities to reduce this burden. Similarly, officials from the Alexandria VAMC explained that many times they also refer veterans to fee basis providers in veterans' own communities to lessen the travel burden. Another related factor that can increase fee basis utilization involves whether veterans referred to fee basis providers are eligible for reimbursement for travel costs through VA's beneficiary travel program. VA's beneficiary travel program reimburses eligible veterans for travel from their home to either their primary VAMC, another VAMC, or to a fee basis provider that can provide the care they need. Under VA's beneficiary travel program regulations, veterans are eligible for travel reimbursement only if they meet one of several criteria--including having a service-connected disability rating of 30 percent or more, or an annual income below a specified threshold. Therefore, veterans who do not meet these criteria cannot receive reimbursement for travel costs to another VAMC for treatment. Under these circumstances, veterans may see a fee basis provider closer to their residences, according to VA officials, even though fee basis care may cost VA considerably more than the cost of treatment in a VAMC. The Secretary of Veterans Affairs has authority under the beneficiary travel authorizing statute to provide travel reimbursement to additional categories of veterans. However, VAMCs only have the authority to reimburse veterans who meet the eligibility requirements of the beneficiary travel program as outlined in VA regulations. In order to allow VAMCs to reimburse additional veterans for travel, VA would need to revise its regulations to include additional categories of veterans. Officials from one VAMC and a few VISNs we reviewed told us they often send veterans who are not eligible for travel reimbursement to fee basis providers instead of referring them to other VAMCs that can provide the care because VA cannot compensate them for their travel to another VA facility. For example, officials from the Biloxi VAMC explained that the Houston VAMC is able to provide veterans with high-quality interventional cardiology services, such as cardiac catheterization and cardiothoracic surgery, which are not available at the Biloxi VAMC. However, if a veteran is not eligible for beneficiary travel, the Biloxi VAMC will refer them to a fee basis provider to lessen the financial burden on the veteran even though, in some cases, care from a fee basis provider may cost the Biloxi VAMC $30,000 to $40,000 more than if the veteran were treated at the Houston VAMC. Biloxi VAMC officials said that they have asked their VISN to allow them to reimburse additional veterans for travel to the Houston VAMC for services that facility can provide, but they were informed that VA's beneficiary travel regulations do not permit them to offer travel reimbursements to veterans not eligible for beneficiary travel benefits. As part of the fee basis preauthorization process, VAMC or VISN officials do not evaluate whether it would be less expensive to send veterans to another VAMC for treatment rather than sending them to a fee basis provider. In requesting authorization for a veteran to see a fee basis provider, VAMC providers do not currently include information on the likely costs of the fee basis care. VA's policy for determining the desired appointment date is unclear. A veteran's desired appointment date is the date on which the patient or provider wants the patient to be seen. In the case of a veteran new to the system, the desired appointment date should be determined based on the veteran's preferred appointment date. See GAO, VA Health Care: Reliability of Reported Outpatient Medical Appointment Wait Times and Scheduling Oversight Need Improvement, GAO-13-130 (Washington, D.C.: Dec. 21, 2012). awarded each fiscal year.developing these performance contracts, wait times for care received from fee basis providers are excluded from these performance measures and VISN and VAMC directors' performance contracts do not include specific goals for wait times for fee basis care. According to VA officials responsible for VA officials from all six VAMCs we reviewed reported that they routinely refer veterans to fee basis providers to help ensure that veterans receive timely care and that their facilities meet performance goals for wait times for VAMC-based care. For example, Biloxi VAMC officials said they refer veterans to fee basis providers to avoid having longer wait times for veterans in VAMC-based clinics that would cause the Biloxi VAMC to fall short of its performance goal for VAMC-based care wait times. Similarly, officials from the Alexandria VAMC explained that their medical center sends veterans to fee basis providers solely to meet the wait time goals for the VAMC. They said that veterans needing treatment in several specialties--including audiology, cardiology, and ophthalmology--are referred to fee basis providers to help the Alexandria VAMC meet its goals for VAMC-based clinic wait times. While serving veterans in a timely way is important and sending them to fee basis providers may provide veterans more timely service, VA does not track how long it takes veterans to be seen by fee basis providers at For example, officials from the Alexandria VAMC explained all VAMCs.that they often refer veterans to fee basis providers when the Alexandria VAMC's wait times are too long, but fee basis providers in their community also face capacity limitations and may not be able to schedule appointments for veterans any sooner than the VAMC-based provider. Since VA does not require all VAMCs to track wait times for fee basis providers, little is known about how often veterans' wait times for fee basis care appointments exceed VAMC-based appointment wait time goals. Because VA has no data on wait times for veterans treated by fee basis providers, it is not possible to determine if veterans are receiving comparable access to fee basis providers as veterans receiving care from VAMC-based providers. Efforts to provide either increased capacity or additional VAMC-based health care services have helped VAMCs reduce their utilization of fee basis care, according to officials from all six VAMCs we reviewed. For example, Durham VAMC officials explained that they recently completed an operating room expansion at their facility, which has allowed them to bring more surgical services back into the VAMC and reduce their reliance on fee basis surgical services. These officials also said that the Durham VAMC is preparing to expand its inpatient psychiatric unit by adding six additional inpatient beds, which will reduce their reliance on fee basis providers for treating veterans when VAMC-based psychiatric beds are at capacity. Durham VAMC officials reported that the operating room expansion saves an estimated $18 million annually and the additional six VAMC-based psychiatric unit beds saves the facility an estimated $3.4 million annually. In another case, Biloxi VAMC officials reported that in 2010 they reduced their reliance on fee basis providers for pulmonary function tests by purchasing additional equipment and hiring an additional technician to increase the VAMC-based capacity to provide these tests. As a result, officials have seen a drop in the number of veterans referred to fee basis providers for this service and fee basis costs for pulmonary function tests decreased by about $112,000 between fiscal years 2010 and 2012. Such expansions require a careful analysis of the benefits and costs of the expansion. Before a VAMC expands its capacity, VA requires VAMCs to develop a business case for the expansion as part of VA's annual consideration of capital investments. These business cases must address several elements--including a financial analysis and safety issues. For example, Durham VAMC officials explained that to make these decisions about expanding its operating room and inpatient psychiatric bed capacity they reviewed weekly fee basis reports that included cost and volume information on the most common services that their VAMC provided through fee basis care and used these reports to make decisions about which Durham VAMC-based services should be expanded. However, some VAMC officials noted that it may not always be more cost effective for VAMCs to provide these services. For example, officials from the Salisbury VAMC explained that they planned to build a VAMC-based dialysis unit to reduce the number of veterans they referred to fee basis providers for dialysis treatments. However, when they compared the cost of building a dialysis unit to the cost of providing veterans dialysis treatments through fee basis providers, they determined that fee basis care was as cost-effective as building a dialysis unit. DOD medical facilities colocated with nearby VAMCs offer an alternative to veterans receiving care from more costly community-based fee basis providers. Currently, VA and DOD have a policy that allows the departments to charge one another at least 10 percent less for clinical services than they would in locations without sharing agreements. As of June 2012, there are nearly 200 active sharing agreements in place between VA and DOD that range in complexity and scope from sharing a single service to agreements that govern the sharing of multiple services. Two of the six VAMCs we reviewed--located in Las Vegas and Biloxi-- share resources with neighboring DOD health care facilities to provide lower-cost care to veterans. The Las Vegas VAMC has a sharing agreement with Nellis Air Force Base for some health care services, including cardiac and radiation oncology services. Similarly, the Biloxi VAMC has several sharing agreements with Air Force and Navy medical facilities along the Gulf Coast for some health care services. Officials from both these VAMCs reported that they refer veterans to these DOD facilities before sending them to fee basis providers in the community because the reimbursement rate for services provided in DOD medical facilities is lower than the Medicare rates used to reimburse fee basis providers. Officials from both the Las Vegas and Biloxi VAMCs explained that they first explore whether care is available through sharing agreements with nearby DOD medical facilities before referring the veterans to fee basis providers. Another critical factor affecting fee basis care spending and utilization is the timely transfer of veterans receiving inpatient care from fee basis providers back to VAMC-based care. This is particularly relevant because, as we discussed earlier, VA has spent almost $1.3 billion over the last 5 years on emergency inpatient services for veterans through the Millennium Act and about $4.6 billion on preauthorized inpatient fee basis care. (See app. II.) As a result, it is important that VAMC staff closely monitor the conditions of veterans receiving inpatient care from fee basis providers to ensure that they are transferred to VAMCs once their conditions stabilize. Officials from all six VAMCs we examined reported that transferring veterans being treated by fee basis providers back to VAMC-based care when appropriate can be a way of reducing the cost of inpatient fee basis care. According to officials at two VAMCs, this is because VAMC inpatient bed capacity limitations that required a veteran to be referred to an inpatient fee basis provider can change during the course of a veteran's hospital stay in non-VA facilities. While officials from all six VAMCs we reviewed noted that transferring veterans back to inpatient VAMC-based care can help reduce fee basis utilization and spending, we found some VAMCs have more robust monitoring methods than other VAMCs for tracking veterans being treated by fee basis providers through their utilization management programs. Specifically, we found the following: Three of the VAMCs we reviewed had a more formal approach that was integrated with their utilization management programs to actively identify circumstances when veterans being treated as inpatients by fee basis providers could return to the VAMC to complete their inpatient care. For example, the Salisbury VAMC has a transfer coordinator program specifically designated to actively identify such circumstances. The Salisbury VAMC employs a nurse case manager who visits veterans during their inpatient stays with fee basis providers and identifies changes in veterans' conditions that will allow them to return to the VAMC, and coordinates veterans' transitions back into VAMC-based care. According to Salisbury VAMC officials, this program has allowed them to transfer veterans back to the VAMC to complete their care once the veterans' conditions have stabilized. In contrast, the other three VAMCs we reviewed had a more passive approach that was limited to tracking veterans' progress through information given to them by the veterans' inpatient fee basis providers. For example, the Alexandria VAMC's transfer coordinator monitors veterans' inpatient fee basis care; however, this information is rarely used to transfer veterans back to the VAMC to complete their treatment. Although ensuring that VAMCs are incorporating fee basis care into their utilization management programs would enable VA to more efficiently identify when opportunities exist for some veterans to be transferred back to lower-cost VAMC-based care, VA does not currently require all VAMCs to conduct such review. Specifically, VA's current utilization management policy does not require VAMCs to incorporate reviews of inpatient fee basis care into their VAMC-based utilization management programs.how to most effectively track veterans receiving inpatient care from fee basis providers, which has allowed VAMC programs to take a variety of forms. Ultimately, without guidance and standardized procedures provided by VA Central Office, some VAMCs may not be monitoring veterans receiving inpatient care from fee basis providers in the VA Central Office has not provided guidance to all VAMCs on community closely enough to prevent prolonged and unnecessary stays for veterans in inpatient fee basis care and may be missing other opportunities to reduce fee basis care spending. One of VHA CBO's three primary methods for monitoring fee basis care spending and utilization is its review of fee basis data. According to VHA CBO officials, these reviews are primarily focused on examining fee basis care utilization and spending--including VISN fee basis care utilization and significant high-cost areas, such as dialysis treatment. Analysis of fee basis data is an important aspect of monitoring that allows VHA CBO staff to look for outliers in spending and utilization, mistakes in fee basis claims data, potential lost opportunities to reduce spending and utilization, and to assess more long-term considerations--such as adjusting the level of fee basis care services or assessing potential areas for VAMC-based service expansion. However, the usefulness of this monitoring method as an oversight tool is significantly limited due to the way fee basis data are collected and reported to the VHA CBO. Currently, VA's data system collects claims data for each individual service provided by a fee basis provider--such as the physician's time, surgical procedures, hospital rooms, and laboratory tests--rather than the total cost of a veteran's office visit or inpatient stay. VA's current data system cannot group these individual services by episode of care--a combined total of all care provided to a veteran during a single office visit or inpatient stay. For example, during an office visit to an orthopedic surgeon for a joint replacement evaluation, an X-ray for the affected joint may be ordered, the veteran may be given a blood test, and the veteran may receive a physical evaluation from the orthopedic surgeon. The fee basis provider would submit a bill to VA for the office visit and separate bills would be submitted by the radiologist that X-rayed the affected joint and the lab that performed the veteran's blood test. Each of these bills would include charges under different medical billing codes. The VISN or VAMC-based fee basis clerk processing this claim would record these charges in VA's basis claims processing software and request payment for these fee basis providers. However, the fee basis data system used by VHA CBO to review these payments would not be able to link the charges for these three treatments together as a single episode of care for this veteran's office visit with an orthopedic surgeon. Not being able to group charges from fee basis providers by episode of care has the following disadvantages in terms of monitoring fee basis care and potentially reducing costs: Monitoring challenges. From a monitoring perspective, not having data by episode of care prevents VA from efficiently identifying areas of utilization growth or unusually high spending. For example, VA- wide episode of care monitoring would allow VHA CBO to assess whether opportunities for strategic expansion of VAMC-based services--such as the Durham VAMC operating room expansion and the Biloxi VAMC addition of pulmonary function test equipment mentioned earlier--would be possible in more VAMCs. Episode of care monitoring would more effectively allow VA to make more consistent strategic decisions about such service expansions. Cost analysis limitations. From a cost perspective, not having fee basis data on an episode of care basis prevents VA from efficiently assessing whether fee basis providers were reimbursed appropriately. Without the ability to monitor fee basis spending by episodes of care, VHA CBO cannot conduct retrospective reviews of VISN and VAMC claims to determine if the appropriate rate was applied for the care provided by fee basis providers. For example, VHA CBO staff cannot verify that fee basis care that should be paid using Medicare "bundled" reimbursement rates were in fact paid using these bundled rates because all individual charges from a veteran's episode of care cannot be reliably linked. Since VA uses Medicare rates to reimburse fee basis providers for most services, VAMCs and VISNs, like Medicare, use bundled reimbursement rates for some procedures that provide a single payment for closely related services in some cases. Bundled rates are designed to give providers an incentive to furnish care more efficiently as providers retain the difference if the bundled payment exceeds the cost of care.incentive for delivering care more efficiently by making providers accountable if a patient's treatment costs exceeded the bundled rate. Bundled rates provide a financial To effectively conduct these retrospective reviews, VHA CBO would need to change its claims processing methods and ensure that the VISN or VAMC fee basis clerks processing each provider's claims assign a claim number to each payment made to a fee basis provider for an episode of care. This claim number would serve as a linkage among the individual service line items in VA's fee basis data system and allow VHA CBO to group together all payments made for a single episode of care and assess the total cost of that episode of care. In September 2012, VA outlined both short- and long-term plans for improving the fee basis care program following problems highlighted by several OIG audits and a recent congressional hearing. The short-term corrective action plan is made up of a series of tasks to be completed in fiscal year 2013 across six key areas--(1) foundational activities, (2) achieving a sustainable decrease in fee basis care improper payments, (3) recovery and recapture of fee basis care overpayments, (4) building a culture of accountability within the fee basis care program, (5) enhancing internal controls and data integrity, and (6) training and educating VISNs and VAMCs. We found that VA has taken a number of steps to better ensure the completion of its short-term corrective action plan in fiscal year 2013. Specifically, VA has identified clear leadership for tasks, created teams to accomplish tasks that include representatives from across VA operations, sought the input of internal stakeholders--such as VISN and VAMC fee basis unit staff--and external stakeholders--including the VA OIG, set clear target dates for the completion of tasks, and identified methods for assessing whether or not tasks had the desired effect on the fee basis care program. While it is still too early to determine if the efforts included in the short-term corrective action plan will produce meaningful improvements in the fee basis care program, it represents an important first step in increasing accountability for the outcomes of the fee basis care program. (See table 1.) VA is also in the process of developing a long-term strategy for improving its fee basis care program. This long-term strategy includes efforts to develop and implement a new organizational structure for the fee basis care program, consolidate claims processing functions in fewer locations, develop comprehensive guidance for the fee basis care program, implement a new competency-based personnel model, and implement new claims processing software efforts. To date, progress on the development of this long-term strategy has been limited to the development of new claims processing software and initial discussions of the new organizational structure. In February 2013, VA officials told us that the long-term strategy is still in development. VA's fee basis care program is a critical means for providing accessible health care to veterans. VA has acknowledged that fee basis care is a necessary tool for veterans when a VAMC does not have an available clinical specialist or when veterans face long travel distances to obtain care from VAMC-based providers. VA has also made concerted efforts in recent years to improve the fee basis care program by implementing a number of initiatives designed to improve the program--including new software packages for VISN and VAMC fee basis claims processing units, a new care coordination program, and initiating a program to better coordinate with fee basis providers. Moving forward, we believe it is critical that VA address four areas as potential ways to more effectively manage and monitor the fee basis care program. First, veterans' eligibility for travel reimbursement may affect whether they are referred to fee basis care or to another VAMC. Some veterans who qualify for travel reimbursement under VA's beneficiary travel program might elect to seek care at another VAMC without incurring personal travel expenses in lieu of being treated by a fee basis provider. In some cases, this could result in VA paying less for their care than it would if the veteran were treated through the fee basis care program. Should the Secretary of Veterans Affairs exercise his ability to revise the beneficiary travel eligibility requirements to allow for the use of beneficiary travel in cases where it is both more cost-effective for VA and in the veteran's best interest to receive care at another VAMC instead of a fee basis provider, it could be possible to lower overall fee basis care utilization and spending. In addition, VA does not currently require VAMCs to assess either the cost-effectiveness of reimbursing veterans for travel to another VAMC when determining whether to preauthorize fee basis care in veterans' local communities. Second, VA should better manage fee basis care wait times and costs. VA currently does not include fee basis care wait times in the measures it uses to assess VISN and VAMC directors' performance and does not track the amount of time veterans wait to see a fee basis provider. As a result, the VAMCs we reviewed are referring veterans to fee basis providers to ensure they meet the wait time performance goals for VAMC- based clinics. Having data on wait times for veterans referred to fee basis providers would help VA better determine if veterans are receiving comparable access to fee basis providers and VAMC-based providers. Third, VA may be missing an opportunity to reduce the cost of inpatient fee basis care by not requiring VAMC-based utilization management programs designed to regularly assess VAMC capacity to consider veterans being treated by non-VA inpatient fee basis providers. Incorporating veterans treated by non-VA inpatient fee basis providers into ongoing VAMC utilization management programs would allow VAMCs to identify situations when they no longer have capacity limitations and can complete a veteran's treatment in-house at a lower cost than the fee basis provider. Finally, VA can also improve its capability to more effectively monitor the fee basis care program. VA Central Office's monitoring efforts are limited by the inability to analyze fee basis care data by episode of care. Because information that would allow VA to pull together all services with a single office visit or inpatient stay is not available, VA Central Office cannot effectively monitor the payments made by fee basis care units or ensure that fee basis providers are billing VA appropriately for care. To effectively manage fee basis care spending, we recommend that the Secretary of Veterans Affairs take the following action: Revise the beneficiary travel eligibility regulations to allow for the reimbursement of travel expenses for veterans to another VAMC to receive needed medical care when it is more cost-effective and appropriate for the veteran than seeking similar care from a fee basis provider. To effectively manage fee basis care wait times and spending, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to take the following three actions: Require during the fee basis authorization process that VA providers and fee basis officials determine the cost-effectiveness of reimbursing medically stable veterans eligible for beneficiary travel for travel to another VAMC rather than referring them to a fee basis provider for similar care. Analyze the amount of time veterans wait to see fee basis providers and apply the same wait time goals to fee basis care that are used as VAMC-based wait time performance measures. Establish guidance for VAMCs that specifies how fee basis care should be incorporated with other VAMC utilization management efforts. To ensure that VA Central Office effectively monitors fee basis care, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to take the following action: Ensure that fee basis data include a claim number that will allow for VA Central Office to analyze the episode of care costs for fee basis care. VA provided written comments on a draft of this report, which we have reprinted in appendix III. In its comments, VA generally agreed with our conclusions, concurred with our five recommendations, and described the agency's plans to implement each of our recommendations. VA also provided technical comments, which we have incorporated as appropriate. In its plan, VA stated that to address our first recommendation, VHA CBO will consider including provisions related to veterans' travel reimbursement to another VAMC to receive needed medical care when it is more cost-effective and appropriate during a planned upcoming revision to the agency's beneficiary travel regulations. To address our second recommendation, VA noted that it is working to revise procedures for both its new fee basis care administration model, referred to as Non-VA Care Coordination, and the beneficiary travel program to ensure that the cost-effectiveness of a veterans' travel to another VAMC or to a non-VA care provider is reviewed as part of the authorization of fee basis care and is included in standard operating procedures and training. To address our third recommendation, VA noted that VHA CBO is completing requirements for a national consolidated monthly wait time indicator to measure performance for fee basis care referrals. However, VA did not acknowledge whether or not the wait time indicators used in this monthly indicator would be the same as those used for VAMC-based care, as we recommended. We support VA's decision to set wait time goals for fee basis care, but we believe the agency should ensure that wait time goals used for fee basis care are the same as those applied to VAMC-based care. To address our fourth recommendation, VA stated that the new fee basis care administration model, Non-VA Care Coordination, includes a template for managing information transfers from non-VA providers to VA staff that will support the utilization management practices of VAMCs. We support VA's efforts to standardize this information exchange in its fee basis care administration practices, but encourage the agency to also clarify its utilization management policies to ensure that VAMC utilization management staff regularly coordinate with VAMC fee basis management staff to receive this information from non-VA providers. Finally, to address our fifth recommendation, VA noted that the agency agrees that analyzing episode of care costs is an important part of the agency's fee basis monitoring activities. VA outlined its plan to analyze existing data systems and determine the most cost-effective method for monitoring episode of care costs. We are sending copies of this report to the Secretary of Veterans Affairs, the Under Secretary for Health, appropriate congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. This appendix provides additional results from our analysis of Department of Veterans Affairs (VA) fee basis data from fiscal years 2008 through 2012. Specifically, the table below provides additional information on how much VA spent on fee basis care and how many unique veterans received care from fee basis providers by fee basis care categories. This appendix provides additional results from our analysis of Department of Veterans Affairs (VA) fee basis data from fiscal years 2008 through 2012. Table 3 provides additional information on how much VA spent on outpatient fee basis care and how many unique veterans received care from outpatient fee basis providers by fee basis care categories. Table 4 provides additional information on how much VA spent on inpatient fee basis care and how many unique veterans received care from inpatient fee basis providers by fee basis care categories. In addition to the contact named above, Marcia A. Mann, Assistant Director; Kathleen Diamond; Krister Friday; Katherine Nicole Laubacher; Daniel K. Lee; Lisa Motley; Rebecca Rust Williamson; and Malissa G. Winograd made key contributions to this report.
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While VA treats the majority of veterans in VA-operated facilities, in some instances it must obtain the services of non-VA providers to ensure that veterans are provided timely and accessible care. These non-VA providers are commonly reimbursed by VA using a fee-for-service arrangement known as fee basis care. VA's fee basis care program has grown rapidly in recent years--rising from about 8 percent of VA's total health care services budget in fiscal year 2005 to about 11 percent in fiscal year 2012. GAO was asked to review fee basis care program spending and utilization and factors that influence VAMC fee basis utilization. This report examines how fee basis care spending and utilization changed from fiscal year 2008 to fiscal year 2012, factors that contribute to the use of fee basis care, and VA's oversight of fee basis care program spending and utilization. GAO reviewed relevant laws and regulations, VA policies, and fee basis spending and utilization data from fiscal year 2008 through fiscal year 2012. In addition, GAO reviewed the fee basis care operations of six selected VAMCs that varied in size, services offered, and geographic location. The Department of Veterans Affairs' (VA) fee basis care spending increased from about $3.04 billion in fiscal year 2008 to about $4.48 billion in fiscal year 2012. The slight decrease in fiscal year 2012 spending from the fiscal year 2011 level was due to VA's adoption of Medicare rates as its primary payment method for fee basis providers. VA's fee basis care utilization also increased from about 821,000 veterans in fiscal year 2008 to about 976,000 veterans in fiscal year 2012. GAO found that several factors affect VA medical centers' (VAMC) utilization of fee basis care--including veteran travel distances to VAMCs and goals for the maximum amount of time veterans should wait for VAMC-based appointments. VAMCs that GAO reviewed reported that they often use fee basis care to provide veterans with treatment closer to their homes--particularly for veterans who are not eligible for travel reimbursement. In addition, VAMC officials reported that veterans are often referred to fee basis providers to ensure that VAMC-based clinics that would otherwise treat them can meet established VA wait time goals for how long veterans wait for an appointment. However, GAO found that VA has not established goals for and does not track how long veterans wait to be seen by fee basis providers. VA's monitoring of fee basis care spending is limited because fee basis data do not currently include a claim number or other identifier that allows all charges from a single office visit with a fee basis provider or an inpatient hospital stay to be analyzed together. GAO found that without the ability to analyze spending in this way, VA is limited in its ability to assess the cost of fee basis care and verify that fee basis providers were paid appropriately. GAO recommends that VA revise its beneficiary travel regulations to allow reimbursement for veterans seeking similar care from a fee basis provider, apply the same wait time goals to fee basis care as VAMC-based care, and ensure fee basis data includes a claim number. VA generally concurred with GAO's conclusions and five recommendations.
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The Marine Corps' HMX-1 squadron uses a fleet of 19 VH-3D and VH- 60N helicopters to transport the President in the national capital region, as well as when the President is traveling in the continental U.S. and overseas locations. These aircraft have been in service for decades. The events following the September 11, 2001, terrorist attacks on the United States highlighted the need for improved transportation, communication, and security capabilities for the presidential helicopter fleet. As a result, a program (subsequently designated the VH-71 program) was initiated in April 2002 to develop aircraft to replace the helicopters currently in service. Initial plans to field the VH-71 by 2011 were accelerated in response to a November 2002 White House memorandum directing that a replacement helicopter be fielded by the end of 2008. By 2009 significant cost growth, plus schedule delays and performance issues resulted in the decision to terminate the VH-71 program. At the time of termination, in June 2009, the estimated VH-71 program cost had doubled from about $6.5 billion at development start in 2005 to $13 billion. Because there remained a need to replace the current in-service presidential helicopters, the Office of the Under Secretary of Defense for Acquisition Technology and Logistics (OUSD(AT&L)) directed the Navy by late June 2009 to present a plan to develop options for a new program to acquire replacement aircraft, now designated VXX. The Navy's VXX efforts began immediately with the initiation of an AOA to assess options on how to proceed toward developing and fielding the replacement presidential helicopter. It was focused, at least in part, on one of the primary lessons learned from the VH-71 program experience-- the need to establish and maintain a sound business case. A sound business case is one in which a balance is established between requirements, costs, and schedule that reflects an executable program with acceptable risk. According to program officials, the program would be aligned to pursue a best practices knowledge-based acquisition approach with the intent of establishing and maintaining an affordable business case. Last year, we reported that VXX program's entry into development had been delayed as the program worked to provide a sound initial business case for development, which is a best practice that was not followed by the terminated VH-71 program. The Navy had produced an initial AOA report under June 2010 study guidance from DOD's Office of Cost Assessment and Program Evaluation (CAPE). This initial work presumed an acquisition strategy under which the program would start in the technology development phase of DOD's acquisition process. The Navy released this initial AOA report to DOD. While CAPE found this initial work sufficient, OUSD(AT&L) did not accept its results. Rather, it identified the need for a 2012 update to address using a streamlined acquisition strategy focused on mitigating cost drivers identified in the 2010 AOA study. Additional guidance was provided by the Office of the Secretary of Defense (OSD) in December 2011. That guidance reflected insights on requirements gained in the 2010 study and expectations of using a streamlined acquisition approach proposed by the Navy. The proposed approach would leverage mature technologies being developed outside of the program before including them on aircraft selected for the program with their adoption being facilitated by open systems architectures. This would allow the program to start with Milestone B approval for engineering and manufacturing development (EMD) and then selecting an existing in-production commercial or military platform and working to integrate communications and mission systems provided by the government, which are expected to be mature by that time. Figure 1 depicts the program's entry into DOD's acquisition process as currently anticipated. DOD is investing in the current fleet of presidential helicopters to increase their service life and address capability gaps while working to field VXX aircraft. The current inventory of 19 aircraft are sometimes stressed to meet operational demands--demands that have been growing--making it difficult to take them out of service for lengthy upgrades. A larger VXX inventory of 21 aircraft is expected to help address this. The Navy has made progress in the past year toward establishing a sound business case for development that reflects a rational balance between requirements, costs and schedule. The Navy completed the AOA, which was deemed sufficient by CAPE to inform future acquisition decisions, and OSD has approved the program to proceed to a Milestone B decision. The CAPE did note, however, some areas of caution, for example, that some air vehicles would require aggressive efforts to manage the weight of the VXX while other air vehicles would be more challenged in other respects. We reviewed that AOA and found that it included elements of a sound AOA. The Navy, building on its initial 2010 study, completed its AOA on April 4, 2012, and concluded that the currently proposed acquisition approach of using mature technologies from outside the program on an in-production commercial or military helicopter was acceptable. The initial 2010 study, which considered nine alternative aircraft, revealed that technology development and recertification of aircraft for airworthiness were primary cost drivers of the total projected program cost under the approach it presumed. The 2012 updated study (focused on the most promising aircraft) assessed that mature, certified, and capable in-production commercial and military aircraft exist that can be modified for presidential requirements and be procured under the proposed strategy using a "Customized" rather than a "Min Mod" approach. It determined that there are candidate aircraft with performance characteristics that can meet to varying degrees the February 2012 draft Capability Development Document (CDD) requirements used to conduct the study and found that the Navy's proposed streamlined acquisition strategy is feasible and would reduce the program's expected schedule, cost, and risk. Specifically, the 2012 study estimates suggest that using the proposed approach of having the program enter the acquisition process in the engineering and manufacturing development phase rather than the technology development phase, as was anticipated in the 2010 study, would reduce investment cost by approximately $1.5 billion (19.7 percent) and shorten the development schedule by about 18 percent. The 2012 study also revealed, however, that the alternatives offered varying degrees of individual system performance with no single alternative meeting all of the VXX requirements. For example, while one alternative met most of the requirements, it would require strict weight and requirements management throughout its life to avoid a more costly Min Mod approach. While other alternatives provided differing capacities for weight growth, they would be challenged in meeting other requirements, such as range, transportability, landing zone suitability, or material supportability requirements. Further, for all of the alternatives in the 2012 study, it was found that if they were required to meet the military's airworthiness standards (as opposed to the certifying authority standard they currently meet), the weight growth associated with meeting some of these standards would likely trigger a more costly Min Mod approach. The 2012 VXX AOA study team made a number of recommendations including: To mitigate aircraft certification risk, the airworthiness certifying authority actively participate in all government development activities for the cockpit, communications, and mission systems and be involved in the source selection process for the aircraft; To reduce the risk of having to resort to a Min Mod approach, an active and aggressive life cycle weight management effort should be put in place if the selected platform does not provide a large enough margin to accommodate future weight growth; and The release of a request for proposals be contingent upon achieving acceptable technical maturity of critical government developments, such as communications and mission systems. The Director of CAPE in a May 30, 2012, memorandum concluded that the 2012 study achieves a logical outcome and was sufficient to inform future acquisition decisions. The CAPE found that the AOA demonstrates that each of the alternatives examined can be provided in a manner consistent with the streamlined acquisition approach, though with assessed limitations as described in the report. It concluded that the study also shows that an approach that avoids recertification was feasible for some of the options considered, and, if adopted, offers potential for reduced cost and schedule. There are some areas of caution, however, in the CAPE's assessment. The alternatives examined in the 2012 study identified similar mission limitations as those seen in the 2010 study. In particular, it was noted that some air vehicles studied exhibited weight sensitivities that would require aggressive weight management for the program's lifecycle. Other air vehicles exhibited better performance in some aspects including allowing for weight growth, but were more challenged in others, for example, landing zone suitability and transportability. The AOA did not examine the integration risk of the government- developed communications package and mission systems--key system components that under the Navy's acquisition strategy are being developed outside of the program but must then be successfully integrated into the selected aircraft. The CAPE's assessment also stated that the validity of the study results was contingent on the reduced requirements in the draft CDD--reduced from the requirements for the VH-71 acquisition--becoming finalized as documented and that a return to the previous requirements would require additional analysis. The Joint Requirements Oversight Council (JROC) subsequently approved the CDD on January 3, 2013. While program officials informed us that there were changes to requirements reflected in the approved CDD, they stated that none would affect the validity of the AOA or require the additional analysis mentioned in CAPE's memo. A CAPE official subsequently informed us that they had reviewed the CDD and do not believe that any of the changes affect the AOA's validity. In addition, the official stated that they reviewed the requirements changes and were satisfied that they made sense. In an August 28, 2012 Acquisition Decision Memorandum, the USD (AT&L) approved the VXX to proceed to Milestone B--approval to enter engineering and manufacturing development--as the program's initial acquisition milestone. The Under Secretary decided that: Milestone B, scheduled for 3rd quarter of fiscal year 2014, will be the first formal acquisition system milestone for VXX; however, a Pre- EMD Review will occur prior to release of the Request for Proposals for development, integration, and production; Prior to the pre-EMD review, the Navy and the JROC are to approve the CDD and the Director, Cost Assessment and Program Evaluation is to develop an Independent Cost Estimate based on the approved CDD; and The Under Secretary will establish affordability targets for the VXX program concurrent with CDD approval by the JROC. The Under Secretary concluded that based on utilization of mature technologies and a proven, mature, existing aircraft, this approach would not require a technology development phase. In addition, the Under Secretary expects to waive a requirement in the Weapon Systems Acquisition Reform Act of 2009, as amended, for competitive prototyping because its anticipated cost outweighs the expected risk reduction and life cycle benefit it would provide. In our prior two reports on this acquisition, we stated that when the AOA was issued we would assess it for its robustness--the range of alternatives it considered, its depth of analysis, and its consideration of trade-offs. Based on our review of the AOA report, supporting material, and interviews of program and other defense officials, we found the AOA to be sufficient for this stage of the acquisition. It included elements that GAO has reported should be part of a robust AOA. We also found it used a cost estimating process that was substantially compliant with GAO identified best practices. An AOA compares the operational effectiveness, suitability, and life-cycle cost estimates of alternatives that appear to satisfy established capability needs. Cost estimating and analysis are significant components of an AOA. We have previously reported on the importance of a robust AOA as a key element in ensuring a program has a sound, executable business case prior to program initiation. Our work has found that programs that conduct a limited AOA (failing to consider a broad range of alternatives or assess technical and other risks associated with each alternative) tended to experience poorer outcomes--including cost growth. We found that the AOA study team considered a broad range of alternatives. The initial 2010 study effort evaluated 9 platforms and 19 possible alternatives to satisfy the mission and the 2012 update studied the most promising platforms in the 2010 study to document the impact of the Navy's proposed streamlined acquisition strategy would have on the merits of each of those alternatives. The study team assessed effectiveness, suitability, technical, schedule, and operational risks associated with the alternatives, though, according to CAPE, it did not assess the risks of integrating government-furnished communications and mission control systems into those alternatives. The study director noted that this integration risk could not be assessed by the study team, given the maturity of these subsystems at the time. Rather, the AOA identified the need to consider this issue at a future engineering review when sufficient maturity existed and an accurate assessment could be made. The AOA process reflected and influenced performance trade-offs. The initial 2010 analysis was based on performance requirements that were lower in a number of areas than for the VH-71 program. The 2012 AOA study reflected additional trade-offs made with regard to cost, schedule, risk and performance. The performance trade-offs enabled the Navy's revised strategy, and is expected to result in reduced costs and schedule. Following the 2012 study the performance requirements were further refined as reflected in the final CDD. Table 1 illustrates some of the performance trade-offs made by comparing the minimum requirements for VXX aircraft as captured in the final CDD to the minimum VH-71 requirements captured in the equivalent Operational Requirements Document for that program. We also assessed the cost estimating procedure for the AOA using GAO's criteria for cost estimating and assessment and found that it was substantially compliant with those criteria. For the purposes of this review, we collapsed the best practices identified in the GAO Cost Estimating and Assessment Guide into four general characteristics: well documented, comprehensive, accurate, and credible. The cost estimating best practices associated with each of those characteristics used in judging the AOA are provided in appendix I. We found the AOA cost estimate to be comprehensive and well documented. We also found that it was substantially accurate and partially met our criteria for being credible. The AOA cost estimate was properly adjusted for inflation, relied on historical analogous aircraft data, contained no significant calculation errors, and had been recently updated from the estimate contained in the 2010 study. While the documentation stated that the estimate reflected most likely costs, it did not specifically identify potential contingency costs and no cost risk analysis was performed to determine a level of confidence for the cost estimate. As result, we were unable to determine if the costs were indeed most likely. In addition, the AOA cost estimate was deemed as having partially met the best practices criteria for being credible as there was evidence that a robust sensitivity analysis had been performed but not an independent cost estimate or cost risk analysis. Although there was not a cost risk analysis, a detailed technical risk assessment process was followed for identifying technical risks, their likelihood of occurring, and the consequences if they occurred. The technical risks were mitigated by incorporating costs into the cost estimate through derivation of realistic and reasonable staffing levels and sufficient schedule for design, development and testing of each alternative. In addition, while an independent cost estimate had not been conducted, the USD(AT&L)'s August 28, 2012, acquisition decision memorandum directs CAPE's completion of one prior to the Pre-EMD Review. This is to occur in the second quarter of fiscal year 2013. As a result, the program could have confirmation of the AOA cost estimating results at that point. The program will then continue to work on its cost estimate to result in a more refined estimate supporting the Milestone B decision in the third quarter of fiscal year 2014. The Navy's currently proposed acquisition approach relies on the government's providing, as government furnished equipment, mature technologies for integration into aircraft. Those technologies either already exist or are in development, some as legacy fleet aircraft upgrades. Their provision will be an important factor in the Navy's achieving the reduced cost and schedule it seeks through its proposed acquisition approach. The program assesses their risks for integration into VXX aircraft as low--supporting the Navy's goal of providing initial operational capability in fiscal year 2020. While the program reports the key technologies to be provided by the government for integration are on track, there are risks that they will not work out as planned. For example, the Navy had originally anticipated that the cockpit technologies leveraged into the VXX acquisition would include a "glass cockpit" display system installed as an upgrade on VH- 60N aircraft. It dropped its planned use of this system. Adopting its use would likely necessitate an airworthiness recertification of the platform selected to be the VXX aircraft, a costly and time-consuming endeavor. As a result, the Navy now plans on the prime contractor using the display systems already in use in its certified aircraft--systems that the program manager noted are as capable if not more capable than the VH-60N's. Even if individual technologies work out as anticipated, they will still have to be successfully integrated in the aircraft. The program depends on a number of government-defined sub-systems and technologies being hosted in a new airframe. Environmental issues such as size, weight, thermal profile, and stability will have to be ascertained, not separately but in totality as a dynamic system. Only then will it be known whether key performance parameters are met, how closely, and what, if any, refinements need to be applied. In the past, we found integration issues can be significant. For example, in fiscal year 2004 DOD rebaselined the Joint Strike Fighter program extending its development by 18 months and adding resources to address problems discovered during systems integration and the preliminary design review. To mitigate integration risk, though, the VXX program is making use of a systems integration laboratory and also plans to install the communications and mission systems into a test aircraft and do demonstration testing before integration efforts begin on the VXX platform. Table 2 provides more information on the technologies to be provided by the government for integration in VXX aircraft. The program has made progress toward establishing a sound business case for development, one that rationally balances requirements, costs, and schedule. The program still faces challenges that will need to be actively managed to provide greater assurance that a sound business case is maintained throughout development as the program moves forward. These challenges include: Maintaining the VXX requirements without significant deviation throughout the acquisition process. Subsequent requirement changes will need to be considered carefully in the context of their implications for cost, schedule, risk, and performance and the program will need to effectively manage technology maturation and integration to achieve success. Managing weight growth of the platform during development so as to not trigger the need for modifications that could then require a flight recertification of the VXX platform. Also, having a weight margin once fielded will place the program in a better position in the future to more readily enhance the platform over its anticipated 40-year service life. Ensuring the technologies being developed for integration into the selected VXX platform develop as needed and integration mitigation efforts are adequately planned, resourced, and executed. Failing to address these challenges could impact the program's ability to stay on track and delay replacement of the in-service helicopter fleet, which is currently stressed at times to meet demand. Additionally, in our prior reports we described both VH-71 lessons learned and acquisition best practices that, if heeded, should help the program remain on track. DOD provided written comments on a draft of this report. The comments are reprinted in appendix II. In commenting on a draft of this report, DOD stated that it would ensure that mitigations are in place to address potential risk areas. It believes its efforts are aligned with GAO's best practices and the recommendations in GAO's 2011 report on the program and plans to continue to monitor program progress in view of these standards. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Under Secretary of Defense for Acquisition, Technology and Logistics; and the Secretary of the Navy. This report also is available at no charge on GAO's website at http://www.gao.gov. Should you or your staff have any questions on the matters covered in this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. The cost estimate includes all life cycle costs. The cost estimate completely defines the program, reflects the current schedule, and is technically reasonable. The cost estimate work breakdown structure (WBS) is product-oriented, traceable to the statement of work/objective, and at an appropriate level of detail to ensure that cost elements are neither omitted nor double-counted. The estimate documents all cost-influencing ground rules and assumptions. The documentation should capture the source data used, the reliability of the data, and how the data were normalized. The documentation describes in sufficient detail the calculations performed and the estimating methodology used to derive each element's cost. The documentation describes step by step how the estimate was developed so that a cost analyst unfamiliar with the program could understand what was done and replicate it. The documentation discusses the technical baseline description and the data in the baseline is consistent with the estimate. The documentation provides evidence that the cost estimate was reviewed and accepted by management. The cost estimate results are unbiased, not overly conservative or optimistic and based on an assessment of most likely costs. The estimate has been adjusted properly for inflation. The estimate contains few, if any, minor mistakes. The cost estimate is regularly updated to reflect significant changes in the program so that it is always reflecting current status. Variances between planned and actual costs are documented, explained, and reviewed. The estimate is based on a historical record of cost estimating and actual experiences from other comparable programs. The cost estimate includes a sensitivity analysis that identifies a range of possible costs based on varying major assumptions, parameters, and data inputs. A risk and uncertainty analysis was conducted that quantified the imperfectly understood risks and identified the effects of changing key cost driver assumptions and factors. Major cost elements were cross-checked to see whether results were similar. An independent cost estimate was conducted by a group outside the acquiring organization to determine whether other estimating methods produce similar results. Key contributors to this report were Bruce H. Thomas, Assistant Director; Jerry W. Clark, Analyst-in-Charge; Bonita J.P. Oden; Karen A. Richey; Jennifer K. Echard; Tisha D. Derricotte; Marie P. Ahearn; Hai V. Tran; and Robert S. Swierczek.
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The VXX is a Navy program to develop a replacement for the current fleet of presidential helicopters. The Ike Skelton National Defense Authorization Act for Fiscal Year 2011 directed GAO to review and report annually to the congressional defense committees on the program. GAO has reported on the program twice previously. The first report identified major lessons learned from a prior terminated program that should be applied in the follow-on program. The second covered the program's progress, upgrades to the existing helicopters, and plans for moving the program forward. This is the last of the required reports. It discusses (1) the program's progress over the past year, particularly regarding evaluation of alternatives, and (2) DOD's efforts to develop key technologies for the VXX aircraft. GAO examined program documents; interviewed officials; and compared the AOA with elements GAO previously reported are needed for a robust AOA, and cost estimating and analysis standards. GAO also assessed the Navy's approach to developing key technologies and progress made. The Navy made progress in the past year in establishing a sound VXX business case that reflects a rational balance between requirements, costs and schedule. In 2012, the Navy completed an updated Analysis of Alternatives (AOA) based on refined requirements and an acquisition approach that would leverage mature technologies from outside the program onto an in-production commercial or military airframe--allowing the program to begin in the engineering and manufacturing development phase of the Department of Defense's (DOD) acquisition process. The 2012 AOA reflected additional trade-offs made among cost, schedule, risk, and performance. Some key performance requirements changed from the terminated VH-71 program to the VXX. Per the AOA, using this approach would reduce investment cost by approximately $1.5 billion (19.7 percent) and shorten the schedule by about 18 percent from the approach anticipated in 2010, which included more time and cost to develop technology within the program. DOD's Director of Cost Assessment and Program Evaluation deemed the AOA sufficient to inform future acquisition decisions and the Under Secretary of Defense for Acquisition, Technology and Logistics approved the program to move forward toward a decision to begin engineering and manufacturing development. GAO's review of the AOA found it to be sufficient for this phase of the acquisition. DOD's efforts to ensure key technologies are ready for integration into VXX aircraft are also making progress. The Navy's acquisition approach relies on the government providing mature technologies for integration into an in-production aircraft selected for the VXX program. These technologies either exist or are in development. Their use will be an important factor in achieving the reduced cost and schedule the Navy seeks. While the program reports that these efforts are on track and assesses the risks of integration as low, it is possible that key technologies may not be realized as planned or be as easy to integrate as anticipated. To mitigate integration risk, the Navy is making use of an integration laboratory and plans to demonstrate key technologies in a test aircraft. Building on these decisions, the program will have to manage challenges in a number of areas, including holding the line on VXX requirements, controlling helicopter weight growth, and ensuring that efforts to mitigate integration risks are adequately planned, resourced, and executed. GAO is not making recommendations in this report. DOD stated that it would ensure that mitigations are in place to address potential risk areas. It believes its efforts are aligned with GAO's best practices and the recommendations in GAO's 2011 report on the program and plans to continue to monitor program progress in view of these standards.
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Aerospace is a nonprofit mutual benefit corporation that provides scientific and technical support, principally general systems engineering and integration services, for the Air Force and other government agencies. Aerospace is headquartered in El Segundo, California, and has offices throughout the United States. The corporation, established in 1960, is governed by a 19-member Board of Trustees in accordance with its articles of incorporation and bylaws. FFRDCs are funded solely or substantially by federal agencies to meet special long-term research or development needs that cannot be met as effectively by existing in-house or contracting resources. One federal agency serves as the primary sponsor and signs an agreement specifying the purpose, terms, and other provisions for the FFRDC's existence. Agreement terms cannot exceed 5 years but can be extended after a review of the continued use and need for the FFRDC. Federal regulations regarding FFRDC policy encourage long-term relationships between the federal government and FFRDCs to provide the continuity that will attract high-quality personnel. Aerospace's primary sponsor is the Assistant Secretary of the Air Force for Acquisition. The Air Force Space and Missile Systems Center (SMC), located adjacent to Aerospace in El Segundo, has day-to-day management responsibility. SMC negotiates annual cost plus fixed-fee contracts with Aerospace. The DOD funding ceiling for Aerospace in fiscal year 1994 was $365.8 million. Aerospace employed 3,335 personnel at the end of fiscal year 1994 and had an annual payroll of about $208 million. Aerospace's typical practice in establishing compensation levels is to recommend an annual salary adjustment to the Board of Trustees for final approval. According to company policy, such recommendations are to be based on an assessment of competitive salary positions, increases and rate structure adjustments at other aerospace industry firms, and other economic considerations. Compensation to Aerospace employees is primarily paid from government contracts, which represent over 99 percent of the company's total business revenue. A small portion is paid out of government contract fees, nongovernment contracts and fees, interest income, and other sources. Aerospace compensation is reviewed by the Air Force for reasonableness during its annual contract negotiations. The Air Force routinely requests that DCAA review Aerospace's proposed compensation costs and uses its recommendations during contract negotiations. Aerospace corporate officers, in addition to their annual salary, receive the standard benefit package that is available to all employees and several additional benefits that are available only to them. Standard benefits include social security contributions, a retirement plan, medical insurance, dental insurance, long-term disability insurance, and life insurance. Additional corporate officer benefits are a supplemental corporate officers' retirement plan; personal use of a company automobile; airline upgrade coupons; and, in the case of two officers, a home security system. Table 1 summarizes the total fiscal year 1994 compensation provided to Aerospace's 12 corporate officers and 20 senior managers based on actual benefits paid and salaries as of September 30, 1994. (See app. I for a further breakdown.) From September 1991 to September 1994, the average annual salary for all Aerospace executives (corporate officers and senior management personnel) increased by 23 percent, from about $125,000 to about $153,300. The average salary for corporate officers increased from about $135,100 to about $176,400, or 31 percent, and the average salary for senior managers increased from about $115,000 to about $139,500, or 21 percent. During those 3 years, the total cost of salaries for Aerospace executives increased by 78 percent, from about $2.75 million to about $4.91 million, primarily due to salary increases of up to 29 percent for individual executives during 1992 and a 45-percent increase in the number of executives from 22 to 32. Salaries included paid absences, such as vacations, holidays, and sick leave. Table 2 shows the number and total salaries of Aerospace executives as of September 1991 and September 1994 and the percent increase for both. Aerospace increased the average salary of its executives by about 18 percent in 1992, from about $132,900 to about $156,600. Most of this increase occurred by implementing a special, one-time increase in June 1992 that averaged 13 percent and by giving a merit pay increase in December 1992. (See app. II for more details.) Aerospace justified the June 1992 pay increase based on the need to bring its salaries more in line with industry salaries and resolve a pay compression problem that had developed between technical staff managers and their subordinates. Although Aerospace notified the Air Force 3 weeks before implementing the increase, the Air Force expressed concern that Aerospace did not present the salary increase and supporting documentation to the government in time to allow the Air Force to review the increase and determine its reasonableness. According to the Air Force, the salary increase represented a major change to Aerospace's compensation package and the process used by Aerospace was inconsistent with SMC's environment of trust and teamwork. Even though the Air Force allowed the salary increase, it requested a DCAA audit of Aerospace's compensation and warned Aerospace that the government would request full reimbursement of any costs determined to be unreasonable. Aerospace told us that it believes that SMC's environment of trust and teamwork has continued throughout this period and that it notified the Air Force immediately after its Board of Trustees approved the salary adjustment, which was based on a sound business position and the best information available at the time. Aerospace also noted that the FAR does not mandate prior contracting officer review; it only mandates that there will be no presumption of allowability when a contractor introduces major revisions of existing compensation plans and has not notified the contracting officer either before implementation or within a reasonable period after implementation. Aerospace maintained that the salary increase did not represent a major revision to its existing compensation plan. Further, Aerospace advised us that the salary adjustment occurred during fiscal years 1992-93, when it was confidently looking toward an increased budget and workload. Even though an unanticipated downturn in Aerospace employment occurred, the increase only restored salaries to market levels, in Aerospace's view. However, Aerospace records provided to us showed that, before the June 1992 salary increase, Aerospace reduced its employment by 423 (272 technical staff and 151 nontechnical staff) through a reduction in force in November 1990 and a retirement incentive program in November 1991. No merit salary increases were given in December 1993, but 13 executives received additional salary increases since December 1992 through 13 promotions. From September 1991 to September 1994, Aerospace increased the number of its executives by 45 percent, from 22 to 32. During the same period, Aerospace nonexecutive employment decreased by about 17 percent, from 3,973 to 3,303. As a result, the ratio of executives to nonexecutive employment decreased from 1 per 181 employees to 1 per 103 employees. Aerospace did not, and is not required by the past or current contracts to, obtain Air Force approval for changing the number of executives. Table 3 compares the number of executives and the total number of employees since September 1991. Aerospace gave us many reasons for increasing the number of executives, including satisfying customer requirements and customer reorganizations and its continuing efforts to improve customer support. For example, when the SMC chief engineer position was expanded to emphasize horizontal engineering and integrated product teams, Aerospace said it added a corporate chief engineer to interface with SMC's chief engineer. Also, it said that a general manager position was created in its Colorado division to improve support to the U.S. Space Command and the Air Force Space Command and consolidate seven different Aerospace organizational units at that division. Aerospace cited other factors, such as more robust succession planning and creating a senior manager position to better distinguish FFRDC and non-FFRDC activities, in response to recent congressional focus on FFRDC activities. It also concluded that increasing the number of senior managers would increase the leverage of the corporate officers. Aerospace noted that, even though the number of executives increased, the total number of managers decreased and the cost per member of the technical staff decreased. Aerospace further concluded that the pressure to downsize programs required adding some higher level managers with a broader perspective to support the Air Force and that the total number of employees decreased because of funding ceilings, not workload. In 1993, Aerospace paid two executives hiring bonuses of $30,000 each. Aerospace informed us that the hiring bonuses were needed, over and above an initial annual salary of $155,000, to hire these two individuals and that the special circumstances of each offer were reviewed and approved by Aerospace's Board of Trustees. Aerospace initially reported these two hiring bonuses as government-reimbursable costs in June and October 1993. Subsequently, Aerospace reclassified these costs as nonreimbursable expenses in accordance with the FAR in July 1994 and December 1993, respectively. Aerospace commented that these were one-time bonuses that were paid in only two special cases for employees that had successfully discharged important responsibilities. After the Air Force's request in June 1992, DCAA initiated a review of Aerospace's compensation. On December 9, 1993, DCAA issued its report, which was subsequently revised three times. DCAA compared Aerospace positions with comparable compensation market survey data and used FAR criteria to initially conclude that Aerospace had provided $616,846 and $4,092,954 in unreasonable compensation for fiscal years 1992 and 1993, respectively. The FAR criteria call for general conformity with compensation practices of other firms of the same size, in the same industry, and in the same geographic area that are engaged in predominantly nongovernment business. Aerospace objected to the comparable compensation market survey DCAA used because it included a number of industries and corporations that Aerospace judged had no comparability to the technical education and experience of the FFRDC staff. Aerospace's objection was that the FAR provides, in part, that the relevant fact is the general conformity with the compensation practice of other firms of the same size, industry, and geographic area. Aerospace noted that its own compensation survey included companies with which it competes for scientific and engineering talent. Aerospace also objected to the market compensation survey data used by DCAA because it did not include bonuses and other monetary compensation of the comparison group. Since Aerospace officers do not receive performance bonuses, Aerospace informed DCAA in December 1993 that all renumeration must be used for a valid comparison. DCAA agreed and, as a result of using additional data, issued a revised report in January 1994, which no longer questioned the reasonableness of corporate officers' salaries and reduced the compensation costs considered unreasonable for other employees. DCAA made further revisions to its report in February and March 1994 to (1) use more current compensation market survey data; (2) challenge, rather than classify as unreasonable, corporate officer fringe benefit costs because Aerospace had not performed a fringe benefit market survey to justify the costs; and (3) adjust the amount of unreasonable compensation to include only that portion of fringe benefits costs that were determined based on a percentage of base salaries. DCAA's fourth and final memorandum reduced the costs classified as unreasonable compensation to $306,809 and $1,788,612 for fiscal years 1992 and 1993, respectively. DCAA informed us that these revisions were done after consideration of additional, more current information. In addition, the final report also challenged $2,124,291 for fiscal year 1993 due to the lack of adequate supporting documentation. DCAA's final memorandum also stated that Aerospace should have provided the government an opportunity to review the reasonableness of the June 1992 increase. DCAA concluded that it was unreasonable for Aerospace to increase salaries by a significant percentage at a time when other industries were implementing cost-saving measures and planning smaller salary increase budgets in response to DOD downsizing and other economic conditions that have resulted in major cutbacks of employees. Appendix III summarizes the four DCAA products. Aerospace objected to each of DCAA's products, including the final one. It concluded that, despite some improvements, DCAA still used inappropriate data and reached erroneous conclusions. Aerospace also said that DCAA's statements were unsupported opinions and that its actions to redress the then-existing salary situation were entirely reasonable. In addition, Aerospace stated that it had complied with FAR requirements by providing the government with notice of the salary increase before implementation. After the DCAA compensation audit reports and subsequent fiscal year 1994 contract negotiations between the Air Force and Aerospace, additional provisions were placed in the fiscal year 1994 contract with Aerospace for determining reasonable technical staff compensation costs. First, the Air Force and Aerospace agreed that about $1.4 million of Aerospace's billings would not be paid until the Air Force determined the reasonableness of the cost of Aerospace's supervisory and nonsupervisory technical staff salaries. To assist the Air Force in making this determination, Aerospace was to provide current and accurate job descriptions and use a compensation market survey agreed to by the government. Second, Aerospace was to commission an independent survey to establish a reasonable executive fringe benefit level. Third, to resolve the notification issue, Aerospace is to notify the contracting officer at least 60 days before announcing any major salary adjustment that was not planned or included in the estimated contract cost. As of December 1994, Aerospace and government contracting representatives were in the process of implementing these contractual provisions and clarifying the computation of Aerospace executive fringe benefits. According to the Air Force, the compensation market survey has been completed and the results are being reviewed. DOD's FFRDCs are privately operated contractors of the United States, and the salaries of officers and employees have not generally been subject to federal government pay scales. However, the Congress has at times restricted the use of DOD appropriations to pay compensation of FFRDC officers or employees over certain levels and has imposed notice requirements concerning certain payments. In the Fiscal Year 1995 DOD Appropriations Act, the Congress placed a limit on defense FFRDC compensation after July 1, 1995. The act states that no employee or executive officer of a defense FFRDC can be compensated from DOD appropriations at a rate exceeding Executive Schedule Level I. The act's legislative history indicates that the July 1, 1995, date was selected to allow individuals affected by the compensation limitation to adjust to its impact. As of September 30, 1994, there were 16 Aerospace executives with annual salaries of more than $148,400, the current Executive Schedule Level I salary amount. The National Defense Authorization Act for Fiscal Year 1995 requires, in part, that DOD funds may not be paid to an FFRDC unless it enters into an agreement with DOD that no officer or employee who is compensated at an annual rate that exceeds Executive Schedule Level I will be compensated in fiscal year 1995 at a higher rate than in fiscal year 1994 and that no such officer or employee will be paid a bonus or provided any other financial incentive in fiscal year 1995. This act also requires the DOD Inspector General to review compensation paid by FFRDCs to all officers and employees who are paid at a rate exceeding the Executive Schedule Level I rate. According to the act, the Inspector General is to (1) assess the validity of the data submitted by FFRDCs, justifying salaries that exceed the Executive Schedule Level I rate; (2) compare the compensation paid to those individuals exceeding that rate with the compensation of similar technical and professional staff from profit and nonprofit organizations that must compete for defense work and with government officials of comparable expertise and responsibility; and (3) examine other appropriate forms of nonsalary compensation, such as bonuses and retirement plans. The results of the Inspector General's review are to be reported to the Senate and House Committees on Armed Services no later than May 1, 1995. We are also reviewing compensation at FFRDCs sponsored by DOD, as required by the Fiscal Year 1992 Defense Appropriations Conference Report. This review will collect data on compensation for selected professional, technical, and managerial employees, not just the highest paid executives, as discussed in this report. To determine the compensation Aerospace provided corporate officers and senior managers, we reviewed Aerospace personnel and payroll records, Board of Trustees' minutes and resolutions, contract documents, accounting records related to executive benefit costs, and policies and procedures that relate to Aerospace's compensation program. We also reviewed DCAA compensation audit reports, supporting workpapers, and Aerospace's responses to the audit reports. In addition, we met with Aerospace's compensation and benefits officials, Air Force program and contract administration officials responsible for overseeing the work at Aerospace, and cognizant DCAA officials. We conducted our work from April to December 1994 in accordance with generally accepted government auditing standards. As agreed with your office, we did not obtain written agency comments on a draft of this report. However, we discussed our results with officials from DOD and Aerospace and included their comments where appropriate. We are sending copies of this report to the Secretary of Defense; the Director, Office of Management and Budget; the Administrator, Office of Federal Procurement Policy; and other interested congressional committees. Copies will also be available to others on request. Please contact me at (202) 512-4587 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix IV. Fiscal year 1992 costs (unreasonable compensation) Fiscal year 1993 costs (unreasonable compensation) Positions with no position descriptions available Not applicable. Odi Cuero Benjamin H. Mannen Ambrose A. McGraw 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 executive compensation at The Aerospace Corporation, which operates an Air Force-sponsored federally funded research and development center (FFRDC). GAO found that: (1) as of September 1994, Aerospace employed 32 senior management personnel (referred to as Aerospace executives), 12 of which were corporate officers; (2) the officers' total annual compensation averaged about $240,200 and their annual salary averaged about $176,400; (3) corporate officers' benefits included a retirement plan that is not available to senior management personnel or other employees; (4) the total annual compensation for the other 20 Aerospace executives that were not corporate officers averaged about $154,300 and their annual salary averaged about $139,500; (5) from September 1991 to September 1994, total salary cost for all Aerospace executives increased by 78 percent, from about $2.75 million to about $4.91 million, primarily due to salary increases of up to 29 percent for individual executives during 1992 and a 45-percent increase in the number of executives from 22 to 32 between 1991 and 1994; (6) during that time, the average annual executive salary increased by 23 percent, from about $125,000 to about $153,300; (7) Aerospace officials told GAO that increasing both the salaries and the number of executives were sound management decisions based on the best information available at the time and were justified for a number of reasons, including to better align Aerospace with its customers; (8) in addition, in 1993, Aerospace paid two executives hiring bonuses of $30,000 each. Aerospace classified these bonuses as nonreimbursable costs, consistent with the Federal Acquisition Regulation (FAR); (9) between September 1991 and September 1994, the number of nonexecutive employees at Aerospace decreased by 17 percent, from 3,973 to 3,303; (10) this decrease, coupled with the increase in the number of executives, reduced the ratio of executives to total nonexecutive employees from 1 per 181 employees to 1 per 103 employees; (11) in an audit started in response to Aerospace's June 1992 salary increases, the Defense Contract Audit Agency (DCAA) initially questioned the reasonableness of corporate officers' salaries and fringe benefits; (12) in its final report, however, DCAA no longer questioned the reasonableness of corporate officers' salaries but recommended that Aerospace provide further support for corporate officers' fringe benefits; (13) the Air Force and Aerospace have been working to resolve the issues raised by DCAA's audit; (14) fiscal year 1995 appropriations legislation limits employee compensation at the Department of Defense (DOD) FFRDCs, effective July 1, 1995, to a rate not to exceed Executive Schedule Level I; and (15) as of September 30, 1994, 16 Aerospace executives had annual salaries of more than $148,400, the current Executive Schedule Level I salary amount.
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Federal law provides states with flexibility in how they operate their CHIP programs and how states implement more recent coverage options under PPACA. For example, states may operate CHIP as a separate program, include CHIP-eligible children in their Medicaid programs, or use a combination of the two approaches. States with separate CHIP programs may modify certain aspects of their programs, such as coverage and cost-sharing requirements.regulations require states' separate CHIP programs to include coverage However, federal laws and for routine check-ups, immunizations, inpatient and outpatient hospital services, and dental services defined as "necessary to prevent disease and promote oral health, restore oral structures to health and function, and treat emergency conditions." In addition, CHIP premiums and cost- sharing may not exceed maximum amounts as defined by law. Similarly, PPACA provides states with flexibility in how they opt to implement certain coverage options included in the law. For example, PPACA allows states to expand eligibility for Medicaid to most non-elderly, non-pregnant adults who are not eligible for Medicare and whose income is at or below 133 percent of the FPL. As of January 2015, 29 states have implemented this expansion. PPACA required the establishment of health insurance exchanges by January 1, 2014, to allow consumers to compare individual health insurance options available in each state and enroll in coverage. In states electing not to operate their own exchange, PPACA required the federal government to establish and operate an exchange in the state, referred to as a federally facilitated exchange. States with federally facilitated exchanges may enter into a partnership with HHS to assist with the operation of certain exchange functions. As such, a state could establish the exchange (referred to as a state-based exchange), cede the responsibility entirely to HHS (referred to as a federally facilitated exchange), or enter into a partnership with HHS (referred to as a partnership exchange). As of January 2015, 17 states established state-based exchanges, 27 states were using the federally facilitated exchange, and 7 states established partnership exchanges.See fig. 1 for information on the variation in children's uninsured rates, CHIP characteristics, and coverage approaches under PPACA by state; and see appendix I for the information in tabular form. The Children's Health Insurance Program Reauthorization Act of 2009 (CHIPRA) included provisions aimed at improving the information available from states on the quality of health care furnished to children in both CHIP and Medicaid. Specifically, CHIPRA required the Secretary of HHS to conduct an independent evaluation of CHIP and to submit the results to Congress. The mandated evaluation, for which the final report was issued in August 2014, documents what is known about CHIP; explores the program's evolution since inception; and examines the role CHIP has played in covering low-income children. In addition, CHIPRA required HHS to identify quality measures, known as the Child Core Set measures, to serve as a tool for states to use to monitor and improve the quality of health care provided to children enrolled in CHIP and Medicaid. CHIPRA also required HHS to develop a standardized format for states to voluntarily report these measures. These measures assess the quality of care provided through CHIP and Medicaid, and include a range of health conditions, such as asthma, obesity, attention deficit hyperactivity disorder, and perinatal care. (See table 1.) In 2013, as required by CHIPRA, HHS began annually publishing recommended changes to the Child Core Set measures in an effort to improve upon the measures and align them with national quality measurement activities, which can result in changes to the number of measures. With the use of state reported data on the Child Core Set, HHS conducts an annual assessment and publishes its findings in its annual quality report, as required under CHIPRA. States report CHIP service utilization and other measures through systems developed by HHS; specifically, the CHIP Annual Reporting Template System (CARTS), a web-based data submission tool, and through the Form CMS-416, an annual report submitted by states on the Medicaid Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) benefit provided for enrolled children. States that use managed care plans to deliver CHIP benefits are also required to report outcomes and performance measures from External Quality Review Organizations and performance improvement projects. In February 2010, CMS awarded 10 grants--which funded 18 states to implement projects that include using quality measures to improve child health. CMS also provided funding to AHRQ to lead a national evaluation of these demonstrations, to be completed by September 30, 2015. electronic health records, and (5) assessing the utility of other innovative approaches to enhance quality. Available assessments of national data we reviewed identify positive effects of CHIP, including a reduction in the rate of uninsured children and children's improved access to care, and these findings are often consistent with our prior work. HHS also has ongoing efforts to enhance state reporting of the Child Core Set measures and publishes data from these quality measures to identify areas for improving the care provided in CHIP. HHS's mandated evaluation identified several positive effects of CHIP across states, particularly with regard to children who are uninsured. For example, based on an analysis of data from the Current Population Survey Annual Social and Economic Supplement (CPS-ASEC), the evaluation reported that Medicaid and CHIP contributed to the decline in the national rate of uninsured children between 1997 and 2012, with coverage rates improving for all ethnic and income groups.notably, coverage rates for Hispanic children increased dramatically, rising from 42 percent to 65 percent during this time. Changes to state CHIP programs also contributed to the decline in the national uninsured rates among children. For example, many states expanded CHIP coverage by raising upper income eligibility limits and covering newly eligible groups, such as immigrant children who have resided legally in the United States for less than 5 years, which was newly permitted under Most federal law. In addition, state outreach and enrollment activities also reduced the number of children eligible for--but not enrolled in--Medicaid or CHIP by about 1.2 million from 2008 to 2012. To determine whether factors other than insurance coverage may affect differences in responses about obtaining care or utilization of health care services, the mandated evaluation controlled for age, sex, race/ethnicity and language groups, more than three children in the household, highest education of any parent, parents' employment status, parent citizenship, and local area or county. CHIP enrollees were an estimated 38 percentage points more likely to have a usual source of dental care, and were an estimated 39 percentage points more likely to have had a dental check-up in the past year; CHIP enrollees were an estimated 25 percentage points more likely to have an annual well-child checkup visit, and were more likely to receive a range of health services, including mental health visits, specialty care, and prescription drugs; CHIP enrollees were more likely to receive most preventive care measures, including flu vaccinations, vision screenings, and height and weight measurements; and parents of CHIP enrollees were less likely to report having trouble paying their child's medical bills, and were substantially more confident in their ability to get needed health care for their child. Based on our assessment of HHS's Medical Expenditure Panel Survey from 2007 through 2010, we also found that children enrolled in CHIP have better access to care and service use than children who are uninsured. In particular, when compared with uninsured children, we found that CHIP enrollees fared better, and the differences we identified were statistically significant in most cases. For example, a higher proportion of CHIP respondents reported having a usual source of care; ease in getting a person the care, tests, or treatment that the parent or a doctor believed necessary; and ease in seeing a specialist; and using certain health care services, including office-based provider visits, outpatient department provider visits, and dental care visits. When the mandated evaluation compared CHIP enrollees with the privately-insured group, it also found that CHIP enrollees experienced comparable access and service use for many, but not all, measures, and that parents of children enrolled in CHIP experienced less financial burden in paying their children's medical bills. CHIP enrollees used a similar level of preventive care and other health care services; however, CHIP enrollees had higher usage of prescription medication and lower levels of emergency department visits and hospital stays. CHIP enrollees had similar rates of health and development screenings, but were 9 percentage points less likely to receive a flu vaccination. CHIP enrollees had higher rates of dental access and utilization of certain services. For example, 92 percent of CHIP enrollees reported having access to dental coverage in 2012, compared with 77 percent of privately insured children. In terms of utilization, 84 percent of CHIP enrollees reported having a dental checkup or cleaning in the previous 12 months compared with 79 percent of privately insured children. Parents of CHIP enrollees reported substantially less trouble paying their children's medical bills and had much lower out-of-pocket spending levels. For our assessment of the Medical Expenditure Panel Survey, we also compared CHIP enrollees' access and service use with children who were privately-insured, and our findings were consistent with some of the findings in the mandated evaluation. When asked about access to care, we found that respondents with children enrolled in CHIP reported experiences that were generally comparable with privately insured children for 5 of the 6 measures reviewed, including having a usual source of care; ability to make needed appointments; and ease in seeing a specialist. Respondents' reported ease in getting needed care was the only measure for which we identified a statistically significant difference. CHIP families faced a lower financial burden than families with private insurance because of the federal requirement that states' CHIP programs may not impose premiums and cost-sharing that, in the aggregate, exceed 5 percent of a family's total income for the length of the child's eligibility period. However, with regard to the utilization of certain services, our prior work is less consistent with the findings of HHS's mandated evaluation. For example, when asked about their use of certain medical and dental services, we found that access to care for CHIP enrollees was lower than that of the privately-insured for several services, and these differences were often statistically significant. Specifically, we previously reported that a lower proportion of CHIP enrollees reported visiting dentists (42.4 percent compared with 50.9 percent) and orthodontists (4.9 percent compared with 11.2 percent) within the past 12 months than did those who were privately insured; and a higher proportion of CHIP enrollees reported having an emergency room visit (14.1 percent compared with 10.4 percent). Differences between our findings and those included in the national evaluation may be related to the timeframes of the data and the measures used. For example, some of the data used in our analyses predate the CHIPRA requirement that CHIP programs offer comprehensive dental benefits coverage beginning in 2009. The timeframes for both bodies of work also predate the implementation of the PPACA requirement that most individual and small group market health plans provide pediatric dental coverage. Finally, while the mandated evaluation noted that, overall, CHIP programs were meeting the health care needs of most enrollees, it identified areas for program improvement. Specifically, many CHIP enrollees did not receive recommended preventive care or reported an unmet health care need. For example, slightly less than half of CHIP enrollees received a flu vaccination, and only about one-third received a developmental screening for children under age 6. In addition, one in four CHIP enrollees had an unmet health care need, with the highest unmet need being for dental care. HHS publishes data that states report on the Child Core Set measures in its annual quality report. While reporting on the Child Core Set measures is voluntary for states, the number of states reporting these quality measures and the median number of measures each state reports has increased steadily since reporting of the measures began in 2010. For example, beginning in fiscal year 2012, all 51 states have reported at least two or more measures, a notable increase from the 43 states that reported at least one measure for fiscal year 2010. Similarly, the median number of Child Core Set measures that states report has increased from about 7 measures in fiscal year 2010 to 16 measures in fiscal year 2013. HHS attributed the rise in state reporting to increased familiarity with the Child Core Set measures and the department's efforts to streamline state reporting and provide technical assistance and guidance to states. For example, CMS established a Quality Measures Technical Assistance and Analytic Support Program in May 2011, which works with states to support their efforts in collecting, reporting, and using quality measures for their CHIP and Medicaid programs. However, states varied considerably in the number of measures they reported in fiscal year 2013, ranging from 2 measures in Nebraska and Wisconsin to 25 measures in North Carolina and South Carolina. (See fig. 2.) Several factors can affect a state's ability to report the Child Core Set measures. Officials from the states we reviewed provided the following examples of challenges they face reporting the Child Core Set measures. Mississippi and Pennsylvania officials cited difficulty reporting certain measures, such as the extent of follow-up care for children prescribed medication for attention-deficit/hyperactivity disorder, due, in part, to their not having access to the data required to report the measure. Arizona, New Hampshire, Nevada, and Wisconsin officials cited the difficulty and cost of reporting certain measures, in particular those measures that require medical record reviews as opposed to the reporting of measures that use only encounter data. For example, HHS suggests that medical record reviews be used to calculate a perinatal measure related to the performance of caesarean sections and none of these states reported this measure in fiscal year 2013. Rhode Island officials noted that it can be difficult to collect data for measures that are not nationally endorsed--and as a result, they may not report them. For example, in fiscal year 2013, Rhode Island did not report the Child Core Set measure of a developmental screening in the first 3 years of a child's life, which had not been endorsed by the National Committee for Quality Assurance, but developed by a university in Oregon. Noting that the state does not have a department dedicated to measuring quality, Alaska cited a lack of internal expertise needed to collect and report reliable data for the measures. As such, an official cited the need to leverage resources and work with other agencies within the state that have the expertise to analyze measures and set targets for quality improvement. In light of difficulties cited by states in reporting on the Child Core Set measures, HHS reported ongoing efforts to assist states with reporting the measures. For example, to streamline state reporting, HHS began calculating three Child Core Set measures on behalf of states in fiscal year 2012. Specifically, HHS began calculating the preventive dental and dental treatment measures from the Form CMS-416. At this time, HHS also began using data available from the Centers for Disease Control and Prevention to calculate the neonatal central-line associated blood stream infection measure. In addition, HHS assists states by allowing states to report Child Core Set measures for the Medicaid population, CHIP population, or combined Medicaid and CHIP populations. Additionally, HHS reported efforts to assist states in improving their reporting of the Child Core Set measures through the Quality Demonstration Grant Program. Through this program, HHS awarded 10 grants providing funding to 18 states to implement various projects to improve the information available on the quality of care provided to children enrolled in CHIP, including undertaking efforts to improve their reporting of the Child Core Set measures. For example, in one such project, Pennsylvania is testing the use of financial rewards to encourage certain health systems--which include hospitals, primary care practice sites, and other facilities--to use the Child Core Set measures to drive Pennsylvania also reported that it is quality improvement projects.recruiting health systems to determine the extent to which electronic health records can provide data for the Child Core Set measures for children. From the measures submitted by states, HHS reports states' performance to assess the quality of care for children enrolled in CHIP and Medicaid, and the results of this assessment are mixed. HHS calculates mean rates for most of the Child Core Set measures--which it calls performance rates--including primary and preventive care, perinatal health, management of acute and chronic conditions, and dental services, among the states reporting those measures. Based on this assessment, HHS determined that states had high performance rates for some measures, such as young children's access to primary care. For example, a mean of 96 percent of children aged 12 to 24 months enrolled in CHIP or Medicaid had at least one primary care physician visit during fiscal year 2013. In contrast, states had lower performance rates for other measures. For example, a mean of 46 percent of children received at least one preventive dental service, and a mean of 25 percent of children (See table 2.) received at least one dental treatment in fiscal year 2013.As such, HHS specified that children's access to oral health care continues to be a primary focus of improvement efforts in CHIP and Medicaid. In addition to HHS's review of states' reporting on the Child Core Set measures, the department's annual quality report includes the results of its review of external quality review reports and performance improvement projects from states that contract with managed care plans to deliver services for CHIP and Medicaid enrollees. States are required to annually review their managed care plans to evaluate the quality, timeliness, and access to services that the plans provide to enrollees, and HHS must include this information in its annual quality report. For the most recent annual quality report, 40 of the 42 states that contract with managed care plans to deliver services to CHIP and Medicaid enrollees Based on its review of these submitted external quality review reports.reports, HHS found that the most frequently reported performance measures from states' external quality reports--which included well-child care, primary care access, childhood immunization rates, and prenatal/postpartum care--mirrored states' most frequently reported Child Core Set measures in fiscal year 2013. In terms of HHS's review of states' performance improvement projects, 38 of the 40 states that submitted external quality review reports included at least one project targeted to improve the quality of care for children and pregnant women enrolled in managed care; for example, by implementing projects related to behavioral health and improving childhood immunization rates for children, and prenatal and postpartum care for pregnant women. Our prior work has identified important considerations related to cost, coverage, and access when determining the ongoing need for CHIP, many of which were echoed by officials from the 10 states we reviewed. With regard to cost, our prior work comparing CHIP plans to states' benchmark plans, which were the models for health plans available under health insurance exchanges established under PPACA, found that costs--defined as deductibles, copayments, coinsurance, and premiums--were almost always less for CHIP plans. CHIP plans we reviewed typically did not require the payment of deductibles, while all five states' benchmark plans did. The cost difference in copayments between CHIP plans and benchmark plans was considerable for physician visits, prescription drugs, and outpatient therapies. For example, an office visit to a specialist in Colorado would cost a CHIP enrollee $2 to $10 per visit, depending on their income, compared to $50 per visit for benchmark plan enrollees. Families could face higher dental costs in states where dental coverage through the exchange is optional and offered as a stand- alone dental plan (SADP) as opposed to CHIP plans where dental benefits are included. Officials from five selected states also expressed concerns about the higher costs of QHP coverage and the implications this would have for families. See GAO-14-40. The five states evaluated in our prior work were Colorado, Illinois, Kansas, New York, and Utah. These findings were subsequently discussed in a hearing before the Subcommittee on Health, Committee on Energy and Commerce, House of Representatives on December 3, 2014. See GAO, Children's Health Insurance: Cost, Coverage, and Access Considerations for Extending Federal Funding. GAO-15-268T (Washington, D.C.: Dec. 3, 2014); We are currently examining how CHIP coverage and consumer costs compare to selected QHPs that were available on the exchanges in these five states in 2014. Based on a review of QHPs available on the state's exchange in 2014, Nevada officials estimated that the average annual premium for a child in a family with an income of 168 percent of the FPL was more than two and a half times higher than the $200 premium for coverage in a CHIP plan. This price difference does not account for differences in co-pays, which the state does not charge under CHIP. The extent to which QHPs in the state apply co-pays to covered services could increase this price differential further. As such, Nevada officials were concerned that absent CHIP, families would not purchase QHP plans due to their higher cost. Due to the additional premiums and cost-sharing associated with SADPs, New Hampshire officials expressed concern that families will forego dental care if they must purchase a SADP. The officials noted that cost-sharing particularly affects families with incomes from 185 to 250 percent of the FPL, which is 75 percent of the state's CHIP population. We also previously reported that coverage is a relevant consideration, and that separate CHIP and benchmark plans were generally similar in terms of their coverage of selected services and the services on which they imposed limits, with some variation. For example, the plans we reviewed were similar in that they typically did not impose any limits on ambulatory patient services, emergency care, preventive care, or prescription drugs; but commonly imposed limits on outpatient therapies, and pediatric dental, vision, and hearing services. Officials from several selected states pointed out that CHIP coverage was more comprehensive than QHPs for certain services, particularly for services needed by children with special health care needs. Alaska and Pennsylvania officials noted that coverage of services-- including orthodontics, vision, audiology, outpatient therapies, language disorders, and durable medical equipment--was more comprehensive in CHIP when compared with QHPs in their states. Rhode Island officials highlighted the state's coverage of comprehensive pediatric dental services and any medically necessary services deemed warranted as a result of the EPSDT benefit to which all CHIP-eligible children in the state are entitled. According to the state officials, these same services are either unavailable or unaffordable through QHPs in the state. Arizona officials specified that coverage of certain enabling services, such as non-emergency medical transportation, family support services, and behavioral health services are included in the state's CHIP plan, but may not be offered in QHPs. With regard to access, our work found that CHIP enrollees generally reported positive responses in their ability to obtain care that was generally comparable to those with private insurance, with some exceptions, including lower utilization of dental and orthodontia services. Some of the states we reviewed also raised concerns related to access to care if CHIP funding is not reauthorized. For example, Nevada officials raised concerns about the ability of certain populations--specifically, children of undocumented parents--to access care if CHIP is no longer available. Nevada officials stated that these children could lose CHIP coverage since a significant portion of them have parents who may not file federal income tax returns that would expose them to tax penalties for failing to enroll their children in alternative health coverage. In addition, an Alaska official noted the need for further work on the comparability of benefits between QHPs and CHIP to ensure that the former could be an adequate substitute, and that children moving to QHPs would not experience decreased access to health care. The official noted that comparability across benefit packages is particularly important for children in households whose income changes would result in movement between CHIP and QHPs. We provided a draft of this report to HHS for comment. The department provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from its date. At that time, we will send copies to the Secretary of Health and Human Services. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. Act (PPACA) Act (PPACA) Act (PPACA) As of February 2015, 42 states operated separate CHIP programs (2 states had a separate CHIP program only, and 40 states covered CHIP children through both a separate program and an expansion of their Medicaid program). The other 9 states covered CHIP children through an expansion of their Medicaid program, which we refer to as a "CHIP Medicaid expansion." Minnesota and New Mexico have CHIP income eligibility levels that vary by age group; therefore, we reported the highest income eligibility level reported for these states--which are ages 0 to 1 year in Minnesota and ages 0 to 5 years in New Mexico. These state-based marketplaces use the federally facilitated marketplace's information technology platform for applicants to apply and enroll in their respective states. In addition to the contact named above, Susan T. Anthony, Assistant Director; Sandra George; Seta Hovagimian; Drew Long; JoAnn Martinez-Shriver; Vikki Porter; Lisa Rogers; Eden Savino; Laurie F. Thurber; and Kate Tussey made key contributions to this report. Health Care Transparency: Actions Needed to Improve Cost and Quality. GAO-15-11. Washington, D.C.: October 20, 2014. Children's Health Insurance: Cost, Coverage, and Access Considerations for Extending Federal Funding. GAO-15-268T. Washington, D.C.: December 3, 2014. Children's Health Insurance: Information on Coverage of Services, Costs to Consumers, and Access to Care in CHIP and Other Sources of Insurance. GAO-14-40. Washington, D.C.: November 21, 2013. Children's Health Insurance: Opportunities Exist for Improved Access to Affordable Insurance. GAO-12-648. Washington, D.C.: June 22, 2012. Medicaid and CHIP: Most Physicians Serve Covered Children but Have Difficulty Referring Them for Specialty Care. GAO-11-624. Washington, D.C.: June 30, 2011. Medicaid and CHIP: Given the Association between Parent and Child Insurance Status, New Expansions May Benefit Families. GAO-11-264. Washington, D.C.: February 4, 2011. State Children's Health Insurance Program: CMS Should Improve Efforts to Assess whether SCHIP Is Substituting for Private Insurance. GAO-09-252. Washington, D.C.: February 20, 2009. Health Insurance For Children: Private Insurance Coverage Continues to Deteriorate. GAO/HEHS-96-129. Washington, D.C.: June 17, 1996.
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CHIP is a joint federal-state program that finances health insurance for over 8 million children. Since the program's inception, the percentage of uninsured children nationwide has decreased by half, from 13.9 percent in 1997 to 6.6 percent in the first three months of 2014. This year, Congress will decide whether to extend CHIP funding beyond 2015. GAO was asked to provide information on the effect of CHIP on children's coverage, and what key issues may be considered in determining the ongoing need for CHIP. In this report, GAO examines (1) what assessments of CHIP suggest about its effect on children's health care coverage and access; and (2) what key issues identified by GAO's work the Congress may wish to consider in determining whether to extend CHIP funding. For the assessments of CHIP's effect, GAO reviewed reports on CHIP, including a mandated evaluation and annual HHS reports on quality, which publish data that states report on Child Core Set measures, which are quality measures identified by HHS that states can use to monitor health care provided to children in CHIP and Medicaid. GAO also reviewed relevant federal statutes and regulations. To identify key issues that the Congress may wish to consider, GAO reviewed its own relevant reports and testimony; reviewed letters from state governors regarding CHIP; and interviewed CHIP officials in 10 states, which were selected based on variation in location, program size, and design. HHS provided technical comments on a draft of this report, which GAO incorporated as appropriate. Assessments of national data GAO reviewed identify positive effects of the State Children's Health Insurance Program (CHIP), and the quality measures reported by states help identify areas needing improvement. A mandated evaluation of CHIP published in 2014 noted that CHIP enrollees (1) had substantially better access to care, service use, and preventive care when compared with uninsured children; and (2) experienced comparable access and service use when compared with privately insured children. These findings are generally consistent with prior GAO work, which used national survey data to compare CHIP enrollees' access and service use with children who were uninsured or privately insured. When comparing CHIP enrollees with privately insured children, the mandated evaluation and prior GAO work differed regarding the utilization of certain services, such as emergency room use and dental services, which may be due to differences in when the data were collected and the particular measures that were used. The Department of Health and Human Services (HHS) also publishes data on quality measures that states voluntarily report annually. These Child Core Set measures show mixed results regarding service utilization among CHIP and Medicaid enrollees. For example, states reported that nearly all children aged 12 to 24 months enrolled in CHIP or Medicaid had at least one primary care physician visit during fiscal year 2013. However, states reported that far fewer children obtained dental prevention or treatment services, with a mean of 46 percent of children receiving a preventive dental service, and a mean of 25 percent receiving dental treatment services. HHS officials said that they use these data to help identify areas for improvement in the care provided in CHIP and Medicaid. GAO's prior work has identified important issues related to cost, coverage, and access that Congress may wish to consider when determining the ongoing need for CHIP, many of which were similar to issues raised by officials from the 10 states GAO reviewed. With regard to cost, GAO's prior work found that costs--defined as deductibles, copayments, coinsurance, and premiums--were almost always less for selected CHIP plans when compared with states' benchmark health plans, which were the models for health plans available in health insurance exchanges established under the Patient Protection and Affordable Care Act. Officials in five states expressed concerns about the higher cost of exchange plans compared with CHIP and the implications for families' finances. With regard to coverage, GAO previously reported that selected CHIP and state benchmark plans were generally similar in terms of their coverage of selected services and the services on which they imposed limits. However, officials from several of the 10 states pointed out that for many services needed by children with special health care needs, CHIP coverage was more comprehensive than exchange plans. With regard to access, several states raised concerns about negative implications for children's coverage if CHIP funding is not reauthorized, including concerns that their states would lose gains made in covering children, who would also lose access to providers and dental care.
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IRS is currently replacing its antiquated tax administration and financial systems. This effort, as we have reported numerous times, has suffered delays and cost overruns due to a number of reasons, including inadequate development and management of requirements. The IRS tax administration system, which collects approximately $2 trillion in annual revenues, is critically dependent on a collection of obsolete computer systems. Congress and IRS designed the BSM program to bring IRS tax administration systems to a level equivalent to private and public sector best practices, while managing the risks inherent in one of the largest, most visible, and sensitive modernization programs under way. Over the past 7 years, IRS has been appropriated approximately $1.9 billion for BSM (see fig. 1). BSM is critical to supporting IRS's taxpayer service and enforcement goals. For example, BSM includes projects to allow taxpayers to file and retrieve information electronically and to help reduce the backlog of collection cases. It also provides IRS with the reliable and timely financial management information it routinely needs to account for the nation's largest revenue stream. BSM has had some recent successes with its modernization efforts. During 2004, IRS implemented initial versions of (1) Modernized e-File (MeF), which provides electronic filing for large corporations and tax-exempt organizations; (2) e-Services, which created a Web portal and other electronic services to promote the goal of conducting most IRS transactions with taxpayers and tax practitioners electronically; (3) Customer Account Data Engine (CADE), which will replace the current system that contains the agency's repository of taxpayer information; and (4) the Integrated Financial System, which replaced aspects of IRS's core financial systems and is ultimately intended to operate as its new accounting system of record. However, despite these successes, IRS has had difficulty developing and managing requirements for its modernization efforts over the years. We reported in 1995 that IRS did not have the requisite software development capability to successfully complete a major modernization effort and that the success of modernization would depend on whether IRS would promptly address the weaknesses in several software development areas, including requirements management. In 1998, we assessed IRS's systems life cycle document and reported a lack of sufficient information to document how business requirements were to be specified. More recently, in February and November of 2004, we reported in testimony and a report that cost overruns in various BSM projects, including CADE, MeF, and e-Services, were due in part to inadequate definition of requirements for their new systems, leading to incorporation of additional requirements late in the system's life cycle and at a higher cost than if they had been included in the initial requirements baseline. We continue to highlight management control weaknesses such as these in our annual expenditure plan reviews. Other organizations that have assessed BSM projects have also found that IRS has not developed and managed requirements sufficiently on various projects. In 2001, the Treasury Inspector General for Tax Administration (TIGTA) reviewed key systems development practices of four BSM projects and reported that weaknesses in several process areas, including requirements management, were responsible for cost increases and schedule delays. TIGTA noted that these weaknesses raised the risk that systems would be developed that would not meet the needs of the businesses they were intended to support and recommended that BSM strengthen and/or implement aspects of these key systems development practices. In 2003, an independent technical assessment of CADE noted significant breakdowns in developing and managing requirements, which resulted in the inability of CADE to meet its original schedule. The assessment further stated that IRS focused primarily on the high-level business requirements and paid less attention to the development of specific, testable requirements developed later in the development life cycle and that responsibility for developing and managing the requirements was distributed among their various organizational component, instead of being concentrated in a centralized authority. BSM has acknowledged that it has weaknesses in developing and managing requirements; since 2004, requirements management has been one of its high-priority initiatives. To demonstrate their commitment to improving the development and management of requirements, it created an RMO in October 2004. This office is to address issues related to (1) lack of quality and completeness of modernization requirements, (2) lack of alignment of modernization requirements with business strategy and needs, (3) risks incurred by projects transitioning to development without a sufficient requirements baseline, and (4) lack of visibility into a fully traceable set of modernization requirements. During 2005, the RMO created a Concept of Operations that showed, at a high level, the RMO's plans to address requirements practices, and, in November 2005, it obtained contractor support to develop new policies and procedures. According to the Software Engineering Institute's (SEI) Capability Maturity Model Integration (CMMIsm), the requirements for a system describe the functionality needed to meet user needs and perform as intended in the operational environment. A disciplined process for developing and managing requirements can help reduce the risks of developing or acquiring a system. A well-defined and managed requirements baseline can, in addition, improve understanding among stakeholders and increase stakeholder buy-in and acceptance of the resulting system. The practices underlying requirements development and management include eliciting, documenting, verifying and validating, and managing the requirements through the systems life cycle (see fig. 2). This set of activities translates customer needs from statements of high-level business requirements into validated, testable systems requirements. The requirements development process starts with project teams eliciting, or gathering, requirements from stakeholders or participants involved in the project (e.g., customers and users). Since the usefulness of the system to its users and stakeholders is critically dependent on the accuracy and completeness of the requirements, all user groups and stakeholders should be identified and involved in defining requirements. In addition to gathering requirements from users and other stakeholders, analysis and/or research can be used to identify additional requirements that balance stakeholder needs against constraints and ensure that the requirements can be met in the proposed operational environment. After requirements have been elicited, they are analyzed in detail; documented as the business, or high-level, requirements; and agreed to by all stakeholders. Stakeholder agreement is an important part of this activity and is needed to demonstrate that the requirements accurately define intended uses. The business requirements should then be decomposed into detailed system requirements, which are analyzed to ensure that they can be implemented in the expected operational environment and that they can satisfy the objectives of higher-level requirements. The final requirements are approved by all stakeholders and documented as the requirements baseline. Once the baseline is established, it is placed under configuration management (CM) control. Once the requirements baseline has been developed, the requirements are analyzed and broken down into more specific system-level requirements and eventually into the code that makes up the system. The verification process ensures that the system-level requirements and the resulting code are an accurate representation of stakeholder needs. This process includes checking selected work products, such as software code, against the initial baseline requirements to ensure that the lower-level items fully satisfy the higher-level requirements. It is an inherently incremental process, occurring throughout the development of the product. This agreement between work products, such as code and baseline requirements, is verified by conducting peer reviews. Peer reviews can also be used to identify action items that need to be addressed. Without such reviews, an organization is taking a risk that substantial defects will not be detected until late in the development and/or testing phases, or even after the system is implemented. While the system is being developed, each component must be tested to ensure that its outputs are accurate. Testing (e.g., unit, system integration, and user acceptance) is the process of executing a program with the intent of finding errors. Clear, complete, and well-documented requirements are needed in order to design and implement an effective testing program. Linking the testing activities back to the requirements assures the organization that, once testing activities are successfully completed, all requirements have been addressed and will be met by the system. Without such assurance, it is possible for a requirement to be missed in development and the resulting lack of functionality not noticed until late in testing, or even after deployment. Requirements, once developed and approved, also need to be managed throughout the system life cycle. Two key areas of requirements management are addressing changes to requirements and establishing and maintaining bidirectional traceability from high-level requirements through detailed work products to test cases and scenarios. As mentioned earlier, once a set of high-level requirements is documented, verified, and approved, it is placed under configuration control. From this point, changes to the requirements are evaluated and validated as part of the change control process. Change control includes reviewing and assessing proposed changes to the requirements to determine the reasons for the changes, determining if these changes are occurring due to flaws in the requirements development process, and ensuring that any effects of the change on other requirements as well as on the cost, schedule, and performance goals of the project are determined and assessed. Establishing and maintaining traceability from initial requirements to work products and the resulting system is also important. A requirements traceability matrix demonstrates forward and backward (bidirectional) traceability from business requirements to detailed system requirements all the way through to test cases. BSM does not yet have adequate policies and procedures in place to guide its systems modernization projects in developing and managing requirements. In January 2006, the RMO developed a set of draft policies that address key areas of requirements development and management; these policies are to serve as interim guidance while the final policies and processes are being developed. At the conclusion of our review, the RMO provided us the draft policies and a high-level plan that includes milestones for completing these policies. Since critical BSM projects continue to be pursued and completion of the policies and procedures is not expected until March 2007, it is critical that BSM immediately implement the draft policies and continue to develop the final policies. BSM does not have comprehensive, detailed policies and procedures for requirements management and development activities that include requirements elicitation, documentation, verification and validation, and management. During our review, BSM officials were unable to provide us with detailed policies and procedures and agreed that they do not have such documents. Project teams were not consistent in their understanding of which guidance they should use for the development and management of requirements; some project team members mentioned BSM's Enterprise Life Cycle (ELC); others said they were waiting for guidance from the RMO. Our review of the ELC showed that it did not provide the procedures project managers would need to properly perform the steps in the requirements development and management process. BSM program officials agreed that the ELC did not provide the needed guidance. In December 2005, the RMO completed an analysis of requirements development and management areas that need improvement. The RMO found, as we did, that BSM lacks detailed guidance; their recommendations included developing process handbooks for aspects of requirements elicitation, documentation, verification and validation, and management. Subsequently, in January 2006, BSM officials developed draft guidance that covers aspects of requirements development and management. However, this guidance does not fully address requirements elicitation, documentation, verification and validation, and management. At that time, BSM also provided us with a high-level plan that contains interim milestones and establishes a March 2007 completion date for the final set of policies and procedures. BSM officials told us that these draft policies are to serve as interim guidance while the remaining policies and procedures are being developed. In addition, IRS also uses its governance processes, particularly the milestone exit reviews, to find and mitigate issues and problems with requirements development and management on existing projects. Finally, the RMO is allocating resources to key projects--such as F&PC version 1.2--to assist them in developing requirements. Without a formal set of documents that detail organizational policies and associated procedures, employees and contractors will rely on their individual knowledge and expertise to complete requirements development and management activities. This raises the risk of cost overruns, schedule delays, and reduction of functionality. Since critical BSM projects are already under way, and completion of the policies and procedures is not set until March 2007, it is urgent that BSM immediately implement the draft policies. Until BSM develops and implements policies and procedures that fully address the key areas of requirements development and management, including elicitation, documentation, tracking of cost and schedule impacts associated with requirements changes, and establishing and maintaining full bidirectional traceability, ongoing projects will continue to run greater risk of cost and schedule overruns and poor system performance. As a result of the lack of policies and procedures, BSM projects varied in the extent to which they followed disciplined requirements practices. All three projects we reviewed--MeF release 3.2 (to be deployed March 2006), and F&PC release 1.1 (deployed January 2006), and CADE release 1.1 (deployed July 2004)--performed some of the practices associated with sound requirements development and management. For example, all three projects had a change management process in place that requires approvals and impact assessments to be completed when changes are made to requirements. However, none of the three BSM project releases we reviewed consistently performed all of the practices needed for effective requirements management. Specifically: Project teams did not have a clear, documented, and consistent method of eliciting requirements. Project teams did not adequately document all requirements. Project teams did not effectively verify requirements. Project teams did not demonstrate adequate management of requirements. Based on stakeholder information such as customer expectations, constraints, and interfaces for a system, the requirements elicitation team discovers, defines, refines, and documents business-level requirements. Due to the importance of this activity, plans or strategies should be in place to guide project officials in defining elicitation-related activities and in outlining how the requirements will be gathered (e.g., interviewing the users or analyzing the current or expected business processes). BSM project teams did not have a clear, consistent, and documented method of eliciting requirements for the projects. For example, although the teams identified stakeholders in their project plans, only MeF 3.2 provided evidence that working group meetings were conducted with stakeholders to understand their needs and to identify their problems and expectations and that strategies or plans were developed for eliciting requirements. CADE 1.1 project team members could not describe how they elicited requirements or provide a requirements plan that documented elicitation procedures or strategies. An F&PC project team member stated that, for release 1.1, the project did not have a fully documented process for elicitation; however, the team member stated that the team had held workshops and obtained resources and assistance from the RMO to help mitigate the lack of a process. The RMO used lessons learned from this effort to develop a new requirements elicitation process, which they expect will assist F&PC in elicitation for its next release. BSM project and program officials agreed that requirements elicitation processes could be improved and stated that they were planning to address some of the problems we found. For example, when we asked project officials about the policies and procedures underlying their current requirements elicitation activities, some stated that they were waiting for new policies to be issued by the RMO, and others cited the ELC as guidance. As mentioned earlier, the ELC does not provide the information needed for the requirements elicitation process. Furthermore, F&PC officials could not state which sections in the ELC described the requirements elicitation process. BSM program management and RMO officials acknowledged the lack of policies and procedures and stated that the RMO has since developed new guidance for eliciting requirements that will be piloted on F&PC version 1.2, which is currently entering the requirements development phase. BSM project teams performed elicitation processes in a nonstandard manner due to the lack of policies, procedures, and guidance. Without standardized policies and procedures to guide this key part of requirements development, BSM program officials cannot ensure that its systems development projects have collected and documented all the necessary requirements, which could result in systems being developed that do not meet user needs. After collecting and documenting high-level requirements from customers, users, and other stakeholders, the requirements team should analyze these high-level requirements against the conceptual (or expected) operational environment to balance user needs and constraints and to ensure that the system developed will perform as intended. The resulting lower-level requirements should also be analyzed to make sure they can be performed in the expected environment and that they satisfy the objectives of the higher-level requirements. The final requirements are documented in the requirements baseline. The BSM projects we reviewed did not complete all of the activities needed to adequately document requirements. Although project teams provided evidence that they created a set of high-level requirements and obtained approvals from stakeholders on this set of requirements, two of the three projects did not provide evidence that requirements were thoroughly analyzed and decomposed to lower-level system requirements. For example, part of this analysis would link all lower-level systems requirements to the original higher-level business requirements. Only one of the project teams--F&PC--provided documentation showing the necessary linking or mapping of lower-level system requirements to the business requirements. MeF and CADE provided documentation; however, their documentation did not fully demonstrate the linking of system-level requirements to the business requirements. A MeF project official agreed that full linkage of system-level requirements to business requirements should be implemented. The MeF official stated that they planned to implement this in their next version--version 4.0. In addition, a BSM program official indicated that additional project guidance on requirements documentation would be part of the RMO's deliverables and would help to address this issue. Without feasible and clearly defined requirements, projects run the risk of cost overruns, schedule delays, and deployment of systems with limited functionality. For example, incomplete definition of requirements has been cited as one reason for schedule delays and cost overruns for both CADE and MeF. Once requirements are fully documented, software code and other work products that will guide development and testing activities need to be verified using peer review techniques against the original requirements. In addition, these products should be validated through testing to ensure that they will operate effectively in the intended environment. Requirements verification ensures that the lower-level requirements, software code, and other work products that will guide development and testing activities are an accurate representation of stakeholder needs. Peer reviews are an important part of the verification process and are a proven mechanism for effective defect removal. During peer reviews, teams of peers examine code and other work products to identify defects, determine the causes of the defects, and make recommendations that address changes needed to help ensure that the system will meet stakeholder and developer needs. Peer reviews should follow a structured, formalized process; peer review events should be planned in advance, with items, such as code and other work products, selected in advance; the results of the sessions should be incorporated into peer review reports that project teams are expected to address before moving further into development activities. The BSM project teams did not provide evidence that work products had been verified against requirements through the use of a formalized peer review process and project officials did not follow recommended practices for conducting peer reviews. BSM project team members stated that they conducted customer technical reviews and milestone exit reviews that they considered to be peer reviews; however, these kinds of reviews do not meet the criteria for peer reviews. They were not structured, did not select code and other items in advance to be evaluated, and did not produce formal peer reports with action items that projects were required to address. Requirements validation is the process of demonstrating that a product fulfills its intended use in its environment. It differs from the verification activities previously described, in that validation determines that the product will fulfill its intended use, while verification ensures that work products properly reflect the baseline requirements. Validation includes tests conducted on the product during development to prove that the product performs its intended functions correctly. In a disciplined software development process, planning for validation activities begins as requirements are developed; testing activities are critical to determining that a system not only operates effectively but addresses all baseline requirements. To complete validation activities, testing is conducted at several levels, each of which validates that the system will operate effectively at a different level. For example, unit testing validates individual sections of code, and system integration testing ensures that the system as a whole can operate effectively in its environment. User acceptance testing allows the user community to determine whether the system, as developed, can be used to effectively support their work. It also validates that the system meets user expectations. An effective testing process confirms the functionality and performance of the product prior to delivery. It is a crucial process and needs to be well planned, well structured, well documented, and carried out in a controlled and managed way. The BSM projects provided evidence of validation activities, such as test plans and test results. CADE 1.1 officials provided both test plans and test reports. MeF release 3.2 and F&PC release 1.1 are still in the testing phase; they provided available test plans but do not yet have test reports. Despite the existence of test plans and reports, requirements are not fully documented or fully traced. In addition, while the ELC provides guidance on testing that discusses test planning, activities, and test responsibilities, program officials say that this guidance is limited. BSM's Enterprise Services organization has initiated an effort to review, revise, and enhance test procedures across BSM. Therefore, until BSM ensures full documentation and traceability of requirements, questions about the completeness of its testing will remain. Finally, requirements must be managed through the system development life cycle. We found that the three projects did not fully demonstrate adequate management of their requirements. Although the projects had a formal change control process in place to analyze and manage changes to requirements, associated costs and schedule changes resulting from requirements changes were not always tracked or updated. In addition, projects' documentation did not demonstrate adequate traceability of requirements from the business requirements (high-level requirements) to system requirements (low-level requirements) to test cases. Managing changes to the original requirements is a formal process to identify, evaluate, track, report, and approve these changes. As work products are developed and more is learned about the system that is being developed, information is occasionally found that requires a change to the original requirements. Modifications to project scope or design can also result in requirements changes. Therefore, projects need to manage these changes to requirements in a structured way. The BSM project teams used a change management process to manage changes to requirements that included documenting the rationale for changes, developing assessments of the impact of the change, and obtaining approvals by the Configuration Change Board. However, only the MeF and F&PC teams provided evidence that their cost and schedule baselines were updated when changes to requirements impacted cost and/or schedule. For example, CADE officials did not provide any evidence to show how they updated and tracked cost changes resulting from changes to requirements, nor did they provide evidence that the work breakdown structure was updated to reflect schedule changes. F&PC officials provided evidence for tracking changes to the cost and schedule. MeF officials provided a document that tracked the cost implications of changes to requirements and the work breakdown structure to reflect schedule changes. A BSM project official indicated that the BSM project was implementing cost and schedule tracking on its current releases. However, it was not clear whether BSM was doing this consistently or whether appropriate guidance for tracking cost and schedule would be provided by BSM. Project teams that do not effectively track cost and schedule changes as a result of changes to requirements will not be able to effectively mitigate the potential impact of these changes to overall cost, schedule, and performance goals, thus raising the risk of cost overruns, schedule delays, and deferral of functionality. Another key element of requirements management is establishing and maintaining the traceability of requirements. Traceability of requirements is tracking the requirements from the inception of the project and agreement on a specific set of business requirements to development of the lower-level system requirements, detailed design, code implementation, and test cases necessary for validating the requirements. Tracing a requirement throughout the development cycle provides evidence that the requirements are met in the developed system and ensures that the product or system will work as intended. Requirements must be traceable forward and backward through the life cycle. Each business requirement must be traceable to associated system requirements and test cases. Without adequate traceability, errors in functionality could occur and not be found until the testing phase, when problems are more costly to fix and time frames for fixing problems without causing a schedule slip for deployment are limited. Of the three projects, only the F&PC team showed evidence of full traceability of the requirements from high-level requirements to low-level requirements. MeF and CADE documentation did not demonstrate clear traceability from the business requirements to lower-level system requirements, coding, and test cases. MeF program officials acknowledged weaknesses in this area and stated that they planned to develop full bidirectional traceability to the business level requirements as part of MeF release 4.0. According to project officials, one reason they do not have full bidirectional traceability is due to the lack of detailed procedures and guidance for traceability of requirements. Until recently, BSM projects were not required to develop and use a traceability matrix. While interim guidance issued by BSM does require the use of traceability matrices and use of its configuration management repository to manage requirements, the guidance lacks the detail needed to ensure that projects meet criteria. BSM program officials agreed that this was an area that needed additional guidance. The RMO is currently reviewing new guidance on how to improve requirements traceability. Without adequate traceability of requirements, system requirements can be missed during development and the agency cannot be assured that validation activities fully demonstrate that all the agreed-upon requirements have been developed, fully tested, and will work as intended. BSM lacks policies and procedures to develop and manage requirements for their systems modernization projects. BSM has acknowledged this deficiency since late 2004 when it listed requirements management as one of its high-priority initiatives and created an RMO. The office has now developed draft policies that cover aspects of eliciting, documenting, verifying and validating, and managing requirements. These draft policies are to serve as guidance to projects teams as BSM projects are pursued. It is critical that BSM implement these draft policies immediately and continue to develop the remaining policies. The three BSM development projects that we reviewed showed significant differences in how they implemented practices for developing and managing requirements. Until BSM and the RMO complete the development of policies and procedures to ensure disciplined requirements development and management practices, projects will not have sufficient guidance to ensure implementation of these practices, which will impair their ability to effectively manage the development and acquisition of critical systems and increase the risk of cost overruns, schedule delays, and deferral of functionality. To improve the requirements development and management policies and practices of the IRS's BSM, we recommend that the Commissioner of Internal Revenue direct the Associate Chief Information Officer for BSM to take the following two actions: 1. Ensure that BSM completes the delivery of policies and procedures for requirements development and management as planned. The policies and procedures should fully describe the processes, include a minimum set of activities required for each project, and provide detailed procedures for each of the key areas of requirements elicitation, documentation, verification and validation, and management. As part of this effort, the policies and procedures should specifically include the following: A standardized process for the elicitation of requirements that ensures that projects fully investigate the requirements needed for a specific system, including gathering requirements from all relevant users and stakeholders. A standardized process for the documentation of requirements that ensures full documentation of the baseline requirements. A process for ensuring formal peer reviews are planned and completed for key products. Guidance on tracking cost and schedule impacts of changes to requirements for all projects. Guidance on establishing and maintaining full bidirectional requirements traceability. 2. In addition, since BSM has ongoing projects that are developing and managing requirements and the development of new policies and procedures is not scheduled to be complete until March 2007, the Commissioner should direct the Associate CIO for BSM to immediately implement its draft policies while the final policies and procedures are being developed. In providing written comments on a draft to this report, the Commissioner of Internal Revenue agreed with our findings and stated that the report provided a sound and balanced representation of the progress IRS has made to date as well as work that remains to be completed. The Commissioner also described the actions that IRS is taking to implement our recommendations, including establishing a schedule to complete the development of policies that address the areas of requirements elicitation, documentation, verification and validation, and management. The Commissioner's written comments are reprinted in appendix III. 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 date of this letter. At that time, we will send copies of this report to the Chairmen and Ranking Members of other Senate and House committees and subcommittees that have appropriation, authorization, and oversight responsibilities for IRS. We are also sending copies to the Commissioner of Internal Revenue, the Secretary of the Treasury, the Chairman of the BSM Oversight Board, and the Director of the Office of Management and Budget. Copies are also available at no charge on the GAO Web site at http://www.gao.gov. Should you or your offices have questions on matters discussed in this report, please contact David A. Powner at (202) 512-9286 or [email protected] or Keith A. Rhodes at (202) 512-6412 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. The objectives of our review were to assess (1) whether the Requirements Management Office (RMO) has established adequate requirements development and management policies and procedures and (2) whether the Business Systems Modernization (BSM) has effectively used requirements development and management practices for key systems development efforts. To assess the adequacy of BSM's requirements development and management policies and procedures, including IRS's Enterprise Life Cycle (ELC), we compared it against criteria based on industry standards and best practices, including the Software Engineering Institute's (SEI) Capability Maturity Model Integration (CMMIsm) version 1.1. We also reviewed draft policies and procedures provided by the RMO in February 2006 and compared them against this criteria. In addition, we interviewed appropriate BSM officials to discuss the creation and goals of the RMO and whether there were BSM requirements development and management policies and procedures in place. To assess whether BSM project teams effectively used requirements development and management practices on its systems acquisitions, we selected three BSM projects to review: (1) Modernized e-File (MeF) release 3.2, which is to be deployed in March 2006; (2) Filing and Payment Compliance (F&PC) release 1.1, which was deployed in January 2006; and Customer Account Data Engine (CADE) Individual Master File release 1.1, which was deployed July 2004. We selected these investments because they were (1) important to the goals and mission of the agency, (2) large-scale development efforts with significant costs, and (3) at different points in their development life cycles. To evaluate whether each of the three projects had effectively used requirements development and management practices for key systems development efforts, we compared the project's documentation and processes against criteria based on industry standards and best practices, including SEI's CMMIsm version 1.1. The documentation reviewed for each of the projects included requirements management plans, traceability matrices, testing plans, baseline requirements, and other items. We also interviewed the program officials from each of these three projects to further clarify issues on their requirements development and management activities. Our work was performed from June 2005 to February 2006 in Washington D.C., in accordance with generally accepted government auditing standards. The following are descriptions of the three projects we selected to review: Modernized e-File (MeF) release 3.2, Filing and Payment Compliance (F&PC) release 1.1, and Customer Account Data Engine (CADE) release 1.1. In fiscal year 2004, BSM introduced the Modernized e-File (MeF) system, which allows e-filing for tax-exempt organizations and large corporations and reduces the time to process their tax forms. The goal for MeF is to replace the current e-filing technology with a modernized, Internet-based electronic filing system. MeF is also expected to result in an increase in the use of electronic filing because it is efficient and easy to access, use, and maintain. Projected benefits of the MeF program are as follows: Reduction in the BSM's effort associated with receiving, processing, manually entering data, and resolving data entry errors from paper returns; Reduction in system maintenance costs; Savings in time and money for taxpayers and tax practitioners due to not copying, assembling, and mailing a return; and Sharing of tax and information return data electronically throughout state agencies. The MeF project is projected to provide the capability for Internet-based filing of 330 different BSM forms. The following is table 2, describing MeF releases deployed and their functionalities, followed by table 3, which describes MeF financial data. The Filing and Payment Compliance (F&PC) project is intended to improve technologies and processes that support BSM's compliance activities. According to BSM, their collection operations rely on 30-year-old technology and processes that are no longer compatible with the realities of today's taxpayer environment. F&PC plans to provide support for detecting, scoring, and working nonfiler and payment delinquency cases. It is to use advanced software to analyze tax collection cases and divide them into cases that require BSM involvement and those that can be handled by private collection agencies. Case attributes are to be identified, segmented, and prioritized to select the individual taxpayer cases that have a greater probability of paying the tax liabilities in full or through installment agreements. The F&PC project is also to serve as an inventory management system to assign, exchange, monitor, control, and update delinquent taxpayer accounts between the BSM Authoritative Data Source and the private collection agencies with whom BSM will contract. The F&PC project is expected to increase the following: collection case closures by 10 million annually by 2014, voluntary taxpayer compliance, and BSM's capacity to resolve the buildup of delinquent taxpayer cases. The BSM intends to deliver an initial limited private debt collection capability in January 2006. Full implementation of this aspect of the F&PC is projected to be completed by January 2008 with additional functionality to follow in later years. Following is table 4, describing F&PC releases deployed and their functionality, followed by table 5, which describes F&PC financial data. The Customer Account Data Engine (CADE), intended to replace BSM's antiquated tax administration system, is BSM's highest priority project and is intended to house tax information for more than 200 million individual and business taxpayers. The CADE databases and related applications are also to enable the implementation of other systems that will improve customer service and compliance and allow the online posting and updating of taxpayer account and return data. The CADE project is intended to generate refund notices, detect potential fraudulent transactions, and replace the group of BSM tax master files with a single database--the Tax Account Data Store; accept, validate, and store taxpayer return and account data, along with financial account activity data, such as tax payments, liabilities, and installment agreements; and enable future business application systems. In July 2004 and January 2005, BSM implemented the initial releases of CADE, which have been used to process Form 1040EZ returns. CADE posted more than 1.4 million returns for filing season 2005 and generated more than $427 million in refunds. In 2006, CADE is expected to expand the number and type of returns beyond the Form 1040EZ. BSM is also projecting that CADE will process 33 million returns during 2007. Following is table 6, describing CADE releases deployed and their functionality, followed by table 7 describing CADE financial data. In addition to those named above, Neil Doherty, Nancy Glover, George Kovachick, Tonia Johnson, Tammi Nguyen, Madhav Panwar, and Rona Stillman made key contributions to this report.
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The Internal Revenue Service's (IRS) effort to modernize its tax administrative and financial systems--Business Systems Modernization (BSM)--has suffered delays and cost overruns due to a number of factors, including inadequate development and management of requirements. Recognizing these deficiencies, IRS created a Requirements Management Office (RMO) to establish policies and procedures for managing requirements. GAO's objectives were to assess (1) whether the office has established adequate requirements development and management policies and procedures and (2) whether BSM has effectively used requirements development and management practices for key systems development efforts. BSM does not yet have adequate policies and procedures in place to guide its systems modernization projects in developing and managing requirements. In January 2006, the RMO developed a set of draft policies that address some key areas of requirements development and management; these policies are to serve as interim guidance while the final policies and processes are being developed. At the conclusion of GAO's review, the RMO also provided a high-level plan that includes milestones for completing these policies. Since critical BSM projects continue to be pursued and completion of the policies and procedures is not expected until March 2007, it is critical that BSM immediately implement the draft policies and continue to develop the final policies. As a result of the lack of policies and procedures, the one ongoing project--Modernized e-File (MeF)--and the two completed projects--Filing and Payment Compliance (F&PC) and Customer Account Data Engine (CADE)--GAO reviewed did not consistently follow disciplined practices for systems development and management. For example, all three projects had a key element of managing requirements--a change management process that requires approvals and impact assessments to be completed when there are changes to requirements--but none met all of the practices needed for effective requirements management. In addition, two projects did not have a clear, consistent way to elicit (gather) requirements, two did not have fully documented requirements, and two could not produce fully traceable requirements (i.e., the requirements could not be tracked through development and testing), which is another key element of managing requirements. Unless IRS takes the steps needed to develop and institutionalize disciplined requirements development and management processes and implements draft policies in the interim to cover key areas of requirements development and management, it will continue to face risks, including cost overruns, schedule delays, and performance shortfalls.
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OMB was established under presidential reorganization authority in 1970, in large part to increase the attention given to management issues in the federal government. OMB is the lead agency for overseeing a framework of recently enacted financial, information resources, and performance planning and measurement reforms designed to improve the effectiveness and responsiveness of federal agencies. This framework contains as its core elements financial management improvement legislation, including the Chief Financial Officers (CFO) Act of 1990, the Government Management Reform Act of 1994, and the Federal Financial Management Improvement Act of 1996; information technology reforms, including the Paperwork Reduction Act (PRA) of 1995 and the Clinger-Cohen Act of 1996; and the Government Performance and Results Act of 1993 (the Results Act). OMB. In addition to serving as the government's key official for financial management, the DDM is to coordinate and supervise a wide range of general management functions of OMB. These functions include those relating to managerial systems, such as the systematic measurement of performance; procurement policy; regulatory affairs; and other management functions, such as organizational studies, long-range planning, program evaluation, and productivity improvement. OMB is responsible for providing guidance and oversight for various other laws and executive orders as well. For example, the Federal Acquisition Streamlining Act (FASA) requires that executive agency heads set cost, performance, and schedule goals for major acquisition programs and that OMB report to Congress on agencies' progress in meeting these goals. Executive Order 12866 directs OMB to coordinate the review of agencies' rules and regulations to ensure that they impose the least burden, are consistent between agencies, focus on results over process, and are based on sound cost/benefit analysis. OMB also has been responsible since 1967, through its Circular A-76, for carrying out executive branch policy to rely on competition between the federal workforce and the private sector for providing commercial goods and services. OMB's perennial challenge is to carry out its central management leadership responsibilities in such a way that leverages opportunities of the budget process, while at the same time ensuring that management concerns receive appropriate attention in an environment driven by budget and policy decisions. Concern that OMB and its predecessor agency, the Bureau of the Budget, lacked the support and institutional capacity necessary to sustain management improvement efforts throughout the executive branch has prompted numerous calls for changes in the past. overwhelmed by--the budget process. Some observers have advocated integrating the two functions, while others have proposed the creation of dedicated offices or a separate agency to provide governmentwide management leadership. Prior OMB reorganizations, reflecting these different points of view, have alternated between seeking to more directly integrate management into the budget review process and creating separate management offices. Previous congressional and OMB attempts to elevate the status of management by creating separate management units within OMB sought to ensure that an adequate level of effort was focused on management issues. Underscoring its concern that management issues receive appropriate attention, Congress established the DDM position to provide top-level leadership to improve the management of the federal government. In 1994, OMB reorganized to integrate its budget analysis, management review, and policy development roles, in an initiative called "OMB 2000." This reorganization was the most recent of a series of attempts to bolster OMB's management capacity and influence. To carry out its responsibilities, OMB's Resource Management Offices (RMO) are responsible for examining agency budget, management, and policy issues. Linking management reforms to the budget has, at a minimum, provided the opportunity to include management issues as part of the president's yearly budget reviews--a regularly established framework for making decisions. coordinate their activities with the statutory offices. In fiscal year 1997, OMB obligated $56 million and employed over 500 staff. During the past 3 years, OMB has focused increased attention on management issues, but there is much more that needs to be done. Today, we will highlight some of those issues that have been both of particular concern to this Committee and the subject of our recent work. OMB's DDM and the OFFM, in concert with the CFO Council, have led governmentwide efforts to focus greater attention on financial management issues. OMB has played a pivotal role in fostering ongoing financial management reforms ranging from improved financial systems and reporting to new accounting standards. We are seeing positive results from OMB's efforts. For example, eight agencies obtained unqualified opinions on their fiscal year 1997 audited financial statements, and OMB set a performance goal for it to assist 21 of the 24 CFO Act agencies to obtain unqualified and timely audit opinions on their annual financial statements for fiscal year 1999. In the 1997 Federal Financial Management Status Report and Five-Year Plan, OMB and the CFO Council discussed accomplishments and future plans in eight priority areas, such as improving financial management systems and implementing the Results Act. OMB also worked with the Department of the Treasury and GAO as part of the Federal Accounting Standards Advisory Board to create a comprehensive set of accounting and cost accounting standards that establish a framework for financial reporting and accountability. In addition, as we reported on March 31, 1998, the federal government prepared consolidated financial statements that have been subjected to an independent audit for the first time in the nation's history. government's ability to adequately safeguard assets, ensure proper recording of transactions, and ensure compliance with laws and regulations. With a concerted effort, the federal government as a whole can continue to make progress toward generating reliable financial information on a regular basis. Annual financial statement audits are essential to ensuring the effectiveness of the improvements now under way. OMB's OFPP has worked to implement FASA and the Clinger-Cohen Act. OFPP has also been working to streamline the procurement process, promote efficiency, and encourage a more results-oriented approach to planning and monitoring contracts. OFPP is spearheading a multi-agency effort to revise parts of the Federal Acquisition Regulation. For example, a major revision to Part 15 completed last year will contribute greatly to a more flexible, simplified, and efficient process for selecting contractors in competitively negotiated acquisitions. OFPP also developed best practices guides to help agencies draft statements of work, solicitations, and quality assurance plans, as well as to aid in awarding and administering performance-based service contracts. OFPP issued a best practices guide for multiple award task and delivery order contracting to encourage agencies to take advantage of new authorities under FASA. In addition, OMB has encouraged agencies to buy commercial products, conduct electronic commerce, and to consolidate their ordering to take advantage of the buying power of the federal government. OMB's efforts to improve capital decision-making are a third example of where OMB's leadership efforts are yielding some results. For example, OMB has required agencies to submit 5-year capital spending plans and justifications--thus encouraging the use of flexible funding mechanisms--and also held the first OMB Director's review on this issue.OMB added a new section to its fiscal year 1998 budget preparation instructions that outlined several broad principles for planning and monitoring acquisition and required agencies to develop baseline cost schedules and performance measurement goals. OMB has also implemented other policy and guidance changes to support new management decision-making requirements and the Chief Information Officers (CIO) Council has adopted the establishment of sound capital planning and investment management practices as one of its strategic goals. The development of the "Raines' Rules"--requiring agencies to satisfy a set of investment management criteria before funding major systems investments--can potentially serve to further underscore the link between information technology management and spending decisions. These investment management practices are also required under the PRA and the Clinger-Cohen Act. The extent to which the Raines Rules make a difference will depend on how well and how consistently they are applied. To address widespread weaknesses in federal information security, the CIO Council, under OMB's leadership, has taken some significant actions, which include designating information security as one of six priority areas and establishing a Security Committee. The Committee, in turn, has developed a preliminary plan for addressing various aspects of the problem and taken steps to increase security awareness and improve federal incident-response capabilities. However, much more needs to be done to monitor agency performance in this area and to ensure that the various management, policy, technical, and legal aspects of information security are effectively addressed. Continuing reports of information security problems are disturbing because federal agencies rely on automated systems and related security controls to support virtually all of their critical operations and assets and to ensure the confidentiality of enormous amounts of sensitive data. Our recent audit of the government's fiscal year 1997 financial statements identified serious information security weaknesses at all 24 CFO agencies. Moreover, we are finding that most agencies have not addressed enhancing information security in their fiscal year 1999 performance plans. processes and supporting systems. More recently, OMB provided additional guidance stating that these contingency plans can be carried out in accordance with GAO's contingency planning guide. The establishment of the President's Council on Year 2000 Conversion provides an opportunity for the executive branch to take further key implementation steps to avert disruptions to critical services, as we outlined in our recent report. To date, however, progress has been slow, and agencies' schedules often leave no room for delay. Many major departments have already missed earlier deadlines. At the current pace, it is clear that not all mission critical systems will be fixed in time, and additional attention therefore needs to be given to those systems that serve the highest priorities. We also have found that improvements are needed in the process used to review and clear regulations. We have testified on the inadequacies of OMB's efforts to meet congressional paperwork reduction goals. Also, OIRA does not attempt to set priorities for agencies' regulations on the basis of risk (e.g., the number of lives saved or injuries avoided). Concerns have been raised by experts in regulatory issues that federal regulations are not sufficiently focused on the factors that pose the greatest risk and that, as a result, large amounts of money may be spent to accomplish only a slight reduction in risk. Using these same resources in other areas that pose higher risks could yield significantly greater payoffs. limited efforts to monitor or enforce compliance with its A-76 guidance or evaluate the success of this process. Finally, OMB's oversight role across the government can provide the basis for analyzing crosscutting program design, implementation, and organizational issues. We have pointed to the need to integrate the consideration of the various governmental tools used to achieve federal goals, such as loans, grants, tax expenditures, and regulations. Specifically, we recommended that OMB review tax expenditures with related spending programs during their budget reviews. In addition, our work has provided numerous examples of mission fragmentation and program overlap within federal missions, and we have suggested that OMB take the lead in ensuring that agency Results Act plans address fragmentation concerns. This effort may be hampered if efforts to resolve problems of program overlap and fragmentation involve organizational changes, because OMB lacks a centralized unit charged with raising and assessing government-organization issues. OMB has not had such a focal point since 1982 when it eliminated its Organization and Special Projects Division. Mr. Chairman, the record of OMB's stewardship of management initiatives that we have highlighted today suggests that creating and sustaining attention to management improvement is a key to addressing the federal government's longstanding problems. In the past, management issues often remained subordinated to budget concerns and timeframes, and the leverage the budget could offer to advance management efforts was not directly used to address management issues. The experiences to-date suggests that certain factors are associated with the successful implementation of management initiatives, regardless of the specific organizational arrangement. and performance measurement issues gained considerable attention in the budget formulation process initially because of the clear commitment of OMB's leadership. However, top leadership's focus can change over time, which can undermine the follow-through needed to move an initiative from policy development to successful implementation. Thus, although top leadership's interest is an important impetus for the initiation of management policies, it alone is not sufficient to sustain these initiatives over time. Second, a strong linkage with the budget formulation process can be a key factor in gaining serious attention for management initiatives throughout government. Regardless of the location of the leadership, management initiatives need to be reflected in and supported by the budget and, in fact, no single organizational arrangement by itself guarantees this will happen. Many management policies require budgetary resources for their effective implementation, whether it be financial management reform or information systems investment. Furthermore, initiatives such as the Results Act seek to improve decision-making by explicitly calling for performance plans to be integrated with budget requests. We have found that previous management reforms, such as the Planning-Programming-Budgeting-System and Management By Objectives, suffered when they were not integrated with routine budget presentations and account structures. Third, effective collaboration with the agencies--through such approaches as task forces and interagency councils--has emerged as an important central leadership strategy in both developing policies that are sensitive to implementation concerns and gaining consensus and consistent follow-through within the executive branch. In effect, agency collaboration serves to institutionalize many management policies initiated by either Congress or OMB. In our 1989 report on OMB, we found that OMB's work with interagency councils were successful in fostering communication across the executive branch, building commitment to reform efforts, tapping talents that exist within agencies, keeping management issues in the forefront, and initiating important improvement projects. One example of this collaboration is the continuing success of CFOs and the CFO Council in leading agencies in addressing a wide range of financial and related management issues, such as their work, in concert with OMB, on a strategic plan to upgrade and modernize federal financial management systems. Finally, support from the Congress has proven to be critical in sustaining interest in management initiatives over time. Congress has, in effect, served as the institutional champion for many of these initiatives, providing a consistent focus for oversight and reinforcement of important policies. For example, Congress'--and in particular this Subcommittee's--attention to the Year 2000 problem, information management, and financial management, has served to elevate the problem on the administration's management agenda. Separate from the policy decisions concerning how best to organize and focus attention on governmentwide federal management issues, there are some intermediate steps that OMB could take to clarify its responsibilities and improve federal management. For example, OMB could more clearly describe the management results it is trying to achieve, and how it can be held accountable for these results, in its strategic and annual performance plans. Many of OMB's strategic and annual goals were not as results-oriented as they could be. Continued improvement in OMB's plans would provide congressional decisionmakers with better information to use in determining the extent to which OMB is addressing its statutory management and budgetary responsibilities, as well as in assessing OMB's contributions toward achieving desired results. In our 1995 review of OMB 2000, we recommended that OMB review the impact of its reorganization as part of its planned broader assessment of its role in formulating and implementing management policies for the government. OMB has not formally assessed the effectiveness, for example, of the different approaches taken by its statutory offices to promote the integration of management and budget issues. We believe it is important that OMB understand how the reorganization has affected its capacity to provide sustained management leadership. Mr. Chairman, this concludes our statement. We would be happy to answer any questions that you or other Members of the Subcommittee have at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed its observations on the Office of Management and Budget's (OMB) efforts to carry out its responsibilities to set policy and oversee the management of the executive branch. GAO noted that: (1) OMB is the lead agency for overseeing a framework of recently enacted financial, information resources, and performance planning and measurement reforms designed to improve the effectiveness and responsiveness of federal agencies; (2) OMB's perennial challenge is to carry out its central management leadership responsibilities in a way that leverages opportunities of the budget process, while at the same time ensuring that management concerns receive appropriate attention in an environment driven by budget and policy decisions; (3) OMB's Deputy Director for Management and the Office of Federal Financial Management, in concert with the Chief Financial Officers Council, have led governmentwide efforts to focus greater attention on financial management issues; (4) OMB has played a pivotal role in fostering ongoing financial management reform, ranging from improved financial systems and reporting to new accounting standards; (5) despite this progress, GAO was not able to form an opinion on the reliability of the federal government's consolidated financial statements because of serious deficiencies; (6) OMB's Office of Federal Procurement Policy (OFPP) has worked to implement the Federal Acquisition Streamlining Act and the Clinger-Cohen Act; (7) OFPP has also been working to streamline the procurement process, promote efficiency, and encourage a more results-oriented approach to planning and monitoring contracts; (8) OMB's efforts to improve capital decisionmaking are a third example of where OMB's leadership efforts are yielding some results; (9) to address widespread weaknesses in federal information security, the Chief Information Officers (CIO) Council, under OMB's leadership, has taken some significant actions; (10) agencies' computer systems' year 2000 compliance remains a concern, and serious vulnerabilities remain, although OMB, the President's Council on Year 2000 Conversion, and the CIO Council all have focused attention on increasing compliance; (11) GAO also found that improvements are needed in the process used to review and clear regulations; (12) OMB's Circular A-76 sets forth federal policy for determining whether commercial activities associated with conducting the government's business will be performed by federal employees or contractors; (13) OMB's oversight role across the government can provide the basis for analyzing crosscutting program design, implementation, and organizational issues; and (14) the experiences to date suggest that certain factors are associated with the successful implementation of management initiatives.
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Emergency plans for commercial nuclear power plants are intended to protect public health and safety whenever plant accidents cause radiation to be released to the environment. Since the 1979 accident at the Three Mile Island nuclear power plant, significantly more attention has been focused on emergency preparedness. For example, the NRC Authorization Act for fiscal year 1980 established a requirement for off-site emergency planning around nuclear power plants and allowed NRC to issue a nuclear plant operating license only if it determines that there is either a related state or local emergency preparedness plan that provides for responding to accidents at the specific plant and complies with NRC's emergency planning guidelines or state, local, or facility plan that provides reasonable assurance that public health and safety are not endangered by the plants' operation in the absence of a related state or local emergency preparedness plan. In November 1980, NRC and FEMA published regulations that provided the criteria for radiological emergency plans. The regulations include emergency standards for on- and off-site safety and require that emergency plans be prepared to cover the population within a 10-mile radius of a commercial nuclear power plant. In addition, state plans must address measures necessary to deal with the potential for the ingestion of radioactively contaminated foods and water within a 50-mile radius. NRC and FEMA have supplemented the criteria several times since 1980. For example in July 1996, the agencies endorsed the prompt evacuation of the public within a 2-mile radius and about 5 miles downwind of the plant, rather than sheltering the public, in the event of a severe accident. FEMA and the affected state and local governments within the 10-mile emergency planning zone conduct exercises at least every 2 years at each nuclear power plant site. In addition, each state with a nuclear power plant must conduct an exercise within the 50-mile zone at least every 6 years. The exercises are to test the integrated capabilities of appropriate state and local government agencies, facility emergency personnel, and others to verify their capability to mobilize and respond if an accident occurs. Before the exercises, generally, FEMA and state officials not involved in them agree to the accident scenarios and the aspects of emergency preparedness that will be tested. In addition, NRC requires plants to conduct exercises of their on-site plans. According to NRC staff, the plants usually conduct their exercises as part of FEMA's biennial exercises. Indian Point 2 is one of the 104 commercial nuclear power plants nationwide licensed to operate. The Indian Point site, which is called the Indian Point Energy Center, has one closed and two operating plants. The other operating plant is referred to as Indian Point 3. Over the years, Consolidated Edison's efforts to improve emergency preparedness at Indian Point 2 were not completely successful, and the company experienced recurring weaknesses in its program, as we reported in July 2001. The four New York counties surrounding the plant made improvements in their emergency response programs but suggested better communication among NRC, FEMA, and nonstate entities in nonemergency situations. Beginning in 1996, NRC identified numerous weaknesses with the emergency preparedness program at Indian Point 2. NRC found, for example, that Consolidated Edison was not training its emergency response staff in accordance with required procedures, and some individuals had not taken the annual examination and/or participated in a drill or exercise within a 2-year period, as required. In response, Consolidated Edison disciplined the individuals responsible, developed an improved computer-based roster containing the current status of the training requirements for emergency response personnel, and began a process to distribute training modules to those employees before their qualifications expired. NRC relied on Consolidated Edison to take corrective actions for other emergency preparedness problems and weaknesses. However, the company did not correct the weaknesses identified. For example, in 1998 and again in 1999, NRC identified problems with activating the pagers used to alert the plant's staff about an emergency, as well as other communication weaknesses. In 1999, NRC concluded that Consolidated Edison lacked the ability to detect and correct problems and determine their causes, resulting in weak oversight of the emergency preparedness program. In response, NRC staff said that they met with the company's managers to specifically discuss and express NRC's concerns. Similarly, NRC identified emergency preparedness weaknesses when evaluating Indian Point 2's response to the February 2000 event. For example, NRC found that Consolidated Edison did not activate its emergency operations facilities within the required 60 minutes, primarily because of the complex process used to page the emergency response staff. This problem delayed the on-site response. NRC's Office of the Inspector General also identified emergency preparedness issues, including the state's difficulties getting information about the emergency from Consolidated Edison and the fact that English is a second language for many who lived within 10 miles of the plant. The Office of the Inspector General concluded, and NRC agreed, that recurring uncorrected weaknesses at Indian Point 2 had played a role in the company's response during the February 2000 event. However, NRC concluded that Consolidated Edison had taken the necessary steps to protect public health and safety. Consolidated Edison subsequently evaluated its entire emergency preparedness program to determine the causes of the deficiencies and to develop corrective actions. Consolidated Edison concluded that senior management did not pay sufficient attention to the emergency preparedness program or problems at Indian Point 2 because these problems were not viewed as a high priority warranting close attention and improvement. As a result, emergency preparedness had relatively low visibility, minimal direction, and inadequate resources. The company also found that (1) the emergency response organization had been stagnant, understaffed, poorly equipped, and consistently ineffective; (2) the emergency manager performed collateral and competing duties; and (3) for a time, a contractor held the manager's position. Furthermore, the professional development and continuing training of the emergency planning staff had been minimal. The company undertook initiatives to address the deficiencies noted. Despite these initiatives, in April 2001, NRC reported that it had found problems similar to those previously identified at Indian Point 2. NRC again found weaknesses in communication and information dissemination. It also found that the utility's training program had not prevented the recurrence of these issues during on-site drills and that its actions to resolve other weaknesses had not been fully effective. NRC said that Consolidated Edison had identified the major issues in its business plan, which, if properly implemented, should improve emergency preparedness at the plant. In commenting on a draft of our July 2001 report, NRC noted that its April 2001 inspection report concluded that Consolidated Edison's emergency preparedness program would provide reasonable assurance of protecting the public. The need to improve communication between Consolidated Edison and the counties about the extent of the emergency and the potential impact on the public was highlighted during the February 2000 event. At that time, Consolidated Edison reported that a radioactive release had occurred but that it posed no danger to the public. County officials, on the other hand, reported that no release had occurred. This contradictory information led to credibility problems with the media and the public. Before the emergency, the counties did not have a defined process to determine what information they needed and how they would present the information to the public. At the time of the February 2000 event, the Radiological Emergency Data Form that Consolidated Edison used to inform local jurisdictions provided for one of three choices about a release of radioactive materials: (1) no release (above technical specification limits), (2) a release to the atmosphere above technical specification limits, and (3) a release to a body of water (above technical specification limits). In April 2000, Consolidated Edison, in partnership with the state and counties, revised the form to ensure that all affected parties were "speaking with one voice" when providing the media and the public with information. The change to the form provided for one of four choices: (1) no release, (2) a release below federally approved operating limits (technical specifications) and whether it was to the atmosphere or to water, (3) a release above federally approved operating limits and whether to the atmosphere or to water, and (4) an unmonitored release requiring evaluation. The counties had also taken some other actions to improve their radiological emergency programs. For example, all four counties agreed to activate their emergency operation centers at the "alert" level (the second lowest of four NRC classifications). Before the February 2000 event, the counties differed on when they would activate their centers, with one county activating its center at the alert level and the other three counties at the site-area emergency level (the next level above an alert). As a result, once the first county activated its center during the event, the media questioned why the other three counties had not done so. The counties also connected the "Executive Hot Line," which linked the state, four counties, and governor, to the emergency operations facility at Indian Point 2 to establish and maintain real-time communications during an emergency. In addition to these actions, county officials suggested to us in 2001 that other changes to improve communications among NRC, FEMA, and nonstate entities could be taken. In particular, county officials said that since they are responsible for radiological emergency preparedness for Indian Point 2, NRC and FEMA should communicate directly with them during nonemergency situations. Absent these direct communications, the counties were not privy to issues or initiatives that could affect their emergency preparedness programs. NRC staff tried to meet every 5 years with officials from all states that have operating nuclear power plants. NRC staff told us that they met with some states more frequently and that the requests to meet exceeded the agency's capability. Although NRC's policy was to meet at the state level, its staff believed that local officials had various options for meeting with NRC. For example, local officials could participate in the meetings held at least every 5 years with the states and could interact with NRC staff during public meetings, including those held annually for all plants. Emergency preparedness officials from the four counties around Indian Point 2 said that they did not believe that public meetings were the appropriate forums for government-to-government interactions. Therefore, the counties suggested that NRC should meet with them at least annually. According to NRC staff, routinely communicating with local officials has resource implications and involves tradeoffs with its other efforts, such as maintaining safety and enhancing the effectiveness and efficiency of operations. However, NRC, at the time of our review, had not assessed the costs and benefits of meeting with local officials nor the impact that such meetings might have. FEMA generally implements its programs through the states and relies on the states to communicate relevant information to local jurisdictions. County officials responsible for emergency preparedness at Indian Point 2 identified instances in which this method of communicating with local jurisdictions had not been effective. For example, both New York State and county officials told us that the February 2000 event identified the need for flexibility in FEMA's off-site exercises. County officials said they responded to the 2000 event as they would have responded during FEMA's exercises, which are conducted to the general emergency level (the highest of NRC's action level classifications). Yet, they noted, the response for an alert like the one that occurred in 2000 is significantly different from the response needed during a general emergency, when a significant amount of radiation would be released from the plant site. State and county officials suggested that it would be more realistic to periodically conduct biennial exercises at the lower alert level, which, they noted (and NRC data confirmed), occur more frequently than a general emergency. In commenting on a draft of our report, FEMA said that the emergency plans for the four New York counties require them to conduct off-site monitoring and dose calculations at the alert level. FEMA officials also noted that the agency's regulations allow state and local jurisdictions the flexibility to structure the exercise scenarios to spend more time at the alert level and less at the general emergency level. Nevertheless, county officials who participated in the exercises were not aware of the flexibility allowed by FEMA's regulations, in part because they did not participate in developing the exercise scenarios. In reviewing NRC's reports on its on-site inspections and evaluations of the plant's emergency preparedness exercises or drills completed since we issued our 2001 report, we found that the facility's emergency preparedness program has continued to experience problems or weaknesses. For example, NRC reported that, in an emergency exercise conducted last fall, the facility gave out unclear information about the release of radioactive materials, which also happened during the February 2000 event. In addition, NRC reported that several actions to correct previously identified weaknesses had not been completed. For example, NRC noted that the timely and accurate dissemination of information was identified as a weakness in the fall 2002 exercise and had been documented previously in drill critique and condition reports. In addition, in our 2001 report, we noted that NRC's Office of the Inspector General found that, during the February 2000 event, the Indian Point plant's technical representatives did not arrive on time at the local counties' emergency operations centers. To help address this problem, Consolidated Edison said that it would install a videoconferencing system in the centers to enhance communications between the plant and the off- site officials. According to county officials, the videoconferencing system had not been installed as of February 2003. With respect to our 2001 recommendation that NRC and FEMA reassess their practices of primarily communicating with state officials during nonemergency situations, federal and local officials indicated that little has changed since our report. NRC officials told us that they did reassess their policy since our report was issued and determined that no changes were needed. According to FEMA officials, the agency will continue to work with state and local officials to carry out its emergency preparedness program but has not made any changes regarding nonemergency communication with state and local officials. Given this history of inadequate efforts to address weaknesses in Indian Point 2's emergency preparedness program, we continue to believe that both NRC and the plant owner could benefit from being more vigilant in correcting problems as they are identified. In addition to improving the plant's program, a better track record in addressing these problems could go a long way in helping alleviate the heightened concerns in the surrounding communities about the plant's safety and preparedness for an emergency. Similarly, more frequent, direct communication by NRC and FEMA with officials of the surrounding counties could improve local emergency preparedness programs and, in turn, help local officials better communicate with their constituents about the plant's safety and preparedness for an emergency. On August 1, 2002, the Governor of New York announced that James Lee Witt Associates would conduct a comprehensive and independent review of emergency preparedness around the Indian Point facility and for that portion of New York State in proximity to the Millstone nuclear power plant in Waterford, Connecticut. According to Witt Associates, the review encompassed many related activities that were designed, when taken together, to shed light on whether the jurisdictions' existing plans and capabilities are sufficient to ensure the safety of the people of the state in the event of an accident at one of the plants, and how the existing plans and capabilities might be improved. According to Witt Associates, it has considered and incorporated public comments on a January 2003 draft of its report and plans to issue the final report this month. We have not evaluated the Witt report or verified the accuracy of its findings and conclusions. We did note that the draft report identifies various issues--such as planning inadequacies; expected parental behavior that would compromise school evacuation; difficulties in communications; the use of outdated technologies; problems caused by spontaneous evacuation in a post September 11, 2001, environment; and a limited public education effort--that may warrant consideration at Indian Point and nationwide. The draft Witt report concludes that NRC and FEMA regulations need to be revised and updated. We understand that FEMA agreed, to an extent, in its review of the draft report. According to the agency, the draft report raises a number of issues that should be considered for enhancing the level of preparedness in the communities surrounding the Indian Point facility, such as better public education, more training of off-site responders, and improved emergency communications. In addition, FEMA stated that some of these issues should be evaluated for their applicability nationwide. However, FEMA also said that a number of the issues raised in the draft report were not supported by its own exercise evaluations, plan reviews, and knowledge of the emergency preparedness program. According to NRC, the draft report gives "undue weight" to the impact of a terrorist attack. The agency said that it saw no difference between emergency plans for releases caused by terrorist acts and those caused by equipment malfunctions.
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After the September 11, 2001, terrorist attacks, emergency preparedness at nuclear power plants has become of heightened concern. Currently, 104 commercial nuclear power plants operate at 64 sites in 32 states and provide about 20 percent of the nation's electricity. In July 2001, GAO reported on emergency preparedness at the Indian Point 2 nuclear power plant in New York State. This testimony discusses GAO's findings and recommendations in that report and the progress the plant, the Nuclear Regulatory Commission (NRC), and the Federal Emergency Management Agency (FEMA) have made in addressing these problems. GAO also provides its thoughts on the findings of a soon-to-be-issued report (the Witt report) on emergency preparedness at Indian Point and the Millstone nuclear power plant in Connecticut, and the implications of that report for plants nationwide. Since 2001, the Entergy Corporation has assumed ownership of the Indian Point 2 plant from the Consolidated Edison Company of New York (ConEd). In 2001, GAO reported that, over the years, NRC had identified a number of emergency preparedness weaknesses at Indian Point 2 that had gone largely uncorrected. ConEd had some corrective actions underway before a 2000 event raised the possibility of a leak of radioactively contaminated water into the environment. ConEd took other actions to address problems during this event. According to NRC, more than a year later, the plant still had problems similar to those previously identified--particularly in the pager system for activating emergency personnel. However, NRC, in commenting on a draft of GAO's report, stated that ConEd's emergency preparedness program could protect the public. Four counties responsible for responding to a radiological emergency at Indian Point 2 had, with the state and ConEd, developed a new form to better document the nature and seriousness of any radioactive release and thus avoid the confusion that occurred during the February 2000 event. Because they are the first responders in any radiological emergency, county officials wanted NRC and FEMA to communicate more with them in nonemergency situations, in addition to communicating through the states. However, NRC and FEMA primarily rely on the states to communicate with local jurisdictions. Since GAO's 2001 report, NRC has found that emergency preparedness weaknesses have continued. For example, NRC reported that, during an emergency exercise in the fall of 2002, the facility gave out unclear information about the release of radioactive materials, which had also happened during the February 2000 event. Similarly, in terms of communicating with the surrounding jurisdictions, little has changed, according to county officials. County officials told GAO that a videoconference system--promised to ensure prompt meetings and better communication between the plant's technical representatives and the counties--had not been installed. In addition, NRC and FEMA continue to work primarily with the states in nonemergency situations. Although they note that there are avenues for public participation, none of these is exclusively for the county governments. GAO did not evaluate the draft Witt report or verify the accuracy of its findings. The draft Witt report is a much larger, more technical assessment than the 2001 GAO report. While both reports point out difficulties in communications and planning inadequacies, the draft Witt report concludes that the current radiological response system and capabilities are not adequate to protect the public from an unacceptable dose of radiation in the event of a release from Indian Point, especially if the release is faster or larger than the release for which the programs are typically designed. GAO is aware that, in commenting on a draft of the Witt report, FEMA disagreed with some of the issues raised but said the report highlights several issues worth considering to improve emergency preparedness in the communities around Indian Point and nationwide. NRC concluded that the draft report gives "undue weight" to the impact of a terrorist attack.
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When the air quality problem occurred at NIEHS in 1981, far less was known about indoor air pollution than is known today, and there was a strong emphasis on energy conservation. As a result of the emphasis on energy conservation at that time, building engineers at facilities across the country had reduced the air exchange rate of air handling systems and initiated other conservation measures. NIEHS began moving employees into its new facility at Research Triangle Park, North Carolina, on April 11, 1981. The facility was constructed in five modules, each with its own air handling system. Modules A and B were administrative spaces; modules C, D, and E were laboratories. According to NIEHS officials, the laboratory modules required their air handling systems to make a 100-percent exchange of the air, whereas the administrative modules had varying amounts of fresh air added, depending on the outside temperature. Shortly after moving into the new facility, some employees in module A began complaining of respiratory problems and eye and throat irritation. Most of the complaints came from the second floor of module A, where most of the administrative employees had office space. One employee went to the hospital on April 20, 1981, complaining of respiratory problems, and a subsequent worker's compensation claim attributed the illness to her work environment. According to the U.S. Consumer Product Safety Commission, formaldehyde is normally present at low levels, usually less than 0.03 ppm, in both outdoor and indoor air. Moreover, homes or offices furnished with products that release formaldehyde into the air can have levels of more than 0.03 ppm. The Occupational Safety and Health Administration's (OSHA) occupational safety standard for formaldehyde in 1981 was 3.0 ppm; the current standard is 0.75 ppm. Indoor formaldehyde levels can vary greatly, depending on the type of building materials and furnishings used, the length of time that these materials have had to off-gas, the temperature and humidity, and the amount of fresh air brought into the building. Indoor formaldehyde levels can be reduced by using materials that contain less formaldehyde, airing the materials out before allowing employees into the space, and increasing the amount of fresh air brought into the building. Although formaldehyde levels can also vary with the temperature and humidity, these factors are controlled in an occupied building and, thus, may not have much effect. In response to requests from your office, two letter reports were issued, one by NIEHS and the other by the Deputy IG of the Department of Health and Human Services, addressing issues involving complaints by employees that they may have become ill after being exposed to the air in the new facility. NIEHS' report, dated March 31, 1997, addresses the events and health effects that may have been caused by exposure to formaldehyde when the new facility was first occupied in April 1981. The IG's letter report, dated August 15, 1997, addresses NIEHS' (1) grievance procedures and treatment of employees, (2) compliance with appropriate policies and procedures regarding employee complaints, and (3) venting and other practices to ensure proper ventilation before the facility was occupied. NIEHS does not have data showing what the air quality was inside its new facility when employees began moving into it on April 11, 1981, or during the first 5.5 months that the building was occupied. NIEHS officials said that such monitoring for airborne contaminants was not common practice at the time. They also said that during these 5.5 months, the air handling system was adjusted to improve the air distribution in module A to help alleviate respiratory problems that some employees were experiencing because it was not immediately recognized that indoor air contaminants could be originating from within the space. In response to the concerns of some employees, NIEHS contracted with the School of Public Health at the University of North Carolina to monitor the air throughout modules A and B and to analyze the results to determine the quality of the air. The initial testing began in September 1981. At our request, an indoor air expert at the Environmental Protection Agency (EPA) extrapolated the range of possible formaldehyde levels in module A when the employees first moved into the space in April 1981. He concluded that those levels were probably higher than the levels measured in September of that year. The initial monitoring, which took place on September 28 and 29, 1981, found that the formaldehyde levels on the second floor of module A ranged from 0.1 to 0.34 ppm--well below OSHA's standard in effect in 1981. Subsequent monitoring between January 20 and March 1, 1982, by the School of Public Health and others showed formaldehyde levels that were no higher than 0.044 ppm. The monitors were placed on top of desks, in closed wooden bookcases, and in other locations and attached to the clothing of some employees. Formaldehyde levels, however, may have been higher when the employees first moved into the space than when the measurements were taken because research shows that formaldehyde levels in enclosed spaces decrease rapidly during the first few days to several weeks. The contractor also sampled the air in modules A and B for 22 other organic substances and detected minute amounts--less than 0.1 ppm--for 10 of these substances, such as benzene, toluene, and trichloroethane. According to the contractor, the level for each of these substances was well below the standard in effect at the time. An air quality survey done by the National Institute for Occupational Safety and Health for NIEHS in March 1982 reported that the primary source of the formaldehyde was the particle board in the office furnishings. NIEHS officials said that adjustments were made to balance the air flow and introduce more outside air in module A during the first 5.5 months to alleviate respiratory problems that some employees reported. According to the officials, because the air was not being monitored during this period, the levels of formaldehyde that the employees were exposed to are unknown. The officials also said that in the early 1980s, air quality measurements were not usually made when employees first moved into buildings because indoor air quality was generally not recognized as the serious health concern that it is today. We asked the indoor air expert from EPA to use NIEHS' air monitoring data to extrapolate a range of possible formaldehyde levels in module A when the employees first moved into the space in April 1981. The expert said that the limited amount of data available made it difficult to estimate the possible formaldehyde levels for the period before NIEHS began monitoring the air. However, with the available data as input for a formaldehyde decay curve, the expert's mathematical extrapolation showed that the initial formaldehyde levels probably ranged between 1.2 and 7.5 ppm when the employees first moved into module A--higher than the levels measured in September 1981. In light of his knowledge about formaldehyde off-gassing from building materials and office furnishings, and the variables that can affect the rate of off-gassing, he said he believed that the actual levels were near the lower end of the range and were probably less than 2.0 ppm, which would be below the occupational safety standard that existed in 1981. Moreover, he stated that the formaldehyde levels probably declined quickly during the first few days to several weeks and continued to decline over time. NIEHS officials, however, do not believe that initial formaldehyde levels can be accurately modeled because of the multiple variables that could have affected the concentrations. They said that the lack of reliable information on such variables as the amount of formaldehyde in the materials when manufactured, the temperature and humidity conditions during the period, and the air exchange rates makes any extrapolation results highly suspect and speculative. Given such uncertainties, they believe that the initial formaldehyde levels were probably at the lower end of the extrapolated range because the furnishings had been installed some time before module A was occupied in April 1981. The General Services Administration's (GSA) guidelines recommend that air handling systems in buildings be tested to determine if they are operating in accordance with specifications. Although the GSA guidelines in effect at the time called for test and balance certifications to be prepared before buildings were occupied, the Health and Human Services Regional Office Facilities Engineering Corps that was responsible for overseeing the building's construction did not have the certification for module A signed until September 29, 1981, 5.5 months after employees moved into the module. NIEHS officials said that they adjusted the air handling system during the first 5.5 months in an effort to alleviate the employees' discomfort. However, an April 27, 1982, memorandum from NIEHS' Health and Safety Manager said that the air handling system could not have been in proper balance on September 29, 1981, as certified, because the agency continued to adjust the system to improve the air flow and the air exchange rate after the certification was signed. A time line summarizing the key events during the first several months of occupancy is in appendix I. The short-term effect of formaldehyde is irritation of the eyes and respiratory tract--in particular the nose and throat and, possibly, the lungs with concentrations as low as 0.41 ppm. Because formaldehyde changes quickly into other compounds when it contacts tissue, other body parts, by and large, are not adversely affected by inhaling formaldehyde. Surveys of the known research show there is no evidence that short-term exposure to formaldehyde affects the musculoskeletal, cardiovascular, immunological, neurological, reproductive, developmental, endocrine, renal, or hepatic systems of the human body, while only "a few . . . vague" gastrointestinal effects have been found. Moreover, the effects it has on the eyes and respiratory tract usually pass quickly once the exposure ends. Furthermore, predominant research results have found that people with asthma react no differently to formaldehyde exposure than do those without asthma. According to the National Institute for Occupational Safety and Health, short-term exposure to concentrations of 20 ppm of formaldehyde is immediately dangerous to the life and health of humans. Long-term exposure of laboratory animals to formaldehyde at a concentration of 2.0 ppm has not been shown to produce nasal cancer. But at concentrations of 14.1 to 14.3 ppm, studies have shown sharp increases in cancer of the animals' nasal linings. Studies of long-term exposure have also shown that the occurrence of cancer increases as the concentration of formaldehyde increases. Even though it has not been unequivocally proven that long-term exposure to formaldehyde has the same effect on humans, the results of the tests on animals have raised concerns that it may affect humans. A number of epidemiological studies that examined the incidence of cancer in certain population groups have been done, primarily with groups that have had long-term occupational exposure to formaldehyde, such as morticians and pathologists. These studies have not produced clear evidence that long-term low-level exposure can cause cancer in humans. While many studies have found no or uncertain correlation between formaldehyde and cancer, others have found that the incidence of some cancers increases from exposure to formaldehyde. However, all of the studies that have shown an association had methodological shortcomings. According to The Toxicological Profile for Formaldehyde, "The overall conclusion to be drawn from these and other studies is that there is not a firm relationship between formaldehyde and the induction of cancers in humans." The three agencies that are responsible for determining whether substances should be categorized as carcinogens--that is, as cancer-causing substances--have placed formaldehyde in an intermediate classification because of the clear evidence that formaldehyde causes cancer in the nasal linings of laboratory animals and the limited evidence from the epidemiological studies of humans. The agencies and their classifications of the effects of formaldehyde on humans are as follows: International Agency for Research on Cancer: Probably carcinogenic to humans; National Toxicology Program: Reasonably anticipated to be a carcinogen; EPA: Probable human carcinogen. EPA did a risk assessment of formaldehyde in 1987 and updated the assessment in 1991. The overall result of the update was that EPA reduced the estimated risk of cancer for humans by a factor of 50 (i.e., EPA decided that the risk of cancer from formaldehyde was not as great as it had originally thought). Much of this reduction occurred because of a change in the way that EPA estimated the effects of exposure to formaldehyde. The earlier method measured the concentration of formaldehyde in the air being breathed, whereas the current method uses a more direct measure of the way that formaldehyde affects tissues. This method estimates the levels of formaldehyde at the site where it most often comes in contact with tissue, such as the nasal lining, by measuring the compounds in the tissue that were produced by the exposure to formaldehyde. In discussing this change, EPA explained that it was desirable to have a complete biological understanding of how cancers were caused by a substance and that this change in method recognized a significant step in that direction. However, because it was not yet completely understood whether or how cancers in humans might be caused by formaldehyde, it was still necessary to extrapolate the risks to humans based on data from animal studies. EPA's decision was significantly influenced by the fact that formaldehyde has been clearly shown to be genotoxic--that is, it causes various kinds of chemical damage and mutations to genetic material--in laboratory microorganisms, tissue culture tests, and some animal tests, which makes it particularly suspected of being a carcinogen. NIEHS' current management is more aware of the need to have adequate air handling systems in buildings and to better monitor indoor air levels to reduce employees' exposure to indoor air pollutants. For example, before moving into a recently completed laboratory module at Research Triangle Park, NIEHS initiated a number of health and safety measures to ensure the quality of the module's indoor air, including improved air handling and monitoring measures and the use of less polluting building materials and furnishings. In addition, according to EPA officials, the manufacturing standards for building materials and office furnishings are more stringent today to ensure that the off-gassing levels of chemicals, such as formaldehyde, are much lower than in past years. NIEHS completed the new module at its Research Triangle Park facility in August 1996. According to NIEHS officials, the project engineer was responsible for keeping track of the building materials used in the construction and furnishing of the module and for ensuring that the materials did not contain excessive levels of pollutants, such as formaldehyde, that would cause indoor air quality problems. NIEHS officials also said that they ensured that the air handling system installed would meet the air exchange rate for the new laboratory space (i.e., 100-percent exchange) recommended by the American Society of Heating, Refrigeration, and Air-Conditioning Engineers, Inc. Before the new module was occupied by employees in 1996, NIEHS conducted several air monitoring tests of all areas of the building to ensure that the air handling system was functioning properly and that any off-gassing of pollutants from the building materials and furnishings was below OSHA's standards. Even after employees moved into the new module, NIEHS' Health and Safety Branch continued to perform some air monitoring to ensure that air quality problems did not occur. According to NIEHS officials, these improvements have reduced the number of complaints from employees about the air quality in their work space. NIEHS' air monitoring procedures for existing space have also changed since the indoor air quality problems occurred in 1981. According to NIEHS officials, current procedures require the Health and Safety Branch to perform an indoor air quality assessment whenever an employee complains about the air flow or air quality, whenever renovations to an area result in the use of new building materials or furnishings, or whenever the building management staff suspects that the air flow or air quality may not be correct. Furthermore, according to NIEHS officials, the air exchange rate recommended by the American Society of Heating, Refrigeration, and Air-Conditioning Engineers, Inc., for administrative space (i.e., 20 cubic feet per minute) is currently being used for the older modules A and B at the facility. Also, according to NIEHS officials, some adjustments, in addition to those done as part of routine maintenance, are still being made today as the agency responds to complaints about the indoor air. The officials said they believe that the continued complaints are the result of employees' heightened awareness of indoor air pollution and not to formaldehyde off-gassing. According to EPA officials, the manufacturing standards for building materials and office furnishings are more stringent today than they were in 1981 to reduce the off-gassing of chemicals such as formaldehyde. As federal agencies became more aware of indoor air pollution problems in the early 1980s, EPA and other agencies worked with the industries that make many of the materials used in office spaces--such as furniture, particleboard and wallboard, and carpet--to reduce the amount of chemicals used in the production of their products. Manufacturers have met these new standards by using less formaldehyde in their products and by using other materials to encase products that contain high levels of pollutants to prevent the off-gassing of these chemicals. In some instances, manufacturers suggest that their products be aired out before they are installed in an office building or that the building be aired out before it is occupied. We provided copies of a draft of this report to the National Institute of Environmental Health Sciences (NIEHS) for review and comment. The agency generally agreed with the information presented but took exception to the section dealing with the mathematical extrapolation showing the probable range of formaldehyde levels when employees first moved into the new building. The agency does not believe that it is possible to accurately model what the formaldehyde levels were in April 1981 because of the multiple variables that could have affected the levels and the lack of reliable information from 1981. While we agree that there are many uncertainties that make modeling formaldehyde levels in April 1981 difficult, enough is known about the various factors to do a simple mathematical extrapolation along a decay curve to show that the possible readings would have been higher than those measured in September 1981. For example, factors such as the type of materials in the building did not change significantly, and the air exchange rate in September should have been higher than in April. These, as well as other physical factors, point to the concentrations of formaldehyde being higher in April than in September 1981, but since monitoring was not done in April, there is no way of knowing exactly how much higher. All of the agency officials we spoke with from NIEHS and EPA agreed that the levels of formaldehyde at the facility in April were higher than in September. Opinions differed, however, as to how much higher the levels were, but there was general agreement that they were likely to have been no higher than 2.0 ppm. NIEHS stated that the initial levels were probably below 2.0 ppm because higher exposures would have caused significant eye irritation in most people and most employees first occupying the space were able to tolerate their indoor environment. We added NIEHS' views as appropriate. Appendix II contains the full text of the agency's written comments. Our review included interviews with NIEHS officials, current and former NIEHS employees, and scientists and experts knowledgeable about modeling, air handling, air monitoring, and the exposure to and the effects of formaldehyde. We also reviewed available documentation and air monitoring data compiled by NIEHS from September 1981 through March 1982. Because no air quality measurements were taken in the new NIEHS facility during the first 5.5 months that it was occupied, we relied on extrapolations and interviews to determine the most likely quality of the air inside module A when it was first occupied. We asked an EPA scientist, who was identified by the agency as an indoor air expert, to use NIEHS' air monitoring data from September 28, 1981, through March 1, 1982, to extrapolate the formaldehyde levels when employees first moved into module A. To identify the available research on the health effects of formaldehyde, we reviewed The Toxic Profile for Formaldehyde (the September 1997 peer-reviewed draft) prepared by the Department of Health and Human Services' Agency for Toxic Substances and Disease Registry. We also reviewed the April 1987 Assessment of Health Risks to Garment Workers and Certain Home Residents From Exposure to Formaldehyde, prepared by EPA's Office of Pesticides and Toxic Substances, and the June 1991 update, Formaldehyde Risk Assessment, prepared by EPA's Office of Toxic Substances. We also reviewed other technical literature on the health effects of formaldehyde. We performed our work from October 1997 through January 1998 in accordance with generally accepted government auditing standards. As arranged with your office, unless you 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 to the appropriate congressional committees; the Secretary, Department of Health and Human Services; and the Director, Office of Management and Budget. We will also make copies available to others on request. Please call me at (202) 512-6111 if you or your staff have any questions. Major contributors to this report are listed in appendix III. upeo noed opossbe lino a quali5/3 E m poee agan went to hopa; 4/20 E mpoee went to hopa4/11 M oed no new buildng 9/29 Teand baane eae gned (n baane) 9/28 - 29 Fa am pe (.1ppm and .34ppm) 2/11 W oe ompenaonomiled b empoee 4/27 Mem oom heah and ae egadng a handling non peebaane n Sepem be 1981 1/20 - 21 A ampe (aeage of .04ppm) 3/25 - 26 Soue deemnedo beunue 2/25 - 3/1 A am pe (upo .044ppm) William F. McGee, Assistant Director Joseph L. Turlington, Evaluator-in-Charge Richard A. Frankel, Technical Adviser Philip L. Bartholomew, Evaluator James B. Hayward, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO provided information on the: (1) quality of air inside the National Institute of Environmental Health Sciences (NIEHS) building when it was occupied in 1981; (2) health effects associated with exposure to formaldehyde; and (3) current management practices at NIEHS for air handling and air monitoring. GAO noted that: (1) NIEHS does not have data showing what the air quality was inside its new facility during the first 5.5 months that the building was occupied; (2) however, in response to some employees' concerns, the agency began monitoring the air in September 1981; (3) the agency found that formaldehyde levels ranged from 0.1 to 0.34 parts per million (ppm), well below the Occupational Safety and Health Administration's safety standard in effect in 1981; (4) officials of the NIEHS said that during the first 5.5 months, they made adjustments to the air handling system to balance the air flow and introduce more outside air to help alleviate the respiratory problems that some employees were experiencing; (5) formaldehyde is a known irritant; (6) short-term exposure to formaldehyde at concentrations as low as 0.41 ppm can irritate the eyes and the respiratory tract; (7) such effects usually pass quickly, however once exposure ends; (8) according to the National Institute for Occupational Safety and Health, short-term exposure to very high concentrations of formaldehyde at levels of 14.1 to 14.3 ppm has produced cancer in the nasal passages of laboratory animals; (9) because it is carcinogenic in animals and is known to damage genetic material in cell cultures, formaldehyde has been classified as a probable human carcinogen; (10) however, examination of epidemiological evidence has not demonstrated a firm relationship between formaldehyde and cancer in humans; (11) the NIEHS' current managers are more aware of the need for adequate air handling systems in buildings and for routinely monitoring indoor air levels to protect employees from exposure to indoor air pollutants than managers were in 1981; (12) for example, prior to a recent move into a new laboratory module at Research Triangle Park, the agency took a number of steps to ensure the quality of the building's indoor air, including improved air handling and monitoring measures; and (13) the manufacturing standards for building materials and office furnishings are more stringent today to ensure that the off-gassing levels of chemicals such as formaldehyde are much lower than in the past years.
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Prescription drug discount cards are a relatively new option for consumers. Most of the large PBM-administered programs have been operating for less than 5 years, although some cards, such as one administered by Express Scripts, have been available for about a decade. Pharmaceutical-manufacturer-sponsored discount cards are a more recent development; the first one began in fall 2001. Together Rx began operating in June 2002. PBM-administered drug discount card programs are generally offered to consumers through such organizations as retail stores, retail pharmacies, employee and other associations, nonprofit organizations, insurance companies, and PBMs. The sponsoring organization typically markets the program under its own name, but contracts with another organization-- usually a PBM--to administer the program. Generally, the PBM creates a network of participating pharmacies that have contracts with the PBM specifying discount arrangements. The PBM processes orders for the cards and operates a mail order pharmacy that cardholders may use. Consumers can have as many different cards as they like. Each card can be used at any participating retail pharmacy or through the PBM's mail order pharmacy. Retail pharmacies play an important role in drug discount card programs because they agree to offer a lower price to cardholders. The PBM administrators with whom we spoke estimated that retail pharmacies fill 75 to 95 percent of the prescriptions paid for using PBM-administered discount cards, with mail order filling the remaining prescriptions. A large majority of prescriptions paid for using pharmaceutical-manufacturer- sponsored cards are also filled by retail pharmacies, rather than through mail order. To the typical pharmacy, however, card users comprise a small share of their prescription business. Representatives of three retail pharmacy chains we contacted told us that from 2 to 10 percent of a pharmacy's prescriptions are purchased using a card. Under the Administration's proposed Medicare-Endorsed Prescription Drug Plan Assistance Initiative, established drug card sponsors could apply to CMS for a Medicare endorsement; if they get it, sponsors could advertise this endorsement. Before the injunction was issued, applications from card sponsors were due March 7, 2003, and a final decision on the initial cards that would be Medicare-endorsed was slated to be announced in May 2003. On this timetable, CMS said it expected that beneficiaries would be able to enroll in the card program of their choice beginning in September 2003. Cards receiving the endorsement would have to meet certain standards, which are described below. The CMS rule does not provide details on some of these standards and is silent on how the agency would ensure compliance with some of them. Beneficiary eligibility. A card program would have to be open to all Medicare beneficiaries. Each beneficiary could be enrolled in only one Medicare-endorsed card program at a time, but could withdraw from it at any time. (A database of all cardholders would be maintained to ensure that each beneficiary was enrolled in only one Medicare-endorsed card program.) After withdrawing from a card program, the beneficiary could enroll in another Medicare-endorsed card program, but that enrollment would not take effect until the first day of the following July or January, whichever came first. Fees. A card program could charge an enrollment fee of no more than $25 to each Medicare beneficiary. Coverage. Each card program would provide a discount for at least one brand name or generic prescription drug from each therapeutic class of drugs (specified in the final rule) commonly needed by Medicare beneficiaries. CMS said it anticipated periodically modifying the therapeutic classes to keep them up to date with Medicare beneficiaries' use of drugs and with changes in the pharmaceutical marketplace, including newly approved drugs. Advertised discounts. The discount that a beneficiary would receive by purchasing drugs with a Medicare-endorsed prescription drug card must be advertised in dollars, not as a percentage. CMS said it anticipated working with beneficiaries and the pharmaceutical industry to create a means to compare prices for drugs among all Medicare-endorsed prescription drug cards. CMS stated that it would give a special designation to up to 10 percent of cards that offered the deepest discounts to beneficiaries. Negotiation of discounts. Medicare-endorsed cards would require card administrators to negotiate with pharmaceutical manufacturers to provide lower prices to retail pharmacies for drugs purchased by cardholders. Discount card administrators would have to ensure that a "substantial" share of the lower prices was passed on to beneficiaries, either indirectly, through retail pharmacies, or directly. Information for beneficiaries. Enrollment fees, the availability of patient management services, such as drug interaction warnings, and information about the generic equivalent of brand name drugs for each Medicare-endorsed card would be included on CMS's Web site and in the documents that contain card price comparisons developed by CMS. PBM-administered drug discount cards differ from pharmaceutical- manufacturer-sponsored cards with respect to eligibility, the range of drugs they cover, the extent to which the retail pharmacy is paid for all or part of the difference between the price a person pays without a discount card and the discount card price for a particular drug, and the prices available with a card. The discount card programs administered by PBMs are available to any adult, while the pharmaceutical manufacturers' cards are available only to Medicare-eligible individuals and couples with incomes below a certain level who do not have prescription drug coverage. Each PBM-administered card covers most outpatient prescription drugs, while the cards sponsored by pharmaceutical manufacturers generally provide discounts only on the outpatient prescription drugs that company produces. PBM-administered discount cards specify that the cardholder's price will be the lower of a percentage below a commonly used reference price or the pharmacy's usual price (generally referred to as the usual and customary price). The typical card sponsored by a pharmaceutical manufacturer offers cardholders either a price that is a specified percentage off a list price or a fixed price for a specified quantity of each covered drug. (See appendix I for selected characteristics of the drug card programs that we examined.) The eligibility requirements for a card generally depend on whether it is administered by a PBM or sponsored by a pharmaceutical manufacturer. Unlike the PBM-administered cards, which are available to any individual, the drug company-sponsored cards are available only to Medicare-eligible individuals and couples with no prescription drug coverage who earn less than a certain amount. Income eligibility limits for these cards range from $18,000 to $30,000 for an individual and from $24,000 to $40,000 for a couple. PBM-administered discount cards usually cover most brand name and generic drugs. PBM officials said exceptions could include high-cost drugs in limited supply, those needing special administration, and the relatively few outpatient prescription drugs covered by Medicare. Each of the cards sponsored by a pharmaceutical manufacturer typically covers all the outpatient prescription drugs that the manufacturer produces. The number of drugs covered by the four manufacturer-sponsored cards we reviewed ranges from 14 to 46. The Together Rx card offers discounts on about 150 brand name drugs manufactured by its participating pharmaceutical manufacturers. Under all drug discount card programs, retail pharmacies agree to accept a lower price from a cardholder than the usual price they would charge a noncardholder. The card programs vary, however, in whether and to what extent the pharmacies are paid for the difference between these two prices. For purchases with the Medco Health Solutions and WellPoint Health PBM-administered cards, there is no such payment. For some of the purchases made with the other three PBM-administered cards, the retail pharmacy is either paid a portion of the difference between the pharmacy's usual price and the price the cardholder pays. For other purchases made with any of these three cards, the pharmacy is not paid for any of the difference between the usual price and the price the cardholder pays. Under the typical pharmaceutical manufacturer-sponsored card, the manufacturer pays retail pharmacies for a portion of the difference between the usual price it charges for a drug and the lower price the pharmacy agrees to charge a cardholder. Some manufacturers set limits on the usual price that will be used to determine this portion. While PBM-administered drug discount cards typically express their savings to cardholders as a percentage off what a cardholder would otherwise pay, the cards differ in how they calculate the price that cardholders pay at a retail pharmacy. For example, all the PBM- administered cards other than Citizens Health express the cardholder's price as the lower of the average wholesale price minus 10 to 15 percent or the retail pharmacy's usual price. Citizens Health and the AARP card administered by Express Scripts use similar formulas, but further stipulate that the cardholder's price must be at least one dollar below the retail pharmacy's usual price. Drug prices available with pharmaceutical manufacturer-sponsored cards are typically lower than the prices available with PBM-administered cards because a manufacturer-sponsored card's price is either a percentage off the manufacturer's list price to wholesalers, which is generally lower than average wholesale price, or a dollar amount for a specified amount of a drug. For example, Aventis cardholders pay no more than 15 percent below its list price to wholesalers for a covered drug, and a Pfizer Share Card enrollee pays $15 for each 30-day supply of any covered drug. With GlaxoSmithKline's Orange card a cardholder pays a price that is the pharmacy's usual price, subject to a limit determined by the manufacturer, minus 25 percent off the company's list price to wholesalers. Each manufacturer participating in Together Rx sets the price for each of its drugs independently, while guaranteeing that the price will be at least 15 percent off the manufacturer's list price to wholesalers. PBM-administered drug discount cards used at retail pharmacies or the PBMs' mail order pharmacies generally offer savings to consumers because card prices are typically lower than the prices retail pharmacies would otherwise charge. Card savings--the difference between the pharmacy's usual price and the cardholder's price--vary, primarily because the usual price varied across the 40 pharmacies we surveyed. For certain drugs at certain pharmacies, however, no savings were achieved through the use of the card because the retail pharmacy's usual price was lower than the median card price. Savings achieved through a PBM- administered card would be reduced by the annual or one-time fee that the card charges. The range of savings achieved using a PBM-administered drug discount card at a retail pharmacy for a 30-day supply of the nine drugs we examined varied within and across geographic areas, primarily because of differences in the usual prices charged by the pharmacies. Choice of pharmacy rather than choice of card had more effect on how much a person saved with a discount card. (See appendix II for more information on the median retail drug card prices and the median retail pharmacy prices in the three areas we examined.) Median savings available with a PBM-administered card in the Washington, D.C. pharmacies ranged from $2.09 to $20.95 for the nine drugs. All 14 of the surveyed pharmacies offered a 10 percent senior discount. Card savings amounted to an additional 1.7 percent to 43.9 percent off the median pharmacy price. The highest percentage discount was for the two generic drugs in our sample (atenolol and furosemide), although because these were the lowest priced drugs, the dollar savings were among the lowest in the sample. The substantial price differences across pharmacies affected the card savings for a given drug. For example, the noncard price for a 30-day supply of 200 milligrams of Celebrex at the surveyed Washington, D.C. pharmacies ranged from $74.33 to $95.59. Median savings in North Dakota ranged from $0.54 to $7.72 for the nine drugs or from 1.3 percent to 42.3 percent off the median pharmacy price. Only 3 of 13 pharmacies offered a senior discount (two offered 10 percent and one offered 5 percent). At one of the pharmacies offering a senior discount, some card prices for eight of the nine drugs were higher than the pharmacy's usual price for those drugs. In California, Medi-Cal, the state's Medicaid program, requires retail pharmacies that participate in the program to offer the Medi-Cal price to Medicare beneficiaries who do not have prescription drug coverage. At the 10 Medi-Cal-participating pharmacies, savings for seven of the nine drugs ranged from $0.44 to $13.06 or from 0.7 percent to 11.1 percent off the median pharmacy price. The Medi-Cal prices for the other two drugs at these pharmacies were lower than the median drug card prices for these drugs so the use of the card offered no savings. At the two pharmacies that did not participate in Medi-Cal, but offered a 10 percent senior discount, the savings were similar to those at the Medi-Cal participating pharmacies, although one pharmacy's prices for four drugs were lower than the median card prices. Savings at the other pharmacy, which did not offer a senior discount or participate in Medi-Cal, were considerably higher. Mail order prices for a 30-day supply of a drug with a PBM-administered discount card were typically lower than the retail pharmacies' usual price without a discount card, resulting in greater card-related savings. The mail order prices with a discount card resulted in savings ranging from $6.30 to $27.56 for eight of the nine drugs we examined at the Washington, D.C. pharmacies we surveyed. The average retail pharmacy usual price without a discount card for the other drug was lower than the mail order price with a card. In North Dakota, the savings realized by using a PBM- administered drug card to purchase the nine drugs from a mail order pharmacy ranged from $0.63 to $17.58. In California, mail order prices using a PBM-administered drug card were lower than the Medi-Cal price for eight of the nine drugs we examined, resulting in savings ranging from $1.03 to $19.67; the Medi-Cal price was lower than the mail order drug card prices for the other drug. Mail order savings at the three California pharmacies that were not participating in Medi-Cal ranged from $3.12 to $104.32, except at one of the pharmacies offering a 10 percent senior discount where the retail price for two drugs was lower than the mail order price. Because it generally offers lower prices than retail pharmacies, mail order can be an attractive option for purchasing drugs for the chronic conditions common among the elderly, such as diabetes, arthritis, and high blood pressure. Two PBM administrators noted, however, that many elderly people cannot afford to buy at one time the 90-day supply of a drug that mail order pharmacies typically dispense. Consumers who use a mail order option can purchase drugs at Internet pharmacies without a discount card. Our comparison of prices using data from November 2001 found that the median mail order price using a PBM- administered discount card was generally lower than Internet pharmacy prices for a drug. But we also found at least one Internet pharmacy at that time that offered a price lower than the median discount card mail order price for 8 of 17 drugs that we examined. The savings from using a card are reduced if the card charges a fee. None of the pharmaceutical manufacturers' cards charges a fee. The PBMs whose cards we examined generally charged a one-time fee or an annual fee. For example, the discount card we examined from Wellpoint Health charges a one-time fee of $25 for an individual and about $50 for a family. The Citizens Health card costs $12 a year for an individual and $28 a year for a family. As of October 2002, 16 states had passed laws regulating one or more aspects of prescription drug discount card programs (see table 1). While the scope of each of the laws varies, the sponsors of several of the laws have characterized their purpose as consumer protection. Thirteen of the states require that a notice appear prominently on the card declaring that it does not represent insurance coverage. Eleven of the states require that the reporting of discounts offered by the cards not be misleading, deceptive, or fraudulent. New Hampshire's law, for example, requires that the advertising for any discount card expressly state that the discount is available only at participating pharmacies. The law was enacted in May 2001 after some consumers complained about confusion in how and where discount cards could be used. The sponsor of the New Hampshire law told us that she heard from consumers in her state who said they would pay for a card over the telephone, only to later find that the nearest pharmacy honoring it was 50 to 100 miles away from their home. Twelve states require that the discounts be specifically authorized by separate contracts between the card administrator and each participating pharmacy or pharmacy chain. South Dakota's law, which includes such a provision, was enacted following complaints from pharmacists that companies were selling cards that promised discounts at various pharmacies, but that the companies did not have agreements with all of those pharmacies to actually provide the discounts. The sponsor of the South Dakota law said some cardholders claimed that certain pharmacies that the card's sponsor advertised as accepting the card did not do so. The sponsor of the law told us that it is intended to protect consumers and pharmacies from deceptive sales practices by drug discount card sponsors. Mississippi's drug discount card law bars a program administrator, such as a PBM, from requiring pharmacies to accept a card as a condition of receiving a contract for the PBM's other business, unless the administrator "pays a portion" of the cost of the discount given by the pharmacy. According to a representative of the Mississippi Attorney General's office, which is responsible for enforcing the law, the state has not defined "portion" in regulation and the meaning of the term has not been the subject of litigation. We provided a draft of this report for review to the five PBM administrators whose cards we examined, four of whom responded. We also obtained comments from a pharmaceutical manufacturer that sponsors its own card and participates in the Together Rx card, and one independent expert reviewer. They provided technical comments that we incorporated as appropriate. As agreed with your offices, unless you publicly announce this report's contents earlier, we plan no further distribution until 30 days after its issue date. At that time, we will send copies to the Administrator of CMS, the PBMs that administered the cards we examined, the pharmaceutical manufacturers that sponsored cards we examined and other interested parties. We will also make copies available to others upon request. This report is also available at no charge on GAO's Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please call me at (202) 512-7119 or John Hansen at (202) 512-7105. Major contributors to this report were Roseanne Price, Michael Rose, and Jeff Schmerling. Washington, D.C.
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While prescription drugs have become an increasingly important part of health care for the elderly, more than one-quarter of all Medicare beneficiaries have no prescription drug coverage. Over the past decade, private companies and not-for-profit organizations have sponsored prescription drug discount cards that offer discounts from the prices the elderly would otherwise have to pay for their prescriptions. These cards are typically administered by pharmacy benefit managers (PBM). Pharmaceutical manufacturers also sponsor and administer their own discount cards. The Administration has been interested in endorsing specific drug cards for Medicare beneficiaries to make the discounts more widely available. Legislative proposals in the Senate and House of Representatives have included drug cards as a means to lower prescription drug prices for Medicare beneficiaries. GAO was asked to examine how existing drug discount cards work and the prices available to card holders. Specifically, GAO evaluated the extent to which PBM-administered drug discount cards offer savings off non-card prices at 40 pharmacies in California, North Dakota, and Washington, D.C., and the differences between PBM-administered cards and cards sponsored by pharmaceutical manufacturers. Medicare beneficiaries can receive prices with prescription drug discount cards at retail pharmacies that are generally lower than those available to seniors without cards. Prices available for a particular drug tend to be similar across PBM-administered cards. Savings from PBM-administered cards, however, can differ because retail pharmacy prices vary widely. For example, in Washington, D.C., which had the highest median retail pharmacy prices of the three areas GAO surveyed, median savings using a PBM-administered card ranged from $2.09 to $20.95 for a 30-day supply of the nine drugs frequently prescribed for the elderly that GAO examined. This was after accounting for the 10 percent discount for senior citizens given by each of the 14 surveyed pharmacies. Savings in California with the use of a card tended to be lower because 10 of the 13 California pharmacies GAO surveyed participated in the state's Medicaid program (Medi-Cal) and are required to give Medicare beneficiaries the Medi-Cal price. For seven of the nine drugs, savings ranged from $0.44 to $13.06. For the other two drugs the cards offered no savings at Medi-Cal-participating pharmacies because the Medi-Cal prices were lower than the median price available with a PBM-administered card. Savings in North Dakota for the nine drugs ranged from $0.54 to $7.72 even though 10 of the 13 pharmacies there did not offer a senior discount. Any savings achieved with a card are reduced by the annual or one-time fee charged by the PBM-administered cards. Prices available with a pharmaceutical-manufacturer-sponsored card for a particular drug are typically lower than prices obtained using PBM-administered cards, and are often a flat price of $10 or $15. PBM-administered cards differ from pharmaceutical-manufacturer-sponsored cards with respect to eligibility and the range of drugs they cover, as well as the price available with the card. PBM-administered discount cards are available to all adults and can be used to purchase most outpatient prescriptions. Pharmaceutical-manufacturer-sponsored cards are available only to Medicare beneficiaries with incomes below a certain level who have no prescription drug coverage and can be used to purchase only outpatient prescription drugs produced by the sponsoring manufacturers.
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CAT/BPSS, which is part of TSA's Passenger Screening Program, has undergone initial testing and is in the operational testing and evaluation phase of acquisition, according to TSA. The goal of CAT/BPSS is to deploy a computerized system that will read and analyze data and embedded security features on every passenger's identification and some boarding passes, and to identify fraudulent credentials and boarding passes. In 2011, TSA conducted qualification testing of this system at its System Integration Facility at Washington Reagan National Airport, including testing the systems against more than 530 genuine and fraudulent documents, such as state-issued driver's licenses, passports, and military identification cards, according to TSA. The technology is designed to automatically compare a passenger's identification with a set of embedded security features to seek to identify indicators of fraud and concurrently ensure that the information on the identification and boarding pass matches. This system is intended to help ensure that identity credentials and boarding passes presented at the checkpoint have not been tampered with or fraudulently produced, and that the information on the boarding pass matches that of the identity credential. According to TSA, CAT/BPSS is to compare identity credentials with an internal database of more than 2,400 templates for various types of credentials and to check for certain embedded security features, then alert the operator of any discrepancies. In September 2011, TSA awarded contracts for approximately $3.2 million, which included the purchase of 30 units from three different vendors. In April 2012, TSA began deploying units to three airports-- George Bush Intercontinental in Houston, Luis Munoz Marin International in San Juan, and Washington Dulles International--in preparation for initial operational testing. TSA officials said that those airports were selected, in part, because of their high passenger volume and experience with detecting fraudulent documents. In preparation for initial testing, TSA tested the performance of its current process for comparison purposes. TSA is also training personnel on the CAT/BPSS systems, collecting preliminary data on system performance and availability, and assessing the adequacy of the concept of operations and standard operating procedures. According to TSA officials, these efforts will allow travel document checkers at the three airports to test the three systems in an operational environment and provide feedback on the systems' performance. During operational testing, TSA plans to assess the systems' performance against key performance parameters for detection, passenger throughput, and availability. Once operational testing is complete, TSA plans to produce a system evaluation report and recommend whether to move forward with the acquisition or make modifications. Vendors that successfully exit the operational testing phase will be eligible to compete for a contract to produce 1,400 units, according to TSA. According to the life cycle cost estimate for the Passenger Screening Program, of which CAT/BPSS is a part, the estimated 20-year life cycle cost of CAT/BPSS is approximately $130 million based on a procurement of 4,000 units. As highlighted in our Cost Estimating and Assessment Guide, a reliable cost estimate has four characteristics--it is comprehensive, well documented, accurate, and credible. We reviewed TSA's November 2011 life cycle cost estimate for the Passenger Screening Program and compared it with the four characteristics. Based on our assessment, the life cycle cost estimate is reasonably comprehensive and well documented. Regarding accuracy, the cost estimate assumes a 1 percent inflation rate from fiscal years 2015 through 2029, as compared with the historic inflation rates calculated for fiscal years 2009 through 2014, which ranged from 3.3 to 4.5 percent. If a larger inflation rate were used, costs would be much higher than what are currently estimated. In addition, we cannot make a determination as to the credibility of the life cycle cost estimate as it does not include a risk and uncertainty analysis or an independent cost estimate. The risk assessment would quantify risks and identify effects of changing key cost driver assumptions and factors. In the cost estimate, TSA indicates that it is pursuing the acquisition of risk analysis capability and plans on having such capabilities in time for the next life cycle cost estimate. Likewise, there is no evidence that an independent cost estimate was conducted by a group outside the acquiring organization to determine whether other estimating methods would produce similar results. TSA officials indicated that the agency is updating its life cycle cost estimate to include a risk and uncertainty analysis and independent cost estimate, but the document has not yet been approved. The agency plans to expand the CAT/BPSS deployment schedule following successful implementation and testing in the selected airport environments. As of June 2012, TSA officials estimated that this could occur as soon as the end of this calendar year, depending on the results of the operational testing and evaluation phase. Our past work has identified three key challenges related to TSA's efforts to acquire and deploy technologies to address homeland security needs: (1) developing and meeting technology program requirements, (2) overseeing and conducting testing of new screening technologies, and (3) developing acquisition program baselines to establish initial cost, schedule, and performance parameters. We have previously reported that DHS and TSA have faced challenges in developing and meeting program requirements when acquiring screening technologies, and that program performance cannot be accurately assessed without valid baseline requirements established at the program start. In June 2010, for example, we reported that more than half of the 15 DHS programs we reviewed awarded contracts to initiate acquisition activities without component or department approval of documents essential to planning acquisitions, setting operational requirements, or establishing acquisition program baselines. We made a number of recommendations to help address issues related to these procurements. DHS generally agreed with these recommendations and, to varying degrees, has begun taking actions to address them. We currently have ongoing work related to this area and we plan to report the results later this fall.fully follow DHS acquisition policies when acquiring advanced imaging At the program level, in May 2012, we reported that TSA did not technology (AIT), or body scanners, which resulted in DHS approving full AIT deployment without full knowledge of TSA's revised specifications. As a result, we found that TSA procured and deployed a technology that met evolving requirements, but not the initial requirements included in its key acquisition requirements document that the agency initially determined were necessary to enhance the aviation system. We recommended that TSA develop a road map that outlines vendors' progress in meeting all key performance parameters. DHS agreed with our recommendation and has begun taking action to address it. We have also reported on DHS and TSA challenges in overseeing and testing new screening technologies, which can lead to costly redesign and rework at a later date. Addressing such problems before moving to the acquisition phase can help agencies better manage costs. For example, in October 2009, we reported that TSA had deployed explosives trace portals, a technology for detecting traces of explosives on passengers at airport checkpoints, in January 2006 even though TSA officials were aware that tests conducted during 2004 and 2005 on earlier models of the portals suggested the portals did not demonstrate reliable performance in an airport environment. In June 2006, TSA halted deployment of the explosives trace portals because of performance problems and high installation costs. In our 2009 report, we recommended that, to the extent feasible, TSA ensure that tests are completed before deploying new checkpoint screening technologies to airports. DHS concurred with the recommendation and has taken action to address it, such as requiring more-recent technologies to complete both laboratory and operational tests prior to deployment. GAO, Aviation Security: DHS and TSA Have Researched, Developed, and Begun Deploying Passenger Checkpoint Screening Technologies, but Continue to Face Challenges, GAO-10-128 (Washington, D.C.: Oct. 7, 2009). cost and schedule can provide useful indicators of the health of acquisition programs. For example, we reported in April 2012 that TSA has not had a DHS-approved acquisition program baseline since the inception of the Electronic Baggage Screening Program (EBSP) more than 8 years ago. Further, DHS did not require TSA to complete an acquisition program baseline until November 2008. According to TSA officials, they have twice submitted an acquisition program baseline to DHS for approval--first in November 2009 and again in February 2011. An approved baseline would provide DHS with additional assurances that TSA's approach is appropriate and that the capabilities being pursued are worth the expected costs. In November 2011, because TSA did not have a fully developed life cycle cost estimate as part of its acquisition program baseline for the EBSP, DHS instructed TSA to revise the life cycle cost estimates as well as its procurement and deployment schedules to reflect budget constraints. DHS officials told us that they could not approve the acquisition program baseline as written because TSA's estimates were significantly over budget. TSA officials stated that TSA is currently working with DHS to amend the draft program baseline and plans to resubmit the revised acquisition program baseline before the next Acquisition Review Board meeting, which is planned for July or August 2012. Establishing and approving a program baseline, as DHS and TSA plan to do for the EBSP, could help DHS assess the program's progress in meeting its goals and achieve better program outcomes. Our prior work on TSA acquisition management identified oversight problems that have led to cost increases, delivery delays, and other operational challenges for certain assets, such as EBSP, but TSA has also taken several steps to improve its acquisition management. For example, while we continue to find that some TSA acquisition programs do not have key documents needed for properly managing acquisitions, CAT/BPSS has a DHS-approved mission needs statement, operational requirements document, and acquisition program baseline. This hearing provides an opportunity for congressional stakeholders to focus a dialogue on how to continue a sufficient level of oversight of the CAT/BPSS acquisition and implementation and other key components of the Passenger Screening Program. For example, relevant questions that could be raised include the following: To what extent, if any, have key performance parameters changed during the course of the acquisition, and how will these changes affect security and efficiency at the checkpoint? What would be TSA's strategy if vendors have difficulty meeting the key performance parameters? How will TSA ensure that implementation of the system addresses the security vulnerabilities previously identified? What confidence does TSA have in its cost estimates and how is the agency mitigating the risk of cost escalation or schedule delays? In managing limited resources to mitigate a potentially unlimited range of security threats, how does CAT/BPSS fit into TSA's broader aviation security strategy? What cost-benefit and related analyses, if any, are being used to guide TSA decision makers? These types of questions and related issues warrant ongoing consideration by TSA management and continued oversight by congressional stakeholders. Chairman Rogers, Ranking Member Jackson Lee, and Members of the Committee, this concludes my prepared statement. I look forward to responding to any questions that you may have. For questions about this statement, please contact Steve Lord at (202) 512-4379 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Jessica Lucas-Judy, Assistant Director; Carissa Bryant; Jennifer Echard; Laurier Fish; Tom Lombardi; and Katherine Trimble. Key contributors for the previous work that this testimony is based on are listed within each individual product. Homeland Security: DHS and TSA Face Challenges Overseeing Acquisition of Screening Technologies. GAO-12-644T. Washington, D.C.: May 9, 2012. Checked Baggage Screening: TSA Has Deployed Optimal Systems at the Majority of TSA-Regulated Airports, but Could Strengthen Cost Estimates. GAO-12-266. Washington, D.C.: April 27, 2012. Transportation Security Administration: Progress and Challenges Faced in Strengthening Three Key Security Programs. GAO-12-541T. Washington D.C.: March 26, 2012. Homeland Security: DHS and TSA Acquisition and Development of New Technologies. GAO-11-957T. Washington, D.C.: September 22, 2011. Aviation Security: TSA Has Made Progress, but Additional Efforts Are Needed to Improve Security. GAO-11-938T. Washington, D.C.: September 16, 2011. Department of Homeland Security: Progress Made and Work Remaining in Implementing Homeland Security Missions 10 Years after 9/11. GAO-11-881. Washington, D.C.: September 7, 2011. Homeland Security: DHS Could Strengthen Acquisitions and Development of New Technologies. GAO-11-829T. Washington, D.C.: July 15, 2011. Aviation Security: TSA Has Taken Actions to Improve Security, but Additional Efforts Remain. GAO-11-807T. Washington, D.C.: July 13, 2011. Aviation Security: TSA Has Enhanced Its Explosives Detection Requirements for Checked Baggage, but Additional Screening Actions Are Needed. GAO-11-740. Washington, D.C.: July 11, 2011. Homeland Security: Improvements in Managing Research and Development Could Help Reduce Inefficiencies and Costs. GAO-11-464T. Washington D.C.: March 15, 2011. High-Risk Series: An Update. GAO-11-278. Washington D.C.: February 16, 2011. Department of Homeland Security: Assessments of Selected Complex Acquisitions. GAO-10-588SP. Washington, D.C.: June 30, 2010. Aviation Security: Progress Made but Actions Needed to Address Challenges in Meeting the Air Cargo Screening Mandate. GAO-10-880T. Washington, D.C.: June 30, 2010. Aviation Security: TSA Is Increasing Procurement and Deployment of Advanced Imaging Technology, but Challenges to This Effort and Other Areas of Aviation Security Remain. GAO-10-484T. Washington, D.C.: March 17, 2010. Aviation Security: DHS and TSA Have Researched, Developed, and Begun Deploying Passenger Checkpoint Screening Technologies, but Continue to Face Challenges. GAO-10-128. Washington, D.C.: October 7, 2009. GAO Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs. GAO-09-3SP. Washington, D.C.: March 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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This testimony discusses our past work examining the Transportation Security Administration's (TSA) progress and challenges in developing and acquiring technologies to address aviation security needs. TSA's acquisition programs represent billions of dollars in life cycle costs and support a wide range of aviation security missions and investments. Within the Department of Homeland Security (DHS), the Science and Technology Directorate (S&T) and TSA have responsibilities for researching, developing, and testing and evaluating new technologies, including airport checkpoint screening technologies. Specifically, S&T is responsible for the basic and applied research and advanced development of new technologies, while TSA, through its Passenger Screening Program, identifies the need for new checkpoint screening technologies and provides input to S&T during the research and development of new technologies, which TSA then procures and deploys. TSA screens more than 600 million air passengers per year through approximately 2,300 security checkpoint lanes at about 450 airports nationwide, and must attempt to balance its aviation security mission with concerns about efficiency and the privacy of the traveling public. The agency relies upon multiple layers of security to deter, detect, and disrupt persons posing a potential risk to aviation security. Part of its checkpoint security controls include a manual review and comparison by a travel document checker of each person's boarding pass and identification, such as passports or state-issued driver's licenses. However, concerns have been raised about security vulnerabilities in this process. For example, in 2006, a university student created a website that enabled individuals to create fake boarding passes. In addition, in 2011, a man was convicted of stowing away aboard an aircraft after using an expired boarding pass with someone else's name on it to fly from New York to Los Angeles. Recent news reports have also highlighted the apparent ease of ordering high-quality counterfeit driver's licenses from China. We have previously reported on significant fraud vulnerabilities in thepassport issuance process and on difficulties in detecting fraudulent identity documentation, such as driver's licenses. In response to these vulnerabilities, and as part of its broader effort to improve security and increase efficiency, TSA began developing technology designed to automatically verify boarding passes and to better identify altered or fraudulent passenger identification documents. TSA plans for this technology, known as Credential Authentication Technology/Boarding Pass Scanning Systems (CAT/BPSS), to eventually replace the current procedure used by travel document checkers to detect fraudulent or altered documents. However, we have previously reported that DHS and TSA have experienced challenges in managing their acquisition efforts, including implementing technologies that did not meet intended requirements and were not appropriately tested and evaluated, and have not consistently included completed analyses of costs and benefits before technologies were implemented. This testimony focuses on (1) the status of TSA's CAT/BPSS acquisition and the extent to which the related life cycle cost estimate is consistent with best practices and (2) challenges we have previously identified in TSA's acquisition process to manage, test, acquire, and deploy screening technologies. This statement also provides information on issues for possible congressional oversight related to CAT/BPSS. In summary, TSA has completed its initial testing of the CAT/BPSS technology and has begun operational testing at three airports. We found the project's associated life cycle cost estimate to be reasonably comprehensive and well documented, although we are less confident in its accuracy due to questions about the assumed inflation rate. In addition, we could not evaluate its credibility because the current version does not include an independent cost estimate or an assessment of how changing key assumptions and other factors would affect the estimate. Our past work has identified three key challenges related to TSA's efforts to acquire and deploy technologies to address homeland security needs: (1) developing and meeting technology program requirements, (2) overseeing and conducting testing of new screening technologies, and (3) developing acquisition program baselines to establish initial cost, schedule, and performance parameters.
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OJP's bureaus and offices provide grants and other awards to various organizations, including state and local governments, universities, and private entities, which are intended to develop the nation's capacity to prevent and control crime, administer justice, and assist crime victims. Within OJP, NIJ serves as DOJ's research and development agency and provides evidence-based knowledge and tools to address crime and justice challenges, particularly at the state and local levels. As part of this mission, NIJ provides awards from the DNA and forensic program appropriation and administers these awards for the purpose of DNA analysis and capacity enhancement and for other forensic science purposes. Within NIJ, the Office of Investigative and Forensic Sciences is responsible for administering awards for these purposes. According to OJP, approximately seven NIJ staff members within the Office of Investigative and Forensic Sciences are responsible for managing and monitoring funds associated with the DNA and forensic program appropriation. NIJ prioritizes initiatives it will fund from the DNA and forensic program appropriation on an annual basis and provides awards through various funding mechanisms, including grants and nongrant agreements as described below. NIJ's award mechanism varies depending on the type of initiative being funded and the type of recipient receiving the funds. NIJ formula discretionary grants: Awards provided under a formula set by DOJ and based primarily on the violent crime rate. The DNA Backlog Reduction Program is the only formula grant program awarded through the DNA and forensic program appropriation. Other discretionary grants: Awards provided to eligible entities, which vary depending on the purpose and requirements of the award. Such grants may be awarded to state and local governments, public and private universities, as well as for-profit and nonprofit organizations. NIJ's other discretionary grants are generally awarded on a competitive basis. Interagency agreements: Awards between federal agencies establishing an agreement for projects that may cover similar topics and initiatives as NIJ's other discretionary grants. Federal agencies may not receive funds through grants; however, they may compete for some awards, if eligible, or receive non- competitive awards, if determined to be appropriate for NIJ's DNA and forensic science activities. Contracts: Agreements with various nongovernment entities, such as private laboratories, for various services, such as conducting certain DNA analytical services or providing other technical scientific services. NIJ funds grants through solicitations, which are formal requests for funding proposals outlining goals, eligibility requirements, and the instructions for applying to receive grant funding. Federal agencies may apply under such solicitations if eligible; however, in such cases, NIJ awards federal agencies funds through interagency agreements, and not through the solicitation and grant-making process. Contracts are not funded through the typical grant-making process, but through requests for contract proposals. For the purposes of this report, "initiatives" include all awards NIJ funded from the DNA and forensic program appropriation, including awards funded through grants, interagency agreements, and contracts. NIJ provides funds under various initiatives for the purposes of reducing the DNA backlog and for other forensic sciences needs, including research and development and forensic science training. Table 1 describes NIJ's initiatives funded from fiscal years 2008 through 2012 through the DNA and forensic program appropriation that directly benefit state and local government DNA-related efforts to reduce backlogs and build capacity. Throughout this report, we refer to these initiatives as the DNA backlog initiatives. Table 2 describes NIJ's additional initiatives funded through the DNA and forensic program appropriation that do not directly benefit the state and local government DNA analysis backlog, but address other DNA and forensic science challenges identified by the agency from fiscal years 2008 through 2012. OJP policy directs that monitoring be performed to assess the performance of programs that support NIJ initiatives. For example, for grants, during programmatic monitoring, grant managers review qualitative information (such as progress reports submitted by grantees and supporting documentation on grantee program implementation), and quantitative information (such as performance measurement data submitted by grantees), to determine grant progress and performance. In grant applications, grantees are required to propose grant goals that support NIJ's stated program purpose, the activities through which they aim to achieve those goals, and an implementation plan describing timelines and steps for the activities. For interagency agreements and contracts, OJP and NIJ officials determine the type of monitoring documents, such as progress reports, required based on the goals and objectives of each specific award. From fiscal years 2008 through 2012, Congress appropriated approximately $691 million to NIJ to provide grant and other awards for state and local governments to reduce the DNA backlog and increase DNA lab capacity, as well as for other forensic science purposes. The appropriations language was broad and enabled NIJ to allocate funding for a variety of forensic programs at funding levels established by the agency. As a result, NIJ allocated funds for both its DNA backlog initiatives and other forensic science initiatives based on NIJ's mission and annual budgeting priorities. For instance, over the 5-year period, NIJ provided funding through the DNA Backlog Reduction Program, other discretionary DNA backlog initiatives such as analyzing DNA samples from cold cases, and other forensic science initiatives awarded through grants and nongrants including research, development, and evaluation; forensic science training; and support for the development of best practices. NIJ allocated the majority--about 64 percent, or $442 million of the available $691 million in the DNA and forensic program appropriations-- to DNA backlog initiatives. Our analysis of the data shows that about $343 million of this $442 million was awarded through the DNA Backlog Reduction Program, and the remaining approximately $98 million was awarded through its other DNA backlog initiatives. According to NIJ officials, these awards directly affected the DNA backlog by providing funds to state and local entities for either analyzing DNA samples or increasing the capacity of state and local laboratories to conduct DNA sample analyses. Additionally, NIJ awarded approximately 31 percent, or $212 million of the available $691 million, to other DNA and forensic science purposes that do not directly reduce the DNA backlog. NIJ officials stated that funding from some of these initiatives may have indirect or long-term benefits for reducing the DNA backlog. The remainder of the funding, $38 million, went toward other activities, such as management and administration. See figure 1. We further analyzed the 64 percent of appropriated funding that went toward the DNA Backlog Reduction Program and other DNA backlog initiatives over the 5-year period. We found that, annually, NIJ generally has increased the percentage of funding provided to the DNA Backlog Reduction Program, while the overall amount of the DNA and forensic program funds available through appropriations and prior year carryover decreased from a high of about $153 million in fiscal year 2010 to $118 million in fiscal year 2012. For instance, in fiscal year 2008, NIJ awarded about 36 percent of the total amount available to NIJ to obligate for the DNA Backlog Reduction Program. By 2012, NIJ had increased the amount to about 63 percent of the total available for obligation. At the same time, funds awarded through its other DNA backlog initiatives generally decreased. See figure 2 for the proportion of funds provided for the DNA Backlog Reduction Program and other backlog initiatives by fiscal year. NIJ officials stated that the increased funding for the DNA Backlog Reduction Program was primarily because the agency decided to prioritize the program more than its other initiatives. In addition, NIJ officials stated that funding also increased when the agency subsumed the Convicted Offender and/or Arrestee DNA Backlog Reduction Program into the larger DNA Backlog Reduction Program starting in 2011. As a result, the new program had a larger scope and provided more money to grantees through NIJ's continued emphasis on this program. We also analyzed the breakdown of the grants and nongrant awards for other forensic science initiatives that do not directly contribute to reducing the DNA backlog. From fiscal years 2008 through 2012, this amounted to about 31 percent of the $691 million appropriated, or about $212 million. See figure 3 below for an analysis of funds awarded to other forensic science initiatives. We further analyzed grant and award description information across the initiatives that do not directly contribute to reducing the DNA backlog to determine whether they were DNA-related, and our analysis showed that more than $121 million of the approximately $212 million for other forensic science initiatives covered a range of DNA-related projects such as research, development, and evaluation to improve the ability to analyze aged or compromised DNA samples, DNA training for state and local laboratories, and DNA-related initiatives such as the National Missing and Unidentified Persons System. NIJ officials stated that the agency funded these projects because they provide valuable services and resources to practitioners solving crimes with DNA. For instance, DNA-related research can lead to faster and better methods for recovering and analyzing DNA. Also, NIJ officials stated that the agency's mission includes facilitating faster and better DNA-related knowledge transfer across the country. As a result, several of its technical assistance initiatives covered a facet of NIJ's commitment to training and information sharing. NIJ officials stated they consider these DNA-related initiatives to be a form of DNA capacity enhancement and an important part of the strategy to reduce the DNA backlog. The remaining amount--approximately $90 million of the $212 million-- was awarded to support other areas of forensic science. This represents about 13 percent of the $691 million appropriated and includes efforts such as research, development, and evaluation of faster and less expensive methods to detect drugs or explosives at crime scenes and training for cell phone and other digital information forensic evidence. NIJ officials stated that NIJ has authority to support the criminal justice community in general forensic science endeavors, which is important because lab technicians must process many types of forensic evidence. NIJ officials added that cases may be solved through many different types of evidence and manners of processing, not just through DNA. They stated that faster and better analysis of other forensic evidence may help increase the amount of time lab technicians have to analyze DNA samples and indirectly benefit how many DNA cases can be completed. NIJ has a process in place for determining its annual priorities for the allocation of DNA and forensic program appropriation funds; however, NIJ does not clearly document this process. According to NIJ officials, NIJ staff use the prior fiscal years' funding as a starting point to make a proposed initial estimate of the amount to be allocated to the DNA Backlog Reduction Program. Specifically, NIJ staff examine the amount of funds remaining on active formula grant awards from prior fiscal years, and then use historical funding data to determine what is needed to fund eligible applicants for the next fiscal year. After the proposed initial allocation for the DNA Backlog Reduction Program has been determined, NIJ staff then develop an initial recommendation for how the estimated remaining funding will be allocated to other DNA and forensic initiatives. In addition, NIJ uses the professional expertise of its forensic staff, as well as input from NIJ-sponsored Technology Working Groups (TWG). These groups are committees of 25 to 30 experienced practitioners from local, state, tribal and federal agencies and laboratories associated with a particular NIJ technology investment portfolio, such as DNA Forensics or General Forensics, that help NIJ determine the criminal justice technology needs of the field. After NIJ staff arrive at proposed allocations among the initiatives, staff brief the Director of NIJ with documents--such as budget briefing slides or funding memos--that outline their priority areas. The NIJ Director then determines the initial allocation among the various initiatives. NIJ next begins the process of implementing these initiatives through solicitations. According to NIJ officials, the solicitations are developed by NIJ staff possessing the relevant subject matter expertise, in consultation with Office of Investigative and Forensic Sciences leadership and with input from the forensic science TWGs. NIJ then posts each solicitation to the NIJ web site and either a federal government grant website or an OJP web-based system in order to accept proposals from qualified applicants applying for funding. Qualified proposals submitted in response to a competitive solicitation are subjected to a peer review process and evaluated for their scientific merit. Funding recommendations for individual proposals are, in part, informed by peer review and, in the case of forensics-related research proposals, the needs and priorities identified by the TWGs. According to NIJ officials, the rationale for funding allocation decisions, such as the amount to be used for the DNA Backlog Reduction Program, is documented in the briefing slides and funding memos that are presented to the NIJ Director. However, according to our review, these documents do not consistently or adequately demonstrate NIJ's rationale for how funding priorities are determined. Specifically, from fiscal years 2008 through 2011, NIJ used budget briefing slides to present funding priorities to the NIJ Director. These briefing slides showed the various initiatives and the amount of funding NIJ proposed to allocate to each initiative, but they did not consistently provide justifications for how or why NIJ determined these amounts. For fiscal years 2008 and 2009, the briefing slides included rationale sections that were descriptions of the funding being allocated rather than justifications for why NIJ chose to allocate specific funding amounts to each initiative. For example, for fiscal year 2008, for the Forensic Technology Center of Excellence initiative, NIJ provided an itemized list of the funding request and projects in the rationale section. For fiscal year 2010, the budget briefing document outlined recommended changes to the DNA Backlog Reduction Program, such as adjusting minimum funding levels available to states and units of local government. However, the document did not include any rationale for this decision. For fiscal years 2012 and 2013, NIJ changed its process from using briefing slides to using funding memos to present funding prioritization decisions to the NIJ Director. While these memos show the final amounts NIJ decided to allocate to various initiatives, they do not provide details on the justifications for how funding levels were determined for each initiative. Further, although NIJ had a category for rationale in the fiscal year 2008 and 2009 briefing slides, this practice ended beginning with fiscal year 2010. According to NIJ officials, there was no longer a need to include a rationale in the briefing slides because the briefings to the NIJ Director began occurring later in the prioritization process and the Director's signature, indicating approval of funding prioritization decisions, had already been obtained. Standards for Internal Control in the Federal Government states that internal control and all transactions and other significant events need to be clearly documented, and the documentation should be readily available for examination. The documentation should appear in management directives, administrative policies, or operating manuals, and all documentation and records should be properly managed and maintained. The standards also state that transactions and significant events are to be clearly documented to help management with decision making and to help ensure operations are carried out as intended. According to NIJ officials, the budget briefing slides for fiscal years 2008 through 2011 and the funding memos for fiscal years 2012 and 2013 are the only documents the agency uses to show its rationale for prioritization of the DNA and forensic program appropriation. Additionally, in light of budget uncertainty from year to year, NIJ officials believe their current process is the most useful because it allows the agency flexibility for making decisions. However, without a clearly documented process that demonstrates the rationale for how NIJ is prioritizing its DNA and forensic program appropriation, there is limited transparency regarding how and why the agency is allocating its funding. In addition, documenting the agency's rationale for prioritizing funding--regardless of the timing of the briefing to the NIJ Director--would be worthwhile so that there is a record of the agency's decision. Furthermore, the significant amount of funding NIJ administers under this appropriation, as well as the continuing demand for DNA analysis, highlights the importance of ensuring transparency when it comes to determining priorities for funding allocations. NIJ has processes in place to assess progress of the DNA Backlog Reduction Program, but does not have an approach to verify performance data submitted by grantees so as to reduce error rates. NIJ also has a performance measure to assess the results of this program, but data are lacking to determine whether efforts are having a measurable impact in reducing the DNA backlog. NIJ assesses performance of the DNA Backlog Reduction Program by requiring grantees to submit reports every 6 months outlining their progress in, among other things, meeting the program goals and objectives established in their initial applications for funding. A key component of these progress reports is data on grant results-- performance data--that outline grantee progress such as in analyzing cases using NIJ funds. NIJ program managers are responsible for reviewing performance measure data to assess progress in meeting grantee goals and objectives. NIJ also assesses grantee progress and performance by conducting monitoring activities that include, among other things, desk reviews and in-depth monitoring activities. While NIJ has developed performance measures for its grant programs and collects performance measurement data from its grantees, the agency does not have an approach to verify the reliability of the data--a process of checking or testing performance data to reduce the risk of using data that contain significant errors--and, as a result, faces continuing data errors. In October 2011, based on NIJ's review of progress reports, NIJ noted that, with respect to the DNA Backlog Reduction Program, 30 percent of progress reports submitted by grantees in 2011 had errors in the collection and reporting of data, contained inaccurate data, or lacked goals and updates on progress achieved. Furthermore, according to an NIJ review of site visits it conducted in 2010, NIJ identified many issues with how data are collected and, many times, NIJ found data that were neither accurate nor auditable. In response to these concerns, in October 2011, NIJ provided grantees with additional guidance for preparing data collection plans and required them to explain any changes in data that they had previously submitted. NIJ also began requiring grantees to use an updated progress report form and provided an updated spreadsheet with pre-populated math formulas for reporting data on cases and samples analyzed to minimize data reporting errors. However, in March 2013, a year and a half after these actions, NIJ officials stated that they still estimate that 30 percent of progress reports submitted by grantees contain errors. NIJ officials noted that progress reports are sent back to grantees to correct mistakes, and the grantees are in turn required to send the reports back to NIJ for review and approval. OJP requires that award recipients collect data that are appropriate for facilitating reporting requirements for GPRA, as amended, and that valid and auditable source documentation is available for such data. Office of Management and Budget (OMB) guidance states that in order to assess progress toward achievement of performance goals, performance data must be appropriately accurate and reliable for intended use. OMB's guidance further states that verification and validation of performance data support the general accuracy and reliability of performance information, reduces the risk of inaccurate performance data, and provides a sufficient level of confidence to Congress and the public that the information presented is credible as appropriate to its intended use. In addition, our work on performance assessment has identified that data verification helps to ensure that users can have confidence in the reported performance information because it provides a mechanism for assessing data completeness, accuracy, consistency, and timeliness, among other things. NIJ officials stated that they had not taken action to verify performance data because NIJ does not have access to original data to check that data are being reported correctly. As a result, officials stated that they primarily rely on grantees to submit reliable data. Officials also noted that they do not have the resources to systematically verify the reliability of data reported because, on average, each program manager is responsible for monitoring about 200 awards. Officials explained that as part of monitoring efforts--enhanced programmatic desk reviews, site visits, and review of progress reports--program managers will spot-check data for any anomalies and will follow up with grantees in cases where the data seem inaccurate. Ensuring the reliability of the data is especially important in light of the fact that the DNA Backlog Reduction Program is NIJ's largest investment. Furthermore, NIJ reports performance data in OJP's annual Performance Budget to show progress in reducing the DNA backlog. Without an approach to verify grantee-reported data, NIJ cannot provide assurance that grantees have valid and auditable source documentation for the data they report, as required by OJP. In addition, NIJ officials are not required to verify performance data when reviewing progress reports. NIJ estimated that 30 percent of progress reports were sent back to grantees for correction because they contained errors. However, because program managers are not required to verify performance data, NIJ cannot be certain that the remaining 70 percent of progress reports were free of data errors. As a result, NIJ cannot provide a sufficient level of confidence to Congress and the public that performance data associated with the DNA Backlog Reduction Program are reliable enough to show that the program is successfully meeting its goals or reducing the DNA backlog. As part of its site visit monitoring efforts, during which time NIJ officials have access to grantees' original source data, NIJ could, for example, assess whether additional edit checks are needed to better ensure data are reliable. Although there could be a cost associated with such efforts, defining a cost-effective approach to verify its performance measurement data would better position NIJ to help ensure that it is providing quality information to the public, internal agency officials, and congressional decision makers who play a role in determining where to allocate NIJ funding resources. We also found that the performance measure NIJ uses to measure results of the DNA Backlog Reduction Program may yield an incomplete picture. The performance measure, reported as "percent of reduction in DNA backlog casework," is a projection of DNA casework that grantees expect to complete as opposed to an actual tabulation of completed cases. Using data submitted by grantees, NIJ calculates the number of cases grantees expect to test with future funding, divided by the DNA casework backlog reported by grantees at the end of the calendar year. In fiscal year 2011, for example, the reported percent reduction was 32.9 percent and was based on a calculation of the estimated number of cases grantees expected to be completed, divided by the total DNA casework backlog. Grantees submit their estimated number of cases to NIJ in their funding applications before they are awarded the grants and begin work. Further, these grantees have up to 3 years to complete their work. NIJ officials explained that reducing the DNA backlog is a DOJ goal in support of GPRA and the agency reports this measure in OJP's annual Performance Budget. According to officials, the DNA Backlog Reduction Program is NIJ's program with the most immediate impact in reducing the DNA backlog. However, NIJ's performance measure does not demonstrate actual results, as required by GPRA, as amended. In addition, NIJ has established a target of 25 percent reduction in DNA backlog casework, which NIJ officials stated that they establish based on historical knowledge. However, NIJ's target is also a projection of the DNA casework that grantees expect to achieve based on estimates submitted in grantee applications. Our prior work on GPRA states that agencies that were successful in measuring performance strived to establish performance measures that, among other things, enable an organization to assess accomplishments, make decisions, realign processes, assign accountability, and demonstrate results so as to tell each organizational level how well it is achieving its goals. In addition, in our work assessing performance measures, we identified that performance measures should provide useful information for decision making by providing managers and other stakeholders timely, action-oriented information in a format that helps them make decisions that improve program performance. Measures that do not provide managers with useful information will not alert managers and other stakeholders to the existence of problems or help them respond when problems arise. According to NIJ officials, the agency is unable to develop a performance measure that reports actual cases completed (on the fiscal year basis called for in OJP's annual budget submission) under the DNA Backlog Reduction Program because grantees have up to 3 years to complete their work and the completed number of cases for the entire grant period is not known until the grant period closes. In addition, NIJ officials explained that they would prefer a more meaningful measure, but the current measure captures NIJ's best guess of the percentage reduction in DNA backlog casework. While measuring annual performance for multi-year grants can be challenging, NIJ could take steps to better assess the results of DNA backlog efforts by analyzing performance data on actual cases completed, which the agency already collects from grantees every 6 months as part of the grantees' progress reports. In fact, for grants that have not yet closed, NIJ has already started analyzing actual performance data to identify grantees' annual progress in meeting goals. Such data, once sufficiently reliable, could help NIJ to better assess actual results and develop a more accurate performance measure. Officials from OJP's Office of the Chief Financial Officer--the office responsible for reporting performance measure information--stated that in order to modify a measure, NIJ would need to propose the change and OJP would submit the proposed revised measure, with approval of other components of DOJ, to OMB in the OJP annual budget submission. By revising its performance measure to include casework actually completed, NIJ will be better situated to provide decision makers with timely, action-oriented information that helps them make decisions that improve program performance or that alerts them to the existence of problems so they can respond to them when they arise. As reported by DOJ, federal funds to address the persisting backlogs of untested DNA samples, among other things, have provided needed support to state and local laboratories to help resolve criminal cases. However, DOJ could take additional steps to improve transparency and better assess results. While NIJ has a process to determine funding priorities, documenting the agency's rationale for funding allocation decisions, as recommended by standards for internal control in the federal government, NIJ could enhance transparency of the agency's funding priorities. DOJ has a process in place, as well as a performance measure, to assess results of NIJ's DNA Backlog Reduction Program, but the agency could verify data and use actual outcomes, as required by federal requirements, to attain reasonable assurance that funds are having a measureable impact in reducing DNA backlogs. We recommend that the Director of NIJ take the following three actions. In order to provide stakeholders and Congress greater transparency regarding its funding allocations, we recommend that the Director of NIJ document the rationale for its annual funding priorities. In order to assist Congress and NIJ management and stakeholders to better assess whether NIJ's DNA Backlog Reduction Program is having a measurable impact in reducing the DNA backlog, we recommend that the Director of NIJ take the following two actions: develop a cost-effective approach to verify performance data submitted by grantees to provide reasonable assurance that such data are sufficiently reliable to report progress in reducing the DNA backlog, and, revise the "percent of reduction in DNA backlog casework" performance measure to include casework actually completed as part of the measure instead of casework that is projected. We provided a draft of this report to DOJ for review and comment. DOJ provided written comments, which are reproduced in full in appendix II, and technical comments, which we incorporated as appropriate. DOJ agreed with all three of the recommendations and outlined steps to address them. With respect to the first recommendation, OJP stated that in fiscal year 2014, the Director of NIJ will begin documenting the rationale for the estimated initial allocation of funds appropriated (or anticipated to be appropriated) for DNA analysis and capacity enhancement program efforts, and for other local, state, and federal forensic activities. Regarding the second recommendation, OJP stated that once NIJ revises the performance measure for the NIJ DNA Backlog Reduction Program (in response to our third recommendation), NIJ will begin developing a cost-effective approach to provide reasonable assurance that data collected from grantees, in support of the new or revised performance measure, are sufficiently reliable to report program progress. Finally, for the third recommendation, OJP stated that the Director of NIJ will undertake efforts to revise the performance measure for the NIJ DNA Backlog Reduction Program and anticipates that the new or revised performance measure will reflect actual cases competed. OJP also noted that the new or revised performance measure will be subject to review and/or approval of other DOJ components as the well as the Administration. We are sending copies of this report to the Attorney General, appropriate congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841, [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. The Department of Justice's (DOJ) National Institute of Justice (NIJ) was appropriated about $691 million from fiscal years 2008 through 2012 for the DNA and forensic program, which is administered by its National Institute of Justice (NIJ). NIJ awarded almost two-thirds of all funds--or about 63 percent--to either state or local units of government from the DNA and forensic program appropriation for fiscal years 2008 through 2012, as seen in figure 4. Of the about $691 million, about $442 million, or 64 percent, went to directly benefit state and local units of government to reduce the DNA backlog. Of the $442 million, about 96 percent, or about $422 million, was allocated directly to either state or local units of government through NIJ's DNA backlog initiatives, including NIJ's DNA Backlog Reduction Program. Three percent--or about $14 million--was awarded to public universities to conduct DNA analyses and increase lab capacity on behalf of state and local governments, and an additional 1 percent--about $6 million--was awarded to for-profit businesses to conduct similar analyses for certain populations of DNA samples. Approximately $212 million of $691 million was awarded to various entities for purposes that do not directly support state and local governments' efforts to reduce the DNA backlog, but for which there may be an indirect benefit to the reduction of DNA backlogs. For example, of the $212 million, public colleges and universities received about $63 million for initiatives that do not directly benefit state and local government efforts to reduce DNA backlogs. See table 3. In addition to the contact named above, Dawn Locke (Assistant Director), Joel Aldape, Brian Lipman, and Jeremy Manion made significant contributions to the work. Also contributing to the report were Michele Fejfar, Grant Mallie, Jessica Orr, and Janet Temko.
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Since 2008, Congress has appropriated more than $100 million each year to the Department of Justice (DOJ) that may be used, among other things, to reduce DNA backlogs and enhance crime laboratory capacity. NIJ, within DOJ, is responsible for, among other things, providing awards for DNA analysis and forensic activities. NIJ's DNA Backlog Reduction Program was established to provide grants to state and local governments with the intent, in part, of reducing the backlog of DNA samples. The conference report accompanying the Consolidated and Further Continuing Appropriations Act, 2012, mandated GAO to examine, among other things, DNA analysis funds. This report addresses (1) how NIJ has allocated its DNA and forensic program appropriation over the past 5 fiscal years, (2) the extent that NIJ has a process to determine its funding priorities for its DNA and forensic program appropriation, and (3) the extent that NIJ verifies data on grant results submitted by grantees and measures the outcomes of the DNA Backlog Reduction Program. GAO reviewed relevant appropriations, NIJ funding documentation, and data from fiscal years 2008 through 2012, and interviewed NIJ officials. The National Institute of Justice (NIJ) allocated funding for various DNA and other forensic science activities, with the majority of the available $691 million from fiscal years 2008 through 2012 going to state and local governments to reduce the DNA backlog. Specifically, over this 5-year period, 64 percent was allocated through initiatives that directly benefit state and local efforts to reduce DNA backlogs and build DNA analysis capacity. The largest initiative was NIJ's DNA Backlog Reduction Program, and other DNA backlog initiatives included DNA analysis of cold cases, among others. A smaller portion (31 percent) went to other forensic sciences initiatives, such as research and development and training, although NIJ officials stated that funding these initiatives may have long-term benefits for reducing the DNA backlog. The remainder of the funding went toward other activities, such as management and administration. NIJ has a process in place to determine DNA and forensic program funding priorities, but its decisions regarding these priorities are not clearly documented. According to NIJ officials, the rationale for funding the DNA Backlog Reduction Program versus other initiatives is documented in briefing slides, but these documents do not show NIJ's rationale for how funding priorities are determined. For example, while the budget documents for fiscal years 2012 and 2013 show the final amounts NIJ decided to allocate to various initiatives, these documents do not provide details on the justifications for how funding levels were determined for each initiative. Without a clearly documented process that demonstrates the rationale for NIJ's annual funding priorities, there is limited transparency regarding how and why the agency is allocating its funding. NIJ could verify data and revise its performance measure to better assess the DNA Backlog Reduction Program. NIJ assesses performance of this program by requiring grantees to submit reports every 6 months that, in part, outline their progress in meeting program goals and objectives. However, NIJ does not have an approach to verify the reliability of the data--testing data to ensure data quality--and as a result, faces continuing data errors. Verifying these data would help ensure that the data are reliable enough to show that the program is successfully meeting its goals. In addition, NIJ has a performance measure to assess the results of this program--percent of reduction in DNA backlog casework--but it is a projection of DNA casework that grantees expect to complete as opposed to an actual tabulation of completed cases. While measuring annual performance for multiyear grants can be challenging because the completed number of cases is not known until after the grant period closes, taking steps to analyze performance data on actual cases completed could help NIJ to better assess actual results. GAO recommends that NIJ clearly document the rationale for annual funding priorities, develop a cost-effective approach to verify the reliability of grantee performance data, and revise its performance measure to reflect actual completed cases. DOJ agreed with GAO's recommendations and outlined steps to address them.
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In its September 2015 report, DOD addressed the committee direction to identify root causes regarding the improper documentation and packaging of HAZMAT shipments and any needed corrective actions, but it is too soon to determine the effectiveness of the department's efforts. DOD identified the root causes of the improper documentation and packaging of HAZMAT shipments and developed a plan of action with milestones to address them. In its September 2015 report, DOD used an approach involving stakeholders from throughout DOD's transportation system. According to officials, the Office of the Deputy Assistant Secretary of Defense for Supply Chain Integration coordinated the stakeholders' efforts. According to its officials, the office established a working group comprising stakeholder representatives from the Office of the Deputy Assistant Secretary of Defense for Supply Chain Integration, the Defense Logistics Agency, TRANSCOM, the Air Mobility Command, the Army's Surface Deployment Distribution Command, and the Government Services Administration. As part of this working group, these stakeholders analyzed HAZMAT transportation data from, among other DOD transportation sources, the Global Air Transportation Execution System, the Defense Logistics Agency, and the Web Supply Discrepancy Reports, according to officials. As a result of this approach, DOD identified in its report contract- and documentation-related issues and human error as root causes of improper documentation and packaging of HAZMAT. For example, air HAZMAT shipment documentation and packaging discrepancies resulted from HAZMAT shipments arriving at an aerial port without certain required documentation for air transportation. Specifically, according to the report, missing documentation included confirmation of air clearance, the Advance Transportation Control and Movement Document, and Shipper's Declaration of Dangerous Goods. In addition, DOD noted in its report that contract- and process-related issues contribute to HAZMAT shipments arriving at an aerial port not documented or packaged correctly for air transportation. According to the report, for many shipments delivered directly from the vendors, contracts did not clearly specify for vendors when they must prepare HAZMAT for air shipment, to include preparing required documentation, requesting air clearance, and packaging in accordance with the applicable rules for that mode of transportation. In addition, some contracts did not instruct vendors to use the Defense Logistics Agency's Vendor Shipping Module website, which could have assisted them in requesting air clearance, submitting advance transportation movement and control data, and printing military shipment labels. Further addressing the committee direction, DOD in its September 2015 report included a plan of action and milestones to address the root causes identified and specified over 40 corrective actions. Our analysis found that these corrective actions generally align with the root causes that DOD identified. Examples follow of corrective actions intended to reduce the percentage of HAZMAT shipments with missing, incomplete, or inaccurate documentation arriving at aerial ports and to improve the reporting of HAZMAT shipment documentation and packaging discrepancies: reducing the percentage of HAZMAT shipments from government shippers arriving at aerial ports with missing documentation by notifying shippers of the requirement to prepare HAZMAT for shipment to the final destination, to include preparing required documentation, requesting air clearance, and repacking in accordance with applicable rules; reducing the percentage of HAZMAT shipments arriving at aerial ports with incorrect or incomplete documentation by investigating and recommending alternatives for reducing human error in HAZMAT documentation; and improving the reporting of HAZMAT shipment documentation and packaging discrepancies by adding specific data elements for HAZMAT shipments in a web-based supply discrepancy reporting system, such as WebSDR--an automated process used to report shipping or packaging discrepancies and to provide appropriate responses and resolution. During the course of our review, and according to DOD officials, we found that as of February 2017 DOD had modified and added new corrective actions based on feedback from the working group that developed the September 2015 report and had conducted further analysis of the documentation and packaging issues addressed there. According to DOD officials, the working group of stakeholders involved in this effort meets every quarter to elicit input from its members and update the plan of action and milestones as necessary to reflect actions taken in the field. For example, DOD officials reported that the plan of action and milestones has been updated in response to Joint Base McGuire-Dix- Lakehurst implementing the use of WebSDR in September 2016 and the Defense Logistics Agency implementing a contract provision in January 2017 to help ensure proper documentation and packaging of shipments arriving at aerial ports. As DOD implements its corrective actions, it continues to face issues with improper documentation and packaging causing delayed cargo, according to DOD officials. According to the Global Air Transportation Execution System data that we reviewed for HAZMAT shipments at the five major aerial ports and according to DOD officials whom we interviewed during the course of our review, there continue to be a number of HAZMAT shipments that were not documented and packaged properly. According to DOD officials, these documentation and packaging discrepancies can result in shipment delays that can be as short as a few hours or last several days, depending on the nature of the issue. Based on DOD's Global Air Transportation Execution System database and according to transportation officials, of the 62,703 total shipments of HAZMAT received from October 1, 2013, through March 9, 2017, 34,040 shipments or 54.2 percent were delayed. Of the 34,040 delayed shipments, 19,858 or 58.3 percent were delayed primarily because they were not in compliance with the Defense Transportation Regulation requirements for documentation and packaging, and 14,183 shipments or 41.6 percent were delayed for security-clearance-related reasons (i.e., for shipments supporting foreign assistance missions) that are out of the control of the shipper or DOD. Following are examples of HAZMAT shipments that we identified in 2016 during the course of our review that were delayed for documentation and packaging issues: Scissor lifts were delayed in transport to Bagram Air Base in Afghanistan because, according to DOD transportation officials, they arrived without shipping documentation, air certifications, and shoring (packaging). According to the Defense Transportation Regulation, the transportation officer must ensure that HAZMAT is properly marked, packaged, and labeled for air transportation. However, the shipping papers for the scissor lifts did not identify Bagram Air Base as the destination. In addition, there was ineffective coordination between the vendor, shipper, and contracting officer (who is located at Bagram Air Base), according to the DOD transportation officials. Cylinders filled with refrigerant gas were delayed because, according to DOD officials, the Shipper's Declaration for Dangerous Goods was missing or incomplete, and the cylinders were not properly packaged for shipment. According to the Defense Transportation Regulation, the transportation officer must ensure that HAZMAT is properly marked, packaged, and labeled for air transportation. A skid of lithium-ion batteries was delayed because, according to DOD officials, the Shipper's Declaration for Dangerous Goods was missing the correct gross weight. The Defense Transportation Regulation requires that when transporting HAZMAT by air, the shipper must accurately reflect the quantity of the material to be transported. DOD officials noted that is too early to evaluate the effectiveness of the corrective actions identified in the report's plan of action and milestones to mitigate delays in transporting HAZMAT. According to DOD officials, most of the corrective actions were to begin in late fiscal year 2016 and the key performance measures for assessing those and the remaining actions will not be completed until late fiscal year 2017.The officials added that it will take time to accumulate data and conduct subsequent analyses to determine the efficacy of actions that have already been taken or are currently in progress. We agree with DOD that is too early to evaluate and determine the efficacy of the corrective actions. DOD officials also told us that they recognize that root causes are long- standing reasons for transportation delays, that several studies have documented the delayed cargo issues at aerial ports of embarkation, and that the issue of delayed cargo will never go away completely. However, the officials noted that the corrective actions will help the warfighter receive needed equipment without delay. By continuing to identify and address the root causes for these transportation delays, the department will be able to continue to develop and implement corrective actions to mitigate delays of its HAZMAT shipments in support of the warfighter. In its September 2015 report, DOD addressed the committee direction to report on the extent to which it used TPS for HAZMAT shipments that could have been safely and securely transported using less costly alternatives, and identified two corrective actions. However, the report did not fully disclose the assumptions and limitations associated with its analysis. In its report, DOD concluded that between June 1, 2013, and July 31, 2014, it had used TPS motor carriers to transport 518 of 31,373 HAZMAT shipments that could have been transported using less costly alternatives and that doing so had resulted in a total unnecessary cost of approximately $126,000. DOD reported that in the majority of these instances transportation officers had either made errors or conscious decisions that two drivers were necessary to meet tight time frame delivery requirements or, when transportation officers could not obtain complete cargo documentation to determine whether a TPS designation was needed, they had erred on the side of safety and opted to use the TPS carriers to transport the shipments. DOD reported that it had calculated the approximately $126,000 in unnecessary costs by accounting for the "accessorial charges" for TPS carriers-the additional costs incurred for providing constant surveillance, dual-driver protection, protective security service, and satellite motor surveillance. DOD concluded that it had infrequently used TPS carriers unnecessarily and that the additional costs incurred for doing so were relatively low. DOD developed and conducted a one-time analysis to address the committee direction. According to DOD's Transportation Policy officials, DOD developed this analysis in order to respond to the congressional direction since the department lacked an established procedure to extract and match the tens of thousands of records of HAZMAT shipments transported by motor, rail, or air carriers using TPS each year and calculate the costs for doing so. DOD's analysis included data for motor and air TPS HAZMAT shipments transported from June 1, 2013, through July 31, 2014, and data for rail HAZMAT shipments transported through TPS from January 1, 2014, through June 30, 2014. The Transportation Command's Surface Deployment and Distribution Command, which manages the TPS program for DOD, provided these data for DOD's analysis. Next, DOD used TPS guidance in the Defense Transportation Regulation as criteria to identify scenarios within the data set where DOD shipping activities may have ordered TPS for shipments when not required. An item's Controlled Item's Inventory Code located in the Federal Logistics Information System determines whether an item requires TPS. According to officials because the Surface Deployment and Distribution Command TPS data lack cost information, DOD matched the bill of lading records in the data system to shipment entries in DOD's Third Party Payment System to determine the cost of TPS shipments that could have been safely and securely transported using less costly means. DOD was able to match most of the bill of lading records in the two systems. According to DOD, the shipments that they could not match were likely never invoiced by the transportation provider. In reviewing DOD's September 2015 report, supporting documentation and interviewing agency officials, we identified assumptions and limitations that the report did not disclose in its findings and conclusions. Absent these disclosures, decision makers cannot be assured this report is conveying quality information. Generally accepted research standards and Standards for Internal Control in the Federal Government call, among other things, for a study methodology to explicitly identify any assumptions and limitations and for any data obtained to be processed into quality information. Following are examples of assumptions and limitations the report did not include in its description of its analysis: The number of shipments requiring TPS varied depending on the assumptions used: For example, during our review we requested that Surface Deployment and Distribution Command officials provide TPS shipment data for the same time frame DOD used in the September 2015 report (June 1, 2013 through July 31, 2014). The data that they provided showed there were a potential of 1,097 TPS motor shipments that may not have required TPS, compared with the 518 TPS motor shipments referred to in the report. Surface Deployment and Distribution Command officials said the difference between the two totals could be a result of how DOD applied certain Controlled Item Inventory Codes when it determined whether an item required TPS to create the data set of TPS shipments that was subsequently analyzed, and how they counted non-TPS shipments that were transported with TPS shipments. DOD used inconsistent dates in its collection of shipment data in its analysis: The DOD report shows that DOD analyzed HAZMAT shipment data from the Surface Deployment and Distribution Command for the period June 1, 2013, through July 31, 2014. We found, however, that this 13-month time frame included data for only motor and air TPS shipments. For rail TPS shipments, DOD used data from a 6-month time frame (January 1, 2014, through June 30, 2014). DOD officials explained that the time frames used for their analysis were driven by which data were available at the time of their request. We believe disclosing this limitation would have provided decision makers with important information about the reliability of the reported results. DOD omitted air and rail TPS HAZMAT shipments and their costs: DOD omitted 10 HAZMAT shipments transported by rail and 4 HAZMAT shipments transported by air from the shipments analyzed in its report, which together total about $4,525 in unnecessary costs. These 14 shipments were omitted because, in DOD's estimation, their number and their costs were low and therefore statistically insignificant. Given that DOD concluded that TPS was used only infrequently when not required, we find it inconsistent that the additional 14 rail and air TPS shipments and their costs were omitted from the report, and led to the report conveying incomplete results. We believe that, in accordance with our generally accepted research standards, DOD should have fully explained its rationale for such an omission in its discussion of its methodology. DOD did not disclose the use of average cost estimates: According to DOD, on 10 of the 518 invoices for TPS motor carrier shipments, DOD found the TPS charges exceeded the total amount paid to the carrier. Including those charges would significantly skew the results of the analysis, according to DOD. For those 10 invoices, DOD applied an average cost to estimate the amounts paid for TPS. DOD estimated average costs using three different methods: average TPS cost per shipment, average TPS cost per mile, and average TPS cost as a percentage of the total. DOD chose to use the average cost per mile as it produced the highest cost estimate for the 10 invoices according to the DOD documents. We believe that disclosing the use of TPS shipment cost averages in DOD's cost calculation for these 10 HAZMAT shipments would inform decision makers about the potential effect of this approach on the reported results. DOD officials acknowledged that DOD's September 2015 report lacked details regarding the assumptions and limitations made in DOD's analysis. However, the officials noted that, because the number of improper TPS shipments is relatively low and the range of the potential cost of these shipments is also relatively low, these assumptions and limitations did not affect the department's general conclusion that DOD had infrequently used TPS unnecessarily to transport HAZMAT and that the additional cost incurred was relativity small. Reviewing the data DOD provided in support of its analysis, we have reasonable assurance that DOD was correct in its general conclusion that DOD had infrequently used TPS during the period studied and that the additional cost associated with these shipments was relatively small. In addition, DOD identified corrective actions to preclude the future unnecessary use of TPS. Specifically, as part of its plan of action and milestones, DOD plans to publish advisories reiterating TPS usage criteria to transportation officers. An advisory in November 2015 advised transportation officers that they should request TPS for shipments only if required by the Defense Transportation Regulation. To monitor compliance with the customer advisories and the Defense Transportation Regulation, DOD plans to conduct spot checks of TPS HAZMAT shipment data every 2 years beginning in November 2017, according to DOD officials. According to the February 2017 DOD plan of action and milestones, DOD also plans to identify and evaluate policy options to ensure proper coding of HAZMAT items in the Federal Logistics Information System by September 30, 2018. We anticipate that these actions, if properly implemented, will help ensure that TPS is only used when necessary. We provided a draft of this report to DOD, and DOD responded that it would not be providing comments. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Director of the Defense Logistics Agency, the Commander of the U.S. Transportation Command, 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) 512-5431 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in the appendix. In addition to the contact named above: James A. Reynolds, Assistant Director; Colin Chambers; Pat Donahue; Alfonso Garcia; Alexandra Gonzalez; Mae Jones; Ruben Montes de Oca; and Michael Shaughnessy made key contributions to this report.
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Commercial carriers transport over 3 billion tons of HAZMAT in commerce in the United States each year, transporting an estimated 1 million HAZMAT shipments per day. DOD relies heavily on commercial carriers to transport HAZMAT, using them to transport about 90 percent of the department's HAZMAT shipments. DOD uses the TPS program to transport certain sensitive materials including ammunition and classified materials that follow more stringent safety and security standards. House Report 113-446 accompanying a bill for the National Defense Authorization Act for Fiscal Year 2015 directed DOD to report on the root causes of improper documentation and packaging of HAZMAT; the extent to which TPS is used for materials that could be transported using less costly means; and any needed corrective actions and a plan, with milestones, to address them. The House report also included a provision for GAO to review DOD's report. DOD issued its report in September 2015. This report examines the extent to which DOD (1) identified the root causes of improper documentation and packaging of HAZMAT shipments and any corrective actions taken since the report's issuance and (2) reported on the department's use of TPS carriers to transport shipments that could have been safely and securely transported using less costly alternatives. GAO examined DOD's HAZMAT data and found the data it examined sufficiently reliable for the purposes of the review. DOD reviewed a draft of this report and did not have any comments. The Department of Defense (DOD) has addressed the committee direction to identify the root causes regarding the improper documentation and packaging of hazardous materials (HAZMAT) shipments and any needed corrective actions, but it is too soon to evaluate the effectiveness of these efforts. In its September 2015 report, DOD identified: contract- and documentation-related issues and human error as the root causes, several corrective actions--such as improved reporting--that aligned with these root causes, and milestones and DOD stakeholders to implement the corrective actions. In addition to aligning with the DOD-identified root causes, the corrective actions also align with the root causes of improper documentation and packaging that GAO identified in its May 2014 report. However, it is too early to determine the efficacy of these corrective actions. According to DOD officials, most of the corrective actions were to begin in late fiscal year 2016, and the key performance measures for assessing those and the remaining actions will not be fully completed until late fiscal year 2017. DOD has addressed the committee direction to report on the extent to which the department had used Transportation Protective Services (TPS) for HAZMAT shipments that could have been safely and securely transported using less costly alternatives, but did not include in its September 2015 report detail on the assumptions or limitations made underpinning its analysis. In its analysis, conducted specifically to address the committee direction, DOD concluded that it had used TPS infrequently when not required between June 1, 2013, and July 31, 2014. Specifically, DOD reported it used TPS to transport 518 of 31,373 HAZMAT shipments that it could have transported using less costly alternatives. This resulted in a total unnecessary cost of approximately $126,000, according to DOD. While GAO found DOD did not include detail on the assumptions or limitations underpinning its analysis, GAO concurs with the report's general conclusion that DOD had infrequently used TPS unnecessarily to transport HAZMAT during the period studied and that the additional cost associated with these shipments was relatively small. Further, as part of its plan of action, DOD has identified corrective actions to preclude future unnecessary use of TPS, which, if properly implemented, should help ensure that in the future DOD uses TPS only when necessary.
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Our April 1996 report found that since deregulation, fares have fallen and service has improved for most large-community airports. Our report also found that substantial regional differences exist in fare and service trends, particularly among small- and medium-sized community airports. A primary reason for these differences has been the greater degree of economic growth that has occurred over the past two decades in larger communities and in the West and Southwest. In particular, we noted that most low-fare airlines that began interstate air service after deregulation, such as Southwest Airlines and America West, had decided to enter airports serving communities of all sizes in the West and Southwest because of those communities' robust economic growth. By contrast, low-fare carriers had generally avoided serving small- and medium-sized-community airports in the East and upper Midwest, in part because of the slower growth, harsher weather, and greater airport congestion in those regions. Our review of the trends in fares between 1979 and 1994 for a sample of 112 small-, medium-sized, and large-community airports identified 15 airports at which fares, adjusted for inflation, had declined by over 20 percent and 8 airports at which fares had increased by over 20 percent. Each of the 15 airports where fares declined was located in the West or Southwest, and low-fare airlines accounted for at least 10 percent of the passenger boardings at all but one of those airports in 1994. On the other hand, each of the eight airports where fares had increased by over 20 percent since deregulation was located in the Southeast and Appalachia. Our April 1996 report also revealed similar findings concerning the trends in service quantity and quality at the 112 airports. Large communities in general, and communities of all sizes in the West and Southwest, had experienced a substantial increase in the number of departures and available seats as well as improvements in such service quality indicators as the number of available nonstop destinations and the amount of jet service. However, without the cross-subsidy present under regulation, fares were expected to increase somewhat at airports serving small and medium-sized communities, and carriers were expected to substitute turboprop service for jet. Over time, smaller and medium-sized communities in the East and upper Midwest had generally experienced a decline in the quantity and quality of air service. In particular, these communities had experienced a sharp decrease in the number of available nonstop destinations and in the amount of jet service relative to turboprop service. This decrease occurred largely because established airlines had reduced jet service from these airports since deregulation and deployed turboprops to link the communities to those airlines' major hubs. We subsequently reported in October 1996 that operating barriers at key hub airports in the East and upper Midwest, combined with certain marketing strategies of the established carriers, fortified established carriers' dominance of those hub airports and routes linking those hubs with nearby small- and medium-sized-community airports. In the upper Midwest, there is limited competition in part because two airlines control nearly 90 percent of the takeoff and landing slots at O'Hare, and one airline controls the vast majority of gates at the airports in Minneapolis and Detroit under long-term, exclusive-use leases. Similarly, in the Southeast and Appalachia, one airline controls the vast majority of gates under exclusive-use leases at Cincinnati, Charlotte, and Pittsburgh. Finally, in the Northeast, a few established airlines control most of the slots at National, LaGuardia, and Kennedy. As a result, the ability of nonincumbents to enter these key airports and serve nearby small and medium-sized communities is very limited. Particularly for several key markets in the upper Midwest and East, the relative significance of those operating barriers in limiting competition and contributing to higher airfares has grown over time. As a result, our October 1996 report, which specifically addressed the effects of slot and perimeter rules, recommended that DOT take action to lower those barriers, and highlighted areas for potential congressional action. To reduce congestion, FAA has since 1969 limited the number of takeoffs and landings that can occur at O'Hare, National, LaGuardia, and Kennedy. By allowing new airlines to form and established airlines to enter new markets, deregulation increased the demand for access to these airports. Such increased demand complicated FAA's efforts to allocate takeoff and landing slots equitably among the airlines. To minimize the government's role in the allocation of slots, DOT in 1985 began to allow airlines to buy and sell them to one another. Under this "Buy/Sell Rule," DOT "grandfathered" slots to the holders of record as of December 16, 1985. Emphasizing that it still owned the slots, however, DOT randomly assigned each slot a priority number and reserved the right to withdraw slots from the incumbents at any time. In addition, to mitigate the anticompetitive effects of grandfathering, DOT retained about 5 percent of the slots at O'Hare, National, and LaGuardia and in early 1986 distributed them in a random lottery to airlines having few or no slots at those airports. In August 1990, we reported that a few established carriers had built upon the favorable positions they inherited as a result of grandfathering to such an extent that they could limit access to routes beginning or ending at any of the slot-controlled airports. We also reported that while the lottery was successful in placing slots in the hands of some entrants and smaller incumbents, the effect on entry over the long term was disappointing, in part because many of the lottery winners subsequently went out of business or merged with an established carrier. Recognizing the need for new entry at the slot-controlled airports, the Congress in 1994 created an exemption provision to allow additional slots for entry at O'Hare, LaGuardia, and Kennedy when DOT "finds it to be in the public interest and the circumstances to be exceptional." In October 1996, we reported that the level of control over slots by a few established airlines had increased even further (see app. I). We found that the exemption authority, which in effect allows DOT to issue new slots, resulted in little new entry because DOT had interpreted the "exceptional circumstances" criterion very narrowly. DOT had approved applications only to provide service in markets not receiving nonstop service. We found no congressional guidance, however, to support this interpretation. As a result, little new entry occurred at these airports, which is crucial to establishing new service in the heavily traveled eastern and midwestern markets. In our 1990 report, we outlined the pros and cons of various policy options to promote airline competition. These options included keeping the Buy/Sell Rule but periodically withdrawing a portion of slots that were grandfathered to the major incumbents and reallocating them by lottery. Because the situation had continued to worsen, we recommended in our October 1996 report that DOT redistribute some of the grandfathered slots to increase competition, taking into account the investments made by those airlines at each of the slot-controlled airports. We also said that if DOT did not choose to do so, the Congress may wish to consider revising the legislative criteria that govern DOT's exceptional circumstances provision so that DOT could consider competitive benefits as a key criterion in deciding whether or not to grant slots to new entrants. At LaGuardia and National airports, perimeter rules prohibit incoming and outgoing flights that exceed 1,500 and 1,250 miles, respectively. The perimeter rules were designed to promote Kennedy and Dulles airports as the long-haul airports for the New York and Washington metropolitan areas. However, the rules limit the ability of airlines based in the West to compete because those airlines are not allowed to serve LaGuardia and National airports from markets where they are strongest. By contrast, because of their proximity to LaGuardia and National, each of the seven largest established carriers is able to serve those airports from its principal hub. While the limit at LaGuardia was established by the Port Authority of New York & New Jersey, National's perimeter rule is federal law. Thus, in our October 1996 report, we suggested that the Congress consider granting DOT the authority to allow exemptions to the perimeter rule at National when proposed service will substantially increase competition. We did not recommend that the rule be abolished because removing it could have unintended negative consequences, such as reducing the amount of service to smaller communities in the Northeast and Southeast. This could happen if major slot holders at National were to shift their service from smaller communities to take advantage of more profitable, longer-haul routes. As a result, we concluded that a more prudent course to increasing competition at National would be to examine proposed new services on a case-by-case basis. Our reports have also identified restrictive gate leases as another barrier to establishing new or expanded service at some airports. These leases permit an airline to hold exclusive rights to use most of an airport's gates over a long period of time, commonly 20 years. Such long-term, exclusive-use gate leases prevent nonincumbents from securing necessary airport facilities on equal terms with incumbent airlines. To gain access to an airport in which most gates are exclusively leased, a nonincumbent must sublet gates from the incumbent airlines--often at nonpreferred times and at a higher cost than the incumbent pays. Since our 1990 report, some airports, such as Los Angeles International, have attempted to regain more control of their facilities by signing less restrictive, shorter-term leases once the exclusive-use leases expired. Nevertheless, our October 1996 report identified several airports in which entry was limited because most of the gates were under long-term, exclusive-use leases with one airline. Although the development, maintenance, and expansion of airport facilities is essentially a local responsibility, most airports are operated under federal restrictions that are tied to the receipt of federal grant money from FAA. In our 1990 report, we suggested that one way to alleviate the barrier created by exclusive-use gate leases would be for FAA to add a grant restriction that ensures that some gates at an airport would be available to nonincumbents. Because many airports have taken steps since then to sign less restrictive gate leases, we concluded in our 1996 report that such a broad grant restriction was not necessary. However, to address the remaining problem areas, we recommended that when disbursing airport improvement grant moneys, FAA give priority to those airports that do not lease the vast majority of their gates to one airline under long-term, exclusive-use terms. In response to our October 1996 report, DOT stated in January of this year that it shared our concerns that barriers to entry limit competition in the airline industry. The agency indicated that it would include competitive benefits as a factor when determining whether to grant slots to new entrants under the exceptional circumstances criterion. DOT also committed to giving careful consideration to our recommendation that it create a pool of available slots and periodically reallocate them, but that it might choose to pursue alternative means to enhancing competition. On October 3, 1997, DOT announced that it would soon publicly issue a number of initiatives aimed at enhancing competition. Two of those initiatives related to identified problems: providing access to high-density airports through slot exemptions and investigating allegations of anticompetitive behavior. As of mid-October, DOT had 174 requests for slot exemptions, most of which were for slots at O'Hare and LaGuardia airports. On Friday, October 24, 1997, DOT issued its decision on some of the requests for slot exemptions and set forth its new policy on slot exemptions, which has been expanded to take into account the need for increased competition at the slot controlled airports. Because some in government and academia believe that slots at some airports may be underutilized, DOT is also evaluating how effectively slots are being used at these airports. Finally, DOT has expressed concern about potentially over-aggressive attempts by some established carriers to thwart new entry. According to DOT, over the past 16 months, there has been an increasing number of allegations of anticompetitive practices, such as predatory conduct, aimed at new competition, particularly at major network hubs. DOT is formulating a policy that will more clearly delineate what is acceptable and unacceptable behavior in the area of competition between major carriers at their hubs and smaller, low-cost competitors. This policy is to indicate those factors DOT will consider in pursuing remedies through formal enforcement actions. The proposed Aviation Competition Enhancement Act of 1997 has been drafted to promote domestic competition. The legislation targets three of the barriers to competition: slot controls, the perimeter rule, and predatory behavior by air carriers. The bill would create a mechanism by which DOT would increase access to the slot-controlled airports. Under the draft legislation, where slots are not available from DOT, the Department would be required to periodically withdraw a small portion of the slots that were grandfathered to incumbent airlines and reallocate them among new entrant and limited incumbent air carriers. Slots would not be withdrawn if they were already being used to serve certain small or medium-sized airports. This provision of the proposed bill is consistent with the spirit of our recommendation on slots and provides a good starting point for the debate about how such a process should be used and its potential impact. Our recommendation recognized the sensitivities with withdrawing and reallocating slots from one airline to another by stating that such a process should take into account the investments made by the established airlines. The proposed bill does not specify details about how DOT should implement this process. Because of the sensitivities in making any reallocations, DOT would need to carefully consider balancing the goals of increasing competition with fair treatment of affected parties. The bill also addresses the perimeter rule by requiring the Secretary of Transportation to grant exemptions to the existing 1,250 mile limit at Washington National Airport under certain circumstances. There are legitimate concerns about whether or not exemptions to the rule would negatively affect the noise, congestion, and safety at Washington National, as well as air service to and from different communities within the perimeter. The bill addresses these concerns by specifying that only stage 3 aircraft (aircraft that meet FAA's most stringent noise standards) can be used and that exemptions would not be allowed to affect the number of hourly commercial operations at National Airport. The bill further specifies that the Secretary certify that whenever exemptions to the rule are granted, noise, congestion, and safety will not deteriorate relative to their 1997 levels. The Secretary must similarly certify that air service to communities within the existing perimeter will not worsen. Finally, the bill also contains a provision intended to limit the time that DOT has to respond to complaints of predatory behavior. As we noted previously, because of its concerns in this area, DOT plans to announce a policy that will more clearly delineate the factors it will consider in pursuing remedies through formal enforcement actions. Because a variety of factors has contributed to higher fares and poorer service that some small and medium-sized communities in the East and upper Midwest have experienced since deregulation, a coordinated effort involving federal, regional, local, and private-sector initiatives may be needed. In addition to DOT's planned actions and the proposed legislation, several public and private initiatives that are currently under way, as well as other potential options, are discussed below. If successful, these initiatives would complement, and potentially encourage, the increasing use of small jets by the commuter affiliates of established airlines--a trend that has the potential for increasing competition and improving the quality of service for some communities. Recognizing that federal actions alone would not remedy their regions' air service problems, several airport directors and community chamber of commerce officials in the Southeast and Appalachian regions recently initiated a coordinated effort to improve air service in their regions. As a result of this effort, several members of Congress from the Southeast and Appalachian regions in turn organized a bipartisan caucus named "Special Places of Kindred Economic Situation" (SPOKES). Among other things, SPOKES is designed to ensure sustained consumer education and coordinate federal, state, local, and private efforts to address the air service problems of communities adversely affected since deregulation. Two SPOKES-led initiatives under way include establishing and developing a Website on the Internet and convening periodic "national air service roundtables" to bring together federal, state, and local officials and airline, airport, and business representatives to explore potential solutions to air service problems. On February 7, 1997, the first roundtable was held in Chattanooga. A key conclusion of the February 1997 roundtable was that greater regional, state, and local efforts were needed to promote economic growth and attract established and new airlines alike to serve small and medium-sized markets in the East and upper Midwest. Suggested initiatives included (1) creating regional trade associations composed of state and local officials, airport directors, and business executives; (2) offering local financial incentives to nonincumbents, such as guaranteeing a specified amount of revenue or providing promotional support; and (3) communities' aggressive marketing efforts to airlines to spur economic growth. To grow and prosper, businesses need convenient, affordable air service. As a result, businesses located in the affected communities have increasingly attempted to address their communities' air service problems. Perhaps the most visible of these efforts has been the formation of the Business Travel Contractors Corporation (BTCC) by 45 corporations, including Chrysler Motors, Procter & Gamble, and Black & Decker. These corporations formed BTCC because they were concerned about the high fares they were paying in markets dominated by one established airline. BTCC held national conferences in Washington, D.C., in April and October 1997 to examine this problem and explore potential market-based initiatives. At BTCC's October conference, attendees endorsed the concepts of (1) holding periodic slot lotteries to provide new entrant carriers with access to slot controlled airports, (2) allowing new entrants and other small carriers to serve points beyond Washington National's perimeter rule, and (3) requiring DOT to issue a policy addressing anticompetitive practices, and specifying the time frames within which all complaints will be acted upon. In addition to public and private-sector initiatives, the increasing use of 50- to 70-seat regional jets is improving the quality of air service for a growing number of communities. Responding to consumers' preference to fly jets rather than turboprops for greater comfort, convenience, and a perceived higher level of safety, commuter affiliates of established airlines are increasingly using regional jets to (1) replace turboprops on routes between established airlines' hubs and small and medium-sized communities and (2) initiate nonstop service on routes that are either uneconomical or too great a distance for commuter carriers to serve with slower, higher-cost, and shorter-range turboprops. Because regional jets can generally fly several hundred miles farther than turboprops, commuter carriers will be able to link more cities to established airlines' hubs. To the extent that this occurs, it could increase competition in many small and medium-sized communities by providing consumers with more service options. Mr. Chairman, this concludes our prepared statement. We would be glad to respond to any questions that you or any member of the Subcommittee may have. Airline Deregulation: Addressing the Air Service Problems of Some Communities (GAO/T-RCED-97-187, June 25, 1997). Domestic Aviation: Barriers to Entry Continue to Limit Benefits of Airline Deregulation (GAO/T-RCED-97-120, May 13, 1997). Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets (GAO/RCED-97-4, Oct. 18, 1996). Changes in Airfares, Service, and Safety Since Airline Deregulation (GAO/T-RCED-96-126, Apr. 25, 1996). Airline Deregulation: Changes in Airfares, Service, and Safety at Small, Medium-Sized, and Large Communities (GAO/RCED-96-79, Apr. 19, 1996). Airline Competition: Essential Air Service Slots at O'Hare International Airport (GAO/RCED-94-118FS, Mar. 4, 1994). Airline Competition: Higher Fares and Less Competition Continue at Concentrated Airports (GAO/RCED-93-171, July 15, 1993). Airline Competition: Options for Addressing Financial and Competition Problems, Testimony Before the National Commission to Ensure a Strong Competitive Airline Industry (GAO/T-RCED-93-52, June 1, 1993). Computer Reservation Systems: Action Needed to Better Monitor the CRS Industry and Eliminate CRS Biases (GAO/RCED-92-130, Mar. 20, 1992). Airline Competition: Effects of Airline Market Concentration and Barriers to Entry on Airfares (GAO/RCED-91-101, Apr. 26, 1991). Airline Competition: Weak Financial Structure Threatens Competition (GAO/RCED-91-110, Apr. 15, 1991). Airline Competition: Fares and Concentration at Small-City Airports (GAO/RCED-91-51, Jan. 18, 1991). Airline Deregulation: Trends in Airfares at Airports in Small and Medium-Sized Communities (GAO/RCED-91-13, Nov. 8, 1990). Airline Competition: Industry Operating and Marketing Practices Limit Market Entry (GAO/RCED-90-147, Aug. 29, 1990). Airline Competition: Higher Fares and Reduced Competition at Concentrated Airports (GAO/RCED-90-102, July 11, 1990). Airline Deregulation: Barriers to Competition in the Airline Industry (GAO/T-RCED-89-65, Sept. 20, 1989). Airline Competition: DOT's Implementation of Airline Regulatory Authority (GAO/RCED-89-93, June 28, 1989). Airline Service: Changes at Major Montana Airports Since Deregulation (GAO/RCED-89-141FS, May 24, 1989). Airline Competition: Fare and Service Changes at St. Louis Since the TWA-Ozark Merger (GAO/RCED-88-217BR, Sept. 21, 1988). Competition in the Airline Computerized Reservation Systems (GAO/T-RCED-88-62, Sept. 14, 1988). Airline Competition: Impact of Computerized Reservation Systems (GAO/RCED-86-74, May 9, 1986). Airline Takeoff and Landing Slots: Department of Transportation's Slot Allocation Rule (GAO/RCED-86-92, Jan. 31, 1986). Deregulation: Increased Competition Is Making Airlines More Efficient and Responsive to Consumers (GAO/RCED-86-26, Nov. 6, 1985). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed the barriers that limit aviation competition, focusing on: (1) the actions the Department of Transportation (DOT) has taken to address those barriers; and (2) how the Aviation Competition Enhancement Act of 1997 and other initiatives seek to address those problems. GAO noted that: (1) a combination of factors continues to limit entry at airports serving small and medium-sized communities in the East and upper Midwest; (2) these factors include the dominance of routes to and from those airports by one or two traditional hub-and-spoke airlines and operating barriers, such as slot controls and long-term exclusive-use gate leases at hub airports; (3) in contrast, the more wide-spread entry of new airlines at airports in the West and Southwest since deregulation--and the resulting geographic differences in fare and service trends--has stemmed largely from the greater economic growth in those regions as well as from the absence of dominant market positions of incumbent airlines and barriers to entry; (4) GAO has found that little progress has been achieved in lowering the barriers to entry since GAO first reported on them in 1990; (5) slot controls continue to block entry at key airports in the East and upper Midwest; (6) GAO recommended that DOT take actions to promote competition in regions that have not experienced lower fares as a result of airline deregulation by creating a pool of available slots by periodically withdrawing some grandfathered slots from the major incumbents and redistributing them in a fashion that increases competition; (7) moreover, GAO suggested that, absent action by DOT, Congress may wish to consider revising the legislative criteria that govern DOT's granting slots to new entrants; (8) GAO also suggested that Congress consider granting DOT the authority to allow exemptions on a case-by-case basis to the perimeter rule at National Airport when the proposed service will substantially increase competition; (9) in response to GAO's recommendations, DOT indicated that it would revise its restrictive interpretation of the legislative criteria governing the granting of new slots; (10) on October 24, 1997, DOT announced its decision on some of the pending requests for slot exemptions; (11) DOT also is evaluating how effectively slots are being used and it is formalizing a policy that will identify anticompetitive behavior as a precursor for formal enforcement action; (12) the proposed Aviation Competition Enhancement Act of 1997 addresses three barriers to competition: slot controls, the perimeter rule, and predatory behavior by air barriers; and (13) increasing competition and improving air service at airports serving small and medium-sized communities that have not benefited from fare reductions and/or improved service since deregulation will entail a range of federal, regional, local, and private-sector initiatives.
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A great deal of budget reporting focuses on a single number--the unified budget deficit, which was $248 billion in fiscal year 2006. This largely cash-based number represents the difference between revenues and outlays for the government as a whole. It is an important measure since it is indicative of the government's draw on today's credit markets--and its claim on today's economy. But it also masks the difference between Social Security's cash flows and those for the rest of the budget. Therefore we also need to look beneath the unified deficit at the on-budget deficit-- what I like to call the "operating deficit." And, finally, we should be looking at the financial statements' report of net operating cost--the accrual-based deficit. Social Security currently takes in more tax revenue than it needs to pay benefits. This cash surplus is invested in Treasury securities and earns interest in the form of additional securities. The difference between the on-budget deficit and the unified budget deficit is the total surplus in Social Security (cash and interest) and the U.S. Postal Service. Excluding consideration of the $185 billion surplus in Social Security and a $1 billion surplus in the Postal Service, the on-budget deficit was $434 billion in 2006. Figure 2 shows graphically how the on-budget deficit and the off- budget surplus have related and combine to lead to the unified deficit. Since the Social Security trust fund invests any receipts not needed to pay benefits in Treasury securities, its cash surplus reduces the amount the Treasury must borrow from the public. As I will note later, this pattern of cash flows is important--and it is projected to come to an end just 10 years from now. The third number, net operating cost, is the amount by which costs exceed revenue and it is reported in the federal government's financial statements, which are prepared using generally accepted accounting principles. Costs are recorded on an accrual basis--namely, in the period when goods are used or services are performed as opposed to when the resulting cash payments are made. However, most revenues, on the other hand, are recorded on the modified cash basis--that is, they are recorded when collected. The net operating cost can be thought of as the accrual deficit. The accrual measure primarily provides more information on the longer- term implications of today's policy decisions and operations by showing certain costs incurred today but not payable for years to come, such as civilian and military pensions and retiree health care. In fiscal year 2006 net operating cost was $450 billion. All three of these numbers are informative. However, neither accrual nor cash measures alone provide a full picture of the government's fiscal condition or the cost of government. Used together, they present complementary information and provide a more comprehensive picture of the government's financial condition today and fiscal position over time. For example, the unified budget deficit provides information on borrowing needs and current cash flow. The accrual deficit provides information on the current cost of government, but it does not provide information on how much the government has to borrow in the current year to finance government activities. Also, while accrual deficits provide more information on the longer-term consequences of current government activities, they do not include the longer-term cost associated with social insurance programs like Social Security and Medicare. In addition, they are not designed to provide information about the timing of payments and receipts, which can be very important. Therefore, just as investors need income statements, statements of cash flow, and balance sheets to understand a business's financial condition, both cash and accrual measures are important for understanding the government's financial condition. Although looking at both the cash and accrual measures provides a more complete picture of the government's fiscal stance today and over time than looking at either alone, even these together do not tell us the full story. For example, as shown in table 1, all three of these deficits improved between fiscal year 2005 and fiscal year 2006. This improvement, however, did not result from a change in the fundamental drivers of our long-term challenge and did not signal an improvement in that outlook. To understand the long-term implications of our current path requires more than a single year's snapshot. In this regard, the long- term outlook has worsened significantly in the last several years. That is why for more than a decade GAO has been running simulations to tell this longer-term story. As I mentioned, it is not the recent past shown in figure 1--nor the outlook for this year--that should concern us. Rather it is the picture in figure 3 that should worry us. Long-term fiscal simulations by GAO, CBO, and others all show that we face large and growing structural deficits driven primarily by rising health care costs and known demographic trends. GAO runs simulations under two sets of assumptions. One takes the legislatively-mandated baseline from CBO for the first 10 years and then keeps discretionary spending and revenues constant as a share of GDP while letting Social Security, Medicare, and Medicaid grow as projected by the Trustees and CBO under midrange assumptions. The other, perhaps more realistic, scenario based on the Administration's announced policy preferences changes only two things in the first 10 years: discretionary spending grows with the economy and all expiring tax provisions are extended. Like the "Baseline Extended" scenario, after 10 years both revenues and discretionary spending remain constant as a share of the economy. As figure 3 shows, deficits spiral out of control under either scenario. We will be updating these figures with the release of the new CBO baseline later this month, but even with the lower deficit in 2006, the long-term picture will remain daunting. Looking more closely at each scenario gives a fuller understanding of what the impact of continuing these trends would have on what government does. And it shows us "Why Deficits Matter." First, it makes sense to look back to 2001--it is worth understanding how much worse the situation has become. As I noted, despite some recent improvements in short-term deficits, the long-term outlook is moving in the wrong direction. Figures 4 and 5 show the composition of spending under our "Baseline Extended" scenario in 2001 and 2006. Even with short-term surpluses, we had a long-term problem in 2001, but it was more than 40 years out. Certainly an economic slowdown and various decisions driven by the attacks of 9/11 and the need to respond to natural disasters have contributed to the change in outlook. However, these items alone do not account for the dramatic worsening. Tax cuts played a major role, but the single largest contributor to the deterioration of our long-term outlook was the passage of the Medicare prescription drug benefit in 2003. Figure 5 illustrates today's cold hard truth, that neither slowing the growth in discretionary spending nor allowing the tax provisions to expire--nor both together--would eliminate the imbalance. This is even clearer under the more realistic scenario as shown in figure 6. Estimated growth in the major entitlement programs results in an unsustainable fiscal future regardless of whether one assumes future revenue will be somewhat above historical levels as a share of the economy as in the first simulation (fig. 5) or lower as shown in figure 6. Both these simulations remind us "Why Deficits Matter." They illustrate that without policy changes on the spending and revenue side of the budget, the growth in spending on federal retirement and health entitlements will encumber an escalating share of the government's resources. A government that in our children's lifetimes does nothing more than pay interest on its debt and mail checks to retirees and some of their health providers is unacceptable. Although Social Security is a major part of the fiscal challenge, contrary to popular perception, it is far from our biggest challenge. While today Social Security spending exceeds federal spending for Medicare and Medicaid, that will change. Over the past several decades, health care spending on average has grown much faster than the economy, absorbing increasing shares of the nation's resources, and this rapid growth is projected to continue. CBO estimates that Medicare and Medicaid spending will reach 6.3 percent of GDP in 2016, up from 4.6 percent this year (2007), while spending for Social Security will only reach 4.7 percent of GDP in 2016 up from 4.2 percent this year. For this reason and others, rising health care costs pose a fiscal challenge not just to the federal budget but also to states, American business, and our society as a whole. While there is always some uncertainty in long-term projections, two things are certain: the population is aging and the baby boom generation is nearing retirement age. The aging population and rising health care spending will have significant implications not only for the budget but also for the economy as a whole. Figure 7 shows the total future draw on the economy represented by Social Security, Medicare, and Medicaid. Under the 2006 Trustees' intermediate estimates and CBO's long-term Medicaid estimates, federal spending for these entitlement programs combined will grow to 15.5 percent of GDP in 2030 from today's 9 percent. This graphic is another illustration of why we have to act. I do not believe we are prepared to have programs that provide income for us in retirement and pay our doctors absorb this much of our children's and grandchildren's economy. It is clear that taken together, Social Security, Medicare, and Medicaid under current law represent an unsustainable burden on future generations. While Social Security, Medicare, and Medicaid dominate the long-term outlook, they are not the only federal programs or activities that bind the future. Part of what we owe the future is leaving enough flexibility to meet whatever challenges arise. So beyond dealing with the "big 3," we need to look at other policies that limit that flexibility--not to eliminate all of them but to at least be aware of them and make a conscious decision about them. The federal government undertakes a wide range of programs, responsibilities, and activities that obligate it to future spending or create an expectation for spending and potentially limit long-term budget flexibility. GAO has described the range and measurement of such fiscal exposures--from explicit liabilities such as environmental cleanup requirements to the more implicit obligations presented by life-cycle costs of capital acquisition or disaster assistance. Figure 8 shows that despite improvement in both the fiscal year 2006 reported net operating cost and the cash-based budget deficit, the U.S. government's major reported liabilities, social insurance commitments, and other fiscal exposures continue to grow. They now total approximately $50 trillion--about four times the nation's total output (GDP) in fiscal year 2006--up from about $20 trillion, or two times GDP in fiscal year 2000. Clearly, despite recent progress on our short-term deficits, we have been moving in the wrong direction in connection with our long-range imbalance in recent years. Our long-range imbalance is growing daily due to continuing deficits, known demographic trends, rising health care costs, and compounding interest expense. We all know that it is hard to make sense of what "trillions" means. Figure 9 provides some ways to think about these numbers: if we wanted to put aside today enough to cover these promises, it would take $170,000 for each and every American or approximately $440,000 per American household. Considering that median household income is about $46,000, the household burden is about 9.5 times median income. Since at its heart the budget challenge is a debate about the allocation of limited resources, the budget process can and should play a key role in helping to address our long-term fiscal challenge and the broader challenge of modernizing government for the 21st century. I have said that Washington suffers from myopia and tunnel vision. This can be especially true in the budget debate in which we focus on one program at a time and the deficit for a single year or possibly the costs over 5 years without asking about the bigger picture and whether the long term is getting better or worse. We at GAO are in the transparency and accountability business. Therefore it should come as no surprise that I believe we need to increase the understanding of and focus on the long term in our policy and budget debates. To that end--as I noted earlier--I have been talking with a number of Members of the Senate and the House as well as various groups concerned about this issue concerning a number of steps that might help. I've attached a summary of some of these ideas to this statement. Let me highlight several critical elements here. The President's budget proposal should again cover 10 years. This is especially important given that some policies--both spending and tax-- cost significantly more (or lose significantly more revenue) in the second 5 years than in the first. In addition, the budget should disclose the impact of major tax or spending proposals on the short, medium, and long term. The executive branch should also provide information on fiscal exposures--both spending programs and tax expenditures--that is, the long-term budget costs represented by current individual programs, policies, or activities as well as the total. The budget process needs to pay more attention to the long-term implication of the choices being debated. For example, elected representatives should be provided with more explicit information on the long-term costs of any major tax or spending proposal before it is voted upon. It is sobering to recall that during the debate over adding prescription drug coverage to Medicare, a great deal of attention was paid to whether the 10-year cost was over or under $400 billion. Not widely publicized--and certainly not surfaced in the debate--was that the present value of the long-term cost of this legislation was about $8 trillion! Of course, when you are in a hole, the first thing to do is stop digging. I have urged reinstitution of the statutory controls--both meaningful caps on discretionary spending and pay-as-you-go (PAYGO) on both the tax and spending sides of the ledger--that expired in 2002. However given the severity of our current challenge, Congress should look beyond the return to PAYGO and discretionary caps. Mandatory spending cannot remain on autopilot--it will not be enough simply to prevent actions to worsen the outlook. We have suggested that Congress might wish to design "triggers" for mandatory programs--some measure that would prompt action when the spending path increased significantly. In addition, Congress may wish to look at rules to govern the use of "emergency supplementals." However, as everyone in this committee knows, these steps alone will not solve the problem. That is why building in more consideration of the long-term impact of decisions is necessary. There is no easy way out of the challenge we face. Economic growth is essential, but we will not be able to simply grow our way out of the problem. The numbers speak loudly: our projected fiscal gap is simply too great. To "grow our way out" of the current long-term fiscal gap would require sustained economic growth far beyond that experienced in U.S. economic history since World War II. Similarly, those who believe we can solve this problem solely by cutting spending or solely raising taxes are not being realistic. While the appropriate level of revenues will be part of the debate about our fiscal future, making no changes to Social Security, Medicare, Medicaid, and other drivers of the long-term fiscal gap would require ever-increasing tax levels--something that seems both inappropriate and implausible. That is why I have said that substantive reform of Social Security and our major health programs remains critical to recapturing our future fiscal flexibility. I believe we must start now to reform these programs. Although the long-term outlook is driven by Social Security and health care costs, this does not mean the rest of the budget can be exempt from scrutiny. Restructuring and constraint will be necessary beyond the major entitlement programs. This effort offers us the chance to bring our government and its programs in line with 21st century realities. Many tax expenditures act like entitlement programs, but with even less scrutiny. Other programs and activities were designed for a very different time. Taken together, entitlement reform and reexamination of other programs and activities could engender a national discussion about what Americans want from their government and how much they are willing to pay for those things. Finally, given demographic and health care cost trends, the size of the spending cuts necessary to hold revenues at today's share of GDP seems implausible. It is not realistic to assume we can remain at 18.2 percent of GDP--we will need more revenues. Obviously we want to minimize the tax burden on the American people and we want to remain competitive with other industrial nations--but in the end the numbers have to add up. As I noted, we need to start with real changes in existing entitlement programs to change the path of those programs. However, reform of the major entitlement programs alone will not be sufficient. Reprioritization and constraint will be necessary in other spending programs. Finally, we will need more revenues--hopefully through a reformed tax system. The only way to get this done is through bipartisan cooperation and compromise--involving both the Congress and the White House. Delay only makes matters worse. GAO's simulations show that if no action is taken, balancing the budget in 2040 could require actions as large as cutting total federal spending by 60 percent or raising federal taxes to two times today's level. For many years those of us who talk about the need to put Social Security on a sustainable course and to reform Medicare have talked about the benefits of early action. Acting sooner rather than later can turn compound interest from an enemy to an ally. Acting sooner rather than later permits changes to be phased in more gradually and gives those affected time to adjust to the changes. Delay does not avoid action--it just makes the steps that have to be taken more dramatic and potentially harder. Unfortunately, it is getting harder to talk about early action--the future is upon us. Next year members of the baby boom generation start to leave the labor force. Figure 10 shows the impact of demographics on labor force growth. Reflecting this demographic shift, CBO projects the average annual growth rate of real GDP will decline from 3.1 percent in 2008 to 2.6 percent in the period 2012-2016. This slowing of economic growth will come just as spending on Social Security, Medicare and Medicaid will begin to accelerate--accounting for 56 percent of all federal spending by 2016 compared to 43 percent in 2006. As I noted earlier, today Social Security's cash surplus helps offset the deficit in the rest of the budget, thus reducing the amount Treasury must borrow from the public and increasing budget flexibility--but this is about to change. Growth in Social Security spending is expected to increase from an estimated 4.8 percent in 2008 to 6.5 percent in 2016. The result, as shown in figure 11, is that the Social Security surpluses begin a permanent decline in 2009. At that time the rest of the budget will begin to feel the squeeze since the ability of Social Security surpluses to offset deficits in the rest of the budget will begin to shrink. In 2017 Social Security will no longer run a cash surplus and will begin adding to the deficit. That year Social Security will need to redeem the special securities it holds in order to pay benefits. Treasury will honor those claims--the United States has never defaulted. But there is no free money. The funds to redeem those securities will have to come from higher taxes, lower spending on other programs, higher borrowing from the public, or a combination of all three. I spoke before of how big the changes would have to be if we were to do nothing until 2040. Of course, we won't get to that point--something will force action before then. If we act now, we have more choices and will have more time to phase-in related changes. Chairman Spratt, Mr. Ryan, Members of the Committee--in holding this hearing even before the President's Budget is submitted you are signaling the importance of considering any proposal within the context of the long- term fiscal challenge. This kind of leadership will be necessary if progress is to be made. I have long believed that the American people can accept difficult decisions as long as they understand why such steps are necessary. They need to be given the facts about the fiscal outlook: what it is, what drives it, and what it will take to address it. As most of you know, I have been investing a good deal of time in the Fiscal Wake-Up Tour (FWUT) led by the Concord Coalition. Scholars from both the Brookings Institution and the Heritage Foundation join with me and Concord in laying out the facts and discussing the possible ways forward. In our experience, having these people, with quite different policy views on how to address our long-range imbalance, agree on the nature, scale, and importance of the issue--and on the need to sit down and work together--resonates with the audiences. Although the major participants have been Concord, GAO, Brookings, and Heritage, others include such organizations as the Committee for Economic Development (CED); the American Institute of Certified Public Accountants (AICPA); the Association of Government Accountants (AGA); the National Association of State Auditors, Comptrollers and Treasurers (NASACT); and AARP. The FWUT also has received the active support and involvement of community leaders, local colleges and universities, the media, the business community, and both former and current elected officials. We have been to 17 cities to-date. The discussion has been broadcast on public television stations in Atlanta and Philadelphia. Earlier this month OMB Director Portman and former Senator Glenn joined us at an event at the John Glenn School of Public Affairs at Ohio State University in Columbus, Ohio. The specific policy choices made to address this fiscal challenge are the purview of elected officials. The policy debate will reflect differing views of the role of government and differing priorities for our country. What the FWUT can do--and what I will continue to do--is lay out the facts, debunk various myths, and prepare the way for tough choices by elected officials. The American people know--or sense--that there is something wrong; that these deficits are a problem. If they understand that there truly is no magic bullet--if they understand that we cannot grow our way out of this problem; eliminating earmarks will not solve the problem; wiping out fraud, waste, and abuse will not solve the problem; ending the war or cutting way back on defense will not solve the problem; restraining discretionary spending will not solve the problem; and letting the recent tax cuts expire will not solve this problem; then the American people can engage with you in a discussion about what government should do and how. People ask me how I think this can happen. I know that some Members believe a carefully structured commission will be necessary to prepare a package while others feel strongly that elected officials should take up the task of developing that package. Whatever the vehicle, success will require the active and open-minded involvement of both parties in and both houses of the Congress and of the President. With that it should be possible to develop a package which accomplishes at least three things: (1) a comprehensive solution to the Social Security imbalance--one that is not preprogrammed to require us to have to come back again, (2) Round I of comprehensive tax reform, and (3) Round I of Health Care Reform. This is a great nation. We have faced many challenges in the past and we have met them. It is a mistake to underestimate the commitment of the American people to their children and grandchildren; to underestimate their willingness and ability to hear the truth and support the decisions necessary to deal with this challenge. We owe it to our country, to our children and to our grandchildren to address this fiscal imbalance. The world will present them with new challenges--we need not bequeath them this burden too. The time for action is now. Mr. Chairman, Mr. Ryan, Members of the Committee, let me repeat my appreciation for your commitment and concern in this matter. We at GAO stand ready to assist you in this important endeavor. For further information on this testimony, please contact Susan J. Irving at (202) 512-9142 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 Jay McTigue, Assistant Director; Linda Baker and Melissa Wolf. Produce an annual Statement of Fiscal Exposures, including a concise list and description of exposures, cost estimates where possible, and an assessment of methodologies and data used to produce such cost estimates. Increase the transparency of tax expenditures by including them in the annual Fiscal Exposures Statement and, where possible, also showing them along with spending and credit programs in the same policy area. Provide information on the impact of major tax or spending proposals on short-term, mid-term, and long-term fiscal exposures and on the path of surplus/deficit and debt as percent of gross domestic product (GDP) over 10-year and longer-term horizons (and assuming no sunset if sunset is part of the proposal). Cover 10 years in the budget. Consider requiring the President to include in his annual budget submission a long-term fiscal goal (e.g., balance, surplus, or deficit as percent of GDP). Prepare and publish a Summary Annual Report or Citizen's Summary that summarizes, in a clear, concise, plain English, and transparent manner, key financial and performance information included in the Consolidated Financial Report. Prepare and publish a report on long-range fiscal sustainability every 2 to 4 years. Require improved disclosure--at the time proposals are debated but before they are adopted--of the long-term costs of individual mandatory spending and tax proposals over a certain size and for which costs will ramp up over time. An annual report or reports by GAO including comments on the Consolidated Financial Statement (CFS), results of the latest long-term fiscal simulations, comments on the adequacy of information regarding long-term cost implications of existing and proposed policies in the previous year as well as any other significant financial and fiscal issues. Use accrual budgeting for the following areas where cash basis obligations do not adequately represent the government's commitment: employee pension programs (pre-Federal Employee Retirement System employees); retiree health programs; and federal insurance programs, such as the Pension Benefit Guaranty Corporation and crop insurance. Explore techniques for expanding accrual budgeting to environmental cleanup and social insurance--could consider deferring recognition of social insurance receipts until they are used to make payments in the future (this was suggested in GAO's accrual budgeting report as an idea to explore, possibly with a commission designed to explore budget concepts). 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 Comptroller General testified before Congress for a hearing entitled "Why Deficits Matter." The presentation touched on several points. First, the current financial condition in the United States is worse than is widely understood. Second, the current fiscal path is both imprudent and unsustainable. Third, improvements in information and processes are needed and can help. And finally, meeting the long-term fiscal challenge will require (1) significant entitlement reform to change the path of those programs; (2) reprioritizing, restructuring and constraining other spending programs; and (3) more revenues--hopefully through a reformed tax system. This will take bipartisan cooperation and compromise.
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On May 4, 2000, the National Park Service initiated a prescribed burn on federal land at Bandelier National Monument, New Mexico, in an effort to reduce the threat of wildfires in the area. The plan was to burn up to 900 acres. On May 5, 2000, the prescribed burn exceeded the capabilities of the National Park Service, spread to other federal and nonfederal land, and was characterized as a wildfire. By May 7, 2000, the fire had grown in size and caused evacuations in and around Los Alamos, New Mexico. On May 13, 2000, the President issued a major disaster declaration, and subsequent to it, the Secretary of the Interior and the National Park Service assumed responsibility for the fire and the subsequent loss of federal, state, local, tribal, and private property. The fire, known as the Cerro Grande Fire, burned approximately 48,000 acres in four counties and two Indian pueblos, destroyed over 200 residential structures, and forced the evacuation of more than 18,000 residents. On July 13, 2000, the President signed the CGFAA into law. Under the CGFAA, each claimant is entitled to be compensated by the United States government for certain injuries and damages that resulted from the Cerro Grande fire. The Congress appropriated $455 million to the FEMA for the payment of such claims and $45 million for the administration of the Cerro Grande program. The act requires that GAO conduct annual audits on the payment of all claims made and annually report the results of the audits to the Congress by July 13, beginning in fiscal year 2001. The act also requires that our report include a review of all subrogation claims for which insurance companies have been paid or are seeking payment as subrogees under this act. FEMA is also required to annually submit a report to Congress that provides information about claims submitted under the act. This report is to include the amounts claimed, a description of the nature of the claims, and a status or disposition of the claims, including the amounts paid. FEMA's first report is to be issued by August 28, 2001, based on the issuance of the program rules as discussed below. The CGFAA required FEMA to promulgate and publish implementing regulations for the Cerro Grande program within 45 days of enactment of the law. On August 28, 2000, FEMA published the Disaster Assistance: Cerro Grande Fire Assistance; Interim Final Rule in the Federal Register (Interim Final Rules). FEMA followed the Interim Rule with a set of implementing policies and procedures on November 13, 2000. FEMA updated these policies and procedures in January and March 2001. After reviewing public comments on the interim rule, FEMA finalized and published The Disaster Assistance: Cerro Grande Fire Assistance; Final Rule (Final Rule) on March 21, 2001. In performing our review, we considered the Standards for Internal Control in the Federal Government. To gain an understanding of the claim review and payment process established by the OCGFC, we interviewed FEMA and OCGFC officials, General Adjusters Bureau (GAB) Robins officials, and staff from FEMA's Office of Inspector General. We also reviewed the requirements of the CGFAA, the interim and final regulations published in the Federal Register, OCGFC's policies and procedures manual, an actuarial report, FEMA's fiscal year 2000 audited financial statements and the current year Cerro Grande trial balance and other documentation concerning the Cerro Grande program. We also obtained, reviewed, and considered the results of numerous desk reviews completed by FEMA's Office of Inspector General. Finally, we selected three separate random probability samples from the population of claim payments to determine whether policies and procedures in place were being followed and to ensure that they provided adequate internal controls over appropriated federal funds. We did not assess the reasonableness of individual payments made. Our first sample of 59 partial claim payments was drawn from a population of 1,195 partial claim payments made through November 24, 2000, that was processed under the August 28, 2000, Interim Rules. The second random probability sample consisted of 59 items drawn from a population of 488 partial payments made between November 25 and December 28, 2000. These payments were processed using the policies and procedures adopted by the OCGFC on November 13, 2000. For these two samples, we reviewed the claim files to determine if all the required forms and key signatures required to process a partial payment had been obtained. Our third sample consisted of 63 final claim payments selected using a stratified sampling approach from a population of 255 final payments made through March 23, 2001. Fifty-eight of these 63 items were randomly selected from the population of claim payments in which the amount paid was less than $40,000. The remaining five items comprised all claim payments greater than or equal to $40,000. For these 63 items, we reviewed the claim files not only to see if all the required forms and signatures existed but to also look for evidence that victims' claims had been investigated to determine their validity and that the payment amounts were adequately supported and reasonable. As mentioned previously, we were not able to audit subrogated claim payments because, as of June 2001, no subrogated claims had been processed or paid. We did, however, inquire and obtain information about the number and dollar amount of subrogated claims submitted to the OCGFC through June 2001. We also inquired about the status of the policies and procedures being drafted by the OCGFC to process these claims. Our work was conducted in Sante Fe, New Mexico, and Washington, D.C., from December 2000 through June 2001 in accordance with generally accepted government auditing standards. We requested agency comments on a draft of this report from the Director of FEMA. FEMA provided certain technical comments orally, which we have incorporated as appropriate. FEMA's Assistant Director of the Readiness, Response and Recovery Directorate also provided written comments in response to our draft on behalf of FEMA and OCGFC, which are reproduced in appendix I. We evaluated the written comments in the "Agency Comments and Our Evaluation" section of this report. The OCGFC has established and generally followed a systematic process for the payment of claims resulting from the Cerro Grande fire. However, this process, as illustrated in figure 1 and described below, needs to be strengthened. We found that certain key procedures used by the claims reviewers were not formally documented and actions taken by the claim reviewers to verify claimant-provided information and determine claim reimbursements were typically not documented. We also noted that OCGFC is in the process of developing policies and procedures for how certain claims to be paid in the coming months will be processed and paid. The Standards for Internal Control in the Federal Government specifies that internal control and all transactions and other significant events need to be clearly documented and be readily available for examination. Control activities should be documented in management directives, administrative policies, or operating manuals which are properly maintained. Based on our test work and discussions with OCGFC officials, we determined that certain payment determinations were based on policies and procedures that were not formally documented. OCGFC officials told us that certain policies have only been documented in e-mails or in notes from staff meetings. This can result in inconsistent determinations of claim amounts and raised questions regarding the basis for certain claim determinations. For example, we identified inconsistencies in the calculation of lost wages for certain individuals. In one case, the reimbursed amount was determined based on the claimant's gross wages whereas in another case, the claimant was reimbursed based upon net wages. OCGFC officials stated that as part of renegotiating its contract with its claims adjusting firm, it will require that all policies and procedures be identified, formally documented, and updated monthly. In addition to the lack of formally documented procedures, there generally was insufficient documentation in the claim files to enable us to determine what steps, if any, the claims reviewers hired under contract by OCGFC had taken to verify certain key data provided by the claimants or to determine the reasonableness of amounts claimed. This was the case for 43 of the 63 final claim payments we tested. When projected to the universe of final payments made as of March 23, 2001, we can conclude with 95 percent confidence that between 57 and 78 percent of the final payments had similar documentation deficiencies. For the other 20 cases where we determined the documentation was sufficient, the payments usually involved victims' claims for reimbursement of insurance deductibles and/or flood insurance premiums. In these cases, the claim payments were evidenced by documentation provided by the insurer. The following examples illustrate the types of documentation deficiencies we observed during our review of the case files. In numerous cases we examined, the fire forced victims to evacuate their homes. OCGFC compensated these victims for the "loss of use" of their homes based upon a square footage methodology. In these cases, we found in the claim files the calculations to determine the amount of compensation. What we did not typically find was evidence to substantiate the square footage of the home used in the calculations. We did not see evidence that the claims adjusters had visited the property to obtain measurements or that they had obtained or considered other documentation, such as property records or insurance policies, that would substantiate the square footage. For cases where personal property losses occurred, we commonly found lists or spreadsheets prepared by the claimants listing the property destroyed by the fire as well as the claimants' estimates of the costs of replacing these items. What was commonly lacking, however, was documentation of the steps the claims reviewers took to verify that the victims owned the items claimed to have been lost in the fire or to assess the reasonableness of the replacement costs. Most often, the amount paid for personal property was simply the total listed on the spreadsheet with no evidence that any of the items or amounts were reviewed or substantiated. Officials we spoke with from FEMA's Flood Insurance Administration told us that its claims reviewers would routinely take steps to verify and document that the information provided by the claimant was valid and that the costs were reasonable before recommending a payment. Such steps may include confirmation of purchases with a vendor or store, viewing photographs taken prior to the fire, or performing reasonableness tests, such as determining if items claimed are typical household items. While OCGFC's policy manual and its contract with GAB Robins do require an investigation of the claim, there was frequently no evidence that such an investigation was performed. Only in a limited number of circumstances were we able to tell based on documentation in the claims file that a claims reviewer had investigated particular items to establish that a claimant did in fact own an item or that the amount requested to replace the item was reasonable. For example, in one case, the claims reviewer's notes showed that he questioned and ultimately reduced the amount claimed for an autographed poster from $1000 to $5.50 after researching the poster's value on the internet. In another example of documentation deficiencies, a claims reviewer recommended that certain medical expenses, although evidenced by third party receipts and a physician's letter, not be paid because the reviewer determined that the claimant had a pre-existing condition. Based on our discussions with OGCFC officials, we were told that this recommendation was forwarded to an OCGFC authorizing official who reversed the claims reviewer's decision because the OCGFC policies provide for such a payment under certain circumstances. However, the claim file contained no explanation as to why the initial recommendation of the claim reviewer was reversed. Key decisions such as this should be clearly documented in the claim files to facilitate the supervisory review process and establish an adequate audit trail as required by the Standards for Internal Control in the Federal Government. OCGFC officials advised us that the GAB Robins claims reviewers use an automated claims information system (ACIS) to document their interactions with the claimants and to document certain aspects of their claim investigation work. Such an automated system could help mitigate some of the documentation deficiencies we have discussed in this report. We requested that OCGFC provide us with the available ACIS information for specific cases in our sample. We reviewed the ACIS reports and found that the reports documented GAB Robins' contacts with the fire victims but provided little or no information about what steps had been taken to verify the validity or reasonableness of the claim payments for these particular cases. In addition, the OIG reviews of OCGFC claim payments, like our work, raised a number of questions regarding the adequacy of documentation contained in the case files and also questioned whether in certain circumstances OCGFC had established written policies on how to handle certain claims. An OIG official told us that he has not found ACIS to be helpful in resolving the documentation issues he has identified. Without sufficient documentation, claims supervisors and authorizing officials can not properly review the work of the claims reviewers, and the risk of improper payments is increased. In addition, as stated above, the lack of documentation in the claim files precluded us from determining what steps the claims reviewers had taken to determine the validity and reasonableness of most of the claim payments we tested. As of June 2001, OCGFC was in the process of developing certain key policies and procedures for the payment of various claim types. Established policies and procedures that are both documented and communicated throughout an organization are a key component of an effective system of internal control. As previously discussed, OCGFC is still developing policies and procedures for paying subrogated claims. In addition, OCGFC has deferred formulation of policies on how to compensate property owners for unrealized declines in their property values until the Los Alamos real estate market is further analyzed. Under the CGFAA, fire victims have until August 28, 2002, to file Notices of Loss for injuries resulting from the fire. OCGFC officials acknowledged that finalizing all necessary policies and procedures is important and stated that they have and will continue to approach policy development in a prioritized manner. For instance, since the CGFAA specified subrogated claim payments were not to occur until after the payment of other claims, OCGFC placed a lower priority on the development of these policies and procedures. OCGFC officials stressed that no claims have been paid without first having put policies and procedures in place and that so far all claims have been paid within 180 days after the receipt of a Notice of Loss as specified in the CGFAA. As previously discussed, the CGFAA appropriated $455 million to compensate victims for losses resulting from the Cerro Grande fire. In its fiscal year 2000 audited financial statements, FEMA recognized an estimated claim liability of $437 million. This amount represents the known probable and estimable losses that were unpaid as of September 30, 2000, and is based on the August 28, 2000, Interim Final Rules published in the Federal Register. In addition, FEMA reported that there is a reasonable possibility that additional liabilities may have been incurred. However, these amounts could not yet be estimated because the potential claims were unknown or had not been defined under the CGFAA "Interim Final Rules." FEMA's estimated claim liability is based largely on a December 5, 2000, independent actuary's report. This report has not been updated to reflect the policy changes contained in the final program rules published in March 2001 or to reflect new policies implemented since December. FEMA officials told us that because this report is costly to prepare, they only intend to update the study annually for financial statement purposes. Based on our analysis of this actuarial report, we believe there is a possibility that additional funding may be required to satisfy the claims likely to arise as a result of the fire. The actuary's study did not provide estimates for certain categories of losses that could be significant. For example, no estimates of loss were included for business losses outside of the immediate fire area or for damaged or lost sacred Pueblo (tribal) lands. At least one Pueblo has filed a Notice of Loss where there is a potential claim for damages to unique cultural and religious sites as well as environmental damages to the Pueblo grounds. The Notice of Loss also mentions potential claims for loss of range productivity and agricultural lands, cultural plants, big game, and archeological and cultural sites. In addition, to date, no estimates for devaluation of residential and commercial real estate and Pueblo lands as a result of the fire have been made. OCGFC contracted with an independent public accounting firm to analyze the residential real estate in the County of Los Alamos. The purpose of this analysis was to assess whether the value of residential property that was not physically damaged by the fire declined as a result of the fire, and if so, which communities and types of housing were most effected. The results of this study were released on March 28, 2001, and concluded that single-family residences in Los Alamos County sold between May 10, 2000, and January 31, 2001, experienced an average diminution in value in the range of 3 to 11 percent. In addition, the study concluded that other types of housing, including quads, duplexes, condos, and townhouses in the eastern area of the City of Los Alamos, also appear to have lost value. As of March 28, 2001, there have been approximately 25 claims for realized and unrealized property value diminution filed by Los Alamos residents. On April 2, 2001, OCGFC issued policy guidance on how it intends to compensate claimants who have realized losses. The policy states that unrealized loss claims will not be addressed until an additional follow-up analysis of the residential real estate market in Los Alamos is completed during the second quarter of 2002. Until this study is completed and policies are developed that address compensation for unrealized losses, uncertainties about the potential cost will continue to exist. Also, in the CGFAA Final Rules published in the Federal Register on March 21, 2001, FEMA increased the amount of allowable compensation for miscellaneous and incidental expenses incurred in the claims process. These payments are made after FEMA has obtained a properly executed Release and Certification form from the claimant. Under the interim rule that was in effect when the original actuarial report was issued, claimants (most individuals and businesses) were reimbursed for 1 percent of their insured and uninsured losses (excluding flood insurance premiums) with a minimum payment of $100 and a maximum payment of $3,000. Under the final rule, claimants now receive a payment equal to 5 percent of their insured and uninsured losses subject to a $100 minimum and a $15,000 maximum payment. This policy change will increase the total amount paid under the CGFAA and increases the likelihood that additional funding may be needed. Finally, OCGFC officials stated that the volume of claims received has been greater than originally anticipated. As of June 20, 2001, OCGFC officials told us that approximately 14,000 claims had been submitted. Initial estimates we were able to obtain only anticipated 1,200 to 1,500 claims being submitted. Therefore, the volume of claims submitted through mid-June of this year is approximately 10 times more than the initial estimates. This further calls into question the adequacy of the $455 million appropriated to pay victims' claims. While the federal government has accepted responsibility for the Cerro Grande fire and enacted legislation to expeditiously compensate those injured by the fire, it is incumbent on FEMA as the administering agency to establish an effective system of internal control to safeguard the funds appropriated for the Cerro Grande program. The CGFAA lays a framework to establish such accountability by requiring FEMA to determine that victims' injuries and losses occurred as a result of the fire and to determine the amount of allowed compensation. In addition, the act requires that we conduct annual audits of all claim payments. FEMA has established a process to review all claims submitted. However, this process as currently implemented does not provide adequate assurance that only valid claims were paid or that the amounts paid were reasonable because there is insufficient documentation of the steps taken to determine the validity and reasonableness of the claim amounts. This lack of documentation precluded us from determining what steps or actions the claim reviewers took to determine the validity and reasonableness of the claims we attempted to review but more importantly, may limit or prevent FEMA officials responsible for approving the payments from obtaining assurance that the payments are proper. In addition, certain OCGFC policies and procedures for paying claims have either not yet been developed or have not been formally and centrally documented. Beyond identifying deficiencies in FEMA's claims process, our work raised questions about whether the $455 million appropriation to pay victims' claims will be sufficient. The current estimate of the government's liability ($437 million) does not include estimates for all claim types and was determined prior to the implementation of the final rules for compensating fire victims. FEMA has not re-estimated the government's liability in light of significant changes that have occurred since December 2000. In order to strengthen the claim review and approval process, we recommend that the Director of FEMA direct the OCGFC to take the following actions: Require claims reviewers to document all steps and procedures they perform to determine the validity of a claim and the amount recommended for payment. Review and consolidate all existing informal guidance and incorporate this guidance into a set of formally documented policies and procedures that are regularly updated and distributed to all staff responsible for the claims review and award determination process. Establish standardized policies and procedures to address claims for which no policy currently exists as expediently as possible. Based on the information currently available, re-estimate the remaining claims to determine if there is sufficient funding available to fulfill the objectives of the CGFAA. In the future, update the estimate as necessary to reflect new claims information or changes in key policies and procedures. FEMA, in a letter from its Assistant Director of the Readiness, Response and Recovery Directorate, stated that FEMA and the Office of Cerro Grande Fire Claims (OCGFC) were pleased that this report recognized that a systematic process for paying fire victim's injury claims in accordance with the Cerro Grande Fire Assistance Act (CGFAA) was established and generally followed. However, FEMA expressed its concern that our report did not provide a sufficiently balanced view of its efforts to develop and implement the program since its inception 9 months ago and provided comments on areas of the report where FEMA and OCGFC took issue with our findings and comments on its progress. FEMA did not specifically comment on our recommendations. FEMA's comments are reproduced in appendix I and discussed in more detail below. FEMA expressed the need for further clarification on several of our comments and findings on the (1) level of documentation contained in claim files and (2) policies and procedures/methodologies used for calculating losses. FEMA stated that it believes guidance and procedures necessary to support claims determination are present and are in use. Our evaluation of FEMA's comments follows. We amplified the discussion on several topics in our report in response to these comments. With regard to our finding that OCGFC's current policies do not cover all needed procedures and do not require sufficient evidentiary documents, FEMA stated that consistent with the resources provided, OCGFC has responded timely and energetically to emerging policy and procedure needs for a first-time program. FEMA also stated that claim reviewers have responded to their direction to improve the claim file documentation. While we recognize the unique nature of this program, the necessity for documentation that proper policies and procedures have been carried out still exists. The documentation contained in the claim files during the period of our audit, did not provide us with a basis for determining what steps, if any, the claims reviewers had taken to determine the validity and reasonableness of most claim payments we attempted to audit. Further and more importantly, because of the condition of the files, FEMA officials cannot effectively carry out their responsibilities for assessing the contractor's work to determine the validity and reasonableness of the amounts claimed. As a result, inconsistent claims determinations can occur and there is no assurance that the amounts paid are proper. FEMA further stated that the key separation of duties and multiple layers of review in its process (reviewer, supervisor, and authorizing official) constitute substantial documentary evidence of the validation of an individual claim. The main point of our report is that sufficient documentary support is either not obtained or not written down to evidence the specific procedures performed by the contracted claims reviewers. Therefore, the effectiveness of the supervisory review process, even though it consists of multiple layers of review, is diminished and does not provide reasonable assurances that the claim payment determinations were proper. Better documentation is needed so that OCGFC officials are able to properly oversee the work of the contractors and to make a fully informed decision concerning approval of a claimed amount for payment. FEMA stated that the legislative history of the CGFAA provides that "the regulation should not be overly burdensome for the claimants and should provide an understandable and straightforward path to settlement." In this regard, our recommendations in no way put any additional burden on the victims of the fire, but rather are directed toward obtaining reasonable assurance that the procedures performed by OCGFC and its contractors during the claim review and payment process are properly documented and provide a reasonable basis for payment decisions under the circumstances. Regarding our example of insufficient documentation of square footage, FEMA stated that GAB Robins claims reviewers followed industry standards and that OCGFC required complete documentation of steps taken by claim reviewers during verification of square footage and personal property losses. While we were told that the claim reviewers performed various procedures to determine the validity of the claimed amounts, we typically found that there was no evidence of these steps in the case files. Therefore, there is no basis for any after-the-fact determinations on whether enough work was done to access the reasonableness of the claims for square footage or other types of losses. In commenting on our observation regarding the development of key policies and procedures, FEMA stated that OCGFC policies that were in effect during our review were detailed and extensive, and were intended to help first those whose homes had been lost or damaged by fire, those who suffered interruption of their businesses, and those who were evacuated in response to the fire. They further stated that other policies were developed when the need arose and only after consulting with several other U.S. government agencies to ensure consistency with other policies and positions taken in lawsuits. We revised our report to make it clear that we do not take issue with FEMA's development of policies in a prioritized manner. However, we continue to believe that FEMA should work expediently to develop and finalize all remaining policies so that victims know what losses are eligible for compensation and how their compensation will be determined well in advance of the August 28, 2002, deadline for filing Notices of Loss. We are sending copies of this report to the congressional committees and subcommittees responsible for FEMA related issues; the Director of the Federal Emergency Management Agency; Director of the Office of Cerro Grande Fire Claims; and the Inspector General of the Federal Emergency Management Agency. Copies will also be made available to others upon request. If you have questions about this report, please contact me at (202) 512- 9508 or Steven Haughton, Assistant Director, at (202) 512-5999. Other key contributors to this assignment were Julia Duquette, Phillip McIntyre, and Christine Fant.
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While the federal government has accepted responsibility for the Cerro Grande fire and enacted the Cerro Grande Fire Assistance Act (CGFAA) to expeditiously compensate those injured by the fire, it is incumbent on the Federal Emergency Management Agency (FEMA) as the administering agency to establish an effective system of internal control to safeguard the funds appropriated for the Cerro Grande program. The act lays a framework to establish such accountability by requiring FEMA to determine that victims' injuries and losses occurred as result of the fire and to determine the amount of allowed compensation. FEMA has established a process to review all claims submitted. However, this process as currently implemented does not provide adequate assurance that only valid claims were paid or that the amounts paid were reasonable because there is insufficient documentation of the steps taken to determine the validity and reasonableness of the claim amounts. In addition, policies and procedures for paying claims have either not yet been developed or have not been formally and centrally documented.
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The Army's reserve components are the Army Reserve and Army National Guard. The Army Reserve is comprised of units that support combat forces and is restricted to federal missions. The Guard has both combat and support units and federal and state responsibilities. The Guard is to be organized and resourced for federal wartime missions, according to Guard policy. Federal missions range from participating in full-scale military conflicts to operations other than war, backfilling active forces deployed on operational missions, providing training support to the active component, supporting domestic disaster relief and emergency operations under federal control, and providing strategic reserve forces to meet unknown contingencies. The Guard's state missions typically involve support for state officials and organizations during domestic civil emergencies and natural or man-made disasters. The size of DOD's forces and budgets has declined with the end of the Cold War and pressures to reduce the deficit. In 1989 the Guard had about 457,000 personnel. By the end of fiscal year 1996, the Guard plans to have 373,000 personnel in 54 separate state and territorial military commands in the 50 states, District of Columbia, Puerto Rico, U.S. Virgin Islands, and Guam. About 161,000 Guard personnel are to be in 42 combat brigades, including 67,000 in 15 enhanced brigades. The remaining 212,000 personnel are in headquarters units and units that support combat. By the end of fiscal year 1999, the Guard plans to be down to 367,000 personnel, with about 187,000 personnel in the combat units, including the 67,000 in the enhanced brigades. The Guard's 42 combat brigades are organized as follows: 8 divisions comprised of 3 brigades each, 15 enhanced brigades, and 3 separate combat units, consisting of 2 separate brigades and a scout group. In addition to the combat units, the Guard has elements that support combat units, such as engineers, military police, military intelligence, and transportation. The enhanced brigade concept, described in DOD's 1993 Report on the Bottom-Up Review, became effective on October 1, 1995. The concept provides for 15 separate brigades that are not part of a divisional structure during peacetime and that are required to be ready to deploy at the Army's highest readiness level within 90 days of mobilization. The enhancements, according to the bottom-up review, are training and resources above those provided to the Guard's other combat forces. The enhancements are to enable the 15 brigades to achieve peacetime readiness goals so that they can meet their deployment criteria by the end of fiscal year 1998. The President's budget request for fiscal year 1996 included $5.5 billion for the Guard, which represents about 2.2 percent of DOD's budget request and 9.3 percent of the Army's request. About $1.7 billion of the $5.5 billion request is for the Guard combat units. The remaining $3.8 billion is for such organizations as headquarters units and elements that support combat. These other organizations receive most of the funds because they include support elements that are the first to deploy. For fiscal year 2001, the Guard's budget is projected to be about $6 billion, with about $1.8 billion for combat units. Table 1 further breaks down these budgets. In March 1993, DOD initiated a comprehensive bottom-up review to assess the nation's defense strategy, force structure, and budgets to counter regional aggression in the post-Cold War environment. DOD judged it prudent to maintain the capability to fight and win two nearly simultaneous major regional conflicts. To execute the two-conflict strategy, DOD determined that the Army must maintain 10 divisions in the active forces augmented by 15 reserve enhanced brigades and associated support forces. The bottom-up review report stated that the reserve component must adapt to meet new challenges. Accordingly, this means making smarter use of reserve component forces by adapting them to new requirements, assigning them missions that properly use their strengths, and funding them at a level consistent with their expected missions during a crisis or war. The bottom-up review concluded that the Army's reserve components should be reduced to 575,000 personnel by 1999--a 201,000 decrease since fiscal year 1989. The review specified that the reserve components' combat structure would be about 37 brigades, 15 of which would be enhanced. A group of senior officers of the Army, its reserve components, and organizations that represent Army component issues was tasked with providing a recommendation to the Secretary of the Army on the allocation of the 575,000 personnel between the Guard and the Army Reserve. The group allocated 367,000 personnel to the Guard and 208,000 to the Army Reserve. In addition to the 15 enhanced brigades specified in the bottom-up review, the Guard, in concert with the Army, determined that it would retain 8 combat divisions, 3 separate combat units, and numerous support units. The Guard's eight combat divisions and three separate combat units are not required to accomplish the two-conflict strategy, according to Army war planners and war planning documents that we reviewed. The Army's war planners at headquarters and at U.S. Forces Command stated that these forces are not needed during or after hostilities cease for one or more major regional conflicts. Moreover, the Joint Chiefs of Staff have not assigned the eight combat divisions or the three separate combat units for use in any major regional conflict currently envisioned in DOD planning scenarios. The missions for these divisions and units, according to the bottom-up review, include (1) providing the basis for rotation when forces are required to remain in place over an extended period after the enemy invasion has been deterred, (2) serving as a deterrent hedge to future adversarial regimes, and (3) supporting civil authorities at home. According to Army officials involved in the review, there was no analysis to determine the appropriate number of forces required to perform these missions. The Guard's 15 enhanced brigades are the principal reserve component ground combat forces. The bottom-up review report states that one important role for these brigades is to supplement active component divisions, should more ground combat power be needed to deter or fight a second major regional conflict. Although the bottom-up review specified a need for 15 enhanced brigades and the Joint Chiefs of Staff have made all 15 brigades available for war planning purposes, the planners have identified requirements for less than 10 brigades to achieve mission success in the war fight. However, these plans are evolving and the number of brigades required may change. This lesser number of brigades is generally consistent with the required reserve combat forces included in the Army's current Total Army Analysis process. That process projects the Army's future support needs based on the future combat force. According to U.S. Forces Command planners, the enhanced brigades that are not required to achieve mission success in the war fight are considered to be strategic reserve that can either be used for occupational forces once the enemy has been defeated or for other missions. Other roles would be to replace active forces stationed overseas or engaged in peacekeeping operations should the replaced forces be needed for a regional conflict. The Guard has a wide range of state missions. These missions include the defense of states or other entities from disorder, rebellion, or invasion; emergency and disaster relief; humanitarian assistance; and community support activities. In crisis situations, the governors primarily use the Guard to supplement civil agencies after those agencies have exhausted their resources. According to Guard officials at the state level, the state expects the local authorities to respond first, followed by county, and then state resources. If the crisis exceeds the state's civil capabilities, the Guard can be called on for added support. For example, needs far exceeded the state's civil agencies' capabilities after Hurricane Andrew devastated south Florida. Therefore, the Governor called up almost 50 percent of Florida's Army and Air Guard personnel for such tasks as providing temporary shelters, removing debris, distributing food and water, and providing security. For situations beyond a state's capabilities, the Governor can ask the President to declare a federal emergency. When this declaration is made, the Federal Emergency Management Agency becomes the coordinating agency between state and federal agencies. For example, Florida's immediate assistance needs after Hurricane Andrew exceeded the capacity of the state's resources, including its Guard forces. As a result, the Governor requested and received a presidential disaster declaration that entitled the state to obtain federal funding and assistance from federal agencies and the active military. The federal government has added several domestic initiatives to the Guard's federally funded state missions. For example, newly acquired initiatives include drug interdiction and counter-drug activities, drug demand reduction programs, medical assistance in underserved areas, and the Civilian Youth Opportunities program. Although federally funded, the state governors authorize missions like these under the control of authorized Guard officials. Given the concerns for potential hardships to Guard members, their families, and their employers, most state Guard leaders plan to rotate Guard members used in state missions lasting longer than 7 days. For example, in both the Midwest floods of 1993 and Hurricane Andrew in 1992, Guard personnel were rotated, which resulted in the use of a greater number of personnel, but for shorter durations. Guard officials at the state level said that general soldier skills, such as discipline and following a chain of command, are often all that are needed to satisfy state missions. In the specialized skills areas, they said that support skills and equipment such as engineering, transportation, medical support, aviation, and military police are most often needed. In the states we visited, we were told that Guard members were asked to perform a variety of tasks on state active duty. For example, in California, the Guard provided homeless shelters for people displaced by major earthquakes, patrolled the streets of Los Angeles during a riot, and provided support to firefighters during wild fires. In Kansas and Utah, Guard members filled sandbags to fight flooding. In the previously mentioned study, which was required by the National Defense Authorization Act for Fiscal Year 1994, RAND reported that the Army and Air Guard in fiscal year 1993 experienced the highest number of state active duty days in over 10 years. The 54 state and territorial Guard entities reported spending over 460,000 duty days on state missions, involving over 34,000 members of the total Guard. This equated to about 6 percent of the total available Army and Air Guard personnel. Almost 50 percent of the Guard's use that year was due to the Midwest floods. As might be expected, Guard usage for state missions varies from state to state and year to year. For example, RAND reported that the Florida Army and Air Guard were on state active duty in 1992 for Hurricane Andrew for over 80 days, with a peak personnel commitment of some 6,200 out of a total strength of about 13,500, or about 46 percent. RAND also reported that New York, with an Army and Air Guard strength of about 20,000, had its highest Guard usage in 6 years in 1994. During that year, the state used about 6,000 Guard workdays, which amounts to about 1 state active duty day per year for about 30 percent of the state's total Army and Air Guard strength. This latter experience is typical of many states during the same period. RAND reported that, nationally, state demands on the Army and Air Guard are not significant. Moreover, the Guard's own data do not show sizable demands on its personnel and resources for state missions. As such, RAND concluded that, even in a peak use year, state missions would not require a large portion of the Guard and should not be used as a basis for sizing the Guard force. It also concluded that the Guard is large enough to handle both state and federal missions, even in the unlikely, but possible, event of simultaneous peak demands. The Army is studying the redesign of the Guard's combat structure to meet critical shortages in support capabilities. In May 1995, the Army's Vice Chief of Staff chartered a work group to develop alternatives and make recommendations for using the Guard's combat structure to meet critical shortages in support forces. According to the group's charter, the Army has undertaken this effort because it is critically short support forces, but continues to maintain Guard combat units that are excess to war-fighting requirements. review the Army's future unresourced support requirements, review the structure and missions of the Guard combat elements and develop options for changing the structure to meet future Army requirements, conduct a resource feasibility assessment of the options to determine whether the Army possesses or is able to program the resources needed to equip and maintain the redesigned structure, and refine and prioritize the options for presentation to the Army leadership by March 1996. The group's charter established certain parameters such as (1) the Guard's planned end strength will not change, (2) the redesign efforts will consider the Guard's need to remain responsive to state missions, and (3) the redesign effort is not intended to reduce the number of Guard division headquarters. Previous studies have also recognized the need for changes to the Guard's combat structure. In December 1992, we reported that opportunities existed to break up some Guard divisions and convert some combat units to support units. In March 1995, we reported that the Army would be challenged to provide sufficient numbers of certain types of support units for two major regional conflicts because it had difficulty providing such units in the single conflict Persian Gulf War. We suggested that an option for augmenting the Army's support capability is to use existing support capability in the eight Guard divisions that DOD did not include in the combat force for executing the two-conflict strategy. We recommended that the Secretary of the Army (1) identify the specific unresourced support requirements that could be met using Guard divisional support units and the personnel and equipment in these units and (2) work with the Guard to develop a plan for employing this capability. The work group is considering this recommendation as one of the options. In accordance with the National Defense Authorization Act for Fiscal Year 1994, DOD established a Commission on Roles and Missions of the Armed Forces, which looked at, among other things, the better use of reserve forces. The Commission determined that the Army's combat structure exceeds the requirements for a two major regional conflict scenario and concluded that reserve component forces with lower priority tasks should be eliminated or reorganized to fill shortfalls in higher priority areas. In its report, the Commission cited the example of the Army's eight Guard divisions that were required for possible war with the former Soviet Union, but are not needed for the current national security strategy. The report noted that the bottom-up review did assign the eight Guard divisions secondary missions such as serving as a deterrent hedge to future adversarial regimes; however, it also said that eight divisions is too large a force for these secondary missions. The Commission's report also noted that at the same time, the Army estimated that it is short 60,000 support troops for a two regional conflict strategy. The Army's most recent Total Army Analysis process also projects a shortage of 60,000 support troops, primarily in transportation and quartermaster units. The Commission report also stated that, even after the support shortfalls were filled, there would still be excess combat spaces in the total Army and recommended eliminating these spaces from the active or reserve components. The end of the Cold War and budgetary pressures have provided both the opportunity and the incentive to reassess defense needs. Because the Guard's combat forces exceed projected war requirements and the Army's analysis indicates a shortage of support forces, we believe it is appropriate for the Army to study the conversion of some Guard combat forces to support roles. Therefore, we recommend that the Secretary of Defense, in conjunction with the Secretary of the Army and the Director, Army National Guard, validate the size and structure of all of the Guard's combat forces and that the Secretary of the Army prepare and execute a plan to bring the size and structure of those combat forces in line with validated requirements. If the Army study suggests that some Guard combat forces should be converted to support roles, we recommend that the Secretary of the Army follow through with the conversion because it would satisfy shortages in its support forces and further provide the types of forces that state governors have traditionally needed. Moreover, to the extent that there are Guard forces that exceed validated requirements, the Secretary of Defense should consider eliminating them. DOD agreed with our findings and recommendations. It stated that before its review is finalized, all shortfalls will be validated against requirements set forth in the national military strategy. It also stated that until ongoing studies are completed, it is premature to restructure or eliminate Army National Guard units. DOD's comments are shown in appendix I. To determine the federal and state roles and missions of the Guard's combat units, we interviewed cognizant officials and obtained and analyzed documents from DOD, the Army, the Army National Guard, and RAND in Washington, D.C.; U.S. Army Forces Command, Fort McPherson, Georgia; and State Area Commands and combat units in Alabama, California, Kansas, South Carolina, Utah, Virginia, and Washington. To determine the efforts by DOD and the Army to redesign the Guard combat divisions, we interviewed cognizant officials and obtained and analyzed documents from DOD, the Army, the Army National Guard, U.S. Army Forces Command, and the U.S. Army Training and Doctrine Command's Force Development Directorate, Fort Leavenworth, Kansas. We conducted this review from February to November 1995 in accordance with generally accepted government auditing standards. We are providing copies of this report to appropriate House and Senate committees; the Secretaries of Defense and the Army; the Director of the Army National Guard; and the Director, Office of Management and Budget. We will also provide copies to other interested parties upon request. Please contact me at (202) 512-3504 if you or your staff have any questions concerning this report. The major contributors to this report were Robert Pelletier, Leo Sullivan, Lee Purdy, and Ann Borseth. 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: (1) roles and missions of the Army National Guard's combat units; and (2) efforts by the Department of Defense (DOD) and the Army to redesign the Guard's combat divisions. GAO found that: (1) despite reductions, the Army National Guard's combat units may still be too large for projected war requirements; (2) the Guard's eight remaining combat divisions and three separate combat units are not needed to meet the two-conflict strategy or any probable conflict scenarios; (3) DOD considers the excess Guard forces to be a strategic reserve that could be used as occupational and rotational forces, a deterrent against aggressive regimes, and support for civilian authorities, but it did not present any analytical support for the continued force levels; (4) DOD has not finalized plans for 15 enhanced Guard combat brigades, and fewer than 15 may be needed; (5) state missions often require more support skills and equipment than Guard combat forces, which usually supplement other state resources in emergencies; (6) over the last decade, states have needed only a fraction of the Guard's personnel to meet their emergency requirements; (7) the Army is studying ways that the Guard could meet critical shortages in its support capabilities; and (8) DOD believes that since Guard forces exceed combat needs, reserve components with lower priority tasks should be eliminated or reorganized to meet higher priorities.
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Responsibility for helping to prepare members of the community for all hazards is shared by federal, state, local, and tribal entities, and nongovernmental organizations. At the federal level, FEMA is responsible for developing national strategies, policies, and guidelines related to emergency preparedness, response, and recovery. To achieve the goals of a national strategy, however, requires a close relationship with nonfederal partners, based on the premise that resilient communities--those that can quickly recover from a disaster--begin with prepared individuals and depend on the leadership and engagement of local government and other community members. According to DHS, emergency management agencies at the jurisdiction level are to develop preparedness plans for their localities that are consistent with plans at the state and federal levels. States submit requests for federal Homeland Security funding for state, local, and regional projects, including projects related to community preparedness. FEMA is required under the Post-Katrina Emergency Management Reform Act of 2006 (Post-Katrina Act) to establish a National Preparedness System to ensure that the nation has the ability to prepare for and respond to disasters of all types, whether natural or man-made, including terrorist attacks. The Community Preparedness Division is responsible for leading activities related to community preparedness, including management of the Citizen Corps program. According to fiscal year 2008 Homeland Security Grant Program guidance, the program is to bring together community and government leaders, including first responders, nonprofit organizations, and other community stakeholders as a Citizen Corps Council to collaborate in involving community members in emergency preparedness, planning, mitigation, response, and recovery. Councils and partner programs register online to be included in the national program registries. The Community Preparedness Division also supports the efforts of non-DHS federal "partner programs," such as the Department of Health and Human Services' Medical Reserve Corps, which promote preparedness and the use of volunteers to support first responders. The CERT program's mission is to educate and train people in basic disaster preparedness and response skills, such as fire safety, light search and rescue, and disaster medical operations, using a nationally developed, standardized training curriculum. Trained individuals can be recruited to participate on neighborhood, business, or government teams to assist first responders. According to FEMA officials, training is conducted by local government, typically the fire or police department, which also organizes and supports teams of the trained volunteers in neighborhoods, the workplace, and high schools. The mission of the Fire Corps program is to increase the capacity of fire and emergency medical service departments through the use of volunteers in nonoperational roles and activities, including administrative, public outreach, fire safety, and emergency preparedness education. FEMA is also responsible for a related program, the Ready Campaign, which works in partnership with the Ad Council, an organization that creates public service announcements (PSA), with the goals of raising public awareness about the need for emergency preparedness, motivating individuals to take steps toward preparedness, and ultimately increasing the level of national preparedness. The program makes preparedness information available to the public through its English and Spanish Web sites (www.ready.gov and www.listo.gov), through printed material that can be ordered from the program or via toll-free phone lines, and through PSAs. The Ready Campaign message calls for individuals, families, and businesses to (1) get emergency supply kits, (2) make emergency plans, and (3) stay informed about emergencies and appropriate responses to those emergencies. FEMA faces challenges in measuring the performance of local community preparedness efforts because it lacks accurate information on those efforts. FEMA is also confronted with challenges in measuring performance for the Ready Campaign because the Ready Campaign is not positioned to control the placement of its preparedness messages or measure whether its message is changing the behavior of individuals. According to FEMA officials, FEMA promotes citizen preparedness and volunteerism by encouraging collaboration and the creation of community Citizen Corps, CERT, and Fire Corps programs. FEMA includes the number of Citizen Corps Councils, CERTs, and Fire Corps established across the country as its principal performance measure for community preparedness. However, FEMA faces challenges ensuring that the information needed to measure the number of established, active units is accurate. In our past work we reported on the importance of ensuring that program data are of sufficient quality to document performance and support decision making. FEMA programs report the number of local units registered nationwide as a principal performance measure, but FEMA does not verify that the registration data for Citizen Corps Councils, CERT, or Fire Corps volunteer organizations are accurate. Our work showed that the number of active units reported may differ from the number that actually exists. For example, as of September 2009 we found the following. Citizen Corps reported having 2,409 registered Citizen Corps Councils nationwide that encompass jurisdictions where approximately 79 percent of the U.S. population resides. However, of the 17 organizations registered as councils that we contacted during our site visits, 12 were active and 5 were not active as councils. The CERT program reported having 3,354 registered CERTs. Of the 12 registered CERTs we visited, 11 reported that they were actively engaged in CERT activities, such as drills and emergency preparedness outreach, or had assisted in an emergency or disaster. The 12th registered CERT was no longer active. State officials in two of the four states we visited also said that the data on the number of registered programs might not be accurate. A state official responsible for the Citizen Corps Council and CERT programs in one state estimated that as little as 20 percent of the registered councils were active, and the state subsequently removed more than half of its 40 councils from the national Web site. Officials in another state said that the database is not accurate and they have begun to send e-mails to or call local councils to verify the accuracy of registrations in their state. These officials said that they plan to follow up with those councils that do not respond, but they were uncertain what they planned to do if the councils were no longer active. These results raise questions about the accuracy of FEMA's data on the number of councils across the nation, and the accuracy of FEMA's measure that registered councils cover 79 percent of the population nationwide. Although changes in the number of active local programs can be expected based on factors, including changes in government leadership, voluntary participation by civic leaders, and financial support, a FEMA official responsible for the Citizen Corps program acknowledged that the current program registration lists need to be verified to determine whether they are accurate. The official said that FEMA has plans for improving the accuracy of the data as part of a new online registration process for Citizen Corps Councils and CERTs in 2010, which would involve reregistering local programs with the goal of reactivating inactive programs, although it is likely that some inactive programs would be removed from FEMA's registries. However, it is possible that registration data could continue to be inaccurate because, according to a FEMA official, the Citizen Corps program does not have the authority to require all local units to update information, particularly councils or CERTs that do not receive federal funding. Furthermore, FEMA officials explained that the Homeland Security Grant Program guidance designates state officials as responsible for approving initial council and CERT registrations and ensuring that the data are updated as needed and said that under the new registration process, state officials will continue to be responsible for ensuring that data are updated as needed. A Citizen Corps official told us that the Community Preparedness Division does not monitor whether states are regularly updating local unit registration information as they do not have the staff or processes in place to monitor states' efforts and the Division would look to regional staff to work with state officials. The official said that FEMA is considering the possibility of providing contract support to states that request assistance in contacting local programs as part of the re-registration effort. A key FEMA official told us that they recently drafted a new strategic approach and are considering developing and using outcome measures that are focused on the achievements of Citizen Corps programs as well as the number of programs, as is currently measured. Outcome measures are important because a registered program being active is only a first step in measuring whether local programs are meeting intended program goals. However, our review of the draft showed that it does not state what actions FEMA intends to take to ensure that registrations are accurate and remain up-to-date. Therefore, FEMA does not have reasonable assurance that its data about the number of registrations for local Citizen Corps programs are accurate, which may affect its ability to measure the results of those programs. By developing an approach to ensure the accuracy of local Citizen Corps program data, FEMA managers and others would be better positioned to understand why Citizen Corps programs that no longer exist were disbanded, possible strategies for reconstituting or creating new programs, and a foundation for developing outcome measures that gauge whether local programs are achieving goals associated with enhancing community preparedness. Currently, the Ready Campaign measures its performance based on measures such as materials distributed or PSAs shown. For example, according to a DHS official, in fiscal year 2008 the Ready Campaign had more than 99 million "hits" on its Web site, more than 12 million pieces of Ready Campaign literature requested or 43,660 calls to the toll-free numbers. The Ready Campaign relies on these measures because it faces two different challenges in determining whether its efforts are influencing individuals to be more prepared. First, the Ready Campaign is not positioned to control when or where its preparedness message is viewed. Second, the Ready Campaign is not positioned to measure whether its message is changing the behavior of individuals. With regard to the Ready Campaign's ability to control the distribution of its message, our past work has shown that it is important for agencies to measure their performance based on clear and reliable data that are linked to program goals, but also recognizes that agencies whose programs rely on others to deliver services, like the Ready Campaign, may need to use substitute measures--such as counts of Web site hits and the number of television announcements--which are not linked to outcomes. According to FEMA's Acting Director for the Ready Campaign, the program budget of $2.5 million for 2010 limits the extent to which they could produce advertisements and purchase commercial space for their placement. The PSAs developed by the Ad Council cannot be used for purchased media placement; rather, the Ready Campaign relies on donations of various sources of media. As a result, the Ready Campaign does not control what, when, or where Ready Campaign materials are placed when the media are donated. For example, what PSA is shown and the slots (e.g., a specific channel at a specific time) that are donated by television, radio, and other media companies are not under the Ready Campaign's control, and these are not always prime viewing or listening spots. On the basis of a review of Ad Council data, the Ready Campaign's PSAs in 2008 were aired about 5 percent or less of the time by English language and Spanish language television stations during prime time (8:00 pm to 10:59 p.m.), and about 25 percent of the PSAs were aired from 1:00 a.m. to 4:00 a.m. Similarly, about 47 percent of English language radio and about 27 perc of Spanish language radio spots were aired from midnight to 6:00 a.m. FEMA officials said because new material is more appealing to PSA directors, they expect better placement with the new PSAs released in September 2009. In November 2009, a FEMA official told us that the n PSAs had been released, but information was not yet available to show whether the new material had received better placement. Just as the Ready Campaign has no control over the time PSAs are aired, it does not control the type of media (e.g., radio, television) donated. Based on Ad Council data on the dollar value of media donated to show Ready Campaign materials (the value of the donated media is generally based on what it would cost the Ready Campaign if the media space were purchased), much of the value from donated media is based on space donated in the phone book yellow pages. Figure 1 shows the value of various types of media donated to the Ready Campaign to distribute its message during 2008. The Ready Campaign also faces a challenge determining the extent to which it contributes to individuals taking action to become more prepared--the program's goal. Measuring the Ready Campaign's progress toward its goal is problematic because it can be difficult to isolate the specific effect of exposure to Ready Campaign materials on an individual's level of emergency preparedness. Research indicates that there may be a number of factors that are involved in an individual taking action to become prepared, such as his or her beliefs concerning vulnerability to disaster, geographic location, or income. One factor in establishing whether the Ready Campaign is changing behavior requires first determining the extent to which the Ready Campaign's message has been received by the general population. The Ad Council conducts an annual survey to determine public awareness of the Ready Campaign, among other things. For example, the Ad Council's 2008 survey found the following When asked if they had heard of a Web site called Ready.gov that provides information about steps to take to prepare in the event of a natural disaster or terrorist attack, 21 percent of those surveyed said that they were aware of the Ready.gov Web site. When asked a similar question about television, radio, and print PSAs, 37 percent of those surveyed said that they have seen or heard at least one Ready Campaign PSA. Another factor is isolating the Ready Campaign's message from other preparedness messages that individuals might have received. The Ad Council's 2008 survey found that 30 percent of those surveyed identified the American Red Cross as the primary source of emergency preparedness information; 11 percent identified the Ad Council. While the Ad Council survey may give a general indication as to the population's familiarity with the Ready Campaign, it does not provide a measure of preparedness actions taken based on the Ready Campaign's promotion; that is, a clear link from the program to achieving program goals. The Ad Council reported that those who were aware of the Ready Campaign's advertising were significantly more likely than those who had not seen it to say that they had taken steps to prepare for disaster, but acknowledged that the Ready Campaign could not claim full credit for the differences. Further, as previous Citizen Corps surveys showed, the degree to which individuals are prepared may be less than indicated because preparedness drops substantially when more detailed questions about specific supplies are asked. While DHS's and FEMA's strategic plans have incorporated efforts to promote community preparedness, FEMA has not developed a strategy encompassing how Citizen Corps, its partner programs, and the Ready Campaign are to operate within the context of the National Preparedness System. An objective in DHS's Strategic Plan for fiscal years 2008 through 2013 to "ensure preparedness" envisions empowering Americans to take individual and community actions before and after disasters strike. Similarly, FEMA's Strategic Plan for fiscal years 2008 through 2013 envisions a strategy to "Lead the Nation's efforts for greater personal and community responsibility for preparedness through public education and awareness, and community engagement and planning, including outreach to vulnerable populations." FEMA's Strategic Plan delegates to the agency's components the responsibility for developing their own strategic plans, which are to include goals, objectives, and strategies, but does not establish a time frame for completion of the component plans. FEMA's Strategic Plan states that the components' strategic plans are to focus on identifying outcomes and measuring performance. NPD has not clearly articulated goals for FEMA's community preparedness programs or developed a strategy to show how Citizen Corps, its partner programs, and the Ready Campaign are to achieve those goals within the context of the National Preparedness System. In our past work, we reported that desirable characteristics of an effective national strategy include articulating the strategy's purpose and goals; followed by subordinate objectives and specific activities to achieve results; and defining organizational roles, responsibilities, and coordination, including a discussion of resources needed to reach strategy goals. In April 2009, we reported that NPD had not developed a strategic plan that defined program roles and responsibilities, integration and coordination processes, and goals and performance measures for its programs. We reported that instead of a strategic plan, NPD officials stated that they used an annual operating plan and Post-Katrina Act provisions to guide NPD's efforts. The operating plan identifies NPD goals and NPD subcomponents responsible for carrying out segments of the operating plan, including eight objectives identified for the division under NPD's goal to "enhance the preparedness of individuals, families, and special needs populations through awareness planning and training." NPD's objectives for meeting this goal did not describe desired outcomes. In late September 2009, NPD provided us a spreadsheet that was linked to the NPD operating plan which outlined more detailed information on NPD's goals and objectives, such as supporting objectives, the responsible NPD division, and projected completion dates. However the spreadsheet lacked details about key issues, and did not include all of the elements of an effective national strategy. For example, one of NPD's operating plan objectives--called a supporting goal in FEMA's spreadsheet--for the Community Preparedness Division is to increase "the number of functions that CERTs will be able to perform effectively during emergency response," but neither the plan nor the spreadsheet provide details, such as the functions CERTs currently perform, what additional functions they could perform, and what it means to be effective. The spreadsheet elaborates on this supporting goal with a "supporting objective" to "develop 12 new CERT supplemental training modules that promote advanced individual and team skills" and a completion date of September 30, 2009. FEMA officials said that 6 of the 12 modules were completed as of September 30, 2009, and that the spreadsheet should have identified the effort as ongoing because developing the planning modules was to be completed over a 4-year period ending in 2011. The operating plan, spreadsheet, and FEMA officials provided no time frame for when the training is expected to be implemented at the local level to increase the function of individual CERTs, nor did they discuss performance measures and targets for gauging changes in the effectiveness of CERTs, or how local training will be coordinated or delivered. NPD's operating plan and spreadsheet also did not include other key elements of an effective national strategy, such as how NPD will measure progress in meeting defined goals and objectives and the potential costs and types of investments needed to implement community preparedness programs. As a result, NPD is unable to provide a picture of priorities or how adjustments might be made in view of resource constraints. In our April 2009 report, we recommended that NPD take a more strategic approach to implementing the National Preparedness System to include the development of a strategic plan that contains such key elements as goals, objectives, and how progress in achieving them will be measured. DHS concurred with our recommendation and stated that it is making progress in this area and in fully implementing the recommendation. NPD officials stated in September 2009 that DHS, FEMA, and NPD, in coordination with national security staff, were discussing the development of a preparedness and implementation strategy within the context of Homeland Security Presidential Directive 8 (National Preparedness) (HSPD-8). They said that community and individual preparedness were key elements of those discussions. At that time, NPD officials did not state when the strategy would be completed; thus, it is not clear to what extent the strategy will integrate Citizen Corps, its partner programs, and the Ready Campaign. NPD officials stated that work is under way on revising the target capabilities, which are to include specific outcomes, measures, and resources for the Community Preparedness and Participation capability. They said that they expect to issue a draft for public comment in the second quarter of fiscal year 2010. Also, in testimony before the Subcommittee on Emergency Communications, Preparedness and Response, Committee on Homeland Security, on October 1, 2009, the NPD Deputy Administrator said that, in recognition of the preliminary observations raised in our testimony, NPD is reformulating the NPD operating plan as a strategic plan. He said that once complete, the strategic plan is intended to integrate Community Preparedness, specifically the efforts of Citizen Corps, its partner programs and affiliates, and the Ready Campaign. However, he said he was not prepared to provide a time frame as to when the strategic plan would be completed. The NPD Deputy Administrator agreed to consult with the Subcommittee staff and other stakeholders as NPD develops the draft strategic plan. The FEMA official leading the development of the NPD strategic plan told us that NPD had begun to develop a strategic plan, but it had not developed a timeline with milestone dates for completing it because NPD is waiting to coordinate the plan's development with the revision of HSPD- 8 and the Quadrennial Homeland Security Review. He said NPD would be better able to establish a timeline and milestones for completing the NPD strategic plan once these other documents were revised; but he was uncertain about when these documents would be completed. He also stated that NPD had developed a draft strategic approach for community preparedness in response to a request by the Chairman of the Subcommittee on Emergency Communications, Preparedness and Response, Committee on Homeland Security, during the October 1, 2009 hearing. He said that NPD intends to use this strategic approach as a vehicle for discussing community preparedness within the context of NPD's overall strategy. He told us that, as with the draft strategic plan, NPD had not established a timeline with milestone dates for completing the Community Preparedness strategy. On December 2, 2009, FEMA provided a copy of the draft community preparedness strategic approach that it prepared for the Subcommittee. FEMA's draft represents an important first step because it partially satisfies the elements of an effective national strategy. Specifically, the draft strategic approach broadly discusses why FEMA produced it, the process by which it was developed, and FEMA's overall community preparedness vision. The draft also outlines goals and subordinate goals and discusses the outcomes FEMA expects in achieving them. However, the draft strategic approach lacks key elements of an effective national strategy because, among other things, it does not discuss how progress will be measured in achieving these goals; the roles and responsibilities of the organizations responsible for implementing the strategy, and mechanisms for coordinating their efforts; and the cost of implementation, including the source and types of resources needed and where those investments and resources should be targeted. FEMA's draft did not identify a timeline and milestones for completing the strategy. The Ready Campaign is also working to develop its strategic direction. According to the FEMA Director of External Affairs, the Ready Campaign's strategy is being revised to reflect the transition of the program from DHS's Office of Public Affairs to FEMA's Office of External Affairs, and the new FEMA Director's approach to preparedness. Program officials said that the Ready Campaign will have increased access to staff and resources and is to be guided by a FEMA-wide strategic plan for external communications. As of September 2009, the plan was still being developed and no date had been set for completion. The Ready Campaign Director said in November 2009 that the plan is not expected to be done before the end of the year, but was not aware of a timeline and milestones for its completion. The Director also said that the Ready Campaign was included in the draft community preparedness strategy. We recognize that HSPD-8 and the Quadrennial Homeland Security Review are instrumental in articulating the overall national preparedness strategy and FEMA's strategic approach, and that NPD's plan and community preparedness strategies, including the Ready Campaign, are components of efforts to revise these initiatives. Standard practices for project management established by the Project Management Institute state that managing a project involves, among other things, developing a timeline with milestone dates to identify points throughout the project to reassess efforts under way to determine whether project changes are necessary. By developing plans with timelines and milestones for completing the NPD and community preparedness strategies, FEMA will be better positioned to provide a more complete picture of NPD's approach for developing and completing these documents. They also would provide FEMA managers and other decision makers with insights into (1) NPD's overall progress in completing these strategies, (2) a basis for determining what, if any, additional actions need to be taken, and (3) the extent to which these strategies can be used as building blocks for the national preparedness strategy and FEMA's strategic approach. Hurricane Katrina was one of the most devastating natural disasters in our nation's history and will have long-standing effects for years. By their nature, catastrophic events involve casualties, damage, or disruption that will likely overwhelm state and local responders. Americans who are prepared as individuals for disasters, and as trained volunteers, can help to mitigate the impact of disasters in their local communities, yet the previous FEMA surveys indicate that many Americans are still not prepared. The majority of those responding to the surveys said they plan to rely on assistance from first responders during a major disaster. While FEMA identifies community preparedness as an important part of its national preparedness strategy, FEMA lacks accurate performance information on its community preparedness programs that would enable it to determine whether these programs are operating in the communities in which they have been established. We recognize that FEMA's Citizen Corps Program and partner programs have relatively small budgets and staff, and that program officials are aware of inaccuracies in the data and are considering options to improve information on local programs, such as re-registering existing programs. However, it is unclear whether these measures will be enough to provide FEMA the assurance it needs that local programs that are registered continue to operate. By having accurate data, FEMA managers and other decision makers would be better positioned to measure progress establishing and maintaining these programs nationwide and in local communities. This would also provide FEMA managers the basis for exploring (1) why programs that no longer exist were disbanded, and (2) possible strategies for reconstituting local programs or developing new ones. Accurate data would also provide a foundation for developing outcome measures that gauge whether local programs are achieving goals associated with enhancing community preparedness. Challenges in measuring the performance of these programs stem in part from FEMA lacking an overall strategy for achieving community preparedness or defining how these efforts align with the larger National Preparedness System, particularly how Citizen Corps, its partner programs, and the Ready Campaign fit within the strategy. Defining program roles, responsibilities, and coordination mechanisms; identifying performance measures to gauge results; and ensuring the resources needed to achieve program goals would be part of an effective strategy. FEMA has agreed such a strategy is needed and has started to develop strategies for NPD and Community Preparedness, including the Ready Campaign, but has no timeframes or milestone dates for developing and completing them. By having a plan with time frames and milestone dates for completing the NPD strategic plan and its community preparedness strategy, FEMA managers and other decision makers would be better equipped to track NPD's progress. Moreover, they would have a basis to determine what, if any, additional actions are needed to enhance NPD's overall preparedness strategy and community preparedness and insights into the extent to which these plans can be used as building blocks for the national preparedness strategy and FEMA's strategic approach. To better ensure that national community preparedness efforts are effective and completed in a timely fashion, we recommend that the Administrator of FEMA take the following two actions: examine the feasibility of developing various approaches for ensuring the accuracy of registration data of local Citizen Corps Councils and partner programs, and develop plans including timelines and milestone dates for completing and implementing (1) NPD's strategic plan and (2) its Community Preparedness Strategic Approach, including details on how Citizen Corps, partner programs, and the Ready Campaign are to operate within the context of the National Preparedness System. We requested comments on a draft of this report from the Secretary of Homeland Security. The department declined to provide official written comments to include in our report. However, in an e-mail received January 19, 2010, the DHS liaison stated that DHS concurred with our recommendations. FEMA provided written technical comments, which were incorporated into the report as appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Secretary of Homeland Security, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any further questions about this report, please contact me at (202) 512-8777 or email at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. William O. Jenkins, Jr Director, Homeland Security and Ju . The Department of Homeland Security (DHS) support for local community preparedness activities is provided through Homeland Security grants, specifically the Citizen Corps grant program, but community preparedness activities are also eligible for support under other Homeland Security grants. Citizen Corps grants are awarded to states based on a formula of 0.75 percent of the total year's grant allocation to each state (including the District of Columbia and Commonwealth of Puerto Rico) and 0.25 percent of the total allocation for each U.S. Territory, with the balance of funding being distributed on a population basis. For other DHS homeland security grants, states prepare a request for funding, which can include support for the state's community preparedness efforts, as allowed under the guidance for a particular grant. For example, the 2009 Homeland Security Grant Program guidance lists "conducting public education and outreach campaigns, including promoting individual, family and business emergency preparedness" as an allowable cost for State Homeland Security Grants. Grant funding can be used to support Citizen Corps, Citizen Corps partner programs, or other state community preparedness priorities. The Federal Emergency Management Agency's (FEMA) grant reporting database does not categorize grants in a way that allows identification of the amount of funding going to a particular community preparedness program, such as a Community Emergency Response Team (CERT) or Fire Corps. Table 1 summarizes the approximately $269 million in DHS grants that were identified by grantees as supporting community preparedness projects from 2004 through 2008. Our selection of projects for inclusion in this summary relied on DHS data on grantees who identified their project as one of three predefined project types that are, according to FEMA officials, relevant for community preparedness, or were projects funded with a Citizen Corps Program grant. Not all grantees may have used these project-type descriptions, so the amount below is an approximation. We worked with grant officials to identify the most appropriate grant selection criteria. To determine the reliability of these DHS grant data, we reviewed pertinent DHS documents, such as the Grant Reporting Tool User's Manual and interviewed DHS officials about their process for compiling these data. We determined that the grant data we used were sufficiently reliable for purposes of this report. In addition to the contact named above, John Mortin, Assistant Director, and Monica Kelly, Analyst-in-Charge, managed this assignment. Carla Brown, Qahira El'Amin, Lara Kaskie, Amanda Miller, Cristina Ruggiero- Mendoza, and Janet Temko made significant contributions to the report.
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Individuals can reduce their need for first responder assistance by preparing for a disaster. By law, the Federal Emergency Management Agency (FEMA) in the Department of Homeland Security (DHS) is to develop a National Preparedness System (NPS) that includes community preparedness programs. These programs account for less than 0.5 percent of FEMA's budget. They include the Citizen Corps Program (CCP) and partner programs, e.g., Fire Corps, which provide volunteers to assist first responders. FEMA's Ready Campaign promotes preparedness through mass media. GAO was asked to review federal efforts to promote community preparedness. GAO was asked to address (1) challenges, if any, FEMA faces in measuring the performance of CCP, its partner programs, and the Ready Campaign, and (2) actions, if any, FEMA has taken to develop a strategy to encompass how these programs are to operate within the context of the NPS. GAO analyzed documents on preparedness plans and strategies and compared reported performance data with observations during 12 site visits, selected primarily on the basis of major disasters. While not projectable, the results add insight. FEMA faces challenges measuring performance for CCP, its partner programs, and the Ready Campaign because (1) it relies on states to verify data for local program units and (2) it is unable to control the distribution of the Ready Campaign messages or measure whether the messages are changing the behavior of individuals. GAO's past work showed the importance of ensuring that program data are of sufficient quality to document performance and support decision making. FEMA includes the number of local volunteer organizations registered nationwide as its principal performance measure for community preparedness, but does not verify that registration data are accurate. For example, 5 of the 17 registered Citizen Corps councils GAO contacted were not active as councils. FEMA relies on state officials to verify the accuracy of the data, and does not have staff or processes for this purpose. FEMA officials agreed that the data are inaccurate, and have plans to improve the registration process, but this process is not designed to ensure accurate data because states will continue to be responsible for verifying the accuracy of data. FEMA counts requests for literature, Web site hits, and the number of television and radio announcements made to gauge performance of the Ready Campaign, but it does not control when information is accessed or viewed. Also, changes in behavior can be the result of a variety of factors, including campaigns sponsored by other organizations. GAO's past work stated that agencies should measure performance based on accurate, clear, and reliable data that are clearly linked to program goals, but also recognized that programs like the Ready Campaign may need to rely on substitute measures that it uses such as Web site hits. GAO recognizes that FEMA is challenged measuring the performance of CCP, partner programs, and the Ready Campaign, but examining the feasibility of approaches to verify data on CCP and its partner programs could position FEMA to begin to (1) explore why programs that no longer exist were disbanded and (2) develop possible strategies for reconstituting local programs or developing new ones. FEMA's challenges in measuring the performance of community preparedness programs are compounded because it has not developed a strategy to show how its community preparedness programs and the Ready Campaign are to operate within the context of the NPS. In April and October 2009, GAO reported that FEMA's National Preparedness Directorate (NPD), responsible for community preparedness, had not developed a strategic plan; rather it used an operating plan, which lacked key elements of an effective national strategy, such as how to gauge progress. GAO recommended that NPD develop a strategic plan that contains these key elements. FEMA agreed and reported that it is taking actions to strengthen strategic planning. While officials said an NPD strategic plan and a community preparedness strategy are being developed, NPD has not developed timelines with milestone dates for completing these strategies. By doing so, consistent with standard management practices for implementing programs, FEMA would be better positioned to show progress and provide insights into how these plans can be used as building blocks for the national preparedness strategy.
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The Social Security Act of 1935 required most workers in commerce and industry, then about 60 percent of the workforce, to be covered. Amendments to the act in 1950, 1954, and 1956 allowed states, generally acting for their employees, to voluntarily elect Social Security coverage through agreements with SSA. The amendments also permitted states and localities that elected coverage to withdraw from the program after meeting certain conditions. Policymakers have addressed the issue of extending mandatory Social Security coverage for state and local government employees on several occasions. In response to financial problems the Social Security system faced in the early 1970s, for example, the 1977 Social Security amendments directed that a study be made of the desirability and feasibility of extending mandatory coverage to employees at all levels of government, including state and local governments. The Secretary of the Department of Health, Education, and Welfare--now the Departments of Health and Human Services and Education--established the Universal Social Security Coverage Study Group to develop options for mandatory coverage and analyze the fiscal effects of each option. Recognizing the diversity of state and local systems, the study group selected representative plans for analysis. Two data sources were developed and analyzed. First, the Actuarial Education and Research Fund, sponsored by six professional actuarial organizations, established a task force of plan actuaries to study 25 representative large and small noncovered retirement systems. Second, the Urban Institute, under a grant from several government agencies, used an actuarial firm to obtain data on 22 of the largest 50 noncovered employee retirement systems. The study group report, issued in 1980, provided information on the costs and benefits of various options but did not draw conclusions about their relative desirability. In 1983, the Congress removed authority for states and localities that had voluntarily elected Social Security coverage to withdraw from the program, which effectively made coverage mandatory for many state and local employees. Additionally, in 1990, the Congress mandated coverage for state and local employees not covered by public pension plans. SSA estimates that 96 percent of the workforce, including 70 percent of the state and local government workforce, is now covered by Social Security. During 1997, Social Security had $457.7 billion in revenues and $369.1 billion in expenditures. About 89 percent of Social Security's revenues came from payroll taxes. The Social Security payroll tax is 6.2 percent of pay each for employers and employees, up to an established maximum. Maximum earnings subject to Social Security payroll taxes were $65,400 in 1997 and are $68,400 in 1998. Social Security provides retirement, disability, and survivor benefits to insured workers and their families. Insured workers are eligible for full retirement benefits at age 65 and reduced benefits at age 62. The retirement age was increased by the 1983 Social Security amendments. Beginning with those born in 1938, the age at which full benefits are payable will increase in gradual steps from age 65 to age 67. Benefit amounts are based on a worker's age and career earnings, are fully indexed for inflation, and as shown in table 1, replace a relatively higher proportion of the final year's wages for low earners. Social Security provides additional benefits for eligible family members, including spouses aged 62 or older--or younger spouses if a child meeting certain requirements is in their care--and children up to age 18--or older if they are disabled. The amount of a spouse's or child's benefit is one-half the insured worker's age-65 benefit amount. A spouse's benefit is reduced if taken earlier than age 65, unless the spouse has a child in his or her care. SSA estimates that about 5 million state and local government employees, excluding students and election workers, occupy positions not covered by Social Security. SSA also estimates that the noncovered employees have annual salaries totaling about $132.5 billion. Seven states--California, Colorado, Illinois, Louisiana, Massachusetts, Ohio, and Texas--account for over 75 percent of the noncovered payroll. Based on a 1995 survey of public pension plans, the Public Pension Coordinating Council (PPCC) estimates that police, firefighters, and teachers are more likely to occupy noncovered positions than other employees are. According to a 1994 Bureau of Labor Statistics (BLS) survey, most full-time state and local employees participate in defined benefit pension plans. Table 2 shows membership and contribution rates for nine defined benefit state and local pension plans that we studied as part of the review. For the most part, active members in the nine plans occupy positions that are not covered by Social Security. Defined benefit plans promise a specific level of benefits to their members when they retire. Minimum retirement age and benefits vary; however, the BLS and PPCC surveys indicate that many public employees can retire with full benefits at age 55 or earlier with 30 years of service. The surveys also indicate that plan members typically have a benefit formula that calculates retirement income on the basis of specified benefit rates for each year of service and the members' average salary over a specified time period--usually the final 3 years. For example, the benefit rates for members of the Colorado Public Employees' Retirement Association are 2.5 percent of highest average salary per year over a 3-year period for the first 20 years of service and 1.5 percent of highest average salary per year for each additional year of service. Full retirement benefits are available at any age with 35 years of service, at age 55 with 30 years of service, age 60 with 20 years of service, or at age 65 with 5 years of service. Therefore, plan members who retire at age 55 with 30 years of service receive annual retirement income amounting to 65 percent of their highest average salary. Reduced retirement benefits are available, for example, at age 55 with 20 years of service. In addition to retirement income benefits, most public pension plans provide other benefits, such as disability or survivor benefits. For example, BLS reported that of defined benefit plan members, 91 percent were provided with disability benefits, all have a survivor annuity option, and 62 percent receive some cost-of-living increases after retirement. Public pension plan coverage for part-time, seasonal, and temporary employees varies. In Ohio, for example, part-time and temporary state employees participate in a defined benefit plan. In California, the 16,000 part-time, seasonal, and temporary state employees have a defined contribution plan. Plan benefits are based on plan contributions, which consist of 7.5 percent of the employees' gross pay deducted from their pay and returns on plan investments. SSA estimates that extending mandatory Social Security coverage to all newly hired state and local employees would reduce the trust funds' 75-year actuarial deficit by about 10 percent. The surplus payroll tax revenues associated with mandatory coverage and interest on that surplus would extend the trust funds' solvency by about 2 years. Extending mandatory coverage to newly hired employees would also increase program participation and, in the long run, simplify program administration. Table 3 shows SSA's analysis of the present discounted value of revenues and expenditures with and without mandatory coverage over the 75-year period beginning January 1, 1998. The analysis indicates that extending mandatory coverage to all state and local employees hired beginning January 1, 2000, would reduce the program's long-term actuarial deficit by 10 percent, from about 2.19 percent of payroll to 1.97 percent of payroll. Figure 1 shows that SSA's analysis indicates that extending mandatory coverage to new state and local employees would extend the trust funds' solvency by about 2 years, from 2032 to 2034. As with most other elements of the reform proposals put forward by the 1994-1996 Social Security Advisory Council, extending mandatory coverage to newly hired state and local employees would contribute to the resolution of--but not fully resolve--the trust funds' solvency problem. A combination of adjustments will be needed to extend the program's solvency over the entire 75-year period. SSA's analysis indicates that revenues resulting from an extension of mandatory coverage, including payroll taxes and interest on surplus revenues, would substantially exceed additional expenditures throughout the 75-year period. SSA assumes that payroll tax collections for new employees would accelerate early in the 75-year period, while benefits for those employees would not accelerate until later in the period. For example, annual revenues from payroll taxes collected from the newly covered employees and their employers are expected to exceed expenditures for benefits to those employees until 2050. In that year, however, revenues resulting from an extension of mandatory coverage, including interest on cumulative surplus revenues, are projected to exceed expenditures on those employees by over 300 percent. While Social Security's solvency problems triggered the analysis of the effect of mandatory coverage on program revenues and expenditures, the inclusion of such coverage in a comprehensive reform package would likely be grounded in other considerations as well, such as broadening Social Security's coverage and simplifying program administration. an effective Social Security program helps to reduce public costs for relief and assistance, which, in turn, means lower general taxes. There is an element of unfairness in a situation where practically all contribute to Social Security, while a few benefit both directly and indirectly but are excused from contributing to the program. According to SSA, one important way that noncovered employees benefit from, without contributing to, Social Security is that their parents, grandparents, or other relatives receive Social Security's retirement, disability, or survivor benefits. Social Security is designed as a national intergenerational transfer program where the taxes of current workers fund the benefits of current beneficiaries. SSA stated that those not contributing to the program still receive the benefits of this transfer. Extending mandatory Social Security coverage to all newly hired state and local employees would also simplify program administration by eliminating, over time, the need to administer and enforce special rules for noncovered state and local employees. For example, SSA's Office of Research, Evaluation, and Statistics estimates that 95 percent of state and local employees occupying noncovered positions become entitled to Social Security as either workers or dependents. Additionally, the Office of the Chief Actuary estimates that 50 to 60 percent of state and local employees in noncovered positions will be fully insured by age 62 from other, covered employment. The Congress established the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) to reduce the unfair advantage that workers eligible for pension benefits on the basis of noncovered employment may have when they apply for Social Security benefits. The earnings history for workers with noncovered earnings may appear to qualify them for increased Social Security benefits as low-income wage earners--or for additional benefits for a nonworking spouse--when in fact they have had substantial income from noncovered employment. With a few exceptions, WEP and GPO require SSA to use revised formulas to calculate benefits for workers with noncovered employment. In April 1998, we reported that SSA is often unable to determine whether applicants should be subject to WEP or GPO and this has led to overpayments. We estimated total overpayments to be between $160 million and $355 million over the period 1978 to 1995. In response, SSA plans to perform additional computer matches with the Office of Personnel Management and the Internal Revenue Service (IRS) to obtain noncovered pension data and ensure WEP and GPO are correctly applied. Mandatory coverage would reduce required WEP and GPO adjustments to benefits by gradually reducing the number of employees in noncovered employment. Eventually, all state and local employees--with the exception of a few categories of workers, such as students and election workers--would be in covered employment, and adjustments would be unnecessary. In 1995, SSA asked its Office of the Inspector General to review state and local government employers' compliance with Social Security coverage provisions. In December 1996, the Inspector General reported that Social Security provisions related to coverage of state and local employees are complex and difficult to administer. The report stated that few resources were devoted to training state and local officials and ensuring that administration and enforcement roles and responsibilities are clearly defined. The report concluded that there is a significant risk of sizeable noncompliance with state and local coverage provisions. In response, SSA and IRS have initiated an effort to educate employers and ensure compliance with legal requirements for withholding Social Security payroll taxes. Extending coverage to all newly hired state and local government employees would eventually eliminate this problem. SSA stated that the time needed to fully phase in mandatory coverage could be 20 to 30 years, if it followed estimates of the time needed to phase in Medicare coverage, which was mandated for newly hired state and local employees starting in 1986. SSA also stated that mandatory Social Security coverage for new hires would possibly create another tier in the payroll reporting process resulting in additional compliance issues in the near term. Additionally, payroll practitioners would need to account for Social Security covered and noncovered government employment--along with Medicare covered and noncovered employment--and, as a result, they would face additional reporting burdens in the near term as they extended Social Security coverage to new employees. If Social Security becomes mandatory, all newly hired state and local employees would be provided with the minimum income protection afforded by Social Security. Also, they and their employers would pay Social Security's combined 12.4-percent payroll tax. Each state and locality with noncovered employees would then decide how to respond to the increase in benefits and costs. Possible responses range from the government's absorbing the added costs and leaving current pension plans unchanged to entirely eliminating state and local pension plan benefits for newly hired employees. From discussions with state and local representatives, however, noncovered employers would likely adjust their pension plans to reflect Social Security's benefits and costs. To illustrate the implications of mandatory coverage for public employers and employees, we examined three possible responses: States and localities could maintain similar total retirement benefits for current and newly hired employees. For example, employees who retire before age 62 would be paid supplemental retirement benefits until they become eligible for Social Security benefits. This response would likely result in an increase in total retirement costs and some additional family and other benefits for many newly hired employees. States and localities could examine other pension plans that are already coordinated with Social Security and provide newly hired employees with similar benefits. For example, employees who retire before age 62 would receive, on average, a smaller initial retirement benefit than current noncovered employees. This response would also likely result in an increase in total retirement costs and some additional family and other benefits for newly hired employees. States and localities could maintain level retirement costs. This response would likely require a reduction in pension benefits from the government's plans for many newly hired employees, but the new employees would also have Social Security benefits. According to pension plan representatives, the changes to current pension plans in response to mandatory coverage could result in reduced contributions to those plans, which could affect their long-term financing. States and localities with noncovered employees could decide to provide newly hired employees with pension benefits at retirement, which, when combined with Social Security benefits, approximate the pension benefits of current employees. Studies indicate that such a decision would likely result in an increase in retirement costs. The amount of increase would vary depending on a number of factors; however, studies indicate the increase could be about 7 percent of new-employee payroll. The 1980 Universal Social Security Coverage Study Group report estimated that total retirement costs, including Social Security payroll taxes and pension plan contributions, would need to increase an average of 5 to 10 percent of payroll to maintain level benefits for current and newly hired employees. However, the estimated increase included the 2.9 percent of payroll Medicare tax that was mandated for all new state and local employees in 1986--6 years after the study was completed. Deducting the Medicare tax reduces the estimate of additional costs to between 2 and 7 percent of payroll. The 1980 study group assumed that most newly hired employees would have salary replacement percentages in their first year of retirement that would be comparable to the salary replacement percentages provided to current employees. For example, employees retiring before age 62 would receive a temporary supplemental pension benefit to more closely maintain the benefits of the current plan. Since Social Security benefits are weighted in favor of families and lower income employees--and because Social Security benefits are fully indexed for inflation, while many pension plans provide limited or no cost-of-living protection--total lifetime benefits for some new employees would be greater than those provided to current employees. More recent studies by pension plan actuaries in Colorado, Illinois, and Ohio also indicate the cost increase would be in the same range. For example, a December 1997 study for a plan in Ohio indicated that providing retirement benefits for new employees that, when added to Social Security benefits, approximate retirement benefits for current employees would require an increase in contributions of 6 to 7 percent of new-employee payroll. A 1997 study for a pension plan in Illinois indicated the increased payments necessary to maintain similar total retirement benefits for current and new employees would be about 6.5 percent of new-employee payroll. Since it would be limited to new employees, the cost increase would be phased in over several years. For example, the cost increase would be about 0.25 percent of total payroll starting the first year, 2.83 percent of total payroll in 10 years, and 6.54 percent of total payroll after all current employees have been replaced. The 1980 study group report stated that the causes of the cost increase cannot be ascribed directly to specific Social Security or pension plan provisions. According to the study, however, among the most important factors contributing to the cost increase are Social Security's strengthening of cost-of-living protection, provision of substantial additional benefits to some families, and reduction in pension benefit forfeitures occurring when employees move between jobs. The study stated that another contributing factor would be the need for pension plans to provide supplemental benefits to employees, especially police and firefighters, who retire before they begin receiving Social Security benefits at age 62. The study also found that the magnitude of the cost increase would depend on the pension plan's current benefits. Cost increases would be less for plans that already provide benefits similar to those provided by Social Security because those plans would be able to eliminate duplicate benefits. Maintaining level benefits for noncovered and newly hired employees would require states and localities in redesigning plans for the newly hired employees to adopt benefit formulas that explicitly integrate pension and Social Security benefits. For example, affected states and localities could adopt a benefit formula that offsets a portion of the member's pension benefit with a specified percentage of the member's Social Security benefit. This approach is more common in the private sector--where a 1995 BLS survey of large and medium establishments found that about 51 percent of full-time employees had benefits integrated with Social Security--than the public sector, where a survey found that only about 4 percent of full-time employees had pension benefits integrated with Social Security. In the public sector, pension plans for covered employees generally recognize Social Security benefits implicitly by providing their members with lower benefit rates than are provided to noncovered employees. SSA estimates that about 70 percent of the state and local workforce is already covered by Social Security. The 1980 study group examined the impact on retirement costs if states and localities with noncovered employees provide newly hired employees with pension benefits that are similar to the benefits provided to employees who are already covered by Social Security. The study group concluded that implementing such formulas would increase overall retirement costs by 6 to 14 percent of payroll--or about 3 to 11 percent of payroll after deducting the Medicare tax. The study also concluded that for most pension plans, the present value of lifetime benefits for new employees covered by Social Security would be greater than the value of benefits of current noncovered employees. As shown in table 4, our analysis of 1995 PPCC data also indicates that total retirement costs for states and localities covered by Social Security are higher than the costs for noncovered states and localities. PPCC data also indicate that many employees, especially police and firefighters, retire before age 62, when they would first be eligible for Social Security retirement benefits. The data indicate, for example, that police and firefighters in noncovered plans retired, on average, at age 54. The average retirement age of other employees in noncovered plans was age 60. In covered plans, the average retirement age for police and firefighters and other employees was somewhat higher at ages 55 and 62, respectively. Analyses indicate that, initially, the percentage of salary that is replaced by retirement income is smaller for covered employees who retire before they are eligible for Social Security benefits than for noncovered employees. Our analysis of PPCC data indicates, for example, that public pension plans replace about 65 percent of the final average salary of members who retired with 30 years of service and were not covered by Social Security. For members who retired with 30 years of service and were covered by both a pension plan and Social Security, the PPCC data indicate that pension plans replace only about 53 percent of their members' final average salary. After Social Security benefits begin, however, covered employees generally have higher salary replacement rates. For example, the average salary replacement rates in 1994 were higher for covered state and local employees than for noncovered employees, after they reach age 62 at all salary levels between $15,000 and $65,000. (See table 5.) We did not compare the expected value of total lifetime benefits for covered and noncovered employees because amounts would vary depending on the benefits offered by each plan. The extent to which the experience of states and localities with covered employees can be generalized to those with noncovered employees is limited. According to the 1980 study group report, most public pension plans that coordinated with Social Security did so in the 1950s and 1960s when Social Security benefits and payroll taxes were much smaller. As Social Security benefits grew, pension plan benefits remained basically unchanged. The study stated that, starting in the 1970s, however, rising pension costs caused several large state systems to consider reducing their relatively liberal pension benefits. In the 1980s, for example, California created an alternative set of reduced benefits for general employees to, among other things, reduce the state's retirement costs. Initially, general employees were permitted to select between the higher costs and benefits of the original plan and the lower costs and benefits of the revised plan. Subsequently, however, newly hired general employees were limited to the reduced benefits. Regardless, the circumstances surrounding the experiences of states with covered employees make it difficult to predict what changes would occur from further extension of coverage. Several employer, employee, and pension plan representatives with whom we spoke stated that spending increases necessary to maintain level retirement income and other benefits would be difficult to achieve. State and pension plan officials noted that spending for retirement benefits must compete for funds with spending for education, law enforcement, and other areas that cannot be readily reduced. For example, Ohio officials noted that the state is having difficulty finding the additional funds for education needed to comply with court ordered changes in school financing. A representative of local government officials in Ohio stated that payroll represents 75 to 80 percent of county budgets, and there is little chance that voters would approve revenue increases needed to maintain level retirement benefits. He stated the more likely options for responding to increased retirement costs were to decrease the number of employees or reduce benefits under state and local pension plans. If states and localities decide to maintain level spending for retirement, they might need to reduce pension benefits under public pension plans for many employees. For example, a June 1997 actuarial evaluation of an Ohio pension plan examined the impact on benefits of mandating Social Security coverage for all employees, assuming no increase in total retirement costs. The study concluded that level spending could be maintained if service retirement benefits were reduced (for example, salary replacement rates for employees retiring with 30 years of service would be reduced from 60.3 percent to 44.1 percent); retiree health benefits were eliminated for both current and future employees; and the funding period of the plan's unfunded accrued liability was extended from 27 years to 40 years. The study also stated that additional benefit reductions might be needed to maintain level spending if additional investment income was not available to subsidize pension benefits for newly hired employees. States and localities typically use a "reserve funding" approach to finance their pension plans. Under this approach, employers--and frequently employees--make systematic contributions toward funding the benefits earned by active employees. These contributions, together with investment income, are intended to accumulate sufficient assets to cover promised benefits by the time employees retire. However, many public pension plans have unfunded liabilities. The nine plans that we examined, for example, have unfunded accrued liabilities ranging from less than 1 percent to over 30 percent of total liabilities. Unfunded liabilities occur for a number of reasons. For example, public plans generally use actuarial methods and assumptions to calculate required contribution rates. Unfunded liabilities can occur if a plan's actuarial assumptions do not accurately predict reality. Additionally, retroactive increases in plan benefits can create unfunded liabilities. Unlike private pension plans, the unfunded liabilities of public pension plans are not regulated by the federal government. States or localities determine how and when unfunded liabilities will be financed. Mandatory coverage and the resulting pension plan modifications would likely result in reduced contributions to public pension plans. This would occur because pension plan contributions are directly tied to benefit levels and plan contributions would be reduced to the extent plan benefits are reduced and replaced by Social Security benefits. The impact of reduced contributions on plan finances would depend on the actuarial method and assumptions used by each plan, the adequacy of current plan funding, and other factors. For example, some plan representatives are concerned that efforts to provide adequate retirement income benefits for newly hired employees would affect employers' willingness or ability to continue amortizing their current plans' unfunded accrued liabilities at current rates. Actuaries also believe that reducing contributions to current pension plans could adversely affect the liquidity of some plans. In 1997, for example, an Arizona state legislative committee considered closing the state's defined benefit pension plan to new members and implementing a defined contribution plan. Arizona state employees are already covered by Social Security; however, states and localities faced with mandatory coverage might consider making a similar change to their pension plans. A March 1997 analysis of the proposed change stated that as the number of employees covered by the plan decreased, the amount of contributions flowing into the plan would also decrease. At the same time, the number of members approaching retirement age was increasing and benefit payments were expected to increase. As a result, external cash flow would become increasingly negative over time. The analysis estimated that about 10 years after the plan was closed to new members, benefit payments would exceed contributions by over $1 billion each year. In another 10 years, the annual shortfall would increase to $2 billion. The analysis stated that the large negative external cash flow would require that greater proportions of investment income be used to meet benefit payment requirements. In turn, this would require the pension plan to hold larger proportions of plan assets in cash or lower yielding short-term assets. Once this change in asset allocation occurs, the plan would find it increasingly difficult to achieve the investment returns assumed in current actuarial analyses and employer costs would increase. Mandatory coverage presents several legal and administrative issues, and states and localities with noncovered employees would require several years to design, legislate, and implement changes to current pension plans. Although mandating Social Security coverage for state and local employees could elicit a constitutional challenge, mandatory coverage is likely to be upheld under current U.S. Supreme Court decisions. Several employer, employee, and plan representatives with whom we spoke stated that they believe mandatory Social Security coverage would be unconstitutional and should be challenged in court. However, recent Supreme Court cases have affirmed the authority of the federal government to enact taxes that affect the states and to impose federal requirements governing the states' relations with their employees. A plan representative suggested that the Supreme Court might now come to a different conclusion. He pointed out that a case upholding federal authority to apply minimum wage and overtime requirements to the states was a 5 to 4 decision and that until then, the Supreme Court had clearly said that applying such requirements to the states was unconstitutional. States and localities also point to several recent Supreme Court decisions that they see as sympathetic to the concept of state sovereignty. However, the facts of these cases are generally distinguishable from the situation that would be presented by mandatory Social Security coverage. Unless the Supreme Court were to reverse itself, which it seldom does, mandatory Social Security coverage of state and local employees is likely to be upheld. Current decisions indicate that mandating such coverage is within the authority of the federal government. The states would require some time to adjust to a mandatory coverage requirement. The federal government required approximately 3 years to enact legislation to implement a new federal employee pension plan after Social Security coverage was mandated for federal employees. The 1980 study group estimated that 4 years would be required for states and localities to redesign pension formulas, legislate changes, adjust budgets, and disseminate information to employers and employees. Our discussions with employer, employee, and pension plan representatives also indicate that up to 4 years would be needed to implement a mandatory coverage decision. They indicated, for example, that developing revised benefit formulas for each affected pension plan would require complex and time-consuming negotiations among state legislatures, state and local budget and personnel offices, and employee representatives. Additionally, constitutional provisions or statutes in some states may prevent employers from reducing benefits for employees once they are hired. Those states would need to immediately enact legislation that would establish a demarcation between current and future employees until decisions were made concerning benefit formulas for new employees who would be covered by Social Security. According to the National Conference of State Legislators, the legislators of seven states, including Texas, meet biennially. Therefore, the initial legislation could require 2 years in those states. In deciding whether to extend mandatory Social Security coverage to state and local employees, policymakers will need to weigh numerous factors. On one hand, the Social Security program would benefit from the decision. The solvency of the trust fund would be extended for 2 years, and the long-term actuarial deficit would be reduced by about 10 percent. Mandatory coverage would also address the fairness issue raised by the advisory council and simplify program administration. However, the implications of mandatory coverage for public employers, employees, and pension plans are mixed. To the extent that employers provide total retirement income benefits to newly hired employees that are similar to current employees, retirement costs would increase. While the increased retirement costs would be phased in over several years, employers and employees would also incur additional near-term costs to develop, legislate, and implement changes to current pension plans. At the same time, Social Security would provide future employees with benefits that are not available, or are available to a lesser extent, under current state and local pension plans. SSA stated that the report generally provides a balanced presentation of the issues to be weighed when considering mandating coverage. SSA provided additional technical comments, which we have incorporated as appropriate. SSA's comment letter is reprinted in appendix II. We are sending copies of this report to the Commissioners of the Social Security Administration and the Internal Revenue Service and to other interested parties. Copies will also be made available to others on request. If you or your staff have any questions concerning this report, please call me on (202) 512-7215. Other GAO contacts and staff acknowledgments are listed in appendix III. To examine the implications of a decision to extend mandatory coverage to newly hired state and local employees for the Social Security program, we reviewed documents provided by SSA and IRS and held discussions with their staff. We examined SSA estimates concerning the increase in taxable payroll and Social Security revenues and expenditures attributed to extending mandatory coverage to newly hired state and local employees and discussed data sources with SSA officials. We did not assess the validity of SSA's assumptions. SSA estimates used the intermediate assumptions reported by Social Security's Board of Trustees in 1998. To examine the implications of mandatory coverage for state and local government employers, employees, and their pension plans, we reviewed the 1980 study by the Universal Social Security Coverage Study Group, which was prepared for the Secretary of Health, Education, and Welfare at that time and transmitted to the Congress in March 1980. We discussed study results with the study's Deputy Director for Research and examined supporting documents for the study. We also held discussions and reviewed documentation of state and local government employer, employee, or pension plan representatives in the seven states that account for over 75 percent of the noncovered payroll. We examined financial reports for nine state and local retirement systems: the California State Teachers' Retirement System, the Public Employees' Retirement Association of Colorado, the Teachers' Retirement System of the State of Illinois, the Louisiana State Employees' Retirement System, the Massachusetts State Retirement System, the Massachusetts Teachers' Contributory Retirement System, the State Teachers Retirement System of Ohio, the Public Employees' Retirement System of Ohio, and the Teacher Retirement System of Texas. We also identified a number of states that have changed, or have considered changing, plan benefits in ways that are similar to those that might be made by states and localities with noncovered employees in response to mandatory Social Security coverage. We discussed the potential impact on plan finances of changing plan benefits with pension plan representatives in those states and examined study reports provided by them. For example, we contacted representatives of pension plans in Arizona, Kansas, Montana, South Dakota, Vermont, Washington, and West Virginia that have implemented or considered implementing defined contribution plans to replace some or all of the benefits provided by their defined benefit pension plans. Additionally, we reviewed survey reports addressing pension benefits, costs, investment practices, or actuarial valuation methods and assumptions prepared by BLS, PPCC, and the Society of Actuaries. We discussed the implications of mandatory coverage for public pension plans with actuaries at the Office of Personnel Management, the Pension Benefit Guarantee Corporation, the American Academy of Actuaries, and in private practice. To analyze differences between public pension costs and benefits for covered and noncovered state and local employees, we used PPCC survey data. We used the 1995 survey, which covered 1994, because the 1997 survey, which covered 1996, did not include some of the required data. Despite some limitations, the PPCC data are the best available. The data cover 310 pension systems, representing 457 plans and covering 80 percent of the 13.6 million active members in fiscal year 1994. The survey questionnaire was mailed to 800 systems, which were selected from member associations. Due to the nonrandom nature of the sample, no analysis can offer generalizations, nor can confidence intervals be calculated. Nevertheless, the survey describes the costs and benefits of a substantial majority of public pension plan members. For our analysis of PPCC data, we classified pension plans as (1) Social Security covered if 99 percent or more of the members participated in the Social Security program or (2) Social Security noncovered if 1 percent or less of the members participated in the program. We did not adjust cost and contribution rate data to standardize actuarial cost methods and assumptions. State and local governments may have legitimate reasons for choosing various cost methods, and we did not evaluate their choice. To identify potential legal or other problems with implementing mandatory coverage, we reviewed relevant articles and current case law. We conducted our work between September 1997 and May 1998 in accordance with generally accepted government auditing standards. Francis P. Mulvey, Assistant Director, (202) 512-3592 John M. Schaefer, Evaluator-in-Charge Hans Bredfeldt, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. 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Pursuant to a congressional request, GAO examined the implications of extending mandatory social security coverage to all newly hired state and local employees, focusing on: (1) the implications of mandatory coverage for the Social Security Program and for public employers, employees, and pension plans; and (2) potential legal or administrative problems associated with implementing mandatory coverage. GAO noted that: (1) the Social Security Administration (SSA) estimates that extending mandatory social security coverage to all newly hired state and local government employees would reduce the program's long-term actuarial deficit by about 10 percent and would extend the trust funds' solvency by about 2 years; (2) in addition to helping to some extent resolve the solvency problem, mandatory coverage would broaden participation in an important national program and simplify program administration; (3) the impact on public employers, employees, and pension plans would depend on how state and local governments with noncovered employees responded to the additional costs and benefits associated with social security coverage; (4) social security retirement benefits are fully protected from inflation and are weighted in favor of families and low-income employees; (5) many public pension plans, on the other hand, permit employees to retire earlier and provide a higher retirement income benefit than social security; (6) those states and localities that decide to maintain benefit levels for new employees consistent with the earlier retirement age and enhanced retirement income benefit would experience increased costs; (7) however, those employees would also have the additional family and other protection provided by social security; (8) alternatively, states and localities that choose to maintain level retirement spending might need to reduce some retirement benefits for newly hired employees; (9) several employer, employee, and plan representatives stated that mandating social security coverage for all new state and local government employees would raise constitutional issues and would be challenged in court; (10) however, GAO believes that mandatory coverage is likely to be upheld under current Supreme Court decisions; (11) mandatory coverage would also present administrative issues for implementing state and local governments; and (12) up to 4 years could be required for states and localities to develop, legislate, and implement pension plans that are coordinated with social security.
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Aviation safety is a priority goal for FAA. That priority is reflected in the Administration's budget for fiscal year 2008, which requests $1.9 billion to promote aviation safety and efficiency. To the credit of FAA and the aviation industry, U.S. commercial aviation has had an extraordinary safety record in recent years. In 1997, FAA established a goal to reduce the commercial fatal accident rate by 80 percent in 10 years and for many years the agency has made incremental progress toward that goal. However, increased air traffic, leading to congestion and delays, is straining the efficiency and potentially the safety of the nation's airspace system. Moreover, while commercial aviation safety trends have been positive over the last several years, FAA did not meet its performance target for commercial aviation accidents last year and does not expect to meet its target for 2007. If air traffic triples as expected over the next two decades and the accident rate of recent years is unchanged, there would be nine fatal commercial aviation accidents each year, on average. To maintain a safe and efficient airspace system, especially if substantial growth in the industry materializes, it will be important for FAA to have well-established, efficient, and effective processes in place to provide an early warning of hazards that can lead to accidents. It will also need a skilled workforce to implement these processes. FAA is moving to a system safety approach to oversight and has established risk-based, data- driven safety programs to oversee the industry and a workforce that includes approximately 4,500 safety inspectors and engineers to implement those programs, about 15,420 air traffic controllers, and nearly 7,200 technicians responsible for maintaining FAA's air traffic control equipment and facilities. In addition, FAA leverages its inspector and engineer workforce through its "designee" programs, in which about 13,400 private individuals and over 200 organizations have been delegated to act on the agency's behalf. Our recent work has identified data limitations and human resource challenges facing the agency that affect its ability to implement these programs and oversee aviation safety. FAA's ability to identify and respond to trends and early warnings of safety problems and to manage risk is limited by incomplete and inaccurate data. While FAA has developed risk-based processes for monitoring and inspecting the aviation industry, in some cases, the implementation of those processes is hampered by the lack of reliable and complete data, which are important for identifying and mitigating safety risks. In other cases, FAA does not fully utilize the data it collects by evaluating or analyzing it for nationwide safety trends. For example, FAA does not collect actual flight activity data for general aviation operators and air taxis. Instead, the agency uses an annual survey to query a sample of registered aircraft owners about the activity of their aircraft during the previous year. The National Transportation Safety Board (NTSB) noted a number of problems with these data, such as historically low response rates, and concluded that FAA's data do not accurately portray changes in general aviation activity. As a result, FAA lacks information to monitor the rate of general aviation accidents, which decreased from 1,715 in 2002 to about 1,500 in 2006. (See fig. 1.) Therefore, the agency cannot meaningfully evaluate changes in the number of general aviation accidents or determine the effect of its general aviation safety initiatives. NTSB made a number of recommendations to FAA to improve the accuracy of the survey data, such as improving the currency of aircraft owner contact information. As another example, FAA does not collect basic data to measure changes in the air ambulance industry, such as flight hours or number of trips flown. From 1998 through 2005, the air ambulance industry averaged 11 accidents per year, peaking at 18 accidents in 2003. (See fig. 2.) Without data about the number of flights or flight hours, FAA and the air ambulance industry are unable to identify whether the increased number of accidents has resulted in an increased accident rate, or whether it is a reflection of growth in the industry. Data describing the safety trends of the industry are essential to understanding the impact of FAA efforts to improve air ambulance safety. In addition, while FAA receives important data, including self-reporting of safety violations, through its partnership programs with industry, the agency does not evaluate this information for nationwide trends. According to FAA officials, the Aviation Safety Action Program, Aviation Safety Reporting Program, and Voluntary Disclosure Reporting Program allow the agency to be aware of many more safety incidents than are discovered during inspections and surveillance. Although FAA tracks the actions taken to resolve the individual safety violations that it learns about through these programs, it does not evaluate such information in the aggregate to identify trends in violations and their potential cause in order to improve safety. We recommended that FAA develop a continuous evaluative process for its industry partnership programs, and use it to create measurable performance goals for the programs and track performance towards those goals. FAA has not taken these actions, but has begun to address other data issues. FAA recognizes the critical nature of the issues associated with its data. To address its data limitations, FAA is in the early stages of planning the Aviation Safety Information Analysis and Sharing system--a comprehensive new data system that is expected to provide the agency with access to a vast amount of safety data that reside with entities such as NTSB and industry partners including airlines and repair stations. Working with the National Aeronautics and Space Administration (NASA), FAA began planning for the new system in 2006. Because this activity is in the early planning stages, our concerns about FAA's data remain relevant. The fiscal year 2008 budget for FAA proposes $32 million for safety databases and computer systems. As FAA prioritizes the activities that it undertakes with such funds, it will be important to continue addressing these critical data limitations. Changes to FAA's oversight programs, such as the planned rapid expansion of the Air Transportation Oversight System (ATOS), from 16 air carriers in 2005 to approximately 115 air carriers by the end of 2007, will pose workload challenges for FAA's safety inspector workforce of about 3,600. As FAA moves air carriers under the ATOS program, it will also move inspectors to the program. As of January 2007, the 51 air carriers in ATOS were overseen by 829 safety inspectors. Unlike other FAA inspection programs, ATOS inspectors are dedicated to an air carrier and generally cannot be used to inspect other entities. Inspectors who are not part of ATOS, on the other hand, have duties in addition to inspecting air carriers--such as overseeing repair stations, designees, and aviation schools, and investigating accidents. In prior work, we found that about 75 percent of the non-ATOS inspectors had responsibility for more than 3 entities and about half had responsibility for more than 15. In addition, we found that ATOS requires more inspectors per airline than the traditional inspection approach. As inspectors are transitioned to ATOS, the remaining inspectors will have to add those other entities to their workload. With the expansion of ATOS that will continue into fiscal year 2008, it will be important to monitor the magnitude of the shift in resources and the effect it may have on FAA's overall capability to oversee the industry. Part of the challenge that FAA faces with regard to safety inspectors is improving its process for determining staffing needs. This is especially important as oversight activities and workload shifts with the expansion of ATOS and other program changes, yet FAA lacks staffing standards for safety inspectors. The National Academy of Sciences, under a congressional mandate, recently completed a study for FAA that analyzed FAA's staffing processes for safety inspectors. The study identified a number of issues that FAA must address when developing a staffing model for safety inspectors. For instance, the study included concerns that the current staffing process does not focus resources in the areas of greatest need and the match between individual inspectors' technical knowledge and the facilities and operations they oversee is not always optimal. The study recommended a process for FAA to follow to develop a staffing model and identified key factors--such as changes in aircraft and systems, changes in FAA oversight practices including a shift to a system safety approach through programs like ATOS and increasing the use of designees, and new knowledge and skill demands--that should be considered in developing the model. In response to the Academy's recommendations, FAA expects to develop a staffing model, but the agency does not have a specific timeframe for initiating this effort. With nearly $1 billion of the fiscal year 2008 budget request for FAA covering personnel compensation and benefits for aviation safety and operations, these workload and staffing challenges are critical to address. During the coming decade, FAA will need to hire and train thousands of air traffic controllers to replace those who will retire and leave for other reasons. FAA estimated it will lose 10,291 controllers, or about 70 percent of the controller workforce, during fiscal years 2006 through 2015, primarily due to retirements. To replace these controllers and accommodate increases in air traffic while accounting for expected productivity increases, FAA plans to hire a total of 11,800 new controllers from fiscal year 2006 through 2015. In fiscal year 2006, FAA hired 1,116 controllers. The Administration's budget for fiscal year 2008 proposes about $4.4 billion for salaries and benefits for the air traffic organization account, which includes FAA's large air traffic controller workforce. The fiscal year 2008 proposal includes FAA's plans to hire 1,420 air traffic controllers, which would bring the total number of air traffic controllers to about 15,000. Figure 3 shows the estimated losses each year as well as the number of planned hires. Recent events may exacerbate the hiring situation. Data indicate that controllers are retiring at a faster rate than FAA anticipated. FAA projected 341 retirements for fiscal year 2005; 465 controllers actually retired--36 percent more than FAA's estimate. Similarly, in fiscal year 2006, 25 percent more controllers retired than FAA projected. To meet its hiring target of 930 controllers in fiscal year 2006, FAA shifted about 200 of its planned hires from fiscal year 2007 to fiscal year 2006 by speeding up the initial screening and training process. According to FAA, it is on track to hire between 1,300 and 1,400 controllers in fiscal year 2007. To keep on track, FAA has recently expanded its hiring sources, which had focused on individuals with prior FAA or Department of Defense (DOD) air traffic control experience and graduates from FAA's collegiate training initiative program, to include the general public. This strategy is needed, according to FAA officials, because DOD has recently become less of a hiring source for controllers due to military incentives for retaining controllers and higher salaries than FAA's entry-level salary. It is also important for FAA to ensure that air traffic control facilities have adequate staffing based on their unique traffic demands and the accuracy of FAA's retirement forecast. Historically, FAA has computed staffing standards, which are the number of controllers needed on a systemwide basis, but distribution of these totals to the facility level was a negotiated process. The staffing standards did not take into account the significant differences in complexity and workload among FAA's 300 terminal and enroute control facilities, which can lead to staffing imbalances. FAA has begun developing and implementing new staffing standards that use an algorithm that incorporates traffic levels and complexity of traffic at the facility level to determine the number of air traffic controllers needed, according to an FAA official. As FAA further refines its process for determining controller staffing needs, the ultimate objective is to assess the traffic level and complexity on a sector-by-sector basis to develop more accurate controller staffing requirements. This process is in the early stages of implementation and it is too early to assess the outcome. Such staffing standards for air traffic controllers as well as safety inspectors are important to ensure that FAA deploys its resources for fiscal year 2008 and later years in a cost-effective and risk-based manner. FAA has made significant progress in implementing management processes that use leading practices of private sector businesses, but further work remains to fully address past problems. Historically, those problems included chronic cost and schedule difficulties associated with operating and modernizing the nation's air traffic control system as well as weaknesses in FAA's financial management. In 1995, we declared FAA's air traffic control modernization program a high-risk initiative because of its cost, complexity, and systemic management and acquisition problems. In 1999, we also placed FAA on the high-risk list for financial management, noting weaknesses that rendered the agency vulnerable to fraud, waste, and abuse by undermining its ability to manage operations and limiting the reliability of financial information provided to the Congress. FAA has made significant progress in both areas and we removed FAA's financial management from our high risk list in 2005. However, additional work is needed in managing its acquisitions and finances and is crucial to developing a sustainable capability for delivering priority systems on budget and on time. In addition, FAA, in partnership with other federal agencies, is embarking on the development of NextGen--one of the federal government's most complex and comprehensive undertakings in recent times. FAA faces challenges associated with moving forward from planning to implementing NextGen. FAA has taken actions to operate in a more business-like manner and enable the agency to more economically and efficiently manage the $14.1 billion requested for its fiscal year 2008 budget. Since we designated FAA financial management as high-risk in 1999, FAA has made significant improvements, including implementing a new financial management system called Delphi and developing a cost accounting system. Additionally, FAA received unqualified opinions from auditors on its annual financial statements for fiscal years 2001 through 2005, in spite of material internal control weaknesses that the auditors identified. This progress led us to remove FAA financial management from our high risk list in 2005. Nonetheless, external auditors issued a qualified opinion on FAA's fiscal year 2006 financial statements for the first time since 2000 and repeated a material internal control weakness that was reported in 2005. The opinion and internal control report stemmed from FAA's inability to support the accuracy and completeness of the construction-in-progress account, reported in the financial statements as $4.7 billion. Difficulties with this account, which includes costs for projects such as radars, runway guidance systems, and aviation safety and security systems, have been a longstanding concern. FAA has begun work to address this problem. However, it will be important for FAA to develop a systematic solution to this problem, so that it does not recur. FAA's efforts towards improved financial management also include establishing a cost control and cost reduction program. According to agency officials, each line of business--such as FAA's Air Traffic Organization (ATO), which is responsible for managing and modernizing the air traffic control system--is annually required to propose at least one cost control initiative, and the Administrator tracks and reviews progress on these initiatives monthly. According to FAA, these initiatives have yielded a total of $99.1 million in cost savings and $81.9 million in cost avoidance for fiscal years 2005 and 2006. Additional cost control efforts include outsourcing flight service stations, which FAA estimates will save $2.2 billion over 10 years, and restructuring its administrative service areas from 9 separate offices to 3, which FAA estimates will save up to $460 million over 10 years. We have ongoing work that is assessing FAA's cost control strategy and identifying additional cost savings opportunities that may exist. For example, we have previously reported the need for FAA to pursue further cost control options, such as exploring additional opportunities for consolidating facilities and contracting out more of its services. FAA has taken steps to improve its software acquisition and investment management processes and for the last 3 years has reported meeting its cost and schedule targets for the acquisition of major systems, including air traffic control systems. These improvements are particularly important since FAA plans to spend about $9.4 billion from fiscal year 2007 through fiscal year 2011 to upgrade and replace air traffic control systems. To better manage its information technology investments, including its software intensive air traffic control systems, and address problems we have identified, FAA has changed its acquisition management guidance to require review of all investments--new systems as well as systems in service. In addition, FAA has established a cost estimating methodology for its investments. FAA has also developed and applied a process improvement model to assess the maturity of its software and systems capabilities resulting in, among other things, enhanced productivity and greater ability to predict schedules and resources. Further, FAA has made progress in expanding its enterprise architecture--a comprehensive guide to its plans for acquiring new systems--to include the initial requirements for NextGen. However, making further improvements and institutionalizing them throughout the agency will continue to be a challenge for FAA. For example, FAA's acquisition management guidance does not clearly indicate whether the reviews of in-service systems include reevaluations of projects' alignment with strategic goals and objectives, as we recommended. In addition, the agency has yet to implement its cost estimating methodology. Furthermore, FAA has not established a policy to require use of its process improvement model on all major acquisitions for the national air space system. Additionally, as FAA begins to detail the scope and system requirements of NextGen, it will be important to adapt and expand the enterprise architecture for the national air space system to guide these future plans. Until the agency fully addresses these residual issues, it will continue to risk program management problems affecting cost, schedule, and performance. With a multi-billion dollar acquisition budget, addressing these actions are as critical as ever. Institutionalizing these financial, acquisition, and information technology improvements will be a challenge for FAA, especially in view of the imminent departure of the Chief Operating Officer later this month and the departure of the Administrator, who will reach the end of her 5-year term this September. We have reported that the experiences of successful transformations and change management initiatives in large public and private organizations suggest that it can take 5 to 7 years or more until such initiatives are fully implemented and cultures are transformed in a sustainable manner. Such changes require focused, full-time attention from senior leadership and a dedicated team. Work to determine the capabilities and requirements that will be needed for NextGen and to produce a comprehensive vision for that system is nearing completion; however, given the staggering complexity of this ambitious effort to modernize and transform the air traffic control system over the next two decades, it will not be easy to move from planning to implementation. To plan NextGen, Congress authorized the creation of the Joint Planning and Development Office (JPDO) in 2003. JDPO is housed within FAA and the Administration's fiscal year 2008 budget includes $14.3 million to support JPDO. To carry out its planning function, JPDO is required to operate in conjunction with multiple government agencies. JPDO's approach requires unprecedented collaboration and consensus among many stakeholders--federal and nonfederal--about necessary system capabilities, equipment, procedures, and regulations. Recently, JPDO has made progress in developing key planning documents, including a cost estimate for NextGen. However, as efforts move forward to implement NextGen, it will be important to identify the source and funding for completion of intermediate technology development and determine how FAA can best manage the complex implementation and integration of NextGen technologies. Without a timely transition to NextGen capabilities, JPDO officials estimate a future gap between the demand for air transportation and available capacity that could cost the U.S. economy billions of dollars annually. FAA and the other JPDO partners have been working to refine the vision for NextGen and achieve a general consensus on that vision. The bulk of JPDO's planning has been to develop three critical documents--a concept of operations, enterprise architecture, and operational improvement roadmaps. Once these key documents are completed in the next few months, it will be important to synchronize them with partner agency planning documents, including FAA's implementation plan for NextGen-- the Operational Evolution Partnership (OEP)--and to continue to use the documents to drive agency budget decisions. The OEP is intended as a comprehensive description of how the agency will implement NextGen, including the required technologies, procedures, and resources. JPDO is continuing to work with the Office of Management and Budget (OMB) to develop a unified, cross-agency program for NextGen funding requests. Given the criticality of NextGen, another important planning document-- possibly the most important for Congress--is a comprehensive estimate of the costs to JPDO partner agencies, particularly FAA, for the required research, development, systems acquisitions, and systems integration. Such an estimate does not yet exist. As we reported in November 2006, a limited, preliminary cost estimate concluded that FAA's budget under a NextGen scenario would average about $15 billion per year through 2025, or about $1 billion more annually (in today's dollars) than FAA's fiscal year 2006 appropriation. A JPDO official told us they have submitted a limited NextGen cost estimate to OMB with the 2008 budget request. As of February 9, 2007, JPDO had not publicly released its cost estimate for NextGen. According to the Department of Transportation, the Administration's budget for fiscal year 2008 includes $175 million to support key FAA investments in NextGen. According to JPDO officials, their current estimate focuses only on the near-term capital needs for FAA's ATO portfolio. To develop what they believed would be a more accurate cost estimate, JPDO also focused on the funding necessary to achieve only the capabilities of the NextGen system around 2016, rather than the long-term 2025 capabilities. JPDO then laid out the major systems and investments required by ATO to achieve the mid-term vision and the related costs for ATO. While JPDO's new estimate will be a step toward understanding the costs of NextGen, this estimate is still incomplete. Much work remains to develop a comprehensive cost estimate for NextGen that includes the costs to the rest of FAA (beyond ATO), the other JPDO partner agencies, and industry. A JPDO official told us the agency is working to develop a comprehensive estimate and plans to have one ready to submit with the 2009 budget request. This comprehensive estimate is intended to describe the business case for NextGen and detail the investments that will be required by all the JPDO partner agencies to achieve the NextGen vision by 2025. The successful implementation of NextGen will depend, in part, on resolving the uncertainty over which entities will fund and conduct the research and development necessary to achieve some key NextGen capabilities and to support the operational roadmaps. In the past, a significant portion of aeronautics research and development, including intermediate technology development, has been performed by NASA. However, our analysis of NASA's aeronautics research budget and proposed funding shows a 30 percent decline, in constant 2005 dollars, from fiscal year 2005 to fiscal year 2011. To its credit, NASA plans to focus its research on the needs of NextGen. However, NASA is also moving toward a focus on fundamental research and away from developmental work and demonstration projects. FAA has determined that research gaps now exist as a result of both NASA's cuts to aeronautical research funding and the expanded requirements for NextGen coming from JPDO. These gaps are in the activities of applied research and development--activities that will be required to implement new policies, demonstrate new capabilities, set parameters for certification of new systems, and develop technologies for transfer to industry. It will be important for both FAA and JPDO to find ways, in the near term, to keep the necessary research and development on track to support implementation of NextGen by 2025. In 2006, officials from FAA and JPDO initiated an assessment of NextGen research and development requirements. Their goal was to identify specific research initiatives that were not currently funded, but which they said must be initiated no later than fiscal year 2009 to comply with the operational roadmaps. The preliminary findings from this assessment led to increased budget requests for FAA to help lessen the research and development gaps. However, JPDO officials noted that a research and development gap remains, with items in the research and development pipeline that need funding to take them from concept to development. Other options for addressing the gap are for JPDO and FAA to further explore ways to leverage the research being conducted in other agencies or to partner with industry or academia. For example, JPDO and FAA have already identified research within DOD on alternative fuels that, with a modest investment, could be leveraged to include civil aviation. Currently, it is unknown how all of the significant research and development activities inherent in the transition to NextGen will be conducted or funded. Another issue with regard to NextGen implementation will be FAA's ability to manage the systems acquisitions and integration needed to implement a system as broad and complex as NextGen. In the past, a lack of expertise contributed to weaknesses in FAA's management of air traffic control modernization efforts. Industry experts with whom we have spoken continue to question whether FAA will have the technical expertise needed to implement NextGen. In November, we recommended that FAA examine its strengths and weaknesses with regard to the technical expertise and contract management expertise that will be required to define, implement, and integrate the numerous complex programs inherent in the transition to NextGen. In response to our recommendation, FAA is considering convening a blue ribbon panel to study this issue and make recommendations to the agency about how to best proceed with its management and oversight of the implementation of NextGen. We believe that such a panel could help FAA begin to address this challenge. As it modernizes the national airspace system to meet the nation's future air transportation needs, FAA must not only transform the air traffic control system, but also work with airport operators to provide increased capacity at airports to safely handle the projected growth in the demand for air travel. This latter responsibility will include overseeing airports' efforts to adapt their infrastructure to accommodate the introduction of very light jets, and in the case of the largest airports, the new large Airbus A380. Airports are an integral part of the nation's transportation system and maintaining their safety and efficiency is an important FAA responsibility. To this end, FAA administers the Airport Improvement Program (AIP), which provides federal funds for development projects at the entire range of the nation's 3,400 airports--from small general aviation airports to the very largest that handle several million passengers per year. The Administration has proposed cuts in AIP funding and is considering possible changes to the AIP allocation formula as well as increasing the cap on passenger facility charges for airport development projects. Any change in the level or allocation of these funds could have implications for funding airport capital projects. Not only AIP grants but also portions of other FAA programs receive funds from the Airport and Airway Trust Fund, which is largely financed by excise taxes on ticket purchases by airline passengers and aviation fuel. Since these taxes are scheduled to expire at the end of September 2007, ensuring that there is no lapse in revenue to the trust fund will require Congressional action. Without a continued flow of funds to the trust fund, FAA's ability to carry out AIP and other programs during fiscal year 2008 may be in jeopardy. FAA estimates the total cost for planned airport projects that are eligible for AIP funding, including runways, taxiways, and noise mitigation and reduction efforts, will be about $42 billion for fiscal years 2007 through 2011. This estimate is little changed from the agency's last estimate in 2004 for the period 2005 to 2009. FAA's current estimate indicates that over half of the planned development will occur at large and medium hub airports. The Airports Council International--North America (ACI-NA) also provides estimates of planned airport development. ACI-NA includes both AIP-eligible projects and ineligible projects and, as a result, has higher estimates. Historically, airports have received funding for capital development from a variety of sources. As we reported in 2003, the single largest source of financing for airports is tax-exempt bonds, followed by AIP grants and passenger facility charges. Tax exempt bonds are currently supported by airport revenue and, in some cases, by passenger facility charges. Access to these funding sources varies according to airports' size and funding capabilities. Large and medium hub airports depend primarily on tax- exempt bonds, while the smaller airports rely principally on AIP grants. Passenger facility charges are a particularly important source of capital for large and medium hub airports because they have the majority of commercial service passengers. The Administration has proposed changing the federal role in financing airport development in its fiscal year 2008 budget proposal, which also includes a reauthorization proposal for FAA that will be submitted later this month. Funding for AIP grants would be reduced and the allocation formula changed. The Administration's reauthorization proposal is expected to provide details on these proposed changes. It is, therefore, currently unclear how a number of issues will be addressed. The reauthorization proposal may clarify the impact on smaller airports, which received about two-thirds of AIP grants in fiscal year 2004. As noted earlier in my statement, smaller airports rely primarily on AIP grants for capital funding. In recent years, statutory changes in the distribution of AIP grants have increased the share to smaller airports. However, under the fiscal year 2008 budget proposal, funding changes would especially impact smaller airports if the current allocation formulas are unchanged in the forthcoming reauthorization proposal. First, primary airport entitlements under AIP would be cut in half from the fiscal year 2006 level. In turn, the small airport fund, which is funded from AIP entitlement amounts that large and medium hub airports must turn back if they impose passenger facility charges, would also be reduced by half. Second, state entitlements for non-primary commercial service and general aviation airports would be reduced from 20 percent to 18.5 percent of total AIP obligations. Finally, discretionary set aside grants for reliever airports would be eliminated under the fiscal year 2008 budget proposal. Table 1 shows the effect on the amounts available for various types of AIP grants at different funding levels including the $2.75 billion requested in the Administration's budget and the actual funding level for fiscal year 2006. To help offset any reductions in AIP grants, FAA is also considering allowing airports to collect more revenue from passenger facility charges, which large airports generally prefer. Airlines, however, have been generally opposed to an increase in these charges because they have little control in how passenger facility charges are spent and because they believe these charges reduce passenger demand for air travel. Nonetheless, if airports were to increase charges, additional airport revenue could be generated. Increasing the cap on passenger facilities charges would primarily benefit larger airports because these charges are a function of passenger traffic. However, as already noted, under AIP, large airports that collect passenger facility charges must forfeit a certain percentage of their AIP formula funds. These forfeited funds are subsequently divided between the small airport fund, which is to receive 87.5 percent, and the discretionary fund, which is to receive 12.5 percent. Thus, under current law, smaller airports would benefit indirectly from any increases in passenger facility charges and help offset reductions in AIP funding. With the excise taxes that fund the Airport and Airway Trust Fund scheduled to expire at the end of fiscal year 2007, Congress will need to act if there is to be no lapse in revenue to the trust fund to fund FAA. If the taxes are neither reauthorized by that time nor replaced by other revenue sources for the trust fund, the only revenues to the trust fund will be interest earned on the fund's cash balance. FAA estimates that two previous lapses in 1996-1997 resulted in the trust fund not receiving about $5 billion in revenue. As of the end of fiscal year 2006, the trust fund's uncommitted balance-- surplus revenues in the trust fund against which no commitments, in the form of budget authority, have been made--was less than $2 billion. The Administration's budget proposal projects that the uncommitted balance will be about $2 billion at the end of fiscal year 2007. If today's level of monthly tax revenue continues, a 2- to 3-month lapse in fiscal year 2008 could reduce the revenue to the trust fund enough to cause the uncommitted balance to fall to zero in fiscal year 2008. Most of FAA's funding comes from the trust fund--the fiscal year 2008 budget request for FAA proposes about 80 percent of the agency's funding from the trust fund with the remainder from the general fund. If the trust fund balance falls to zero, continuation of FAA's programs--including efforts to address some of the safety and management challenges that I have discussed--would depend on providing additional general revenues. For further information on this testimony, please contact Dr. Gerald L. Dillingham at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony include Paul Aussendorf, Jay Cherlow, Jessica Evans, Colin Fallon, Carol Henn, Ed Laughlin, Ed Menoche, Faye Morrison, Colleen Phillips, Taylor Reeves, Richard Scott, Teresa Spisak, and Larry Thomas. 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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FAA operates one of the safest air transportation systems in the world. It is, however, a system under strain. The skies over America are becoming more crowded every day. FAA faces the daunting task of safely integrating a growing influx of passengers and aircraft into the system and simultaneously leading the transition to the Next Generation Air Transportation System (NextGen)--a complicated effort to modernize the system. FAA's broad responsibilities to maintain and modernize the nation's air transportation system must be met in an uncertain budgetary and long-term fiscal environment. GAO's concerns about financing the nation's transportation system, including aviation, led GAO to designate this issue as high-risk. To ensure continued safety within the national airspace system, FAA is using risk-based, data-driven safety programs to oversee the industry; however, the agency faces data and human resource challenges that affect its ability to fully implement these programs. GAO has previously recommended that FAA improve the accuracy and completeness of the safety data and analysis of that data needed to monitor safety trends, fully implement its safety programs, and assess their effectiveness to determine if they are focused on the greatest safety risk. FAA has made progress in this area but more remains to be done. FAA's ability to oversee the aviation industry will be further affected by its ability to hire, train, and deploy its primary workforce of safety inspectors, engineers, and air traffic controllers. The expansion of FAA's oversight program for air carriers will result in workload shifts for its inspectors that will make it important for FAA to improve its staffing process. In addition, the agency estimates that it will lose about 70 percent of the air traffic controller workforce over the next 10 years, primarily due to retirements. FAA has made significant progress in implementing management processes and systems that use leading practices of private sector businesses; however, further work remains to institutionalize these efforts. For example, new and improved acquisition processes and oversight have contributed to FAA meeting its acquisition cost and schedule goals for the last three years. Additional work remains, though--FAA received a qualified opinion on its most recent financial audit as a result of lack of support for the accuracy of about $4.7 billion for equipment. Moreover, GAO has previously recommended that FAA should undertake additional efforts to consolidate its facilities and outsource some of its services to further cut costs. Some key challenges for the transition to NextGen include completing the design and cost estimates for NextGen and proposing how that cost will be funded. FAA will also need to assess its capacity to handle the technical and contract management expertise that will be required to oversee the implementation of NextGen. FAA estimates that the total cost for planned airport development that is eligible for funding from the Airport Improvement Program (AIP) will be about $42 billion for 2007 through 2011. FAA's budget request for fiscal year 2008 proposes significant cuts in AIP. These cuts, along with changes to the way AIP is allocated among airports and possible increases in the cap on passenger ticket charges for airport projects, could have implications for the amount of funding available for planned airport development, especially at small airports. Additionally, the taxes that fund the Airport and Airway Trust Fund are scheduled to expire at the end of fiscal year 2007. Until Congress reauthorizes those taxes, FAA's ability to carry out programs related to airport development as well as some other programs throughout the agency may be in jeopardy, compounding the safety and management challenges facing FAA.
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Through a number of legislative actions, Congress has indicated its desire that agencies create telework programs to accomplish a number of positive outcomes. These actions have included recognizing the need for program leadership within the agencies; encouraging agencies to think broadly in setting eligibility requirements; requiring that employees be allowed, if eligible, to participate in telework, and requiring tracking and reporting of program results. Some legislative actions have provided for funding to assist agencies in implementing programs, while other appropriations acts withheld appropriated funds until the covered agencies certified that telecommuting opportunities were made available to 100 percent of each agency's eligible workforce. The Telework Enhancement Act of 2007, S. 1000, continues the efforts of Congress to achieve greater participation. The most significant congressional action related to telework was the enactment of Section 359 of Public Law No. 106-346 in October 2000, which provides the current mandate for telework in the executive branch of the federal government by requiring each executive agency to establish a policy under which eligible employees may participate in telework to the maximum extent possible without diminishing employee performance. The conference report language further explained that an eligible employee is any satisfactorily performing employee of the agency whose job may typically be performed at least one day per week by teleworking. In addition, the conference report required the Office of Personnel Management (OPM) to evaluate the effectiveness of the program and report to Congress. The legislative framework has provided both the General Services Administration (GSA) and OPM with lead roles for the governmentwide telework initiative, to provide services and resources to support and encourage telework, including providing guidance to agencies in developing their program procedures. In addition, Congress required certain agencies to designate telework coordinators to be responsible for overseeing the implementation of telework programs and serve as points of contact on such programs for the Committees on Appropriations. GSA and OPM provide services and resources to support the governmentwide telework implementation. OPM publishes telework guidance, which it recently updated, and works with the agency telework coordinators to guide implementation of the programs and annually report the results achieved. GSA offers a variety of services to support telework, including developing policy concerning alternative workplaces, managing the federal telework centers, maintaining the mail list server for telework coordinators, and offering technical support, consultation, research, and development to its customers. Jointly, OPM and GSA manage the federal Web site for telework, which was designed to provide information and guidance. The site provides access for employees, managers, and telework coordinators to a range of information related to telework, including announcements, guides, laws, and available training. Although agency telework policies meet common requirements and often share some common characteristics, each agency is responsible for developing its own policy to fit its mission and culture. According to OPM, most agencies have specified occupations that are eligible for telework and most apply employee performance-related criteria in considering authorizing telework participation. In addition, OPM guidance states that eligible employees should sign an employee telework agreement and be approved to participate by their managers. The particular considerations in regard to these requirements and procedures will differ among agencies. In our 2003 study of telework in the federal government, we identified 25 key practices that federal agencies should implement in developing their telework programs. A full list of the key practices appears in appendix I. Among those were several practices closely aligned with managing for program results, including: developing a business case for implementing a telework program; establishing measurable telework program goals; establishing processes, procedures, and/or a tracking system to collect data to evaluate the telework program; and identifying problems and/or issues with the telework program and making appropriate adjustments. Yet, in our assessment of the extent to which four agencies--the Department of Education, GSA, OPM, and the Department of Veterans Affairs--followed the 25 key practices, we found these four practices to be among the least employed. In discussing the business case key practice in our 2003 study, we cited the International Telework Association and Council, which had stated that successful and supported telework programs exist in organizations that understand why telework is important to them and what specific advantages can be gained through implementation of a telework program. A business case analysis of telework can ensure that an agency's telework program is closely aligned with its own strategic objectives and goals. Such an approach can be effective in engaging management on the benefits of telework to the organization. For example, making a case for telework as a part of an agency's Continuity of Operations (COOP) plan can help organizations understand why they support telework, address relevant issues, minimize business risk, and make the investment when it supports their objectives. Through business case analysis, organizations have been able to identify cost reductions in the telework office environment that offset additional costs incurred in implementing telework and the most attractive approach to telework implementation. None of the four agencies we reviewed, however, had effectively implemented this practice. Moreover, none of the four agencies had established measurable telework program goals. As we noted in our report, OPM's May 2003 telework guide discussed the importance of establishing program goals and objectives for telework that could be used in conducting program evaluations for telework in such areas as productivity, operating costs, employee morale, recruitment, and retention. However, even where measurement data are collected, they are incomplete or inconsistent among agencies, making comparisons meaningless. For example, in our 2005 report of telework programs in five agencies--the Departments of State, Justice, and Commerce; the Small Business Administration; and the Securities and Exchange Commission--measuring eligibility was problematic. Three of the agencies excluded employees in certain types of positions (e.g., those having positions where they handle classified information) when counting and reporting the number of eligible employees, while two of the agencies included all employees in any type of position when counting and reporting the number of eligible employees, even those otherwise precluded from participating. With regard to the third key practice aligned with managing for results-- establishing processes, procedures and/or a tracking system to collect data to evaluate the telework program--in our 2003 review we found that none of the four agencies studied were doing a survey specifically related to telework or had a tracking system that provided accurate participation rates and other information about teleworkers and the program. At that time, we observed that lack of such information not only impeded the agencies in identifying problems or issues related to their programs but also prevented them from providing OPM and Congress with complete and accurate data. Also, in our 2005 study at five agencies, we found that four of the five agencies measured participation in telework on the basis of their potential to telework rather than their actual usage. The fifth agency reported the number of participants based on a survey of supervisors who were expected to track teleworkers. According to OPM, most agencies report participation based on telework agreements, which can include both those for employees teleworking on a continuing basis as well as those for episodic telework. None of the five agencies we looked at had the capability to track who was actually teleworking or how frequently, despite the fact that the fiscal year 2005 consolidated appropriations act covering those agencies required each of them to provide a quarterly report to Congress on the status of its telework program, including the number of federal employees participating in its program. At that time, two of the five agencies said they were in the process of implementing time and attendance systems that could track telework participation, but had not yet fully implemented them. The other three agencies said that they did not have time and attendance systems with the capacity to track telework. "The conferees are troubled that many of the agencies' telework programs do not even have a standardized manner in which to report participation. The conferees expect each of these agencies to implement time and attendance systems that will allow more accurate reporting." Despite this language, officials at four of the five agencies said that they have not yet developed such systems and are still measuring participation as they did in 2005. For the fifth agency--the Department of Justice (DOJ)--an official told us that the department has now implemented a Web-based time and attendance system in most bureaus and that this system allows DOJ to track actual telework participation in those bureaus. According to this official, the Federal Bureau of Investigation is the major exception, but DOJ is working towards having all bureaus use this system. As for the fourth key practice closely related to managing for program results--identifying problems and/or issues with the telework program and making appropriate adjustments--none of the four agencies we reviewed for our 2003 study had fully implemented this practice and one of the four had taken no steps to do so despite the importance of using data to evaluate and improve telework programs. An OPM official told us, for example, that she did not use the telework data she collected to identify issues with the program; instead, she relied on employees to bring problems to her attention. To help agencies better manage for results through telework programs, in our 2005 study, we said that Congress should determine ways to promote more consistent definitions and measures related to telework. In particular, we suggested that Congress might want to have OPM, working through the Chief Human Capital Officers Council, develop a set of terms, definitions, and measures that would allow for a more meaningful assessment of progress in agency telework programs. Some information could be improved by more consistent definitions, such as eligibility. Some information may take additional effort to collect, for example, on actual usage of telework. Some of this information may already be available through existing sources. The Federal Human Capital Survey, for example, which is administered biennially, asks federal employees about their satisfaction with telework. In the latest survey, only 22 percent indicated they were satisfied or very satisfied, while 44 percent indicated they had no basis to judge--certainly there seems to be room for improvement there. In any case, OPM and the Chief Human Capital Officers Council are well-situated to sort through these issues and consider what information would be most useful. The council and OPM could also work together on strategies for agencies to use the information for program improvements, including benchmarking. S. 1000 is intended to enhance the existing legislative framework and provides that all employees of executive agencies are eligible for telework except in some circumstances related to an employee's duties and functions. In addition, the bill addresses the coverage of employees in the legislative and judicial branches and provides that within 1 year from the date of enactment, policies shall be established to allow such employees, unless otherwise excluded, to participate in telework to the maximum extent possible without diminishing employee performance or legislative or judicial branch operations. The bill further recognizes the importance of leadership in promoting an agency's telework program by requiring the appointment of a senior-level management official to perform several functions to promote and enhance telework opportunities. We have several observations to offer on the bill. As we have discussed with your staff, we have specific concerns about section 5 of the bill, which would require GAO to establish and implement a rating system for agency compliance with and participation in telework initiatives and report the results. For executive branch agencies, we believe this function is more appropriately placed with OPM. A GAO rating system that does not have the benefit of a full GAO evaluation of the underlying information would raise concerns that our independence is compromised if we were asked at a future time to evaluate telework programs in the federal government. Accordingly, we have provided Committee staff with substitute language that would place these rating and report functions in OPM, the agency that is currently responsible for reporting on most telework activities and participation in the executive branch. Our substitute language would have the Comptroller General instead provide his views on the OPM report to the Senate Committee on Homeland Security and Governmental Affairs and the House Committee on Oversight and Government Reform within 6 months of the report. We would also like to bring several other issues to your attention. The bill would extend coverage of these telework initiatives to the legislative and judicial branches. We suggest substituting a reference to "the head of each legislative branch entity" in sections 2(c)(3) and 4(a) of the bill so that the heads of the Library of Congress, the Government Printing Office, and GAO, for example, would be responsible for developing agency policies on telework, determining which employees are eligible for telework, and designating senior-level employees to serve as telework managing officers. This approach would be consistent with the coverage of the executive branch under the bill where the head of each agency would perform similar functions. With regard to the bill's requirement to appoint a telework managing officer in each executive branch agency, it is not clear how that employee's duties would relate to the duties of the agency officials currently designated as telework coordinators pursuant to the provisions of section 627 of Public Law No. 108-199. Another provision of the bill would define telework as occurring on at least 2 business days per week, leaving unclear how this would relate to the broader definitions of telework currently defined in existing legislation and OPM guidance, which includes episodic or occasional instances. It is also unclear whether the bill intends to allow agencies to consider employee performance in making telework eligibility decisions. Current legislation and agency practice requires employees to be performing satisfactorily. The bill also provides for "productivity awards" for teleworking employees, but it is not clear whether nonteleworking employees would also be eligible to receive productivity awards and would be evaluated on the same performance standards. We would note that one of the key practices identified in our 2003 report was ensuring that the same performance standards are used to evaluate both teleworkers and nonteleworkers. The perception that care had not been taken to establish fair and equitable eligibility criteria could present performance and morale issues. Finally, the bill includes among the duties of the telework managing officer assisting the head of the agency in designating employees to telework in order to continue agency operations in the event of a major disaster as defined under the Stafford Act, 42 U.S.C. SS 5122. We would note, however, that telework can be effective in a variety of emergency conditions not limited to those emergencies defined under the Stafford Act. For example, we reported that GAO's telework capability was significant to assisting the House of Representatives and minimizing the disruption to its own operations when anthrax bacteria were released on Capitol Hill in 2001. In conclusion, telework is a key strategy to accomplish a variety of federal purposes. Telework is an investment in both an organization's people and the agency's capacity to perform its mission. We continue to believe that OPM and the Chief Human Capital Officers Council are well-positioned to help agencies better manage for results through telework. Mr. Chairman and members of the subcommittee, this completes my statement. I would be pleased to respond to any questions that you might have. For further information on this testimony, please contact Bernice Steinhardt, Director, Strategic Issues, (202) 512-6806 or at [email protected]. Individuals making key contributions to this testimony include William J. Doherty, Joyce D. Corry, Allen Lomax, and Michael Volpe. 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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Telework continues to receive attention within Congress and federal agencies as a human capital strategy that offers various flexibilities to both employers and employees, including the capacity to continue operations during emergency events, as well as benefits to society, such as decreased energy use and pollution. This statement highlights some of GAO's prior work on federal telework programs, including key practices for successful implementation of telework initiatives, identified in a 2003 GAO report and a 2005 GAO analysis of telework program definitions and methods in five federal agencies. In addition, the statement discusses GAO observations on the Telework Enhancement Act of 2007, S. 1000. Through a number of legislative actions, Congress has indicated its desire that agencies create telework programs to accomplish a number of positive outcomes. Many of the current federal programs were developed in response to a 2000 law that required each executive branch agency to establish a telework policy under which eligible employees may participate in telecommuting to the maximum extent possible without diminishing employee performance. The legislative framework has provided the OPM and the General Services Administration (GSA) with lead roles for the governmentwide telework initiative, providing services and resources to support and encourage telework. Although agency telework policies meet common requirements and often share characteristics, each agency is responsible for developing its own policy to fit its mission and culture. In a 2003 report, GAO identified a number of key practices that federal agencies should implement in developing their telework programs. Four of these were closely aligned with managing for program results: (1) developing a business case for telework, (2) establishing measurable telework program goals, (3) establishing systems to collect data for telework program evaluation, and (4) identifying problems and making appropriate adjustments. None of the four agencies we reviewed, however, had effectively implemented any of these practices. In a related review of five other agencies in 2005, GAO reported that none of the agencies had the capability to track who was actually teleworking or how frequently, relying mostly on the number of telework agreements as the measure of program participation. S. 1000 is intended to enhance the existing legislative framework and provides that all employees of the executive, judicial, and legislative branches are eligible for telework except in some circumstances related to an employee's duties and functions. The bill also recognizes the importance of leadership in promoting an agency's telework program by requiring the appointment of a senior-level management official to perform several functions to promote and enhance telework opportunities. GAO's statement suggests changes to the assignment of responsibilities for rating and reporting along with changes to make the responsibilities for heads of agency and entities in the legislative and judicial branches more consistent with those of executive branch officials. The statement also points out several provisions of S. 1000 that are not clear in relation to existing legislation.
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Annually, the Forest Service receives appropriations to operate its nationwide programs. On the basis of these appropriations, the Forest Service allocates a portion to each of its regions to carry out the regional and field office programs. In the case of the Alaska Region, appropriations are further allocated to (1) the regional office, which provides overall direction and support for programs and activities in the region as well as funds for the State and Private Forestry operations located in Anchorage, Alaska; (2) the centralized field costs, which fund programs or activities that usually have regionwide benefits; (3) the four field offices to operate "on the ground" programs; and (4) reserve accounts from which distributions are made during the year to the field offices. As shown on table 1, the Alaska Region's operating costs ranged from $108 million to $127 million annually during fiscal years 1993 through 1997 and were estimated to be about $106 million for fiscal year 1998. Until fiscal year 1998, the Alaska Region used a category of operating costs, known as centralized field costs, as a means to improve efficiency by having one office--either the regional office or one of the field units--manage certain programs or activities for the benefit of multiple offices. Centralized field costs include activities such as payments to the National Finance Center for payroll and accounting services. Overall, the centralized field costs established by the region increased from about $5 million in fiscal year 1993 to almost $9 million in fiscal year 1997, and the number of programs or activities included in these costs fluctuated from 24 to 41 during the same period. However, this overall increase is not reflective of the increases or decreases in individual centralized field costs during this period because the same programs or activities were not funded each year nor did the amounts of individual centralized field costs remain constant. As a component of the Alaska Region's overall operating budget, these costs averaged about 5 percent of the total. Regional office budget officials viewed the use of these centralized field costs as a means to better achieve efficiency because the costs of certain programs or activities generally would be managed centrally rather than allocating each unit's share of the cost and then requiring each unit to pay its proportional amount. Field office officials cited both the advantages and disadvantages of using centralized field costs. Yet none of these field office officials could provide us with specific examples of disadvantages that negatively affected their operations or what more they could have accomplished if centralized field costs had not existed. In the conference report for the Forest Service's fiscal year 1998 appropriations, the conferees expressed concern "about the appearance that expenditures for regional office operations and centralized field costs have risen significantly as a proportion of annual appropriated funds since 1993." As a result, in the appropriations act the Congress limited the Alaska Regional Office's expenditures for the regional office's operations and centralized field costs to $17.5 million, without 60 days prior notice to the Congress. The preliminary budget allocation for fiscal year 1998 regional office operations and centralized field costs totaled about $26.5 million. According to a regional budget official, the region is currently implementing the following measures to meet the congressional limitation: Eliminating all existing centralized field costs by allocating the funds directly to the field units whenever the office and amounts are known. Placing unallocated funds into a reserve account and distributing them as decisions are reached as to which office will receive the money. Separating the costs associated with the State and Private Forestry organizational unit from the regional office's expenses. According to the regional budget official, the region eliminated centralized field costs and was able to reduce the planned regional office cost allocations to about $18.7 million as of March 4, 1998. Although this estimate exceeds the $17.5 million congressional limitation, according to an Alaska Region budget official, further adjustments will be made as the year progresses to ensure that regional office operating expenses do not exceed the amount allowed by the Congress. He also stated that centralized field costs will not be used in the future. The Alaska Region establishes reserves because of the uncertainty about the timing or the amount of funds needed for certain projects. Once the specific amount or responsible unit is determined, the region distributes the necessary reserves to the unit responsible for making the payment. In fiscal years 1995 through 1997, the Alaska Region distributed reserves ranging from $6 million to $12 million. The four field offices received from 87 to 98 percent of the reserves during this period, and the remainder went to the region for regional office operations. Any ending balance in the reserve category becomes the carryover amount for the next fiscal year. To determine whether reserves play a positive or negative role in effectively implementing programs, we spoke with officials of each of the four field offices. The officials agreed that establishing a reserve amount to facilitate the accounting for unknowns was an effective procedure and believed that the region's actions in this case generally led to less paperwork for the local units. In most cases, the field offices viewed reserves as a reasonable approach to addressing the uncertainties related to contracting, such as delays, cost increases, or the lack of appropriate bids. Thus, overall, the field office officials generally supported the process of establishing reserves and the manner in which the regional office approached the distribution of these funds. Beginning in fiscal year 1995, the Forest Service's Pacific Research Station scientists performed work in connection with the Tongass Land Management Plan. The work of the Research Station scientists was jointly funded: Part of the expenses was funded from the Alaska Region's portion of the National Forest System appropriation, which is normally used for forest planning activities, and another part was funded by the Research Station's portion of the Research appropriation, which is used for research activities. The work performed by the Research Station scientists dealt with (1) the revision of the Tongass Land Management Plan, including resource conservation assessments, resource analyses, workshops, and risk assessment panels and (2) the post-plan priority research studies identified in the plan as important for further amendments or revisions to the plan. Although we asked for documentation of the rationale for decisions about the funding split for the particular work performed by the research scientists, neither of these organizations could provide us with adequate explanations or documentation. According to the Forest Service's records, for fiscal years 1995 through 1998 the work of the scientists will have cost about $4.7 million, of which $2.8 million was funded by the National Forest System appropriation and $1.9 million was funded by the Research appropriation. Our analysis of these data showed that the Research Station scientists used 60 percent of the funds for the revision of the plan and 40 percent for post-plan studies. According to an Intra-Agency Agreement, the Alaska Region and the Research Station plan to continue funding post-plan studies at about $1.35 million annually in future years with $900,000 and $450,000 from the National Forest System and Research appropriations, respectively. The Congress provided the National Forest System appropriation for the management, protection, improvement, and utilization of the National Forest System and for forest planning, inventory, and monitoring, all of which are non-research activities. We asked regional budget and fiscal officials to provide (1) justification for the charges to the National Forest System appropriation for the work of the Pacific Research Station scientists and (2) the criteria that they used to make this determination. These officials said that such a determination was not made and that they could not provide us with information on the types of tasks performed by the scientists with National Forest System funds. They also could not provide us with any criteria, such as agency guidance or procedures, that were available in 1995 to make such a determination. In effect, when the Research Station scientists requested National Forest System funds for work on the Tongass Land Management Plan, the Alaska Region provided the funds requested, but it did not determine if the activities funded were a proper charge to the appropriation. On March 4, 1998, the Alaska Region provided us with its final budget allocation for fiscal year 1998, and again we asked the budget officials for their justification for charges to the National Forest System appropriation for the work of the Pacific Northwest Research Station scientists, including the documentation required by the August 1997 revision to the Forest Service's Service-Wide Appropriations Handbook. These officials said that such a justification was not made and that they had not complied with the documentation requirements of the Handbook. The Forest and Rangeland Research appropriation was provided by the Congress for the Forest Service's research stations to conduct, support, and cooperate in investigations, experiments, tests, and other activities necessary to obtain, develop, and disseminate the scientific information required to protect and manage forests and rangelands, all of which are research activities. We asked the Pacific Northwest Research Station staff, including the Science Manager for the Tongass Land Management Plan team, to provide justification for the charges to the Research appropriation for the work of the Research Station scientists and the criteria used to make the determination. This official said that such a determination was not documented and that he could not provide us with documentation on the types of tasks performed using research funds. Also, the official could not provide us with any criteria to make such a determination. On March 4, 1998, the Research Station provided us with the estimated budget allocation for fiscal year 1998, and again we asked the Pacific Northwest Research Station's Science Manager for justification for the charges to the Research appropriation for the work of the Research Station scientists, including the documentation required by the August 1997 revision to the Forest Service's Service-Wide Appropriations Handbook. This official said that such a justification was not made and that the Research Station had not complied with the documentation requirements of the handbook, although it is in the process of developing a procedure to address the handbook's requirements. The Department of Agriculture's Office of Inspector General addressed a similar issue in its May 1995 report on the use of the National Forest System appropriation for research studies performed by the Forest Service's research stations. The report pointed out that the Forest Service's directives did not provide clear guidance for determining the type of reimbursable work that research stations could do for the Forest Service's other units. According to the Inspector General's report, this situation resulted in unauthorized augmentation of the Forest Service's Forest and Rangeland Research appropriation. The Inspector General recommended that the Forest Service supplement its direction in its manual that provides guidance on the type of reimbursable work that research stations may perform for the Forest Service's other units and establish procedures for reviewing the work that research stations perform for other units to ensure that it is in compliance with appropriations law and the direction in the manual. On August 28, 1997, the Forest Service issued an interim directive to its Service-Wide Appropriations Handbook that provides direction on jointly funded projects, including preparing financial plans and determining the appropriate funding allocations However, as of the date of our report, neither the Alaska Region nor the Research Station have complied with the August 1997 directive. Furthermore, because of the lack of documentation or adequate explanations, we could not determine whether the National Forest System and the Research appropriations were used appropriately or inappropriately in fiscal years 1995 through 1998. This type of documentation is particularly important when projects, such as the revision of the Tongass Land Management Plan and post-plan studies, are jointly funded by two appropriations that were provided for specifically different purposes, because the tasks funded by each must be identified and charged to the correct appropriation. Clearly, the use of one appropriation to accomplish the purpose of another is improper. It is imperative that the Forest Service in general and the Alaska Region in particular have procedures in place to ensure that appropriations are made available only for their stated purposes and that controls are in place to ensure that the procedures are used throughout the Forest Service. In our report, we recommended that the Chief of the Forest Service direct the Alaska Regional Forester and the Pacific Northwest Research Station Director to (1) fully comply with the Forest Service's August 28, 1997, direction on special Research funding situations, which requires the preparation of financial plans and documentation of the determination of the appropriate funding allocations, and (2) establish procedures to ensure compliance with appropriations law Forest Service-wide. To date, we have not received the Forest Service's statement of actions taken on our recommendations required by 31 U.S.C. 720. Mr. Chairman, this concludes our prepared statement. We will be pleased to respond to any questions that 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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Pursuant to a congressional request, GAO discussed: (1) the National Forest Service's Alaska Region's allocation of funds for its operating costs for fiscal year (FY) 1993 through FY 1998; (2) the nature, purpose, and allocation of centralized field costs and the steps the Alaska Region is taking to comply with the congressional limitation on the expenditures for the regional office and centralized field costs; (3) the rationale for and the distribution of regional reserve funds; and (4) whether the Forest Service's National Forest System and Research appropriations were used appropriately to pay for work performed by the Pacific Northwest Research Station in connection with the revision of the Tongass Land Management Plan and for post-plan studies. GAO noted that: (1) the Alaska Region's operating costs ranged from $108 million to $127 million annually during FY 1993 through FY 1997; (2) the region allocated 71 to 76 percent of these funds to field offices carrying out local programs, 13 to 17 percent for managing regional office operations, 4 to 7 percent for centralized field costs, 2 to 5 percent for regional reserves, and 2 to 4 percent for state and private forestry operations; (3) for FY 1998, the region's estimated allocations totalled about $106 million to carry out these regional programs; (4) until FY 1998, the Alaska Region used centralized field costs to manage certain programs or activities for the benefit of multiple offices; (5) the Forest Service's FY 1998 appropriations act limited the Alaska Regional Office's expenditures for regional office operations and centralized field costs to $17.5 million; (6) to comply with this legislative requirement, the Alaska Region eliminated the use of the centralized field cost category, included unallocated funds in regional reserve accounts until the funds are distributed to the field units, and separated the costs for state and private forestry operations from the operations of the regional office; (7) the Alaska Region establishes reserves because of the uncertainty about the timing or the amount of funds needed for certain projects; (8) once the specific amount or responsible unit is determined, the region distributes the necessary reserves to the unit responsible for making the payment; (9) any ending balance in the reserve category becomes the carryover amount for the next fiscal year; (10) beginning in FY 1995, both the Alaska Region's portion of the National Forest System appropriation and the Pacific Northwest Research Station's portion of the Forest and Rangeland Research appropriation funded the work performed by the Research Station scientists on the revision of the Tongass Land Management Plan and post-plan studies; (11) documentation of the rationale for decisions about the funding split for particular work performed by the research scientists could not be provided; and (12) GAO could not determine whether the National Forest System and Research appropriations were used appropriately or inappropriately for FY 1995 through FY 1998.
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In general, drug abuse is defined by the level and pattern of drug consumption and the severity of resulting functional problems. People who are dependent on drugs often use multiple drugs and have substantial health and social problems, including mental health disorders. One of the many challenges to providing effective treatment for addiction is the complicated nature of the disorder. Unlike other chronic diseases, drug addiction extends beyond physiological influence to include significant behavioral and psychological aspects. For example, specific environmental cues that a drug abuser associates with drug use can trigger craving and precipitate relapse, even after long periods of abstinence. Therefore, drug abusers may enter treatment a number of times, often reducing drug use incrementally with each treatment episode. Despite the potential for relapse to drug use, not all drug users require treatment to discontinue use. For those who require treatment, services are provided in either outpatient or inpatient settings and via two major approaches--pharmacotherapy and behavioral therapy--with many programs combining elements of both. Although abstinence from illicit drug use is the central goal of all drug abuse treatment, researchers and program staff commonly accept reductions in drug use and criminal behavior as realistic, interim goals. these funds support services provided by state and local grantees, which are given broad discretion in how best to use them. In numerous large-scale studies examining the outcomes of drug abuse treatment provided in a variety of settings, researchers have concluded that treatment is beneficial. Clients receiving treatment report reductions in drug use and criminal activity as well as other positive outcomes. The studies have also demonstrated that better treatment outcomes are associated with longer treatment periods but have found that retaining clients in treatment programs is problematic. Comprehensive analyses of the effectiveness of drug abuse treatment have been conducted by several major, federally funded studies over a period of nearly 30 years: the Drug Abuse Treatment Outcome Study (DATOS), the National Treatment Improvement Evaluation Study (NTIES), the Treatment Outcome Prospective Study (TOPS), and the Drug Abuse Reporting Program (DARP). These large, multisite studies--conducted by research organizations independent of the groups operating the treatment programs being assessed--were designed to measure people's involvement in illicit drug and criminal activity before, during, and after treatment. Although the studies report on reductions in drug use from the year prior to treatment to the year after, most also track a subset of treatment clients for followup interviews over longer time periods. For example, DARP followed clients for as long as 12 years, TOPS for 3 to 5 years following treatment, and DATOS researchers are planning additional followup to determine long-term outcomes. These studies are generally considered by the research community to be the major evaluations of drug abuse treatment effectiveness, and much of what is known about "typical" drug abuse treatment outcomes comes from these studies. or outpatient methadone maintenance--regardless of the drug and client type. DATOS found that, of the individuals in long-term residential treatment, 66 percent reported weekly or more frequent cocaine use in the year prior to treatment, while 22 percent reported regular cocaine use in the year following treatment. Also, 41 percent of this same group reported engaging in predatory illegal activity in the year prior to treatment, while 16 percent reported such activity in the year after treatment. Previous studies found similar reductions in drug use and criminal activity. For example, researchers from the 1980s TOPS study found that across all types of drug abuse treatment, 40 to 50 percent of regular heroin and cocaine users who spent at least 3 months in treatment reported near abstinence during the year after treatment, and an additional 30 percent reported reducing their use. Only 17 percent of NTIES clients reported arrests in the year following treatment--down from 48 percent during the year before treatment. Another finding across these studies is that clients who stay in treatment longer report better outcomes. For the DATOS clients that reported drug use when entering treatment, fewer of those in treatment for more than 3 months reported continuing drug use than those in treatment for less than 3 months. DATOS researchers also found that the most positive outcomes for clients in methadone maintenance were for those who remained in treatment for at least 12 months. Earlier studies reported similar results. Both DARP and TOPS found that reports of drug use were reduced most for clients who stayed in treatment at least 3 months, regardless of the treatment setting. recommended at least 6 months in treatment; for both program types, the median treatment episode was 3 months. Because all of the effectiveness studies relied on information reported by the clients, the level of treatment benefit reported may be overstated. Typically, drug abusers were interviewed before they entered treatment and again following treatment and asked about their use of illicit drugs, their involvement in criminal activity, and other drug-related behaviors.Although this data collection method is commonly used in national surveys and drug abuse treatment evaluations, recent questions about the validity of self-reported drug use raise concerns about this approach. In general, self-reporting is least valid for (1) the more stigmatized drugs, such as cocaine; (2) recent use; and (3) those involved with the criminal justice system. A recent National Institute on Drug Abuse (NIDA) review of current research on the validity of self-reported drug use highlights the limitations of data collected in this manner. According to this review, recent studies conducted with criminal justice clients (such as people on parole, on probation, or awaiting trail) and former treatment clients suggest that 50 percent or fewer current users accurately report their drug use in confidential interviews. As questions have developed about the accuracy of self-reported data,researchers have begun using more objective means, such as urinalysis, to validate such data. For example, NTIES researchers found that 20 percent of those in a validation group acknowledged cocaine use within the past 30 days, but urinalysis revealed recent cocaine use by 29 percent. TOPS researchers reported that only 40 percent of the individuals testing positive for cocaine 24 months after treatment had reported using the drug in the previous 3 days. Because results from the major studies of treatment effectiveness were not adjusted for the likelihood of underreported drug use, reductions in drug use found may be overstated. However, researchers emphasize that client reporting on use of illicit drugs during the previous year (the outcome measure used in most effectiveness evaluations) has been shown to be more accurate than client reporting on current drug use (the measure used to assess the validity of self-reported data). Therefore, they believe that the overall findings of treatment benefits are still valid. Although supplementary data collection, such as hair analysis or urinalysis, can help validate the accuracy of self-reported data, these tools also have limitations. Urine tests can accurately detect illicit drugs for about 48 hours following drug use but do not provide any information about drug use during the previous year. In addition, individual differences in metabolism rates can affect the outcomes of urinalysis tests. Hair analysis has received attention because it can detect drug use over a longer time--up to several months. However, unresolved issues in hair testing include variability across drugs in the accuracy of detection, the potential for passive contamination, and the relative effect of different hair color or type on cocaine accumulation in the hair. We have reported on the limitations of using self-reported data in estimating the prevalence of drug use and concluded that hair testing merited further evaluation as a means of confirming self-reported drug use. Using federal treatment dollars most effectively requires an understanding of which approaches work best for different groups of drug abusers, but on this subject, research findings are less definitive. Although strong evidence supports methadone maintenance as the most effective treatment for heroin addiction, less is known about the best ways to provide treatment services to cocaine users or adolescents. treatment or psychiatric status, can significantly affect the patient's performance in treatment. Current research generally does not account for these factors in evaluating the effectiveness of alternative approaches for specific groups of drug abusers. Methadone maintenance is the most commonly used treatment for heroin addiction, and numerous studies have shown that those receiving methadone maintenance treatment have better outcomes than those who go untreated or use other treatment approaches. Methadone maintenance reduces heroin use and criminal activity and improves social functioning. HIV risk is also minimized, since needle usage is reduced. As we have previously reported, outcomes among methadone programs have varied greatly, in part because of the substantial differences in treatment practices across the nation. For example, in 1990, we found that many methadone clinics routinely provided clients dosage levels that were lower than optimum--or even subthreshold--and discontinued treatment too soon. In late 1997, a National Institutes of Health consensus panel concluded that people who are addicted to heroin or other opiates should have broader access to methadone maintenance treatment programs and recommended that federal regulations allow additional physicians and pharmacies to prescribe and dispense methadone. Similarly, several studies conducted over the past decade show that when counseling, psychotherapy, health care, and social services are provided along with methadone maintenance, treatment outcomes improve significantly. However, the recent findings from DATOS suggest that the provision of these ancillary services--both the number and variety--has eroded considerably during the past 2 decades across all treatment settings. DATOS researchers also noted that the percentage of clients reporting unmet needs was higher than the percentage in previous studies. researchers have relied on cognitive-behavioral therapies to treat cocaine addiction. Studies have shown that clients receiving cognitive-behavioral therapy have achieved long periods of abstinence and have been successful at staying in treatment. The cognitive-behavioral therapies are based largely on counseling and education. One approach, relapse prevention, focuses on teaching clients how to identify and manage high-risk, or "trigger," situations that contribute to drug relapse. A study of this approach showed cocaine-dependent clients were able to remain abstinent at least 70 percent of the time while in treatment. Another technique, community reinforcement/contingency management, establishes a link between behavior and consequence by rewarding abstinence and reprimanding drug use. A program using this approach found that 42 percent of the participating cocaine-dependent clients were able to achieve nearly 4 months of continuous abstinence. A third approach, neurobehavioral therapy, addresses a client's behavioral, emotional, cognitive, and relational problems at each stage of recovery. One neurobehavioral program showed that 38 percent of the clients were abstinent at the 6-month followup. Drug use among teenagers is a growing concern. It is estimated that 9 percent of teenagers were current drug users in 1996--up from 5.3 percent in 1992. Unfortunately, no one method has been shown to be consistently superior to others in achieving better treatment outcomes for this group. Rather, studies show that success in treatment for adolescents seems to be linked to the characteristics of program staff, the availability of special services, and family participation. poor parent supervision--have been identified as risk factors for the development of substance abuse among adolescents. However, NIDA acknowledged in a recently published article that further research is needed to identify the best approach to treating adolescent drug abusers.Similarly, the American Academy of Child and Adolescent Psychiatry acknowledged in its 1997 treatment practice parameters that research on drug abuse treatment for adolescents has failed to demonstrate the superiority of one treatment approach over another. With an annual expenditure of more than $3 billion--20 percent of the federal drug control budget--the federal government provides significant support for drug abuse treatment activities. Monitoring the performance of treatment programs can help ensure that we are making progress to achieve the nation's drug control goals. Research on the effectiveness of drug abuse treatment, however, is problematic given the methodological challenges and numerous factors that influence the results of treatment. Although studies conducted over nearly 3 decades consistently show that treatment reduces drug use and crime, current data collection techniques do not allow accurate measurement of the extent to which treatment reduces the use of illicit drugs. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you and other members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO discussed its recent report on drug abuse treatment research findings, focusing on: (1) the overall effectiveness of drug abuse treatment; (2) the methodological issues affecting drug abuse treatment evaluations; and (3) what is known about the effectiveness of specific treatments for heroin, cocaine, and adolescent drug addiction. GAO noted that: (1) it found that large, multisite, longitudinal studies have produced considerable evidence that drug abuse treatment is beneficial to the individual undergoing treatment and to society; (2) the studies have consistently found that a substantial proportion of clients being studied report reductions in drug use and criminal activity following treatment; (3) the studies also show that clients who stay in treatment for longer periods report better outcomes; (4) however, drug abuse treatment research is complicated by a number of methodological challenges that make it difficult to accurately measure the extent to which treatment reduces drug use; (5) in particular, growing concerns about the validity of self-reported data, which are used routinely in the major evaluations of drug abuse treatment, suggest that the treatment benefit reported by these studies may be somewhat overstated; (6) in addition, the research evidence to support the relative effectiveness of specific treatment approaches or settings for particular groups of drug abusers is limited; and (7) while one specific treatment approach--methadone maintenance--has been shown to be the most effective treatment for heroin addiction, research on the best treatment approach or setting for cocaine addiction or adolescent drug users is less definitive.
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Mr. Chairman and Members of the Committee: I am pleased to be here today to discuss our observations on the Department of Justice's August draft of its strategic plan. The Government Performance and Results Act of 1993 (the Results Act) requires that all executive branch agencies submit their plans to Congress and the Office of Management and Budget (OMB) by September 30, 1997. My statement focuses on Justice's August draft strategic plan, which builds on our July comments regarding Justice's February draft plan. Specifically, my statement will focus on the August plan's compliance with the Act's requirements and on the extent to which it covered crosscutting program activities, management challenges, and Justice's capacity to provide reliable performance information. In summary, Justice's February draft of its strategic plan was incomplete in that of the six elements required by the Act, three--the relationship between long-term goals/objectives and the annual performance plans, the key factors external to Justice that could affect Justice's ability to meet its goals, and a program evaluation component--were not specifically identified in the draft plan. The remaining three elements--the mission statement, goals and objectives, and strategies to achieve the goals and objectives--were discussed. The August plan includes two of the three missing elements but the plan does not include a required discussion on a third element--how the long-term goals and objectives are tied to Justice's annual performance plans. In addition, the revised plan would better meet the purposes of the Act if it provided more complete coverage of crosscutting programs, management challenges, and performance information. In the 1990s, Congress put in place a statutory framework to address long-standing weaknesses in federal government operations, improve federal management practices, and provide greater accountability for achieving results. This framework included as its essential elements financial management reform legislation, information technology reform legislation, and the Results Act. In enacting this framework, Congress sought to create a more focused, results-oriented management and decisionmaking process within both Congress and the executive branch. These laws seek to improve federal management by responding to a need for accurate, reliable information for congressional and executive branch decisionmaking. This information has been badly lacking in the past, as much of our work has demonstrated. Implemented together, these laws provided a powerful framework for developing fully integrated information about agencies' missions and strategic priorities, data to show whether or not the goals are achieved, the relationship of information technology investment to the achievement of those goals, and accurate and audited financial information about the costs of achieving mission results. The Results Act focuses on clarifying missions, setting goals, and measuring performance toward achieving those goals. It emphasizes managing for results and pinpointing opportunities for improved performance and increased accountability. Congress intended for the Act to improve the effectiveness of federal programs by fundamentally shifting the focus of management and decisionmaking away from a preoccupation with tasks and services to a broader focus on results of federal programs. program evaluations were used to establish and revise strategic goals and a schedule for future program evaluations. Justice's strategic plan is organized around what Justice has identified as its seven core functions: (1) investigation and prosecution of criminal offenses; (2) assistance to state and local governments; (3) legal representation, enforcement of federal laws, and defense of federal government interests; (4) immigration; (5) detention and incarceration; (6) protection of the federal judiciary and improvement of the justice system; and (7) management. Justice's February draft of its strategic plan was incomplete and did not provide Congress with critical information for its consultations with Justice. Justice's August version added two of the three required elements that were missing in the February plan. As a result, the August plan includes, to some degree, a discussion on five of the six required elements--a mission statement, goals and objectives, key external factors, a program evaluation component, and strategies to achieve the goals and objectives. The August plan does not include a required discussion of a sixth element--the relationship between Justice's long-term goals/objectives and its annual performance plans. "Our mission at the United States Department of Justice is to enforce the law and defend the interests of the U.S. according to the law, provide Federal leadership in preventing and controlling crime, seek just punishment for those guilty of unlawful behavior, administer and enforce the Nation's immigration laws fairly and effectively and ensure fair and impartial administration of justice for all Americans." Justice's mission statement covers six of the seven core functions that Justice identified but does not specify the detention and incarceration function, which is one of Justice's largest budget items. The plan does incorporate the detention and incarceration function in the discussion of goals and objectives and in its strategies to achieve those goals and objectives. Justice officials said that it was their intent to cover the detention and incarceration function by the phrases "seek just punishment . . ." and "ensure fair and impartial administration of justice . . ." While we agree that mission statements may vary in the extent to which they specify particular activities, we believe that it would be helpful to explicitly include the detention and incarceration function in this case. Our belief is based on Justice's decision to specify all of the other major functions in its mission statement and our concern that the Department's stakeholders may not interpret the phrases cited by Justice officials as indicating that the detention and incarceration component is part of its mission. Justice's goals and objectives cover its major functions and operations and are logically related to its mission. However, they are not as results oriented as they could be and some focus on activities and processes. For example, one set of results-oriented goals involves reducing violent, organized, and gang-related crime; drug-related crime; espionage and terrorism; and white collar crime. However, goals in other areas are more process oriented, such as "Represent the United States in all civil matters for which the Department of Justice has jurisdiction," "Promote the participation of victims and witnesses throughout each stage of criminal and juvenile justice proceedings at the Federal, State, and local levels," and "Make effective use of information technology." Another concern we have with some of the goals is that they are not always expressed in as measurable a form as intended by OMB guidance. For example, two of Justice's goals in the legal representation, enforcement of federal laws, and defense of U.S. interests core function are to protect the civil rights of all Americans and safeguard America's environment and natural resources. It is not clear from the August plan how Justice will measure its progress in achieving these goals. The Results Act and OMB Circular A-11 indicate that agency strategic plans should describe the processes the agencies will use to achieve their goals and objectives. Our review of Justice's strategic plan, specifically the strategies and performance indicators, identified areas where the plan did not fully meet the Act's requirements and OMB Circular A-11 guidance. programs and activities have contributed to changes in violent crime, availability and abuse of illegal drugs, espionage and terrorism, and white collar crime. Similarly, in its immigration core function, Justice has a goal to maximize deterrence to unlawful migration by reducing the incentives of unauthorized employment and assistance. It is likewise unclear how Justice will be able to determine the effect of its efforts to deter unlawful migration, as differentiated from the effect of changes in the economic and political conditions in countries from which illegal aliens originated. The plan does not address either issue. Some of Justice's performance indicators are more output than outcome related. For example, one cited strategy for achieving the goal of ensuring border integrity is to prevent illegal entry by increasing the strength of the Border Patrol. One of the performance indicators Justice is proposing as a measure of how well the strategy is working is the percentage of time that Border Patrol agents devote to actual border control operations. While this measure may indicate whether agents are spending more time controlling the border, it is not clear how it will help Justice assess its progress in deterring unlawful migration. The Act requires that agencies' plans discuss the types of resources (e.g., human skills, capital, and information technology) that will be needed to achieve the strategic and performance goals and OMB guidance suggests that agencies' plans discuss any significant changes to be made in resource levels. Justice's plan does not include either discussion. This information could be beneficial to Justice and Congress in agreeing on the goals, evaluating Justice's progress in achieving the goals, and making resource decisions during the budget process. In its August plan, Justice added a required discussion on key external factors that could affect its plan outcomes. Justice discusses eight key external factors that could significantly affect achievement of its long-term goals. These factors include emergencies and other unpredictable events (e.g., the bombing of the Alfred P. Murrah building), changing statutory responsibilities, changing technology, and developments overseas. According to Justice, isolating the particular effects of law enforcement activity from these eight factors that affect outcomes and over which Justice has little control is extremely difficult. This component of the plan would be more helpful to decisionmakers if it included a discussion of alternatives that could reduce the potential impact of these external factors. In its August plan, Justice added a required discussion on the role program evaluation is to play in its strategic planning efforts. Justice recognizes that it has done little in the way of formal evaluations of Justice programs and states that it plans to examine its evaluation approach to better align evaluations with strategic planning efforts. The August plan identifies ongoing evaluations being performed by Justice's components. OMB guidance suggests that this component of the plan include a general discussion of how evaluations were used to establish and revise strategic goals, and identify future planned evaluations and their general scope and time frames. Justice's August plan does neither. Under the Results Act, Justice's long-term strategic goals are to be linked to its annual performance plans and the day-to-day activities of its managers and staff. This linkage is to provide a basis for judging whether an agency is making progress toward achieving its long-term goals. However, Justice's August plan does not provide such linkages. In its August plan, Justice pointed out that its fiscal year 1999 annual performance planning and budget formulation activities are to be closely linked and that both are to be driven by the goals of the strategic plan. It also said that the linkages would become more apparent as the fiscal year 1999 annual performance plan and budget request are issued. how Justice and the Department of the Treasury, which have similar responsibilities concerning the seizure and forfeiture of assets used in connection with illegal activities (e.g., money laundering) will coordinate and integrate their operations; how INS will work with the Bureau of Prisons and state prison officials to identify criminal aliens; and how INS and the Customs Service, which both inspect arriving passengers at ports of entry to determine whether they are carrying contraband and are authorized to enter the country, will coordinate their resources. Along these lines, certain program areas within Justice have similar or complementary functions that are not addressed or could be better discussed in the strategic plan. For example, both the Bureau of Prisons and INS detain individuals, but the plan does not address the interrelationship of their similar functions or prescribe comparable measures for inputs and outcomes. As a second example, the plan does not fully recognize the linkage among Justice's investigative, prosecutorial, and incarceration responsibilities. One purpose of the Results Act is to improve the management of federal agencies. Therefore, it is particularly important that agencies develop strategies that address management challenges that threaten their ability to achieve both long-term strategic goals and this purpose of the Act. Over the years, we as well as others, including the Justice Inspector General and the National Performance Review (NPR), have addressed many management challenges that Justice faces in carrying out its mission. In addition, recent audits under the Chief Financial Officers Act of 1990 (CFO Act), expanded by the Government Management Reform Act, have revealed internal control and accounting problems. Justice's draft strategic plan is silent on these issues. contains a new section on "Issues and Challenges in Achieving Our Goals," which was not in its February plan. This new section discusses Justice's process for managing its information technology investments, steps taken to provide security over its information systems, and its strategy to ensure that computer systems accommodate dates beyond the year 2000. However, neither this new section nor the "Management" core function addresses some of the specific management problems that have been identified over the years and the status of Justice's efforts to address them. In its August draft plan, Justice also added a discussion on "accountability," which points out that Justice has an internal control process that systematically identifies management weaknesses and vulnerabilities and specifies corrective actions. This section also recognizes the role of Justice's Inspector General. However, the plan would be more helpful if it included a discussion of corrective actions Justice has planned for internally and externally identified management weaknesses, as well as how it plans to monitor the implementation of such actions. In addition, the plan does not address how Justice will correct significant problems identified during the Inspector General's fiscal year 1996 financial statement audits, such as inadequate safeguarding and accounting for physical assets and weaknesses in the internal controls over data processing operations. To efficiently and effectively operate, manage, and oversee its diverse array of law enforcement-related responsibilities, Justice needs reliable data on its results and those of other law enforcement-related organizations. Further, Justice will need to rely on a variety of external data sources (e.g., state and local law enforcement agencies) to assess the impact of its plan. These data are needed so that Justice can effectively measure its progress and monitor, record, account for, summarize, and analyze crime-related data. Justice's August strategic plan contains little discussion about its capacity to provide performance information for assessing its progress toward its goals and objectives over the next 5 years. and reliable budget, accounting, and performance data to support decisionmaking, and (2) integrating the planning, reporting and decisionmaking processes. These strategies could assist Justice in producing results-oriented reports on its financial condition and operating performance. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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 Department of Justice's August 1997 draft strategic plan developed in compliance with the Government Performance and Results Act of 1993, focusing on the plan's compliance with the Act's requirements and on the extent to which it covered crosscutting program activities, management challenges, and Justice's capacity to provide reliable performance information. GAO noted that: (1) Justice's plan discusses, to some degree, five of the six required elements--mission statement, goals and objectives, key external factors, a program evaluation component, and strategies to achieve the goals and objectives; (2) the plan does not include a required discussion on the relationship between Justice's long-term goals/objectives and its annual performance plans; (3) the draft plan could better address how Justice plans to: (a) coordinate with other federal, state, and local agencies that perform similar law enforcement functions, such as the Defense and State Departments regarding counter-terrorism; (b) address the many management challenges it faces in carrying out its mission, such as internal control and accounting problems; and (c) increase its capacity to provide performance information for assessing its progress in meeting the goals and objectives over the next 5 years.
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The contracting processes, activities, and challenges associated with rebuilding Iraq can be viewed as similar to, albeit more complicated than, those DOD normally confronts. We and others have already reported on the large and continuing drain on reconstruction dollars to meet unanticipated security needs. Further, multiple players with diffuse and changing responsibilities have had large roles in rebuilding Iraq, complicating lines of authority and accountability. Additionally, rebuilding a nation after decades of neglect and multiple wars is an inherently complex, challenging, and costly undertaking. From May 2003 through June 2004, the Coalition Provisional Authority (CPA), led by the United States and the United Kingdom, was the United Nations recognized authority responsible for the temporary governance of Iraq and for overseeing, directing, and coordinating reconstruction efforts. During 2003, several agencies, most notably the U.S. Agency for International Development (USAID) and the U.S. Army Corps of Engineers, played a role in awarding and managing initial reconstruction contracts. To coordinate and manage the $18.4 billion in reconstruction funding provided in fiscal year 2004, the CPA established a multi-tiered contracting approach for Iraq reconstruction activities. The CPA, through various military organizations, awarded the following contracts: 1 program management support contract to oversee reconstruction efforts; 6 sector program management contracts to coordinate reconstruction efforts specific to each sector; and 12 design-build contracts to execute specific construction tasks. DOD is now emphasizing greater use of local Iraqi firms to perform reconstruction work that was previously intended to be performed by the design-build contractors. With the establishment of Iraq's interim government in June 2004, the CPA's responsibilities were transferred to the Iraqi government or to U.S. agencies. The Department of State is now responsible for overseeing U.S. efforts to rebuild Iraq. The Project and Contracting Office (PCO), a temporary DOD organization, was tasked with providing acquisition and project management support. In December 2005, DOD merged the PCO with the U.S. Army Corps of Engineers Gulf Region Division, which now supervises DOD reconstruction activities in Iraq. Additionally, the State Department's Iraq Reconstruction and Management Office is responsible for strategic planning and for prioritizing requirements, monitoring spending, and coordinating with the military commander. USAID continues to award its own contracts, which are generally associated with economic assistance, education and governance, and certain infrastructure projects. The United States has made some progress in restoring Iraq's essential services, but as of August 2006, such efforts generally have not met prewar production levels or U.S. goals. Reconstruction activities have focused on restoring essential services, such as refurbishing and repairing oil facilities, increasing electrical generating capacity, and restoring water treatment plants. About one-third of DOD's construction work remains, and DOD estimates that some work is not planned for completion until late 2008. Continued violence, however, may make it difficult for the United States to achieve its goals. For August 2006, the U.S. embassy reported that the oil, electricity, and water sectors generally performed below the planned U.S. goals. Specifically, Crude oil production capacity was reported as about 2.4 million barrels per day (mbpd), below the prewar level of 2.6 mbpd and the desired goal of 3 mbpd. In the electricity sector, peak generation capacity was reported at 4,855 megawatts, above the prewar level of 4,300 megawatts, but below the U.S. goal of 6,000 megawatts. Further, the current demand for power continues to outstrip the available supply of electricity as more Iraqis purchase consumer items and devices requiring electricity to operate. In the water sector, new or restored treatment capacity was reported at about 1.44 million cubic meters per day, compared to the U.S. goal of 2.4 million cubic meters. According to senior CPA and State officials responsible for the U.S. strategy, the CPA's 2003 reconstruction plan assumed that (1) creating or restoring basic essential services for the Iraqi people took priority over jobs creation and the economy and (2) the United States should focus on long-term infrastructure projects because of the expertise the United States could provide. Further, the strategy assumed that reconstruction efforts would take place in a relatively benign environment. The difficult security environment and persistent attacks on U.S.-funded infrastructure, among other challenges, contributed to project delays, increased costs, and canceling or reducing the scope of some reconstruction projects. As we reported on September 11, 2006, the overall security conditions have grown more complex, as evidenced by increased numbers of attacks and Sunni/Shi'a sectarian strife. The continuing violence may make it difficult for the United States to achieve its goals. The contracting challenges encountered in Iraq are emblematic of systemic issues faced by DOD. A fundamental prerequisite to having good outcomes is a match between well-defined requirements and available resources. At the sector, program, and project levels, the failure to define realistic requirements has had a cascading effect on contracts and made it difficult to take subsequent steps necessary to get to successful outcomes. For example, in the absence of settled requirements, DOD has sometimes relied on what are known as undefinitized contractual actions, which were used extensively in Iraq and can leave the government exposed to increased costs. Managing risks when requirements are in flux requires effective oversight, but DOD lacked the capacity to provide a sufficient acquisition workforce, thereby hindering oversight efforts. In Iraq, as elsewhere, we found instances in which DOD improperly used interagency contracts to meet reconstruction needs. Finally, the underlying market discipline offered by competition can help promote better outcomes, but DOD, like other agencies, was challenged, particularly early on, in its ability to realize the benefits of competition. One or more of these factors can contribute to unsatisfactory outcomes on individual projects; the net effect, however, is that many reconstruction projects did not achieve their intended goals and DOD has incurred unanticipated costs and schedule delays. One of the factors that can contribute to poor DOD acquisition outcomes is the mismatch between wants, needs, affordability, and sustainability. This mismatch was evident in the reconstruction efforts in Iraq. U.S. reconstruction goals were based on assumptions about the money and time needed, which have proven unfounded. U.S. funding was not meant to rebuild Iraq's entire infrastructure, but rather to lay the groundwork for a longer-term reconstruction effort that anticipated significant assistance from international donors. To provide that foundation, the CPA allocated $18.4 billion in fiscal year 2004 reconstruction funds among various projects in each reconstruction sector, such as oil, electricity, and water and sanitation. As noted by the Special Inspector General, almost immediately after the CPA dissolved, the Department of State initiated an examination of the priorities and programs with the objectives of reprioritizing funding for projects that would not begin until mid- to late-2005 and using those funds to target key high-impact projects. By July 2005, the State Department had conducted a series of funding reallocations to address new priorities, including increasing support for security and law enforcement efforts and oil infrastructure enhancements. One of the consequences of these reallocations was to reduce funding for the water and sanitation sector by about 44 percent, from $4.6 billion to $2.6 billion. One reallocation of $1.9 billion in September 2004 led the PCO to cancel some projects, most of which were planned to start in mid-2005. Changes, even those made for good reasons, make it more difficult to manage individual projects to successful outcomes. Further, such changes invariably have a cascading effect on individual contracts. To produce desired outcomes within available funding and required time frames, DOD and its contractors need to have a clear understanding of reconstruction objectives and how they translate into the terms and conditions of a contract: what goods or services are needed, when they are needed, the level of performance or quality desired, and what the cost will be. When such requirements were not clear, DOD often entered into contract arrangements on reconstruction efforts that posed additional risks. For example, In June 2004, we reported that faced with uncertainty as to the full extent of the rebuilding effort, DOD often authorized contractors to begin work before key terms and conditions, including the work to be performed and its projected costs, were fully defined. The use of undefinitized contract actions, while allowing needed work to begin quickly, can result in additional costs and risks to the government. We found that as of March 2004, about $1.8 billion had been obligated on reconstruction contract actions without DOD and the contractors reaching agreement on the final scope and price of the work. In one case, we found a contract action that had been modified nine times between March and September 2003, increasing estimated costs from $858,503 to about $204.1 million without DOD and the contractor reaching agreement on the scope of work or final price. In September 2005, we reported that difficulties in defining the cost, schedule, and work to be performed associated with projects in the water sector contributed to project delays and reduced scopes of work. We reported that DOD had obligated about $873 million on 24 task orders to rebuild Iraq's water and sanitation infrastructure, including municipal water supplies, sewage collection systems, dams, and a major irrigation project. We found, however, that agreement between the government and the contractors on the final cost, schedule, and scope of 18 of the 24 task orders we reviewed had been delayed. These delays occurred, in part, because Iraqi authorities, U.S. agencies, and contractors could not agree on scopes of work and construction details. For example, at one wastewater project, local officials wanted a certain type of sewer design that increased that project's cost. Earlier this week, we issued a report on how DOD addressed issues raised by the Defense Contract Audit Agency (DCAA) in audits of Iraq- related contract costs. We again noted that DOD frequently authorized contractors to begin work before reaching agreement on the scope or price of the work. In such cases, we found that DOD contracting officials were less likely to remove costs questioned by DCAA from a contractor's proposal when the contractor had already incurred these costs. For example, of the 18 audit reports we reviewed, DCAA issued 11 reports on contract actions where more than 180 days had elapsed between the beginning of the period of performance to final negotiations. For 9 of these audits, the period of performance DOD initially authorized for each contract action concluded before final negotiations took place. In one case, DCAA questioned $84 million in its audit of a task order proposal for an oil mission. In this case, the contractor did not submit a proposal until a year after the work was authorized, and DOD and the contractor did not negotiate the final terms of the task order until more than a year after the contractor had completed work (see fig. 1). In the final negotiation documentation, the DOD contracting official stated that the payment of incurred costs is required for cost-type contracts, absent unusual circumstances. In contrast, in the few audit reports we reviewed where the government negotiated prior to starting work, we found that the portion of questioned costs removed from the proposal was substantial. Instability--such as when wants, needs, and contract requirements are in a state of flux--requires greater attention to oversight, which in turn relies on a capable government workforce. Managing the attendant risks in unstable situations grows in both importance and difficulty. Unfortunately, attention to oversight and a capable government workforce has not always been evident during the reconstruction effort. Such workforce challenges are not unique to Iraq. DOD's civilian workforce shrank by about 38 percent between fiscal years 1989 and 2002, but DOD performed this downsizing without ensuring that remaining staff had the specific skills and competencies needed to accomplish future DOD missions. In other cases, contractors have taken over support positions that were traditionally filled by government personnel. For example, a contractor began providing intelligence support to the Army in Germany in 1999 and deployed with the Army to Iraq in 2003. The Army, however, found itself unprepared for the volume of Iraqi detainees and the need for interrogation and other intelligence and logistics services. We and others have reported on the impact of the lack of adequate acquisition personnel and high turnover rates on reconstruction efforts. For example, among the lessons learned identified by the Special Inspector General was that one of the CPA's critical personnel shortcomings was the inadequate link between position requirements and necessary skills. In this case, gaps existed in the experience levels of those hired, as well as in the quality and depth of their experiences relative to their assigned jobs. Similarly, in January 2004, an interagency assessment team was sent to Iraq to review the CPA's contracting capability. The team found that existing contracting personnel were insufficient to handle the increased workload that was expected with the influx of fiscal year 2004 reconstruction funding and that the CPA needed more individuals with acquisition expertise who could help the programmatic side of the operation. In part, the CPA's decision to award seven contracts in early 2004 to help better coordinate and manage the fiscal year 2004 reconstruction efforts was in recognition of this shortfall. As a result, DOD finds itself in the position of relying on contractors to help manage and oversee the work of other contractors. At the contract level, having personnel who are trained to conduct oversight, assigned at or prior to contract award, and held accountable for their oversight responsibilities is essential for effective oversight. Our work has shown that if oversight is not conducted, is insufficient, or is not well documented, DOD, and other reconstruction agencies, risk not identifying and correcting poor contractor performance in a timely manner and paying contractors more than the value of the services they perform. For example, Our June 2004 report found that early contract administration challenges were caused, in part, by the lack of sufficient personnel. We found that, due to the lack of government personnel to provide oversight, one contractor may have purchased $7 million in equipment and services that were not specifically authorized under the contract. Similarly, on another contract, to provide subject matter experts to the CPA and Iraqi ministries, DOD officials stated that some experts failed to report to duty or when they did, did not perform as expected. DOD officials attributed such performance issues to the lack of personnel to provide oversight when the experts arrived in Iraq. In July 2005, we noted that USAID obligated an additional $33 million on one of its contracts to pay for unanticipated increases in security costs, which left it short of funds to pay for construction oversight and quality assurance efforts, as well as to fund administrative costs. Our September 2005 report on water and sanitation efforts found that frequent staff turnover affected both the definitization process and the overall pace and cost of reconstruction efforts. For example, new contracting officers had to be brought up to speed and would sometimes ask the contractor to resubmit information in formats different from those previously required. A PCO official also noted that the contracting office in Iraq lacked sufficient staff and equipment and that some of the staff assigned as contracting officers lacked experience with the type of projects the PCO managed. Another area in which workforce shortfalls proved problematic was in DOD's use and management of interagency contracting vehicles. We identified management of interagency contracting as a high-risk area in January 2005. In recent years, federal agencies have been making a major shift in the way they procure many goods and services. Rather than developing and awarding their own contracts, agencies are making greater use of contracts already awarded by other agencies, referred to as interagency contracting. This practice offers the benefits of improved efficiency and timeliness. Such contracts, however, need to be effectively managed, and their use demands a higher than usual degree of business acumen and flexibility on the part of the acquisition workforce. Our work and that of some agency inspectors general found instances of improper use of interagency contracting, resulting from increasing demands on the acquisition workforce, insufficient training, inadequate guidance, an inordinate focus on meeting customer demands at the expense of complying with sound contracting policy and required procedures, and the lack of clear lines of responsibility and accountability. During the initial stages of reconstruction, we and the DOD Inspector General found instances in which DOD improperly used interagency contracts for many of the same reasons. For example, In March 2004, the DOD Inspector General reported that a review of 24 contract actions awarded by a DOD component on behalf of the CPA revealed that DOD circumvented contracting rules, including improperly using General Services Administration federal supply schedule contracts and improperly contracting for personal services. The Inspector General attributed this condition to the need to quickly award contracts and to DOD's failure to plan for the acquisition support the CPA needed to perform its mission. In June 2004, we noted that a task order awarded by the Air Force to provide logistical support and equipment to support USAID's mission in Baghdad and at other sites in Iraq was, in part, outside the scope of the contract. The Air Force indicated that it was issuing additional guidance to ensure that future task orders were within the scope of the contract. In April 2005 we reported that a lack of effective management controls--in particular insufficient management oversight and a lack of adequate training--led to breakdowns in the issuance and administration of task orders for interrogation and other services by the Department of the Interior on behalf of DOD. These breakdowns included issuing 10 out of 11 task orders that were beyond the scope of underlying contracts, in violation of competition rules; not complying with additional DOD competition requirements when issuing task orders for services on existing contracts; not properly justifying the decision to use interagency contracting; not complying with ordering procedures meant to ensure best value for the government; and not adequately monitoring contractor performance. Because officials at Interior and the Army responsible for the orders did not fully carry out their roles and responsibilities, the contractor was allowed to play a role in the procurement process normally performed by the government. Further, the Army officials responsible for overseeing the contractor, for the most part, lacked knowledge of contracting issues and were not aware of their basic duties and responsibilities. Finally, one tool that can help mitigate acquisition risks is to rely on the discipline provided by market forces when contracts are awarded under full and open competition--that is, when all responsible prospective contractors are afforded the opportunity to compete. During the initial stages of reconstruction, we found that agencies were unable to take full advantage of competition, in part because of the relatively short time-- often only weeks--to award the first contracts. Our June 2004 report found that agencies generally complied with applicable requirements for competition when awarding new contracts but did not always do so when issuing task orders against existing contracts. We found that 7 of the 11 task orders we reviewed were for work that was, in whole or in part, outside the scope of the existing contracts. In each of these cases, the out- of-scope work should have been awarded using competitive procedures or supported with a justification and approval for using other than full and open competition in accordance with legal requirements. Given the urgent need for reconstruction efforts, we noted that the authorities under the competition laws provided agencies ample latitude to justify their approach. Such latitude presupposes that the rationale for such actions is valid; if not, then the loss of the benefits from competition cannot be easily justified. For example, in November 2005, we sustained a protest of a sole- source contract awarded by the Air Force in December 2004 for bilingual- bicultural advisers that was placed under an environmental services contract, which, on its face, did not include within its scope the bilingual- bicultural adviser requirement. We concluded that the agency's efforts were so fundamentally flawed as to indicate an unreasonable level of advance planning. In the same decision, we sustained a protest of a second, follow-on sole-source contract awarded by the Air Force in July 2005 to the same company, in which the justification and approval prepared in support of the contract was premised on the conclusion that the contractor was the only responsible source, yet the capabilities of other firms were not in fact considered. The lack of advance planning, the failure to meaningfully consider other sources, and the attempts to justify the use of sole-source contracts originated, in large part, from the desire and pressure to meet the customer's needs in a short time frame. At the time of our decision, the initial contract was substantially complete, but we recommended that the agency promptly obtain competition for the requirement or prepare a properly documented and supported justification and approval for the second contract. Overall, the Special Inspector General has reported that competition has improved for Iraq reconstruction projects since the early reconstruction efforts. Next month we will issue a congressionally mandated report that will provide an assessment of competition for actions subsequent to our June 2004 report. The reconstruction contracting problems we and others have reported on over the last several years are emblematic of contracting problems we have identified in numerous other situations but with more dramatic consequences for failure, as the nature of the task for the United States is so large and so costly. While some of the factors I discussed today-- mismatches between needs, wants, affordability, and sustainability; oversight and workforce challenges; improper use of contracting approaches; and competition issues--were more prevalent in the initial stages of reconstruction, the risks posed by others have not yet been fully mitigated. Understanding not just where we are today, but why, is important to enable DOD to make corrections and prevent repeating mistakes. Just as multiple factors contribute to success or failure, multiple actors play a role in achieving successful acquisition outcomes, including policy makers, program managers, contracting officers, and the contractors themselves. Looking to the future, about one-third of DOD's planned construction work remains to be completed, including some work that is not planned for completion until the end of 2008. It is not too late for DOD to learn from its past difficulties and provide adequate oversight on these remaining projects. Delivering these projects on time and within cost is essential if we are to maximize the return on this investment and make a difference in the daily lives of the Iraqi people and help to provide the services they need--safe streets, clean water, reliable electricity, and affordable health care. - - - - - Mr. Chairman and members of the committee, this concludes my prepared statement. I will be happy to answer any questions you may have. In preparing this testimony, we relied primarily on our completed and ongoing reviews of efforts to rebuild Iraq that we have undertaken since 2003, as well as our work related to selected DOD contract management issues. We conducted these reviews in accordance with generally accepted government auditing standards. We also reviewed audit reports and lessons learned reports issued by the Special Inspector General for Iraq Reconstruction and work completed by the Inspector General, Department of Defense. We conducted this work in accordance with generally accepted government auditing standards in September 2006. For questions regarding this testimony, please call Katherine V. Schinasi at (202) 512-4841 or on [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the back page of this statement. Key contributors to this statement were Daniel Chen, Lily Chin, Tim DiNapoli, Kate France, Dave Groves, John Hutton, Chris Kunitz, Steve Lord, Micah McMillan, Kate Monahan, Mary Moutsos, Ken Patton, Jose Ramos, and Bill Woods. 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, along with its coalition partners and various international organizations, has undertaken a challenging, complex, and costly effort to stabilize and rebuild Iraq. The Department of Defense (DOD) has responsibility for a significant portion of the reconstruction effort. Amid signs of progress, the coalition faces numerous political, security, and economic challenges in rebuilding Iraq. Within this environment, many reconstruction projects have fallen short of expectations, resulting in increased costs, schedule delays, reduced scopes of work, and in some cases project cancellations. This testimony (1) discusses the overall progress that has been made in rebuilding Iraq and (2) describes challenges faced by DOD in achieving successful outcomes on individual projects. This testimony reflects our reviews of reconstruction and DOD contract management issues, as well as work of the Special Inspector General for Iraq Reconstruction. In our previous reports, we have made several recommendations to improve outcomes in Iraq. DOD generally agreed with our recommendations. Overall, the United States generally has not met its goals for reconstruction activities in Iraq with respect to the oil, electricity, and water sectors. As of August 2006, oil production is below the prewar level, and the restoration of electricity and new or restored water treatment capacity remain below stated goals. One-third of DOD's planned construction work still needs to be completed and some work is not planned for completion until late 2008. Continuing violence in the region is one of the reasons that DOD is having difficulty achieving its goals. The contracting challenges encountered in Iraq are emblematic of systemic issues faced by DOD. When setting requirements for work to be done, DOD made assumptions about funding and time frames that later proved to be unfounded. The failure to define realistic requirements has had a cascading effect on contracts and has made it difficult to take subsequent steps to get successful outcomes. For example, in the absence of settled requirements, agencies sometimes rely on what are known as undefinitized contract actions, which can leave the government exposed to increased costs. Further, DOD lacked the capacity to provide effective oversight and manage risks. We also found that DOD, at times, improperly used interagency contracts and was not able to take advantage of full and open competition during the initial stages of reconstruction. Just as multiple factors contribute to success or failure, multiple actors play a role in achieving successful acquisition outcomes, including policy makers, program managers, contracting officers, and the contractors themselves.
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VHA's National Patient Safety Improvement Handbook identifies key staff involved in the RCA process, establishes minimum requirements for conducting RCAs, and outlines the RCA process. VISNs are regional systems of care that oversee the day-to-day functions of VAMCs that are within their network. Each VAMC is assigned to one of VA's 21 VISNs. Within VHA, NCPS supports the RCA process VHA-wide as part of its broader efforts to reduce and prevent inadvertent harm to patients as a result of their care. NCPS staff categorize and analyze RCA data, and provide training and education for VAMCs on the RCA process. According to VHA policy, NCPS is also responsible for disseminating important information learned from RCAs to VAMCs. NCPS reports to the Assistant Deputy Under Secretary for Health for Quality, Safety, and Value, but also works with other VHA offices, including the Office of the Deputy Under Secretary for Health for Operations and Management, which directs operations at the VISN and VAMC levels. At the VISN level, patient safety officers may provide additional oversight of the RCA process and disseminate information from NCPS to the VAMCs within their networks. Each VAMC has a patient safety manager who facilitates the RCA process at the local level. An RCA may be required by VHA policy if a VAMC's initial review of an adverse event finds that there is a risk to the safety of veterans, based on the severity of the event and its likelihood of recurrence. VHA requires that each VAMC complete a minimum of eight RCAs each fiscal year, four of which must be on individual adverse events. The other four RCAs can be a combination of individual RCAs and aggregated RCAs, the latter of which review a group of similar adverse events to identify common causes and actions to prevent future occurrences. VHA requires that VAMCs conduct aggregated RCAs on three types of adverse events-- falls, adverse drug events, and missing patients--to the extent that they occur in a given year. All RCA-related information is required to be entered into VHA's centralized RCA reporting system--WebSPOT, a software application within VHA's Patient Safety Information System. WebSPOT is the means by which RCA information is provided to NCPS and to VISN patient safety officers. Information obtained through the RCA process is protected and confidential, according to federal law, and cannot be used to inform an adverse action or privileging action against a provider. Therefore, the RCA process is referred to as a protected process. VAMCs use the RCA process to examine whether a systems or process issue caused an adverse event. Figure 1 provides an overview of the RCA process at VAMCs. Adverse event occurs. The RCA process at a VAMC begins with the recognition of an adverse event. At the VAMC, the patient safety manager receives information from VAMC staff about an adverse event that occurs at the VAMC. To determine if an RCA is required, the patient safety manager evaluates the event using VHA's safety assessment code matrix to score the severity of the event and its likelihood of recurrence on a scale of 1 (lowest risk) to 3 (highest risk). As directed by VHA policy, adverse events with a score of 3 always require an RCA. VAMCs have discretion in determining whether to conduct RCAs on adverse events with scores of 1 or 2. VAMC conducts RCA. After determining the need for an RCA, the VAMC director convenes a multidisciplinary team of VAMC staff to identify root causes and actions to be taken with associated outcome measures. VHA policy states that those staff directly involved in the adverse event cannot participate on the RCA team; however, the RCA team may interview these staff as part of its investigation to obtain their perspectives on the event that occurred and suggestions for preventing its recurrence. The RCA team is required to develop a report, which includes a description and flowchart of the adverse event, identifies one or more root causes, and includes actions to be taken with associated outcome measures. Actions describe VAMC-level changes to reduce or eliminate future occurrences of similar adverse events. Each action is also required to have at least one outcome measure--a specific, quantifiable, and time- bound means by which responsible staff can determine the extent to which the action has been taken to address the root cause. For example, in the case of an overdose of an anesthesia medication from a pump that held an unsafe amount of medication, the action might be to use a different type of pump that holds less medication and prevents an accidental overdose; an outcome measure might be to measure patient outcomes 1 year later to ensure that no such overdoses occurred. Leadership reviews/approves. Upon completion of the RCA report, the RCA team presents its findings to VAMC leadership. The completed RCA report is required to be signed by the VAMC director within 45 days of the determination of the need for an RCA.signature is the date the RCA is considered complete. The patient safety manager then submits the completed report to NCPS through WebSPOT. The date of the director's VAMC implements RCA actions. After an RCA report is submitted to NCPS, patient safety managers follow up with VAMC staff on the implementation of identified actions, and, after implementation, evaluate the effectiveness of those actions in addressing the identified root causes. Patient safety managers also update WebSPOT with the actual implementation date of each action. If a VAMC does not implement an action, the patient safety manager can indicate in WebSPOT that the action was not implemented and the reason why. VAMCs may not implement certain actions identified by the RCA team for several reasons, including funding constraints and other unforeseen complications, like building design limitations. After implementation, patient safety managers update WebSPOT to add any comments associated with implementation, as well as information about the effectiveness of each action in addressing identified root causes on a five-point scale from "much worse" to "much better." In fiscal year 2014, VAMCs most commonly rated RCA actions as having made the related system or process "better" or "much better." Upon receipt of a completed RCA report, NCPS staff categorize key aspects, such as the type of adverse event, location of the event, corrective actions, and outcome measures. NCPS staff also categorize RCA actions according to an action strength hierarchy of stronger, intermediate, or weaker. (See table 1 for descriptions of stronger, intermediate, and weaker actions.) NCPS recommends using stronger or intermediate actions to the extent possible to improve the likelihood that actions will remove human error from processes and be more successful in addressing the root causes of an adverse event. About two-thirds (68 percent) of all actions resulting from RCAs in fiscal year 2014 were categorized as stronger or intermediate. Total completed RCAs (both individual and aggregated) at VAMCs decreased in each of the past 5 fiscal years. Overall, from fiscal years 2010 through 2014, the total number of RCAs completed at VAMCs decreased by 18 percent--from 1,862 in fiscal year 2010 to 1,523 in fiscal year 2014. (See fig. 2.) Individual RCAs accounted for 88 percent of the decrease during this time period. VHA's NCPS officials told us they are not certain why the number of completed RCAs has decreased over time, especially in light of an increase in reports of adverse events over the past 5 fiscal years. Specifically, our analysis of adverse event reports in WebSPOT shows that they increased by 7 percent in the past 5 fiscal years (from 109,951 in fiscal year 2010 to 117,136 in fiscal year 2014). An increase in reports does not necessarily mean that there should also be an increase in the number of RCAs conducted, as it is possible that the safety assessment code score was not high enough to require an RCA, giving the VAMC the discretion to address the adverse event through other available processes. However, NCPS officials told us they have not conducted an analysis to determine the contributing factors to the decrease. Without further analysis, it is unclear whether an increase in adverse event reports at the same time that the number of completed RCAs is decreasing is a cause for concern. NCPS's lack of analysis is not consistent with federal internal control standards, which state that control activities should include comparisons and assessments of different sets of data so that analyses of the relationships can be made and appropriate actions taken. NCPS officials told us they were aware of the decrease in completed RCAs, but have not conducted an analysis of the decrease because it is difficult to determine causal relationships between many possible contributing factors. Although they have not conducted an analysis, NCPS officials suggested possible contributing factors to the decrease in completed RCAs, including: (1) a change in the culture of safety at VAMCs; (2) VAMCs using alternative processes to address adverse events in place of RCAs; and (3) an increasing number of VAMCs conducting the minimum of four individual RCAs each fiscal year. Change in the culture of safety at VAMCs. NCPS officials stated that they have observed a change in the culture of safety in recent years in which staff feel less comfortable reporting adverse Officials added that this change events than they did previously.is reflected in NCPS's periodic survey on staff perceptions of safety; specifically, 2014 scores showed decreases from 2011 on questions measuring staff's overall perception of patient safety, as well as decreases in perceptions of the extent to which staff work in an environment with a nonpunitive response to error. As previously noted, however, the number of adverse event reports has been increasing, despite NCPS officials' observation of a change in the culture of safety. VAMCs' use of alternative processes. NCPS officials told us that VAMCs sometimes choose alternative processes, such as those based on Lean methods, to address adverse events when an RCA is not required. However, VHA is unaware how many VAMCs use these alternative processes. From fiscal year 2009 through fiscal year 2014, VHA trained over 20,000 staff on the use of Lean methods, but an official from the VA Center for Applied Systems Engineering--the VHA office that conducted the trainings--told us VHA has not conducted any follow-up to determine how these methods are being applied at VAMCs. The official added that, after training, it is up to VAMC leadership to implement Lean methods in their VAMCs, and that the Center for Applied Systems Engineering began working with NCPS about a year ago to begin aligning the RCA process with Lean methods. The lack of follow-up on the use of alternative processes is not consistent with standards for internal control. Without information on the extent to which VAMCs are using alternative processes like Lean methods in place of RCAs, NCPS has limited awareness of the extent to which VAMCs are addressing the root causes of adverse events. Three of the four VAMCs in our review completed fewer RCAs in fiscal year 2014 compared to fiscal year 2010. Officials at one of these VAMCs told us the reason they had completed fewer RCAs was because the VAMC director supported the use of a Lean method to understand and act on the root cause of an adverse event when an RCA was not required. Officials at this VAMC also told us that they thought their Lean method was sometimes more appropriate for reviewing low-severity events because it yielded similar results to an RCA and allowed for a broader, more complete view of the issue being examined. NCPS officials told us they support VAMCs' use of these alternative processes when appropriate, but acknowledged loss of information as the results of these processes are not required to be entered into WebSPOT, or otherwise shared with NCPS. Increasing numbers of VAMCs conducting the minimum of 4 individual RCAs each fiscal year. NCPS officials told us they were aware that by setting a requirement in 2007 that VAMCs conduct a minimum of 4 individual RCAs each fiscal year, VAMCs that had previously completed many more than 4 might decrease the number of individual RCAs they completed over time. Our analysis of RCA data shows that from fiscal years 2010 through 2014, the number of VAMCs completing more than 4 individual RCAs declined by 8 percent (from 135 to 124 VAMCs). In addition, the number of VAMCs completing exactly 4 individual RCAs in this time period more than doubled, from 4 VAMCs in fiscal year 2010 to 10 VAMCs in fiscal year 2014. All 10 of these VAMCs completed more than 4 individual RCAs in fiscal year 2010, with totals ranging from 5 to 14 individual RCAs. Officials stated that the selection of 4 individual RCAs as a minimum (as well as the selection of 8 as a minimum total of individual and aggregated RCAs), was arbitrary but seemed reasonable. They expressed concern that raising the annual individual RCA minimum requirement may result in lower-quality RCAs. Because NCPS has not conducted an analysis to understand the relationship between the decrease in RCAs and possible contributing factors, such as the increase in adverse event reports and use of alternative processes, it is unclear whether the decrease indicates a negative trend in patient safety at VAMCs or a positive one. For example, the decrease can indicate a negative trend of VAMCs not reporting severe adverse events that would require RCAs, or a positive trend reflecting fewer severe adverse events occurring. Moreover, without complete information on the extent to which VAMCs are using alternative processes to address the root causes of adverse events and the results of those processes, NCPS lacks important data that may be helpful in better identifying trends and system-wide patient safety improvement opportunities. NCPS and VISN patient safety officers oversee the RCA process by monitoring each VAMC's compliance with RCA requirements, including by reviewing RCA information in WebSPOT and conducting site visits. Reviewing RCA information in WebSPOT. NCPS conducts quarterly reviews of RCA information in WebSPOT to monitor VAMCs' progress toward meeting annual RCA requirements. NCPS monitors, for example, each VAMC's progress toward completing the required number of individual and aggregated RCAs for the fiscal year. Our analysis of WebSPOT data shows that, from fiscal year 2010 through fiscal year 2014, almost all VAMCs completed the minimum number of RCAs required each year: an average of 98 percent of VAMCs completed four or more individual RCAs, and an average of 96 percent of VAMCs completed eight or more total RCAs. NCPS officials told us that their review of WebSPOT information also provides insight into the effectiveness of a VAMC's RCA process. NCPS submits quarterly reports of VAMCs' progress to the Deputy Under Secretary for Health for Operations and Management. NCPS officials told us that when they find that a VAMC has not met the annual requirement for the number of completed RCAs, they may contact the VAMC's patient safety manager to ask if barriers to the RCA process exist. Officials said that, in one such instance, the patient safety manager at a VAMC that had not completed the required number of RCAs told NCPS that the medical center director was not supportive of the RCA process. According to NCPS officials, in situations such as this they may then contact the VAMC's leadership to remind them of the importance of completing RCAs and of the benefits to the entire system of having complete information in WebSPOT, and to offer their assistance. VISN patient safety officers we spoke with told us that they also monitor VAMCs' compliance with RCA requirements through reviews of RCA information in WebSPOT, and by meeting with VAMC patient safety managers. Conducting site visits to VAMCs. NCPS officials said they may conduct a site visit to provide consultation and feedback to a VAMC that appears to be encountering challenges in meeting RCA requirements, such as completing individual RCAs within 45 days. NCPS site visits can also include an examination of other aspects of the RCA process, including reviewing a sample of RCAs to examine the assignment of safety assessment scores, the strength of corrective actions, and the implementation status of the actions. Officials stated that the 12 to 20 site visits they conduct each year are the most valid way for them to verify the implementation of RCA actions because they provide NCPS with the ability to observe implemented activities and the effectiveness of RCA-based improvements. NCPS officials told us that they visit VAMCs at the request of the VAMC director or as participants in a visit made by other VHA offices, including the Deputy Under Secretary for Health for Operations and Management. In addition to NCPS, patient safety officers at three of the four VISNs in our review told us that they also conduct annual site visits to some or all VAMCs in their networks to assess implementation of RCA actions and to consult with VAMC patient safety managers. In addition to monitoring compliance, NCPS uses RCA information to inform system-wide initiatives to improve patient safety. Not all initiatives are based solely on RCAs, but officials told us that RCAs are a contributing factor to NCPS's larger patient safety improvement efforts. Officials told us that they focus their initiatives on problems that pose the greatest risk to patients or are the most prevalent in VA's health care system, such as suicide. Officials explained that their choice of which initiative to pursue is determined by what will have the greatest impact on a problem. Examples of NCPS's initiatives include Patient Safety Alerts and Advisories, topic summaries, and Clinical Team Training. Patient Safety Alerts and Advisories. Patient Safety Alerts and Advisories are urgent notifications sent to VAMCs that contain a description of a safety issue, instructions for implementing actions to prevent recurrence of the problem, and due dates for completion of actions. NCPS officials told us that alerts and advisories can come from several sources, including reports from VAMCs, other VHA offices, and medical device manufacturers. Patient Safety Alerts and Advisories are developed by NCPS and then issued by the VHA Deputy Under Secretary for Health for Operations and Management. For example, VHA issued a Patient Safety Alert after a patient in a VAMC behavioral health unit hanged himself from an air conditioning vent. The RCA team recommended a structural change to the vents to prevent recurrence, which VHA then required to be implemented at all VAMCs. NCPS also tracks the date that VAMCs completed implementation of actions. From fiscal year 2010 through fiscal year 2014, NCPS has developed 57 alerts and 7 advisories. Topic summaries. Officials told us that NCPS may issue an RCA topic summary if they identify a trend in adverse events or RCAs in WebSPOT. An RCA topic summary provides background context for the relevant adverse event, discusses root causes that were identified through the RCAs conducted, and describes corrective actions taken by VAMCs. For example, NCPS officials told us that after their review of RCAs identified a trend in adverse events caused by the misidentification of patients, they determined that system-wide improvements were needed. NCPS prepared topic summaries on misidentification related to specimens and transporting patients, as well as a guidance document on patient wristbands, which included best practices for VAMCs. NCPS officials told us topic summaries are distributed to VAMCs as part of the agenda for monthly conference calls that NCPS conducts with patient safety staff at VAMCs and VISNs, and that they are also made available through NCPS's internal website and via e-mail. From fiscal year 2010 through fiscal year 2014, NCPS has issued 12 topic summaries. NCPS may also determine the need for a topic summary on the basis of requests for WebSPOT searches from VAMC and VISN patient safety staff interested in knowing whether RCAs have been conducted for similar adverse events at other VAMCs. NCPS officials estimated that they conduct about 200 such searches annually, and that these searches provide VAMC and VISN staff with information on similar adverse events, such as the corrective actions identified at other locations to address the adverse event. According to officials, NCPS may determine through these searches that several locations are encountering similar patient safety issues, prompting the preparation of a topic summary. Clinical Team Training. NCPS implemented Clinical Team Training for surgical teams in 2007 following analysis of RCA information in WebSPOT that found communication failure to be a root cause or contributing factor in 75 percent of the more than 7,000 RCAs reviewed. The objective of Clinical Team Training is to enhance teamwork and overcome obstacles to effective communication across professional boundaries. The training curriculum includes 2 months of preparation by the VAMC; a day- long onsite learning session consisting of lectures, group interaction, and videos; and quarterly interviews of the clinical team to assess training implementation. One study found that surgical mortality decreased 11 percent more in VAMCs that received Clinical Team Training compared to those that had not NCPS officials told us they have expanded Clinical received it. Team Training beyond surgical teams, and have provided this training, for example, to teams in emergency departments, intensive care units, and inpatient behavioral health units. Julia Neily et al., "Association between Implementation of a Medical Team Training Program and Surgical Mortality," Journal of the American Medical Association, vol. 304, no. 15 (2010). RCAs are an important tool for VAMCs to identify the systems or processes that contributed to an adverse event, and implement actions to address them. They are also an important contributor to NCPS initiatives to improve patient safety across VA's health care system. It is unclear whether the 18 percent decrease in total RCAs completed from fiscal year 2010 to fiscal year 2014 is a negative trend reflecting less reporting of serious adverse events, or a positive trend reflecting fewer serious adverse events that would require an RCA. VHA has not, as would be consistent with federal internal control standards, conducted an analysis to determine the relationship between data showing a decrease in RCAs and factors that may be contributing to this trend, including VAMCs use of alternative processes, such as Lean methods, when RCAs are not required. Although the choice to use alternative processes may be appropriate, NCPS is not aware of the extent to which these processes are used, the types of events being reviewed, or the changes resulting from them. Without analyzing the reasons for declining RCAs, and understanding the extent that VAMCs use alternative processes and their results, NCPS has limited awareness of what VAMCs are doing to address the root causes of adverse events. Moreover, the lack of complete information may result in missed opportunities to identify needed system-wide patient safety improvements. To ensure that appropriate steps are being taken to address the root causes of adverse events within VHA, the Secretary of Veterans Affairs should direct the Under Secretary for Health to take the following two actions: Conduct an analysis of the declining number of completed RCAs within the VA health care system, including identifying contributing factors, and take appropriate actions to address them. Determine the extent to which VAMCs are using alternative processes to address the root causes of adverse events when an RCA is not required, and collect information from VAMCs on the number and results of those alternative processes. We provided a draft of this report to VA for comment. In its written comments, reproduced in appendix I, VA generally agreed with our conclusions and concurred with our recommendations. In its comments, VA also provided information on an initial analysis it had conducted, as well as its plans for implementing each recommendation, with an estimated completion date of November 2015. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of Veterans Affairs, 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) 512-7114 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. In addition to the contact named above, Janina Austin, Assistant Director; Jennie F. Apter; Frederick K. Caison; Christine Davis; Kaitlin McConnell; Vikki L. Porter; Emily Wilson; and Malissa G. Winograd made key contributions to this report.
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Adverse events are incidents that pose a risk of injury to a patient as the result of a medical intervention or the lack of an appropriate intervention. VAMCs use the RCA process to identify and evaluate systems or processes that caused an adverse event, recommend changes to prevent the event's recurrence, and determine whether implemented changes were effective. GAO was asked to review VA's processes and procedures for responding to adverse events. In this report, GAO examined (1) the extent to which VAMCs used the RCA process to respond to adverse events and (2) how VHA oversees the RCA process and uses information from the process to make system-wide improvements. To conduct this work, GAO reviewed VHA policy and guidance documents, analyzed VHA data on RCAs completed from fiscal years 2010 through 2014, and interviewed officials from NCPS--the VHA office responsible for monitoring RCA data. GAO also analyzed local RCA data and interviewed officials from four VAMCs selected to provide variation in factors such as complexity and location. To address adverse events, Department of Veterans Affairs (VA) medical centers (VAMC) completed 18 percent fewer root cause analyses (RCA) in fiscal year 2014 compared to fiscal year 2010, and the Veterans Health Administration (VHA) has not analyzed the reasons for the decrease. VHA's National Center for Patient Safety (NCPS) officials told GAO they were aware of the decrease, but were not certain why the number of completed RCAs had decreased over time, especially in light of a 7 percent increase in reports of adverse events over the same time period. NCPS officials suggested several potential factors that could contribute to the decrease, including VAMCs' use of processes other than RCAs to address adverse events. However, NCPS is unaware of how many VAMCs use these other processes or their results. VHA's lack of analysis is inconsistent with federal internal control standards which state that agencies should compare data to analyze relationships and take appropriate actions. Because NCPS has not conducted an analysis of the relationship between the decrease in RCAs and possible contributing factors, it is unclear whether the decrease indicates a negative trend in patient safety at VAMCs or a positive one. In addition, without understanding the extent to which VAMCs use alternative processes and their results, NCPS has limited awareness of what VAMCs are doing to address the root causes of adverse events. NCPS oversees the RCA process by monitoring VAMC compliance, and develops system-wide patient safety initiatives informed by RCA data. NCPS monitors each VAMC's compliance with requirements by reviewing RCA database information and conducting site visits. NCPS uses RCA information to inform system-wide patient safety initiatives, such as Patient Safety Alerts and Advisories--urgent notifications sent to VAMCs that describe a safety issue and include instructions and due dates for implementing actions to prevent recurrence. GAO recommends that VA (1) analyze the declining number of completed RCAs, including identifying the contributing factors and taking appropriate actions, and (2) determine the extent to which VAMCs are using alternative processes to address adverse events, and collect information on their results. VA concurred with GAO's recommendations.
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In the mid-1990s, the Army Military History Institute began developing proposed legislation for charging and retaining fees to defray costs of providing historical information to the public. The Institute, whose mission is to preserve the Army's history and ensure access to historical research material, was experiencing a significant increase in requests from the public while resources available to respond were decreasing. For example, the Institute reported that the annual number of requests increased from about 13,000 in 1987 to 20,600 in 1995 and to 35,800 in 2000. During the same period, the number of staff members decreased from over 40 to 33. As a result, backlogs and waiting times increased. The Institute developed and submitted legislative proposals that authorized it to charge and retain fees. In response, Congress enacted Section 1085 of the National Defense Authorization Act for Fiscal Year 2001, which authorizes the charging and retaining of fees by one designated primary archive in each of the four military departments. The four designated archives are the Air Force Historical Research Agency at Maxwell AFB, Alabama; Army Military History Institute at Carlisle Barracks, Pennsylvania; Marine Corps Historical Center at Washington Navy Yard, D.C.; and Naval Historical Center at Washington Navy Yard, D.C. Section 1085 does not specify a fee structure or the fees that are to be charged, but states that fees are not to exceed the costs of providing the information. The Section also states that fees are not to be charged for information that is requested (1) to carry out a duty as a member of the armed forces or employee of the United States or (2) under FOIA, which has a separate fee structure. Prior to the authority granted under Section 1085, DOD, including the military archives, was authorized to charge fees for responding to requests for information under the User Charge Statute and FOIA. Because Section 1085 does not apply to the DOD offices, organizations, museums, and archives other than the four designated archives, the User Charge Statute and FOIA will continue to be the basic authority for these activities to charge fees for providing information. The User Charge Statute is implemented by Office of Management and Budget (OMB) Circular No. A-25, and DOD Financial Management Regulation (FMR), Volume 11A, Chapter 4. DOD's policy, as stated in Chapter 4, is that when a service is provided that conveys special benefits to recipients, above and beyond those accruing to the public at large, a reasonable charge shall be made to each identifiable recipient. The policy provides that a charge shall be imposed to recover the full cost to the federal government of rendering a service or the fair market value of such service, whichever is higher. Appendix 1 of Chapter 4 lists benefits for which no charge is to be made such as services requested by members of the U.S. Armed Forces in their capacity as service members. Appendix 2, "Schedule of Fees and Rates for Copying, Certifying, and Searching Records Rendered to the Public," is mandated for use throughout DOD. The Under Secretary of Defense (Comptroller) is responsible for additions or revisions to Chapter 4. FOIA, which specifies processes and procedures for making information available to the public, is implemented in DOD by DOD Regulation 5400.7-R. In accordance with FOIA, DOD Regulation 5400.7-R contains a fee schedule for responding to FOIA requests. For general information, the fees for search, review, and duplication of documents are to be based on direct costs. For technical information, the fees are to be based on all reasonable costs, which is defined as the full costs to the federal government of rendering the service, or fair market value of the service, whichever is higher. The regulation also provides that the first 2 hours of search time and the first 100 pages of duplication shall be provided without charge unless requesters are seeking documents for commercial use, fees will be waived or reduced when the information is likely to contribute significantly to public understanding of DOD, and fees shall be automatically waived when assessable fees total $15 or less. The Directorate for Freedom of Information and Security Review is responsible for the FOIA regulation. FOIA requests are specifically excluded under Section 1085 and the DOD regulations implementing the User Charge Statute. Accordingly, the provisions of Regulation 5400.7-R would determine fees for any FOIA request. However, if a request is not identified as a FOIA request, the fees should be determined under the User Charge Statute as specified in FMR, Volume 11A, Chapter 4. None of the four designated archives has changed its fee structure pursuant to Section 1085. At the time of our work, two of the four archives were taking actions to implement the Section. Officials at the Army Military History Institute were developing fee schedules and planning to implement the Section by October 2001. Officials at the Air Force Historical Research Agency had tasked key stakeholders with determining a fee structure. However, they have not established a target date for implementing the Section. Section 1085 permits each of the four archives to develop its own fee schedule provided that the fees charged do not exceed the costs of providing the information. Officials at the Naval Historical Center and the Marine Corps Historical Center have not decided whether to implement a fee system based on Section 1085 provisions. They have taken no specific actions toward implementation and have received no implementation guidance from their headquarters. One of the factors affecting Section 1085 implementation decisions by the four archives is that they were already authorized under both the User Charge Statute and FOIA to charge for information provided to the public. Based on the statute and regulations, the archives should charge for information provided to public requesters under the User Charge Statute unless the request is identified as a FOIA request. If identified as a FOIA request, any charges should be based on FOIA implementing regulations. However, neither of these statutes authorizes the military archives to retain fees collected in providing general information to the public to defray costs. Fees collected under both the User Charge Statute and FOIA for general information must be deposited in the Treasury as Miscellaneous Receipts. Accordingly, the authority to retain collected fees to defray incurred costs is one significant distinction between Section 1085 and the other two statutes. The Army Military History Institute identified the ability to use collected fees to improve service to the public as the primary reason it developed the legislative proposals that led to Section 1085. Increasing numbers of public requests at a time when budgetary resources were decreasing resulted in the archives developing arrangements to minimize the cost impact of public requests on the archives' budgets. For example, the Army Military History Institute arranged for a contract, through a nonappropriated fund account, to reproduce requested photographs with fees collected for the photographs reimbursing the fund. The Naval Historical Center refers those requesting its photographs to the Naval Historical Foundation, a nonprofit foundation, which reproduces the photographs and charges the customer. Without such arrangements, the costs of reproducing photographs and responding to requesters would come from the archive's budget, and the fees collected from the customer would be deposited in Treasury's Miscellaneous Receipts and would not be available to offset the costs. These arrangements, by reducing budgetary pressures, have lessened the benefits that an archive could achieve from implementing Section 1085. All of the four primary archives charge fees for providing historical information to requesters. However, none of the fees were in accordance with the mandated DOD user fee schedule specified in Appendix 2 of DOD FMR, Volume 11A, Chapter 4. In fact, archive officials told us that they were unaware of the mandated fee schedule. The "Schedule of Fees and Rates for Copying, Certifying, and Searching Records Rendered to the Public" in Appendix 2 establishes a minimum fee of $3.50 for any chargeable case and additional fees for searching and providing copies of various records, photographs, forms, etc. For office copy reproductions, a minimum fee of $3.50 per request (six pages or less) is specified with a charge of $0.10 for each additional page. For photography, the Appendix's schedule of prices per print is based on the size, type, and quantity ordered. For example, the price per print for an 8- by 10-inch print ranges from $4.50 for one to nine prints to $1.75 for each print in quantities of over 50. The specified charge for clerical search and processing is $13.25 per hour with a minimum charge of $8.30. Existing fees vary significantly among the archives. For example, the charges for a paper copy made by archive staff ranged from no charge by the Air Force Historical Research Agency, to no charge by the Marine Corps Historical Center for the first 100 pages and a charge of $0.15 for each page thereafter, to a charge by the Army Military History Institute of $0.25 per page, to a charge by the Naval Historical Center of $0.30 per page. In general, the archives do not impose a minimum charge for providing information. This could result in requesters receiving copies of documents free or for less than a dollar as opposed to the $3.50 minimum specified in the DOD's User Charge fee schedule. The Marine Corps fees, which are based on FOIA, resulted in any requester receiving up to 2 hours of search time and 100 pages without a charge. With the exception of the Marine Corps, the archives did not have a clearly identified basis for their fee schedules. The archives also appear to have different practices regarding which requesters are charged and under what circumstances fees will be waived. Archives officials told us that, in many cases, fees are not charged when the request is from military personnel, veterans, or government employees. Under the User Charge regulation, only members of the U.S. Armed Forces, in their capacity as Service members, are exempt from charges. Archive officials also said that fee waivers were used extensively for FOIA requests. DOD's FOIA regulations provide that the first 100 reproduced images and 2 hours of research are free per request and that fees shall be waived for all requesters when assessable costs for a FOIA request total $15 or less. Further, the regulations provide that documents shall be provided without charge or at reduced charge when a DOD component determines that a waiver or reduction of fees is in the public interest and likely to contribute significantly to public understanding of DOD. DOD last revised its User Charge Statute fee schedule for copying, certifying, and searching records in March 1986. At that time, DOD revised its user fees instruction and added a schedule of fees and rates for services related to copying, certifying, and searching records. The instruction stated that this schedule was to be used for such services throughout DOD. The same fees were included in the DOD FMR, Volume 11A, Chapter 4, Appendix 2, issued in March 1997. Although the Chief Financial Officers Act of 1990 and OMB Circular A-25 require a biennial review of charges for services, DOD Comptroller officials were not aware of any reviews having been done and had no documentation of reviews of the fee schedule for copying, certifying, and searching records. Fees being developed by the Army Military History Institute indicate that the fees mandated in Appendix 2 might be significantly understated. For example, the Institute's early proposal, based on total direct and indirect costs, shows a total fee of $10.50 for mailing a requester 10 paper copies of an item, itemized as follows. The total fee under Appendix 2 for the same order would be $3.90, itemized as follows. In this case, the fee under Appendix 2 appears to be about one-third of the Institute's proposal. Comptroller officials noted that Appendix 2 provided for a minimum clerical search and processing charge of $8.30 and that including this minimum clerical charge in the above comparison would result in a higher fee under Appendix 2 than under the Army Military History Institute's proposal. However, the officials had no information as to whether the minimum clerical charge had been or would be included in a fee involving a request for paper copies of an item. Further, if a search charge is appropriate, the Institute's proposal includes a $25 hourly research charge as opposed to the $13.25 hourly charge for clerical search and processing under Appendix 2. The Institute's proposal for five copies of an 8- x 10-inch photograph shows a total fee of $105 (pull fee per item of $5 and $20 for each copy). The total fee under Appendix 2 would be $22.50 ($4.50 per copy) or less than one-fourth of the Institute's proposal. As with User Charges, DOD fee schedules for charges under FOIA are not current. The FOIA fee schedule for general information, which is to be based on direct cost, has not been updated since 1986. The FOIA fee schedule for technical information, which is to be based on full cost (both direct and indirect costs), was last issued in 1998, but is the same as the schedule first issued in 1986. The collections reported by the four primary military archives are not indicative of potential future collections under updated fee schedules. Military archive officials reported collecting about $81,000 during fiscal year 2000 with the Air Force reporting the most collections (about $46,000) and the Marine Corps reporting the least (about $2,000). However, these amounts are probably much less than amounts that should be collected if updated fee schedules are established and effectively implemented because of the following. Fees charged by the archives are generally less than those in DOD fee schedules even though the fees in the DOD schedules are outdated and could be understated by a factor of three or four. Archives officials said that fees are often waived for military personnel, veterans, government employees, and others although such waivers are not addressed by DOD's regulations implementing the User Charge Statute. Archive officials state that search fees are not usually charged, which can be a significant element of cost that should be recovered. Arrangements that the archives have used to lessen budgetary impacts, such as the Naval Historical Foundation collecting fees for Naval Historical Center photographs, have reduced reported collections. Further, there are many additional organizations that would have increased collections resulting from updated fee schedules under the User Charge Statute and FOIA. DOD Comptroller officials had no information as to the amount of funds collected throughout DOD using the fee structure mandated in the DOD FMR, Volume 11A, Chapter 4, Appendix 2. They agreed that numerous offices and organizations throughout DOD-- some of which have significant numbers of requesters-- should use the fee schedule. With regard to FOIA, DOD reported that about $670,000 was recovered through assessed fees in fiscal year 2000, less than 2 percent of the reported $36.5 million in costs associated with providing information under FOIA. If FOIA fees are understated by a significant amount, as appears possible, increases in collections from updated FOIA fee schedules could be significant. Because of DOD's inconsistent use of authority to charge fees and use of outdated fees schedules, the archives and other providers of public information throughout DOD have not collected a million dollars or more annually in user fees and have treated public requesters inconsistently. DOD, in conjunction with considering implementation of Section 1085, needs to ensure that fees charged to public requesters for information throughout DOD are current and consistent. This is not the situation now because (1) DOD has not revised its fee schedules under the User Charge Statute and FOIA since 1986, (2) the primary military archives are not using the mandated fee schedules, and (3) fees being charged to public requesters vary significantly across these archives. Accordingly, a first step that would precede implementation of Section 1085 is updating the User Charge Statute and FOIA fee schedules. This would assist archives in determining whether to implement Section 1085 and whether an archive that implements Section 1085 needs a separate fee schedule. To provide consistency throughout DOD, an archive implementing Section 1085 could use DOD's user fee schedule in lieu of establishing a new fee schedule unless specific justification exists for the new schedule. Further, after fee schedules are updated for the User Charge Statute and FOIA, they need to be implemented consistently throughout DOD by all offices and organizations responding to public requesters. Such implementation is necessary for the fair and equitable treatment of the public. We recommend that the Under Secretary of Defense (Comptroller), and the Director, Freedom of Information and Security Review, in conjunction with the secretaries of the military departments and other DOD officials, as appropriate, review and update fee schedules under the User Charge Statute and FOIA; for each archive implementing Section 1085, establish fee schedules that are consistent with the updated fee schedules unless a determination is made that a different fee schedule is justified; and undertake a notification, training, and follow-up effort to ensure that all DOD offices and organizations responding to requesters for information are properly using the updated fee schedules. In written comments on a draft of this report, DOD concurred with the recommendations and commented on actions that have been or are to be taken. With regard to the recommendation to review and update fee schedules under the User Charge Statute, DOD commented that the Office of the Under Secretary of Defense (Comptroller) will work with other organizations to update, as appropriate, and publish a revised fee schedule periodically. With regard to FOIA fee schedules, DOD commented that the Directorate for Freedom of Information and Security Review, which is responsible for those schedules, did not provide comments on the recommendations. With regard to the recommendation that the fee schedule for each archive implementing Section 1085 be consistent with updated user charge fee schedule, DOD commented that fee schedules authorized by Section 1085 are optional. DOD said that the Army Military History Institute, the only archive developing a schedule of charges under Section 1085, would consider, where appropriate, the changes in a revised user charge schedule. With regard to the recommendation to undertake a notification, training, and follow-up effort, DOD commented that the Office of the Under Secretary of Defense (Comptroller) has an established process for making changes to the DOD FMR. It added that DOD audit organizations will be requested to include user fee schedule compliance as a part of their standard reviews, where applicable. Because archive officials were unaware of the FMR fee schedule, we continue to believe that the more substantive actions that we recommended are warranted. We are sending copies of this report to the Office of the Under Secretary of Defense (Comptroller); the Director, Freedom of Information and Security Review; and interested congressional committees. Copies of this report will also be made available to others upon request. Please contact me at (202) 512-9505 if you have any questions. Major contributors to this report were David Childress, Mary Jo Lewnard, and Edda Emmanuelli-Perez. 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 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 our home page and complete the easy-to-use electronic order form found under "To Order GAO Products." Web site: www.gao.gov/fraudnet/fraudnet.htm, E-mail: [email protected], or 1-800-424-5454 (automated answering system).
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The National Defense Authorization Act for 2001 authorized the military archives to (1) charge fees to persons requesting information and (2) retain collected fees to help defray costs of providing the information. Although none of the archives has yet implemented a fee, one archive plans to do so by October 2001. The Department of Defense's (DOD) archives and other offices are also authorized under both the User Charge Statute and the Freedom of Information Act (FOIA) to charge for information provided to the public. However, neither of these statutes authorizes an agency to retain those fees. The four designated archives are charging fees to public requesters but are not using the fee schedule mandated by the DOD regulation implementing the User Charge Statute. Similarly, DOD's fee schedules for charges under FOIA are outdated. DOD's inconsistent use of the authority to charge fees and the use of outdated DOD fees schedules result in uncollected fees of a million dollars or more annually and inconsistent handling of public requests for historical information.
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Many foreign physicians who enter U.S. graduate medical education programs do so as participants in the Department of State's Exchange Visitor Program--an educational and cultural exchange program aimed at increasing mutual understanding between the peoples of the United States and other countries. Participants in the Exchange Visitor Program enter the United States with J-1 visas. Nearly 6,200 foreign physicians with J-1 visas took part in U.S. graduate medical education programs during academic year 2004-05. Physicians participating in graduate medical education on J-1 visas are required to return to their home country or country of last legal residence for at least 2 years before they may apply for an immigrant visa, permanent residence, or certain nonimmigrant work visas. They may, however, obtain a waiver of this requirement from the Department of Homeland Security at the request of a state or federal agency if they have agreed to practice in an underserved area for at least 3 years. States were first authorized to request J-1 visa waivers on behalf of foreign physicians in October 1994. Federal agencies were first authorized to request J-1 visa waivers for physicians in graduate medical education in September 1961. In general, waiver physicians must practice in areas that HHS has designated as underserved. HHS has specified that waiver physicians may practice in HPSAs or medically underserved areas or populations (MUA/P). HPSAs are geographic areas, population groups within areas, or facilities that HHS has designated as having a shortage of health professionals; HPSAs for primary care are generally identified on the basis of the ratio of population to primary care physicians and other factors. MUA/Ps are areas or populations that HHS has designated as having shortages of health care services; these are identified using several factors in addition to the ratio of population to primary care physicians. HPSAs and MUA/Ps can overlap; as a result, a facility can be located in both a HPSA and an MUA/P. States and federal agencies have some discretion in shaping their J-1 visa waiver programs to address particular needs or priorities. For example, while states and federal agencies can request waivers for physicians to work in both primary care and nonprimary care specialties and in a variety of practice settings, they may choose to limit the number of waivers they request for physicians to practice nonprimary care or require that waiver physicians work in certain practice settings. States and federal agencies may also choose to conduct monitoring activities to help ensure that physicians are meeting their waiver agreements--for example, that they are working at the facilities for which their waivers were granted. Although states and federal agencies are generally subject to the same statutory provisions regarding requests for J-1 visa waivers for physicians, there are two notable distinctions. First, states are limited in the number of waivers that may be granted in response to their requests each year. Initially, states were authorized to request waivers for up to 20 physicians each fiscal year; in 2002, the limit was increased to 30 waivers per state per year. Federal agencies are not statutorily limited in the number of waivers that may be granted in response to their requests each year. Second, while federal agencies' waiver requests must be for physicians to practice in underserved areas, Congress gave states the flexibility, in December 2004, to use up to 5 of their 30 waiver allotments each year for physicians to work in facilities located outside of HHS-designated undeserved areas, provided that the facilities treat patients who reside in underserved areas. We refer to these waivers as "flexible waivers." Obtaining a J-1 visa waiver at the request of a state or federal agency to practice in an underserved area involves multiple steps (see fig. 1). A physician must submit an application to obtain a case number from the Department of State and must secure a bona fide offer of employment from a health care facility that is located in an underserved area or, in the case of flexible waivers, from a health care facility that treats residents of an underserved area. The physician, the prospective employer, or both apply to a state or federal agency to request a waiver on the physician's behalf. If, after reviewing the application, the state or federal agency decides to request a waiver, the state or federal agency submits a letter of request to the Department of State affirming that it is in the public interest for the physician to remain in the United States. If the Department of State decides to recommend the waiver, it forwards its recommendation to the Department of Homeland Security's U.S. Citizenship and Immigration Services (USCIS). USCIS is responsible for making the final determination and notifying the physician when the waiver is granted. According to officials involved in recommending and approving waivers at the Department of State and USCIS, after a review for compliance with statutory requirements and security issues, nearly all waiver requests are recommended and granted. Once the physician is granted the waiver, the employer petitions USCIS for the physician to obtain H-1B status (a nonimmigrant classification used by foreign nationals employed temporarily in a specialty occupation). The physician must work at the facility specified in the waiver application for a minimum of 3 years, unless the physician obtains approval from USCIS to transfer to another facility. USCIS considers transfer requests only in extenuating circumstances, such as closure of the physician's assigned facility. Once the physician fulfills the employment contract, the physician may apply for permanent residence, continued H-1B status, or other nonimmigrant status, if the physician wishes to remain in the United States. No single federal agency is responsible for managing or tracking the use of J-1 visa waivers for physicians to practice in underserved areas. HHS is the primary federal agency responsible for addressing physician shortages, both in terms of administering NHSC programs that place physicians and other providers in areas experiencing shortages of health professionals and in designating areas as underserved. HHS's oversight of waiver physicians practicing in underserved areas, however, has generally been limited to the few physicians for whom it has requested J-1 visa waivers. USCIS and the Department of State process J-1 visa waiver requests but do not maintain comprehensive information about waiver physicians' numbers, practice locations, and practice specialties. States and federal agencies that request waivers maintain such information for the physicians for whom they request waivers, but this information is not centrally collected and maintained by any federal agency. Although the use of J-1 visa waivers has not been systematically tracked, available data indicate that the pool of physicians who could seek waivers--that is, the number of foreign physicians in graduate medical education with J-1 visas--has declined in recent years. In academic year 1996-97, a little more than 11,600 foreign physicians took part in U.S. graduate medical education programs with J-1 visas; by academic year 2004-05 this number had decreased more than 45 percent to slightly less than 6,200. The reasons for this decrease are not completely understood. States and federal agencies reported requesting more than 1,000 J-1 visa waivers in each of fiscal years 2003 through 2005 (see fig. 2). We estimated that, at the end of fiscal year 2005, there were roughly one and a half times as many waiver physicians practicing in underserved areas (3,128) as U.S. physicians practicing in underserved areas through NHSC programs (2,054). In contrast to our findings a decade ago, states have become the primary source of waiver requests for physicians to practice in underserved areas, accounting for 90 percent or more of requests in each of fiscal years 2003 through 2005. The number of states that reported ever having requested a J-1 visa waiver has grown steadily since they were first authorized to do so, from 20 states in fiscal year 1995 to 53 states (all but Puerto Rico) as of fiscal year 2005. States varied, however, in the number of waivers they requested in fiscal years 2003 through 2005. For example, in fiscal year 2005, about one-quarter of the 54 states requested the maximum of 30 waivers, about one-quarter requested 10 or fewer, and two (Puerto Rico and the U.S. Virgin Islands) requested no waivers (see fig. 3). The number of waivers requested by federal agencies has decreased significantly since 1995, with the exit of the two agencies that requested the most waivers for physicians to practice in underserved areas that year. The Department of Agriculture, which stopped requesting waivers for physicians to practice in underserved areas in 2002, and the Department of Housing and Urban Development, which stopped in 1996, together requested more than 1,100 waivers for physicians to practice in 47 states in 1995, providing a significant source of physicians for some states. Federal agencies accounted for about 94 percent of waiver requests that year, in contrast to fiscal year 2005, when federal agencies made about 6 percent of requests. Of the 1,012 waivers requested by states and federal agencies in fiscal year 2005, ARC, DRA, and HHS accounted for 56 requests for physicians to practice in 14 states. States and federal agencies requested waivers for physicians to practice a variety of specialties, with states requesting waivers for physicians to practice both primary and nonprimary care and federal agencies generally focusing on primary care. Although the waivers states and federal agencies requested were for physicians to work in diverse practice settings, most were for physicians to work in hospitals and private practices. These practice settings were about equally divided between rural and nonrural areas. Additionally, less than half of the states opted to request flexible waivers for physicians to work outside of designated underserved areas. Overall, a little less than half (46 percent) of the waivers requested by states and federal agencies in fiscal year 2005 were for physicians to practice exclusively primary care, while a slightly smaller proportion (39 percent) were for physicians to practice exclusively nonprimary care (see fig. 4). A small proportion of waiver requests (5 percent) were for physicians to practice both primary and nonprimary care--for example, for individual physicians to practice both internal medicine and cardiology. An additional 7 percent of waiver requests in fiscal year 2005 were for physicians to practice psychiatry. States and federal agencies differed, however, in the proportion of waivers they requested for physicians to practice primary versus nonprimary care (see fig. 5). Less than 50 percent of the waivers requested by states in fiscal year 2005 were for physicians to practice exclusively primary care, compared with 80 percent of those requested by federal agencies. Nearly all of the states and DRA reported that their fiscal year 2005 policies allowed them to request waivers for physicians to practice nonprimary care. Twenty-seven of these states, however, reported placing some limits on such requests, including limiting the number of requests for physicians to practice nonprimary care or restricting the number of hours a physician could practice a nonprimary care specialty. Even with these limitations, the number of waivers requested for physicians to practice nonprimary care increased among both states and federal agencies over the 3-year period beginning in fiscal year 2003. Overall, requests for physicians to practice exclusively nonprimary care increased from about 300 (28 percent) in fiscal year 2003 to nearly 400 (39 percent) in fiscal year 2005. States and federal agencies reported requesting waivers in fiscal year 2005 for physicians to practice more than 40 nonprimary care specialties (e.g., anesthesiology) and subspecialties (e.g., pediatric cardiology); the most common of these were anesthesiology, cardiology, and pulmonology (the study and treatment of respiratory diseases). Regarding practice settings, more than three-quarters of the waivers requested by states in fiscal year 2005 were for physicians to practice in hospitals (37 percent) and private practices (41 percent) (see fig. 6). In addition, 16 percent were for physicians to practice in federally qualified health centers (facilities that provide primary care services in underserved areas) and rural health clinics (facilities that provide outpatient primary care services in rural areas). Although the largest proportion of waivers that states requested was for physicians to work in private practices, more than 80 percent of the states and all three federal agencies reported that their fiscal year 2005 policies required the facilities where waiver physicians work--regardless of practice setting--to accept some patients who are uninsured or covered by Medicaid. Overall, about half of all waiver requests in fiscal year 2005 were for physicians to practice in areas that respondents considered rural, although the proportions differed between states' and federal agencies' requests. States' waiver requests in fiscal year 2005, which accounted for the vast majority of total requests that year, were about equally divided between those for physicians to work in areas respondents considered rural and those they considered nonrural. Federal agencies' waiver requests were mostly (93 percent) for physicians to work in areas considered rural (see fig. 7). Most of the waivers requested by states and federal agencies in fiscal year 2005 were for physicians to practice in HPSAs. While federal regulations generally permit states and federal agencies to request waivers for physicians to work in HPSAs or MUA/Ps, about a quarter of the states and two federal agencies (ARC and HHS) had policies in place in fiscal year 2005 that limited at least some types of physicians to practicing in HPSAs. Overall, more than three-quarters (77 percent) of waivers requested by states and federal agencies in fiscal year 2005 were for physicians to work in facilities located in HPSAs, and 16 percent were for physicians to work in facilities located in MUA/Ps that were outside of HPSAs. Additionally, less than half of the states (23 states) reported taking advantage of the option to request flexible waivers--those for physicians to work in facilities that, while located outside of HHS-designated underserved areas, treat patients residing in underserved areas. Requests for flexible waivers in fiscal year 2005, the first year such waivers were allowed, accounted for 7 percent of all waiver requests that year. Most states and federal agencies reported that they conducted monitoring activities to help ensure that physicians were meeting their agreements to work in underserved areas. Although monitoring is not explicitly required of states and federal agencies that request waivers, more than 85 percent of states and two of the three federal agencies that requested waivers in any fiscal year from 2003 through 2005 reported that they conducted at least one monitoring activity in fiscal year 2005. These activities included actions to help determine, for example, whether physicians were working in the locations for which their waivers were requested or whether they were treating the intended patients, such as those who were uninsured or covered by Medicaid. The most common monitoring activity--reported by 40 states, ARC, and DRA--was to require periodic reports from physicians or employers (see fig. 8). For example, some states and federal agencies required written reports submitted once or twice a year that included information such as the number of hours waiver physicians worked or the number of patients for whom Medicaid claims were submitted. States and federal agencies that requested waivers also reported that they monitored waiver physicians through regular communications with employers and physicians, such as through phone calls, and through site visits to waiver physicians' practice locations. In addition, a small number of states reported conducting other monitoring activities. For example, one state official said the state's J-1 visa waiver program used Medicaid data to confirm that waiver physicians were treating patients covered by Medicaid. Although most states and federal agencies reported conducting at least one monitoring activity, the number of monitoring activities varied. Ten states and DRA reported conducting at least four different activities, while six states and HHS--together accounting for about 13 percent of waiver requests in fiscal year 2005--reported that they did not conduct any monitoring activities in fiscal year 2005. Four of the six states that reported they did not conduct monitoring activities reported requesting more than 25 waivers in each of fiscal years 2003 through 2005. States and federal agencies reported identifying relatively few incidents in fiscal years 2003 through 2005 in which physicians were not meeting their waiver agreements. These incidents included cases in which the physician was not working in the practice specialty or at the facility specified in his or her waiver agreement, was not seeing the intended patients, or did not serve the entire 3-year employment contract. The most common issue cited was physicians' transferring to another location or employer without the approval of the state or federal agency that requested their waivers. In addition, several states reported that they had identified cases in which waiver physicians never reported to work. Officials from these states cited examples in which physicians simply failed to appear at the practice sites and did not contact the state that had made the waiver requests on the physicians' behalf. According to states and federal agencies that reported identifying any incidents, physicians were not solely responsible in all cases in which they did not meet their waiver agreements. Some state officials provided examples of employers who directed physicians to work in locations other than those for which their waivers were requested, including locations outside of underserved areas. States and federal agencies that requested waivers reported that they use a variety of practices to prevent or respond to cases of physicians' not meeting their waiver agreements (see fig. 9). For example, 38 states and HHS reported that it is their practice to bar employers who are responsible for problems involving waiver physicians from consideration for future J-1 visa waiver physician placements, either temporarily or permanently. Forty states and two federal agencies reported that it is their practice to inform USCIS if they identify physicians who are not meeting their waiver agreements. Physicians not meeting their waiver agreements would again be subject to the 2-year foreign residence requirement and would need to return to their home country or country of last legal residence before they could apply for an immigrant visa, permanent residence, or certain nonimmigrant work visas. USCIS officials said that reports of physicians not meeting their waiver agreements have been relatively rare. Some states and federal agencies that requested waivers also reported that they require physicians' contracts to stipulate fees to be imposed if the physicians fail to meet their waiver agreements. These requirements include, for example, liquidated damages clauses, which set a particular amount that physicians agree to pay employers if the physicians break their employment contracts. Other practices that states reported included reporting problems with waiver physicians to state medical boards. States cited a number of factors affecting their ability to monitor or take other actions that they believed could help them ensure that physicians meet their waiver agreements. More than one-quarter of the states reported that funding and staffing constraints limited their ability to carry out monitoring activities. For example, four states commented that time and staff constraints limited their ability to conduct visits to physicians' practice sites. Several states noted that they have little or no authority to take actions that would help ensure that physicians meet their waiver agreements. For example, one state commented that beyond reporting physicians who do not meet their waiver agreements to USCIS, it has no authority over waiver physicians. In addition, a few states noted that their ability to effectively monitor physicians is limited by the fact that they are not notified when USCIS grants waivers or approves transfers. Consequently, states may not know with certainty which physicians USCIS has authorized to work in, or move to or from, their states. One federal agency (ARC) cited two factors that positively affected its ability to help ensure that physicians meet their waiver agreements: the liquidated damages clauses for violating employment agreements that ARC requires to be in physicians' employment contracts, and site visits by staff of ARC's Office of Inspector General. According to a senior ARC official, these unannounced visits have occasionally resulted in the discovery of physicians working at sites other than those at which the physicians were authorized to work. The official commented that the visits have also had a deterrent effect. Although the use of J-1 visa waivers remains a major means of providing physicians to practice in underserved areas, HHS does not have the information needed to account for waiver physicians in its efforts to address physician shortages. Without such information, when considering where to place NHSC physicians, HHS has no systematic means of knowing whether the needs of a HPSA are already being met through waiver physicians. Our analysis indicates that some states could have had more waiver and NHSC physicians practicing primary care in HPSAs than HHS identified as needed, while other states were below HHS's identified need. Although data were not available to determine the number of waiver physicians practicing primary care specifically in HPSAs, our analysis showed that in seven states the estimated number of waiver physicians practicing primary care in all locations (including HPSAs, MUA/Ps, and nondesignated areas), combined with the number of NHSC physicians practicing primary care in HPSAs at the end of fiscal year 2005, exceeded the number of physicians HHS identified as needed to remove the primary care HPSA designations in the state. In six of these seven states, the estimated number of primary care waiver and NHSC physicians exceeded by at least 20 percent the number needed to remove primary care HPSA designations. Meanwhile, in each of 25 states, the estimated number of primary care waiver and NHSC physicians was less than half of the state's identified need for primary care physicians. The lack of information on waiver physicians could also affect HHS's efforts to revise how it designates primary care HPSAs and other underserved areas. Multiple federal programs use HHS's primary care HPSA designation system to allocate resources or provide benefits, but as we have reported, the designation system does not account for all primary care providers practicing in underserved areas, including waiver physicians. Specifically, waiver physicians practicing primary care in an area are not counted in the ratio of population to primary care physicians, one of the factors used to determine whether an area may be designated as a primary care HPSA. HHS has been working on a proposal--in process since 1998--to revise the primary care HPSA designation system, which would, among other things, account for waiver physicians, according to HHS officials. HHS officials acknowledged, however, that the department lacked complete data on waiver physicians, needed to implement such a provision. Recognizing the lack of a comprehensive database with information on J-1 visa waiver physicians and other international medical graduates, HHS in 2003 contracted with ECFMG--the organization that sponsors all foreign physicians with J-1 visas participating in graduate medical education--to assess the feasibility of developing a database that would provide access to information on the U.S. practice locations of, populations served by, and other information about international medical graduates. ECFMG completed the study and in 2004 submitted a draft report to HHS that included recommendations. As of September 2006, a final report had not been published. The use of J-1 visa waivers remains a major means of placing physicians in underserved areas of the United States, supplying even more physicians to these areas than NHSC programs. Although thousands of physicians practice in underserved areas through the use of J-1 visa waivers, comprehensive data on their overall numbers, practice locations, and practice specialties are not routinely collected and maintained by HHS. Only by surveying states and federal agencies that requested waivers were we able to collect information for this report. Having comprehensive data on waiver physicians could help HHS more effectively target the placement of NHSC physicians and implement proposed changes to designating underserved areas. To better account for physicians practicing in underserved areas through the use of J-1 visa waivers, we recommend that the Secretary of Health and Human Services collect and maintain data on waiver physicians-- including information on their numbers, practice locations, and practice specialties--and use this information when identifying areas experiencing physician shortages and placing physicians in these areas. We provided a draft copy of this report to the five federal agencies that are involved with waivers for physicians to practice in underserved areas: ARC, DRA, HHS, the Department of Homeland Security, and the Department of State. We received written comments on the draft report from HHS (see app. III). HHS concurred with our recommendation that data should be collected and maintained to track waiver physicians. HHS noted that the department had also discussed, internally, tracking other physicians who are working under H-1B visas, stating that this would allow a more complete accounting of the actual number of physicians providing care in underserved areas. HHS commented that the department's goal is to assure that the limited resources of the J-1 visa waiver program and other programs addressing areas and populations with limited access to health care professionals are targeted most effectively and that the availability of complete data on these additional providers would enhance the data used to identify such shortage areas. HHS also commented that the draft report may have overstated, to a degree, the "oversupply" of physicians in some states. HHS acknowledged that we made important adjustments in our analysis for physicians practicing nonprimary care and psychiatry. The department, however, expressed concern that our calculations did not address the fact that some J-1 visa waiver placements are not in HPSAs, referring to our finding that 23 percent of waivers requested in fiscal year 2005 were for physicians to practice outside of HPSAs. We believe that applying this percentage to our analysis would be inappropriate for several reasons. First, this percentage pertained to waiver physicians practicing all specialties, including primary care, nonprimary care, and psychiatry, while our analysis focused on physicians practicing primary care. Further, the 23 percent figure represents waivers requested in only one fiscal year (fiscal year 2005), while our analysis covered waivers requested in 3 fiscal years. In addition, fiscal year 2005 was the only year in our analysis in which states could request waivers for physicians to practice in nondesignated areas. In our draft report, we did not use the term "oversupply," but we acknowledge that our report should clearly specify the limitations in the data used in our analysis. To do so, we clarified the text describing our methodology and results. We also received technical comments from HHS and the Department of Homeland Security's USCIS, which we incorporated as appropriate. Three agencies--ARC, DRA, and Department of State--said that they did not have comments on the draft report. We are sending copies of this report to the Secretary of Health and Human Services, the Secretary of Homeland Security, the Secretary of State, the Federal Co-chair of ARC, the Federal Co-chairman of DRA, and appropriate congressional committees. 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 members have any questions about this report, please contact me at (312) 220-7600 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. This appendix presents the following information for each state as of the end of fiscal year 2005: (1) the number of primary care physicians the Department of Health and Human Services (HHS) identified as needed to remove primary care health professional shortage area (HPSA) designations, (2) our estimate of the number of J-1 visa waiver physicians practicing primary care, (3) the number of National Health Service Corps (NHSC) physicians practicing primary care, and (4) primary care waiver and NHSC physicians as a percentage of the HHS-identified need. To determine the need for primary care physicians in each state, we used the number of physicians HHS reported as needed to remove primary care HPSA designations in the state, a measurement used by HHS to identify the need for physicians. Specifically, we used summary data from HHS's Health Resources and Services Administration on the number of additional full-time equivalent (FTE) primary care physicians needed to remove primary care HPSA designations in the state as of September 30, 2005. HHS determines the number of additional full-time primary care physicians needed to remove primary care HPSA designations for geographic areas, population groups, and facilities. For geographic areas, HHS's threshold for the ratio of population to primary care physicians is 3,500 to 1 (or 3,000 to 1 under special circumstances); for population groups, it is 3,000 to 1; for facilities that are state or federal correctional institutions, it is 1,000 to 1. In calculating the ratio of population to primary care physicians, HHS does not take into account waiver physicians and most NHSC physicians. In addition to HPSAs, waiver physicians may also practice in designated medically underserved areas or populations (MUA/P). HHS does not, however, have a similar measure of the number of physicians needed in MUA/Ps. To determine the number of NHSC physicians practicing primary care in HPSAs in each state as of September 30, 2005, we used data obtained from the Health Resources and Services Administration on the number of primary care physicians practicing through the NHSC Scholarship, NHSC Loan Repayment, and NHSC Ready Responder programs. NHSC physicians are required to practice in HPSAs. Although data are not available on the number of physicians granted J-1 visa waivers and practicing primary care in underserved areas at any given time, we estimated this number using data on waivers requested by states and by three federal agencies--the Appalachian Regional Commission (ARC), the Delta Regional Authority (DRA), and HHS. We estimated the number of waiver physicians practicing primary care in each state as of September 30, 2005, by using the number of waivers requested in fiscal years 2003 through 2005 for such physicians. This number represents the number of primary care physicians expected to be fulfilling the minimum 3-year employment contract at the end of fiscal year 2005 or who had waivers in process to do so. Our estimate includes all waiver physicians practicing primary care in the state (including those practicing in HPSAs, MUA/Ps, and nondesignated areas). Data were not available to distinguish waiver physicians practicing primary care in HPSAs from those practicing in MUA/Ps or nondesignated areas. Table 1 shows the estimated number of waiver and NHSC physicians practicing primary care at the end of fiscal year 2005 and the number of physicians needed to remove primary care HPSA designations in each state. This appendix summarizes states' and federal agencies' responses to selected questions from GAO's surveys, as well as data obtained from ARC, DRA, and HHS on their waiver requests by state. The following tables present data on the number of waivers states and federal agencies requested in each of fiscal years 2003 through 2005, in total (table 2), by federal agency (table 3), by practice specialty (table 4), and by practice setting (table 5). We also present data on states' and federal agencies' policies for requesting waivers (table 6). In addition to the contact named above, Kim Yamane, Assistant Director; Ellen W. Chu; Jill Hodges; Julian Klazkin; Linda Y.A. McIver; and Perry Parsons made key contributions to this report. Health Professional Shortage Areas: Problems Remain with Primary Care Shortage Area Designation System. GAO-07-84. Washington, D.C.: October 24, 2006. Foreign Physicians: Preliminary Findings on the Use of J-1 Visa Waivers to Practice in Underserved Areas. GAO-06-773T. Washington, D.C.: May 18, 2006. State Department: Stronger Action Needed to Improve Oversight and Assess Risks of the Summer Work Travel and Trainee Categories of the Exchange Visitor Program. GAO-06-106. Washington, D.C.: October 14, 2005. Health Workforce: Ensuring Adequate Supply and Distribution Remains Challenging. GAO-01-1042T. Washington, D.C.: August 1, 2001. Health Care Access: Programs for Underserved Populations Could Be Improved. GAO/T-HEHS-00-81. Washington, D.C.: March 23, 2000. Foreign Physicians: Exchange Visitor Program Becoming Major Route to Practicing in U.S. Underserved Areas. GAO/HEHS-97-26. Washington, D.C.: December 30, 1996. Health Care Shortage Areas: Designations Not a Useful Tool for Directing Resources to the Underserved. GAO/HEHS-95-200. Washington, D.C.: September 8, 1995.
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Many U.S. communities face difficulties attracting physicians. To address this problem, states and federal agencies have turned to foreign physicians who have just completed graduate medical education in the United States under J-1 visas. Ordinarily, these physicians must return home after completing their programs, but this requirement can be waived at the request of a state or federal agency if the physician agrees to practice in an underserved area. In 1996, GAO reported that J-1 visa waivers had become a major source of physicians for underserved areas but were not well coordinated with Department of Health and Human Services (HHS) programs for addressing physician shortages. GAO was asked to examine (1) the number of waivers requested by states and federal agencies; (2) waiver physicians' practice specialties, settings, and locations; and (3) the extent to which waiver physicians are accounted for in HHS's efforts to address physician shortages. GAO surveyed states and federal agencies about waivers they requested in fiscal years 2003-2005 and reviewed HHS data. The use of J-1 visa waivers remains a major means of providing physicians to practice in underserved areas of the United States. More than 1,000 waivers were requested in each of fiscal years 2003 through 2005 by states and three federal agencies--the Appalachian Regional Commission, the Delta Regional Authority, and HHS. At the end of fiscal year 2005, the estimated number of physicians practicing in underserved areas through J-1 visa waivers exceeded the number practicing there through the National Health Service Corps (NHSC)--HHS's primary mechanism for addressing physician shortages. In contrast to a decade ago, when federal agencies requested the vast majority of waivers, states have become the primary source of J-1 visa waiver requests, accounting for 90 percent or more of waiver requests in fiscal years 2003 through 2005. States and federal agencies requested waivers for physicians to work in a variety of practice specialties, settings, and locations. In fiscal year 2005, a little less than half of the waiver requests were for physicians to practice exclusively primary care. More than three-quarters of the waiver requests were for physicians to work in hospitals or private practices, and about half were for physicians to practice in rural areas. HHS does not have the information needed to account for waiver physicians in its efforts to address physician shortages. Without such information, when considering where to place NHSC physicians, HHS has no systematic means of knowing if an area's needs are already being met by waiver physicians.
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Virtually all federal operations are supported by automated systems and electronic data, and agencies would find it difficult, if not impossible, to carry out their missions and account for their resources without these information assets. Hence, the degree of risk caused by security weaknesses is high. For example, resources (such as federal payments and collections) could be lost or stolen, data could be modified or destroyed, and computer resources could be used for unauthorized purposes or to launch attacks on other computer systems. Sensitive information, such as taxpayer data, Social Security records, medical records, and proprietary business information could be inappropriately disclosed, browsed, or copied for improper or criminal purposes. Critical operations could be disrupted, such as those supporting national defense and emergency services. Finally, agencies' missions could be undermined by embarrassing incidents, resulting in diminished confidence in their ability to conduct operations and fulfill their responsibilities. Recognizing the importance of securing federal systems and data, Congress passed FISMA, which sets forth a comprehensive framework for ensuring the effectiveness of security controls over information resources that support federal operations and assets. FISMA's framework creates a cycle of risk management activities necessary for an effective security program, and are similar to the principles noted in our study of the risk management activities of leading private sector organizations--assessing risk, establishing a central management focal point, implementing appropriate policies and procedures, promoting awareness, and monitoring and evaluating policy and control effectiveness. More specifically, FISMA requires agency information security programs that, among other things, include * periodic assessments of the risk; * risk-based policies and procedures; * subordinate plans for providing adequate information security for networks, facilities, and systems or groups of information systems, as appropriate; * security awareness training for agency personnel, including contractors and other users of information systems that support the operations and assets of the agency; * periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices, performed with a frequency depending on risk, but no less than annually; * a process for planning, implementing, evaluating, and documenting remedial action to address any deficiencies; * procedures for detecting, reporting, and responding to security * plans and procedures to ensure continuity of operations. In addition, agencies must develop and maintain an inventory of major information systems that is updated at least annually. OMB and agency IGs play key roles under FISMA. FISMA specifies that, among other responsibilities, OMB is to develop policies, principles, standards, and guidelines on information security, and is required to report annually to Congress. OMB has provided instructions to federal agencies and their IGs for FISMA annual reporting. OMB's reporting instructions focus on performance metrics such as certification and accreditation, testing of security controls, and security training. Its yearly guidance also requests IGs to report on their agencies' efforts to complete their inventory of systems and requires agencies to identify any physical or electronic incidents involving the loss of, or unauthorized access to, personally identifiable information. FISMA also requires agency IGs to perform an independent evaluation of the information security programs and practices of the agency to determine the effectiveness of such programs and practices. Each evaluation is to include (1) testing of the effectiveness of information security policies, procedures, and practices of a representative subset of the agency's information systems and (2) assessing compliance (based on the results of the testing) with FISMA requirements and related information security policies, procedures, standards, and guidelines. These required evaluations are then submitted by each agency to OMB in the form of a template that summarizes the results. In addition to the template submission, OMB encourages the IGs to provide any additional narrative in an appendix to the report that provides meaningful insight into the status of the agency's security or privacy program. Since May 2006, federal agencies have reported a spate of security incidents that put sensitive data at risk. Personally identifiable information about millions of Americans has been lost, stolen, or improperly disclosed, thereby exposing those individuals to loss of privacy, identity theft, and financial crimes. Agencies have experienced a wide range of incidents involving data loss or theft, computer intrusions, and privacy breaches, underscoring the need for improved security practices. The following reported examples illustrate that a broad array of federal information and assets are at risk. * The Department of Veterans Affairs (VA) announced that computer equipment containing personally identifiable information on approximately 26.5 million veterans and active duty members of the military was stolen from the home of a VA employee. Until the equipment was recovered, veterans did not know whether their information was likely to be misused. In June, VA sent notices to the affected individuals that explained the breach and offered advice concerning steps to reduce the risk of identity theft. The equipment was eventually recovered, and forensic analysts concluded that it was unlikely that the personal information contained therein was compromised. * A Centers for Medicare & Medicaid Services contractor reported the theft of a contractor employee's laptop computer from his office. The computer contained personal information including names, telephone numbers, medical record numbers, and dates of birth of 49,572 Medicare beneficiaries. * The Department of Agriculture (USDA) was notified that it had posted personal information on a Web site. Analysis by USDA later determined that the posting had affected approximately 38,700 individuals, who had been awarded funds through the Farm Service Agency or Rural Development program. That same day, all identification numbers associated with USDA funding were removed from the Web site. USDA is continuing its effort to identify and contact all those who may have been affected. * The Transportation Security Administration (TSA) announced a data security incident involving approximately 100,000 archived employment records of individuals employed by the agency from January 2002 until August 2005. An external hard drive containing personnel data, such as Social Security number, date of birth, payroll information, and bank account and routing information, was discovered missing from a controlled area at the TSA Headquarters Office of Human Capital. * The Census Bureau reported 672 missing laptops, of which 246 contained some degree of personal data. Of the missing laptops containing personal information, almost half (104) were stolen, often from employees' vehicles, and another 113 were not returned by former employees. Commerce reported that employees were not held accountable for not returning their laptops. * Officials at the Department of Commerce's Bureau of Industry and Security discovered a security breach in July 2006. In investigating this incident, officials were able to review firewall logs for an 8- month period prior to the initial detection of the incident, but were unable to clearly define the amount of time that perpetrators were inside its computers, or find any evidence to show that data was lost as a result. * The Treasury Inspector General for Tax Administration reported that approximately 490 computers at the Internal Revenue Service (IRS) were lost or stolen between January 2003 and June 2006. Additionally, 111 incidents occurred within IRS facilities, suggesting that employees were not storing their laptop computers in a secured area while the employees were away from the office. The IG concluded that it was very likely that a large number of the lost or stolen computers contained unencrypted data and also found other computer devices, such as flash drives, CDs, and DVDs, on which sensitive data were not always encrypted. * The Department of State experienced a breach on its unclassified network, which daily processes about 750,000 e-mails and instant messages from more than 40,000 employees and contractors at 100 domestic and 260 overseas locations. The breach involved an e-mail containing what was thought to be an innocuous attachment. However, the e-mail contained code to exploit vulnerabilities in a well-known application for which no security patch existed at that time. Because the vendor was unable to expedite testing and deploy a new patch, the department developed its own temporary fix to protect systems from being further exploited. In addition, the department sanitized the infected computers and servers, rebuilt them, changed all passwords, installed critical patches, and updated their anti-virus software. Based on the experience of VA and other federal agencies in responding to data breaches, we identified numerous lessons learned regarding how and when to notify government officials, affected individuals, and the public. These lessons have largely been addressed in guidance issued by OMB. OMB has issued several policy memorandums over the past 13 months. For example, it sent memorandums to agencies to reemphasize their responsibilities under law and policy to (1) appropriately safeguard sensitive and personally identifiable information, (2) train employees on their responsibilities to protect sensitive information, and (3) report security incidents. In May 2007, OMB issued additional detailed guidelines to agencies on safeguarding against and responding to the breach of personally identifiable information, including developing and implementing a risk-based breach notification policy, reviewing and reducing current holdings of personal information, protecting federal information accessed remotely, and developing and implementing a policy outlining the rules of behavior, as well as identifying consequences and potential corrective actions for failure to follow these rules. As illustrated by numerous security incidents, significant weaknesses continue to threaten the confidentiality, integrity, and availability of critical information and information systems used to support the operations, assets, and personnel of federal agencies. In their fiscal year 2006 financial statement audit reports, 21 of 24 major agencies indicated that deficient information security controls were either a reportable condition or material weakness (see fig. 1). Our audits continue to identify similar conditions in both financial and non-financial systems, including agencywide weaknesses as well as weaknesses in critical federal systems. Persistent weaknesses appear in five major categories of information system controls: (1) access controls, which ensure that only authorized individuals can read, alter, or delete data; (2) configuration management controls, which provide assurance that only authorized software programs are implemented; (3) segregation of duties, which reduces the risk that one individual can independently perform inappropriate actions without detection; (4) continuity of operations planning, which provides for the prevention of significant disruptions of computer-dependent operations; and (5) an agencywide information security program, which provides the framework for ensuring that risks are understood and that effective controls are selected and properly implemented. Figure 2 shows the number of major agencies that had weaknesses in these five areas. A basic management control objective for any organization is to protect data supporting its critical operations from unauthorized access, which could lead to improper modification, disclosure, or deletion of the data. Access controls, which are intended to prevent, limit, and detect unauthorized access to computing resources, programs, information, and facilities, can be both electronic and physical. Electronic access controls include the use of passwords, access privileges, encryption, and audit logs. Physical security controls are important for protecting computer facilities and resources from espionage, sabotage, damage, and theft. Most agencies did not implement controls to sufficiently prevent, limit, or detect access to computer networks, systems, or information. Our analysis of IG, agency, and our own reports uncovered that agencies did not have adequate access controls in place to ensure that only authorized individuals could access or manipulate data. Of the 24 major agencies, 22 had access control weaknesses. For example, agencies did not consistently (1) identify and authenticate users to prevent unauthorized access, (2) enforce the principle of least privilege to ensure that authorized access was necessary and appropriate, (3) establish sufficient boundary protection mechanisms, (4) apply encryption to protect sensitive data on networks and portable devices, and (5) log, audit, and monitor security-relevant events. Agencies also lacked effective controls to restrict physical access to information assets. For instance, many of the data losses that occurred at federal agencies over the past few years were a result of physical thefts or improper safeguarding of systems, including laptops and other portable devices. In addition to access controls, other important controls should be in place to protect the confidentiality, integrity, and availability of information. These controls include policies, procedures, and techniques addressing configuration management to ensure that software patches are installed in a timely manner; appropriately segregating incompatible duties; and establishing continuity of operations planning. Agencies did not always configure network devices and services to prevent unauthorized access and ensure system integrity, such as patching key servers and workstations in a timely manner; assign incompatible duties to different individuals or groups so that one individual does not control all aspects of a process or transaction; and maintain or test continuity of operations plans for key information systems. Weaknesses in these areas increase the risk of unauthorized use, disclosure, modification, or loss of information. An underlying cause for information security weaknesses identified at federal agencies is that they have not yet fully or effectively implemented all the FISMA-required elements for an agencywide information security program. An agencywide security program, required by FISMA, provides a framework and continuing cycle of activity for assessing and managing risk, developing and implementing security policies and procedures, promoting security awareness and training, monitoring the adequacy of the entity's computer-related controls through security tests and evaluations, and implementing remedial actions as appropriate. Our analysis determined that at least 18 of the 24 major federal agencies had not fully implemented agencywide information security programs. Results of our recent work illustrate that agencies often did not adequately design or effectively implement policies for elements key to an information security program. We identified weaknesses in information security program activities, such as agencies' risk assessments, information security policies and procedures, security planning, security training, system tests and evaluations, and remedial actions. For example, * One agency had no documented process for conducting risk assessments, while another agency had outdated risk assessments. Another agency had assessed and categorized system risk levels and conducted risk assessments, but did not identify many of the vulnerabilities we found and had not subsequently assessed the risks associated with them. * Agencies had developed and documented information security policies, standards, and guidelines for information security, but did not always provide specific guidance on how to guard against significant security weaknesses regarding topics such as physical access, Privacy Act-protected data, wireless configurations, and business impact analyses. * Instances existed where security plans were incomplete or not up- to-date. * Agencies did not ensure all information security employees and contractors, including those who have significant information security responsibilities, received sufficient training. * Our report on testing and evaluating security controls revealed that agencies had not adequately designed and effectively implemented policies for testing their security controls in accordance with OMB and NIST guidance. Further, agencies did not always address other important elements, such as the definition of roles and responsibilities of personnel performing tests, identification and testing of security controls common to multiple systems, and the frequency of periodic testing. In other cases, agencies had not tested controls for all of their systems. * Our report on security controls testing also revealed that seven agencies did not have policies to describe a process for incorporating weaknesses identified during periodic security control testing into remedial actions. In our other reviews, agencies indicated that they had corrected or mitigated weaknesses; however, we found that those weaknesses still existed. In addition, we reviewed agencies' system self-assessments and identified weaknesses not documented in their remedial action plans. We also found that some deficiencies had not been corrected in a timely manner. As a result, agencies do not have reasonable assurance that controls are implemented correctly, operating as intended, or producing the desired outcome with respect to meeting the security requirements of the agency, and responsibilities may be unclear, misunderstood, and improperly implemented. Furthermore, agencies may not be fully aware of the security control weaknesses in their systems, thereby leaving their information and systems vulnerable to attack or compromise. Until agencies effectively and fully implement agencywide information security programs, federal data and systems will not be adequately safeguarded to prevent disruption, unauthorized use, disclosure, and modification. Recent reports by GAO and IGs show that while agencies have made some progress, persistent weaknesses continue to place critical federal operations and assets at risk. In our reports, we have made hundreds of recommendations to agencies to correct specific information security weaknesses. The following examples illustrate the effect of these weaknesses at various agencies and for critical systems. * Independent external auditors identified over 130 information technology control weaknesses affecting the Department of Homeland Security's (DHS) financial systems during the audit of the department's fiscal year 2006 financial statements. Weaknesses existed in all key general controls and application controls. For example, systems were not certified and accredited in accordance with departmental policy; policies and procedures for incident response were inadequate; background investigations were not properly conducted; and security awareness training did not always comply with departmental requirements. Additionally, users had weak passwords on key servers that process and house DHS financial data, and workstations, servers, and network devices were configured without necessary security patches. Further, changes to sensitive operating system settings were not always documented; individuals were able to perform incompatible duties such as changing, testing, and implementing software; and service continuity plans were not consistently or adequately tested. As a result, material errors in DHS' financial data may not be detected in a timely manner. * The Department of Health and Human Services (HHS) had not consistently implemented effective electronic access controls designed to prevent, limit, and detect unauthorized access to sensitive financial and medical information at its operating divisions and contractor-owned facilities. Numerous electronic access control vulnerabilities related to network management, user accounts and passwords, user rights and file permissions, and auditing and monitoring of security-related events existed in its computer networks and systems. In addition, weaknesses existed in controls designed to physically secure computer resources, conduct suitable background investigations, segregate duties appropriately, and prevent unauthorized changes to application software. These weaknesses increase the risk that unauthorized individuals could gain access to HHS information systems and inadvertently or deliberately disclose, modify, or destroy the sensitive medical and financial data that the department relies on to deliver its services. * The Securities and Exchange Commission had made important progress addressing previously reported information security control weaknesses. However, 15 new information security weaknesses pertaining to access controls and configuration management existed in addition to 13 previously identified weaknesses that remain unresolved. For example, the Securities and Exchange Commission did not have current documentation on the privileges granted to users of a major application, did not securely configure certain system settings, or did not consistently install all patches to its systems. In addition, the commission did not sufficiently test and evaluate the effectiveness of controls for a major system as required by its certification and accreditation process. * The IRS had made limited progress toward correcting previously reported information security weaknesses at two data processing sites. IRS had not consistently implemented effective access controls to prevent, limit, or detect unauthorized access to computing resources from within its internal network. These access controls included those related to user identification and authentication, authorization, cryptography, audit and monitoring, and physical security. In addition, IRS faces risks to its financial and sensitive taxpayer information due to weaknesses in configuration management, segregation of duties, media destruction and disposal, and personnel security controls. * The Federal Aviation Administration (FAA) had significant weaknesses in controls that are designed to prevent, limit, and detect access to those air traffic control systems. For example, the agency was not adequately managing its networks, system patches, user accounts and passwords, or user privileges, and it was not always logging and auditing security-relevant events. As a result, it was at increased risk of unauthorized system access, possibly disrupting aviation operations. While acknowledging these weaknesses, agency officials stated that because portions of their systems are custom built and use older equipment with special- purpose operating systems, proprietary communication interfaces, and custom-built software, the possibilities for unauthorized access are limited. Nevertheless, the proprietary features of these systems do not protect them from attack by disgruntled current or former employees, who understand these features, or from sophisticated hackers. * Certain information security controls over a critical internal Federal Bureau of Investigation (FBI) network were ineffective in protecting the confidentiality, integrity, and availability of information and information resources. Specifically, FBI did not consistently (1) configure network devices and services to prevent unauthorized insider access and ensure system integrity; (2) identify and authenticate users to prevent unauthorized access; (3) enforce the principle of least privilege to ensure that authorized access was necessary and appropriate; (4) apply strong encryption techniques to protect sensitive data on its networks; (5) log, audit, or monitor security-related events; (6) protect the physical security of its network; and (7) patch key servers and workstations in a timely manner. Taken collectively, these weaknesses place sensitive information transmitted on the network at risk of unauthorized disclosure or modification, and could result in a disruption of service, increasing the bureau's vulnerability to insider threats. * The Federal Reserve had not effectively implemented information system controls to protect sensitive data and computing resources for the distributed-based systems and the supporting network environment relevant to Treasury auctions. Specifically, the Federal Reserve did not consistently (1) identify and authenticate users to prevent unauthorized access; (2) enforce the principle of least privilege to ensure that authorized access was necessary and appropriate; (3) implement adequate boundary protections to limit connectivity to systems that process Bureau of the Public Debt (BPD) business; (4) apply strong encryption technologies to protect sensitive data in storage and on its networks; (5) log, audit, or monitor security-related events; and (6) maintain secure configurations on servers and workstations. As a result, auction information and computing resources for key distributed-based auction systems maintained and operated on behalf of BPD were at an increased risk of unauthorized and possibly undetected use, modification, destruction, and disclosure. Furthermore, other applications that share common network resources with the distributed-based systems may face similar risks. * Although the Centers for Medicare & Medicaid Services had many information security controls in place that had been designed to safeguard the communication network, key information security controls were either missing or had not always been effectively implemented. For example, the network had control weaknesses in areas such as user identification and authentication, user authorization, system boundary protection, cryptography, and audit and monitoring of security-related events. Taken collectively, these weaknesses place financial and personally identifiable medical information transmitted on the network at increased risk of unauthorized disclosure and could result in a disruption in service. Despite having persistent information security weaknesses, federal agencies have continued to report steady progress in implementing certain information security requirements. For fiscal year 2006 reporting (see fig. 3), governmentwide percentages increased for employees and contractors receiving security awareness training and employees with significant security responsibilities receiving specialized training. Percentages also increased for systems that had been tested and evaluated at least annually, systems with tested contingency plans, and systems that had been certified and accredited. However, IGs at several agencies sometimes disagreed with the information reported by the agency and have identified weaknesses in the processes used to implement these and other security program activities. The majority of agencies reported that more than 90 percent of their employees and contractors received IT security awareness training in fiscal year 2006. This is an increase from what we reported in 2006, where approximately 81 percent of employees governmentwide received IT security awareness training. There has been a slight increase in the number of employees who have security responsibilities and received specialized security training since our last report--almost 86 percent of the selected employees had received specialized training in fiscal year 2006, compared with about 82 percent in fiscal year 2005. Although agencies have reported improvements both in the number of employees receiving security awareness training and the number of employees who have significant security responsibilities and received specialized training, several agencies exhibit training weaknesses. For example, according to agency IGs, five major agencies reported challenges in ensuring that contractors had received security awareness training. In addition, reports from IGs at two major agencies indicated that security training across components was inconsistent. Five agencies also noted that weaknesses still exist in ensuring that all employees who have specialized responsibilities receive specialized training, as policies and procedures for this type of training are not always clear. Further, the majority of agency IGs disagree with their agencies' reporting of individuals who have received security awareness training. Figure 4 shows a comparison between agency and IG reporting of the percentage of employees receiving security awareness training. If all agency employees and contractors do not receive security awareness training, agencies risk security breaches resulting from employees who are not fully aware of their security roles and responsibilities. In 2006, federal agencies reported testing and evaluating security controls for 88 percent of their systems, up from 73 percent in 2005, including increases in testing high-risk systems. However, shortcomings exist in agencies' testing and evaluating of security controls. For example, IGs reported that not all systems had been tested and evaluated at least annually, including some high impact systems, and that weaknesses existed in agencies' monitoring of contractor systems or facilities. As a result, agencies may not have reasonable assurance that controls are implemented correctly, are operating as intended, and are producing the desired outcome with respect to meeting the security requirements of the agency. In addition, agencies may not be fully aware of the security control weaknesses in their systems, thereby leaving the agencies' information and systems vulnerable to attack or compromise. The number of systems with tested contingency plans varied by the risk level of the system. Federal agencies reported that 77 percent of total systems had contingency plans that had been tested, up from 61 percent in 2005. However, on average, high-risk systems had the smallest percentage of tested contingency plans compared to other risk levels --only 64 percent of high-risk systems had tested contingency plans. Several agencies had specific weaknesses in developing and testing contingency plans. For example, the IG of a major agency noted that contingency planning had not been completed for certain critical systems. Another major agency IG noted that the agency had weaknesses in three out of four tested contingency plans--the plans were inaccurate, incomplete, or outdated, did not meet department and federal requirements, and were not tested in accordance with department and federal government requirements. Without developing contingency plans and ensuring that they are tested, the agency increases its risk that it will not be able to effectively recover and continue operations when an emergency occurs. A complete and accurate inventory of major information systems is essential for managing information technology resources, including the security of those resources. The total number of agency systems is a key element in OMB's performance measures, in that agency progress is indicated by the percentage of total systems that meet specific information security requirements such as testing systems annually, testing contingency plans, and certifying and accrediting systems. Thus, inaccurate or incomplete data on the total number of agency systems affects the percentage of systems shown as meeting the requirements. FISMA requires that agencies develop, maintain, and annually update an inventory of major information systems operated by the agency or under its control. The total number of systems in some agencies' inventories varied widely from 2005 to 2006. In one case, an agency had a 300 percent increase in the number of systems, while another had approximately a 50 percent reduction in the number of their systems. IGs identified some problems with agencies' inventories. For example, IGs at two large agencies reported that their agencies still did not have complete inventories, while another questioned the reliability of its agency's inventory since that agency relied on its components to report the number of systems and did not validate the numbers. Without complete, accurate inventories, agencies cannot efficiently maintain and secure their systems. In addition, the performance measures used to assess agencies' progress may not accurately reflect the extent to which these security practices have been implemented. Federal agencies continue to report increasing percentages of systems completing certification and accreditation from fiscal year 2005 reporting. For fiscal year 2006, 88 percent of agencies' systems governmentwide were reported as certified and accredited as compared to 85 percent in 2005. In addition, 23 agencies reported certifying and accrediting more than 75 percent of their systems, an increase from 21 agencies in 2005. Although agencies reported increases in the overall percentage of systems certified and accredited, results of work by their IGs showed that agencies continue to experience weaknesses in the quality of this metric. For fiscal year 2006, ten IGs rated their agencies' certification and accreditation process as poor or failing-- an increase from last year. In at least three instances of agencies reporting certification and accreditation percentages over 90 percent, their IG reported that the process was poor. Moreover, IGs continue to identify specific weaknesses with key documents in the certification and accreditation process such as risk assessments and security plans not being completed per NIST guidance or finding those items missing from certification and accreditation packages. IG reports highlighted weaknesses in security plans such as agencies not using NIST guidance, not identifying controls that were in place, not including minimum controls, and not updating plans to reflect current conditions. In other cases, systems were certified and accredited, but controls or contingency plans were not properly tested. Because of these discrepancies and weaknesses, reported certification and accreditation progress may not be providing an accurate reflection of the actual status of agencies' implementation of this requirement. Furthermore, agencies may not have assurance that accredited systems have controls in place that properly protect those systems. Agencies had not always implemented security configuration policies. Twenty-three of the major federal agencies reported that they currently had an agencywide security configuration policy. Although 21 IGs agreed that their agency had such a policy, they did not agree that the implementation was always as high as agencies reported. To illustrate, one agency reported implementing configuration policy for a particular platform 96 to 100 percent of the time, while their IG reported that the agency implemented that policy only 0 to 50 percent of the time. Another IG noted that three of the agency's components did not have overall configuration policies and that other components, which had the policies, did not take into account applicable platforms. If minimally acceptable configuration requirements policies are not properly implemented and applied to systems, agencies will not have assurance that products are configured adequately to protect those systems, which could increase their vulnerability and make them easier to compromise. Shortcomings exist in agencies' security incident reporting procedures. According to the US-CERT annual report for fiscal year 2006, federal agencies reported a record number of incidents, with a notable increase in incidents reported in the second half of the year. However, the number of incidents reported is likely to be inaccurate because of inconsistencies in reporting at various levels. For example, one agency reported no incidents to US-CERT, although it reported more than 800 incidents internally and to law enforcement authorities. In addition, analysis of reports from three agencies indicated that procedures for reporting incidents locally were not followed--two where procedures for reporting incidents to law enforcement authorities were not followed and one where procedures for reporting incidents to US-CERT were not followed. Several IGs also noted specific weaknesses in incident procedures such as components not reporting incidents reliably, information being omitted from incident reports, and reporting time requirements not being met. Without properly accounting for and analyzing security problems and incidents, agencies risk losing valuable information needed to prevent future exploits and understand the nature and cost of threats directed at the agency. Remedial Actions to Address Deficiencies in Information Security Policies, Procedures, and Practices IGs reported weaknesses in their agency's remediation process. According to IG assessments, 16 of the 24 major agencies did not almost always incorporate information security weaknesses for all systems into their remediation plans. They found that vulnerabilities from reviews were not always being included in remedial actions. They also highlighted other weaknesses that included one agency having an unreliable process for prioritizing weaknesses and another using inconsistent criteria for defining weaknesses to include in those plans. Without a sound remediation process, agencies cannot be assured that information security weaknesses are efficiently and effectively corrected. Periodic reporting of performance measures for FISMA requirements and related analysis provides valuable information on the status and progress of agency efforts to implement effective security management programs; however, opportunities exist to enhance reporting under FISMA and the independent evaluations completed by IGs. In previous reports, we have recommended that OMB improve FISMA reporting by clarifying reporting instructions and requesting IGs to report on the quality of additional performance metrics. OMB has taken steps to enhance its reporting instructions. For example, OMB added questions regarding incident detection and assessments of system inventory. However, the current metrics do not measure how effectively agencies are performing various activities. Current performance measures offer limited assurance of the quality of agency processes that implement key security policies, controls, and practices. For example, agencies are required to test and evaluate the effectiveness of the controls over their systems at least once a year and to report on the number of systems undergoing such tests. However, there is no measure of the quality of agencies' test and evaluation processes. Similarly, OMB's reporting instructions do not address the quality of other activities such as risk categorization, security awareness training, or incident reporting. OMB has recognized the need for assurance of quality for agency processes. For example, it specifically requested that the IGs evaluate the certification and accreditation process. The qualitative assessments of the process allows the IG to rate its agency's certification and accreditation process using the terms "excellent," "good," "satisfactory," "poor," or "failing." Providing information on the quality of the processes used to implement key control activities would further enhance the usefulness of the annually reported data for management and oversight purposes. Currently, OMB reporting guidance and performance measures do not include complete reporting on certain key FISMA-related activities. For example, FISMA requires each agency to include policies and procedures in its security program that ensure compliance with minimally acceptable system configuration requirements, as determined by the agency. As we previously reported, maintaining up-to-date patches is key to complying with this requirement. As such, we recommended that OMB address patch management in its FISMA reporting instructions. Although OMB addressed patch management in its 2004 FISMA reporting instructions, it no longer requests this information. As a result, OMB and the Congress lack information that could identify governmentwide issues regarding patch management. This information could prove useful in demonstrating whether or not agencies are taking appropriate steps for protecting their systems. Although the IGs conducted annual evaluations, they did not have a common approach. We received copies of all 24 IG FISMA template submissions and 20 IG FISMA reports. For these efforts, the scope and methodology of IGs' evaluations varied across agencies. For example: * According to their FISMA reports, certain IGs reported interviewing officials and reviewing agency documentation, while others indicated conducting tests of implementation plans (e.g. security plans). * Multiple IGs indicated in the scope and methodology sections of their reports that their reviews were focused on selected components, whereas others did not make any reference to the breadth of their review. * Several reports were solely comprised of a summary of relevant information security audits conducted during the fiscal year, while others included additional evaluation that addressed specific FISMA-required elements, such as risk assessments and remedial actions. * The percentage of systems reviewed varied; 22 of 24 IGs tested the information security program effectiveness on a subset of systems; two IGs did not review any systems. * One IG noted that the agency's inventory was missing certain Web applications and concluded that the agency's inventory was only 0-50 percent complete, although it also noted that, due to time constraints, it was unable to determine whether other items were missing. * Two IGs indicated basing a portion of their template submission solely on information provided to them by the agency, without conducting further investigation. * Some reviews were limited due to difficulties in verifying information provided to them by agencies. Specifically, certain IGs stated that they were unable to conduct evaluations of their respective agency's inventory because the information provided to them by the agency at that time was insufficient (i.e. incomplete or unavailable). The lack of a common methodology, or framework, has culminated in disparities in audit scope, methodology, and content. As a result, the collective IG community may be performing their evaluations without optimal effectiveness and efficiency. A commonly used framework or methodology for the FISMA independent evaluations is a mechanism that could provide improved effectiveness, increased efficiency, and consistency of application. Such a framework may provide improved effectiveness of the annual evaluations by ensuring that compliance with FISMA and all related guidance, laws, and regulations are considered in the performance of the evaluation. IGs may be able to use the framework to be more efficient by focusing evaluative procedures on areas of higher risk and by following an integrated approach designed to gather evidence efficiently. Without a consistent framework, work completed by IGs may not provide information that is comparable for oversight entities to assess the governmentwide information security posture. In summary, as illustrated by recent incidents at federal agencies, significant weaknesses in information security controls threaten the confidentiality, integrity, and availability of critical information and information systems used to support the operations, assets, and personnel of federal agencies. Almost all major agencies exhibit weaknesses in one or more areas of information security controls. Despite these persistent weaknesses, agencies have continued to report steady progress in implementing certain information security requirements. However, IGs sometimes disagreed with the agency's reported information and identified weaknesses in the processes used to implement these and other security program activities. Further, opportunities exist to enhance reporting under FISMA and the independent evaluations completed by IGs. Mr. Chairman, this concludes my statement. I am happy to answer any questions at this time. If you have any questions regarding this report, please contact me at (202) 512-6244 or [email protected]. Other key contributors to this report include Jeffrey Knott (Assistant Director), Larry Crosland, Nancy Glover, Min Hyun, and Jayne 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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For many years, GAO has reported that weaknesses in information security are a widespread problem with potentially devastating consequences--such as intrusions by malicious users, compromised networks, and the theft of personally identifiable information--and has identified information security as a governmentwide high-risk issue. Concerned by reports of significant vulnerabilities in federal computer systems, Congress passed the Federal Information Security Management Act of 2002 (FISMA), which permanently authorized and strengthened the information security program, evaluation, and reporting requirements for federal agencies. In this testimony, GAO discusses security incidents reported at federal agencies, the continued weaknesses in information security controls at major federal agencies, agencies' progress in performing key control activities, and opportunities to enhance FISMA reporting and independent evaluations. To address these objectives, GAO analyzed agency, inspectors general (IG), and GAO issued and draft reports on information security. Federal agencies have recently reported a spate of security incidents that put sensitive data at risk. Personally identifiable information about millions of Americans has been lost, stolen, or improperly disclosed, thereby exposing those individuals to loss of privacy, identity theft, and financial crimes. The wide range of incidents involving data loss or theft, computer intrusions, and privacy breaches underscore the need for improved security practices. As illustrated by these security incidents, significant weaknesses in information security controls threaten the confidentiality, integrity, and availability of critical information and information systems used to support the operations, assets, and personnel of federal agencies. Almost all of the major federal agencies had weaknesses in one or more areas of information security controls. Most agencies did not implement controls to sufficiently prevent, limit, or detect access to computer networks, systems, or information. For example, agencies did not consistently identify and authenticate users to prevent unauthorized access, apply encryption to protect sensitive data on networks and portable devices, and restrict physical access to information assets. In addition, agencies did not always manage the configuration of network devices to prevent unauthorized access and ensure system integrity, such as patching key servers and workstations in a timely manner; assign incompatible duties to different individuals or groups so that one individual does not control all aspects of a process or transaction; and maintain or test continuity of operations plans for key information systems. An underlying cause for these weaknesses is that agencies have not fully or effectively implemented agencywide information security programs. Nevertheless, federal agencies have continued to report steady progress in implementing certain information security requirements. However, IGs at several agencies sometimes disagreed with the agency's reported information and identified weaknesses in the processes used to implement these and other security program activities. Further, opportunities exist to enhance reporting under FISMA and the independent evaluations completed by IGs.
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Freight shipped by rail travels over an extensive network that consists of 140,000 route-miles across the United States. Freight railroads are generally privately owned and rely on their revenues to invest in maintenance and operations that support safe and efficient transportation services. During the last 40 years, the freight railroad industry has consolidated. Currently, the U.S. railroad industry includes seven major Class I freight railroads. Railroads carry a variety of commodities and may compete with each other and other shipping modes such as trucks and barges for business. The Interstate Commerce Commission (ICC) was established in 1887, originally to regulate almost all of the rates that railroads charged shippers to ensure that the rates were reasonable and just. The Railroad Revitalization and Regulatory Reform act of 1976 and the Staggers Rail Act of 1980 were enacted in response to economic slowdown in the 1970s, with rising costs, losses in traffic and revenues to motor carriers, and bankruptcies affecting the railroad industry. These laws substantially reduced federal regulation and encouraged greater reliance on competition to set rates. In particular, the Staggers Rail Act gave railroads increased freedom to price their services according to market conditions, including the freedom to use differential pricing, a practice in which railroads can charge higher rates to shippers of commodities such as coal and chemicals, which are more dependent on the rail network. The ICC Termination Act of 1995 transferred the ICC's regulatory functions to the Surface Transportation Board (STB), an independent adjudicatory body. The STB now serves as the industry's economic regulator, resolving rate and service disputes between shippers and railroads for regulated goods shipped under tariff. The acts also allowed railroads and shippers to enter into confidential contracts to set terms and rates. STB has no authority to review the terms or rates for freight shipped by contract. To protect shippers served by only one railroad with no competitive shipping alternatives--known as "captive" shippers--from unreasonably high rates, STB established a process in which shippers that transport their freight by tariff could potentially challenge the reasonableness of a rail rate and seek financial relief from the railroads, a process that we refer to as a "rate-relief" process. Some commodities were later exempted from STB's jurisdiction, primarily commodities that could be shipped by boxcar or intermodal containers, in part because these goods can also be transported by other competitive alternatives such as barge or truck and are therefore unlikely to be captive. According to a Department of Agriculture report, these exemptions, in addition to contracts, effectively freed about 75 to 85 percent of freight traffic from economic regulation by STB. Currently, the most frequently transported commodities that could be subject to STB rate regulation, by tons shipped, are agricultural, specifically, grain soybeans, and sunflower seeds; assorted food items; coal; chemicals; and nonmetallic minerals. Railroads are required, upon request, to offer tariff terms and rates to shippers, but railroads are not required to offer a contract. Contracts are confidential, mutually agreed upon, and may contain rates for specific routes and other service terms for a specific shipper. According to the selected railroads and shippers we spoke to, contracts generally contain multiple, shipper-specific O-D routes--agreements on terms and rates for specific shipments over specific shipping routes--because a shipper may have multiple routes. For example, according to a Class I railroad representative, a chemical production facility may receive its raw materials from multiple origins, with each route having agreed upon terms and rates, as shown in figure 1. STB has the authority to review the reasonableness of rates and service terms for regulated commodities if shipped by tariff. Tariffs are a pricing document issued by the railroads showing rates that are usually not customer-specific. Tariffs also spell out the standard terms of the railroad. These standard terms differ by commodity, covering everything from loading specifications to billing procedures. Under STB's rate-relief process, in which it resolves disputes regarding the terms or rates in a tariff, in order for STB to review a rate as potentially unreasonable, the rate must not be under contract and the commodity must not be exempt from STB rate regulation. STB may then consider the reasonableness of a rate only if it also finds that the railroad has market dominance over the shipment at issue--that is, if (1) the rate is equal to or exceeds 180 percent of the railroad's variable costs for providing specific services to the shipper and (2) the railroad does not face effective competition from other railroads or other modes of transportation. If STB decides the rate is unreasonable, it can order the railroad to pay reparations to the shipper for past shipments and decide the maximum rate the railroad is permitted to charge for future shipments. Under its authority, STB considers the reasonableness of a challenged rate using one of its three tests, as chosen by the shipper. There is a financial limit imposed on the relief available depending on the test chosen: Stand-Alone Cost (SAC): The most commonly used test is the Stand- Alone Cost test, which requires the shipper to design a hypothetical railroad, tailored to serve the specific route(s), to simulate the competitive rate that would exist in a perfectly efficient network. STB then compares the challenged rate to the hypothetical rate. During the rate relief process, both the railroad and the shipper have the opportunity to present their views to STB. Simplified SAC: The simplified SAC seeks to create a cost-effective alternative to the SAC test. The simplified test eliminates or restricts the evidence parties can submit to the actual operations and services provided by the railroad. Three Benchmark: The Three Benchmark test is faster and less rigorous, but limits the potential return for a successful rate challenge. STB determines the reasonableness of a challenged rate by examining three benchmarks, or tests, that assess rate markups. Between 1996 and 2016, STB reviewed 50 rate reasonableness cases. Of these cases, 36 used the SAC rate case process, 5 used the simplified SAC, 5 used the three benchmark process, and 4 used a different methodology. To date, most of the 50 STB rate cases have been for coal (32) or chemical (16) shippers. Among the 50 cases brought before STB since 1996, about half (26) were settled without an STB decision, while those that were decided by STB were split fairly evenly in favor of the shippers (11) or the railroads (10). According to representatives of the four Class I railroads we spoke to, while contracts' and tariffs' terms and rates are developed using similar methodologies, they may contain key differences. For example, selected stakeholders said that contracts are often customized to a specific shipper and may reflect the railroad's and shipper's preferences for a given route or shipment. Figure 2 describes the similarities and differences between contracts and tariffs, based on our interviews with representatives from the four largest Class I railroads and selected shippers, pertinent laws, as well as sample contract language and tariffs provided by the railroads. Railroad representatives said they rely on publicly available standard terms to govern shipments over their network, regardless of whether the shipments are moving under contract or tariff. These terms are unique to each railroad and potentially negotiable for shipments under contract--as are all aspects of a contract. A railroad's standard terms cover all aspects of a shipment, from loading specifications to billing procedures, and may be contained in multiple documents. As a result, according to one railroad representative, contracts typically incorporate or reference all of the railroad's applicable standard terms unless certain terms are specifically negotiated by the shipper. Sample contract language provided by three Class I railroads show contracts may also include negotiable terms not typically found in tariffs, such as volume commitments, discounts, and service standards. However, according to two shipping associations representing coal shippers, in recent years, contracts have become more standardized and often reference other governing documents that spell out additional rules and conditions. More specifically, a representative from one of these shipper associations said that some contract features have become more difficult to negotiate, in part, because of the increased standardization. For example, they told us most contract negotiations now are generally limited to rates, fuel surcharges, train size, loading and unloading timeframes, and volume commitments. According to three of the selected Class I railroads and a representative from a shipper association, to start a contract negotiation, typically a shipper may issue a request for proposal outlining its needs or informally contact the railroad. Railroad representatives said the railroad will typically respond with a standard contract. One railroad representative told us the railroad may administer thousands of contracts at any given time, so maintaining standard terms across their contracts allows the railroad to manage its business portfolio and operations more efficiently. For example, a representative from another Class I railroad said its standard terms allow it to efficiently handle different shippers' cars on the same train. According to representatives from the four Class I railroads we interviewed, they individually determine contract and tariff rates based on a number of similar market factors associated with the supply and demand for the commodity the shipper plans to transport. Because railroads must offer a tariff rate upon request, railroad representatives said they consider more general market factors in determining tariff rates. Selected shippers told us that tariff rates are usually, but not always, higher than contract rates, and sometimes are the same, in part, because contract rates, according to a railroad representative, can be negotiated and reflect market factors specific to the shipper as well as discounts for volume commitments. In our discussions with the four Class I railroads, they said they look at the extent of competition when determining contract and tariff rates. According to one railroad representative, this includes considering customer feedback, past experience, and market research to determine the level of three types of competition: Competition from other forms of transportation: Generally, a railroad can charge more if it does not have to compete with another railroad or other transportation forms, such as barge, pipeline, or truck. As a result, a shipper served by more than one railroad or competitive alternative can create more leverage during contract negotiations. For example, representatives of the selected railroads told us if they are competing with the trucking industry for business, they may offer lower rates to obtain the shipper's business. Competition from other freight being shipped to the same market: A chemical shipper, as part of its comments to STB's 2011 competition proceeding, stated that rail rates may impact a shipper's ability to compete nationally and globally. According to railroad representatives we spoke to, they examine commodity markets to ensure they are pricing rates to allow shippers to be competitive. For example, a railroad representative told us it examines the rates it charges domestic crude oil shippers to ensure it remains competitive with imported crude oil. Representatives from the railroad industry also said understanding the extent of geographic competition within a market ensures the railroad maintains volume over their network. If rates are priced too high, a shipper may lose business and transport less freight. However, according to coal and grain shippers we interviewed, tariff rates may not always reflect current commodity market conditions. Competition through substitution: Some shippers may be able to obtain a commodity it needs from a different location, or it may use an alternative commodity. For example, a railroad told us a power plant may choose to obtain its coal from another mine or switch from coal to natural gas if prices make doing so advantageous and the plant is able and configured to do so. Contract and tariff rates also reflect the characteristics of a given shipment. More specifically, representatives from the four Class I railroads we interviewed said the rates reflect the characteristics of the commodity being shipped and its particular origin and destination. For example, a shipper association representing chemical shippers and a railroad representative said that commodities such as toxic inhalation hazards are more expensive to ship under contract and tariff because of their hazardous nature and liability concerns. In addition, railroad representatives also told us rates may vary by distance, and longer routes may be more expensive. Railroads rely on selling freight transportation services at a particular rate to recover their operating and infrastructure costs. However, while representatives from all four Class I railroads we spoke to told us they do not develop their rates to provide transportation based on these costs, they also said they will not typically set rates below the cost of providing rail transportation. According to a Department of Agriculture report, the costs associated with providing rail transportation for each shipment, such as maintenance and rail crew costs, serve only as a floor below which rates should not go and bears little relationship to individual rail rates, which are closer to what the shippers are willing and able to pay. According to a representative from one Class I railroad, competitive factors may sometimes require the railroad to charge less than its costs to ship. However, railroads can also charge higher rates where its network is highly valuable to its shippers. Selected shippers and railroad representatives also said contracts generally provide key advantages by allowing for increased financial and logistical certainty for both parties. According to selected shippers we spoke to, they prefer to maintain the minimal number of contracts to meet their transportation needs. A shipper association said shippers can more efficiently manage multiple routes under one contract because of the stability in rates over the duration of the contract. As a result, according to the railroad representatives, shippers often request contracts covering multiple routes--potentially up to thousands of routes, according to one railroad representative--because managing each route under a separate contract, or by tariff, would be too complex to administer. For example, one chemical shipper told us it may move one or two carloads per day across 1,000 separate routes over a year. In addition, contracts allow shippers and railroads to customize terms to better fit their shipping needs, such as offering guaranteed pickup and delivery times or specific services. For example, according to one railroad representative, in a contract with multiple routes, a railroad may offer a lower rate on some routes, while increasing rates on others, to allow a shipper to break into a new market. Another railroad representative said the railroad can also provide additional logistics services at a lower cost within a contract that contains multiple routes because the economy of scale offered by a large contract allows the railroad to provide services at a lower rate due to gains in efficiency. Furthermore, according to representatives from three Class I railroads, a contract's overall volume commitment and certainty helps the railroads better plan future investments. Specifically, one railroad representative said a contract allows the railroad to allocate locomotives and rail crews more efficiently and ensure a consistent source of revenue. As a result, contracts generally include agreements on the amount of volume a shipper is willing to commit. Railroad representatives and selected shippers told us that the guaranteed volume from a contract may also create additional leverage for the shipper during contract negotiations. To gain additional volume guarantees, railroads and shippers said railroads typically offer discounted rates to shippers in exchange for volume commitments. Railroad representatives also said these discounts may be for one, multiple, or all of the routes in contract, and they said the more volume a shipper is willing to commit, the better deal it can expect to receive. However, if the shippers fail to meet their expected volume commitment, they may be subject to financial penalties. Moreover, according to one railroad representative, higher-volume shippers are also more likely to request custom terms. However, some selected shippers said tariffs may provide advantages in certain situations. For example, they said contract negotiations may be too long and costly for shippers with infrequent or small volume shipments. Furthermore, according to coal shippers, in some instances, the tariff rate may be the same as the contract rate, and shippers incur potential penalties associated with failing to meet contractual volume commitments. Contract usage across the most frequently transported commodities regulated by STB has generally increased or stayed relatively the same in recent years. Specifically, from 2005 through 2014, the ton-miles shipped under contract for these commodities have increased by 6 percent, from about 705,000 ton-miles to about 800,000 ton-miles, a measurement that combines weight and mileage. In 2014, about 76 percent of regulated freight was shipped by contract. However, according to railroad representatives, each railroad's business differs. Figure 3 shows the percent of selected commodities with regulated rates by ton-miles shipped under contract from 2005 through 2014. From 2005 to 2014, the percentage of coal and chemicals shipped under contract has increased when measured on a ton-mile basis. Specifically, in 2005, 55 percent of all chemical shipments, measured in ton-miles, were shipped by contract; by 2014, that percentage had increased to 85 percent. Similarly, over the same time period, the ton-miles of coal shipped increased from 86 percent to 94 percent. A representative of a shipper association said chemical shipments under contract increased, in part, because the potential for improved negotiated terms may provide additional certainty and lower rates. Both coal and chemicals are also heavily dependent on the railroad's network. We were unable to obtain contract duration data from selected railroads and shippers, but selected coal and grain shippers as well as a railroad representative told us that the duration of contracts has generally decreased during the last 10 years. According to another rail representative, contract duration depends on the commodity and the market; for example, this official said shippers in markets that change frequently may prefer shorter contracts. Additionally, representatives from two selected shipper associations that represent various commodities told us the duration of contracts has decreased over the years, with longer contracts becoming increasingly uncommon, though they prefer longer contracts because of their rate stability. A coal-shipper association representative also told us current coal contracts are typically for about 3 to 5 years, in part because a shorter contract would result in more frequent contract renegotiation. Another coal shipper association representative said the duration of contracts to transport coal has gotten shorter, mostly because of the increased uncertainty in the energy market. In the past, we have reported that the duration of contracts has declined, in part, because of the railroads' desire to quickly react to shifting market demand. One railroad representative we spoke to said as markets become more dynamic, shippers can continue to expect to receive shorter contracts. In addition, selected shippers told us the railroads may also be shifting certain costs to shippers. More specifically, according to a grain shipper, railroad service commitments that used to be common are no longer included in contracts. Further, one coal shipper said the railroad previously supplied its own personnel to load the coal, but now, with no reduction in rates, the shipper is required to do so. Despite the volume discounts and other advantages to contracts with multiple O-D routes, some shippers said that contracts effectively constrain them into paying higher rates on some routes, because railroads will propose contracts with multiple O-D routes where some of the routes are priced unreasonably high, in the shippers' view. This is particularly an issue for shippers that are "captive"--that is, shippers served by a single railroad without an economically viable transportation alternative because a trucking or barge route either does not exist or would be too costly. Figure 4 below illustrates the ways in which a shipper can be captive on all routes or just some routes. Eight of the nine shippers we interviewed stated that captive shippers have no other options than the one railroad that serves them, which can result in higher freight rail rates. Further, according to our analysis of a 2011 STB proceeding on rail competition, 6 of the 11 shippers that provided comments to the proceeding about being a captive shipper said that captive shippers have no other options than the railroad that serves them, which can result in higher rates. Additionally, a 2010 study commissioned by the STB concluded that captive shippers tend to pay higher shipping rates than otherwise similar shippers with access to additional railroad or water competition. As previously discussed, the selected railroads we interviewed said they develop prices based on market forces and the railroad's supply of available equipment and rail lines. This is the basis for differential pricing, a pricing strategy where railroads charge shippers with few or no other options more than shippers with more options for their freight. Differential pricing is permitted and encouraged in the rail freight market by design. The Staggers Rail Act of 1980, which reduced the economic regulation of railroads, provided that rail rates should be set by the competitive market forces to the maximum extent possible. According to railroad officials, railroads make up for lower revenues from highly competitive routes by charging higher rates in less competitive routes where they have market dominance. All four railroads and the Association of American Railroads also said that railroads use differential pricing to charge the highest rate shippers are willing to pay so railroads can cover infrastructure costs. Although shippers have the option of challenging a tariff rate before the STB, they do not have this option for challenging rates they view as unfair if agreed to in a contract, since the STB has authority to review tariff rates but not contract rates. Although contracts are negotiated between railroads and shippers, some shippers told us that because contracts often contain rates for multiple routes, they may be pressured to accept higher rates they view as unfair as part of the package of rates they agree to, particularly if some of the shipper's routes are captive. Specifically, three selected shippers said this situation can arise when faced with a contract containing multiple O-D routes where they view some routes as priced too high by the railroads. In this situation, they have two choices: 1) accept the contract and pay higher rates for some routes, or 2) reject the contract and opt instead to move their freight by tariff, which could result in higher prices for all the routes since, as previously discussed, shippers and railroads said that tariff rates are generally higher than contract rates. According to two of the shippers we interviewed, combining captive and competitive routes together in one large contract can create high rates on captive routes. In contrast, officials from one railroad said that the STB tariff rate-relief process prevents railroads from forcing shippers to pay unreasonable rates, even in contracts. The railroad representatives said this occurs because railroads do not want to have a rail rate case before the STB and a shipper that thought a contract rate was unreasonable could always ask for the tariff in place of the contract to be able to file a rate case. When an STB rate case is an option, six of the interviewed shippers said that STB tariff rate-relief cases are complicated, time consuming, and expensive, in part, due to the challenges in determining reasonable and unreasonable rates. Consequently, these shippers said they are deterred from pursuing cases or from requesting tariff rates from railroads in order to pursue a rate case. An STB staff member said that when a rate case involves hundreds of O-D pairs, resolving the case can take substantial resources and time for STB, the railroads, and the shippers involved in the litigation. This STB staff member also stated that cases can take up to 3 years and be so costly that some shippers may think it is not worth bringing a case. The STB rate-relief process was designed, in part, to maintain reasonable rates for captive shippers. However, determining reasonable versus unreasonable rates can be challenging given the market forces involved. Once a rate case is filed, STB must determine whether the rate is reasonable because it allows a railroad to earn adequate revenue for its fixed costs, or whether the rate is unreasonable because it allows the railroad to earn more than adequate revenue from its market dominance. According to economic literature, differential pricing allows railroads to collect adequate revenue to cover all costs and earn a reasonable return on their investments. Railroads not earning adequate revenue to remain in business and to adapt their network to meet future shipper demands would be problematic for both railroads and the shippers that rely on them. However, some research shows that railroads may be recovering from the rising costs, losses, and bankruptcies in the 1970s. For example, according to two economic studies of railroad economics, the Class I railroads may now be earning adequate returns on investment, and perhaps sometimes in excess of adequate returns, so measures to reduce the amount contributed by captive shippers to railroad returns may be appropriate. More recently, in September 2016, STB determined that four Class I railroads were revenue-adequate for the year 2015, specifically that these railroads achieved a rate of return equal to or greater than STB's calculation of the average cost of capital to the freight rail industry. STB is currently reviewing its rate relief process as required in the Surface Transportation Board Reauthorization Act of 2015. In June 2016, STB released an Advance Notice of Proposed Rulemaking outlining measures to expedite its handling of SAC rate cases. Comments were due in August 2016. STB staff said that measures such as standardizing evidence submissions would expedite SAC cases for purposes of fairness to litigants and improving overall agency efficiency. They also said that since the current proceeding on expediting SAC rate cases had just begun, it was too soon to know how changes might affect the SAC process. We provided a draft of this product to STB for comment prior to finalizing this report. We received technical comments from STB which we incorporated as appropriate. We will send copies of this report to appropriate congressional committees. In addition, we will make copies available to others upon request, and the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix I. In addition to the individual named above, other key contributors to this report were Andrew Huddleston, Assistant Director; Sarah R. Jones, Analyst-in-Charge; Namita Bhatia Sabharwal; Herbert J. Bowsher; Stephen M Brown; Russell C. Burnett; Ross A. Gauthier; Richard A. Jorgenson; Grant M. Mallie; Cheryl M. Peterson; Malika Rice; Kelly L. Rubin; Amelia (Michelle) Weathers; Alwynne Wilbur; and William T. Woods.
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The nation's freight rail network is vital to the economy, moving about 40 percent of U.S. freight and generating over $73 billion in revenue in 2013. Railroads charge various rates for moving freight from a particular origin to a particular destination. A rate may be set by the railroad in a public pricing document--known as a tariff--or negotiated through a private contract with a shipper. While most freight ships under contract, some shippers have raised concerns with how railroads negotiate contracts that contain multiple origin-to-destination routes. Though shippers that use rail to transport freight under tariff may seek relief from STB for rates they view as unreasonable, STB has authority to review tariff rates, but not contract rates. The Surface Transportation Board Reauthorization Act of 2015 included a provision for GAO to review rail transportation contract proposals containing multiple origin-to-destination routes. This report addresses (1) similarities and differences in shipping freight under a tariff versus a contract, and the potential benefits to using each, and (2) views of selected stakeholders on the implications of shipping freight under a tariff versus a contract. GAO analyzed STB data from 2005 to 2014, reviewed documents provided by and interviewed representatives of the four largest freight railroads, the Association of American Railroads, STB officials, and representatives of nine shippers selected to represent a mix of commodities transported by rail. While rail contracts and tariffs are similar, contracts offer the flexibility to customize rates and terms to a specific shipper, according to selected stakeholders GAO interviewed. Both contract and tariff rates are based on market factors, such as competition, according to representatives from the four largest U.S. freight railroads. However, they noted that in developing contract rates, a railroad will also examine factors specific to each shipper and may negotiate discounts in exchange for the shipper committing to provide a specified volume over the contract's duration. According to railroad representatives, the volume commitments negotiated in a contract allow the railroad to more efficiently allocate its resources and ensure consistent revenues. Also, selected shippers told GAO that they can more efficiently manage multiple shipping routes under one contract because of the stability in rates over the duration of the contract. In contrast, tariffs may be preferred for smaller shipments. Despite the volume discounts contracts can offer, some selected shippers said that contracts that include rates for multiple origin-to-destination routes can contain high rates on some routes. This is particularly an issue for shippers that are "captive"--that is, shippers served by a single railroad without an economically viable transportation alternative. Representatives of the four largest freight railroads said they charge what shippers are willing to pay to cover infrastructure costs for the entire rail network. However, according to selected shippers GAO interviewed, combining captive and non-captive routes together in one contract can compel shippers to accept some unreasonable rates. Shippers subject to contract rates they view as unreasonable cannot challenge those rates at the Surface Transportation Board (STB) because contracts are not subject to STB oversight. A railroad official said that a shipper may ask the railroad to switch rates the shipper views as unreasonable to a tariff. However, selected shippers said that tariff rates are generally higher than contract rates, so they are reluctant to forgo a contract with a mix of rates in favor of using a tariff. While the STB process for reviewing tariff rates was designed, in part, to protect captive shippers from unreasonably high rates, selected shippers said the process is complicated, time-consuming, and expensive. In 2016, STB began to reform the tariff review process with the goal of improving its efficiency.
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Historically, a principal concern in noncompetitive contracting situations has been how to ensure that the prices proposed by contractors are fair and reasonable. Recognizing this risk, the Congress enacted the Truth in Negotiations Act in 1962. The act represents the government's key safeguard against inflated contract prices on noncompetitive contracts. The act requires contractors and subcontractors to provide the government with cost or pricing data supporting their proposed prices and to certify that the data are accurate, complete, and current. If the government later discovers that the contractor submitted data that were not accurate, complete, and current, the act allows the government to pursue remedies, such as a reduction in the contract price. Interest and penalties can also be assessed under certain conditions. These provisions are designed to give the government the information it needs to ensure fair and reasonable contract prices. The negotiation process with certified cost or pricing data can be lengthy, and the documentation requirements for both sides can be extensive. The process starts when the contractor provides estimated costs for subcontracts and materials along with a detailed breakdown of the work to be performed, including estimated manufacturing labor costs, engineering costs, tooling costs, and other direct costs for each segment of the work. As figure 1 shows, DOD contracting officers then review these data along with price analysts from the Defense Contract Management Agency and auditors from the Defense Contract Audit Agency. The government and the contractor then negotiate cost elements to settle on a price. Once this is done, the contractor certifies the data as accurate, complete, and current. DOD may conduct an audit after the contract's award. When enacted in 1962, the Truth in Negotiations Act did not include an explanation of what constituted an "exceptional case" and it has never been amended to define that term. Up until 1995, the Federal Acquisition Regulation (the implementing regulation) largely mirrored the Truth in Negotiations Act. The waiver provision in the Federal Acquisition Regulation was amended in 1995 to allow contracting officers to waive data when sufficient information was available to determine a fair and reasonable price. However, the regulation still provided little guidance on the circumstances that would warrant a waiver in a particular case. The first sentence of the current provision states that the "head of the contracting activity . . . may, without power of delegation, waive the requirement for submission of cost or pricing data in exceptional cases."The waiver provision also states that the head of the contracting activity "may consider waiving the requirement if the price can be determined to be fair and reasonable without submission of cost or pricing data." Aside from stating that a waiver may be considered in this situation, the regulation provides no further guidance on the circumstances that would warrant a waiver. Finally, the regulation includes no other guidance to help agency officials weigh the potential risks and benefits of granting a waiver in a particular case, as opposed to obtaining certified data. The conferees agree that the term "exceptional circumstances" requires more than the belief that it may be possible to determine the contract price to be fair and reasonable without the submission of certified cost and pricing data. For example, a waiver may be appropriate in circumstances where it is possible to determine price reasonableness without cost or pricing data and the contracting officer determines that it would not be possible to enter into a contract with a particular contractor in the absence of a waiver. In response to these concerns, DOD was directed in 1998 to work with appropriate executive branch officials to clarify situations in which an exceptional case waiver may be granted. According to DOD, no actions have been taken to clarify when waivers should be granted. Using DOD's contract database, we identified 20 waivers valued at more than $5 million each in fiscal year 2000. The total value of these waivers was about $4.4 billion. As table 1 shows, six buying organizations approved these waivers. Five of the contracts included waivers that covered multiple-year purchases. Six waivers that we identified involved large, complicated acquisitions, which combined represented about 94 percent of the dollar value of the waivers we reviewed. (See table 2.) We could not assess the extent to which waivers are being used at DOD because DOD's contract database is unreliable. However, for the contract actions we examined, we were able to verify data by reviewing the actual contracts and supporting documents. Contract pricing or waiver documents for all of the cases we reviewed stated that sufficient information was available to determine the price to be fair and reasonable without the submission of cost or pricing data and did not cite other circumstances to justify the waivers. This justification complies with the Federal Acquisition Regulation. In three cases, our review found that other factors strongly influenced the decision to waive certified cost or pricing data. These involved purchases for crashworthy fuel systems and combat vehicle track as well as a foreign military sale of F-16 fighter aircraft to Greece. In the crashworthy fuel system purchase, the company's business model requires the company to sell its products at catalog prices rather than use a traditional government approach based on certified cost or pricing data, which the company never provides. This unique supplier also developed all of its products and maintains a production base exclusively at the company's expense. In the case of the purchase of combat vehicles track, the company's commercial accounting system did not segregate unallowable costs from its overhead accounts, and the company did not want to run the risk of government claims and possible damage to its reputation because of the inadvertent failure to exclude such costs from government proposals. As a result, the company would not provide certified data. The Army and the company agreed to reduce general and administrative costs allocated to this buy by 25 percent to compensate for possible unallowable costs. Finally, in the F-16 sale, two approaches were considered. The first called for accepting the price offered by the contractor during a competition between different aircraft types. The second called for traditional negotiations based on the certification of cost or pricing data. The contractor objected to providing certified data, arguing that adequate price competition had occurred. As a compromise, the Air Force waived the certification requirement but obtained and analyzed pricing data from the contractor. Contracting officers responsible for the 20 waivers we reviewed used a variety of techniques and approaches--sometimes a combination of several--to determine whether prices were fair and reasonable. Many of the contracting officers conducted a price analysis. Under a price analysis, the contracting officer reviews the proposed price for the contract without a breakdown of supporting costs. In 11 cases, the contracting officers compared contractors' proposed prices with prices that had been negotiated previously for the same systems with certified data. In some cases, if a significant amount of time had elapsed since the previous price had been established, the contracting officers adjusted the price to account for inflation and quantity changes. In four cases, contracting officers conducted more thorough analyses using the contractors' cost data, but the contractors were not required to certify the data as accurate, complete, or current. Under a cost analysis, the contracting officer reviews a breakdown of supporting costs in terms of materials, labor, and various overhead accounts. Such a breakdown, for example, could list various prices for materials as well as anticipated hours and rates for labor. In five cases, a variety of other pricing techniques were employed, including the use of regression analyses, learning curves, and parametric estimates. Table 3 summarizes primary techniques employed on each of the 20 waivers we reviewed. The government was at a higher risk of inflated pricing in situations where there was a lot of uncertainty about the data used to support analyses and a lower risk in situations where there was less uncertainty. Factors that increased uncertainty included changes in the design of the weapon system since a previous purchase, changes in the processes or equipment used to produce the system, or even changes in the amount being ordered by the government. More indirect factors contributing to uncertainty include mergers and acquisitions, cost-cutting measures, or changes in relationships with subcontractors. All of these things can significantly affect the costs of a product. The practice of relying on previously certified data that are fairly old also increased risk--principally because it increased the potential for more uncertainty. In several cases we reviewed, the data relied on were 2 to 3 years old. At times, contracting officers took action to make up for the uncertainties associated with the time elapsed, such as adjusting the price to account for inflation. However, the contracting officers still could not be assured that all other conditions--such as production processes, business processes, subcontractor relationships-- affecting the purchase remained the same. One case we identified, the Navy's purchase of spare parts for Orion radar systems, was particularly risky--not only because the contracting officer relied on 7-year-old data, but the data had never been certified. We also identified factors and practices that helped to minimize risk. Of course, relying on data that were certified fairly recently for systems where conditions had not changed lowered the risk to the government. This occurred in several cases that we reviewed. In other cases, contracting officers employed pricing experts from the Defense Contract Management Agency and the Defense Contract Audit Agency to help them analyze costs and/or prices. Such officials lent substantial expertise and experience to the negotiation process by performing audits and reviews of the contractor's purchasing systems, estimating systems, overhead rates, and operations in general. In some cases, government and contractor personnel worked collaboratively and effectively within integrated product teams to analyze costs and prices. In doing so, they shared and used the same data to come to a consensus on issues affecting contract price. This arrangement also served to minimize the development of adversarial relationships between the contractor and the government. Another factor that could lower risk is the contractor's having sound estimating and purchasing systems--ones approved by government organizations. Such systems are integral to producing credible proposals. Nearly all of the contractors in the cases that we reviewed had such systems, and in a few cases, allowed government representatives direct access to the data within the systems. Specific examples highlighting risk factors are provided in the figure below. DOD's guidance on the waiver process is not adequate. First, DOD does not have guidance that would help clarify for buying organizations what an "exceptional" case might actually entail. The Truth in Negotiations Act does not define exceptional cases and the regulatory guidance is limited. The current guidance states that the head of the contracting activity may consider waiving the requirement if the price can be determined to be fair and reasonable without the submission of cost or pricing data. But the guidance cites only one example of a situation where a waiver may be granted: "if cost or pricing data were furnished on previous production buys and the contracting officer determines such data are sufficient, when combined with updated information." The trade-offs and complexities involved in making the decision to grant a waiver require more guidance. On the one hand, the certification process greatly lowers the risk of inflated pricing and provides the government with recourse in the event that items are found to be defectively priced. In fact, in fiscal year 2000, Defense Contract Audit Agency audits related to the Truth in Negotiations Act identified potential cost savings of $4.9 billion. On the other hand, the certification process can be costly to both the contractor and the government in terms of time, effort, and money. And there may be times--such as when there is an urgent need for the item or when the same item was purchased very recently using certified data--when the government may be willing to take a greater risk. By developing more detailed guidance, DOD could help buying organizations weigh these trade-offs and avoid using the waiver process as merely a shortcut to getting an item, even an expensive weapon system, quicker and easier. Second, DOD does not have guidance that would help buying organizations draw the line between what type of data and analyses would be acceptable or not and what kinds of outside assistance, such as DOD contracting and pricing experts, should be obtained. Our analysis showed that there was a wide spectrum in the quality of the data and analyses being used. On one end, there were situations where the analysis focused only on the bottom-line price and not the supporting costs and where the data being relied on were exceptionally old. On the other end, were situations where the negotiations were based on data that were very recently certified with little change in quantity. In addition, in some situations, other risk mitigating techniques were employed, such as involving contract and pricing experts. Clearly, it is in DOD's interest to encourage contracting officers to reduce the risk of inflated pricing as much as possible by conducting more rigorous analyses and taking advantage of DOD's pricing and contracting expertise. Third, we identified several issues, not covered within existing guidance, where there was some confusion on what the law and regulations allowed. For example, contracting officers' views differed on whether the government can obtain a waiver that covers only a portion of costs associated with a procurement. In purchasing Apache helicopters, for example, the government, in fact, obtained a partial waiver covering subcontractor costs and recurring labor costs, estimated at $462.6 million of the total $2.3 billion contract. In contrast, in another case, the contracting officer told us that the regulations do not provide for partial waivers. Another question that could be clarified is whether waivers can be applied to planned, but unpriced, contract options in later years. Specifically, under contracts which have options that are not priced or under which the price can be redetermined, it is not clear whether a waiver obtained in the first year of the contract should apply to price negotiations that occur in subsequent years of the contract. This question came up with the Army's purchase of combat vehicle track from Goodyear Tire and Rubber. In another related situation involving the Army's purchase of Black Hawk helicopter engines from General Electric, the waiver ultimately covered planned purchases over 5 years under two separate contracting actions. For the majority of its sole-source purchases, DOD minimizes the risk of inflated pricing by requiring its contractors, under the Truth in Negotiations Act, to provide detailed cost or pricing data to support their proposed prices and certify that the data are accurate, complete, and current. But for several billion dollars in contracts, DOD is at a greater risk of inflated pricing because it is waiving the requirement. In some cases, contracting officers still make a considerable effort to reduce risks, such as performing detailed price or cost analyses, involving pricing and contracting experts, and relying on data that were recently certified. By developing guidance to encourage all contracting officers to take such steps and to help buying organizations weigh the decision to grant waivers, DOD could reduce its risk of inflated pricing even further. We recommend that the secretary of defense work with the Office of Federal Procurement Policy to develop guidance to be included in the Federal Acquisition Regulation to minimize the risk of inflated pricing when waivers for certified cost or pricing data are granted to its contractors and subcontractors. This guidance should (1) clarify situations in which an exceptional case waiver may be granted, (2) identify what type of data and analyses are recommended for arriving at a price when waivers are granted, and (3) identify what kinds of outside assistance should be obtained. We also recommend that the secretary develop guidance that clarifies whether the government can obtain a partial waiver and what should be done with contracts that have options that are not priced. We further recommend that the secretary survey buying organizations to assess whether additional specific issues not covered within existing guidance need to be clarified. In providing written comments on a draft of this report, DOD generally agreed with our findings and recommendations. Its only disagreement was with our recommendation to work with the Office of Federal Procurement Policy to incorporate new guidance in the Federal Acquisition Regulation. DOD specifically acknowledged that the age and usefulness of data and analysis should be a concern for contracting officers. In response to our recommendations, DOD intends to develop additional guidance to the contracting community regarding (1) the approval of a waiver of the requirement for cost or pricing data, (2) the types of analyses that should be conducted when waivers are granted, and (3) outside expertise that should be engaged in conducting these analyses. DOD plans to include guidance in a memorandum to the military departments and defense agencies and incorporate it into the next update of its Contract Pricing Reference Guides. DOD also agreed with the need to address partial waivers and waivers on unpriced options. In addition, DOD agreed to survey buying organizations to assess whether specific issues not covered within existing guidance need to be clarified. DOD disagreed with our recommendation to place the revised guidance in the Federal Acquisition Regulation because it believed that such a listing would detract from the application of the best professional judgment by contracting officers. We believe that DOD is taking constructive measures to reduce risks that come with the waiver process. In addition, we appreciate that providing additional guidance outside the Federal Acquisition Regulation will provide a more immediate benefit than amending the regulation. However, it is still appropriate for DOD to work with OFPP and the FAR Council to incorporate its guidance into the Federal Acquisition Regulation since the guidance would help clarify the regulation and since the regulation is the definitive source for contract management. We are sending copies of this report to the secretary of defense; the secretaries of the army, navy, and air force; the director, Office of Management and Budget; the administrator, Office of Federal Procurement Policy; and interested congressional committees. We will also make copies available to others on request. If you have any questions about this report or need additional information, please call me on (202) 512-4841. Key contributors to this report are listed in appendix IV. To meet our objectives, we reviewed 20 waivers valued at more than $5 million each in fiscal year 2000 at six buying organizations. In total, the waiver value of these 20 contracts amounted to about $4.4 billion. These 20 waivers involved an array of buying commands, weapon systems, major contractors, and purchasing circumstances. The DOD contract database was used as the basis to identify sole source, fixed-price weapon system contracts, with more than $5 million in expenditures (or contract actions) in fiscal year 2000. The DOD database includes a variety of contracting actions, such as a basic award of a contract as well as modification of a contract. Modifications could include an exercise of an option to a basic contract or funding of the contract for a specific year on a contract funded on an incremental basis. As a result, in some cases with multiyear buys, the pricing of the contract or modification selected for review occurred before fiscal year 2000. We selected six commands to visit during this review because these commands, based on DOD's contract database, were the only locations that had individual waivers with more than $5 million in expenditures in fiscal year 2000. These six include the (1) Naval Air Systems Command, (2) Naval Sea Systems Command, (3) Naval Inventory Control Point, (4) Army Tank-Automotive and Armaments Command, (5) Army Aviation and Missile Command, and (6) Aeronautical Systems Center of the Air Force Materiel Command. Because of concerns regarding the reliability of computer-generated data, we also requested the commands to independently review their records to identify any additional waivers meeting these criteria. In total, through the use of the database and independent review process, we identified the 20 contracts with waivers amounting to about $4.4 billion. These six are large buying organizations and visiting these organizations, in our view, gives us visibility into the use of waivers for large contracts nationally in fiscal year 2000. We reviewed the techniques associated with the methods of pricing the contracts. This review included the data used by contracting officers to determine whether the prices were fair and reasonable. To accomplish this review, we reviewed contract files and held discussions with contracting officers at the DOD buying organizations. In addition, we also held discussions with representatives of most of the contractors to obtain information on the orders as well as DOD officials located at contractor plants. We conducted our review between March 2001 and April 2002 in accordance with generally accepted government auditing standards. Below is the waiver provision, which is at section 15.403-1 (c) (4) of the Federal Acquisition Regulation. The head of the contracting activity (HCA) may, without power of delegation, waive the requirement for submission of cost or pricing data in exceptional cases. The authorization for the waiver and the supporting rationale shall be in writing. The HCA may consider waiving the requirement if the price can be determined to be fair and reasonable without submission of cost or pricing data. For example, if cost or pricing data were furnished on previous production buys and the contracting officer determines such data are sufficient, when combined with updated information, a waiver may be granted. If the HCA has waived the requirement for submission of cost or pricing data, the contractor or higher-tier subcontractor to whom the waiver relates shall be considered as having been required to provide cost or pricing data. Consequently, award of any lower-tier subcontract expected to exceed the cost or pricing data threshold requires the submission of cost or pricing data unless-- 1. An exception otherwise applies to the subcontract; or 2. The waiver specifically includes the subcontract and the rationale supporting the waiver for that subcontract. In addition to those named above, Erin Baker, Cristina Chaplain, Ken Graffam, Martin Lobo, Ralph Roffo, John Van Schaik, and Paul Williams made key contributions to this report.
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Although most federal contracts are awarded through competition, the government also buys unique products and services, including sophisticated weapons systems, for which it cannot always rely on competition to get the best prices and values. Instead, it uses a single source for its procurements. In these cases, contractors and subcontractors provide the government with cost or pricing data supporting their proposed prices and certify that the data submitted are accurate, complete, and current, as required by the Truth in Negotiations Act. This ensures that the government has the data it needs to effectively negotiate with the contractor and avoid paying inflated prices. The government can waive the requirement for certified data in exceptional cases. In these instances, contracting officers use other techniques to arrive at fair and reasonable prices. Using the Department of Defense's (DOD) contract database, GAO found 20 waivers, each valued at more than $5 million, in fiscal year 2000. The total value of these waivers was $4.4 billion. In each case, the contract pricing or waiver documents stated that sufficient information was available to determine the price to be fair and reasonable without the submission of cost or pricing data. There was a wide variety in the quality of the data and analyses being used, from very old to very recent data. Despite the range of techniques employed to arrive at a price, DOD does not have guidance that would help buying organizations determine acceptable data and analyses and what kinds of outside assistance, such as contracting and pricing experts, should be obtained.
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Corporations can be located in tax haven countries through a variety of means, including corporate inversions, acquisition, or initial incorporation abroad. Location in a tax haven country can change a company's tax liability because the United States taxes domestic corporations differently than it taxes foreign corporations. The United States taxes the worldwide income of domestic corporations, regardless of where the income is earned; gives credits for foreign income taxes paid; and defers taxation of foreign subsidiaries until their profits are repatriated in the form of dividends or other income. However, a U.S. parent corporation is subject to current U.S. tax on certain income earned by a foreign subsidiary, without regard to whether such income is distributed to the U.S. corporation. Through "deferral," U.S. parent corporations are allowed to postpone current taxation on the net income or economic gain accrued by their subsidiaries. These subsidiaries are separately incorporated foreign subsidiaries of U.S. corporations. Because they are not considered U.S. residents, their profits are not taxable as long as the earnings are retained and reinvested outside the United States in active lines of business. That is, U.S. tax on such income is generally deferred until the income is repatriated to the U.S. parent. The U.S. system also contains certain anti-deferral features that tax on a current basis certain categories of passive income earned by a domestic corporation's foreign subsidiaries, regardless of whether the income has been distributed as a dividend to the domestic parent corporation. Passive income includes royalties, interest and dividends. According to the Internal Revenue Code (I.R.C.), passive income is "deemed distributed" to the U.S. parent corporation and thus denied deferral. The rules defining the application and limits of this antideferral regime are known as the Subpart F rules. In order to avoid double taxation of income, the United States permits a taxpayer to offset, in whole or in part, the U.S. tax owed on this foreign- source income. Foreign tax credits are applied against a corporation's U.S. tax liability. The availability of foreign tax credits is limited to the U.S. tax imposed on foreign-source income. To ensure that the credit does not reduce tax on domestic income, the credit cannot exceed the tax liability that would have been due had the income been generated domestically. Firms with credits above that amount in a given year have "excess" foreign tax credits, which can be applied against their foreign source income for the previous 2 years or the subsequent 5 years. This system of taxation of U.S. multinational corporations has been the subject of ongoing debate. Specific issues in international taxation include whether to reform the U.S. system by moving from worldwide taxation to a territorial system that exempts foreign-source income from U.S. tax. These issues have become more prominent with the increasing openness of the U.S. economy to trade and investment. The United States taxes foreign corporations on income generated from their active business operations in the United States. Such income may be generated by a subsidiary operating in the United States or by a branch of the foreign parent corporation. It is generally taxed in the same manner and at the same rates as the income of a U.S. corporation. In addition, if a foreign corporation is engaged in a trade or business in the United States and receives investment income from U.S. sources, it will generally be subject to a withholding tax of 30 percent on interest, dividends, royalties, and certain types of income derived from U.S. sources, subject to certain exceptions. This tax may be reduced or eliminated under an applicable tax treaty. For objective 1, we collected and analyzed information on government contracting practices and business decision-making processes. We also reviewed the economics literature and reports of the Department of the Treasury and the Joint Committee on Taxation to determine how differences in the tax treatment of corporations can contribute to a tax cost advantage. Using the information we obtained, we built a simple qualitative model to explain the conditions under which a tax haven company may have a tax cost advantage in competing for federal contracts relative to other companies whose headquarters are not located in tax haven countries. For a description of the model, see appendix I. For objective 2, we used the qualitative model to identify companies that had characteristics consistent with having a tax cost advantage. We matched contractor data (name and taxpayer identification numbers) from the GSA's FPDS for 2000 and 2001 to tax and location data from the IRS's SOI corporation file. In this matched database, we analyzed information about large corporations, those with at least $10 million in assets. We identified the large corporations with characteristics consistent with a tax cost advantage compared to other large corporations and counted the number of these advantaged and disadvantaged corporations. We divided the SOI data into categories that differentiated between federal contractors (domestically owned and foreign owned) and noncontractors (domestically owned and foreign owned). We further divided the foreign- owned corporation data by those headquartered in tax haven countries from those not headquartered in tax haven countries. SOI is a data set widely used for research purposes. SOI corporation files are representative samples of the population of all corporations that filed tax returns. Generally, SOI data can be used to project tax return information to the universe of all filers. However, the total corporations that matched in both the SOI and FPDS databases could not be used to project the results of our analysis to the universe of all corporations. Because SOI's sampling rate for smaller corporations is very low, our matched database contained very few smaller corporations and would not lead to reliable estimates of the properties of the universe of smaller corporations. Therefore, the results of our analysis cannot be projected to the universe of all corporate filers. However, our results do represent the universe of large tax haven contractors. SOI samples corporations with at least $10 million in assets at a 100 percent rate so that the SOI sample includes the universe of these larger corporations. For this reason, we report the results of our analysis without sampling error. IRS performs a number of quality control steps to verify the internal consistency of SOI sample data. For example, it performs computerized tests to verify the relationships between values on the returns selected as part of the SOI sample and manually edits data items to correct for problems, such as missing items. We conducted several reliability tests to ensure that the data excerpts we used for this report were complete and accurate. For example, we electronically tested the data and used published data as a comparison to ensure that the data set was complete. To ensure accuracy, we reviewed related documentation and electronically tested for obvious errors. We concluded that the data were sufficiently reliable for the purposes of this report. We have previously reported that there are limitations to the accuracy of the data in FPDS. The data accuracy issues we reported on involved contract amounts and classification of contract characteristics. For this report, the only FPDS data we used were the contractors' names and taxpayer identification numbers. Our previous report did not address the accuracy of these data elements. Therefore, our match of the FPDS and SOI data may contain some nonsampling error; that is, due to inaccurate identification numbers, we may fail, in some cases, to correctly identify large corporations in SOI that were also federal contractors. However, we expect this nonsampling error to be small, and we concluded that the data were sufficiently reliable for the purposes of this report. Contractors, including tax haven contractors, that have a lower marginal tax rate on the income from a contract than other contractors would have a tax cost advantage when competing for a contract. Furthermore, there is some evidence that a tax haven contractor may be able to shift income between the U.S. subsidiary and its tax haven parent in order to reduce U.S. taxable income. There are conditions under which a contractor could have a tax cost advantage when competing for a contract. The tax cost of the contract is the tax paid on the additional income derived from the contract. A contractor that pays less tax on additional income from a contract gains a tax cost advantage compared to companies that pay higher tax. One way to gain a tax cost advantage is by offsetting income earned on the contract with losses from other activities. The contractors with a tax cost advantage are not necessarily the successful competitors because the tax cost savings may not be reflected in actual bid prices or price proposals, and prices or costs are only one of several factors involved in awarding contracts. This reasoning holds for all contractors, including tax haven contractors, and all contracts, including federal contracts. The appropriate measure of the tax cost of the contract is the corporation's marginal tax rate. The marginal tax rate is the rate that applies to an increment of income. As such, the marginal tax rate would be the rate that applies to the additional income that would arise from the federal contract. For example, if a contractor in a 34 percent tax bracket earns $1 million of additional income from the contract, it would owe $340,000 in additional tax. The 34 percent statutory tax rate is this contractor's marginal rate. A lower marginal tax rate may confer a tax cost advantage when companies are bidding on contracts because it indicates a higher after-tax rate of return on the contact. All other things being equal, a lower marginal effective tax rate is equivalent to a reduction in cost, that is, a reduction in either the tax rate or cost would produce a higher after-tax return. For example, a contractor with a 30 percent marginal tax rate on a contract producing $1 million of income pays $300,000 in taxes and receives $700,000 in additional after-tax income. On the other hand, a contractor with a 34 percent marginal tax rate on the same contract producing $1 million of income pays $340,000 in taxes and receives $660,000 in additional after-tax income. The $40,000 difference in after-tax income due to the difference in marginal tax rates is the tax cost advantage. In this example, the contractor with the tax cost advantage can, in theory, underbid the competitor by as much as $40,000 and earn an after-tax income at least as large as the competitor. In this sense, the competitor with the lower marginal tax rate would have a tax cost advantage over a competitor with a higher marginal tax rate. A contractor gains a tax cost advantage if it has a lower marginal tax rate compared to other companies that are competing for the contract. However, the available data are not sufficient to measure marginal rates accurately. In order to compute marginal rates, detailed information is required about the tax status of the contractors and types of spending by the contractors associated with the contracts. Although the marginal tax rates are not available, conditions under which the marginal rates may be lower for some companies than others can be inferred from their current taxable income. Specifically, a company that has positive taxable income may be more likely to have a positive tax liability on the incremental income from the contract than companies with zero or negative taxable income. Therefore, a company with zero taxable income may have a lower marginal tax rate relative to companies with positive taxable income. Tax losses in the United States on other activities could absorb incremental income generated from a contract. All other things being equal, a company competing for a federal contract that reported taxable income in the United States would face a higher tax cost than a competitor without taxable income. While a zero tax liability provides an indicator of a tax cost advantage, it does not necessarily mean that the advantage exists. Whether a contractor with zero tax liability has a tax cost advantage when competing for a particular contract depends on the tax liabilities of the other competitors. The contractor with zero tax liability would have no tax cost advantage if all the other competitors also had no tax liability. Even if a contractor can be shown to have a tax cost advantage when competing for a federal contract, this advantage does not imply that the contractor's bid or proposal will be successful. A tax cost advantage may not be reflected in the contractor's bid or price proposal, the content of which depends on the business judgment of the contractor. For example, in order to include more profit, a contractor may decide not to use any tax cost advantage to reduce its price. Even if the tax advantage is reflected in the bid or price proposal, other price or cost factors that affect whether the bid or proposal is successful may not be equal across the companies competing for the contract. For example, a bidder may have a tax cost advantage over other bidders, but if its costs of labor and material are higher, its tax cost advantage may be offset by its higher costs for those other elements of its bid. Further, where price or cost is not the only evaluation factor for award of the contract, any tax cost advantage may be offset by the relative importance of other factors such as technical merit, management approach, and past performance. Generally, the contractor's tax cost advantage would become a competitive advantage where other contractors would have to reduce their prices (or costs) and/or improve the nonprice (or noncost) elements of their proposals to offset the tax cost advantage. Tax haven contractors may be more likely to have lower tax costs than other contractors because they may be able to shift U.S. source income to their tax haven parents, reducing U.S. taxable income. Some, but not all, domestic contractors - those that have overseas affiliates - may also be able to shift income. Any income earned by the U.S. subsidiary from a contract for services performed in the United States would be U.S. taxable income. Such income would be taxed in the United States unless it is shifted outside the United States through such techniques as transfer pricing abuse. Location in a tax haven country can confer tax advantages that are not related to income shifting and do not give a company an advantage when competing for federal contracts. When a parent locates in a tax haven country, taxes on foreign income can be reduced by eliminating U.S. corporate-level taxation of foreign operations. However, these tax savings are unrelated to the taxes paid on income derived from the contract for services performed in the United States and have no effect on the tax cost of the contract. The tax haven contractor potentially gains an advantage with respect to contract competition because of the increased scope for income shifting to reduce U.S. taxable income below zero. A tax haven contractor may be able to shift income outside of the United States by increasing payments to foreign members of the corporate group. The contractor may engage in transfer pricing abuse, whereby related parties price their transactions artificially high or low to shift taxable income out of the United States. For example, the tax haven parent can charge excessive prices for goods and services rendered (for example, $1000 instead of $500). This raises the subsidiary's expenses (by $500), lowers its profits (by $500), and shifts the income ($500) to the lower tax jurisdiction outside the United States. Transfer pricing abuse can also occur when the foreign parent charges excessive interest on loans to its U.S. subsidiary. Interest deductions can also be used to shift income outside the United States through a technique called "earnings stripping." Using this technique, the foreign parent loads the U.S. subsidiary with a disproportionate amount of debt, merely by issuing an intercompany note, thereby generating interest payments to the parent and interest deductions against U.S. income for the subsidiary. However, the U.S. subsidiaries would still be subject to the I.R.C. rules that limit the deductibility of interest to 50 percent of adjusted taxable income whenever the U.S. subsidiary's debt-equity ratio exceeds 1.5 to 1. Determining whether companies shift income to obtain a tax cost advantage is difficult because differences among companies that may indicate shifting can also be explained by other factors affecting costs and profitability. For example, while differences in average tax rates and interest expenses may be consistent with income shifting, they do not prove that such activities are occurring. The differences might be explained by other factors, such as the age of the company. As table 1 shows, tax haven contractors in 2001 had greater interest expense and lower tax liabilities relative to gross receipts than domestic or all foreign contractors. The greater interest expense associated with lower tax liabilities may indicate that the tax haven contractors have used techniques like earnings stripping to shift taxable income outside the United States. The pattern of tax liabilities and interest expense in 2000 is the same as in 2001 in all respects except one: the ratio of interest expense to gross receipts for tax haven noncontractors is lower than the ratio for domestic or all foreign contractors in 2000. (For details, see app. II.) This pattern of interest expenses and tax liabilities is largely consistent with tax haven contractors inflating interest costs to shift taxable income outside of the United States but does not prove that this has occurred. The differences may be due to such factors as the age and industry of the companies, their history of mergers or acquisitions, and other details of their financial structure and the markets for their products. Furthermore, low or zero tax liability is not necessarily an indicator of noncompliance. Companies may have low or zero tax liabilities for a variety of reasons, such as overall business conditions, industry- or company-specific performance issues, and the use of income shifting. The evidence on the extent to which income shifting is occurring is not precise. Studies that compare profitability of foreign-controlled and domestically controlled companies show that much of the difference can be explained by factors other than income shifting. However, the range of estimates can be wide, contributing to uncertainty about the precise effect, and the studies do not focus on income shifting to parents in tax haven countries. The 1997 study by Harry Grubert showed that more than 50 percent, and perhaps as much as 75 percent, of the income differences could be explained by factors other than income shifting. A Treasury report on corporate inversions did discuss income shifting to parents in tax haven countries but did not provide any quantitative estimates of the extent of such shifting. According to the report, the tax savings from income shifting are greatest in the case of a foreign parent corporation located in a no-tax jurisdiction. The Treasury report cites increased benefits from income shifting among other tax benefits as a reason for recent corporate inversion activity and increased foreign acquisitions of U.S. multinationals. Using tax liability as an indicator of ability to offset contract income, we determined that large tax haven contractors were more likely to have a tax cost advantage than large domestic contractors in both 2000 and 2001. In both years, tax haven contractors were about one and a half times more likely to have no tax liability as domestic contractors. As table 2 shows, in 2000, 56 percent of the 39 tax haven contractors reported no tax liability, while 34 percent of the 3,253 domestic contractors reported no tax liability. In 2001, 66 percent of the 50 tax haven contractors and 46 percent of the 3,524 domestic contractors reported no tax liability. Under the conditions of our model, contractors with no tax liability would have a tax cost advantage compared to the contractors that did have tax liabilities in these years. Consequently, in 2000, the tax haven contractors without tax liabilities were likely to have a tax cost advantage compared to the 17 other tax haven contractors and 2,132 domestic contractors that had tax liabilities. The 1,121 domestic contractors without tax liabilities were also likely to have a tax cost advantage compared to these same companies. In 2001, the tax haven contractors with zero tax liability were likely to have a tax cost advantage compared to the 17 other tax haven contractors and 1,888 domestic contractors that had tax liabilities. Because they reported no tax liability, 1,636 domestic contractors were also likely to have a tax cost advantage with compared to these same companies. This analysis of possible tax advantages does not show that income shifting is the only potential cause of the advantage. As mentioned above, the tax losses that confer the advantage may be due to income shifting, but may also be due to other factors such as overall business conditions, industry and age of the company, or company-specific performance issues. In addition, the analysis does not show the size of the advantage in terms of tax dollars saved. The amount saved depends, in part, on the amount of additional income from the contract. If the contractor with no tax liability has insufficient losses to offset the additional income, it would pay taxes on at least part of the income, reducing the potential advantage. Lastly, the analysis identifies tax haven contractors that meet the conditions for having a tax cost advantage with respect to income from the contract in 2000 and 2001. The data do not indicate whether they have an overall tax cost advantage on a contract that produces income in other years. Furthermore, to the extent that losses are used to offset income in the current year, they cannot be used to offset income in other years. These smaller loss carryovers would reduce the overall tax cost advantage. The existence of a tax cost advantage for some tax haven contractors matters to American taxpayers. First, the advantage could, but does not necessarily, affect which company wins a contract. A contractor with a tax cost advantage could offer a price that wins a contract based more on tax considerations than on factors such as the quality and cost of producing goods and services. Second, the potential tax cost advantage may contribute, along with other tax considerations, to the incentives for companies to move to tax haven countries, reducing the U.S. corporate tax base. The issue of tax cost advantages for tax haven contractors is related to the larger issue of how companies headquartered or operating in the United States should be taxed. For example, the questions about how the worldwide income of U.S. multinational corporations should be taxed are part of a larger debate and beyond the scope of this report. Because of these larger policy issues, we are not making recommendations in this report. In a letter dated June 22, 2004, the IRS Commissioner stated that because IRS's only role in our report was to provide us with certain tax data, IRS's review of a draft of this report would be limited to evaluating how well we described the tax data it provided. The Commissioner stated that IRS believes that the report fairly describes these data. On June 28, officials from the Department of the Treasury's Office of Tax Policy provided oral comments on several technical issues, which we incorporated into the report where appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its date. 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. In addition, this report will be available at no charge on GAO's Web site at http://www.gao.gov. If you have any questions concerning this report, please contact me at (202) 512-9110 or [email protected] or Kevin Daly at (202) 512-9040 or [email protected]. Key contributors to this report are listed in appendix III. A parent corporation that locates in a tax haven country may reduce U.S. tax on corporate income by shielding subsidiaries from U.S. taxation and by providing opportunities for shifting of U.S. source income to lower tax jurisdictions. Such a corporation could have an advantage because it is able to have a lower marginal tax rate on U.S. contract income than its domestic competitors or other foreign competitors. The simple qualitative model in this appendix specifies a set of conditions under which corporations with a tax haven parent may have a lower marginal U.S. tax rate. The principal means by which a parent corporation that locates in a tax haven country may have lower U.S. tax liabilities are as follows. The corporation pays no U.S. tax on what would have been its foreign source income if it were located in the United States. To the extent that foreign subsidiaries are owned by a foreign parent, the U.S. corporate- level taxation of foreign operations is eliminated. Tax savings would come from not having to pay tax on the corporate group's foreign income. The corporation may be able to shift income outside of the United States by increasing payments to foreign members of the group. The corporation may engage in transfer pricing abuse, whereby related parties price their transactions artificially high or low to shift taxable income out of the United States. Transfer pricing abuse can also occur when the foreign parent charges excessive interest on loans to its U.S. subsidiary. Interest deductions can also be used to shift income outside the United States through a technique called earnings stripping. Using this technique, the foreign parent loads the U.S. subsidiary with a disproportionate amount of debt, merely by issuing an intercompany note, thereby generating interest payments to the parent and interest deductions against U.S. income for the subsidiary. The subsidiaries would still be subject to the thin capitalization rules (I.R.C. section 163 (j)) that limit the deductibility of interest to 50 percent of adjusted taxable income whenever the U.S. subsidiary's debt-equity ratio exceeds 1.5 to 1. When a parent corporation locates in a tax haven country, the elimination of U.S. corporate-level taxation of foreign operations can reduce taxes on foreign income. However, these tax savings are unrelated to the taxes paid on income derived from the contract and have no effect on the tax cost of the contract. Any income earned by the U.S. subsidiary from a contract for services performed in the U.S. would be U.S. taxable income. Therefore, the elimination of the corporate-level taxation of foreign operations provides no competitive advantage to a corporation that is competing for a U.S. government contract. A corporation has a U.S. tax advantage in competing for a government contract when it would pay a lower marginal U.S. tax rate on the income from that contract than would the other companies competing for that same contract. The available data are not sufficient to measure marginal rates accurately. However, the likelihood that the rates are lower for some companies than others can be inferred from their current tax liabilities. The manipulation of interest payments and other transfer pricing can reduce U.S. taxable income. We can infer that the corporation may have a lower marginal tax rate on its U.S. contract income if the manipulation allows a corporation that would otherwise have positive taxable income to reduce its taxable income (excluding the net income from the contract) to a negative amount. Table 3 shows a set of situations, or cases, in which a corporation may and may not have a cost advantage when bidding on a contract. In order to use this model to identify corporations with a tax cost advantage, we make two assumptions: (1) corporations with positive U.S. taxable income pay tax at the same rate based on the schedule of corporate tax rates (that is, their income before the contract income puts them in the same tax bracket) and (2) corporations with negative income have sufficient losses to offset income from the contract. With these assumptions, we can draw inferences about relative marginal tax rates for the three cases. A U.S. corporation that has positive U.S. taxable income (before taking the income from the contract into account) and has a parent located in a tax haven country does not have a competitive advantage compared to a U.S. corporation with positive income (Case 2). Because they have positive income and pay the same rate of tax, neither has a lower marginal tax rate than the other. Likewise, a corporation with a tax haven parent that has U.S. tax losses and zero tax liability would not have an advantage compared to another corporation with tax losses (Case 3). Because the marginal tax rate is zero for both these corporations and they have sufficient losses to offset the contract income, neither has a tax cost advantage. However, a corporation that has a tax haven parent and U.S. tax losses would have an advantage when compared to a corporation with positive income (Case 1). In this case, the corporation with losses has a zero marginal rate, which provides a tax cost advantage compared to a corporation with taxable income and a positive marginal rate. The assumption that a corporation with zero tax liability has sufficient losses to offset contract income may not be true in particular instances. For example, a corporation may obtain more than one contract (in the public or private sector) and the marginal tax rate on income from a particular contract will depend on how the losses are allocated across income from all the contracts. However, a corporation with zero tax liability is more likely to be able to offset the additional income than a corporation with positive tax liability. In this sense, tax liability is an indicator of the ability to offset income from the contract. The qualitative model does not identify the causes of the advantage. The tax losses that confer the advantage may be due to income shifting, but may also be due to other factors. In addition, the model does not show the size of the advantage in terms of tax dollars saved. The amount saved depends, in part, on the amount of additional income from the contract. If the contractor with no tax liability has insufficient losses to offset the additional income, it would pay taxes on at least part of the income, reducing the potential advantage compared to contractors that have positive tax liabilities. Lastly, the model is used to identify tax haven contractors that meet the conditions for having a competitive advantage with respect to income from the contract in 2000 and 2001. The data do not indicate whether they have an overall tax advantage on a contract that produces income in other years. The additional table of tax liabilities and interest expense for 2000 is provided for comparison with the data reported in the letter. It shows substantially the same pattern. Table 4 shows that in 2000, tax haven contractors had greater interest expense and lower tax liabilities relative to gross receipts than domestic or all foreign contractors. The pattern of tax liabilities and interest expense in 2000 is the same as in 2001 in all respects except one: the ratio of interest expense to gross receipts for tax haven noncontractors is lower than the ratio for domestic or all foreign contractors in 2000. The greater interest expense associated with lower tax liabilities may indicate, but does not prove, that the tax haven contractors have used techniques like earnings stripping to shift taxable income outside the United States. Amy Friedheim, Donald Marples, Samuel Scrutchins, James Ungvarsky, and James Wozny 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. 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The federal government was involved in about 8.6 million contract actions, including new contract awards, worth over $250 billion in fiscal year 2002. Some of these contracts were awarded to tax haven contractors, that is, U.S. subsidiaries of corporate parents located in tax haven countries. Concerns have been raised that these contractors may have an unfair cost advantage when competing for federal contracts because they are better able to lower their U.S. tax liability by shifting income to the tax haven parent. GAO's objectives in this study were to (1) determine the conditions under which companies with tax haven parents have a tax cost advantage when competing for federal contracts and (2) estimate the number of companies that could have such an advantage. GAO matched federal contractor data with tax and location data for all large corporations, those with at least $10 million in assets, in 2000 and 2001, in order to identify those companies that could have an advantage. There are conditions under which a tax haven contractor may have a tax cost advantage (lower tax on additional income from a contract) when competing for a federal contract. The extent of the advantage depends on the relative tax liabilities of the tax haven contractor and its competitors. One way for a contractor to gain a tax cost advantage is by reducing its U.S. taxable income from other sources to less than zero and by using its losses to offset some or all of the additional income from a contract, resulting in less tax on the contract income. A company would thereby gain an advantage relative to those competitors with positive income from other sources and may be able to offer a lower price or cost for the contract. While some domestic corporations may also have a tax cost advantage, tax haven contractors may be better able to reduce U.S. taxable income to less than zero because of opportunities to shift income to their tax haven parents. Whether a contractor has a tax cost advantage in competing for a particular contract depends on the tax liabilities of other competitors. Also, the contractors with a tax cost advantage are not necessarily the successful competitors because the tax cost savings may not be reflected in actual prices, and prices may be only one of several factors involved in awarding contracts. Using tax liability as an indicator of ability to offset contract income, GAO found that large tax haven contractors in both 2000 and 2001 were more likely to have a tax cost advantage than large domestic contractors. In 2000, 56 percent of the 39 large tax haven contractors reported no tax liability, while 34 percent of the 3,253 large domestic contractors reported no tax liability. In 2001, 66 percent of large tax haven contractors and 46 percent of large domestic contractors reported no tax liability.
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SFA manages and administers student financial assistance programs authorized under title IV of the Higher Education Act of 1965, as amended (HEA). These postsecondary programs include the William D. Ford Federal Direct Loan Program (FDLP--often referred to as the "Direct Loan"), the Federal Family Education Loan Program (FFELP--often referred to as the "Guaranteed Loan"), the Federal Pell Grant Program, and campus-based programs. Annually, these programs together provide about $50 billion in student aid to approximately 8 million students and their families. As a consequence, the student financial aid data exchange environment is large and complex. It includes about 5,300 schools authorized to participate in the title IV program, 4,100 lenders, 36 guaranty agencies, as well as other federal agencies. Currently, SFA oversees or directly manages approximately $220 billion in outstanding loans representing about 100 million borrowers. Figure 1 provides an overview of this environment. During the past three decades, the Department of Education has created many nonintegrated information systems to support its growing number of student financial aid programs. In many cases, these systems--maintained and operated by a host of different contractors, on multiple platforms-- are unable to easily exchange timely, accurate, and useful information needed to ensure the proper management and oversight of various student aid programs. Table 1 lists SFA's current inventory of major systems. Beginning in 1992, title IV student financial aid systems integration was the subject of heightened congressional concern. The 1992 HEA amendments required the department to centralize data on student loan indebtedness by integrating databases containing student financial aid program information. In response to this mandate, in January 1993 Education awarded a 5-year, $39-million contract for development and maintenance of NSLDS. The system was to provide information on students across programmatic boundaries, yet problems persisted. Since 1995, because of concerns over Education's vulnerabilities to losses due to fraud, waste, abuse, and mismanagement, student financial aid has been included on our high-risk list. Studies had shown that Education had used inadequate management information systems containing unreliable data, and that inaccurate loan data were being loaded into NSLDS. In 1997, 4 years after the initiation of the NSLDS contract, data inconsistencies and errors across systems, such as a student's enrollment status or the amount of loan indebtedness, continued to have a negative impact on the student's ability to receive aid. Education still lacked an accurate, integrated system for student financial aid data; the nonintegrated systems would sometimes provide conflicting information to the department's financial aid partners (schools, lenders, guaranty agencies). The department had opted to establish NSLDS as a data repository rather than an integrated database; this meant that while the system could receive and store information from other title IV systems, the lack of uniformity in how the individual systems stored their information-- no common student or institutional identifiers or data standards-- complicated data-matching among systems. Hence, NSLDS could not be effectively updated (or update other systems) without expensive data conversion programs. As a result, data contained in other systems, operated by a variety of contractors, were often in conflict with data stored in NSLDS due to differences in the timing of updates among the multiple data providers. As also reported in 1997, large amounts of redundant student financial aid data generated by schools, lenders, guaranty agencies, and several internal department systems, were being stored in standalone databases, thereby increasing the cost to administer the various title IV programs. We concluded that these data exchange and storage problems, as well as other program operation and monitoring difficulties, were partly related to the lack of a fully functional integrated database covering all title IV student financial aid programs. In 1998, in part to address these and other longstanding management weaknesses, Congress amended HEA and established SFA as the federal government's first performance-based organization (PBO). Under the PBO concept, SFA is a discrete organizational unit within the Department of Education, and focuses solely on programmatic--rather than policy-- issues, which remain the responsibility of the Secretary of Education. Thus, upon being designated a PBO, SFA was expected to shift from a focus on adherence to required processes to a focus on customers and program results. Moreover, in establishing SFA as a PBO, Congress gave SFA specific personnel hiring authority, including the ability to appoint up to 25 technical and professional employees without regard to provisions governing appointments to the competitive service. Also in conjunction with its PBO status, SFA can seek waivers from governmentwide regulations, policies, and procedures (e.g., acquisition, human capital, and procurement). This flexibility is intended to give SFA greater freedom in achieving their performance goals while maintaining accountability for operational aspects of federal student aid programs. In September 1999, under this PBO procurement authority, SFA hired Accenture (formerly Andersen Consulting) as its "modernization partner," to help it carry out its Modernization Blueprint. Accenture's role is to provide leadership of critical planning activities essential to the success of SFA's modernization. As a result of these and other events between 1992 and 1999, the management structure of SFA's postsecondary education activities was completely reorganized. Under the partnership between the PBO and Accenture, a new systems integration strategy emerged, focusing on the use of middleware software technology to achieve database integration and improve access to and use of SFA's information. Table 2 lists key events and milestones during the past decade affecting Education's student financial assistance programs and the systems that support them. Hundreds of organizations around the world have found successful technology integration solutions through the use of middleware, sharing data across different information systems and databases. Middleware is a type of software that enables programs and databases located on different systems to work together as if they all resided in a single database. Often organizations use middleware together with Web-based applications to present users with an integrated view of relevant data over the Internet, without having to develop new systems or database software. The middleware acts as an intermediary that mines data from existing databases and performs any necessary data transformation so that the existing information can be quickly compiled and presented to the user. For instance, middleware is used heavily in the banking industry, particularly for those institutions involved in numerous mergers and acquisitions, as it allows both banks to keep their existing systems, programs, and databases essentially unchanged, while providing users such as branch personnel with a composite view of both customer databases. We contacted three major financial institutions that use the same middleware product adopted by SFA: IBM's MQSeries. According to these companies, as with SFA, the driving force behind the acquisition of the middleware technology was multiple, incompatible platforms. Overall, banking industry information technology officials with whom we spoke were pleased with the technical capabilities of middleware, but said that the major issue in successfully implementing and maintaining a middleware-based systems environment was retaining skilled employees-- whether in-house or via an external contract. According to SFA's chief operating officer, by using the banking industry as a benchmark for establishing the viability of the middleware approach, SFA was better able to identify the strengths and weaknesses of that approach. He saw the banking industry as analogous to SFA in that it had to successfully address systems interoperability problems and provide users with an integrated data view following mergers. Similarly, we previously noted a gap between the services available to bank customers, and those available to students and their families--such as the ability to view complete account data and make account changes worldwide, across systems, through automated teller machines. SFA's initiative is in its early stages, and as of July 1, 2001, SFA had made the initial system modifications necessary to use the middleware technology on five systems. In addition, SFA's contract programmers have been developing software using extensible markup language (XML)13--now becoming an industry standard--that will eventually standardize student grant and loan origination and disbursement requests into a single common record format for all aid programs. Moreover, the enterprise application integration architecture plans and documents are in place that are conducive to the IBM MQSeries middleware product line being used to facilitate data integration across SFA's different computing platforms. The first use of middleware and XML together for loan originations and disbursements is expected in March 2002, when a single process for delivering Direct Loan and Pell Grant aid to students, called Common Origination and Disbursement (COD), is scheduled for implementation in time for the 2002-2003 school year. In March, SFA plans to provide at least 50 schools that participated in testing using COD with the option of submitting data via its new common record format for Direct Loans and Pell Grants. The COD is designed to provide a consistent process--via the common record--for requesting, reporting, and reconciling Pell Grants and Direct Loans. Now, schools must enter, submit, and reconcile data separately for each program, data including name, address, and other pertinent information for the same student in different formats--a redundant process that can be quite time-consuming. XML is a meta-markup language that provides a format for describing structured data. XML is designed to enable the exchange of information (data) between different applications and data sources on the World Wide Web and has been standardized by the World Wide Web Consortium, an organization that develops common protocols to promote the evolution and interoperability of the Web. common record format and outgoing records back to the schools in their current record format. Thus, if SFA's middleware approach is operationally successful, it will allow schools to use either method; those schools that do not use the new common record format could migrate to the common record on timetables that are more feasible for their individual circumstances. Figure 2 illustrates the first planned implementation of COD for Direct Loan and Pell Grant originations and disbursements using either the common record format or middleware. According to the Modernization Blueprint, COD will ultimately provide the 5,300 schools that participate in the title IV student financial aid programs with a single process for all aid origination and disbursement. This is expected to create a system that facilitates close to real-time sharing of data across all of SFA's partners, and establish a platform that supports integrated technical and functional customer service for schools across all programs. SFA's Modernization Blueprint also outlines key projects that are scheduled for implementation over the course of several years. Table 3 lists some of them. In adopting this approach to better integration and utilization of its existing data on student loans and grants, SFA may be able to address, at least in part, long-standing database integration problems. Such problems have contributed to slow and inconvenient loan servicing and management, as well as weak internal controls. SFA fully expects that this solution will provide improved customer service by permitting its eleven major systems to operate more cohesively in the near future and help reduce the total number of needed systems over the long term. Some of the problems SFA hopes to eliminate include improving the cumbersome process for gaining access to the various SFA system databases. This process sometimes requires users, such as an educational institution's financial aid or accounting staff, to continually log in and out of different systems for related aid information on students for each program. These individuals must sometimes use a different school identifier and password to gain access to student information for each SFA program, and often do not have the ability to retrieve necessary information when they do gain access. As we noted in 1995, this internal control problem of not having access to current, accurate information sometimes led to loans and grants being improperly awarded. SFA expects that its middleware product will enable entities to gradually upgrade or migrate to new systems and databases while maintaining a consistent view for the user. That is, middleware can enable SFA to realize short-term, user-level integration, while enabling it to gradually improve its older systems over time. In short, by adopting a middleware-based strategy, SFA expects that it can continue operating some of its existing systems, applications, and databases, but in a more homogeneous fashion. Moreover, according to SFA's chief operating officer, the alternative of developing a new, large, central database or student financial aid system was less suitable because of the cost and time involved in database redesign and data format conversion. Further, he expects middleware to be part of SFA's long-term solution for integrating databases under its Modernization Blueprint and, through 2004, allow the eventual retirement of several existing systems. Finally, he expects this approach to allow SFA to be more responsive to customer needs. Figure 3 shows how the two alternative approaches differ in providing data to users. The experiences of other organizations have demonstrated that critical skill shortages must continually be addressed when using middleware as an integration solution. According to middleware users, the technology requires experienced, highly skilled programmers, with a broad knowledge of the entire environment in order to maintain seamless data exchanges. Industry officials cite the lack of sufficient numbers of programmers with the needed technical skills. According to IBM representatives, extensive technical training is needed before an experienced programmer can become effective using its middleware product. Banking officials confirm that finding people who are highly skilled in the use of this technology is difficult. For example, according to a senior official at a major bank, an experienced, certified middleware systems programmer can command over $100,000 annually, making retention of this type of talent challenging even for this bank in today's competitive information technology marketplace. SFA management recognizes that it will face the same inherent human capital issues as these organizations and has tried to address them by leveraging experiences from the banking industry and by acquiring contracted expertise. In addressing the human capital skills issue associated with successful middleware implementation, SFA will count on the help of its modernization partner, who has substantial experience in implementing middleware solutions in the banking industry and the use of the middleware product's vendor (IBM) as programmers. According to officials of another federal agency using MQSeries, when they originally tried to develop similar capabilities in-house, they were later forced to switch to the commercial product because of technical difficulties in maintaining the system on their own. A MQSeries users group also exists; other federal agencies using the MQSeries include the Customs Service, the Department of Veterans Affairs, and the Air Force, from which SFA may be able to borrow knowledge and technical expertise. As has been the case with several other organizations, a middleware integration strategy is likely a viable technology alternative for SFA in addressing its long-standing systems integration problems. SFA recognizes the human capital issues that middleware presents, and is preparing to meet them. While early, if implemented properly, middleware appears to be a reasonable approach that could result in improved user-level systems integration, while enabling SFA to gradually retire many of its remaining systems over time. In commenting on our draft report, the Deputy Secretary sought clarification on whether our analysis of SFA's actions to use a middleware integration strategy addressed the full range of issues that we and the Education Inspector General had raised in past reports regarding SFA's systems integration problems and rationale for SFA's programs being included on our high-risk list. Specifically, he suggested that we clarify whether the middleware strategy adequately addressed our earlier concerns about SFA's lack of an architecture, the costs associated with maintaining nine or more separate information systems, and the need for a long-term integrated SFA database. Additionally, the Deputy Secretary wanted us to clarify whether the new strategy introduced any new problems related to costs, increased risk of system breakdown, or introduction of errors into the current systems environment. While these are important issues, the focus of our review was to provide information on the use of the middleware technology and its viability as a means of integrating student financial aid information. As we note in the report, SFA's middleware integration work is still in development and is moving into very early stages of implementation. Although preliminary testing and pilot efforts involving the middleware data integration capability have been positive, the actual versus expected benefits will not be known or measured until planned projects and activities become operational. We have concluded that SFA's middleware strategy itself appears to be a reasonable technical approach for improving data integration. The Deputy Secretary also asked whether we took into account several previous reports in which we stated that the department needed a sound systems architecture before embarking on systems integration. We note that SFA has devised an enterprise-wide systems architecture in response to our 1997 recommendation and that SFA provided us with requisite technical documents that explained the guiding architecture on which it is building its middleware strategy. However, the scope of our review did not include an assessment of the adequacy of departmentwide architecture implementation and usage. Finally, the Deputy Secretary raised several technical questions related to the report's graphics, terminology, and descriptions. We have clarified or modified these points where appropriate. Education's written comments, along with our responses, are reproduced in appendix II. As we agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We are sending copies of this report to the Secretary of Education, Education's Office of Student Financial Assistance's chief operating officer, the Director of the Office of Management and Budget, and appropriate congressional committees. Copies will also be available to other interested parties upon request. This report will be available on our Web site at www.gao.gov. If you or your offices have questions regarding this report, please call me at (202) 512-6257 or David B. Alston, Assistant Director, at (202) 512-6369. We can also be reached by e-mail at [email protected] and [email protected], respectively. Other individuals making key contributions to this report included Nabajyoti Barkakati, Michael P. Fruitman, and Glenn R. Nichols. Our objectives were to provide information on the use of middleware technology, and to evaluate the viability of SFA's approach to using it to integrate student financial aid information. To achieve these objectives, we examined SFA documents, including the Modernization Blueprint and updates and information technology target architectures. We assessed how critical information technology integration issues are being addressed at SFA, including the merits and risks of the blueprint, and assessed agency documentation to determine whether SFA's systems environment lends itself to a technically feasible middleware solution. In addition, we analyzed several technical documents on the general function and use of middleware, and interviewed officials from SFA and Accenture, its modernization partner. We also interviewed officials from the Advisory Committee on Student Financial Assistance to obtain their perspective on SFA's use of middleware. Further, we spoke with officials from IBM, the developer of the middleware product (MQSeries) being implemented by SFA. We analyzed technical documents describing the operation of the MQSeries in general, as well as design documents addressing the implementation of this middleware product at SFA. To independently document the success of this middleware product in the public and private sectors, we consulted with users from the U.S. Customs Service, Bank of America, Chase Manhattan Bank, and First Union Bank. We analyzed documents relating to the implementation of this middleware product in two of these organizations. We performed this work at SFA headquarters and Accenture offices in Washington, D.C.; IBM's office in McLean, Virginia, the U.S. Customs Service office in Springfield, Virginia; and Bank of America offices in Charlotte, North Carolina. We also conducted telephone interviews with officials from Chase Manhattan Bank and First Union Bank. Our work was performed from February through August 2001, in accordance with generally accepted government auditing standards. 1. We changed the report title to clarify that the scope of our review was focused on determining if SFA's middleware systems integration strategy was a viable approach. 2. Given the scope of our review, we believe the report adequately addresses this concern. In drafting our report, we took into consideration previous GAO, Education's Inspector General reports, and the department's internal reports, particularly those relating to Education's lack of a guiding enterprise architecture and the department's pressing need to integrate its student financial aid systems and databases. For instance, we have already credited the department with defining a departmentwide systems architecture in response to our 1997 report on this topic. Further, in reviewing SFA's middleware strategy, we confirmed that enterprise application integration architecture plans and documentation existed and was conducive to the IBM MQSeries middleware product line being used to facilitate data integration across SFA's current computing platforms. However, the scope of our work did not permit us to assess the adequacy of departmentwide architecture implementation and usage issues. 3. The commitment indicated by the Secretary and SFA to resolve longstanding problems mentioned in our previous reports can go a long way towards providing the catalyst to solve many of Education's data integrity problems. These problems have contributed to the inclusion of SFA's programs on GAO's high-risk list. However, neither the department's or SFA's efforts to address critical data quality and internal control issues related to its high-risk designation were included in the scope of this review. We do note, however, that SFA expects to reduce the number of total systems needed in the long-term in conjunction with its middleware implementation. 4. Past problems as well as rationale for better integrated program and financial data across SFA's existing databases are explained in the background section of our report rather than in this brief opening paragraph. As such, we made no changes to the report. While middleware provides a means for better user integration, sound business practices and disciplined internal management controls will be needed for any organization to achieve mission improvements and financial benefits from its information systems investments. 5. Our discussion of integration in this context is based upon SFA's most recently released Modernization Blueprint, which states that SFA's task is to create: " . . . an integrated enterprise that meets our PBO goals of improved customer and employee satisfaction, and reduced unit costs. Part of that task is to modernize key systems and processes to create an enterprise that meets our customers needs. We can view some of these key processes and systems as major pieces of an overall integrated solution." Given SFA's description of the goals they wish to achieve through integration, we did not modify our report. 6. We agree with the descriptions of the additional shortcomings of NSLDS, but timeliness of updates remains a major issue. The objective of our review also was not to review and critique the problems of NSLDS as we did previously, rather, to focus on looking forward and assessing middleware as a suitable technology solution in the future for integrating SFA's systems. Thus, we only provided one example of the negative consequences stemming from the lack of integration but provided numerous references to previous reports that describe these and other problems in greater detail. Accordingly, we did not modify our report. 7. SFA's Chief Operating Officer (COO) clearly considers the use of middleware part of a long-term systems integration solution. Therefore, we did not modify our report. 8. We concur that the scope of our review was to determine whether middleware technology is viable and feasible in SFA's system environment and that other issues were not covered in our work. Accordingly, we did not modify our report. 9. We updated our report to reflect that SFA now plans to have about 14 systems connected to middleware by December 2001. 10. We updated our report to clarify that some legacy systems, according to SFA's Modernization Blueprint, will not have to be modified for middleware because some will be retired in the future. 11. We modified our report to reflect that the first planned use of middleware for Direct Loan and Pell Grant originations and disbursement would occur next year. 12. We updated our report to reflect the change in the implementation date. 13. We did not modify our report. Education's Central Automated Processing System (EDCAPS) included in figure 1 and table 1 in our report is not the same as the Central Data System (CDS), which has been retired. EDCAPS is the primary accounting system for the department. The department's Management Improvement Team Accomplishments document, dated October 30, 2001, describes EDCAPS as Education's "financial records and accounting system." CDS is not discussed in our report. 14. We modified our report to reflect that the PBO was established in 1998. 15. We modified our report to clarify responsibilities of SFA under the PBO legislation. 16. We modified our report to indicate SFA's participation. 17. We believe the appointment of SFA's COO was a relevant milestone. Several sections of the HEA Amendments of 1998 creating the PBO address the functions of the COO, including the requirement to have a PBO performance plan. Likewise, the selection of the SFA modernization partner also was a relevant milestone, especially in light of the important role that the partner plays in SFA's systems modernization, which is described in the report. Therefore, we did not modify our report. 18. We modified our report to clarify that there are additional users of the MQSeries product. 19. We did not modify our report. The figure displays only the COD process, which will initially include only Direct Loan and Pell Grant origination and disbursements. All Direct Loan and Pell Grant funds are federal and ultimately come from the U.S. Treasury. We purposely omitted the Federal Reserve and other intermediary systems for simplicity. Schools will follow the COD process described in the figure when originating loan and grant applications on behalf of students. 20. We modified our report to better reflect that middleware will also convert disbursement records back to each school's current record format. 21. According to SFA's most recently released Modernization Blueprint (page 13), the COD is expected to be able to provide all schools that participate in title IV financial aid programs with a single process for aid origination and disbursement. SFA staff confirmed the accuracy of this statement. Therefore, we did not modify our report. 22. According to SFA's Modernization Blueprint, COD is expected to be capable of handling all aid distribution. The first use will be for Direct Loan and Pell Grant origination and distribution. Therefore, we did not modify our report. 23. We did not modify our report. The internal control problems identified in the 1995 report focused on the need to have timely, accurate student eligibility data. Also, see comment 6. 24. As noted in the report, we are attributing the choice between two options -- developing a large central database or maintaining several integrated databases using middleware -- to SFA's COO. By 2004, SFA does expect to retire several existing systems that should result in fewer databases than currently exist. 25. We modified our report to note that SFA plans to retire systems through 2004. 26. We did not assess the capabilities of Accenture, as this was not included in the scope of our work. Therefore, we did not modify our report. 27. As noted, we point out that SFA is attempting to address its human capital challenges associated with the use of the new middleware technology by leveraging the experiences from the banking industry as well as acquiring recognized contractor expertise. These are prudent steps, but the adequacy of specific measures being taken both by SFA management and its modernization partner in addressing workforce management and planning needs go beyond the scope of this review; therefore, we did not modify the report. 28. We modified the report to delete any reference to the availability of 24- hour customer support. Financial Management: Internal Control Weaknesses Leave Department of Education Vulnerable to Improper Payments (GAO-01-585T, April 3, 2001). High-Risk Series: An Update (GAO-01-263, January 2001). High-Risk Series: An Update (GAO/HR-99-1, January 1999). Student Financial Aid Information: Systems Architecture Needed to Improve Programs' Efficiency (GAO/AIMD-97-122, July 29, 1997). High-Risk Program: Information on Selected High-Risk Areas (GAO/HR- 97-30, May 1997). Department of Education: Multiple, Nonintegrated Systems Hamper Management of Student Financial Aid Programs (GAO/T-HEHS/AIMD-97- 132, May 15, 1997). High Risk Series: Student Financial Aid (GAO/HR-97-11, February 1997). Reporting of Student Loan Enrollment Status (GAO/HEHS-97-44R, February 6, 1997). Department of Education: Status of Actions to Improve the Management of Student Financial Aid (GAO/HEHS-96-143, July 12, 1996). Student Financial Aid: Data Not Fully Utilized to Identify Inappropriately Awarded Loans and Grants (GAO/T-HEHS-95-199, July 12, 1995). Student Financial Aid: Data Not Fully Utilized to Identify Inappropriately Awarded Loans and Grants (GAO/HEHS-95-89, July 11, 1995). Federal Family Education Loan Information System: Weak ComputerControls Increase Risk of Unauthorized Access to Sensitive Data (GAO/AIMD-95-117, June 12, 1995). High-Risk Series: Student Financial Aid (GAO/HR-95-10, February 1995). Financial Audit: Federal Family Education Loan Program's Financial Statements for Fiscal Years 1993 and 1992 (GAO/AIMD-94-131, June 30, 1994). Financial Management: Education's Student Loan Program Controls Over Lenders Need Improvement (GAO/AIMD-93-33, September 9, 1993). Financial Audit: Guaranteed Student Loan Program's Internal Controls and Structure Need Improvement (GAO/AFMD-93-20, March 16, 1993). Department of Education: Management Commitment Needed to Improve Information Resources Management (GAO/IMTEC-92-17, April 20, 1992). The 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 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 our home page and complete the easy-to-use electronic order form found under "To Order GAO Products." Web site: www.gao.gov/fraudnet/fraudnet.htm, E-mail: [email protected], or 1-800-424-5454 (automated answering system).
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Although the Department of Education spent millions of dollars to modernize and integrate its nonintegrated financial aid systems during the past 10 years, these efforts have met with limited success. Recently, Education's Office of Student Financial Assistance (SFA) began using a software approach known as middleware to provide users with a more complete and integrated view of information in its many databases. In selecting middleware, SFA has adopted a viable, industry-accepted means for integrating and utilizing its existing data on student loans and grants. To meet its human capital needs, SFA has solicited the help of a private sector "modernization partner" with experience in implementing and managing middleware solutions--particularly in the financial industry--and has also chosen to use a leading middleware software product.
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After about 30 years of relatively steady growth, USPS's expenses began consistently exceeding revenues in fiscal year 2007 (see fig. 1). As a result, USPS has lost a total of $56.8 billion since fiscal year 2007. The continued deterioration in USPS's financial condition is due primarily to two factors. 1. Declining mail volumes: USPS continues to face decreases in mail volume, its primary revenue source, as online communication and e-commerce expand. While remaining USPS's most profitable product, First-Class Mail volume in particular has significantly declined in recent years. For example, while total mail volume declined 27 percent from its peak in fiscal year 2006 (including a 1 percent decline in fiscal year 2015), First-Class Mail volume has declined to a greater extent--40 percent since its peak in fiscal year 2001 (with a 2 percent decline in fiscal year 2015). USPS reported that the most significant factor contributing to the decline in First-Class Mail volume is the continued migration toward electronic communication and transaction alternatives--a migration USPS expects to continue for the foreseeable future. USPS added that the decline in First-Class Mail was exacerbated by the Great Recession that the National Bureau of Economic Research reported as lasting from December 2007 to June 2009. In the long run, USPS faces the risk of increasing diversion of mail to electronic alternatives and the possibility of future economic downturns that could negatively affect mail volumes. USPS has reported that although increased shipping and package volume has offset some of the declines in mail volume, this volume has a smaller profit margin than First-Class Mail. USPS will need to be efficient in its processing and delivery of packages to capitalize on growth in that market. 2. Growing Expenses: While mail volume has declined, USPS's operating expenses have been rising. USPS reported that its key operating expenses grew in fiscal year 2015--notably salary increases for unionized employees, as well as additional work hours, in part due to a 14.1 percent growth in shipping and packages, which are more labor intensive to process. Despite efficiency initiatives such as consolidation of 36 mail-processing facilities in 2015, total employee work hours increased, and the size of USPS's career workforce increased slightly in fiscal year 2015--the first increase in the size of the career workforce since fiscal year 1999. Compensation and benefits comprise close to 80 percent of total USPS expenses. Thus, expenses will further grow if increases in salaries and work hours continue. According to USPS, increases in compensation and benefits costs (primarily from increased wages) will add $1.1 billion in additional costs in fiscal year 2016. As previously discussed, USPS's unfunded liabilities and debt have become a large and growing financial burden, increasing from 99 percent of USPS revenues at the end of fiscal year 2007 to 182 percent of revenues at the end of fiscal year 2015 (see table 2 in app. I for more detail). At the end of fiscal year 2015, USPS's $125 billion in unfunded liabilities and outstanding debt represented a $7.4 billion increase from the previous year. In addition, reduced mail volumes and growing expenses have contributed to USPS's inability to fully meet its requirement to prefund retiree health benefits. The Postal Accountability and Enhancement Act (PAEA) established the Postal Service Retiree Health Benefits Fund and required USPS to begin prefunding health benefits for its current and future postal retirees, with annual payments of $5.4 billion to $5.8 billion from fiscal years 2007 through 2016, followed by actuarially determined prefunding payments beginning in 2017 and every year thereafter. As of the end of fiscal year 2015, USPS's liability for retiree health benefits was about $105.2 billion and the Postal Service Retiree Health Benefits Fund balance was $50.3 billion, with a resulting unfunded liability of $54.8 billion. USPS has not made a prefunding payment since fiscal year 2011, with a total of $28.1 billion in missed payments. These missed payments represent about half of USPS's total losses since fiscal year 2007. Even without the annual prefunding requirement, however, USPS would have still lost $10.8 billion during this time period. USPS has stated that it expects to miss its required prefunding payment of $5.8 billion due at the end of fiscal year 2016. USPS will remain unlikely to fully make its required retiree health and pension payments in the near future. Beginning in fiscal year 2017, USPS's payments will be restructured as it will no longer be required to make fixed prefunding payments, but will be required to start making annual payments based on actuarial determinations of the following component costs: a 40-year amortization schedule to address the unfunded liabilities for postal retiree health benefits, the "normal costs" of retiree health benefits for current employees, and a 27-year amortization schedule to address the unfunded liabilities for postal pension benefits under the Civil Service Retirement System (CSRS). These payments are in addition to annual payments USPS is already required to make to finance its pension benefits under the Federal Employees Retirement System (FERS), which consists of a 30-year amortization schedule to address any unfunded liabilities, and the normal costs of FERS benefits for current employees. USPS will find it very difficult to make all of these required payments given its financial condition and outlook. As table 1 below shows, in fiscal year 2017, USPS will be required to make an estimated total of $11.3 billion in payments for retiree health and pension benefits under CSRS and FERS--about $4.6 billion more than what USPS paid in fiscal year 2015 for these benefit programs. In addition to declining mail volumes and increased expenses, USPS's ability to make its required payments for these retirement programs will be further challenged due to: Expiration of a temporary rate surcharge: USPS reported that it generated $2.1 billion in additional revenue during fiscal year 2015 and $1.4 billion in additional revenue in fiscal year 2014 as a result of a 4.3 percent "exigent" surcharge that began in January 2014. However, USPS expects this surcharge to be discontinued around April 2016, when the surcharge is expected to have contributed $4.6 billion in total additional revenue. USPS expects its additional revenue from the exigent surcharge to be about $1.1 billion in fiscal year 2016, with no additional revenue in fiscal year 2017, as the surcharge will have expired. USPS recently reported that the expiration of the exigent surcharge will have an adverse impact on its future operating revenue and liquidity, and that its actions to increase efficiency, reduce costs, and generate additional revenue may be insufficient to meet all of its financial obligations or to carry out its strategy. No new major cost-savings initiatives planned. USPS has no current plans to initiate new major initiatives to achieve cost savings in its operations. USPS officials recently told us that it is not yet known whether USPS will have sufficient financial resources to make all or a portion of its legally- required payments for retiree health and pension benefits at the time that they become due. USPS further reported that without structural change to its business model, absent legislative change, it expects continuing losses and liquidity challenges for the foreseeable future. Large unfunded liabilities for postal retiree health and pension benefits-- which were $78.9 billion at the end of fiscal year 2015--may ultimately place taxpayers, USPS employees, retirees and their beneficiaries, and USPS itself at risk. As we have previously reported, funded benefits protect the future viability of an enterprise such as USPS by not saddling it with bills later after employees have retired. Further, since USPS retirees participate in the same health and pension benefit programs as other federal retirees, if USPS ultimately does not adequately fund these benefits and if Congress wants these benefits to be maintained at current levels, funding from the U.S. Treasury, and hence the taxpayer, would be needed to continue the benefit levels. Alternatively, unfunded benefits could lead to pressure for reductions in benefits or in pay. Thus, the timely funding of benefits protects USPS employees, retirees, beneficiaries, taxpayers, and the USPS enterprise. USPS's financial situation leaves Congress with difficult choices and trade-offs to achieve the broad-based restructuring that will be necessary for USPS to become financially sustainable. USPS's ability to make its required retiree health and pension payments requires a decrease in expenses or increase in revenues, or both. As we have previously reported, USPS's actions alone under its existing authority will be insufficient to achieve sustainable financial viability; comprehensive legislation will be needed. Congressional decisions about how to address the following issues will shape USPS's future role, services, operations, networks, and ability to adapt to changes in mail volume. In making these decisions, Congress could consider, among other things, the following factors. The level of postal services and the affordability of those services: USPS's growing financial difficulties combined with vast changes in how people communicate provide Congress with an opportunity to consider what postal services will be needed in the 21st century. Specifically, Congress could consider what postal services should be provided on a universal basis to meet customer needs and how these services should be provided. Congress also could consider trade-offs in reducing the level of postal services, such as providing USPS with the authority to reduce the frequency of letter mail delivery, to enable USPS to reduce its expenses. A key factor in any consideration to reduce postal services would include potential effects on postal customers, mail volumes, and employees. In particular, Congress could consider the quality of postal service--such as the frequency and speed of mail delivery and the accessibility and scope of retail postal services--in considering any service reduction. In January 2015, for example, USPS revised its standards for on-time mail delivery by increasing the number of days for some mail to be delivered and still be considered on time. However, under the revised delivery standards, the percentage of mail delivered on time declined for many types of mail, such as First-Class Mail and Periodicals. USPS attributed declines in delivery performance to operational changes it implemented in January 2015 coupled with adverse winter weather. Compensation and benefits in an environment of revenue pressures: Key compensation and benefits costs have increased and continue to increase for USPS employees, while demand for USPS's main revenue source, mail and First-Class Mail in particular, has declined and continues to decline. Further, the exigent rate increase mentioned above is expected to expire in April 2016. To put USPS's situation into context, many private sector companies (such as automobile companies, airlines, mail preparation and printing companies, and major newspapers) took far-reaching measures to cut costs (such as reducing or stabilizing workforce, salaries, and benefits) when the demand of their central product and services declined. However, although USPS also has taken a range of cost-cutting measures, USPS has stated that its strategies to increase efficiency and reduce costs by adjusting its network, infrastructure, and workforce and to retain and grow revenue are currently constrained by statutory, contractual, regulatory, and political restrictions. For example, USPS does not administer its employees' pension, health, and workers' compensation benefits programs, and postal rates are regulated by the Postal Regulatory Commission, with rate increases for most mail limited by an inflation-based price cap. Most USPS employees are covered by collective bargaining agreements with four major labor unions which have established salary increases, cost-of-living adjustments, and the share of health insurance premiums paid by employees and USPS. When USPS and its unions are unable to agree, the parties are required to enter into binding arbitration by a third-party panel. There is no statutory requirement for USPS's financial condition to be considered in arbitration. Considering USPS's poor and deteriorating financial condition and the competitive environment, we continue to believe--as we reported in 2010--that Congress should consider revising the statutory framework for collective bargaining to ensure that USPS's financial condition be considered in binding arbitration. USPS's dual role of providing affordable universal service while remaining self-financing: As an independent establishment of the executive branch, USPS has long been expected to provide affordable, quality, universal delivery service to all parts of the country while remaining self-financing. USPS and other stakeholders have considered a range of different business models to address USPS's financial difficulties. For example, USPS's 2002 Transformation Plan included a range of alternatives from a publicly-supported model to a business model with a corporate structure supported by shareholders. An alternative business model, if any, would need to address the level of any costs that would be transferred from USPS, which is financed by postal ratepayers, to the federal government, which is funded by taxpayers. In addition, if Congress requires eligible postal retirees to participate in Medicare, as USPS has previously proposed, it should consider the tradeoffs for the federal budget deficit and Medicare's financial condition, as well as the implications for affected employees. Finally, a fully functioning USPS Board of Governors is needed to support USPS's ability to carry out its critical responsibilities. USPS's 11-seat Board of Governors is required by law to have a quorum of six members in order to take certain actions. Because two Governors left the Board in December 2015 due to term limits, the Board currently consists of only one Governor (who will not be able to serve past December 2016), the Postmaster General, and the Deputy Postmaster General. Certain powers are reserved to the Governors. USPS has reported that although the inability of the Board to constitute a quorum does not inhibit or affect the authority of the Governors in office from exercising those powers, it is not apparent how those powers could be exercised if there were no Governors. According to USPS, the critical responsibilities reserved to the Governors are setting postal prices, approving new products, and appointing or removing the Postmaster General and the Deputy Postmaster General. USPS has stated that in the event no Governors are in place, these critical duties may not be able to be executed, potentially leaving USPS without the ability to adjust its prices as needed, introduce new products, or appoint or replace its two most senior executive officers. In conclusion, USPS management, unions, the public, community leaders, and Members of Congress need to take a hard look at what level of postal services residents and businesses need and can afford. The status quo is not sustainable. Chairman Johnson, Ranking Member Carper, 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. For further information about this statement, please contact Lori Rectanus, Director, Physical Infrastructure Issues, 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. In addition to the contact named above, Frank Todisco, Chief Actuary, FSA, MAAA, EA, Applied Research and Methods; Teresa Anderson; Samer Abbas; Kenneth John; Faye Morrison; and Crystal Wesco made important contributions to this statement. Mr. Todisco meets the qualification standards of the American Academy of Actuaries to render the actuarial opinions contained in this testimony. Selected USPS liabilities (Included and Pension Funds (Not fully on USPS balance sheet) included in USPS Balance Sheet) Funded status for retiree health benefits (unfunded) Funded status for CSRS (unfunded) Funded status for FERS (unfunded) Unfunded obligations, liabilities, and debt as percentage of revenue (12.7) (55.0) (3.1) (12.5) (53.5) (9.0) (13.2) (52.0) (7.3) (13.6) (48.6) (14.2) (46.2) (17.8) (13.7) (47.9) (18.8) (12.5) (48.3) (17.8) (0.1) (12.5) (48.9) (19.4) (3.6) (12.5) (54.8) (20.4) (3.7) Total USPS liabilities, debt, and unfunded obligations (74.3) (83.7) (85.9) (74.3) (103.7) (112.1) (110.9) (117.8) (125.2) Unfunded obligations, liabilities, and debt are the sum of the unfunded actuarial liabilities (obligations), USPS liabilities, and debt shown in this table. Total USPS revenue consists of total USPS operating revenue plus interest and investment income for each fiscal year. Total assets consist of current assets including cash and noncurrent assets largely comprising property and equipment measured at historic purchase value after depreciation. This does not include assets funding the retiree health and pension benefits. Net CSRS funded Status (unfunded) Net FERS funded status (unfunded) Total pension funded status (unfunded) (3.1) (9.0) (7.3) (17.8) (18.8) (17.8) (0.1) (19.4) (3.6) (20.4) (3.7) 5.3 (2.5) (0.4) 12.5 (15.2) (17.9) (17.9) (23.0) (24.1) (52.0) (48.6) (46.2) (47.9) (48.3) (48.9) (54.8) 5.8 33.9 Pension and retiree health benefit funded status (49.7) (56.0) (52.4) (36.1) (61.4) (65.8) (66.2) (71.9) (78.9) This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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USPS is a critical part of the nation's communication and commerce, delivering 154 billion pieces of mail in fiscal year 2015 to 155 million delivery points. However, USPS's mission of providing prompt, reliable and efficient universal services to the public at risk due to its poor financial condition. USPS's net loss was $5.1 billion in fiscal year 2015, which was its ninth consecutive year of net losses. At the end of fiscal year 2015, USPS had $125 billion in unfunded liabilities, mostly for retiree health and pensions, and debt--an amount equal to 182 percent of USPS's revenues. In July 2009, GAO added USPS's financial condition to its list of high-risk areas needing attention by Congress and the executive branch. USPS's financial condition remains on GAO's high-risk list. In previous reports, GAO has included strategies and options for USPS to generate revenue, reduce costs, increase the efficiency of its delivery operations, and restructure the funding of USPS pension and retiree health benefits. GAO has also previously reported that Congress and USPS need to reach agreement on a comprehensive package of actions to improve USPS's financial viability. This testimony discusses (1) factors affecting USPS's deteriorating financial condition, (2) USPS's ability to make required retiree health and pension payments, and (3) choices Congress faces to address USPS's financial challenges. This testimony is based primarily on GAO's work over the past 5 years that examined USPS's financial condition--including its liabilities--and updated USPS financial information for fiscal year 2015. The U.S. Postal Service's (USPS) financial condition continues to deteriorate as a result of trends including: Declining mail volume : First-Class Mail--USPS's most profitable product--continues to decline in volume as communications and payments migrate to electronic alternatives. USPS expects this decline to continue for the foreseeable future. Growing expenses: Key USPS expenses continue to grow, such as salary increases and work hours due in part to growth in shipping and packages, which are more labor-intensive. Compensation and benefits comprise close to 80 percent of USPS's expenses. USPS's financial condition makes it unlikely it will be able to fully make its required retiree health and pension payments in the near future. In fiscal year 2015, USPS was required to make $12.6 billion in retiree health and pension payments, but it only made $6.7 billion in payments as it did not make a required retiree health payment of $5.7 billion. USPS's required payments will be restructured in fiscal year 2017, with estimated payments totaling $11.3 billion--$4.6 billion more than what USPS paid in fiscal year 2015. USPS's ability to make these required payments will be further challenged due to: Expiration of a temporary rate surcharge: This surcharge on most postal rates effective January 2014, which has generated $3.6 billion in additional annual revenues through September 2015, is expected to expire April 2016. No new major cost savings initiatives are planned. Large unfunded liabilities for postal retiree health and pension benefits--which were $78.9 billion at the end of fiscal year 2015--may ultimately place taxpayers, USPS employees, retirees, and their beneficiaries, and USPS itself at risk. As we have previously reported, funded benefits protect the future viability of an enterprise such as USPS by not saddling it with bills later after employees have retired. Further, since USPS retirees participate in the same health and pension benefit programs as other federal retirees, if USPS ultimately does not adequately fund these benefits, and if Congress wants these benefits to be maintained at current levels, funding from the U.S. Treasury, and hence the taxpayer, would be needed to continue the benefit levels. Alternatively, unfunded benefits could lead to pressure for reductions in benefits or in pay. Congress faces difficult choices and tradeoffs to address USPS's financial challenges. The status quo is not sustainable. Considerations for Congress include the (1) level of postal services provided to the public and the affordability of those services, (2) compensation and benefits for USPS employees and retirees in an environment of revenue pressures, and (3) tension between USPS's dual roles as an independent establishment of the executive branch required to provide universal delivery service and as a self-financing entity operating in a businesslike manner.
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SSI is an income assistance program for people who are aged, blind, or disabled. It was authorized in 1972 and is administered by SSA. To be eligible for SSI, individuals cannot have income greater than the maximum benefit level (in 1995, $458 per month for an individual and $687 for a couple if both spouses were eligible) or resources worth more than $2,000 ($3,000 for a couple), subject to certain exclusions, such as a home that is the primary residence. In 31 states and the District of Columbia, SSI recipients are automatically eligible for Medicaid without filing a separate application for benefits with the state Medicaid agency. The remaining states may require a separate application for Medicaid benefits or have more restrictive definitions of disability and financial eligibility requirements than SSI. Beginning in 1981, individuals filing SSI claims were prohibited from transferring resources for less than fair market value to qualify for SSI. Under the provision prohibiting such transfers, SSI applicants or recipients who got rid of resources to qualify for SSI had the uncompensated value of those resources counted toward the resource limit for 24 months from the date of transfer. As a result, such individuals were probably ineligible for SSI benefits for 2 years after transferring resources, and, in many cases, they were also ineligible for Medicaid for the same length of time. In 1988, the Congress eliminated the SSI restriction for resource transfers at less than fair market value, allowing individuals who dispose of resources to qualify for benefits. The Congress, however, retained a similar restriction for the transfer of resources by individuals applying for Medicaid nursing home benefits. Under the current Medicaid provision, applicants for Medicaid long-term care benefits who transfer resources at less than fair market value within 3 years of application or within 3 years of entering a nursing home are deemed to be temporarily ineligible for such benefits. Since information on resource transfers is relevant to the Medicaid nursing home eligibility decision, the law requires SSA to ask SSI applicants about resource transfers even though their answers do not affect the determination of their SSI eligibility. SSA is also required to provide this information to state Medicaid agencies. A provision to reinstate a transfer-of-resource restriction for certain transfers was included in welfare reform legislation passed by the 104th Congress, which was subsequently vetoed by the President. SSA is currently considering the merits of reinstating an SSI transfer-of-resource restriction and may include such a proposal in its fiscal year 1997 legislative proposals. Since 1989, the number of SSI recipients reporting nonexcludable resource transfers has substantially increased, from fewer than 500 in 1989 to almost 2,800 in 1994. Between 1988 and 1994, 9,326 recipients reported transferring resources. While the number of recipients reporting resource transfers is relatively small compared with the total number of SSI recipients, it represents a growing population receiving millions of dollars in SSI benefits each year. We analyzed data on those individuals for whom data were maintained centrally in an automated database at SSA headquarters; this represented about one-third of the 9,326 SSI recipients who reported resource transfers, about 3,505 recipients (see app. I for more details). We estimate that between 1990 and 1994 these recipients transferred cars, homes, land, cash, and other resources worth over $74 million. The average value of transferred resources was about $21,000. This recipient group of 3,505 does not include the more than 5,800 transfers documented in nonautomated case files, nor does it include recipients who failed to report resource transfers. Consequently, the total amount of resources transferred is larger than our estimate. Although SSI benefits are for those with limited income and resources, the resources recipients transferred were often of considerable value. These individuals could receive millions of dollars in SSI benefits in the 24 months after they transferred resources. For example, one individual transferred an apartment complex valued at $800,000 to a nonrelative in May 1994. In July 1994, this person applied for SSI and has subsequently received about $6,800 in SSI payments. Another individual gave away about 380 acres of land valued at $100,000 to a relative in September 1993. This person applied for SSI in October 1993 and has received about $4,200 in SSI payments. In many cases individuals applying for SSI benefits reported having transferred large amounts of cash. For example, one individual gave away almost $38,000 in cash to a relative in July 1992 and applied for SSI in August 1993. This person has received about $4,900 in SSI payments. In another case, a person gave away $29,000 to a relative in September 1993 and applied for SSI in the same month. This person has received about $4,300 in SSI payments. Since repeal of the resource transfer restriction in 1988, 9,326 SSI recipients reported transferring resources before applying for or while receiving SSI; however, the actual number of people who did so is unknown. The extent of resource transfers is unknown because field office claims representatives accept self-reported information. If an applicant does not report a transfer, SSA does not verify this information nor is it required to. Consequently, instances in which individuals transfer resources but do not report the transfer are not detected. Moreover, we found cases in which questionable data were accepted by the claims representatives. Although SSA requires an applicant to provide a bill of sale or other documents to establish that the applicant no longer owns the resource, it does not verify the value because resource transfers do not affect the amount of SSI benefits an individual receives. As a result, our estimate of $74.3 million in resource transfers from 1990 to 1994 probably understates the actual value of resources transferred. Some recipients (5.5 percent) reported transferring resources such as homes and other property but reported the value as $0. For example, one individual gave a house and 72 acres of land to a relative and reported a market value of $0. Moreover, 7.4 percent of recipients reported transferring resources without reporting any value for the resources. In addition to those recipients reporting the value of their resources as $0, other recipients apparently reported inaccurate market values of the resources they transferred. For example, an individual gave away 4 acres of land and reported the value as $10. Another individual gave away two homes and reported the total value of the homes as $20. Under the restriction in effect until 1988, resources transferred by individuals were counted as a resource for 2 years after the date of the transfer, making such individuals ineligible for SSI benefits until 24 months elapsed. We estimate that the 3,505 recipients who reported transferring resources between 1990 and 1994 would receive about $7.9 million in SSI benefits during the 24 months following the date the resources were transferred. Assuming that some individuals did not report such transfers, the total amount of benefits paid is likely to be larger than our estimate, which was based on the 3,505 cases. Currently, the period of ineligibility for Medicaid long-term care is based on the value of the resources transferred at less than fair market value. That is, the period of ineligibility is calculated by dividing the uncompensated value of the resource by the average monthly cost of nursing home care in the state where the person lives. We estimate that from 1990 through December 1995 about $14.6 million in SSI program expenditures could have been saved if SSI had in place a transfer-of- resource restriction similar to Medicaid's provision. For example, if an individual gave away $25,000, under the previous SSI transfer-of-resource restriction, the person would have been ineligible for SSI benefits for 2 years. However, basing the period of ineligibility on the uncompensated value of the resource divided by the maximum SSI payment that can be awarded would have resulted in about 4-1/2 years of ineligibility. Most of the 3,505 recipients who reported transferring resources were, like most SSI recipients, eligible for Medicaid acute-care benefits. In 1994, aged SSI recipients who received Medicaid benefits averaged about $2,800 in benefits, and blind and disabled SSI recipients averaged about $5,300, excluding nursing home and institutional care. An SSI transfer-of-resource restriction could possibly result in savings in the Medicaid program. Some of the individuals denied SSI benefits would not become eligible for Medicaid during the period in which they were ineligible for SSI. We cannot estimate potential Medicaid savings because some individuals denied SSI could possibly receive Medicaid by applying for "medically needy" coverage directly to the state in which they live. SSA estimated that it spent about $600,000 in fiscal year 1995 to obtain transfer-of-resource information. However, virtually all of these costs were related to explaining the provision and asking individuals about resource transfers. SSA incurred little cost to verify the accuracy of reported information. If a restriction were reinstated, SSA would have to substantially expand the effort required to verify the accuracy and completeness of transfer information reported by individuals as well as detect unreported transfers. This is important because individuals may be less likely to report transfers if such transfers affect SSI eligibility. Verifying the accuracy of reported transfer information would be less costly than detecting unreported transfers. Although no data exist to estimate the potential costs of the additional verification and detection requirements that SSA would have to initiate, the costs could be significant. Eliminating the SSI transfer-of-resource restriction has increased SSI benefit expenditures and program costs, which is especially troublesome considering current budgetary constraints. The number of new recipients reporting transfers of resources has increased dramatically since repeal of the restriction. These individuals, who transferred resources that they could have used for self-support, are instead receiving SSI benefits. In addition, many of these individuals, by virtue of their admission to the SSI program, have also become eligible for Medicaid acute-care benefits. An SSI transfer-of-resource restriction similar to Medicaid's restriction could save millions in SSI program expenditures by delaying individuals' date of eligibility for benefits. Such a restriction could also save an unknown amount of Medicaid expenditures. If a restriction were reinstated, SSA would have to considerably expand the steps it takes to verify the value of transferred resources as well as develop mechanisms to detect unreported transfers. This is especially important because individuals might be less likely to report transfers once they affected SSI eligibility. As a result, SSA would incur additional administrative expense in implementing such procedures. However, these cost estimates are not readily available and would have to be developed by SSA. Moreover, this use of SSA's limited resources and the increased administrative costs should be properly balanced with the benefits of bolstering the program's integrity by assuring the public that people may not rely on public services when they can use their own resources and by guaranteeing that only those who need SSI will receive it. SSA is considering whether to include such a proposal in its fiscal year 1997 budget request. In light of the potential for reduced program expenditures and increased program integrity, the Congress may wish to consider reinstating an SSI transfer-of-resource restriction. The restriction could be calculated in a way that takes into account the value of the resource transferred so that individuals transferring more valuable resources would be ineligible for SSI benefits for longer periods of time than those who transfer less valuable resources. SSA agreed with our findings and conclusions that reinstating a transfer-of- resource restriction would increase the SSI program's integrity. SSA noted that it is continuing to work with the Congress to include a provision restoring an SSI transfer-of-resource restriction in welfare reform legislation. SSA also stated its concern that our excluding eight cases from our sample significantly understates the number of cases with excludable resources. We excluded cases on the basis of comments in individuals' files indicating that the resources transferred involved primary residences. Other cases involving transfers of excludable resources may also exist, but SSA could not identify which, if any, involved such resources, and we had no other means to identify those cases. SSA acknowledged that identifying such cases would be difficult since information on many of the transfers would not have been noted in the case files. The agency also made other technical comments, which we incorporated throughout the report as appropriate. (See app. II.) We are sending copies of this report to the Commissioner of the Social Security Administration and other interested parties. Copies also will be available to others on request. If you or your staff have any questions concerning this report, please call me on (202) 512-7215. Other GAO contacts and staff acknowledgments are listed in appendix III. Data on the nature and value of the resources transferred in over half of the reported 9,326 transfers that occurred between 1988 and 1994 were not readily available because the information was not centrally located or contained in an automated database. This information was documented in case files in field offices or other storage facilities. In 1990, however, SSA began using an automated claims process, the Modernized Supplemental Security Income Claims System (MSSICS), to collect and document application information about SSI claimants. These data were centrally located at SSA headquarters and contained relevant automated information on 4,293 individuals who transferred resources. Of these individuals, 3,550 transferred their resources between 1990 and 1994 and received SSI benefits; the other 743 were denied benefits. From the 4,293 individuals, we selected a random sample of 750 individuals whose SSI applications were processed in MSSICS and obtained their transfer-of-resource data. We subsequently found that, of these 750 individuals, only 631 had been determined eligible for SSI; the other 119 were denied benefits. Under SSA operating guidance, field office claims representatives should only collect transfer-of-resource information on countable resources, that is, any assets that count toward the resource limit. The value of resources such as a home that is the primary residence or one automobile is excluded when calculating an individual's resources. SSA officials expressed concern that some of the homes transferred by SSI recipients included in our sample were in fact primary residences. Because such transfers would not have been penalized under the previous transfer-of-resource restriction, SSA did not believe they should be included in our sample. SSA, however, could not identify which, if any, of the cases involved excludable resources. In response to SSA's concern, we reviewed our sample and on the basis of comments noted in the cases determined that eight resource transfers may have involved primary residences. We excluded those cases from our sample. As a result, our revised sample size is 623. Although other cases involving potential transfers of excludable resources may be in our sample, comments indicating this were not noted in the individuals' records, and we had no other available means to identify those cases. We assumed that the proportion of the 3,550 recipients with automated resource data in MSSICS who transferred resources other than primary residences would be the same as the proportion of these individuals in our random sample, 98.73 percent. Thus, we based our estimates on a population of about 3,505 recipients. All of the sampling errors reported below have a confidence level of 95 percent. For estimates of the value of resources transferred when a value was not reported by a recipient, we considered the value of that transfer to be $0. Our estimate of the total value of resources that recipients reported having transferred, $74.3 million, has a sampling error of plus or minus $12.9 million. The estimate of the average value of transferred resources, $21,000, has a sampling error of plus or minus $3,672. For the estimates of proportions in column 2 of table 1, sampling errors do not exceed plus or minus 3 percentage points. In addition, sampling errors associated with estimates of benefits to be received ($7.9 million) and potential program savings ($14.6 million) do not exceed plus or minus $1 million. Since the principal source of our automated data, the Supplemental Security Record (SSR), is subject to periodic SSA quality assurance reviews, we did not independently examine the computer system controls for the SSR. Except for the limitations noted, our review was done between May and December 1995 in accordance with generally accepted government auditing standards. In addition to those named above, the following individuals also made important contributions to this report: Graham D. Rawsthorn, Evaluator; Daniel A. Schwimer, Senior Attorney; Vanessa R. Taylor, Senior Evaluator (Computer Science); Nancy L. Crothers, Communications Analyst; James P. Wright, Assistant Director (Study Design and Data Analysis); and Joel I. Grossman, 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. 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Pursuant to a congressional request, GAO reviewed the Supplemental Security Income (SSI) program, focusing on: (1) the number of SSI recipients reporting resource transfers; (2) the kind and worth of resources being transferred; and (3) the possible savings resulting from a reinstatement of the SSI transfer-of-resources restriction. GAO found that: (1) while the number of SSI recipients reporting resource transfers has increased, they are only a fraction of the total number of SSI recipients; (2) between 1990 and 1994, 3,505 SSI recipients reported transferring resources worth more than $74 million; (3) the value of reported transferred resources varied and the actual extent of resource transfers is unknown because the Social Security Administration (SSA) does not verify or investigate SSI recipients' self-reported information about resource transfers; and (4) reinstating the SSI transfer-of-resource restriction could reduce program costs, reduce Medicaid costs, and increase SSA administrative costs.
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The advent of the Internet and digital transmission of sound recordings through personal computers has revolutionized the music industry and created a new way to transmit music directly to listeners. Although personal computers have been available since the late 1970s and music in digital form since the early 1980s, it was opening up the Internet to commercial activity in 1992 that set the stage for webcasting. In webcasts, sound recordings, such as records and compact discs, and live performances can be transmitted to listeners over the Internet. The popularity of webcasting is growing, with the number of listeners tripling over the past 3 years. Webcasting and traditional radio broadcasting follow essentially the same steps to deliver music to listeners (see figs. 1 and 2). Many webcasters and traditional radio stations deliver music to listeners at no charge. A key difference, however, concerns the number of potential listeners. In traditional radio broadcasting, a station's signal is available to any number of listeners within range of the transmitter. In contrast, the potential audience for a webcast is anyone in the world whose computer is equipped with a media player. Webcasting, also called Internet streaming, is the process of transmitting digitized audio or video content over the Internet. The content can originate from live performances, records, compact discs, or other prerecorded formats. A webcast consists of several steps. The webcasters must first assemble the music that will be transmitted and then translate it into one or more digital formats. Music that is not streamed "live" must be stored so that it is available to individuals who use their personal computers to access the Web site created by the webcaster. The final step is delivering the music through an Internet connection. Choices about the audio quality of the transmitted music and the size of the audience affect the webcaster's operation costs. The quality of the resulting music depends on the bandwidth--the number of bits of information transmitted per second--used by the webcaster. Higher bandwidth results in better sound quality of the transmitted music and allows a greater number of simultaneous listeners. The size of the Internet connection to the webcaster's server and the choice of bandwidth determine the potential size of the audience. Although in its most basic form webcasting can be a relatively inexpensive "do-it-yourself" operation using a minimum of two computers and an Internet connection, the trade-off is lower sound quality and smaller audience size. Alternatively, webcasters that hope to reach a large audience with high-quality music frequently contract with one or more third parties to provide the different steps. Such third parties can provide a single service or some combination of services, including translating the music into digital form and adjusting bandwidth needs to accommodate the number of simultaneous listeners. Some may also provide data on the number and location of listeners. Because webcasters frequently deliver their music at no charge to listeners, webcasters may contract with other third parties, such as companies that wish to advertise products on the webcaster's Web site, to obtain revenue that can help offset the costs associated with webcasting and return a profit to the webcaster. The Internet and the ability to digitally transmit sound recordings have created opportunities for the recording companies that typically own the copyrights in sound recordings to reach an unprecedented number of listeners. Accompanying these opportunities are challenges for copyright owners to maintain control over, and be compensated for, the use of their copyrighted recordings. In the United States, the owners of copyrights in sound recordings have not historically enjoyed the exclusive right to control or authorize public performances of their recordings. Traditionally these copyright owners generated royalties by selling copies of the recordings in the form of albums, cassette tapes, and compact discs. Although radio broadcasters pay royalties to publishers and writers for use of a musical work, they were not obligated to pay record companies for the use of sound recordings. Two key pieces of legislation gave copyright owners the right to control performances of sound recordings when they are digitally transmitted and gave webcasters the automatic right to use the recordings under certain circumstances in exchange for the payment of royalties under a statutory license. The Digital Performance Right in Sound Recordings Act, enacted in 1995, granted copyright owners the exclusive right to control or authorize the use of recordings when they are digitally transmitted but not, for example, when they are transmitted for use as background music in a restaurant. In the Digital Millennium Copyright Act (DMCA), the Congress expanded the scope of this digital transmission right. Among other things, the DMCA specifies that webcasters may operate under an automatic license to use copyrighted works at either a voluntarily negotiated rate or at a rate recommended by a panel known as a Copyright Arbitration Royalty Panel (CARP), subject to review by the Librarian of Congress. These rates, retroactive to October 1998, were to apply through December 2002. The act called for this procedure to be repeated every 2 years as the webcasting industry developed, though it could be extended by agreement between the copyright owners and webcasters. However, the legislation created conflict between record companies and webcasters. The DMCA provided the opportunity to negotiate royalty rates independently. But after negotiations between owners and webcasters broke down, the Library of Congress convened a CARP to resolve the issue and determine the appropriate rates. The CARP held hearings for 6 months, during which both the copyright owners and webcasters presented their cases. In February 2002, the CARP issued a royalty rate recommendation. In June 2002, the Librarian rejected some of the webcasting rates recommended by the CARP and issued a regulation that set royalty rates for Internet transmissions. Both record companies and webcasters contested the Librarian's rates and sought relief in the courts. Some small webcasters believed that the rates set by the Librarian were too high, arguing that they would have to close their operations because they could not pay the rates set by the Librarian and that these rates would put an end to the promise of webcasting. Copyright owners believed the rates were too low and did not reflect the true market value of their music, causing them to, in essence, subsidize the webcasters. Moreover, they argued that royalties are simply another cost of doing business, like buying bandwidth, and webcasters that could not afford to pay them should not be operating. In response to these concerns, the Congress passed the Small Webcaster Settlement Act of 2002. The act did not set new royalty rates but instead allowed small webcasters and copyright owners another opportunity to negotiate an agreement on royalty rates for the period beginning October 28, 1998, through December 31, 2004. These negotiated rates were to be based on a percentage of revenue or expenses, or a combination of both; were to include a minimum fee; and were to apply in lieu of rates set by the Librarian of Congress (see table 1). This option was available to any small webcaster that met the agreed-upon eligibility requirements. In December 2002 the U.S. Copyright Office published the resulting agreement under the act. The agreement contained specific guidance for webcasters to follow in determining the specific revenue and expense categories that were to be included in the calculation of royalties due to copyright owners. The guidance defines revenues and expenses in ways compatible with generally accepted accounting principles and income tax reporting. As of October 2003, 35 small webcasters that had elected to follow the royalty rates and terms set out in the agreement were in operation. As shown in figure 3, these webcasters were located throughout the United States, with one in Canada. We interviewed 30 of these webcasters. Rock and pop are the types of music they most often delivered to listeners, although they also webcast rhythm and blues, jazz, "oldies," and electronic dance music. For 17 of these small webcasters, the targeted audience includes both men and women, while the audience for the remaining 11 is predominately men. Almost all of these small webcasters target listeners between the ages of 25 and 34. Small webcasters have economic arrangements with various third parties, including bandwidth providers, advertisers, and merchandise providers. Other less commonly reported arrangements with third parties included those with companies that help small webcasters manage or obtain advertising, such as companies that insert ads either on the Web site or into the webcast, and companies that sell advertising based on the aggregate audience of multiple webcasters. We determined that the economic arrangements of the small webcasters that elected to follow the terms in the small webcaster agreement and those that elected not to do so were not substantially different. Fifty-two, or 91 percent, of the small webcasters that we interviewed reported having had arrangements with bandwidth providers during the year 2003. In addition, 24 small webcasters said that they had received free bandwidth. However, only 16 of them had received free bandwidth in 2003. Fifteen small webcasters reported that they had received bandwidth at a reduced price at some point, while 14 were receiving it at a reduced price in 2003. Although bandwidth is the dominant cost component for most webcasters, some bandwidth providers offer these incentives as a means to gain business for themselves and to promote the small webcaster market in general. Over half of the small webcasters interviewed had attempted to sell advertising space, either directly or through advertising firms. Of the 40 small webcasters that reported having attempted to sell advertising space, 38 said they were currently running advertising on their stations and 2 stated that they had run advertising in the past, but were no longer doing so. As shown in figure 4, these small webcasters had various methods of selling advertising space. Most reported that the owners or employees of their stations sold advertising space. Other arrangements to sell advertising space, such as through advertising firms or coalitions of webcasters, were less common. Small webcasters use various types of advertising on their sites. Banner ads, which are graphic images that typically appear toward the top of Web pages, were the most common type of advertising used by small webcasters (see fig. 5). Thirty-three of the small webcasters reported that they use banner ads on their sites, and another 2 reported that they used banner ads in the past, but no longer do so. Audio ads, which play at the beginning or during a small webcaster's stream, were currently being used by 29 of the small webcasters, and another 3 reported having used them in the past. Video ads, which are either shown on the computer screen whenever the listener tunes to the station or during the stream, were less common. Only 9 of the small webcasters reported using video ads, and another 4 said they had used them in the past. Some of the small webcasters reported using some other type of advertising on their sites. Advertising is a primary source of revenue for the small webcasters we interviewed. Twenty-seven of the 58 small webcasters interviewed reported that advertising had provided at least 10 percent of their station's gross revenue in 2003 (see fig. 6). According to industry analysts and representatives, advertising sales have remained low, in part due to the collapse of the high technology business sector since 2000 and because of the relative novelty of the Internet as an advertising medium. Twelve of the small webcasters interviewed reported that they had received free or reduced-price advertising since 1998. In addition to advertising, other sources of revenue for the small webcasters included donations and merchandise sales. Small webcasters generally did not have arrangements with other third parties, such as merchandisers and ad insertion companies. Twenty-five, or 44 percent, of the small webcasters that we interviewed reported that they had economic arrangements with suppliers of merchandise, such as T-shirts or coffee mugs in 2003 (see fig. 7). This represented an increase of 4 percent from the 1998 through 2002 time period. In addition to selling merchandise on their sites, 15 small webcasters reported that they had received merchandise, such as compact discs and T-shirts, for free or at a reduced price. Thirteen, or 23 percent, of the small webcasters reported that they had economic arrangements in 2003 with ad insertion companies, which sell either the technology for inserting ads into a webcaster's audio stream or the service of inserting the ads. This technology can help small webcasters target their advertisements to the profiles of their listening audiences as well as provide links to their advertisers' Web sites. Other types of economic arrangements that were even less common involved coalitions of webcasters and arrangements with aggregators. Twelve, or 21 percent, of the small webcasters reported that they had economic arrangements in 2003 with a coalition of webcasters. Such coalitions have formed to help webcasters market themselves to advertisers. Seven percent of the small webcasters reported that in 2003 they had economic arrangements with companies that sell advertising based on the aggregate audience of multiple webcasters. When an advertiser purchases advertising space from a webcaster, the advertiser is purchasing the chance to present a message to as many listeners as possible. While some webcasters are small and may not have enough listeners to attract advertisers on their own, they have entered into arrangements with companies that sell advertising space based on an aggregate audience of multiple webcasters. Other arrangements included those with parent and sister companies and with corporate sponsors. Data obtained from small webcasters that agreed to the terms of the small webcaster agreement suggest that to date the overall effect of their economic arrangements with third parties on royalties owed to copyright owners has been minimal. Most of these small webcasters owed the minimum royalty fee for either or both of the time periods for which payments were to be made. Because royalty obligations for these webcasters are based on a percentage of their revenues or expenses, or a minimum fee, whichever is greater, accurate reporting is essential to ensure the appropriate payment of royalties. We found only limited evidence to suggest small webcasters might not be doing so. The majority of small webcasters we interviewed that had agreed to the royalty terms in the small webcaster agreement owed royalties equal to the minimum fee because they did not generate revenue or incur expenses sufficient to exceed the thresholds for owing royalties above the minimum fee. Nineteen, or 70 percent, of the 27 small webcasters that provided us with financial information reported revenue and expense estimates that were below the levels that would result in royalty payments above the minimum fee for one or both of the time periods for which payments were to be made--the historical period, which began on October 28, 1998, and ended on December 31, 2002, and 2003 (see table 2). The specific revenue and expense thresholds vary, in part, depending on when the webcaster began operating. The revenue threshold ranged from $25,000 for those that began operating in 2002 to more than $100,000 for those that began in 1998, while the expense threshold ranged from $40,000 to $170,000. For the period 2003 to 2004, the revenue threshold varied in relation to anticipated revenue, with the threshold at $20,000 for those earning less than $50,000 and at $50,000 for those earning more. During the same time period, the expense threshold was $28,571 for those earning less than $50,000 and $71,429 for those earning more. Most small webcasters reported revenues or expenses that were less than half the thresholds required for royalty payments to exceed the minimum fee. Eight small webcasters owed royalties that were based on either revenues or expenses and exceeded the minimum fee. Five owed $3,000 or less above the minimum fee and one owed $5,000 above the minimum fee. The remaining two small webcasters owed more than three times the amount of the minimum fee. These two owed royalties based on their revenues in both time periods. One webcaster attributed much of its revenue to a relationship with an online retailer, while the other received revenue from an Internet service provider that offered its customers the option of including the webcast as an additional service. The specific minimum fee applicable to any individual small webcaster varied in the first period in relation to when it began transmitting, ranging from a low of $500 for a webcaster that operated only in 1998 to $8,500 for one that was operating for all or part of each year from October 28, 1998, through December 2002. The minimum fee for the period 2003 to 2004 varied in relation to anticipated revenue and was $2,000 for small webcasters earning $50,000 or less and $5,000 for those earning more. Reporting revenue and expenses in accordance with the small webcaster agreement is important to help ensure the proper payment of royalties. Under the agreement, all money earned and all expenses incurred, with certain exceptions, are to be reported for purposes of calculating royalties. For example, small webcasters may exclude revenues from the sale of recordings or assets such as land or buildings and such expenses as royalties paid, the cost of recordings used in the webcast, and the value of residential space used in the operation of the webcasting service. Transactions that do not involve the exchange of money but result in the webcaster receiving something of value are to be included in statements of revenues or expenses. The value of the goods or services received is to be included in the small webcaster's revenue, and any goods or services the small webcaster offered in exchange are to be reported as expenses. For example, if a small webcaster received free bandwidth, the value of that service should be included as revenue. In some cases, small webcasters contract with an advertising firm that forwards a portion of the advertising sales to the small webcaster and retains a portion as commission. In these cases, the small webcaster is to report the money it received as revenue and the portion retained by the advertising firm as an expense. Although the extent to which small webcasters comply with the agreed-upon guidance for reporting revenues and expenses could not be determined without a detailed review of their financial records, small webcasters that elect to follow the terms of the small webcaster agreement subsequently certify that the figures they report to copyright owners are accurate under penalty of law. Copyright owners have the right to initiate a detailed review of financial records to verify the accuracy of the reported figures. However, an attorney representing copyright owners said that, to his knowledge, no such reviews have been conducted. We found limited evidence to suggest that small webcasters might not be reporting revenues and expenses as agreed. Specifically, while 13 of the small webcasters interviewed said they had received goods or services at no charge, 2 reported having no revenue, although they had received free bandwidth. In each case, however, these small webcasters reported revenue and expense estimates that were well below the revenue and expense threshold, and both were subject to the minimum fee for both the period from 1998 to 2002 and for 2003. Although the majority of small webcasters that we interviewed reported revenues and expenses that were substantially below the levels required to pay a royalty above the minimum fee, this may change as the industry matures.Revenues and expenses of small webcasters might increase as they attract more listeners, and advertising opportunities and rates may also increase as the webcasting industry matures and advertisers rely more on the Internet as part of their advertising efforts. Two trends that may affect the amount of royalties that small webcasters may have to pay in the future include growth in audience size and growth in advertising. The number of Americans listening to Internet transmissions nearly tripled between 2000 and 2003, and about 40 percent of Americans have listened to webcasts, including Internet transmissions of over-the-air radio programming, at least once, according to recent reports by an international media and marketing research firm. Industry analysts expect this growth to continue. Small webcasters that we interviewed also reported growth in the sizes of their audiences. Thirty-six, or 76 percent, of the small webcasters that we interviewed that started webcasting before January 2002 said their audience size had increased, although they could not quantify the extent of the increase (see fig. 8). As mentioned earlier, the small webcasters that we interviewed indicated that they depend upon advertising as a primary source of revenue. According to an estimate from one of the reports cited above, if the aggregate webcast audience could be "sold" to advertisers as if it were an over-the-air radio network, it could generate up to $54 million per year in advertising revenue. However, according to industry analysts, webcasters have the potential to increase their advertising revenues over current levels, in part because they have the ability to provide demographic information about their listeners, which allows advertisers to more accurately target advertisements to potential consumers. We will send copies of this report to the appropriate House and Senate committees; interested Members of Congress; the Librarian of Congress; and to the Director, 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 have any questions about this report, please contact me at (202) 512-3841. Other major contributors to this report are listed in appendix III. As required by the Small Webcaster Settlement Act of 2002, we conducted a study in consultation with officials from the U.S. Copyright Office in the Library of Congress to determine (1) the economic arrangements between small commercial webcasters and third parties and (2) how those arrangements affect royalties due to copyright owners and performers. We consulted officials from the U.S. Copyright Office throughout the course of our work and incorporated the suggestions and comments we obtained into our report as appropriate. To respond to the objectives set out in the act, we met with officials from the U.S. Copyright Office, the Library of Congress, and representatives of organizations that represent copyright owners. In addition, we interviewed staff from businesses that provide advertising and other services to small webcasters and industry analysts. We also reviewed relevant copyright laws, regulations, and articles. To obtain information from small webcasters, we developed a structured interview. We pretested the content and format of this interview with 6 webcasters. During these pretests we asked the small webcasters to assess whether the questions were clear and unbiased and whether the terms were accurate and precise. We made changes to the interview protocol based on pretest results. We conducted the interview via telephone with 58 small webcasters located throughout the country--30 who had agreed to the terms of the agreement reached by copyright owners and small webcasters under the Small Webcaster Settlement Act and 28 who had not. The U.S. Copyright Office is not required to and does not maintain a list of small webcasters. As a result, to identify the universe of small webcasters, we obtained a list from SoundExchange of 35 small webcasters that had elected to follow the terms of the small webcaster agreement. We subsequently learned that one of the webcasters had determined that it was not eligible to follow the terms of the agreement because the station made too much revenue, and a second webcaster operated only as a subscription service. A third webcaster informed us that it had ceased operating in December 2000. SoundExchange later sent us an updated list that included 3 additional small webcasters. Thus, the number of eligible small webcasters that were operating as of October 2003 and had agreed to follow the terms of the agreement was 35. We completed interviews with 30 of these small webcasters for a response rate of 85.7 percent. We also interviewed small webcasters that did not elect to follow the terms of the small webcaster agreement. We obtained a list of 121 names of small webcasters from BRS Media (a private firm that maintains a list of Internet broadcasting firms). To the best of our knowledge, this encompassed all small webcasters operating in the United States. Of these 121 webcasters, 28 were no longer operating or did not appear to meet the definition of an eligible small commercial webcaster, and 4 had signed the small webcaster agreement (and thus were on the list of "signers"). We attempted to reach the remaining 89 small webcasters. Forty-two small webcasters were contacted. Interviews were completed with 28 that met the criteria of "small webcaster." Fourteen webcasters refused to be interviewed. We were not able to contact the remaining 47 webcasters, although we made repeated attempts and left messages when we could. We did not calculate the response rate for the group of small webcasters that did not sign the agreement because we did not know how many of those not interviewed were eligible small webcasters, and we did not have enough information to reasonably estimate the percentage that might be eligible. To protect the confidentiality of the small webcasters we interviewed, we randomly assigned each an identification number and documented their responses to our interview questions with the identification number. During the interviews, we asked the 58 small webcasters about economic arrangements they had with third parties, whether they were currently receiving or had previously received any free or reduced-price goods or services, and requested estimates of their revenues, expenses, and third party revenues. For those small webcasters that had signed the election form to follow the terms of the small webcaster agreement, we asked for their reasons for doing so. For those that had not signed the election form, we asked for their reasons for not doing so. For many of the questions, we asked small webcasters to provide separate responses for two different periods to correspond with the reporting periods contained in the agreement--the historical period, which began on October 28, 1998, and ended on December 31, 2002, and 2003 to 2004. We asked small webcasters to provide information through the date of our interviews, which were conducted in November and December 2003. We also asked each of the 30 small webcasters we interviewed who had elected to follow the terms of the small webcaster agreement to sign a release form allowing us to obtain access to the financial records they had submitted to SoundExchange. We obtained signed release forms from 25 of the 30 (83.3 percent) small webcasters. A representative of SoundExchange subsequently informed us that it had no financial information for 9 of these 25 small webcasters. We reviewed the information the 16 remaining small webcasters had provided to SoundExchange to determine whether it was comparable to the information they had provided to us. To assess the effect that economic arrangements between small webcasters and third parties have on the royalties due to copyright owners and performers, we used financial information obtained during our interviews with 27 of the 30 small webcasters that elected to follow the terms of the agreement. Three of the 30 small webcasters declined to provide any financial information. We calculated the threshold revenue amounts that each of the 27 small webcasters would have had to exceed to owe more than the minimum royalty fee. These revenue amounts were calculated for both time periods--October 28, 1998 through December 31, 2002, and for 2003--and were based on the length of time the small webcaster had been in operation. We then estimated the amount that each small webcaster owed in royalties for each of the two time periods based on the revenue and expense data that they provided to us. For small webcasters that did not report revenue or expense estimates for the entire year, we used their average monthly revenues to project their yearly gross revenue and/or expenses. These estimated values were compared to the threshold amounts and allowed us to determine whether the small webcasters were subject to royalty payments above the minimum fee. Q1: Number of Webcasters Who Began Operating Current Nonsubscription Webcasting Service in Years 1997 to 2003 (N=30) (N=24) (N=58) Q3: Percentage of Webcasters Streaming One or More Channels (N=30) (N=24) (N=58) Sex of listeners Mostly males (N=28) (N=23) (N=55) Q6: Percentage of Webcasters Who Track Size of Audience (N=30) (N=24) (N=55) Q7: Size of audience. Data are not reported due to unreliability. Q8: Percentage of Webcasters Reporting Increase or Decrease in Size of Audience Since (N=29) (N=24) Q9: Percentage of Webcasters Currently Offering a Subscription (N=29) (N=23) (N=58) Use of advertising Currently use (N=29) (N=24) (N=57) Have never used but intend to use in the future* (N=21) Did not sign small webcaster agreement (N=16) Banner ads Audio ads Video ads Other types of ads (N=40) Banner ads Audio ads Video ads 10.00 Other types of ads 2.50 *This question was asked only of those respondents who answered that they "had never used" that type of advertising. Don't do and don't intend to in future (N=20) Did not sign small webcaster agreement (N=16) Sold by an advertising agency Sold by owners or employees of the station Sold by owners or employees of parent company Sold through a coalition of webcasters Other ways (N=39) Sold by an advertising agency Sold by owners or employees of the station Sold by owners or employees of parent company Sold through a coalition of webcasters Other ways 2.56 Q13: Percentage of Webcasters Who Had Economic Transactions With Different Types Type of business Ad insertion company Advertising agency Audience aggregator for advertisers Bandwidth provider (i.e., an ISP) A music content provider A corporate sponsor A coalition of webcasters A parent or sister company Suppliers of merchandise (e.g., T-shirts) Other types of businesses (N=22) (N=21) (N=47) Type of business Ad insertion company Advertising agency Audience aggregator for advertisers Bandwidth provider (i.e., an ISP) A music content provider A corporate sponsor A coalition of webcasters A parent or sister company Suppliers of merchandise (e.g., T-shirts) Other types of businesses (N=29) (N=24) (N=57) 50.88 Q14: Percentage of Webcasters Using Different Methods to Pay for Goods and Services Method of payment Direct payment, that is, with cash or a check Commissions Revenue or profit sharing Barter or other noncash exchange Other ways (N=22) (N=21) (N=47) Method of payment Direct payment, that is, with cash or a check Commissions Revenue or profit sharing Barter or other noncash exchange Other ways (N=29) (N=24) (N=57) 3.51 Q15: Percentage of Webcasters Who Reported Receiving Different Types of Goods and Goods and services Free bandwidth Reduced-price bandwidth Free or reduced-price advertising for your webcasting service Other goods (N=22) (N=21) (N=47) Goods and services Free bandwidth Reduced-price bandwidth Free or reduced-price advertising for your webcasting service Other goods (N=28) (N=24) (N=56) Goods and services Advertising Cash donations Noncash donations Merchandise sales Other sources (N=21) (N=21) (N=46) Goods and services Advertising Cash donations Noncash donations Merchandise sales Other sources (N=28) (N=24) Q17: Webcasters' Estimates of Their Gross Revenue (N=20) (N=19) (N=41) (N=27) (N=22) Q18: Webcasters' Estimates of Their Expenses (N=20) (N=18) (N=40) (N=27) (N=21) (N=50) Q.19: Percentage of Webcasters Who Participated in the Negotiations That Led to the Small Webcaster Settlement Act (N=28) (N=24) (N=56) Q20: Percentage of Webcasters Who Elected to Pay Royalties to Performers Under the Terms of the Small Webcaster Agreement (N=28) (N=23) (N=55) Q21: Month and Year Election Forms Submitted to SoundExchange. Data are not reported due to unreliability. Reasons for electing to pay royalties The royalty rates for performers under the small webcaster agreement seemed reasonable. Thought there was no choice but to sign the election form. The implementation of your business plan required the certainty of knowing 63.33 performer royalty obligations. Wanted to take advantage of the "delay of obligation" option, which allows a small webcaster to delay performer royalty payments. Other reasons66.67 *This question was answered only by those respondents who elected to pay royalties under the agreement. Reasons for electing to not pay royalties The performer royalties under the agreement seemed too high. Arranged a private agreement with performers. Not familiar with the process and did not know this was an option. Waiting to see if the rate would change. Only stream music by independent artists and labels. Terms and conditions set by the Library of Congress were more favorable. Other reasons *This question was answered only by those respondents who elected to not pay royalties under the agreement. Q24: Webcasters' Estimates of Revenues Earned by Third Parties (N=10) (N=13) (N=27) (N=15) (N=15) (N=34) Stephen M. Brown, Jason Jackson, Jonathan McMurray, Lynn Musser, Deborah Ortega, Janice Turner, and Mindi Weisenbloom 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. 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The emergence of webcasting as a means of transmitting audio and video content over the Internet has led to concerns about copyright protection and the payment of royalties to those who own the recording copyrights. Arriving at an acceptable rate for calculating royalties has been particularly challenging. Under the Small Webcaster Settlement Act of 2002, small commercial webcasters reached an agreement with copyright owners that included the option of paying royalties for the period of October 28, 1998, to December 31, 2004, on the basis of a percentage of their revenues, expenses, a combination of both, or a minimum fee rather than paying the royalty rates set by the Librarian of Congress. During debate on the act, copyright owners raised concerns that small webcasters might have arrangements with other parties, such as advertisers, that could produce revenues or expenses that might not be included in their royalty calculations. In this context, the Congress mandated that GAO, in consultation with the Register of Copyrights, prepare a report on the (1) economic arrangements between small webcasters and third parties and (2) effect of those arrangements on the royalties that small webcasters might owe copyright owners. Small webcasters have a variety of economic arrangements with third parties, the most common being agreements with bandwidth providers and advertisers. Almost all of the webcasters that we interviewed reported arrangements with bandwidth providers, and many reported arrangements with advertisers. Less commonly reported arrangements included those with merchandise suppliers and companies that help small webcasters manage or obtain advertising for their Web sites, such as by inserting ads on the Web site or into the webcast itself or selling advertising based on the aggregate audiences of multiple webcasters. Third-party economic arrangements have had a minimal effect to date on royalties owed by small webcasters to copyright owners. Of the 27 small webcasters we interviewed that had agreed to the terms of the small webcaster agreement and provided us with financial data, 19 reported revenue and expense estimates below the levels that would result in royalty payments greater than the minimum fee. We found limited evidence to suggest that small webcasters may not be reporting revenues and expenses as required by the small webcaster agreement. Specifically, 2 of the 13 small webcasters who reported receiving free or reduced-price items did not report the value of these items as revenue for calculating royalties. However, the data we obtained in our survey may not reflect conditions that could develop as the webcasting industry matures. According to industry analysts, revenues of small webcasters are likely to increase as they attract more listeners and advertisers rely more on the Internet to reach customers.
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In the early 1970s, BIA began giving tribes more training, involvement, and influence in BIA's budget process, in efforts that evolved into TPA. At that time, according to BIA officials, few tribes were experienced in budgeting or contracting, and most depended on BIA for services. Over the years, tribes have become more experienced and sophisticated in TPA budgeting, are more involved in directly contracting and managing their TPA activities, and have more flexibility in shifting funds between activities within TPA. Since 1991, through amendments to the Indian Self-Determination and Education Assistance Act, 206 tribes have entered into self-governance agreements with the federal government. Under the terms of these agreements, the tribes assume primary responsibility for planning, conducting, and administering programs and services--including those activities funded under TPA. Of the $757 million in TPA funds that the Congress appropriated in fiscal year 1998, about $507 million was for base funding, and about $250 million was for non-base funding. Base funding was distributed in three components: $468 million generally on the basis of historical funding levels, $16 million to supplement funding for "small and needy" tribes, and $23 million in a general funding increase. According to Interior officials, how TPA base funds for tribes were initially determined is not clearly documented, and adjustments may have been made over time in consideration of specific tribal circumstances. While most increases in the TPA budget prior to the 1990s resulted from congressional appropriations for specific tribes, subsequent increases have generally been distributed on a pro rata basis. The $468 million in base funds may be used by tribes for such activities as law enforcement, social services, and adult vocational training. Tribes may move these funds from one TPA activity to another. In 1998, the Congress appropriated TPA funds for BIA to supplement historical distribution levels for "small and needy" tribes; as a result, $16 million in additional base funds was distributed to 292 tribes. The designation "small and needy" was developed by the Joint Tribal/BIA/DOI Advisory Task Force on Bureau of Indian Affairs Reorganization in 1994.The task force recommended that tribes with service populations of less than 1,500 have available minimum levels of TPA base funds--$160,000 in the lower 48 states and $200,000 in Alaska--to allow them to develop basic self-government capacity. Because some small tribes were receiving less than $160,000, the Congress directed BIA to supplement TPA base funds with the 1998 distribution so that each of these tribes would receive $160,000. For fiscal year 1999, BIA has requested an additional $3 million to move the "small and needy" tribes in Alaska closer to the task force-recommended minimum funding level of $200,000. The $23 million general increase in base funds was evenly distributed among BIA's 12 area offices, as recommended in January 1998 by a special task force assembled under the 1998 Interior Appropriation bill. Each equal portion was subsequently distributed to tribes and BIA offices according to various considerations. For example, the tribes in BIA's Sacramento area each received an equal share of the area office's $1.95 million allocation. The tribes in BIA's Juneau area each received $4,000, and the remainder was distributed on the basis of population and TPA base funding levels. The remaining $250 million is non-base funds and is generally distributed according to specific formulas that consider tribal needs. In general, tribes may not shift these funds to other activities without special authorization. Road maintenance, housing improvement, welfare assistance, and contract support are all included in this category. For example, road maintenance funds are distributed to BIA's area offices based on factors such as the number of miles and types of roads within each area. Housing improvement funds are distributed to area offices on the basis of an inventory of housing needs that includes such things as the number of units in substandard condition and the number of units needing renovation or replacement. As of March 1998, 95 percent of the $757 million in TPA funds had been distributed among the tribes and BIA offices. Our per capita analysis shows that the distributions ranged from a low of $121 per tribal member within BIA's Muskogee area to a high of $1,020 within the Portland area. However, according to Interior officials, there are reasons for the differences in TPA distributions and the differences should not all be perceived as inequities. For example, BIA is required to fund law enforcement and detention in states that do not have jurisdiction over crimes occurring on Indian lands, so tribes located in those states may receive more TPA funds for these purposes than tribes located in other states. Similarly, BIA has a trust responsibility for natural resources on reservations, so tribes that have large land bases may receive more TPA funds for this purpose than tribes with small land bases. Furthermore, tribes with self-governance agreements may include funds in their TPA base amount that are not included for tribes without self-governance agreements. BIA officials also noted that they do not consider the service population figures, which are estimated by tribes, to be reliable--although they did not offer other figures that they believed to be more accurate. They also noted that TPA funds are distributed to tribes, rather than individuals, and that a lower per capita figure may reflect that tribes in one area have larger memberships but smaller land bases than tribes in another area. Appendix I presents the distributions and per capita analyses for BIA's area offices. The remaining 5 percent of TPA funds not distributed to tribes includes $30 million, primarily for welfare assistance and contract support, that will be distributed later in the fiscal year on the basis of tribal need. While most of the contract support and welfare assistance funds are distributed on the basis of the prior year's expenditures, between 15 and 25 percent is withheld until later in each fiscal year, when tribes' actual needs are better known. An additional $9 million not distributed to tribes is for other uses, including education funding to non-tribal entities (such as states and public schools) and payments for employees displaced as a result of tribal contracting. Nonfederal entities--including tribes--meeting the federal assistance thresholds for reporting under the Single Audit Act (those receiving at least $100,000 in federal funds before 1997 and those expending at least $300,000 in 1997 or later) must submit an audited general-purpose financial statement and a statement of federal financial assistance. We examined all 326 financial statements on file with Interior that were most recently submitted by tribes; these statements generally covered fiscal years 1995 or 1996. The tribes' financial statements varied in the type and amount of information reported. While some statements included only federal revenues, others also included revenues from state, local, and private sources; some included financial information only for tribal departments that expended federal funds, while others provided more complete reporting on their financial positions. In total, the statements reported that these tribes received more than $3.6 billion in revenues during the years covered by them. These revenues included such things as taxes and fees, lease and investment income, and funds received through governmental grants and contracts. About half of the financial statements we examined also included some information on tribal businesses. Tribal businesses include, for example, gaming operations, smokeshops or convenience stores, construction companies, and development of natural resources such as minerals or timber. The tribes that reported the results of their businesses had operating income totaling over $1.1 billion. Not all of these tribes reported a profit, however--about 40 percent reported operating losses totaling about $50 million. The reliability of the general-purpose financial statements we reviewed varied. Of the 326 we reviewed, 165--or about half--of the statements were certified by independent auditors as fairly presenting the financial position of the reporting entity and received "unqualified" auditors' opinions. However, auditors noted that 38 of the "unqualified" statements were limited to certain funds and were not intended to represent the financial position of the tribe as a whole. The independent auditors' opinions for the remaining financial statements indicated that the statements were deficient to varying degrees. Tribes with gaming operations are required under the Indian Gaming Regulatory Act to submit annual financial reports to the National Indian Gaming Commission. In 1997, we reported that 126 tribes with class II and class III gaming operations (which include bingo, pull-tabs, slot machines, and other casino games) reported a total of about $1.9 billion in net income from their gaming operations in 1995. About 90 percent of the gaming facilities included in that report generated net income, and about 10 percent generated net losses. Because the financial statements we examined covered different fiscal years and did not always include gaming revenues, we did not attempt to reconcile them to information reported to the Gaming Commission. In deciding whether to consider tribal revenues or business income in order to determine the amount of TPA funds tribes should receive, information that might be useful to the Congress could include (1) financial information for all tribes, including those tribes not submitting reports under the Single Audit Act; (2) more complete information on the financial resources available to tribes from tribal businesses, including gaming; and (3) more reliable data on tribes' financial positions. However, there are several impediments to obtaining this information. For fiscal year 1997 and later, nonfederal entities (including tribes) expending less than $300,000 in federal funds are not covered by the Single Audit Act. Tribes reporting under the act do not have to report financial information for their tribal businesses if those businesses do not receive, manage, or expend federal funds. Interior officials also noted that under the terms of the Alaska Native Claims Settlement Act, Congress established for-profit native corporations as separate legal entities from the non-profit arms that receive federal financial assistance; for this reason, financial information on the for-profit arms would not be reported under the Single Audit Act. Further, financial information submitted by Alaskan villages that have formed an association or consortium or operate under self-governance agreements reflect only the operations of the umbrella organization and do not provide information regarding the separate tribal governments. Interior officials further noted that some tribes that meet the reporting threshold of the act have not submitted financial statements annually as required, or have not submitted them in a timely manner, and that BIA has few sanctions to encourage these tribes to improve their reporting. Finally, the financial statements we examined included a range of auditors' opinions, and the reliability of the information in the statements varied. Mr. Chairman, this concludes my prepared statement. I will be pleased to respond to any questions that you or Members of the Subcommittee may have. We obtained information about (1) BIA's bases for distributing 1998 TPA funds; (2) distributions of TPA funds in fiscal year 1998; (3) revenue and business income reported by tribes under the Single Audit Act; and (4) additional revenue and income information that might be useful to the Congress in deciding whether to distribute TPA funds considering total financial resources available to tribes. We contacted officials with the Department of the Interior's Bureau of Indian Affairs, Office of Audit and Evaluation, and Office of Self-Governance in Washington, D.C., and its Office of Audit and Evaluation in Lakewood, Colorado. We analyzed distribution data provided by BIA and Office of Self-Governance officials to determine specific amounts distributed to area offices and tribes in fiscal year 1998. We did not independently verify the distribution or population data. At Interior's Office of Audit and Evaluation in Washington, D.C. and Lakewood, Colorado, we examined all 326 of the most recent financial statements on file that were submitted under the Single Audit Act by tribes, tribal associations, and tribal enterprises. We excluded statements for some entities, such as tribal housing authorities and community colleges, because they are financially separate from the tribes. Of the 326 financial statements, 290 were for federally recognized tribes, 20 were for tribal businesses or components of tribes, 14 were for consortia or associations representing over 170 individual tribes, and 2 were for tribes not federally recognized. From each of the financial statements we examined, we obtained information about the independent auditor's opinion, revenues for all fund types reported, and operating income for tribes that included tribal business information in their statements. We performed our review from November 1997 through April 1998 in accordance with generally accepted government auditing standards. 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 preliminary results of its review of the Bureau of Indian Affairs' (BIA) distribution of Tribal Priority Allocation (TPA)--or TPA--funds, focusing on: (1) BIA's basis for distributing 1998 TPA funds; (2) total distributions of TPA funds in fiscal year (FY) 1998 and a per-capita analysis of those distributions; (3) revenue and business income information reported by tribes under the Single Audit Act; and (4) what additional revenue and income information may be useful to Congress in deciding whether to distribute TPA funds to tribes. GAO noted that: (1) two-thirds of the 1998 TPA funds were distributed primarily on the basis of historical levels, and tribes may shift these base funds among TPA activities according to their needs; (2) the remaining one-third, known as non-base funds, are used for such activities as road maintenance and housing improvement and were generally distributed on the basis of specific formulas; (3) in total, 95 percent of the TPA funds appropriated in FY 1998 have been distributed; (4) average TPA distributions varied widely among BIA's 12 area offices when analyzed and compared on a per-capita basis; (5) the per-capita averages ranged from $121 per tribal member with BIA's Muskogee area to $1,020 per tribal member within BIA's Portland area; (6) according to Interior officials, there are reasons for differences in TPA distributions, and they do not consider the population estimates to be reliable; (7) nonfederal entities--including tribes--meeting certain federal assistance thresholds must submit audited financial statements annually under the Single Audit Act; (8) GAO reviewed all 326 financial statements on file with the Department of the Interior that were most recently submitted by tribes; the statements generally covered fiscal years 1995 or 1996; (9) while some tribes reported only their federal revenues, others included revenues from state, local and private sources; (10) in total, the statements reported that these tribes received more than $3.6 billion in revenues during the years covered by them; (11) these revenues included such things as taxes and fees, lease and investment income, funds received through governmental grants and contracts; (12) some tribes also reported income from their businesses for the periods covered by the statements; (13) however, the quality of the information reported in the statements varied; only about half of the statements received unqualified opinions from auditors, while the others were deficient to varying degrees; (14) in deciding whether to consider tribal revenues or business income in distributing TPA funds, information that might be useful to Congress could include more complete and reliable financial information for all tribes; (15) however, there are several impediments to obtaining this information; and (16) for example, under the Single Audit Act, financial statements must be submitted by those nonfederal entities expending at least $300,000 of federal funds in a year and may not include income from tribes' businesses.
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While there is no uniformly accepted definition of predatory lending, a number of practices are widely acknowledged to be predatory. These include, among other things, charging excessive fees and interest rates, lending without regard to borrowers' ability to repay, refinancing borrowers' loans repeatedly over a short period of time without any economic gain for the borrower (referred to as "loan flipping"), and committing outright fraud or deception--for example, falsifying documents or intentionally misinforming borrowers about the terms of a loan. These types of practices offer lenders that originate predatory loans potentially high returns even if borrowers default, because many of these loans require excessive up-front fees. No comprehensive data are available on the incidence of these practices, but banking regulators, consumer advocates, and industry participants generally agree that predatory loans are most likely to occur in the market for "subprime" loans. The subprime market serves borrowers who have limited incomes or poor or no credit histories, in contrast with the prime market, which encompasses traditional lenders and borrowers with credit histories that put them at low risk of default. Subprime lending is not inherently abusive, and, according to officials at HUD and the Department of the Treasury, the emergence of a subprime mortgage market has enabled a whole class of credit-impaired borrowers to buy homes or access the equity in their homes. Originators of subprime loans most often are mortgage and consumer finance companies but can also be banks, thrifts, and other institutions. Serious data limitations make the extent of predatory lending difficult to determine. However, there have been a number of major settlements resulting from government enforcement actions or private party lawsuits in the last 5 years that have accused lenders of abusive practices affecting large numbers of borrowers. For example, in October 2002, Household International, a large home mortgage lender, agreed to pay up to $484 million to homeowners to settle states' allegations that it used unfair and deceptive lending practices to make mortgage loans with excessive interest and fees. In addition, the rate of foreclosures of subprime loans has increased substantially since 1990, far exceeding the rate of increase for subprime originations. Some consumer groups and industry observers have attributed this development, at least in part, to an increase in abusive lending, particularly loans made without regard to borrowers' ability to repay. Additionally, groups such as legal services agencies have reported seeing an ever-growing number of consumers, particularly the elderly and minorities, who are in danger of losing their homes as a result of predatory lending practices. As shown in figure 1, Congress has passed numerous laws that federal agencies and regulators have used to combat predatory lending. Among the most frequently used laws--HOEPA, the Federal Trade Commission Act, TILA, and RESPA--only HOEPA was specifically designed to address predatory lending. Enacted in 1994, HOEPA places restrictions on certain high-cost loans, including limits on prepayment penalties and balloon payments and prohibitions against negative amortization. However, HOEPA covers only loans that exceed certain rate or fee triggers, and although comprehensive data are lacking, it appears that HOEPA covers only a limited portion of all subprime loans. The Federal Trade Commission Act, enacted in 1914 and amended on numerous occasions, authorizes FTC to prohibit and take action against unfair or deceptive acts or practices in or affecting commerce. TILA and RESPA are designed in part to provide consumers with accurate information about the cost of credit. Other federal laws that have been used to address predatory lending practices include criminal fraud statutes that prohibit certain types of fraud sometimes used in abusive lending schemes, such as forgery and false statements. Also, the Fair Housing Act and Equal Credit Opportunity Act--which prohibit discrimination in housing-related transactions and the extension of credit, respectively--have been used in cases against abusive lenders that have targeted certain protected groups. Using these or other authorities, federal agencies have taken a number of enforcement actions and other steps, such as issuing guidance and revising regulations. Among federal agencies, FTC has a prominent role in combating predatory lending because of its responsibilities in implementing and enforcing certain federal laws among lending institutions that are not depository institutions supervised by federal banking regulators. FTC reported that it has filed 19 complaints--17 since 1998--alleging deceptive or other illegal practices by mortgage lenders or brokers and that some actions have resulted in multimillion dollar settlements. The Department of Justice, which is responsible for enforcing certain federal civil rights laws, has taken two such enforcement actions related to predatory mortgage lending practices and has taken an additional action on behalf of FTC. The Department of Housing and Urban Development has undertaken enforcement activities related to abusive lending that focus primarily on reducing losses to the Federal Housing Administration insurance fund. It has also taken three enforcement actions in abusive mortgage lending cases for violations of the Real Estate Settlement Procedures Act's prohibitions on certain types of fees. Federal banking regulators have stated that their monitoring and examination activities have uncovered little evidence of predatory lending in federally regulated depository institutions. Four of the five federal banking regulators reported taking no formal enforcement actions involving predatory mortgage lending, while the fifth--the Office of the Comptroller of the Currency--reported that it has taken one formal enforcement action against a bank engaged in abusive mortgage lending. Regulators noted that they have taken informal enforcement actions to address questionable practices raised during the examination process and required their institutions to take corrective actions. The banking regulators have also issued guidance to the institutions they supervise on avoiding direct or indirect involvement in predatory lending. In addition, in 2001 the Board made changes to its regulations implementing HOEPA that, among other things, increase the number of loans HOEPA covers. The Board also made changes to its regulations implementing the Home Mortgage Disclosure Act in 2002 that make it easier to analyze potential patterns of predatory lending. Federal agencies and banking regulators have coordinated their efforts to address predatory lending on certain occasions through participation in interagency working groups and through joint enforcement actions. For example, FTC, the Department of Justice, and the Department of Housing and Urban Development coordinated to take an enforcement action against Delta Funding Corporation, with each agency investigating and bringing actions for violations of the laws within its jurisdiction. Issues related to federal oversight and regulation of certain nonbank mortgage lenders may challenge efforts to combat predatory lending. Nonbank mortgage lending companies owned by financial or bank holding companies (i.e., nonbank mortgage lending subsidiaries) account for an estimated 24 percent of subprime loan orginations, according to the Department of Housing and Urban Development, and some have been the target of notable federal and state enforcement actions involving allegations of abusive lending. The Board may be better equipped than FTC to monitor and examine these holding company subsidiaries because of its role in overseeing financial and bank holding companies, but the Board does not have clear authority to do so. Our report recommends that Congress consider (1) making appropriate statutory changes that would grant the Board the authority to routinely monitor and, as necessary, examine the nonbank mortgage lending subsidiaries of financial and bank holding companies for compliance with federal consumer protection laws applicable to predatory lending practices and (2) giving the Board specific authority to initiate enforcement actions under those laws against these nonbank mortgage lending subsidiaries. In commenting on our report, the Board stated that while the existing structure has not been a barrier to Federal Reserve oversight, the approach we recommended for consideration by the Congress would likely be useful for catching some abusive practices that might not be caught otherwise. The Board also noted that the approach would present tradeoffs, such as different supervisory schemes being applied to nonbank mortgage lenders based on whether or not they are part of a holding company, and additional costs. However, these nonbank mortgage lenders are already subject to a different supervisory scheme than other lenders. We agree that costs could increase and believe that Congress should consider both the potential costs and benefits of clarifying the Board's authorities. In response to concerns about the growth of predatory lending and the limitations of existing laws, 25 states, the District of Columbia, and 11 localities have passed their own laws addressing predatory lending practices, according to a database that tracks such laws. Most of these laws regulate and restrict the terms and characteristics of high-cost loans--that is, loans that exceed certain rate or fee thresholds. While some state statutes follow the thresholds for covered loans established in HOEPA, many set lower thresholds in order to cover more loans than the federal statute. The statutes vary, but they generally cover a variety of predatory practices, such as balloon payments and prepayment penalties, and some include restrictions on such things as mandatory arbitration clauses that can restrict borrowers' ability to obtain legal redress through the courts. Some states have also increased the regulation of and licensing requirements for mortgage lenders and brokers, in part to address concerns that some unscrupulous lenders and brokers have been responsible for lending abuses and that these entities have not been adequately regulated. For example, some states have added educational requirements that lenders and brokers must meet in order to obtain a license. In recent years, state law enforcement agencies and banking regulators have also taken a number of actions against mortgage lenders involving predatory lending. For example, an official from Washington State's Department of Financial Institutions reported that the department had taken several enforcement actions to address predatory lending, including one that resulted in a lender being ordered to return more than $700,000 to 120 Washington borrowers for allegedly deceiving them and charging prohibited fees. Three federal banking regulators--the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision--have issued opinions stating that federal laws preempt some state predatory lending laws for the institutions that they regulate. The regulators note that such preemption creates a more uniform regulatory framework, relieves lending institutions of the burden of complying with a hodgepodge of state and federal laws, and avoids state laws that may restrict legitimate lending activities. State officials and consumer advocates that oppose preemption argue that federal laws do not effectively protect consumers against predatory lending practices and that federal regulators do not devote sufficient resources toward enforcement of consumer protection laws for the institutions they oversee. In response, federal banking regulators have noted that federally supervised institutions are highly regulated and subject to comprehensive supervision. The regulators also said they found little to no evidence of predatory lending by the institutions they regulate. Consistent observational and anecdotal evidence, along with some limited data, indicates that, for a variety of reasons, elderly homeowners are disproportionately the targets of predatory lending. Because older homeowners, on average, have more equity in their homes than younger homeowners, abusive lenders could be expected to target these borrowers in order to "strip" the equity from their homes. According to federal officials and consumer groups we contacted, abusive lenders often try to convince elderly borrowers to repeatedly refinance their loans, adding more costs each time--an abuse known as loan flipping. In addition, some brokers and lenders aggressively market home equity loans as a source of cash, particularly for older homeowners who may have limited incomes but require funds for major home repairs or medical expenses. The financial losses older people can suffer as a result of abusive loans can result in the loss of independence and security and a significant decline in their quality of life. A number of factors may make the elderly particularly susceptible to predatory lending practices. For example: Diseases and physical impairments associated with aging--such as declining vision, hearing, or mobility--can restrict elderly consumers' ability to access financial information and compare credit terms. In such situations, potential borrowers may be susceptible to the first lender to offer what seems to be a good deal, especially if the lender is willing to visit them at home or provide transportation to the closing. Some older people may also have diminished cognitive capacity, which can impair their ability to comprehend and make informed judgments on financial issues. According to a report sponsored by the National Academy of Sciences, elderly people may be more likely to have conditions or disabilities that make them easy targets for financial abuse and they may have diminished capacity to evaluate proposed courses of action. Representatives of legal aid organizations have said that they frequently represent elderly clients in predatory lending cases involving lenders that have taken advantage of a borrower's confusion and, in some cases, dementia. Several advocacy groups have noted that some elderly people lack social and family support systems, potentially increasing their susceptibility to unscrupulous lenders who may market loans by making home visits or offering other personal contact. Elderly homeowners often live in older homes and are more likely to need someone to do repairs for them. Federal officials, legal aid services, and consumer groups have reported that home repair scams targeting elderly homeowners are particularly common. For example, a joint report on predatory lending by the Department of Housing and Urban Development and the Department of the Treasury noted that predatory brokers and home improvement contractors have collaborated to swindle older consumers. A contractor may come to a homeowner's door, pressure the homeowner into accepting a home improvement contract, and arrange for financing of the work with a high-cost loan. The contractor then does shoddy work or does not finish the agreed-on repairs, leaving the borrower to pay off the expensive loan. Federal agencies, states, nonprofits, and trade organizations have conducted and funded financial education for consumers as a means of improving consumers' financial literacy and, in some cases, raising consumers' awareness of predatory lending practices. Because the elderly may be more susceptible to predatory lending, government agencies and consumer advocacy organizations have focused some of their education efforts on this population. For example, the Department of Justice offers on its Web site the guide "Financial Crimes Against the Elderly," which includes references to predatory lending. The Department of Health and Human Services' Administration on Aging provides grants to state and nonprofit agencies for programs aimed at preventing elder abuse, including predatory lending practices targeting older consumers. AARP, which represents Americans age 50 and over, sponsors a number of financial education efforts, including a borrower's kit that contains tips for avoiding predatory lending. However, federal consumer protection and fair lending laws that have been used to address predatory lending do not generally have provisions specific to elderly persons. For example, age is not a protected class under the Fair Housing Act, which prohibits discrimination in housing-related transactions. In addition, the Home Mortgage Disclosure Act (HMDA)-- which requires certain financial institutions to collect, report, and disclose data on loan applications and originations--does not require lenders to report information about the age of the applicant or borrower. An exception is the Equal Credit Opportunity Act, which prohibits unlawful discrimination on the basis of age in connection with any aspect of a credit transaction. Little comprehensive data exist on the ages of consumers involved in federal and state enforcement actions and private class-action lawsuits involving predatory lending. Such actions generally seek to provide redress to large groups of consumers, but a few cases have involved allegations of predatory lending targeting elderly borrowers. For example, FTC, six states, AARP, and private plaintiffs settled a case with First Alliance Mortgage Company in March 2002 for more than $60 million. The company was accused of using misrepresentation and unfair and deceptive practices to lure senior citizens and those with poor credit histories into entering into abusive loans; an estimated 28 percent of the 8,712 borrowers represented in the class-action suit were elderly. Some nonprofit groups--such as the AARP Foundation Litigation, the National Consumer Law Center, and the South Brooklyn Legal Services' Foreclosure Prevention Project--provide legal services that focus, in part, on helping elderly victims of predatory lending. The AARP Foundation Litigation, which conducts litigation to benefit Americans 50 years and older, has been party to 7 lawsuits since 1998 involving allegations of predatory lending against more than 50,000 elderly borrowers. Six of these suits have been settled, and the other is pending. While representatives of the mortgage lending industry and consumer groups have noted that financial education may make some consumers less susceptible to abusive lending practices, GAO's review of literature and interviews with consumer and federal officials suggest that consumer education by itself has limits as a tool for deterring predatory lending. First, mortgage loans are complex financial transactions, and many different factors--including the interest rate, fees, provisions of the loan, and situation of the borrower--determine whether a loan is in a borrower's best interest. Even an excellent campaign of consumer education is unlikely to provide less sophisticated consumers with enough information for them to determine whether a loan contains abusive terms. Second, predatory lenders and brokers tend to use aggressive marketing tactics that are designed to confuse consumers. Broad-based campaigns to make consumers aware of predatory lending may not be sufficient to prevent many consumers--particularly those who may be uneducated or unsophisticated in financial matters--from succumbing to such tactics. Finally, the consumers who are often the targets of predatory lenders are also some of the hardest to reach with educational information. Prepurchase mortgage counseling--which can offer a "third party" review of a prospective mortgage loan--may help borrowers avoid predatory loans, in part by alerting consumers to predatory loan terms and practices. The Department of Housing and Urban Development supports a network of approximately 1,700 approved counseling agencies across the country and in some cases provides funding for their activities. While beneficial, the role of mortgage counseling in preventing predatory lending is likely to be limited. Borrowers do not always attend such counseling, and when they do, counselors may not have access to all of the loan documents needed to review the full final terms and provisions before closing. In addition, counseling may be ineffective against lenders and brokers engaging in fraudulent practices, such as falsifying applications or loan documents, that cannot be detected during a prepurchase review of mortgage loan documents. Finally, disclosures made during the mortgage loan process, while important, may be of limited usefulness in reducing the incidence of predatory lending practices. Certain federal laws, including TILA and RESPA, have requirements covering the content, form, and timing of the information that must be disclosed to borrowers. However, industry and consumer advocacy groups have publicly expressed dissatisfaction with the current disclosure system. In July 2002, the Department of Housing and Urban Development issued proposed rules intended to streamline the disclosure process and make disclosures more understandable and timely, and debate over the proposed rules has been contentious. Although improving loan disclosures would undoubtedly have benefits, once again the inherent complexity of loan transactions may limit any impact on the incidence of predatory lending practices. Moreover, even a relatively clear and transparent system of disclosures may be of limited use to borrowers who lack sophistication about financial matters, are not highly educated, or suffer physical or mental infirmities. Finally, as with mortgage counseling, revised disclosures would not necessarily help protect consumers against lenders and brokers who engage in outright fraud or who mislead borrowers about the terms of loans in the disclosure documents themselves. The existence of a secondary market for subprime loans has benefited consumers by increasing the sources of funds available to subprime lenders, potentially lowering interest rates and origination costs for subprime loans. However, the secondary market may also inadvertently facilitate predatory lending by providing a source of funds for unscrupulous originators, allowing them to quickly sell off loans with predatory terms. Further, the existence of a secondary market may reduce the incentive for originating lenders--who generally make their profits from high origination fees--to ensure that borrowers can repay. Purchasers of mortgage loans undertake a process of due diligence designed to avoid legal, financial, and reputational risk. However, the degree of due diligence purchasers undertake varies. Officials of Fannie Mae and Freddie Mac--which are estimated to account for a relatively small portion of the secondary market for subprime loans--told us that their organizations undertake a series of measures aimed at avoiding the purchase of loans with abusive characteristics that may have harmed borrowers. In contrast, according to some market participants, the due diligence of other secondary market purchasers of residential mortgages may be more narrowly focused on the creditworthiness of the loans and on their compliance with federal, state, and local laws. However, even the most stringent efforts cannot uncover some predatory loans. For example, due diligence may be unable to uncover fraud that occurred during the loan underwriting or approval process, some excessive or unwarranted fees, or loan flipping. Under some state and local legislation, purchasers of mortgages or mortgage-backed securities on the secondary market may be held liable for violations committed by the originating lenders--referred to as "assignee liability" provisions. Assignee liability is intended to discourage secondary market participants from purchasing loans that may have predatory features and to provide an additional source of redress for victims of abusive lenders, but some argue that it can also discourage legitimate lending activity. Secondary market purchasers that are unwilling to assume the potential risks associated with assignee liability provisions have stopped purchasing, or announced their intention to stop purchasing, mortgages originated in areas covered by such provisions. Assignee liability provisions of the Georgia Fair Lending Act were blamed for causing several participants in the mortgage lending industry to withdraw from the market, and the provisions were subsequently repealed. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact David G. Wood at (202) 512-8678, or Harry Medina at (415) 904-2000. Individuals making key contributions to this testimony included Jason Bromberg, Randall C. Fasnacht, Jr., Elizabeth Olivarez, and Paul Thompson. 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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While there is no universally accepted definition, the term "predatory lending" is used to characterize a range of practices, including deception, fraud, or manipulation, that a mortgage broker or lender may use to make a loan with terms that are disadvantageous to the borrower. Concerns about predatory lending have increasingly garnered the attention and concern of policymakers, consumer advocates and participants in the mortgage industry. This statement is based on GAO's report, released at today's hearing, and discusses federal and state efforts to combat predatory lending; factors that may make elderly consumers more susceptible to predatory lending; the roles of consumer education, mortgage counseling, and loan disclosures in preventing predatory lending; and how the secondary mortgage market can affect predatory lending. Federal agencies have taken a number of enforcement actions, sometimes jointly, using various federal consumer protection laws to combat predatory lending. The Federal Trade Commission (FTC) has played the most prominent enforcement role, filing 19 complaints and reaching multimillion dollar settlements. The Departments of Justice and Housing and Urban Development have also taken various predatory lending-related enforcement actions. Federal banking regulators report little evidence of predatory lending by the institutions they supervise. However, concerns exist about nonbank mortgage lending companies owned by financial or bank holding companies. While FTC is the primary federal enforcer of consumer protection laws for these entities, it is a law enforcement agency that conducts targeted investigations. In contrast, the Federal Reserve Board is well equipped to routinely monitor and examine these entities and, thus, potentially deter predatory lending activities, but its authority in this regard is less clear. As of January 2004, 25 states, as well as several localities, had passed laws to address predatory lending, often by restricting the terms or provisions of certain high-cost loans; however, federal banking regulators have preempted some state laws for the institutions they supervise. Also, some states have strengthened their regulation and licensing of mortgage lenders and brokers. While there are no comprehensive data, federal, state, and consumer advocacy officials report that elderly people have disproportionately been victims of predatory lending. According to these officials and relevant studies, predatory lenders target older consumers in part because they are more likely to have substantial home equity or may live on limited incomes that make them more susceptible to offers for quick access to cash. Older consumers may also have cognitive or physical impairments such as poor eyesight, hearing, or mobility that limit their ability to access competitive sources of credit. GAO's review of literature and interviews with consumer and federal officials suggest that consumer education, mortgage counseling, and loan disclosures are useful, but may be of limited effectiveness in reducing predatory lending. A variety of factors limit their effectiveness, including the complexity of mortgage transactions, difficulties in reaching target audiences, and counselors' inability to review loan documents. The secondary market--where mortgage loans and mortgage-backed securities are bought and sold--benefits borrowers by expanding credit, but may facilitate predatory lending by allowing unscrupulous lenders to quickly sell off loans with predatory terms. In part to avoid certain risks, secondary market participants perform varying degrees of "due diligence" to screen out loans with predatory terms, but may be unable to identify all such loans.
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Over the past 8 years, DOD has designated over 34,000 servicemembers involved in OEF and OIF as wounded in action. The severity of injuries can result in a lengthy process for a patient to either return to duty or to transition to veteran status. The most seriously injured servicemembers from these conflicts usually receive care at Walter Reed Army Medical Center or the National Naval Medical Center. According to DOD officials, once they are stabilized and discharged from the hospital, servicemembers may relocate closer to their homes or military bases and be treated as outpatients by the closest military or VA facility. Recovering servicemembers potentially navigate two different disability evaluation systems that serve different purposes. DOD's system serves a personnel management purpose by identifying servicemembers who are no longer medically fit for duty. If a servicemember is found unfit because of medical conditions incurred in the line of duty, the servicemember is assigned a disability rating and can be discharged from duty. This disability rating, along with years of service and other factors, determines subsequent disability and health care benefits from DOD. Under VA's system, disability ratings help determine the level of disability compensation a veteran receives and priority status for enrollment for health care benefits. To determine eligibility for disability compensation, VA evaluates all claimed medical conditions, whether they were evaluated previously by the military service's evaluation process or not. If VA finds that a veteran has one or more service-connected disabilities that together result in a final rating of at least 10 percent, VA will pay monthly compensation and the veteran will be eligible to receive a higher priority status for health care benefits enrollment. Efforts have been taken to address the deficiencies reported at Walter Reed related to the care provided and the transition of recovering servicemembers. After the press reports about Walter Reed, several high- level review groups were established to study the care and benefits provided to recovering servicemembers by DOD and VA. In addition, two previously-established review groups were already examining related issues. The studies produced from all of these groups, released from April 2007 through June 2008, contained over 400 recommendations covering a broad range of topics, including case management, disability evaluation systems, data sharing between the departments, and the need to better understand and diagnose TBI and PTSD. In May 2007, DOD and VA established the SOC as a temporary, 1-year committee with the responsibility for addressing recommendations from these reports. To conduct its work, the SOC established eight work groups called lines of action (LOA). Each LOA is co-chaired by representatives from DOD and VA and has representation from each military service. LOAs are responsible for specific issues, such as disability evaluation systems and case management. (See table 1 for an overview of the LOAs.) The committee was originally intended to expire May 2008 but it was extended to January 2009. Then, the NDAA 2009 extended the SOC through December 2009. In addition to addressing the published recommendations, the SOC assumed responsibility for addressing the policy development and reporting requirements contained in the NDAA 2008. Section 1611(a) of the NDAA 2008 directs DOD and VA, to the extent feasible, to develop and implement a comprehensive policy covering four areas--(1) care and management, (2) medical evaluation and disability evaluation, (3) the return of servicemembers to active duty, and (4) the transition of recovering servicemembers from DOD to VA. The specific requirements for each of these four areas are further enumerated in sections 1611 through 1614 of the law and include the development of multiple policies. Table 2 summarizes the requirements for the jointly developed policies. Since its inception, the SOC has completed many initiatives, such as establishing the Defense Centers of Excellence for Psychological Health and Traumatic Brain Injury and creating a National Resource Directory, which is an online public resource for recovering servicemembers, veterans, and their families. In addition, the SOC supported the development of several programs to improve the care, management, and transition of recovering servicemembers, including the disability evaluation system pilot and the Federal Recovery Coordination Program. These programs are currently in pilot or beginning phases. Disability evaluation system pilot: DOD and VA are piloting a joint disability evaluation system to improve the timeliness and resource use of their separate disability evaluation systems. Key features of the pilot include a single physical examination conducted to VA standards to be used by a medical evaluation board to document medical conditions that may limit a servicemember's ability to serve in the military, a single source disability rating prepared by VA for use by both DOD and VA in determining disability benefits, and additional outreach and nonclinical case management provided by VA staff at the DOD pilot locations to explain VA results and processes to servicemembers. DOD and VA anticipate a final report on the pilot in August 2009. Federal Recovery Coordination Program: In 2007, DOD and VA established the Federal Recovery Coordination Program in response to the report by the President's Commission on Care for America's Returning Wounded Warriors, commonly referred to as the Dole-Shalala Commission. The commission's report highlighted the need for better coordination of care and additional support for families. The Federal Recovery Coordination Program serves the most severely injured or ill servicemembers. These servicemembers are highly unlikely to be able to return to duty and may have to adjust to permanent disabling conditions. The program was created to provide uniform and seamless care, management, and transition of recovering servicemembers and their families by assigning recovering servicemembers to coordinators who manage the development and implementation of a recovery plan. Each servicemember enrolled in the Federal Recovery Coordination Program has a Federal Individual Recovery Plan, which tracks care, management, and transition through recovery, rehabilitation, and reintegration. Although the Federal Recovery Coordination Program is operated as a joint DOD and VA program, VA is responsible for the administrative duties and program personnel are employees of the agency. Beyond these specific initiatives, the SOC took responsibility for issues related to electronic health records through the work of LOA 4, the SOC's work group focused on DOD and VA data sharing. This LOA also addressed issues more generally focused on joint DOD and VA data needs, including overseeing the development of components for the disability evaluation system pilot and the individual recovery plans for the Federal Recovery Coordination Program. LOA 4's progress on these issues was monitored and overseen by the SOC. The NDAA 2008 established an interagency program office (IPO) to serve as a single point of accountability for both departments in the development and implementation of interoperable electronic health records. Subsequently, management oversight of many of LOA 4's responsibilities were transferred to the IPO. Also, the IPO's scope of responsibility was broadened to include personnel and benefits data sharing between DOD and VA. As of April 2009, DOD and VA have completed 60 of the 76 requirements we identified for jointly developing policies for recovering servicemembers on (1) care and management, (2) medical and disability evaluation, (3) return to active duty, and (4) servicemember transition from DOD to VA. The two departments have completed all requirements for developing policy for two of the policy areas--medical and disability evaluation and return to active duty. Of the 16 requirements that are in progress, 10 are related to care and management and 6 are related to servicemembers transitioning from DOD to VA. (See table 3.) We found that more than two-thirds of the requirements for DOD's and VA's joint policy development to improve the care and management of recovering servicemembers have been completed, while the remaining requirements are in progress. (See table 4.) We identified 38 requirements for this policy area and grouped them into five categories. Although 28 of the 38 requirements had been completed, one category--improving access to medical and other health care services--had most of its requirements in progress. Most of the completed requirements were addressed in DOD's January 2009 Directive-Type Memorandum (DTM), which was developed in consultation with VA. This DTM, entitled Recovery Coordination Program: Improvements to the Care, Management, and Transition of Recovering Service Members, establishes interim policy for the improvements to the care, management, and transition of recovering servicemembers in response to sections 1611 and 1614 of the NDAA 2008. In consultation with VA, DOD created the Recovery Coordination Program in response to the NDAA 2008 requirements. This program, which was launched in November 2008, extended the same comprehensive coordination and transition support provided under the Federal Recovery Coordination Program to servicemembers who were less severely injured or ill, yet who are unlikely to return to active duty in less than 180 days. This program follows the same structured process as the Federal Recovery Coordination Program. However, DOD oversees this program and the coordinators are DOD employees. DOD's January 2009 DTM includes information on the scope and program elements of the Recovery Coordination Program as well as on the roles and responsibilities of the recovery care coordinators, federal recovery coordinators, and medical care case managers and non-medical care managers. According to DOD officials, DOD took the lead in developing policy to address the requirements for care and management because it interpreted most of the requirements to refer to active duty servicemembers. According to DOD and VA officials, the January 2009 DTM serves as the interim policy for care, management, and transition until the completion of DOD's comprehensive policy instruction, which is estimated to be completed by August 2009. This policy instruction will contain more detailed information on the policies outlined in the DTM. A VA official told us that VA also plans to issue related policy guidance as part of a VA handbook during the fourth quarter of 2009. The VA official noted that the final form of the policy document would correspond with DOD's instruction. DOD and VA have completed all of the requirements for developing policy to improve the medical and physical disability evaluation of recovering servicemembers. (See table 5.) We identified 18 requirements for this policy area and grouped them into three categories: (1) policy for improved medical evaluations, (2) policy for improved physical disability evaluations, and (3) reporting on the feasibility and advisability of consolidating DOD and VA disability evaluation systems. DOD issued a series of memoranda that addressed the first two categories starting in May 2007. These memoranda, some of which were developed in collaboration with VA, contained policies and implementing guidance to improve DOD's existing disability evaluation system. To address the third category in this policy area, DOD and VA have issued a report to Congress that describes the organizing framework for consolidating the two departments' disability evaluation systems and states that the departments are hopeful that consolidation would be feasible and advisable even though the evaluation of this approach through the disability evaluation system pilot is still ongoing. According to a DOD official, further assessment of the feasibility and advisability of consolidation will be conducted. DOD and VA anticipate issuing a final report on the pilot in August 2009. However, as we reported in September 2008, it was unclear what specific criteria DOD and VA will use to evaluate the success of the pilot, and when sufficient data will be available to complete such an evaluation. DOD has completed the requirement for establishing standards for determining the return of recovering servicemembers to active duty. (See table 6.) On March 13, 2008, DOD issued a DTM amending its existing policy on retirement or separation due to a physical disability. The revised policy states that the disability evaluation system will be the mechanism for determining both retirement or separation and return to active duty because of a physical disability. An additional revision to the existing DOD policy allows DOD to consider requests for permanent limited active duty or reserve status for servicemembers who have been determined to be unfit because of a physical disability. Previously, DOD could consider such cases only as exceptions to the general policy. According to a DOD official, it is too early to tell whether the revisions will have an effect on retirement rates or return-to-duty rates. DOD annually assesses the disability evaluation system and tracks retirement and return to duty rates. However, because of the length of time a servicemember takes to move through the disability evaluation system--sometimes over a year--it will take a while before changes resulting from the policy revisions register in the annual assessment of the disability evaluation system. DOD and VA have completed more than two-thirds of the requirements for developing procedures, processes, or standards for improving the transition of recovering servicemembers. (See table 7.) We identified 19 requirements for this policy area, and we grouped them into five categories. We found that 13 of the 19 policy requirements have been completed, including all of the requirements for two of the categories--the development of a process for a joint separation and evaluation physical examination and development of procedures for surveys and other mechanisms to measure patient and family satisfaction with services for recovering servicemembers. The remaining three categories contain requirements that are still in progress. Most of the requirements for improving the transition from DOD to VA were addressed in DOD's January 2009 DTM--Recovery Coordination Program: Improvements to the Care, Management, and Transition of Recovering Service Members--which establishes interim policy for the care, management, and transition of recovering servicemembers through the Recovery Coordination Program. However, we found that DOD's DTM includes limited detail related to the procedures, processes, and standards for transition of recovering servicemembers. As a result, we could not always directly link the interim policy in the DTM to the specific requirements contained in section 1614 of the NDAA 2008. DOD and VA officials noted that they will be further developing the procedures, processes, and standards for the transition of recovering servicemembers in a subsequent comprehensive policy instruction, which is estimated to be completed by June 2009. A VA official reported that VA plans to separately issue policy guidance addressing the requirements for transitioning servicemembers from DOD to VA in the fourth quarter of 2009. DOD and VA officials told us that they experienced numerous challenges as they worked to jointly develop policies to improve the care, management, and transition of recovering servicemembers. According to officials, these challenges contributed to the length of time required to issue policy guidance, and in some cases the challenges have not yet been completely resolved. In addition, recent changes to the SOC staff, including DOD's organizational changes for staff supporting the SOC, could pose challenges to the development of policy affecting recovering servicemembers. DOD and VA officials encountered numerous challenges during the course of jointly developing policies to improve the care, management, and transition of recovering servicemembers, as required by sections 1611 through 1614 of the NDAA 2008, in addition to responding to other requirements of the law. Many of these challenges have been addressed, but some have yet to be completely resolved. DOD and VA officials cited the following examples of issues for which policy development was particularly challenging. Increased support for family caregivers. The NDAA 2008 includes a number of provisions to strengthen support for families of recovering servicemembers, including those who become caregivers. However, DOD and VA officials on a SOC work group stated that before they could develop policy to increase support for such families, they had to obtain concrete evidence of their needs. Officials explained that while they did have anecdotal information about the impact on families who provide care to recovering servicemembers, they lacked the systematic data needed for sound policy decisions--such as frequency of job loss and the economic value of family-provided medical services. A work group official told us that their proposals for increasing support to family caregivers were rejected twice by the SOC, due in part to the lack of systematic data on what would be needed. The work group then contracted with researchers to obtain substantiating evidence, a study that required 18 months to complete. In January 2009, the SOC approved the work group's third proposal. A provision for caregiver benefits based on the SOC's proposal was included in the NDAA 2010 bill that was introduced in May 2009. Establishing standard definitions for operational terms. One of the important tasks facing the SOC was the need to standardize key terminology relevant to policy issues affecting recovering servicemembers. DOD took the lead in working with its military services and VA officials to identify and define key terms. DOD and VA officials told us that many of the key terms found in existing DOD and VA policy, the reports from the review groups, and the NDAA 2008, as well as those used by the different military services were not uniformly defined. Consequently, standardized definitions were important to promote agreement on issues such as identifying the recovering servicemembers who are subject to NDAA 2008 requirements, identifying categories of servicemembers who would receive services from the different classes of case managers or be eligible for certain benefits, managing aspects of the disability evaluation process, and establishing criteria to guide research. In some cases, standardized definitions were critical to policy development. The importance of agreement on key terms is illustrated by an issue encountered by the SOC's work group responsible for family support policy. In this case, before policy could be developed for furnishing additional support to family members that provide medical care to recovering servicemembers, the definition of "family" had to be agreed upon. DOD and VA officials said that they considered two options: to define the term narrowly to include a servicemember's spouse, parents, and children, or to use broader definitions that included distant relatives and unrelated individuals with a connection to the servicemember. These two definitions would result in significantly different numbers of family members eligible to receive additional support services. DOD and VA officials decided to use a broader definition to determine who would be eligible for support. Of the 41 key definitions identified for reconciliation, DOD and VA had concurred on 33 as of April 2009 and these 33 standardized definitions are now being used. Disagreement remains over the remaining definitions, including the definition of "mental health." A DOD official stated that given the uncertainty associated with the organizational and procedural changes recently introduced to the SOC (which are discussed below), obtaining concurrence on the remaining definitions has been given lower priority. Improving TBI and PTSD screening and treatment. Requirements related to screening and treatment for TBI and PTSD were embedded in several sections of the NDAA 2008, including section 1611, and were also discussed extensively in a task force report on mental health. DOD and VA officials told us that policy development for these issues was difficult. For example, during development of improved TBI and PTSD treatment policy, policymakers often lacked sufficient scientific information needed to help achieve consensus on policy decisions. Also, members of the SOC work group told us that they disagreed on appropriate models for screening and treatment and struggled to reorient the military services to patient-focused treatment. A senior DOD official stated that the adoption of patient-focused models is particularly difficult for the military services because, historically, the needs of the military have been given precedence over the needs of individual servicemembers. To address these challenges, the SOC oversaw the creation of the Defense Centers of Excellence for Psychological Health and Traumatic Brain Injury--a partnership between DOD and VA. While policies continue to be developed on these issues, TBI and PTSD policy remains a challenge for DOD and VA. However, DOD officials told us that the centers of excellence have made progress with reducing knowledge gaps in psychological health and TBI treatment, identifying best practices, and establishing clinical standards of care. Release of psychological health treatment records to DOD by VA health care providers who treat members of the National Guard and Reserves. Section 1614 of the NDAA 2008 requires the departments to improve medical and support services provided to members of the National Guard and Reserves. In pursuing these objectives, VA faced challenges related to the release of medical information to DOD on reservists and National Guard servicemembers who have received treatment for PTSD or other mental health conditions from VA. DOD requests medical information from VA to help make command decisions about the reactivation of servicemembers, but VA practitioners face an ethical dilemma if the disclosure of medical treatment could compromise servicemembers' medical conditions, particularly for those at risk of suicide. The challenge of sharing and protecting sensitive medical information on servicemembers who obtain treatment at VA was reviewed by the Blue Ribbon Work Group on Suicide Prevention convened in 2008 at the behest of the Secretary of Veterans Affairs. DOD and VA are continuing their efforts to address the privacy rights of patients who receive medical services from VA while serving in the military, and to protect the confidential records of VA patients who may also be treated by the military's health care system. The need to resolve this challenge assumes even greater importance in light of DOD's and VA's increasing capability to exchange medical records electronically, which will expand DOD's ability to access records of servicemembers who have received medical treatment from VA. The SOC has experienced turnover in leadership, reconfiguration in its organizational structure at DOD, and changes affecting policy development responsibilities. These changes could pose future challenges to DOD's and VA's efforts to develop joint policy. The SOC has experienced leadership changes caused by the turnover in presidential administrations as well as turnover in some of its key staff. For example, the outgoing deputy secretaries of DOD and VA, who previously chaired the SOC, left their positions in January 2009 with the change in administration, and new deputy secretaries were not confirmed until February and April 2009. In their absence, the Secretaries of VA and DOD co-chaired a SOC meeting as a short-term measure. DOD also introduced other staffing changes to replace personnel who had been temporarily detailed to the SOC and needed to return to their primary duties. DOD had relied on temporarily-assigned staff to meet SOC staffing needs because the SOC was originally envisioned as a short-term effort. In a December 2008 memorandum, DOD outlined the realignment of its SOC staff. This included the transition of responsibilities from detailed, temporary SOC staff and executives to permanent staff in existing DOD offices that managed similar issues. For example, the functions of LOA 7 (Legislation and Public Affairs) will now be overseen by the Assistant Secretary of Defense for Legislative Affairs, the Assistant Secretary of Defense for Public Affairs, and the DOD General Counsel. DOD also established two new organizational structures--the Office of Transition Policy and Care Coordination and an Executive Secretariat office. The Office of Transition Policy and Care Coordination oversees transition support for all servicemembers and serves as the permanent entity for issues being addressed by LOA 1 (Disability Evaluation System), LOA 3 (Case Management), and LOA 8 (Personnel, Pay, and Financial Support). The Executive Secretariat office is responsible for performance planning, performance management, and SOC support functions. According to DOD officials, the new offices were created to establish permanent organizations that address a specific set of issues and to enhance accountability for policy development and implementation as these offices report directly to the Office of the Under Secretary of Defense for Personnel and Readiness. Currently, many of the positions in these new offices, including the director positions, are staffed by officials in an acting capacity or are unfilled. DOD's changes to the SOC are important because of the potential effects these changes could have on the development of policy for recovering servicemembers. However, officials in both DOD and VA have mixed reactions about the consequences of these changes. Some DOD officials consider the organizational changes to the SOC to be positive developments that will enhance the SOC's effectiveness. They point out that the SOC's temporary staffing situation needed to be addressed, and also that the two new offices were created to support the SOC and provide focus on the implementation of key policy initiatives developed by the SOC--primarily the disability evaluation system pilot and the new case management programs. In contrast, others are concerned by DOD's changes, stating that the new organizations disrupt the unity of command that once characterized the SOC's management because personnel within the SOC organization now report to three different officials within DOD and VA. However, it is too soon to determine how well DOD's new structure will work in conjunction with the SOC. DOD and VA officials we spoke with told us that the SOC's work groups continue to carry out their roles and responsibilities. Finally, according to DOD and VA officials, the scope of responsibilities of both the SOC and the DOD and VA Joint Executive Council appear to be in flux and may evolve further still. According to DOD and VA officials, changes to the oversight responsibilities of the SOC and the Joint Executive Council are causing confusion. While the SOC will remain responsible for policy matters directly related to recovering servicemembers, a number of policy issues may now be directed to the Joint Executive Council, including issues that the SOC had previously addressed. For example, management oversight of many of LOA 4's responsibilities (DOD and VA Data Sharing) has transitioned from the SOC to the IPO, which reports primarily to the Joint Executive Council. It is not clear how the IPO will ensure effective coordination with the SOC's LOAs for overseeing the development of information technology applications for the disability evaluation system pilot and the individual recovery plans for the Federal Recovery Coordination Program. Given that information technology support for two key SOC initiatives is identified in the joint DOD/VA Information Interoperability Plan, if the IPO and the SOC do not effectively coordinate with one another, the result may negatively affect the development of improved policies for recovering servicemembers. We provided a draft of this report to DOD and VA for comment. VA provided technical comments, which we incorporated as appropriate. DOD and VA did not provide other comments. We are sending copies of this report to the Secretaries of the Departments of Defense and Veterans Affairs, congressional committees, and other interested parties. The report is also available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. To summarize the status of the Departments' of Defense (DOD) and Veterans Affairs (VA) efforts to jointly develop policies for each of the four policy areas outlined in sections 1611 through 1614 of the National Defense Authorization Act for Fiscal Year 2008 (NDAA 2008), we identified 76 requirements in these sections and grouped related requirements into 14 logical categories. Tables 8 through 11 enumerate the requirements in each of GAO's categories and provide the status of DOD's and VA's efforts to develop policy related to each requirement, as of April 2009. In addition to the contact named above, Bonnie Anderson, Assistant Director; Susannah Bloch; Catina Bradley; April Brantley; Frederick Caison; Lisa Motley; and Elise Pressma made major contributions to this report.
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The National Defense Authorization Act for Fiscal Year 2008 (NDAA 2008) requires the Departments of Defense (DOD) and Veterans Affairs (VA) to jointly develop and implement comprehensive policies on the care, management, and transition of recovering servicemembers. The Wounded, Ill, and Injured Senior Oversight Committee (SOC)--jointly chaired by DOD and VA leadership--has assumed responsibility for these policies. The NDAA 2008 also requires GAO to report on the progress DOD and VA make in jointly developing and implementing the policies. This report focuses on the joint development of the policies. Implementation of the policies will be addressed in future reports. Specifically, this report provides information on (1) the progress DOD and VA have made in jointly developing the comprehensive policies required by the NDAA 2008 and (2) the challenges DOD and VA are encountering in the joint development of these policies. GAO determined the current status of policy development by assessing the status reported by SOC officials and analyzing supporting documentation. To identify challenges, GAO interviewed the Acting Under Secretary of Defense for Personnel and Readiness, the Executive Director and Chief of Staff of the SOC, the departmental co-leads for most of the SOC work groups, the Acting Director of DOD's Office of Transition Policy and Care Coordination, and other knowledgeable officials. DOD and VA have made substantial progress in jointly developing policies required by sections 1611 through 1614 of the NDAA 2008 in the areas of (1) care and management, (2) medical and disability evaluation, (3) return to active duty, and (4) transition of care and services received from DOD to VA. Overall, GAO's analysis showed that as of April 2009, 60 of the 76 policy requirements GAO identified have been completed and the remaining 16 policy requirements are in progress. DOD and VA have completed all of the policy development requirements for medical and physical disability evaluations, including issuing a report on the feasibility and advisability of consolidating the DOD and VA disability evaluation systems, although the pilot for this approach is still ongoing. DOD has also completed establishing standards for returning recovering servicemembers to active duty. More than two-thirds of the policy development requirements have been completed for the remaining two policy areas--care and management and the transition of recovering servicemembers from DOD to VA. Most of these requirements were addressed in a January 2009 DOD memorandum that was developed in consultation with VA. DOD officials reported that more information will be provided in a subsequent policy instruction, which is to be issued in August 2009. VA also plans to issue related policy guidance in the fourth quarter of 2009. DOD and VA officials told GAO that they have experienced numerous challenges as they worked to jointly develop policies to improve the care, management, and transition of recovering servicemembers. According to officials, these challenges contributed to the length of time required to issue policy guidance, and in some cases the challenges have not yet been completely resolved. For example, the SOC must still standardize key terminology relevant to policy issues affecting recovering servicemembers. DOD and VA agreement on key definitions for what constitutes "mental health," for instance, is important for developing policies that define the scope, eligibility, and service levels for recovering servicemembers. Recent changes affecting the SOC may also pose future challenges to policy development. Some officials have expressed concern that DOD's recent changes to staff supporting the SOC have disrupted the unity of command because SOC staff now report to three different officials within DOD and VA. However, it is too soon to determine how well DOD's staffing changes will work. Additionally, according to DOD and VA officials, the SOC's scope of responsibilities appears to be in flux. While the SOC will remain responsible for policy matters for recovering servicemembers, a number of policy issues may now be directed to the DOD and VA Joint Executive Council. Despite this uncertainty, DOD and VA officials told GAO that the SOC's work groups continue to carry out their roles and responsibilities. GAO provided a draft of this report to DOD and VA for comment. VA provided technical comments, which GAO incorporated as appropriate. DOD and VA did not provide other comments.
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VA manages a vast medical care network for veterans, providing health care services to about 5 million beneficiaries. The estimated cost of these services in fiscal year 2004 was $29 billion. According to VA, its health care system now includes 157 medical centers, 862 ambulatory care and community-based outpatient clinics (CBOC), and 134 nursing homes. VA health care facilities provide a broad spectrum of medical, surgical, and rehabilitative care. The management of VA's facilities is decentralized to 21 regional networks referred to as Veterans Integrated Service Networks (networks). The Charleston facility is part of Network 7, or the Southeast Network. The Charleston medical facility is a part of the VA health care network and has served the medical needs of Charleston area veterans since it opened in 1966. The Charleston facility is a primary, secondary, and tertiary care facility. (See fig. 1.) The facility consists of more than 352,000 square feet with 117 medical and surgical beds and 28 nursing home care unit beds; according to VA officials, the average daily occupancy rate is about 80 percent. The outpatient workload was about 460,000 clinic visits in fiscal year 2004. VA employs about 1,100 staff at the Charleston facility, which has an annual operating budget of approximately $160 million. VA's Charleston medical facility is affiliated with MUSC. MUSC is the main source of the Charleston facility's medical residents, who rotate through all major VA clinical service areas. VA also purchases approximately $13 million in medical care services from MUSC, including gastroenterology, infectious disease, internal medicine, neurosurgery, anesthesia, pulmonary, cardiovascular perfusion, and radiology services. In addition, VA has a medical research partnership with MUSC for a mutually supported biomedical research facility, the Thurmond Biomedical Research Center. MUSC operates a 709 licensed bed acute care hospital in Charleston that also provides primary, secondary, and tertiary services. The services available through MUSC span the continuum of care with physician specialists and subspecialists in medicine, surgery, neurology, neurological surgery, psychiatry, radiology, and emergency medicine, among other specialties. During a 12-month period ending on June 30, 2003, MUSC admitted 28,591 patients (including newborns), representing an occupancy rate of approximately 78 percent of available beds. Outpatient activity for the same period included 6,802 same-day surgeries, 551,914 outpatient visits, and 35,375 emergency visits. MUSC's net patient service revenue for the fiscal year ending on June 30, 2003, was about $559 million. VA and the CARES Commission concluded that the Charleston facility is in overall good condition and, with relatively minor renovations, can continue to meet veterans' health care needs in the future. VA conducts facility condition assessments (FCA) at its facilities every 3 years on a rotating basis. FCAs evaluate the condition of a VA facility's essential functions--electrical and energy systems, accessibility, sanitation and water--and subsequently estimate the useful and remaining life of those systems. The Charleston facility's most recent FCA was conducted in 2003, and this assessment showed that the facility currently is in overall good condition. According to VA officials, the facility's current condition is a result of targeted capital investments. In particular, VA invested about $11.6 million in nonrecurring maintenance projects over the last 5 years. Such projects include installing a new fire alarm system, replacing roofing, painting the exterior of the building, and upgrading interior lighting. The CARES Commission did not recommend replacing VA's facility in Charleston as it did with facilities in some other locations. In assessing the capital asset requirements for the Charleston facility, the Commission relied on the 2003 FCA and projections of inpatient and outpatient service demands through 2022, among other things. These projections indicate that demand for inpatient beds at VA's facility in Charleston will increase by 29 percent from 2001 to 2022, while demand for outpatient services will increase by 69 percent during the same period. Although the CARES Commission did not recommend a new facility in Charleston, it did call for renovating the nursing home units and the inpatient wards. In his response to the Commission's recommendations, the Secretary agreed to make the necessary renovations at the Charleston facility. VA officials at the Charleston medical facility have a number of ongoing and planned capital maintenance and improvement projects to address the CARES Commission recommendations and to maintain the condition of the current medical center. For example, two minor capital improvements--totaling $6.25 million--are currently under construction. These projects include a third floor clinical addition, which will add 20,000 square feet of space to the medical center for supply processing and distribution, rehabilitation medicine, and prosthetics; and the patient privacy project, which will renovate the surgical in-patient ward to provide private and semiprivate bathrooms for veterans. Planned capital maintenance and improvements projects over the next 10 years include electrical upgrades, renovation of several wards to address patient privacy concerns, renovation of operating rooms and the intensive care units, and the expansion of the specialty care clinics. VA officials estimate that the total cost for all planned capital maintenance and improvement projects is approximately $62 million. In addition to the capital improvement projects at the medical center in Charleston, VA is currently constructing a CBOC, in partnership with the Navy, at the Naval Weapons Station in Goose Creek, South Carolina. The new clinic will be a joint VA-Navy facility and will help VA address the projected increase in demand for outpatient services. The new clinic-- called the Goose Creek CBOC--is scheduled to open in 2008 and will serve a projected 8,000 patients who are currently served by VA's Charleston facility. VA estimates its investment in the planning, design, and construction of the Goose Creek CBOC will be about $6 million. VA and MUSC have collaborated and communicated to a limited extent on a proposal for a joint venture medical center over the past 3 years. As a result of the limited collaboration, negotiations over the proposal stalled. In August 2005, however, initial steps were taken to move the negotiations forward. Specifically, four workgroups were created--which include both VA and MUSC officials--and tasked with examining critical issues related to the proposal. To meet the needs of a growing and aging patient population, MUSC has undertaken an ambitious five-phase construction project to replace its aging medical campus. Construction on the first phase began in October 2004. Phase I includes the development of a four-story diagnostic and treatment building and a seven-story patient hospitality tower, providing an additional 641,000 square feet in clinical and support space--156 beds for cardiovascular and digestive disease services, 9 operating rooms, outpatient clinics with a capacity of 100,000 visits, and laboratory and other ancillary support services. Phase I also includes the construction of an atrium connecting the two buildings, a parking structure, and a central energy plant. Initial plans for phases II through V include diagnostic and treatment space and patient bed towers. As shown in figure 2, phases IV and V would be built on VA property. In particular, phase V would be built on the site of VA's existing medical center. MUSC has informed VA about its proposed locations for these facilities. According to MUSC officials, there are approximately 2 years remaining for the planning of phase II. In November 2002, the President of MUSC sent a proposal to the Secretary of VA about partnering with MUSC in the construction and operation of a new medical center in phase II of MUSC's construction project. Under MUSC's proposal, VA would vacate its current facility and move to a new facility located on MUSC property to the south of phase I. MUSC also indicated that sharing medical services would be a component of the joint venture--that is, VA and MUSC would enter into sharing agreements to buy, sell, or barter medical and support services. VA and MUSC currently share some services--for example, VA purchases services for gastroenterology, infectious disease, and internal medicine. According to MUSC officials, the joint venture proposal would increase the level of sharing of medical services and equipment, which would create cost savings for both VA and MUSC. VA officials told us that the proposed joint venture between MUSC and VA is unprecedented--that is, should VA participate in the joint venture, it would be the first of its kind between VA and a medical education affiliate. In response to MUSC's proposal, VA formed an internal workgroup composed of officials primarily from VA's Southeast Network to evaluate MUSC's proposal. The workgroup analyzed the feasibility and cost effectiveness of the proposal and issued a report in March 2003, which outlined three other options available to VA: replacing the Charleston facility at its present location, replacing the Charleston facility on land presently occupied by the Naval Hospital in Charleston, or renovating the Charleston facility. The workgroup concluded that it would be more cost effective to renovate the current Charleston facility than to replace it with a new facility. This conclusion was based, in part, on the cost estimates for constructing a new medical center. In April 2003, the Secretary of VA sent a counterproposal to the President of MUSC, which indicated that VA preferred to remain in its current facility. The Secretary indicated, however, that if VA agreed to the joint venture, it would rather place the new facility in phase III--which is north of phase I--to provide better street access for veterans. (See fig. 3 for MUSC's proposal and VA's counterproposal.) In addition, the Secretary indicated that MUSC would need to provide a financial incentive for VA to participate in the joint venture. Specifically, MUSC would need to make up the difference between the estimated life-cycle costs of renovating the Charleston facility and building a new medical center--which VA estimated to be about $85 million--through negotiations or other means. The MUSC President responded to VA's counterproposal in an April 2003 letter to the Secretary of VA. In the letter, the MUSC President stated that MUSC was proceeding with phase I of the project and that the joint venture concept could be pursued during later phases of construction. The letter did not specifically address VA's proposal to locate the new facility in phase III, nor the suggestion that MUSC would need to provide some type of financial incentive for VA to participate in the joint venture. To move forward with phase I, the MUSC President stated that MUSC would like to focus on executing an enhanced use lease (EUL) for Doughty Street. Although MUSC owns most of the property that will be used for phases I through III, Doughty Street is owned by VA and serves as an access road to the Charleston facility and parking lots. The planned facility for phase I would encompass Doughty Street. (See fig. 4.) Therefore, MUSC could not proceed with phase I--as originally planned--until MUSC secured the rights to Doughty Street. To help its medical affiliate move forward with construction, VA executed a EUL agreement with MUSC in May 2004 for use of the street. According to the terms of the EUL, MUSC will pay VA $342,000 for initial use of the street and $171,000 for each of the following eight years. Although both entities successfully collaborated in executing the enhanced use lease for Doughty Street, limited collaboration and communication generally characterize the negotiations between MUSC and VA over the joint venture proposal. In particular, before this summer, VA and MUSC had not exchanged critical information that would help facilitate negotiations. For instance, MUSC did not clearly articulate to VA how replacing the Charleston facility, rather than renovating the facility, would improve the quality of health care services for veterans or benefit VA. MUSC officials had generally stated that sharing services and equipment would create efficiencies and avoid duplication, which would lead to cost savings. However, MUSC had not provided any analyses to support such claims. Similarly, as required by law, VA studied the feasibility of coordinating its health care services with MUSC, pending construction of MUSC's new medical center. This study was completed in June 2004. However, VA officials did not include MUSC officials in the development of the study, nor did they share a copy of the completed study with MUSC. VA also updated its cost analysis of the potential joint venture this spring, but again, VA did not share the results with MUSC. Because MUSC was not included in the development of these analyses, there was no agreement between VA and MUSC on key input for the analyses, such as the specific price MUSC would charge VA for, or the nature of, the medical services that would be provided. As a result of the limited collaboration and communication, negotiations stalled--prior to August 2005, the last formal correspondence between VA and MUSC leadership on the joint venture was in April 2003. (See fig. 5 for a time line of key events in the negotiations between VA and MUSC.) On August 1, 2005, a congressional delegation visited Charleston to meet with VA and MUSC officials to discuss the joint venture proposal. After this visit, VA and MUSC agreed to establish workgroups to examine key issues associated with the joint venture proposal. Specifically, VA and MUSC established the Collaborative Opportunities Steering Group (steering group). The steering group is composed of five members from VA, five members from MUSC, and a representative from the Department of Defense (DOD), which is also a stakeholder in the local health care market. The steering group chartered four workgroups, and according to VA: The governance workgroup will examine ways of establishing organizational authority within a joint venture between VA and MUSC, including shared medical services. The clinical service integration workgroup will identify medical services provided by VA and MUSC and opportunities to integrate or share these services. The legal workgroup will review federal and state authorities (or identify the lack thereof) and legal issues relating to a joint venture with shared medical services. The finance workgroup will provide cost estimates and analyses relating to a joint venture with shared medical services. The workgroups will help VA and MUSC determine if the joint venture proposal is mutually beneficial. The workgroups are scheduled to provide weekly reports to the steering group and a final report to the steering group by October 28, 2005. The steering group is scheduled to submit a final report by November 30, 2005, to the Deputy Under Secretary for Health for Operations and Management and to the President of MUSC. The possibility of participating in the joint venture raises a number of issues for VA to consider. The proposed joint venture presents a unique opportunity for VA to reevaluate how it provides health care services to veterans in Charleston. Our ongoing work, as well as our previous work on VA's capital realignment efforts, cost-benefit analysis, organizational transformation, and performance management, however, suggests many issues to consider before making a decision about a joint venture, including governance, legal, and stakeholder issues. Some of these issues will be directly addressed by the workgroups, while others, such as the concerns of stakeholders, will not. In addition, some issues can be addressed through collaboration between VA and MUSC, while others may require VA to seek legislative remedies. Among the issues to explore are the following: Comparing appropriate options and assessing the costs and benefits of all options: According to Office of Management and Budget (OMB) guidelines on evaluating capital assets, a comparison of options, or alternatives, including the status quo, is critical for ensuring that the best alternative is selected. In its guidance, OMB encourages decision makers to consider the different ways in which various functions, most notably health care service delivery in this case, can be performed. OMB guidelines further state that comparisons of costs and benefits should facilitate selection among competing alternatives. The finance workgroup is examining the potential costs for shared services within a joint facility. However, it is unclear whether the workgroup will weigh the benefits and costs of a new facility against those of other alternatives, including maintaining the existing medical center. VA will also need to weigh the costs and benefits of investing in a joint venture in Charleston against the needs of other VA facilities in the network and across the nation. VA did not include the Charleston facility on its list of highest priority major medical facility construction requirements for fiscal years 2004 through 2010. According to VA, the list of priorities, which includes 48 projects across the nation, aligns with existing CARES recommendations. Nevertheless, exploring the potential costs and benefits of a joint venture gives VA an opportunity to reexamine how it delivers health care services to the nation's veterans and uses its affiliations with medical universities now and in the future. As we have stated in previous reports, given the nation's long-term fiscal challenges and other challenges of the 21st Century, such reexaminations of federal programs are warranted. Moreover, as the CARES Commission noted, the potential joint venture between VA and MUSC is a possible framework for future partnerships. Developing a governance plan that outlines responsibilities and ensures accountability: If VA and MUSC decide to enter into a joint venture for a new facility, they will need a plan for governing the facility. Any governance plan would have to maintain VA's direct authority over and accountability for the care of VA patients. In addition, if shared medical services are a component of a joint venture between MUSC and the VA, the entities will need a mechanism to ensure that the interests of the patients served by both are protected today and in the future. For instance, VA may decide to purchase operating room services from MUSC. If the sharing agreement was dissolved at some point in the future, it would be difficult for VA to resume the independent provision of these services. Also, if MUSC physicians were to treat VA beneficiaries, or VA physicians were to treat MUSC patients, each entity would need a clear understanding of how to report health information to its responsible organization. Therefore, a clear plan for governance would ensure that VA and MUSC could continue to serve their patients' health care needs as well as or better than before. Identifying legal issues and seeking legislative remedies: The proposed joint venture raises a number of complex legal issues depending on the type of joint venture that is envisioned. Many of the legal issues that will need to be addressed involve real estate, construction, contracting, budgeting, and employment. The following are among some of the potential issues relating to a joint venture that VA previously identified: What type of interest will VA have in the facility? If MUSC is constructing the facility on MUSC property, will VA be entering into a leasehold interest in real property or a sharing agreement for space, and what are the consequences of each? If the facility is to be located on VA property, will it involve a land transfer to MUSC or will VA lease the property to MUSC under its authority to enter into a EUL agreement? What are the advantages and disadvantages of these options? Because MUSC contracting officials do not have the authority to legally bind the VA, how would contracting for the services and equipment be handled? The legal workgroup is currently identifying VA's and MUSC's legal authorities, or lack thereof, on numerous issues relating to entering into a joint venture. Should VA decide to participate in the joint venture, it may need to seek additional authority from the Congress. Involving stakeholders in the decisionmaking process: Participating in a joint venture medical center, particularly if it includes significant service sharing between VA and MUSC, has significant implications for the medical center's stakeholders, including VA patients, VA employees, and the community. These stakeholders have various perspectives and expectations--some of which are common to the different groups, while others are unique. For example, union representatives and VA officials whom we spoke to indicated that VA patients and employees would likely be concerned about maintaining the quality of patient care at a new facility and access to the current facility during construction. Union representatives also said the employees would be concerned about the potential for the loss of jobs if VA participated in the joint venture and purchased additional services from MUSC. As VA and MUSC move forward in negotiations, it will be important for all stakeholders' concerns to be addressed. Developing a system to measure performance and results: If VA and MUSC decide to jointly build and operate a new facility in Charleston, it will become, as noted in the CARES Commission report, a possible framework for future partnerships between VA and other medical universities. As a result, a system for measuring whether the new joint venture facility is achieving the intended results would be useful. In our previous work on managing for results, we have emphasized the importance of establishing meaningful, outcome-oriented performance goals. In this case, potential goals could be operational cost savings and improved health care for veterans. If the goals are not stated in measurable terms, performance measures should be established that translate those goals into concrete, observable conditions. Such measures would enable VA and other stakeholders to determine whether progress is being made toward achieving the goals. This information could not only shed light on the results of a joint venture in Charleston, but it could also enable VA to identify criteria for evaluating other possible joint ventures with its medical affiliates in the future. It would also help Congress to hold VA accountable for results. In conclusion, Mr. Chairman, we have stated over the past few years that federal agencies, including VA, need to reexamine the way they do business in order to meet the challenges of the 21st century. To address future health care needs of veterans, VA's challenge is to explore alternative ways to fulfill its mission of providing veterans with quality health care. The prospect of establishing a joint venture medical center with MUSC presents a good opportunity for VA to study the feasibility of one method--expanding its relationships with university medical school affiliates to include the sharing of medical services in an integrated facility. This is just one of several ways VA could provide care to veterans. Evaluating this option would involve VA officials, working in close collaboration with MUSC officials, weighing the benefits and costs as well as the risks involved in a joint venture against those of other alternatives, including maintaining the current medical center. Determining whether a new facility for Charleston is justified in comparison with the needs of other facilities in the VA system is also important. Until these difficult, but critical, issues are addressed, a fully-informed final decision on the joint venture proposal cannot be made. Mr. Chairman, this concludes my prepared statement. I will be happy to respond to any questions you or other Members of the Subcommittee may have. For further information, please contact Mark Goldstein at (202) 512-2834. Individuals making key contributions to this testimony include Nikki Clowers, Daniel Hoy, Jennifer Kim, Edward Laughlin, Donna Leiss, James Musselwhite Jr., Terry Richardson, Susan Michal-Smith, and Michael Tropauer. VA Health Care: Key Challenges to Aligning Capital Assets and Enhancing Veterans' Care. GAO-05-429. Washington, D.C.: August 5, 2005. Federal Real Property: Further Actions Needed to Address Long-standing and Complex Problems. GAO-05-848T. Washington, D.C.: June 22, 2005. VA Health Care: Important Steps Taken to Enhance Veterans' Care by Aligning Inpatient Services with Projected Needs. GAO-05-160. Washington, D.C.: March 2, 2005. High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 2005. VA Health Care: Access for Chattanooga-Area Veterans Needs Improvements. GAO-04-162. Washington, D.C.: January 30, 2004. Budget Issues: Agency Implementation of Capital Planning Principles Is Mixed. GAO-04-138. Washington, D.C.: January 16, 2004. Federal Real Property: Vacant and Underutilized Properties at GSA, VA, and USPS. GAO-03-747. Washington, D.C.: August 19, 2003. VA Health Care: Framework for Analyzing Capital Asset Realignment for Enhanced Services Decisions. GAO-03-1103R. Washington, D.C.: August 18, 2003. Department of Veterans Affairs: Key Management Challenges in Health and Disability Programs. GAO-03-756T. Washington, D.C.: May 8, 2003. VA Health Care: Improved Planning Needed for Management of Excess Real Property. GAO-03-326. Washington, D.C.: January 29, 2003. Major Management Challenges and Program Risks: Department of Veterans Affairs. GAO-03-110. Washington, D.C.: January 2003. High-Risk Series: Federal Real Property. GAO-03-122. Washington, D.C.: January 2003. VA Health Care: VA Is Struggling to Address Asset Realignment Challenges. GAO/T-HEHS-00-88. Washington, D.C.: April 5, 2000. VA Health Care: Improvements Needed in Capital Asset Planning and Budgeting. GAO/HEHS-99-145. Washington, D.C.: August 13, 1999. VA Health Care: Challenges Facing VA in Developing an Asset Realignment Process. GAO/T-HEHS-99-173. Washington, D.C.: July 22, 1999. VA Health Care: Capital Asset Planning and Budgeting Need Improvement. GAO/T-HEHS-99-83. Washington, D.C.: March 10, 1999. 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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The Department of Veterans Affairs (VA) maintains partnerships, or affiliations, with university medical schools to obtain medical services for veterans and provide training for medical residents. In 2002, the Medical University of South Carolina (MUSC)--which is affiliated with VA's medical facility in Charleston--proposed that VA and MUSC enter into a joint venture for a new VA facility as part of MUSC's plan to expand its medical campus. Under the proposal, MUSC and VA would jointly construct and operate a new medical center in Charleston. In 2004, the Capital Asset Realignment for Enhanced Services (CARES) Commission, an independent body charged with assessing VA's capital asset requirements, issued its recommendations on the realignment and modernization of VA's capital assets. Although the Commission did not recommend a replacement facility for Charleston, it did recommend, among other things, that VA promptly evaluate MUSC's proposal. This testimony discusses GAO's preliminary findings on the (1) current condition of the Charleston facility, (2) extent to which VA and MUSC collaborated on the joint venture proposal, and (3) issues for VA to consider when exploring the opportunity to participate in the joint venture. VA concurred with GAO's preliminary findings. The most recent VA facility assessment and the CARES Commission concluded that the Charleston medical facility is in overall good condition and, with some renovations, can continue to meet veterans' health care needs in the future. VA officials attribute this to VA's continued capital investments in the facility. For example, over the last 5 years, VA has invested approximately $11.6 million in nonrecurring maintenance projects, such as replacing the fire alarm system and roofing. To maintain the facility's condition over the next 10 years, VA officials from the Charleston facility have identified a number of planned capital maintenance and improvement projects, totaling approximately $62 million. VA and MUSC have collaborated and communicated to a limited extent over the past 3 years on a proposal for a joint venture medical center. For example, before this summer, VA and MUSC had not exchanged critical information that would help facilitate negotiations, such as cost analyses of the proposal. As a result of the limited collaboration, negotiations over the proposal stalled. However, after a congressional delegation visit in August 2005, VA and MUSC took steps to move the negotiations forward. Specifically, VA and MUSC established four workgroups to examine critical issues related to the proposal. The MUSC proposal for a new joint venture medical center presents an opportunity for exploring new ways of providing health care to Charleston's veterans, but it also raises a variety of complex issues for VA. These include the benefits and costs of investing in a joint facility compared with other alternatives, legal issues associated with the new facility such as leasing or transferring property, and potential concerns of stakeholders, including VA patients and employees. The workgroups established by VA and MUSC are expected to examine some, but not all, of these issues. Additionally, some issues can be addressed through collaboration between VA and MUSC, but others may require VA to seek legislative remedies.
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To achieve directed force structure reductions, the Air Force has been reducing the number of F-15 and F-16 aircraft in its inventory. Between fiscal years 1991 and 1997, the Air Force plans to reduce its F-15 aircraft from 342 to 252. Over this same period, the Air Force plans to reduce its F-16 aircraft from 570 to 444. In 1991, F-15 and F-16 aircraft were configured in 42 squadrons. By fiscal year 1997, these aircraft will be configured in 37 squadrons. Until 1992, the Air Force predominantly organized its active fighter aircraft in wings of three squadrons, with 24 combat aircraft in each squadron. However, in 1992, the Air Force Chief of Staff directed that the squadrons be reduced to 18 aircraft. By 1997, most fighter squadrons will have been reduced to this smaller size, leaving only 54 aircraft in most wings. The Secretary of Defense has encouraged the services to consolidate forces wherever possible to reduce infrastructure and operating costs.However, the Air Force acknowledged in 1995 that while the force structure has been reduced by 30 percent, the supporting infrastructure has been reduced by only about 15 percent. The Air Force cited increased deployment flexibility and reduced span of control as the primary benefits for having smaller fighter squadrons. However, the Air Force has not demonstrated that these benefits are compelling. Moreover, the Air Force has neither documented instances of problems with deployment flexibility and span of control nor conducted studies that support its decision to use smaller squadrons. Air Force officials said that the primary benefit of using smaller-sized squadrons is increased operational deployment flexibility. With fewer fighters in the Air Force inventory, reducing squadrons to 18 aircraft increases the number of squadrons above the number there would have been had the aircraft been organized in traditional squadrons of 24 aircraft. Air Force officials stated that these additional squadrons are needed to respond to conflicts that reflect the new security environment. This new security environment is characterized by multiple contingency operations and the possibility of two nearly simultaneous military regional conflicts. On the basis of our analysis of Air Force fighter assistance in recent contingency operations, it appears that the Air Force would have considerable deployment flexibility even if the aircraft remained in the former 24-aircraft configuration. We examined the three contingency operations that were ongoing during June 1995 that required Air Force F-15 and F-16 assistance. For two operations, the Commander in Chief (CINC) for each theater operation required less than one squadron's aircraft for each operation. For these operations, the Air Force rotated 18 squadrons of F-15s and F-16s (7 active and 11 reserve) to provide year-long coverage to support these contingency operations. We were told that for the third operation, the CINC's requirement, which equated to one 18-aircraft squadron each of F-15s and F-16s, was met by rotating 6 F-15 and 6 F-16 continental United States (CONUS) based 18-aircraft fighter squadrons. We were advised that this number of squadrons was used because Air Combat Command (ACC) desired, for quality-of-life reasons, to maintain an 18-month interval between rotations for each squadron's 3- to 4-month deployment overseas. However, using ACC's stated goal of 8 to 9 months between overseas deployments, the CINC's requirements for this latter operation could have been met with only three to four fighter squadrons. If the Air Force deployed squadrons in accordance with ACC's stated goal, a larger number of squadrons would not be needed, particularly since reserve squadrons are available to augment the active force. We also question whether DOD's current military strategy requires the larger number of squadrons afforded by the 18-aircraft squadron design. The Bottom-Up Review specified that 10 fighter wing equivalents (72 aircraft each) would be needed for each of two anticipated major regional conflicts. The term "fighter wing equivalent," however, underscores that fighter requirements are not stated in terms of squadrons but rather in terms of the number of aircraft. The Secretary of Defense's fiscal year 1996-2001 Defense Planning Guidance states Air Force requirements in terms of total aircraft, not squadrons. Further, Air Force officials at ACC and the 9th Air Force headquarters (the U.S. Central Command's air staff) said that requirements for CINC missions are computed by the number of aircraft needed to successfully execute the mission, not by the number of squadrons. Moreover, officials at the 9th Air Force headquarters stated that the primary use of squadron organizations in a regional conflict operation is to manage the daily flight shifts and that squadron structures become almost invisible because all aircraft are controlled by the theater's air component commander. Thus, from the CINC's perspective, the number of squadrons in which aircraft are organized is largely immaterial. Air Force officials told us that another benefit of smaller squadrons was "span of control"--the ability to manage personnel and the collective tasks for which they are responsible. Until recently, flight line maintenance and associated personnel were controlled by the wing. When this function was shifted to the squadron in 1991-92, a typical 24-aircraft squadron would have increased from about 85 to over 300 people. This fourfold growth, according to Air Force officials, would have weakened the commander's ability to effectively manage people and missions. These officials believed that the reduced number of squadron aircraft helps to offset this effect because a smaller squadron reduces the number of squadron personnel. However, we found that reducing the squadron to 18 aircraft only reduced personnel by about 10 percent (about 30 people). The Air Force's standard for span of control for maintenance squadrons commanders is 700 people, about twice the number of personnel being supervised by flight squadron commanders. Although span of control may have been a perceived problem early in the Air Force's wing reorganization, ACC officials are not aware of any instance where it has been raised as an issue. Discussions with a number of wing and squadron officials also indicated that the squadron commander's span of control had not increased enough to be a problem. The Air Force's reduction in squadron size was neither evaluated in a systematic manner, nor supported by documented studies. For example, no assessment of benefits versus drawbacks of the appropriate squadron size was conducted, and there were no studies to support scenarios where more squadrons would be needed. Some Air Force officials said that the basic rationale for moving to smaller squadrons was to minimize the reduction in wing and squadron commands as the number of aircraft in the force declined. We were told that the Air Force considered it inappropriate to identify command reductions during a period when the base realignment and closure (BRAC) process was ongoing because it would constitute an action that would prevent the BRAC process from proceeding as designed. According to Air Force officials, identifying changes that significantly reduce base facilities was against Air Force policy and the laws governing the BRAC proceedings. Although it is true that Department of Defense (DOD) entities were constrained from reducing force structure and closing bases beyond specified limits outside the BRAC process, the Air Force was not precluded from making recommendations on these matters during the BRAC process. In our view, such identifications would have facilitated the development of recommendations for base closures. Organizing the fighter force into 24-aircraft squadrons reduces the total number of squadrons and results in more economical operations than squadrons of 18 aircraft. For example, annual operating costs for 72 F-15s are about $12 million less if they are organized into squadrons of 24 aircraft instead of squadrons of 18. We calculated the savings from staffing standards and cost estimates provided by Air Force officials, using an Air Force's cost estimation model (a more detailed description of our methodology is in app. III). The annual savings are primarily due to reduced military personnel requirements, in such areas as command, staff, administrative, and maintenance. The salary costs associated with reduced military personnel requirements account for about 70 percent of the total savings, of which over 90 percent is enlisted pay. Also, larger squadrons allow maintenance specialty shops to be used more efficiently, requiring little or no change in staffing. Other savings occur due to reduced training, medical services, supplies, and base operating support. The Air Force could modify its current configuration of fighter aircraft in a more cost-effective manner to increase the number of squadrons with 24 aircraft. This modification would entail consolidating some existing F-15 and F-16 squadrons with other squadrons to better maximize base utilization. Our four illustrative options (which are presented in detail in app. I) would have annual savings ranging from $25 million to $115 million annually. ACC officials we contacted stated that bases that previously had 24 aircraft per squadron and 72 aircraft per wing should be able to return to that level. Our review of Air Force base closure capacity analysis data indicated that most fighter wings on CONUS bases could increase squadron size to previous levels with little or no additional cost. For example, a capacity analysis prepared by Moody Air Force Base (AFB) officials stated that Moody will retain the capacity to support 2 additional fighter squadrons and increase 2 of its 18 sized F-16 fighter squadrons to 24 aircraft. Similarly, wing personnel at Shaw AFB and Langley AFB indicated that their installations could absorb 6 more aircraft per squadron or 18 per wing with no additional costs. These officials stated that because their bases previously had 24 aircraft per squadron and facilities were sized for 24 aircraft, returning to 24 would be little to no problem. Moreover, maintenance personnel stated that much of the support equipment could handle six additional aircraft with little additional investment. Deployment personnel at the 20th fighter wing at Shaw AFB stated that the supporting equipment for 24 aircraft would take the same number of transport planes to move as a squadron of 18 aircraft. Air Force officials at different levels of command cited several factors that should be considered when consolidating aircraft into fewer squadrons and wings. These factors include keeping aircraft with the same state of modernization and mission characteristics together. In addition, they stated that aircraft engines should be compatible at least in the squadron and preferably throughout the wing. Other factors officials said should be considered include the availability of training areas, impact on the CONUS/overseas mix, and the capacity of the receiving base to accept the additional aircraft and related personnel and equipment. Air Force officials noted that different modernization upgrades and specialized mission equipment can make the F-16 aircraft very different. For instance, newer F-16s have improved avionics that require different logistical support than earlier versions of the F-16. In addition, some aircraft have specialized equipment, such as the equipment needed to perform the night ground attack mission. Air Force officials stated that specialized training is required for pilots to perform this mission and believe mixing aircraft that have this capability with aircraft that do not will reduce unit readiness. Air Force officials also stated that having either F-15 and F-16 aircraft with different engines in the same wing complicates maintenance. For instance, different engines either from the same or different manufacturer can generate unique maintenance requirements. Because different support equipment and maintenance skills may be needed for various engines, maintaining different types of engines at the same wing can strain maintenance resources and ultimately reduce the availability of deployable aircraft. Additionally, Air Force officials said that any restructuring that affects aircraft outside the United States must consider agreements with foreign governments that govern the number of aircraft based in these countries. In general, the number of aircraft should not change materially. Considering the factors that Air Force officials believe are most important when consolidating forces we developed four alternatives for reorganizing the F-15 and F-16 fighter force. Our alternatives generally did not commingle aircraft with different type engines and modernization and mission characteristics. We also kept relatively constant the U.S./overseas basing mix and the number of aircraft in each theater, and we varied the number of aircraft in the Air Force's composite wings. These options ranged from restructuring only fighter aircraft in the United States to restructuring all F-15s and F-16s worldwide. The "CONUS Only" alternative we developed is projected to save the Air Force about $25 million annually in operating costs. This would be achieved by increasing 6 existing fighter squadrons to 24 aircraft and eliminating 2 squadrons. The alternative of consolidating fighter squadrons worldwide would consolidate the F-15 and F-16 aircraft into 7 fewer squadrons than the Air Force currently plans and increase 17 squadrons to 24 aircraft and 2 squadrons to 30 aircraft. This alternative could save the Air Force a projected $115 million annually. Our other two alternatives would fall between these savings. Consolidating aircraft at fewer bases would also help the Air Force identify excess base infrastructure and candidate bases for closure. For example, three of the four alternatives would eliminate all fighter aircraft from at least one base, suggesting the potential of a base closure. If a base closure could be executed with savings similar to what DOD estimated for similar bases during the 1995 BRAC process, annual savings would average about $15 million for the first 6 years and about $50 million in each ensuing year. Air Force officials at headquarters and ACC expressed concerns about the implementation of our alternatives without the support of DOD and Congress. They stated that efforts in the past to move aircraft from a base without an equal substitution for the losing base have not been achievable. In their opinion, if the Air Force leadership decided to implement options to increase squadron and wing size back to 24 and 72, respectively, the Air Force would need the support of both DOD and Congress. We recommend that the Secretary of Defense, in his efforts to reduce the DOD's infrastructure costs, require the Secretary of the Air Force to develop an implementation plan to operate the Air Force's fighter force in larger, more cost-effective squadrons. If the Secretary of Defense believes that the plan could reduce costs, he should seek congressional support for it. DOD concurred with our findings and recommendation. DOD's comments are reproduced in appendix II. A detailed explanation of our scope and methodology appears in appendix III. We conducted this review from February 1995 to February 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of Defense and Air Force and interested congressional committees. We will also make copies available to others upon request. Please contact me at (202) 512-3504 if you or your staff have any questions about this report. Major contributors to this report are listed in appendix IV. We developed and refined four alternatives that demonstrate that the Air Force could organize its fighter aircraft more cost-effectively. Underpinning our analysis were principles that the Air Force cited as important. These factors included keeping the continental United States (CONUS)/overseas basing mix relatively constant; avoiding mixing aircraft with different modernization upgrades (blocks), mission characteristics, and engines; balancing capability throughout theaters; and assessing receiving base capacity. While these principles are plausible, our options vary the extent that these principles were used to gain greater economies. Moreover, the Air Force has not rigidly adhered to these principles. For example, different engines are contained in the F-15 wing at Eglin Air Force Base. The Air Force also plans to mix F-16s with different blocks. The following tables compare the Air Forces's planned fiscal year 1997 mix of 18- and 24-aircraft squadrons at each base with the mix of squadrons that would be achieved with each of our four alternatives.Preceding each table, we described the specific factors we considered in developing each alternative. This alternative consolidates squadrons that are located in CONUS only. Under this alternative, fighter aircraft would remain at the same number of bases as the Air Force currently plans. The number of aircraft of one composite wing would be changed. Bases would be restricted to having the same aircraft that were in the Air Force's plan. This alternative would result in annual operating costs savings of $25 million. Table I.1 compares the Air Force's planned basing with alternative one. This alternative consolidates squadrons and uses one fewer base than currently planned by the Air Force. In order to execute this alternative, fewer than one squadron from CONUS would have to be shifted outside of CONUS. Two different aircraft blocks would be mixed, which is comparable to the Air Force's plan. The number of aircraft at two composite wings would be changed. Also, aircraft other than F-15s and F-16s would have to be relocated to fully execute this alternative. This alternative would result in annual operating costs savings of $59 million. Table I.2 compares the Air Force's planned basing with alternative two. This alternative consolidates fighters at one fewer base than currently planned by the Air Force. The number of aircraft in three composite wings would be changed. One squadron at base 4 would have 30 aircraft. One squadron substitution between the Air Force's active and reserve components would be necessary. Some aircraft would be exchanged between theaters. Two different aircraft blocks were mixed at one wing, which is comparable to the Air Force's plan. This alternative would result in annual operating costs savings of $101 million. Table I.3 compares the Air Force's planned basing with alternative three. This alternative consolidates fighters at one fewer base than currently planned by the Air Force. The number of aircraft at two composite wings would be changed. One squadron at base 4 and one squadron at base 6 would have 30 aircraft each. One squadron substitution would be required between the Air Force's active and reserve components. Also aircraft would be exchanged between theaters. Two different aircraft blocks were mixed at one wing, which is comparable to the Air Force's plan. This alternative would result in annual costs savings of $115 million. Table I.4 compares the Air Force's planned basing with alternative four. The objective of this review was to evaluate the cost-effectiveness of operating the fighter forces in smaller squadron sizes and the implications this might have on the Secretary of Defense's efforts to reduce defense infrastructure. Our review focused on the Air Force's active component fighter aircraft with a primary focus on the C and D model of F-15s and F-16s. To evaluate the benefits resulting from reduced squadron sizes, we interviewed officials in various Air Force Headquarters offices such as the Force Programming Division; the Combat Forces Division of the Directorate of Forces; the Combat Forces of the Directorate of Programs and Evaluation; and the Air Operations Group. We also interviewed Air Combat Command (ACC) officials, including officials from various staff functions, the 33rd Fighter Wing, 1st Fighter Wing, and the 20th Fighter Wing. Additionally, we interviewed officials from the U.S. Central Command Air Forces Headquarters. We examined a variety of Air Force documents, including peace-keeping and Gulf War deployment records, staffing requirements and historical levels, and various studies and analyses. We also reviewed the Secretary of Defense's Defense Planning Guidance and Joint Strategic Capabilities Plan and the Air Force's War Implementation and Mobilization Plan. To calculate the cost implications of operating smaller squadrons, we obtained estimated annual operating costs for F-15 and F-16 fighters from Air Force headquarters cost-modeling officials. Separate estimates were provided for squadrons of 18 and 24 aircraft in the U.S., Pacific, and European theaters. These are based on staffing estimates that we developed using planning factors provided by the Air Force. The planning factors included the number of officer and enlisted personnel in squadron overhead, flight crew, and maintenance positions for independent and dependent squadrons. To provide this data, the Air Force used its Systematic Approach to Better Long Range Estimating (SABLE) model, an automated model that uses various cost and planning factors to estimate the peacetime operating and support costs of flying units. Operating costs include cost elements in the operation and maintenance, military personnel, and other procurement appropriations. Within these appropriations, the major cost categories include military and civilian pay, aviation fuel, depot level repairables, and consumable supplies. These costs are estimated for each type and model of aircraft within each major command. The SABLE model only addresses variable costs but not any fixed costs. Similarly, it captures direct costs but few indirect costs such as the costs of maintaining the base and runway. The SABLE produces general cost estimates to evaluate force structure options. The estimated savings do not include any military construction, base closure, or other costs that may be associated with transferring aircraft from one specific location to another. Since 70 percent of the estimated cost savings resulted from reduced military personnel, our reliability assessment consisted of an analysis of the reasonableness of the military personnel planning factors provided by the Air Force. In conducting this assessment, we interviewed ACC manpower officials who developed the personnel factors that were used for the squadron located at U.S. bases. Since maintenance positions accounted for over 80 percent of the military personnel savings, we also reviewed the Logistics Composite Model (LCOM) that ACC officials used in developing their maintenance personnel factors. We also interviewed fighter wing and squadron command and maintenance officials at Langley, Eglin, and Shaw Air Force Bases and toured wing and squadron maintenance and flight line areas. We also reviewed historical staffing data that covered the period when the wings at these two bases previously had squadrons of 24 aircraft. To develop and evaluate alternatives for consolidating active F-15 and F-16 squadrons, we analyzed force structure organization at all bases that had combat F-15 and F-16 squadrons from 1991 to present, as well as the Air Force's plans through 2001. We also reviewed and analyzed the base capacity assessment completed by each fighter base as part of the 1995 base realignment and closure (BRAC) process. Additionally, we met with various officials from Air Force Headquarters and ACC to identify and understand factors that would constrain the consolidation of these fighter aircraft. We also discussed squadron consolidation and constraining factors with fighter wing officials such as the wing commander, squadron commanders, maintenance officers, and facility and air space managers. The baseline for our alternatives was the Air Force's planned fighter force structure for fiscal year 1997. Our alternatives ranged from restructuring only fighter aircraft in the United States to including all F-15 and F-16s worldwide. These options were discussed in open critiques with Air Force officials from both Air Force Headquarters and ACC. Our alternatives did not attempt to address political or international policies impacting basing decisions. Fred Harrison, Evaluator-in-Charge Dan Omahen, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO reviewed the cost-effectiveness of the Air Force's reconfiguration of F-15 and F-16 fighters into smaller squadrons, focusing on the consequences this might have on the Secretary of Defense's efforts to reduce defense infrastructure costs. GAO found that: (1) while smaller 18-aircraft squadrons provide more deployment flexibility than 24-aircraft squadrons, the larger configuration provides enough deployment flexibility to meet the Air Force's needs; (2) the ability of squadron commanders to manage the personnel and tasks of 24-aircraft squadrons has not proved to be a problem; (3) the Air Force's decision to reduce squadron size from 24 to 18 aircraft was not based on organized analysis or documented studies; (4) using 24-aircraft squadrons instead of 18-aircraft squadrons could reduce costs; (5) by consolidating some existing F-15 and F-16 squadrons with other squadrons to better maximize base utilization, the Air Force could cost-effectively increase the number of 24-aircraft squadrons; (6) all 18-aircraft squadrons could return to their original size of 24 aircraft with little or no effort and expense; (7) if the Air Force consolidates its squadrons, it should keep aircraft with the similar modernization, mission characteristics, and engine types together; and (8) at least four alternatives exist to consolidate the Air Force's squadrons that could save between $25 million and $115 million annually.
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FHWA is responsible for administering and overseeing various highway transportation programs, including the Federal-Aid Highway Program--which provides financial assistance to the states for improving the efficiency of highway and traffic operations. FHWA relies on AASHTO to (1) provide technical guidance for the design, construction, and maintenance of highways and other transportation facilities; (2) publish manuals, guides, and specifications regarding design, safety, maintenance, and materials; and (3) conduct planning for highways, bridges, and other structures. Active membership in AASHTO is open to the state departments of transportation of the United States, Puerto Rico, and the District of Columbia. DOT is an active, albeit nonvoting, member. FHWA supports AASHTO's manuals, guides, and specifications, which the states can use in designing and analyzing federally funded highway projects. In addition, states can use their own pavement design criteria and procedures for such projects, which generally mirror what is in AASHTO's pavement design guide. Currently, highway pavement design criteria and procedures are documented in AASHTO's 1993 Guide For the Design of Pavement Structures. AASHTO's Joint Task Force on Pavements is responsible for the development and updating of the guide. The guide was first issued in 1961 and then updated in 1972, 1981, 1986, and 1993. Another update of the guide is forthcoming. The task force's efforts to update the guide are overseen by a National Cooperative Highway Research Program (NCHRP) project panel, which functions under the Transportation Research Board (TRB) of the National Academy of Sciences' National Research Council. While constructing new highways was once the primary goal of state transportation departments, the major emphasis in pavement design in the 1990s has progressed to rehabilitating existing highways. According to NCHRP, the current guide does not reflect this shift in emphasis, and the updated guide is the expected product of an NCHRP/TRB contract with an engineering consulting firm that is expected to be awarded in the near future. Under the contract, the guide would be updated by 2002. In updating the guide, NCHRP intends to improve upon the outdated pavement design procedures contained in the current guide. The current design guide and its predecessors were largely based on design equations empirically derived from the observations AASHTO's predecessor made during road performance tests completed in 1959-60. Several transportation experts have criticized the empirical data thus derived as outdated and inadequate for today's highway system. In addition, a March 1994 DOT Office of Inspector General report concluded that the design guide was outdated and that pavement design information it relied on could not be supported and validated with systematic comparisons to actual experience or research. In contrast to the current guide, which relied heavily on an empirical approach to derive its design equations, the NCHRP contract to update the guide by 2002 calls for the use of an approach that would more realistically characterize existing highway pavement usage and improve the reliability of designs. Under the first phase of the contract that ended in July 1997, Nichols Consulting Engineers developed a detailed work plan for completing the new pavement design guide. When the project manager resigned in June 1997, NCHRP decided to rebid the contract. The NCHRP program officer stated that he believes that the new guide will be completed as planned. An existing method called nonlinear 3D-FEM has the potential to significantly improve the design and analysis of highway pavement structures. A number of nonlinear 3D-FEM computer programs have been available since the 1970s that can be used for solving complex structural engineering problems, including designing safer, longer-lasting, more cost-effective highway pavement structures. Nonlinear 3D-FEM is considered by many experts to be superior to current design and analysis methods because values of stresses, strains, and pavement deflections can be calculated accurately from a variety of traffic loads--static, impact, vibratory, and moving mixes of traffic loads, including multiaxle truck/trailer loads both within and outside legal weight limits. The nonlinear 3D-FEM analysis allows a level of detail that aids in selecting pavement materials as well as improving the accuracy of determinations of the thickness needed for new, reconstructed, and overlay pavements. This method can be used to analyze pavements for strengthening that may be required for expected traffic loads in the future and for computing the pavements' remaining structural and operational lives. Several highway departments and academic institutions have already used nonlinear 3D-FEM for various structural analysis applications. The Indiana, Mississippi, and Ohio departments of transportation, for example, have pioneered the use of nonlinear 3D-FEM in pavement design and analysis. Officials of these agencies told us that they are very satisfied with its application on various road systems. In 1995, the University of Mississippi used nonlinear 3D-FEM to analyze jointed concrete pavement for dynamic truck loads and thermal analysis.An official from the Mississippi State Department of Transportation told us that this method enabled the state to determine the conditions causing the rapid deterioration of its concrete pavement. Similarly, a senior scientist from a firm specializing in evaluating the integrity of engineering structures told us that, among other things, the finite element method--combined with statistical theory (which factors in uncertainties in material properties)--has been used to predict the expected life of a concrete runway at Seymour Johnson Air Force Base in North Carolina. Because it considers AASHTO's pavement design guide to be outdated, the School of Civil Engineering, Purdue University, also has been using nonlinear 3D-FEM to analyze various pavement problems. The university has used this method to analyze responses to moving multiaxle truck/trailer loads within and outside legal weight limits on both flexible and rigid pavements. Studies the university has conducted to verify the analyses have shown a strong correlation between field and predicted pavement responses (strains and deflections). More recently, Purdue University conducted a study--including the use of field instrumentation, laboratory testing, field data collection, and subgrade and core sampling--of three asphalt pavement sections with different subdrainage configurations on a portion of Interstate 469 in Ft. Wayne, Indiana. Nonlinear 3D-FEM was used to evaluate the subdrainage performance and the analysis of moisture flow through the pavement. The results of the study indicated a strong correlation between the predicted and field-measured outflows of water. The effects of high moisture conditions on pavement performance include rutting, cracking, and faulting--leading to increased roughness, unsafe conditions, and a loss of serviceability. A pavement design manager with the Indiana Department of Transportation told us that the Purdue study, using nonlinear 3D-FEM, confirmed that the Department's previously used subdrainage design procedures resulted in a drainage outflow pipe that was too small--thus limiting moisture outflow. Subdrainage layers with filter layers, a perforated pipe (subdrainage collector pipe), trench material, and an outlet pipe play a key role in reducing the extent and duration of high moisture conditions in pavement structures and their subgrade. The manager said that nonlinear 3D-FEM provided the (1) proper (increased) size of drainage outlet pipe and (2) best, most efficient filter material, which turned out to be less costly than the material previously being used. We were told that Indiana's Transportation Department is now in the process of adopting nonlinear 3D-FEM as its preferred method for designing subdrainage systems. An Indiana research section engineer also told us that he believes that nonlinear 3D-FEM could be used by all state highway departments to design subdrainage systems. Battelle Memorial Institute recently applied nonlinear 3D-FEM to predict pavement response to a broad range of vehicle loads on 4 miles of newly constructed highway pavement (2 miles southbound and 2 miles northbound) north of Columbus, Ohio. According to a Battelle project scientist and an academician from Ohio University, the results of the heavily instrumented highway test sections showed a strong correlation with the analytical results achieved from nonlinear 3D-FEM. They also told us that nonlinear 3D-FEM is the best computational method to address pavement problems. A chief engineer of the Ohio Transportation Department further told us that the state was pleased with Battelle's efforts to predict pavement response using the nonlinear method. According to an engineer-advisor with the DOT Inspector General's Office, AASHTO's pavement design guide has changed very little over the years. He was of the opinion that new design procedures are needed, incorporating nonlinear 3D-FEM, if FHWA and the states are going to be better able to ensure that highway pavement is constructed, reconstructed, or overlaid according to current FHWA policy that it be safe, durable, and cost-effective. We reviewed the scope of work of the contract NCHRP awarded in December 1996 to Nichols Consulting Engineers for the development of the new guide. The scope of the most recent contract work does not directly cite nonlinear 3D-FEM as a technique that can be used in the design and analysis of highway pavement. In discussions with Nichols' project manager and with an NCHRP official and in our review of the contractor's work plan for the guide, we did not find any specific reference that nonlinear 3D-FEM would be investigated for inclusion or exclusion in the 2002 update. Through interviews with FHWA, AASHTO, and NCHRP officials, we attempted to determine why the method was not specifically being considered. We did not receive any explanation. However, the program officer said that while the contractual documentation for this particular effort does not contain specific reference to nonlinear 3D-FEM as a pavement design and analysis method, the documentation does not exclude the use of such a method either. The pavement design guide developed and updated by AASHTO over the years for designing and analyzing highway pavement structures is outdated. NCHRP has undertaken a 5-year effort to update the guide employing improved design approaches. Research on nonlinear 3D-FEM and documented successes in its application suggest that this method could be an important tool for accurately (1) designing and analyzing new highway pavement structures and (2) analyzing the response of deteriorated pavement structures for rehabilitation. We believe it should be considered in NCHRP's ongoing efforts to update AASHTO's current pavement design and analysis guide. The recent decision to rebid the contract for the design guide update provides an opportunity for FHWA to specify the consideration of this method. To better assist states in designing safer, longer lasting, and more cost-effective new, reconstructed, and overlay highway pavement structures, we recommend that the Secretary of Transportation direct the Administrator, FHWA, to ensure that nonlinear 3D-FEM is considered in the current update of the pavement design guide. We provided a draft of this report to DOT for its review and comment. In written comments dated October 31, 1997 (see app. II), DOT stated that it has maintained a long- standing commitment to ensuring that the nation's investment in its highway infrastructure is cost-effective. DOT concurred with our recommendation that nonlinear 3D-FEM be considered in the current update of AASHTO's pavement design guide. DOT stated that it would work with NCHRP to encourage full consideration of the method along with other quantitative analytical methods. As part of its commitment to a cost-effective highway infrastructure, DOT stated that FHWA has supported research efforts at its own Turner-Fairbank Highway Research Center as well as efforts by AASHTO, NCHRP, and TRB. DOT further stated that FHWA is fully aware of and recognizes the potential benefits to highway design offered by 3D-FEM. According to DOT, FHWA has supported the development of this technology at its Turner-Fairbank facility and with individual states through the State Planning and Research program. DOT stated that FHWA considers 3D-FEM to be a very useful research tool for analyzing pavement structures but that it will be up to NCHRP and AASHTO to determine whether the method has achieved the maturity necessary to become a practical engineering tool. We are pleased to hear of DOT's interest in and acceptance of nonlinear 3D-FEM as an analytical tool for designing and analyzing highway pavement structures. Such interest and acceptance was never made known to us (1) during discussions we had with the Chief, Pavement Division, FHWA; the project manager, AASHTO; a senior program officer, NCHRP; and the initial contractor's project manager for the development of the 2002 pavement guide nor (2) in documentation we gathered and reviewed during the assignment. We made other clarifying changes to the report as appropriate on the basis of other comments by DOT. We performed our work from May 1996 through October 1997 in accordance with generally accepted government auditing standards. Appendix I contains details on our objectives, scope, and methodology. As you know, 31 U.S.C. 720 requires the head of a federal agency to submit a written statement of the actions taken on our recommendations to the Senate Committee on Governmental Affairs and to the House Committee on Government Reform and Oversight not later than 60 days from the date of this letter and to the House and Senate Committees on Appropriations with the agency's first request for appropriations made more than 60 days after the date of this letter. We are sending copies of this report to the Administrator, FHWA; the Director, Office of Management and Budget; and appropriate congressional committees. We will make copies available to others upon request. Please call me at (202) 512-2834 if you have any questions. Major contributors to this report are listed in appendix III. The objectives of this review were to (1) describe the roles of the Federal Highway Administration (FHWA) and others in developing and updating the pavement design guide and (2) examine the use and potential of a computer analysis method known as the nonlinear 3 Dimensional-Finite Element Method (3D-FEM) for improving the design and analysis of highway pavements. To accomplish these objectives, we first reviewed the American Association of State Highway and Transportation Officials' (AASHTO) highway pavement guide, which is being used by many state departments of transportation as an aid in designing and analyzing pavement structures, federally funded and otherwise. We reviewed available literature and contacted officials from FHWA, AASHTO, and the Transportation Research Board. We also contacted contractor officials responsible for the development and updates of the pavement design guide. We contacted officials from the Transport Research Laboratory, Crawthorne, Berkshire, United Kingdom, and reviewed its pavement design practices. We contacted officials from the U.S. Army Engineer Waterways Experiment Station, Vicksburg, Mississippi; Indiana, Mississippi, and Ohio state highway departments; and various engineering consulting firms. We contacted academicians from the University of Arizona, the University of Cincinnati, Florida A&M University-Florida State University, Ohio University, the University of Iowa, the University of Mississippi, the University of Nebraska, and Purdue University, as well as Birmingham University in the United Kingdom. Also, we contacted scientists from Battelle Memorial Institute and Lawrence Livermore National Laboratory. We selected these educational institutions and nonprofit organizations because all have conducted research and development work related to pavement design and analysis and/or the application of nonlinear 3D-FEM for solving structural engineering problems. Furthermore, we performed a literature and database search to identify any individuals who have authored publications on the applications of nonlinear 3D-FEM to highway pavement design and analysis or other structural engineering problems. We discussed with FHWA and others their roles in keeping up with and promoting up-to-date techniques regarding pavement design and analysis. We reviewed FHWA's pavement policy issued in December 1996, which states that pavements should be designed to accommodate current and predicted traffic needs in a safe, durable, and cost-effective manner. More broadly, we used in this review information we obtained through attendance at the Fourth International Conference on the Bearing Capacity of Roads and Airfields held in July 1994 in Minneapolis, Minnesota; the Third Materials Engineering Conference held in November 1994 in San Diego, California; annual Transportation Research Board meetings held in January 1995 and in January 1997 in Washington, D.C.; and the Structures Congress XV held in April 1997 in Portland, Oregon. Dr. Manohar Singh, P.E., Engineering Consultant Ralph W. Lamoreaux, Assistant Director 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 provided information on the: (1) roles of the Federal Highway Administration (FHwA) and others in developing and updating the pavement design guide; and (2) use and potential of a computer analysis method known as nonlinear 3 Dimensional-Finite Element Method (3D-FEM) for improving the design and analysis of highway pavement structures. GAO noted that: (1) FHwA has worked cooperatively with the American Association of State Highway and Transportation Officials (AASHTO) in developing and updating the pavement design guide; (2) the current guide is slated to be updated by the year 2002 to better reflect the changing priority of rehabilitating the nation's highways rather than building new ones; (3) in contrast to the current guide, that many transportation experts believe is outdated, the new guide is expected to incorporate the use of analytical methods to predict pavement performance under various loading and climatic conditions; (4) sponsors believe that a new design approach will more realistically characterize existing highway pavements and improve the reliability of designs; (5) a promising analytical method to accurately predict pavement response is the nonlinear 3D-FEM; (6) only with accurate response data can one reliably predict pavement performance; (7) the use of this method has the potential to improve the design of highway pavements, which encompasses highway safety, durability, and cost-effectiveness, because values of stresses, strains, and deflections (pavement response) can be calculated accurately from a variety of static, impact, vibratory, and moving mixes in traffic loads; (8) several state departments of transportation, academicians, and scientists have pioneered the use of the nonlinear 3D-FEM and are using it to solve a variety of complex structural engineering problems, including the design and analysis of highway pavement structures; and (9) while this is a promising method for improving highway pavement design and analysis, GAO could find no evidence that it is being considered for inclusion in the current design guide update.
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In conducting our review, we assessed the Air Force's Year 2000 efforts against our own Year 2000 Assessment Guide. This guide addresses common issues affecting most federal agencies and presents a structured approach and a checklist to aid in planning, managing, and evaluating Year 2000 programs. The guidance, which is consistent with DOD's Year 2000 Management Plan and the Air Force's own Year 2000 management approach, describes five phases--supported by program and project management activities--with each phase representing a major Year 2000 program activity or segment. The phases and a description of each follows. Awareness - Define the Year 2000 problem and gain executive-level support and sponsorship. Establish a Year 2000 program team and develop an overall strategy. Ensure that everyone in the organization is fully aware of the issue. Assessment - Assess the Year 2000 impact on the enterprise. Identify core business areas and processes, inventory and analyze systems supporting the core business areas, and prioritize their conversion or replacement. Develop contingency plans to handle data exchange issues, lack of data, and bad data. Identify and secure the necessary resources. Renovation - Convert, replace, or eliminate selected platforms, applications, databases, and utilities. Modify interfaces. Validation - Test, verify, and validate converted or replaced platforms, applications, databases, and utilities. Test the performance, functionality, and integration of converted or replaced platforms, applications, databases, utilities, and interfaces in an operational environment. Implementation - Implement converted or replaced platforms, applications, databases, utilities, and interfaces. Implement data exchange contingency plans, if necessary. During our review, we concentrated primarily on the Air Force's efforts to oversee its Year 2000 program during the awareness and assessment phases. We focused our review on Year 2000 work being carried out by (1) DOD's Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence (OASD/C3I)--which is responsible for promulgating DOD guidance on Year 2000 and providing assistance to Defense components, (2) Air Force headquarters, including the Air Force Communications and Information Center (AFCIC)--which is responsible for day-to-day management and supervision and for issuing Air Force Year 2000 policy and guidance, (3) Air Force Communication Agency, the designated Air Force Year 2000 program office, and (4) selected program offices managed by the Air Force Materiel Command's Aeronautical Systems Center at Wright-Patterson Air Force Base, Ohio. To assess OASD/C3I efforts in providing Year 2000 support to the Air Force, we met with the Acting Assistant Secretary of Defense for Command, Control, Communications and Intelligence, the Principal Director for Information Management, the Director for Information Technology, and other senior staff responsible for Year 2000 issues. We reviewed the office's Year 2000 guidance and other documentation on Year 2000 funding, reporting, and date format requirements. To assess Air Force headquarters efforts to manage and oversee the Year 2000 computer problem, we (1) met with the Air Force Communications and Information Center officials and Year 2000 focal points, (2) obtained and analyzed documents issued by these offices that describe organizational structure and responsibilities for carrying out the Air Force Year 2000 program, and (3) reviewed the Air Force's Year 2000 Guidance Package to assess the level of guidance, roles, and responsibilities, and target milestone dates for the Year 2000 effort. Further, we obtained and analyzed the Air Force Year 2000 inventory data to determine (1) the number of systems owned and operated by Air Force organizations and (2) the status of Air Force systems in their Year 2000 efforts, proposed strategy, and the number of systems reporting to be compliant. We reviewed pertinent Year 2000 program documentation such as Defense and Air Force guidance and management directives, working group minutes, status reports, and cost and schedule data. We performed our work primarily at the Air Force Materiel Command, Wright-Patterson Air Force Base, Ohio; Headquarters Air Force at the Pentagon, Washington, D.C.; and the Office of Assistant Secretary of Defense for Command, Control, Communications and Intelligence at Arlington, Virginia. We conducted our work from July 1996 through August 1997 in accordance with generally accepted government auditing standards. We received written comments on a draft of this report from the Chief Information Officer for the Department of the Air Force. His comments are discussed in the "Agency Comments and Our Evaluation" section and are reprinted in appendix II. Most of the Air Force's automated information systems and embedded weapon systems are vulnerable to the Year 2000 problem, which is rooted in the way dates are recorded and computed in automated information systems. For the past several decades, systems have typically used two digits to represent the year, such as "97" representing 1997, in order to conserve on electronic data storage and reduce operating costs. With this two-digit format, however, the Year 2000 is indistinguishable from 1900, or 2001 from 1901, etc. As a result of this ambiguity, system or application programs that use dates to perform calculations, comparisons, or sorting may generate incorrect results when working with years after 1999. Should Air Force computer systems fail on the morning of the Year 2000, Air Force operations at all levels could be affected by the incorrect processing of data, as well as corrupted databases, or even massive system failures. In turn, this could result in such problems as delays in supply shipments, faulty inventory forecasts, unreliable budget estimates, and erroneous personnel-related information. Moreover, the problem could adversely affect critical warfighting functions such as combat, communications, command and control, intelligence, surveillance, reconnaissance, and air traffic control. Like the other military services, the Air Force has adopted DOD's Year 2000 management strategy, which calls for centralized oversight with decentralized execution of Year 2000 correction. In February 1995, the Air Force designated the Air Force Communication Agency (AFCA) as the focal point for Year 2000 efforts, with responsibility for (1) coordinating Year 2000 efforts being carried out by its 9 major commands, 36 field operating agencies, and 3 direct reporting units, (2) ensuring that components completed Year 2000-related tasks on time, (3) developing Year 2000 guidance, (4) collecting and reporting progress and inventory-related data, and (5) chairing the Air Force Year 2000 working group which is comprised of representatives from components. In April 1997, the Air Force established a Year 2000 program office at AFCA. The program office is currently staffed with 24 full-time personnel and it reports to the Air Force Communications and Information Center (AFCIC). AFCIC, which was established in April 1997 due to a Headquarters Air Force reorganization, was tasked with responsibility for implementing Year 2000 policy and programmatic changes across the Service. AFCIC also reports to the Office of the Chief Information Officer and it has assigned three full-time staff members to oversee the Air Force's Year 2000 Program. Appendix I illustrates the Air Force's Year 2000 organizational structure and describes the complexity involved in carrying out Year 2000 efforts at the command level. Early in its Year 2000 effort, the Air Force introduced a five-phased management approach for addressing the Year 2000 problem, which was later adopted by DOD and the Federal Government CIO Council's Year 2000 Subcommittee. According to Air Force officials, if properly implemented, this phased approach will enable the Air Force to achieve its goal of having every mission-critical system compliant by December 1998. The five phases and their supporting program and project management activities are consistent with those identified in our Year 2000 Assessment Guide, which draws heavily on the best practices work of the CIO Council's Year 2000 Subcommittee. In addition to following the five-phase approach, our guidance addresses common issues affecting most federal agencies and provides a checklist to aid them in planning, managing, and evaluating their year 2000 programs. Also, because the Year 2000 is a massive and complex management challenge, our guidance recommends that agencies plan and manage a Year 2000 program as a single large information system development effort and promulgate and enforce good management practices on the program and project levels. To comply with DOD's current Year 2000 funding mandate, the Air Force does not plan to provide system/program managers with any additional funds to manage and fix the Year 2000 problem. Rather, system/program managers have been directed to reprioritize or reprogram previously budgeted funds (primarily operational & maintenance (O&M) funds) to fix Year 2000 problems. The Air Force estimates there are 2,944 automated information systems and weapons embedded systems in its inventory and that the majority of these systems will have to be either renovated, replaced, or retired before January 1, 2000. Of the 2,944 systems, 550 (about 19 percent) are considered to be mission-critical systems, that is, they directly support wartime operations. As of September 4, 1997, the Air Force reported that all of its 2,944 systems completed the awareness phase, 33 percent were in the assessment phase, 32 percent in renovation, 17 percent in validation, 12 percent were in implementation, and 6 percent will be decommissioned by December 1999. As of September 1997, the Air Force estimated that it will cost about $405 million to successfully complete its Year 2000 program. Table 1 details the status of Air Force systems according to their mission impact. The Air Force has taken a number of positive steps to ensure that its personnel are fully aware of the impact should Air Force systems not be compliant at the turn of the century. For example, in November 1995, the Air Force established a Year 2000 working group comprised of focal points from each major command, field operating agency, and direct reporting unit. This group has focused on such matters as sharing lessons learned, eliminating duplicative efforts, sharing resources, and tracking component progress. In the same month, the Air Force released an Air Force-wide impact assessment survey to all major commands, field operating agencies, and direct reporting units for the purpose of obtaining a rough order-of-magnitude of the Year 2000 problem throughout the Air Force. The results of this survey indicated that the Air Force Year 2000 problem would be significant and that it required immediate and sustained management attention. The Air Force has also addressed a number of steps associated with the assessment phase of Year 2000 correction, including the following. Developing a comprehensive Air Force-wide system inventory, which will include information on information systems, weapons systems, and infrastructure-related devices that could be affected by the Year 2000 problem. Prioritizing systems for conversion or replacement according to their mission impact. Tasking the Air Force Software Technology Support Center at Hill Air Force Base, Utah, to evaluate in-house and vendor tools and services that could be used to identify and fix Year 2000 problems. Creating a dedicated Year 2000 database, which contains system inventory-related information as well as information on component progress. Issuing a Year 2000 Guidance Package for senior managers and Year 2000 points-of-contact, which (1) explains how to prepare individual project management plans and develop Year 2000 strategies, (2) includes milestones and exit criteria for Year 2000 tasks, (3) provides a flowchart illustrating the five-phase resolution process, and (4) provides cost estimating formulas. This package is continually updated to reflect new managerial, technical, legal and other Year 2000-related developments. Developing a checklist to assist system managers in ensuring that their systems are compliant for the Year 2000, which covers (1) the identification of systems and interfaces, (2) assessment of date usage by the systems, and (3) compliance testing, among other subjects. Directing each major command and field operating agency to appoint Year 2000 certifiers to ensure that all systems belonging to the components have completed the necessary steps to become Year 2000 compliant. The Air Force originally anticipated that it would complete the assessment phase of its Year 2000 effort in May 1997. It acknowledged that approximately 66 percent of its systems did not meet this deadline and it subsequently revised the deadline to October 1997. However, as of September 4, 1997, about 33 percent of its systems had still not been assessed. With less than 26 months remaining before the Year 2000 deadline, this will add pressure on the Air Force to renovate, validate, and implement systems as quickly as possible. According to an industry expert, June 1997 is apt to be the latest point in time to start fixing systems and to have a reasonable probability of finishing before year 2000. The Air Force's Year 2000 guidance, as well as GAO and OMB's Year 2000 guidance, call for a similar completion date. In addition, according to the Gartner Group--an independent contractor hired by Defense to provide Year 2000 technical support primarily in the areas of scheduling and cost estimating--no more than 26 percent of an organization's total Year 2000 effort should be spent in the awareness and assessment phases. Our analysis shows that the Air Force has used nearly 46 percent of its available time to complete these two phases. While Air Force officials acknowledge that the assessment phase is taking longer than expected, they do not believe it will significantly affect their Year 2000 program because system and program managers have already begun to fix systems identified with Year 2000 problems. One reason for the delay in completing the assessment phase is that it has taken longer than anticipated to develop a complete systems inventory. Before its Year 2000 effort, the Air Force did not have a comprehensive servicewide system inventory. As such, it could not readily determine the magnitude (much less the cost to fix) of the Year 2000 problem servicewide when it began the assessment phase. While its inventory now contains 2,944 systems, the Air Force is still expanding it to include information on infrastructure-related devices, such as elevators, traffic control and security devices, telephone switching systems, and medical equipment. These devices rely on either microprocessors or microcontroller chips that may be vulnerable to Year 2000 problems. In addition, the Air Force is contending with slow and incomplete reporting by system and program managers. As a result, it has revised reporting requirements to facilitate better reporting on the part of its components. Furthermore, the Air Force must still resolve discrepancies between its inventory and recent findings by the Air Force Audit Agency. In June 1997, the Audit Agency identified over 6,000 information systems that were not included in the Air Force inventory (which contained 2,543 systems at the time this audit was conducted). These additional systems included 1,600 mission-critical systems. The Air Force is currently reconciling its database to the audit findings. The Air Force has recently enlisted the Air Force Audit Agency to help evaluate component progress in completing the assessment phase. The agency will determine whether selected components have (1) completed timely assessments, (2) addressed all system interfaces, (3) accomplished mandatory system certifications, (4) prioritized and scheduled required renovations, and (5) developed contingency plans. Even though the Air Force is entering the next phases of its Year 2000 correction effort, it has yet to complete several critical assessment steps, which are designed to ensure that it is well-positioned to deal with the later, and more difficult, phases of Year 2000 correction. These include (1) recalculating its $405 million cost estimate, based on actual assessment data, so that it can make informed choices about information technology priorities, (2) ensuring that interfaces are properly accounted for, (3) ensuring that components are developing contingency plans, and (4) ensuring that components are adequately prepared for the testing phase. The Air Force Audit Agency audit should help the Air Force complete these steps; however, this work will be carried out only at selected sites and it will not provide the comprehensive and continued oversight that is needed to ensure that the Air Force can handle unforeseen problems and delays. As DOD's Year 2000 Management Plan and our Year 2000 Assessment Guide state, the primary purpose of the assessment phase is to gather and analyze the information in order to determine the size and scope of the problem. Among other things, this enables an agency to estimate the cost of its Year 2000 effort in terms of dollars and work years, and, in turn, to make informed choices about information technology priorities and whether other system development efforts should be deferred or canceled so that resources can be freed up to solve the Year 2000 problem. The Air Force, however, has not yet fully defined the scope of its Year 2000 problem or refined cost estimates, using actual assessment data, in order to gauge what resources are needed for correction. The need to take immediate action in this regard is critical, given that some organizations are already discovering that they do not have sufficient funding to correct their systems. Currently, the Air Force expects to spend about $405 million from fiscal year 1997 through 1999 to fix its Year 2000 problem. Table 2 breaks down the estimated cost by fiscal year. According to AFCIC officials, the cost estimate was calculated using the Gartner cost formula, which recommends multiplying $1.10 by the lines of code contained in the agency's automated information systems and $8.00 by the lines of code for weapon systems. The Gartner method is helpful in developing a rough estimate of what it will cost to resolve the problem early in the Year 2000 effort. However, according to a directive from Defense's Chief Information Officer as well as Year 2000 consultants, agencies should refine their cost estimates as they progress through the assessment phase and into the later Year 2000 phases to factor in the actual resources they believe are needed to renovate and implement their systems. According to DOD's Year 2000 Management Plan, these can include: The age of the systems being corrected. Age can have a significant impact on the cost of correction since older code tends to be less structured and thus harder to understand and correct than newer code. The Year 2000 strategy that the program is pursuing. Strategies that involve keeping the two-digit code, for example, are much less expensive than those that involve changing the two-digit code to a four-digit code. The degree of documentation that is available on the system and its understandability and the availability of source code. The skill and expertise of in-house programmers. Projected engineering costs. Labor hours required to fix systems. Testing requirements. The September estimate still used the Gartner formula and did not take into account other factors that can have a significant impact on the cost of correction including those identified in DOD's Year 2000 Management Plan. Air Force officials acknowledged that the $405 million estimate is a rough figure. They planned to re-estimate costs at some point after the assessment phase is completed. Costs should be continuously reestimated through the assessment and subsequent Year 2000 phases. By waiting to refine its cost estimates, the Air Force will be delaying the availability of information needed to make informed resource trade-off decisions. In fact, trade-off issues and other funding disputes, which call for the need to develop more accurate cost estimates, have already surfaced in some Air Force programs. For example, one aircraft weapon system program found that correcting the Year 2000 problem in ground software equipment that is used to program the aircraft's operational avionics software for navigation and weapons delivery would cost $42 million more than what was budgeted for routine maintenance of the aircraft. In August 1997, the program office reported that it fixed the problem for about $300,000 using a temporary workaround. However, according to a program office official, because the existing equipment consists of old IBM mainframes and outdated Jovial code it will have to be replaced eventually--and likely at a higher cost--in order to support future planned aircraft enhancements such as Joint Direct Attack Munition and Joint Standoff Weapon. In addition, the Air Force estimates that it will cost between $70 million and $90 million to fix telephone switches throughout the Service. This estimate is not included in the $405 million total Air Force Year 2000 cost estimate. The Air Force is currently in a dispute with the contractor that supplied the switches over who is responsible for Year 2000 correction. At the same time, Air Force components have not budgeted funds to fix their telephone switches. Since then, and according to AFCIC officials, the Air Force has begun to address this funding issue through its normal corporate funding process. It is critically important during the Year 2000 effort that agencies protect against the potential for introducing and propagating errors from one organization to another and ensure that interfacing systems have the ability to exchange data through the transition period. According to our Year 2000 Assessment Guide, to address the issue of interfaces, agencies should (1) identify their internal and external interfaces, (2) determine the need for data bridges and filters, (3) notify outside data exchange partners of their interface plans, (4) test their interface correction strategies, and (5) develop contingency plans that address the possibility of failing to receive data from an external source or receiving invalid data. DOD's Year 2000 Management Plan places responsibility on component heads or their designated Year 2000 points of contact to document and obtain system interface agreements in the form of memorandums of agreement or the equivalent. Since October 1996, the Air Force has participated in six high-level DOD Year 2000 interface workshops, including finance, intelligence, command and control, communications, logistics, and weapons systems. However, to date, the Air Force has not been tracking (1) how its components are going about identifying their interfaces, (2) how they plan to correct interfaces, and (3) whether they are instituting memorandums of agreement in order to communicate their interface plans to their data exchange partners. It is important for the Air Force to immediately begin tracking these issues since individual components are embarking on varying--and possibly conflicting--approaches to addressing interfaces. Moreover, others have not yet addressed the interface issue. For example, none of the five weapon system program offices we surveyed had fully determined the actual impact or program status of their system interfaces. One program office told us that it did not plan to do so until the Air Force prescribed a uniform approach to interfaces. In addition, we found other weapon system program approaches to identifying their interfaces to be considerably different. For example, the F-22 weapon systems program formally requested its development contractor, in writing, to assess the impact of the Year 2000 problem on the aircraft. This assessment would include identification of interfaces and an evaluation on whether they pose a Year 2000 problem. By contrast, the F-16 program office planned to informally contact its subcontractors to identify the status of interfaces and Year 2000 issues for on-board components of the aircraft that the program office does not directly manage. For components that the program office directly manages, it plans to informally request that its contractor assess Year 2000 problems and identify the status of interfaces. However, that assessment will not be documented as the F-22 program office's assessment will be. Clearly, the second approach will provide the Air Force with less assurance that all interfaces have been accounted for than the first approach. Without centralized oversight over the identification and correction of interfaces, there is a chance that some systems and interfaces, for which ownership is unclear, may not be identified and corrected. In addition, there is also a higher risk that conflicting interface solutions will be implemented without the data bridges that are necessary to ensure that information can still be transferred. For example, one system manager may choose to fix a system by expanding its date and year, while another may choose to keep the two-digit format and use procedural code or sliding windows as a strategy for becoming Year 2000 compliant. According to current Defense guidance, either fix is acceptable, but both parties need to know of the potential conflict so that they can install the data bridge. AFCIC plans to recommend that responsible system/program managers prepare interface memorandums of agreement, which describe the method of interface and assign responsibility for accommodating the exchange of data. If implemented, these agreements could ensure that information can be transferred even when components take conflicting approaches to their interfaces. At the time of our review, however, none of the five program offices we visited had prepared such agreements, and the Air Force was not tracking whether these or comparable agreements were being instituted. Our Year 2000 Assessment Guide calls on agencies to develop validation strategies and test plan, and to ensure that resources, such as facilities and tools, are available to perform adequate testing. This planning should begin in the assessment phase since agencies may need over a year to adequately validate and test converted or replaced systems for Year 2000 compliance and since the testing and validation process may consume over half of the Year 2000 program resources and budget. At the time of our review, however, the Air Force was not ensuring that components were developing test plans. It was also not assessing the need for additional testing resources, even though it acknowledged that these resources would be in demand. Instead, AFCIC officials told us that they are relying heavily on system/program managers to organize, plan, and manage the necessary resources to test Year 2000 fixes. Our review showed that more attention is needed in this area. For example, none of the five program offices we surveyed had completed a master Year 2000 test plan. Due to the complexities and risks involved with testing, components that are not currently planning their testing strategies run a high risk of not completing the Year 2000 effort on time. This is because components must not only test the year 2000 compliance of individual applications, but also the complex interactions between scores of converted or replaced computer platforms, operating systems, utilities, applications, databases, and interfaces. Moreover, in some instances, components may not be able to shut down their production systems for testing and thus have to operate parallel systems implemented on a year 2000 test facility. Components may also find that they need computer-aided software testing tools and test scripts to help prepare and manage test data, automate comparisons of test results, and schedule tests. AFCIC officials themselves believe that there is a good chance that adequate test facilities may not be available to conduct joint interoperability testing involving systems that interface with one another. For these reasons, it is critical that Air Force headquarters ensure that components are taking time now to assess their testing needs and that the Air Force is well-positioned to provide components with additional testing facilities and tools. In August 1997, the Air Force working group began to address this testing issue in part by directing its components to identify and develop an inventory of existing testing facilities that could support Year 2000 testing of selective platforms such as Unisys and IBM. This effort is ongoing. DOD's Year 2000 Management Plan and our Year 2000 Assessment Guide call on agencies to develop realistic contingency plans during the assessment phase for critical systems and activities to ensure the continuity of their core business processes. Contingency plans are important because they identify the manual or other fallback procedures to be employed should some critical systems miss their Year 2000 deadline or fail unexpectedly even after they are found to be compliant. Contingency plans also establish a series of checkpoints that allow the agency to identify performance problems early enough to correct them. The Air Force itself has acknowledged that components need to develop contingency plans and it has directed system/program managers to prepare, at a minimum, contingency plans for all mission-critical systems. It has also incorporated this requirement into its assessment phase exit criteria. However, the Air Force has not been tracking the extent to which components have prepared plans for mission-critical functions/systems. Without greater oversight over the preparation of such plans, some components may fail to adequately plan for contingencies without the Air Force's knowledge. In fact, at the time of our review, none of the five system program offices we surveyed had prepared contingency plans. Officials from these offices told us that contingency plans are not needed because they believed that their systems did not require extensive Year 2000 work and thus their corrections would be made before the Year 2000 deadline expired. In addition, they did not believe that contingency planning was cost-effective. All Air Force organizations need to be engaged in contingency planning since there is no guarantee that the corrections they will make will be completed on time or be free of unforeseen problems. As such, according to DOD's Year 2000 Management Plan, components, at a minimum, need to (1) analyze the impact of a system failure, (2) identify alternative activities--including manual or contract procedures--to be employed should critical systems fail to meet their Year 2000 deadline, and (3) identify procedures and responsibilities for implementing such alternatives. Furthermore, given the dangers associated with not having contingency plans, we believe the Air Force headquarters' oversight responsibility must involve ensuring that all components are planning for contingencies for mission-critical systems. To its credit, the Air Force has recognized that virtually every computer system it operates is vulnerable to the Year 2000 problem, it has raised the awareness of the Year 2000 problem among system owners, and it has begun assessing the Year 2000 impact on Air Force systems. However, the Air Force is unnecessarily putting its Year 2000 program at risk of failure because it has not yet refined cost estimates based on actual assessment data, fully examined resource trade-offs, and ensured strong and continuous oversight for interface, testing, and contingency planning issues. Because these steps are designed to ensure that organizations are well-positioned to deal with the more difficult stages of Year 2000 correction, neglecting any one of them can seriously endanger the Air Force's ability to meet its Year 2000 deadline. Given its role in national security, and its interdependence with other military organizations, the Air Force cannot afford this risk. We recommend that the Secretary of the Air Force immediately require that the Air Force ensure its cost estimates factor in the actual resources it believes are needed to renovate and implement systems so that the Service can make informed resource trade-off decisions and ensure that this estimate is periodically refined throughout the Year 2000 program. We also recommend that the Secretary ensure that an approach is developed to continuously track how components are going about identifying interfaces, how they plan to correct interfaces, and whether they are instituting memorandums of agreement. In addition, we recommend that the Secretary ensure that components are developing test plans and identifying the need for additional testing resources and design an approach to obtain any needed testing resources that are identified by Air Force components. Finally, we recommend that the Secretary act to ensure that components have prepared contingency plans for their mission-critical systems. In written comments on a draft of this report, the Office of the Air Force Chief Information Officer agreed with all of our recommendations to improve the Air Force's Year 2000 program. In response to our recommendations, the Air Force agreed to update its cost estimates as it progresses through the remaining Year 2000 phases and include actual resources needed to renovate and implement systems so that it can make informed resource trade-off decisions. The Air Force also agreed to place greater management attention on identifying system interfaces and improve reporting practices to ensure that interface corrections are properly accounted for and can be readily tracked. In addition, the Air Force agreed to have major commands and product centers outline and prioritize their test requirements to ensure that testing resources will be available when needed. The Air Force pointed out that it is working with components to develop Year 2000 contingency plans as part of the renovation and validation phases. In addition, the Air Force plans to open servicewide crisis response centers around August or September 1999 to deal with critical systems that will not be Year 2000 compliant by January 1, 2000. The Air Force is taking steps to ensure that contingency plans will be prepared on each noncompliant system identified and be made readily available to the crisis response centers. The full text of Air Force's comments is provided in appendix II. This report contains recommendations to you. The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight not later than 60 days after the date of this report. A written statement also must be sent to the House and Senate Committees on Appropriations with the agency's first request for appropriations made more than 60 days after the date of this report. We appreciate the courtesy and cooperation extended to our audit team by Air Force officials and staff. We are providing copies of this letter to the Chairman and Ranking Minority Members of the Senate Committee on Governmental Affairs; the Subcommittee on Oversight of Government Management, Restructuring and the District of Columbia, Senate Committee on Governmental Affairs; the Subcommittee on Defense, Senate Committee on Appropriations; the Senate Committee on Armed Services; the Subcommittee on Government Management, Information, and Technology, House Committee on Government Reform and Oversight; the Subcommittee on National Security, House Committee on Appropriations; and the House Committee on National Security. We are also sending copies to the Honorable Thomas M. Davis, III, House of Representatives; the Deputy Secretary of Defense; the Acting Assistant Secretary of Defense for Command, Control, Communications and Intelligence; the Air Force Chief Information Officer, Department of Defense; and the Office of Management and Budget; and other interested parties. Copies will be made available to others on request. If you have any questions on matters discussed in this letter, please call me at (202) 512-6240 or John B. Stephenson, Assistant Director at (202) 512-6225. Major contributors to this report are listed in appendix III. As figure I.1 below indicates, the size and complexity of the Air Force's organization structure will pose a significant management challenge. Year 2000 management and oversight efforts will have to be coordinated among 9 major commands, each with complex and diverse organizational structures of their own, 3 direct reporting units, and 36 field operating agencies. Figure I.2 provides an example of just one command's organizational structure. To understand the complexity involved in carrying out Year 2000 efforts at the command level, consider the following: the Air Force Materiel Command employs about 112,000 personnel; the command manages about 1,700 computer applications and embedded systems; 175 of these systems cover 21 various types of aircraft, including the F-22 and F-16 fighters, the B-1 and the B-2 bombers, and C-17 cargo plans; 410 of these systems are business applications; 266 of these systems are applications covering command, control, communications and intelligence activities; 915 of these systems are base-level owned and operated applications, such as local area networks and medical systems; and the Air Force Materiel Command alone has about 50 Year 2000 points-of-contact. Air Force Chief of Staff 11th Wing, Bolling AFB, Washington, D.C. Air Force Office of Scientific Research, Bolling AFB, Washington, D.C. Robert P. Kissel, Jr., Senior Evaluator Steven M. Hunter, Senior Evaluator Robert G. Preston, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO reviewed the Air Force's program for solving its year 2000 computer systems problem, focusing on the: (1) status of the Air Force's efforts to oversee its Year 2000 program; and (2) appropriateness of the Air Force's strategy and actions for ensuring that the problem will be successfully addressed. GAO noted that: (1) as with other military services, the Air Force is taking a decentralized approach to year 2000 correction--that is, it is relying heavily on its components to identify and correct year 2000 problems affecting their own systems; (2) however, in providing oversight for this effort, the Air Force must ensure that all of its systems have been accounted for and that component actions are successful; (3) it must also be well-positioned to make the resource tradeoff decisions that are inevitable in any year 2000 effort and to address conflicts between component approaches toward identifying and correcting interfaces; (4) further, it must be able to provide additional resources, such as testing facilities, that may be necessary to correct and validate systems; (5) the Air Force has taken a number of positive actions toward fulfilling its year 2000 oversight responsibilities; (6) for example, it is taking inventory of its systems and prioritizing them for conversion or replacement, and it has issued extensive guidance on dealing with the year 2000 problem; (7) it has also established a year 2000 working group comprised of focal points from the components which aims to eliminate duplicative efforts, share resources, and track component progress; (8) at the same time, the Air Force has not yet adequately addressed several critical issues that would ensure that it is well-positioned to deal with the later, and more difficult, phases of year 2000 correction; (9) GAO's review revealed that some components are failing to plan for the testing phase of their year 2000 effort and develop contingency plans; (10) GAO also found that some components are taking conflicting approaches toward determining the actual impact or the program status of their system interfaces; (11) if components and the Air Force do not promptly address and take consistent action on these issues, they may well negate any success they may have in making systems within their control year 2000 compliant; and (12) while the Air Force has enlisted the services of the Air Force Audit Agency to help address some of these concerns, this work needs to be backed by comprehensive and continued Air Force oversight in order to ensure that it can address unforeseen problems and delays in the next, more difficult phases.
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The H-1B program was created by the Immigration Act of 1990, which amended the Immigration and Nationality Act (INA). The H-1B visa category was created to enable U.S. employers to hire temporary workers as needed in specialty occupations, or those that require theoretical and practical application of a body of highly specialized knowledge. It also requires a bachelor's or higher degree (or its equivalent) in the specific occupation as a minimum requirement for entry into the occupation in the United States. The Immigration Act of 1990 capped the number of H-1B visas at 65,000 per fiscal year. Since the creation of the H-1B program, the number of H-1B visas permitted each fiscal year has changed several times. Congress passed the American Competitiveness and Workforce Improvement Act of 1998 (ACWIA), which increased the limit to 115,000 for fiscal years 1999 and 2000. In 2000, Congress passed the American Competitiveness in the Twenty-First Century Act (AC-21), which raised the limit to 195,000 for fiscal year 2001 and maintained that level through fiscal years 2002 and 2003. The number of H-1B visas reverted back to 65,000 thereafter. Generally, an H-1B visa is valid for 3 years of employment and is renewable for an additional 3 years. Filing an application with Labor's Employment and Training Administration is the employer's first step in hiring an H-1B worker, and Labor is responsible for either certifying or denying the employer's application within 7 days. By law, it may only review applications for omissions and obvious inaccuracies. Labor has no authority to verify the authenticity of the information. Employers must include on the application information such as their name, address, rate of pay and work location for the H-1B worker, and employer identification number. All employers are also required to make four attestations on the application as to: 1. Wages: The employer will pay non-immigrants at least the local prevailing wage or the employer's actual wage, whichever is higher, and pay for nonproductive time caused by a decision made by the employer; and offer nonimmigrants benefits on the same basis as U.S. workers. 2. Working conditions: The employment of H-1B nonimmigrants will not adversely affect the working conditions of U.S. workers similarly employed. 3. Strike, lockout, or work stoppage: No strike or lockout exists in the occupational classification at the place of employment. 4. Notification: The employer has notified employees at the place of employment of the intent to employ H-1B workers. Certain employers are required to make three additional attestations on their application. These additional attestations apply to H-1B employers who: (1) are H-1B dependent, that is, generally those whose workforce is comprised of 15 percent or more H-1B nonimmigrant employees; or (2) are found by Labor to have committed either a willful failure to meet H-1B program requirements or misrepresented a material fact in an application during the previous 5 years. These employers are required to additionally attest that: (1) they did not displace a U.S. worker within the period of 90 days before and 90 days after filing a petition for an H-1B worker; (2) they took good faith steps prior to filing the H-1B application to recruit U.S. workers and that they offered the job to a U.S. applicant who was equally or better qualified than an H-1B worker; and (3) prior to placing the H-1B worker with another employer, they inquired and have no knowledge as to that employer's action or intent to displace a U.S. worker within the 90 days before and 90 days after the placement of the H-1B worker with that employer. After Labor certifies an application, the employer must submit a petition for each worker it wishes to hire to USCIS. On March 1, 2003, Homeland Security took over all functions and authorities of Justice's Immigration and Naturalization Service under the Homeland Security Act of 2002 and the Homeland Security Reorganization Plan of November 25, 2002. Employers submit to USCIS the application, petition, and supporting documentation along with the appropriate fees. Information on the petition must indicate the wages that will be paid to the H-1B worker, the location of the position, and the worker's qualifications. Through a process known as adjudication, USCIS reviews the documents for certain criteria, such as whether the petition is accompanied by a certified application from Labor, whether the employer is eligible to apply for H-1B workers, and whether the prospective H-1B worker is qualified for the position. The Wage and Hour Division of Labor's Employment Standards Administration performs investigative and enforcement functions to determine whether an employer has complied with its attestations on the application. An aggrieved individual or entity or certain non-aggrieved parties may file a complaint with Labor that an employer violated a requirement of the H-1B program. To conduct an investigation, the Administrator must have reasonable cause to believe that an employer did not comply with or misrepresented information on its application. Employers who violate any of the attestations on the application are subject to civil money penalties or administrative remedy, such as paying back wages to H-1B workers or debarment, which disqualifies an employer from participating in the H-1B program for a specified period of time. Employers, the person who filed the complaint, or other interested parties who disagree with the findings of the investigation then have 15 days to appeal by requesting an administrative hearing. The Office of Special Counsel for Immigration Related Unfair Employment Practices (OSC) of the Department of Justice also has some enforcement responsibility. Under statutory authority created by the Immigration Reform and Control Act of 1986, OSC pursues charges of citizenship discrimination brought by U.S. workers who allege that an employer preferred to hire an H-1B worker. Labor's H-1B authority is limited in scope, but it does not use its full authority to oversee employers' compliance with program requirements. Labor's review of employers' applications to hire H-1B workers overlooks some inaccuracies, such as applications containing invalid employer identification numbers. WHD investigates complaints made against H-1B employers and recently began random investigations of some employers who had previously violated program requirements. Labor uses education as the primary method of promoting employers' compliance with the H-1B program. Labor reviews applications electronically by subjecting them to data checks, and its web site informs employers that it will certify or deny applications within minutes based on the information entered. We found that of the 960,563 applications that Labor electronically reviewed from January 2002 through September 2005, it certified 99.5 percent. Labor's review of the application is limited by law to identifying omissions or obvious inaccuracies. Labor defines an obvious inaccuracy as when an employer: files an application after being debarred, or disqualified, from participating in the H-1B program; submits an application more than 6 months before the beginning date of the period of employment; identifies multiple occupations on a single application; states a wage rate that is below the Fair Labor Standards Act minimum wage; identifies a wage rate that is below the prevailing wage on the application; and identifies a wage range where the bottom of the range is lower than the prevailing wage on the application. Despite these checks, Labor's system does not consistently identify all obvious inaccuracies. For example, although the overall percentage was small, we found 3,229 applications that were certified even though the wage rate on the application was lower than the prevailing wage for that occupation in the specific location (see table 1). Additionally, Labor does not identify other errors that may be obvious. Specifically, Labor told us its system reviews an application's employer identification number to ensure it has the correct number of digits and that the number does not appear on the list of employers who are ineligible to participate in the H-1B program. However, we found 993 certified applications with invalid employer identification number prefixes. Officials told us that in other programs, such as the permanent employment program, Labor matches the application's employer identification number to a database with valid employer identification numbers. However, they do not formally do this match with H-1B applications because it is an attestation process, not a verification process. Likewise, Labor officials told us they frequently review the application process to determine where improvements can be made, but they rely on a system of data checks rather than a formal quality assurance process because of the factual nature of the form and the number of applications received. Also, officials said if they conducted a more in-depth review of the applications, they could overreach their legal authority and increase the processing time for applications. Additionally, they said the integrity of the H-1B program is ensured through enforcement and by the fact that there is actual review by staff when the employer submits the paperwork to USCIS. Labor enforces H-1B program requirements primarily by investigating complaints filed against employers by H-1B workers or others. Labor's Wage and Hour Division received 1,026 complaints from fiscal year 2000 through fiscal year 2005. Labor officials said they investigate the employer's compliance with all program requirements for all H-1B workers; therefore, an investigation may yield more than one violation. While the number of H-1B complaints and violations has increased from fiscal year 2000 through fiscal year 2005, the overall numbers remain small and may have been affected by changes to the program. As shown in table 2, we found that the number of complaints increased from 117 in fiscal year 2000 to 173 in fiscal year 2005, and the number of cases with violations more than doubled, along with a corresponding increase in the number of employer penalties. In fiscal year 2000, Labor required employers to pay back wages totaling $1.2 million to 206 H-1B workers; by fiscal year 2005, back wages penalties had increased to $5.2 million for 604 workers. The most common type of violation each fiscal year involved a failure to pay H-1B workers the required wage. Labor officials told us it is difficult to attribute changes in complaints and violations to any specific cause because of multiple legislative changes to the program, such as the temporary increase in the number of H-1B workers allowed to enter the country and the additional attestations for certain employers that expired and then were reinstated. Labor's Wage and Hour Division has recently begun random investigations of employers who have willfully violated H-1B program requirements in the past. Under the INA, as amended, Labor has had the authority to conduct these investigations since 1998, but officials told us the agency had not done so until recently for several reasons. First, these employers frequently go out of business because they are not allowed to participate in the H-1B program for a period of time. Second, there are only a limited number of willful violators--just 50 nationwide in late fiscal year 2005. In addition, we were told that H-1B investigators have heavy caseloads. However, Labor officials said they now have 59 cases that they can investigate, and in April 2006, directed each of their regional offices to initiate a random investigation of at least one employer prior to the end of fiscal year 2006. Labor uses education as the primary method of promoting employer compliance with the H-1B program. From 2000 through 2005, Labor's district offices conducted six presentations on H-1B compliance. Labor also holds compliance seminars in response to requests from employer associations and discusses program requirements with companies that do not have pending lawsuits related to the H-1B program. Additionally, Labor posts guidance and fact sheets on its web site. While some of its fact sheets have not been updated since the program was amended by the H-1B Visa Reform Act in 2004, officials said 26 new fact sheets will be posted on the agency's web site by the end of fiscal year 2006. During investigations of employers, Labor explains the employer's legal obligations and asks the employer about the changes it plans to make to comply with the law. When an investigation results in an employer's debarment, Labor publicizes the case through press releases highlighting the consequences for not complying with H-1B program requirements. Labor is also working with the Department of State to provide information cards to H-1B workers when they are issued their visa. These cards inform them about their employment rights, including required wages and benefits, illegal deductions, working conditions, records, and discrimination. Homeland Security and Justice also use education to promote employer compliance with the H-1B program. Homeland Security publishes informational bulletins and uses its web site to advise the public of any changes to the program regarding filing fees or eligibility resulting from changes in the law. Justice engages in educational activities through public service announcements aimed at employers, workers, and the general public. The agency trains employers and works with other federal agencies to coordinate employer education programs. Justice also uses a telephone intervention hotline to resolve disputes between U.S. workers and H-1B employers, answers questions submitted via e-mail, issues guidance, and provides information on its web site. Labor, Homeland Security, and Justice all have responsibilities under the H-1B program, but Labor and Homeland Security face challenges sharing information that could help identify possible program violations. In addition to Homeland Security, Labor also shares enforcement responsibilities with Justice, which pursues charges filed by U.S. workers who allege that they were not hired or were displaced because of an H-1B worker. Justice has found discriminatory conduct in relatively few cases. Homeland Security reviews Labor's certified application as part of the adjudication process; however, it cannot easily verify whether employers have submitted petitions for more workers than originally requested on the application. USCIS's data system does not match each petition to its corresponding application because the system does not include a field for the unique number Labor assigns each application. As a result, USCIS cannot easily verify how many times the employer has used a given application or which petitions were supported by which application, potentially allowing employers to use the application for more workers than they were certified to hire. USCIS told us that while it has attempted to add Labor's application case number to its database, it has not been able to because of the system's memory limitations and it will be several years before a new information technology system is operational. During the process of reviewing employers' petitions, USCIS may find evidence the employer is not meeting the requirements of the H-1B program, but current law precludes Labor's Wage and Hour Division from using this information to initiate an investigation of the employer. Some petitions to extend workers' H-1B status have been submitted with W-2 forms where the wage on the W-2 was less than the wage the employer indicated it would pay on the original Labor application, according to USCIS staff. If the employer is unable to adequately explain the discrepancy, USCIS may deny the petition but does not have a formal mechanism for reporting these discrepancies to Labor. Moreover, even if USCIS did report these cases, current law precludes WHD from using the information to initiate an investigation. According to officials from Labor, it does not consider Homeland Security to be an aggrieved party; therefore, Labor would not initiate an investigation based on information received from, or a complaint filed by, Homeland Security. Justice pursues charges filed by U.S. workers who allege that an H-1B worker was hired in their place. Such charges may be resolved before an administrative law judge, through an out-of-court settlement, or by dismissal for lack of reasonable cause to believe that a violation occurred. From 2000 through 2005, no cases were heard by an administrative law judge. Most of the 101 investigations started by Justice from 2000 through 2005 were found to be incomplete, withdrawn, untimely, dismissed, or investigated without finding reasonable cause for a violation. Of the 97 investigations closed, Justice found discriminatory conduct in 6 cases, and assessed $7,200 in penalties in 3 of the 6 cases, all in 2003. We found that Labor--in coordination with Homeland Security--could provide better oversight of employers' compliance with H-1B visa program requirements. Even though Labor's authority to review applications is limited, it is certifying some applications that do not meet program requirements or have inaccurate information. Additionally, USCIS may find information in the materials submitted by an H-1B employer that indicates the employer is not complying with the program requirements. However, these employers may not face consequences because USCIS does not have a formal mechanism for reporting this information to Labor, and current law restricts Labor from using such evidence to initiate an investigation. USCIS also has an opportunity to improve its oversight by matching information from its petition database with Labor's application case number to detect whether employers are requesting more H-1B workers than they were originally certified to hire. As Congress deliberates changes to U.S. immigration policy, it is essential to ensure that employers comply with program requirements designed to protect both domestic and H-1B workers. To increase employer compliance with the H-1B program and protect the rights of U.S. and H-1B workers, Congress should consider the following two actions: Eliminate the restrictions on Labor using petition information submitted by employers to Homeland Security as the basis for initiating an investigation, and Direct Homeland Security to provide Labor with information received during the adjudication process that may indicate whether an employer is fulfilling its H-1B responsibilities. Further, we recommend that Labor strengthen its oversight of employers' applications to hire H-1B workers by improving its procedures for checking for completeness and obvious inaccuracies, including developing more stringent, cost-effective methods of checking for wage inaccuracies and invalid employer identification numbers. We also recommend that USCIS ensure employers' compliance with the program requirements by including Labor's application case number in its new information technology system, so that adjudicators are able to quickly and independently ensure that employers are not requesting more H-1B workers than were originally approved on their application to Labor. We provided a draft of our report to the Departments of Labor, Homeland Security, and Justice for their review and comments. Each agency provided technical comments, which we incorporated as appropriate. Justice did not have formal comments on our report. Homeland Security agreed with our recommendations, and stated that USCIS intends to include Labor's application case number in its new information technology system. Labor questioned whether our recommendation for more stringent application review measures is supported by the low error rate that we found, as well as whether the benefits of instituting such measures would equal or exceed the added costs of implementing them. In addition, Labor said that Congress intentionally limited the scope of Labor's application review in order to place the focus for achieving program integrity on USCIS. We believe that Labor is at risk of certifying H-1B applications that contain more errors than were found in the scope of our review. For example, we checked only for employer identification numbers with invalid prefix codes, and did not look for other combinations of invalid numbers or data. Therefore, we do not know the true magnitude of the error rate in the certification process. We continue to believe there are cost-effective methods that Labor could use to check the applications more stringently that would enhance the integrity of the H-1B process. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For information regarding this testimony, please contact Sigurd R. Nilsen, Director, Education, Workforce, and Income Security Issues, on 202-512-7215. Individuals making key contributions to this testimony include: Alicia Puente Cackley, Gretta L. Goodwin, Amy J. Anderson, Pawnee A. Davis, Sheila McCoy and Rachael C. Valliere. H-1B Visa Program: Labor Could Improve Its Oversight and Increase Information Sharing with Homeland Security. GAO-06-720. Washington, D.C.: June 22, 2006. Homeland Security: Better Management Practices Could Enhance DHS's Ability to Allocate Investigative Resources. GAO-06-462T. Washington, D.C.: March 28, 2006. Immigration Benefits: Additional Controls and a Sanctions Strategy Could Enhance DHS's Ability to Control Benefit Fraud. GAO-06-259. Washington, D.C.: March 10, 2006. Homeland Security: Visitor and Immigrant Status Program Operating, but Management Improvements Are Still Needed. GAO-06-318T. Washington, D.C.: January 25, 2006. Immigration Benefits: Improvements Needed to Address Backlogs and Ensure Quality of Adjudications. GAO-06-20. Washington, D.C.: November 21, 2005. Immigration Enforcement: Weaknesses Hinder Employment Verification and Worksite Enforcement Efforts. GAO-05-813. Washington, D.C.: August 31, 2005. Department of Homeland Security, U.S. Citizenship and Immigration Services: Allocation of Additional H-1B Visas Created by the H-1B Visa Reform Act of 2004. GAO-05-705R. Washington, D.C.: May 18, 2005. Homeland Security: Some Progress Made, but Many Challenges Remain on U.S. Visitor and Immigrant Status Indicator Technology Program. GAO-05-202. Washington, DC: February 23, 2005. Alien Registration: Usefulness of a Nonimmigrant Alien Annual Address Reporting Requirement Is Questionable. GAO-05-204. Washington, D.C.: January 28, 2005. Highlights of a GAO Forum: Workforce Challenges and Opportunities For the 21st Century: Changing Labor Force Dynamics and the Role of Government Policies. GAO-04-845SP. Washington, D.C.: June 1, 2004. H-1B Foreign Workers: Better Tracking Needed to Help Determine H-1B Program's Effects on U.S. Workforce. GAO-03-883. Washington, D.C.: September 10, 2003. Information Technology: Homeland Security Needs to Improve Entry Exit System Expenditure Planning. GAO-03-563. Washington, D.C.: June 9, 2003. High-Skill Training: Grants from H-1B Visa Fees Meet Specific Workforce Needs, but at Varying Skill Levels. GAO-02-881. Washington, D.C.: September 20, 2002. Immigration Benefits: Several Factors Impede Timeliness of Application Processing. GAO-01-488. Washington, D.C.: May 4, 2001. H-1B Foreign Workers: Better Controls Needed to Help Employers and Protect Workers. GAO/HEHS-00-157. Washington, D.C.: September 7, 2000. 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The H-1B visa program assists U.S. employers in temporarily filling certain occupations with highly-skilled foreign workers. There is considerable interest regarding how Labor, along with Homeland Security and Justice, is enforcing the requirements of the program. This testimony summarizes our report, GAO-06-720 , that describes how Labor carries out its H-1B program responsibilities and how Labor works with other agencies involved in the H-1B program. While Labor's H-1B authority is limited in scope, it does not use its full authority to oversee employers' compliance with program requirements. Labor's review of employers' applications to hire H-1B workers is timely, but lacks quality assurance controls and may overlook some inaccuracies. From January 2002 through September 2005, Labor electronically reviewed more than 960,000 applications and certified almost all of them. Labor's review of the applications is limited by law to checking for missing information or obvious inaccuracies and does this through automated data checks. However, in our analysis of Labor's data, we found more than 3,000 applications that were certified even though the wage rate on the application was lower than the prevailing wage for that occupation. We also found approximately 1,000 certified applications that contained erroneous employer identification numbers, which raises questions about the validity of the applications. In its enforcement efforts, Labor's Wage and Hour Division (WHD) investigates complaints made against H-1B employers. From fiscal year 2000 through fiscal year 2005, Labor reported an increase in the number of H-1B complaints and violations, and a corresponding increase in the number of employer penalties. In fiscal year 2000, Labor required employers to pay back wages totaling $1.2 million to 226 H-1B workers; by fiscal year 2005, back wage penalties had increased to $5.2 million for 604 workers. Program changes, such as a higher visa cap in some years, could have been a contributing factor. In April 2006, WHD began randomly investigating willful violators of the program's requirements. Labor uses education as its primary method of promoting compliance with the H-1B program by conducting compliance assistance programs and posting guidance on its web site. Labor, Homeland Security, and Justice all have responsibilities under the H-1B program, but Labor and Homeland Security face challenges sharing information. After Labor certifies an application, USCIS reviews it but cannot easily verify whether employers submitted petitions for more workers than originally requested on the application because USCIS's database cannot match each petition to Labor's application case number. Also, during the process of reviewing petitions, staff may find evidence that employers are not meeting their H-1B obligations. For example, Homeland Security may find that a worker's income on the W-2 is less than the wage quoted on the original application. USCIS may deny the petition if an employer is unable to explain the discrepancy, but it does not have a formal process for reporting the discrepancy to Labor. Moreover, current law precludes WHD from using this information to initiate an investigation of the employer. Labor also shares enforcement responsibilities with Justice, which pursues charges filed by U.S. workers who allege they were displaced by an H-1B worker. From 2000 through 2005, Justice found discriminatory conduct in 6 out of the 97 investigations closed, and assessed a total of $7,200 in penalties.
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Although recent events may have moved airport congestion off center stage as a major national issue, delays remain a pervasive problem, in part because of the interdependence of the nation's airports. The effect of delays can quickly spread beyond those airports where delays tend to occur most often, such as New York La Guardia, Chicago O'Hare, Newark International, and Atlanta Hartsfield. Delays at these airports can quickly create a "ripple" effect of delays that affects many airports across the country. For example, flights scheduled to take off from these airports may find themselves being held at the departing airport due to weather or limited airspace. Similarly, an aircraft late in leaving the airport where delays are occurring may be late in arriving at its destination, thus delaying the departure time for the aircraft's next flight. Delays have many causes, but weather is the most prevalent. Figures compiled by FAA indicate that weather causes about 70 percent of the delays each year. Apart from weather, the next main cause is lack of capacity--that is, the inability of the national airspace system to handle the amount of traffic seeking to use it. Capacity can be measured in a variety of ways. For example, at individual airports, one measure is the maximum number of takeoffs and landings that can be conducted in a given period, such as 15 minutes or 1 hour. In our 2001 report, we noted that FAA had established such a capacity benchmark at each of the 31 of the nation's busiest airports. FAA's data on capacity and demand at these airports showed that even in optimum weather conditions, 16 airports had at least three 15-minute periods each day when demand exceeded capacity. Weather and capacity problems are often linked, because bad weather can further erode capacity. For example, some airports have parallel runways that are too close together for simultaneous operations in bad weather. When weather worsens, only one of the two runways can be used at any given time, thereby reducing the number of aircraft that can take off and land. FAA's data in 2001 showed that in bad weather, 22 of the 31 airports had at least three 15-minute periods when demand exceeded capacity. Another measure of capacity, apart from the capacity of individual airports, is the number of aircraft that can be in a given sector of the airspace. For safe operations, aircraft must maintain certain distances from each other and remain within authorized airspace. If too many aircraft are trying to use the same airspace, some must wait, either on the ground or en route. Addressing flight delay problems also requires action by multiple aviation stakeholders because no single entity has the authority or ability to solve delay-related problems. The federal government, especially through the Federal Aviation Administration (FAA) and its parent agency, the Department of Transportation (DOT), plays a major role by operating the national airspace system, distributing federal funding for airports, and setting operating standards for all aircraft and airports. Airports and airlines are also important decision makers and funding sources. The nation's airports are primarily owned and operated by local units of government, so that decisions about such steps as expanding airport capacity are primarily local in nature. Airlines' business decisions have a strong effect on the volume and routing of flights, the type and size of aircraft used, and the degree to which aircraft are upgraded to take advantage of new technology. Several initiatives to reduce flight delays and enhance capacity are ongoing. These initiatives which FAA, the airlines, and the airports are implementing are incorporated into FAA's major capacity-enhancing effort: the Operation Evolution Plan (OEP). The OEP is a rolling 10-year plan to increase capacity and efficiency of the national airspace system and focuses on airport surface infrastructure, and technological and procedural initiatives at 35 of the busiest airports in the United States. FAA acknowledges, however, that the OEP is not intended as the ultimate solution to congestion and delay problems. Responsibility for the various initiatives is still shared among the various segments of the aviation community. In February 2005, FAA published version 7 of the OEP and organized it into the following four quadrants: Airport Congestion. The Airport Congestion quadrant focuses on capacity enhancements for the airport surface. One of the most effective ways to increase capacity is to build runways; however, it takes an average of 10 years from the time planning begins for a runway until it is commissioned. To help expedite the process for building runways, Congress and FAA streamlined the environmental review phase of the runway process. In addition, according to FAA, over the last six years, seven new runways were opened at Phoenix, Detroit, Denver, Miami, Cleveland, Houston, and Orlando airports which provided those airports with the potential to accommodate about one million more annual operations (take-offs and landings). Seven more runways and one runway extension are included in the OEP and are scheduled to open by the end of 2008. These runways are expected to provide those airports with the potential to accommodate 889,000 more annual operations in the system, as shown in figure 2. In addition to the runways listed in the OEP, nine more projects are in the planning or environmental stages, including one new runway, three airfield reconfigurations, one runway extension, and three new airports in major metropolitan areas. FAA also has additional flight reduction activities that are not included in the OEP. To reduce flight delays at some of the delay- prone airports, such as New York La Guardia and Chicago O'Hare, FAA is exploring administrative and market based options. For example, FAA is considering auctioning off landing and take off rights at New York La Guardia and is currently limiting the number of scheduled arrivals during peak periods at New York La Guardia and Chicago O'Hare. Air Traffic Management Flow Efficiency. This quadrant focuses on new technology and procedures to optimize the flow of traffic and maximize system throughput which may allow better control and utilization of current airspace. Included is the Collaborative Convective Forecast Product which is a graphical forecast of potential convective activity areas (i.e. thunderstorms) for use in the strategic planning and management of air traffic. It is intended to provide advance planning for long haul flights and allows for schedule predictability based on 2-, 4-, and 6-hour forecasts. This tool is most useful during the severe weather avoidance procedures season, which is from March to October. Another program is Collaborative Decision Making, which is a joint government/industry initiative. Collaborative decision making focuses on electronic data exchange; optimized airspace utilization; shared planning and decision-making; and post-analysis reporting. In addition, the Traffic Management Advisor, which is in operation at eight air route traffic control centers, is an automated decision support tool, is intended to provide controllers and traffic management coordinators more information on airport arrival demand and available capacity for making decisions on aircraft spacing. En Route Congestion. Although the flying public is impacted by delays at the airports, many times this occurs in the en route areas as the airways become congested. The tools in this quadrant reduce delays and contribute to time and fuel savings for the vast majority of airspace users. One of the tools currently in use is reduced lateral (side-to-side) separation may provide space for additional routes between current city pairs or allow for new direct routes. Reduced longitudinal (nose-to-tail) separation may provide more opportunities to add flights without incurring delays. For domestic flights, Domestic Reduced Vertical Separation Minimum was implemented in fiscal year 2005 in the contiguous United States and Alaska and adds six additional flight levels between existing flight levels. The User Request Evaluation Tool which was installed at l7 air route traffic control centers and is operational at 13 air route traffic control centers, allows controllers to predict aircraft-to- aircraft and aircraft-to-airspace conflicts, which allows them to construct alternative flight paths. Airspace redesign projects also provide significant capacity improvements. For example, new routes added as part of the High Altitude Redesign increased en route throughput form the Pacific Northwest into the San Francisco Bay and the Los Angeles Basin areas. Terminal Area Congestion. Terminal airspace is a critical component in the efficient use of airport capacity. In instances where volume has increased and the current airspace structure is the limiting factor, redesigning arrival and departure procedures, including the addition of Area Navigation and Required Navigation Performance procedures, will allow more efficient use of constrained terminal airspace. Also, by applying existing technology with new procedures may provide instrument approaches to nearly all runways greater than 5,000 feet and under a wider range of meteorological conditions that are insensitive to airport surface traffic. Area navigation procedures provide flight path guidance from the runway to the en route airspace with minimal instructions given by air traffic controllers. As a result, routine controller/pilot communications are reduced, which frees time to handle other safety-critical flight activities. Other key benefits include more efficient use of airspace, with improved flight profiles, resulting in significant fuel efficiencies to the airlines. Additional solutions for increasing capacity in this arena are Time Based Metering which is used in conjunction with Traffic Management Advisor, became operational at seven air route traffic control centers. By optimizing the flow of aircraft from the en route to the terminal area, Time Based Metering with Traffic Management Advisor may help an airport to efficiently use the full capacity of its runways which increases acceptance rates as well as peak throughput. An air traffic management tool called Integrated Terminal Weather System which provides full color graphic displays of essential weather information to promote the safety, capacity, and efficiency of air traffic control operations was also implemented at Boston Logan, Denver International, and Minneapolis-St. Paul airports in 2004. According to FAA, the plan is to install the production version of Integrated Terminal Weather System at the New York terminal radar control facility in 2006. A number of challenges in reducing flight delays and enhancing capacity remain. A daunting challenge that FAA and other aviation stakeholders will have to address is funding the various initiatives that are designed to address flight delays and enhance capacity. The successful implementation of many of these initiatives is predicated on the availability of funding However, since 2000, which is to date the worst year in history for delays, the financial condition of the aviation industry has changed significantly. A number of structural changes within the airline industry, such as the growth of the Internet as a means to sell and distribute tickets, the growth of the low cost airlines, and fare reductions by legacy carriers, all transformed the industry and led to lower average fares. These lower fares have resulted in lower ticket taxes and less revenue into the Airport and Airway Trust Fund. In addition, a series of largely unforeseen events, including the September 11 terrorist attacks, war in Iraq and associated security concerns, SARS, global recessions, and a steep decline in business travel seriously reduced the demand for air travel and resulted in sharp decreases in airline industry revenue. Consequently, FAA expects that over the next four years there may be a multi-billion dollar gap between its costs and revenues. According to one aviation expert, this gap could have consequences that would increase air traffic delays. For example, FAA's Facilities and Equipment account, which provides funding for modernizing the air traffic control system and improving its reliability, capacity, and efficiency, was reduced by 15 percent in fiscal year 2005 and the President's 2006 budget proposes to reduce it by 20 percent in fiscal year 2006. These are the funds that are key to the national airspace system's future ability to handle demand and to minimize delays. For example, to provide the $4.4 billion needed for its major system acquisitions while remaining within its budget targets through fiscal year 2009, FAA has made significant cuts elsewhere in its capital funding plans. Specifically, FAA eliminated all of the $1.4 billion that it had set aside for what it calls the "architecture segment." These funds would have been used to perform about two years' worth of early research on new programs before they are mature enough to receive formal Joint Resources Council approval. FAA also made significant reductions in planned investments for facilities--an action that runs counter to its reported need to refurbish or replace its physical infrastructure. Thus, even if all OEP initiatives are implemented the national airspace system is expected to fall behind demand, resulting in an increase in congestion and delays over the 10-year period of the OEP. FAA's Management Advisory Council estimates that passengers would experience 63 percent more total delay hours in 2012 than they did in 2000. In contrast, FAA states that if all of the OEP initiatives are implemented, delays will be maintained at or below the flight delay levels in 2000. However, FAA also stated that capacity at some airports will not keep pace with demand and in these cases delays will get worse over time because not all airports have improvements planned. In 2004, the airline industry losses totaled $9 billion and the industry is expecting similar losses in 2005, which will make it difficult for them to equip their aircraft with some of the new air traffic control technology, according to Air Transport Association officials. Another important challenge is reducing flight delays and enhancing capacity at delay-prone airports, such as those shown in table 1, some of which have little capacity to physically expand and would find it difficult to build even one more runway, either because they lack the space or would face intense opposition from adjacent communities. Although eight runways were opened during the last six years and seven new runways are scheduled to be opened by the end of 2008, only three (Atlanta Hartsfield, Philadelphia International, and Houston International) of the nine airports that experienced the highest rate of delays in 2004 will receive new runways. Because these delay-prone airports can cause delays that ripple throughout the system, other airports that have increased their own capacity could still experience delays. For example, in 2000, Phoenix Sky Harbor International put an additional runway into service, and the airport had sufficient capacity to allow flights to take off on time. However, the airport ranked among the top 15 in the United States for flight delays. According to airport officials, most of the delays in Phoenix were the result of delays and cancellations at other airports-- circumstances unrelated to the capacity at Phoenix. FAA also projects that the three New York-area airports--La Guardia, Newark, and Kennedy-- will experience relatively small capacity gains during this decade--just 7 percent for Newark and 1 percent each for the other two airports. In addition to addressing the capacity needs of the most delay-prone airports, FAA, airlines, and airports will also have to address the emerging capacity needs of new metropolitan areas in the South and Southwest. Among those metropolitan areas FAA believes will need additional capacity by 2013 are Tucson, AZ; Austin-San Antonio, TX; and South Florida. Other options -- not in the OEP -- exist as potential measures to address capacity needs as shown in table 2. These options, which have been cited by various researchers and policy organizations over the last decade, basically fall into two categories. The first category involves measures for adding airport infrastructure besides adding runways to existing airports, such as building new airports or using nearby underdeveloped regional airports. The second category includes developing alternative modes of intercity travel other than air transportation, such as high-speed rail. The applicability of any particular option is likely to vary by location, considering the circumstances at each major airport. There is no "one-size fits- all" solution; rather, substantially reducing delays will probably require a combination of options spread out over time. For example, the airspace surrounding the greater New York metropolitan area is perhaps the most congested airspace in the nation. The three major airports in the area (La Guardia, Newark, and Kennedy), which currently are among the nation's most delay-prone airports, are expected to continue to experience substantial air traffic growth. But these airports have very limited expansion potential, largely because they cannot realistically build new runways. Building new airports or developing regional airports to serve these airports are long-term solutions that will likely take many years to materialize. In the meantime, other short-term options would need to be considered as passenger demand increases, such as ways to use existing facilities more efficiently. This is the direction that FAA and the New York/New Jersey Port Authority, which operates the three area airports, were moving before the drop in passenger demand following the events of September 11. As demand and delay are once again increasing, the FAA and Port Authority are reevaluating a regional approach to addressing these issues. As noted earlier, FAA and the Port Authority are also considering market- based and administrative approaches, such as auctioning off landing and take-off rights and congestion pricing for La Guardia. However, the airlines oppose auctions because of the uncertainty regarding number of slots and gates that they might receive. The airlines also, to a lesser degree, oppose market-based mechanism such as congestion pricing because of concerns over who would have responsibility for the revenue generated. Because major airports in other locations may face different circumstances than the New York airports face, they may need an entirely different set of solutions to address flight delays. Options-- such as building new airports, developing regional airports, or using ground transportation alternatives --are likely to be a more daunting challenge than implementing initiatives in the OEP. Implementing the OEP's initiatives will not be easy, but the opportunity for success is enhanced because FAA has the support of major aviation stakeholders on nearly all of the initiatives. By contrast, gaining consensus on any of these other options could be much more difficult because they change the nature of the system to the degree that each one could adversely affect the interests of one or more key aviation stakeholder groups--including passengers; air carriers; and aircraft operators, airports, and local communities. For example, Large infrastructure projects, such as building new airports that are located in metropolitan areas, could create major controversy. Such projects are often opposed by adjacent communities that are fearful of noise, displacement, or other environmental concerns. Also, finding suitable sites for such projects in crowded metropolitan areas--with enough land that is compatible with other potential land uses--may be difficult. Airlines may oppose some types of infrastructure projects if they fear that the projects would adversely affect them. For example, an airline with a dominant market position at a major hub airport may oppose building an additional airport nearby because the dominant carrier may view it as an opportunity for their competitors to enter the market in that area. In addition, some airlines are concerned about the need to divide their hub resources between the current airport and a new airport. Administrative, regulatory, and other measures for managing the demand for existing capacity could generate opposition from various sources as well. Airlines may oppose such measures if they perceive that these measures would restrict their choices in determining rates, schedules, and aircraft sizes--all of which could affect their profits and competitive status relative to other airlines. Smaller communities may also oppose such measures, fearing that commercial air service to and from their airports may be reduced or curtailed because airlines would react by choosing more profitable routes for the limited number of airport slots available. Cost, a factor to be weighed in adding runways to existing airports, is also an important consideration when building a new airport. For example, the last major new airport--the Denver International Airport completed in 1995--cost almost $5 billion to build. This cost would have been greater had the airport been located closer to the city, but since it was located on open land away from established communities, the costs of noise mitigation and other land-use issues were minimized. Also, the construction of fast-rail service in populated metropolitan corridors is likely to be costly. For example, Amtrak estimates the cost to construct fast-rail service in federally designated, high-speed corridors and the Northeast Corridor of the United States will be about $50 billion to $70 billion. In summary, the initiatives implemented by FAA, airlines, and the airports might help to reduce flight delays and increase capacity in the national airspace system in the short term. However, FAA and other aviation stakeholders continue to face a number of challenges in reducing delays at the most delay-prone airports and developing long term solutions for enhancing capacity. Addressing these challenges is perhaps more difficult today in comparison to in 2000 because a number of issues have exacerbated the situation. Chief among them is funding these initiatives during a time when the federal government and the aviation industry are experiencing significant fiscal problems. Consequently, keeping up with the economy's increasing demand for air transportation services will require a tremendous amount of planning; making some tough choices about which initiatives, both short-term and long-term, to pursue; and efforts to ensure that such initiatives are adequately funded. For further information on this testimony please contact Dr. Gerald Dillingham by email at [email protected] or Tammy Conquest at [email protected]. Alternatively, we can be reached by phone at (202) 512-2834. Individuals making key contributions to this testimony include Colin Fallon, Simon Galed, David Hooper, Maureen Luna-Long, Richard Scott, Laura Shumway, and Nicolas Zitelli. 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Since the unprecedented flight delays in 2000, a year in which one in four flights were delayed, our aviation system has been adversely affected by many unanticipated events--such as the September 11th terrorist attacks, and Severe Acute Respiratory Syndrome (SARS)--that significantly reduced the demand for air travel. However, demand for air travel is rebounding. For example, the number of passengers traveling by air increased from 642 million in 2003 to 688 million in 2004. Flight delays have been among the most vexing problems in the national transportation system and are defined by the Department of Transportation as instances when aircraft arrive at the gate 15 minutes or more after scheduled arrival time. In 2004, one in five flights were delayed primarily at New York La Guardia and Chicago O'Hare. Delays at these airports have consequences for the rest of the system. GAO's testimony addresses the following questions that pertain to flight delays and enhancing capacity: (1) What initiatives are ongoing by the federal government, airlines, and airports to address flight delays and enhance capacity? (2) What are some of the challenges in reducing flight delays and enhancing capacity? (3) What other options are available for reducing flight delays and enhancing capacity? Several initiatives to address flight delays and enhance capacity are ongoing. Many of these initiatives are reflected in FAA's February 2005 Operation Evolution Plan, which is a 10-year plan to increase capacity and efficiency of the national airspace system at 35 of the busiest airports in the United States. New runways opened in the last 6 years at the Phoenix, Detroit, and 5 other airports. Seven more runways are scheduled to open by the end of 2008. Congress and FAA also streamlined the process for building runways. In addition to building runways, several other initiatives were implemented. For example, in January 2005, FAA implemented the Domestic Reduced Vertical Separation Minimum which is designed to increase high altitude routes in the contiguous United States and Alaska. To reduce flight delays at some of the delay-prone airports, FAA is limiting the number of takeoffs and landings during peak periods at New York La Guardia and Chicago O'Hare and is considering auctioning off landing and take off rights at New York La Guardia. A number of challenges in reducing flight delays and enhancing capacity remain. Chief among them is obtaining funding for the initiatives mentioned above; their successful implementation is predicated on the availability of funding from several sources, including FAA, airlines, and airports. Another challenge is reducing flight delays and enhancing capacity at delay-prone airports, such as New York La Guardia, which have little capacity to expand and would find it difficult to build even one more runway. Other options to address delay problems include adding new capacity by building new airports. According to FAA, airport authorities in Chicago, Las Vegas, and San Diego are evaluating the need for new airports. Another option is to develop other modes of intercity travel, such as high-speed rail, where metropolitan areas are relatively close together. These options may conflict with the interests of one or more key stakeholder groups; and, in many cases, would be costly.
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Some DI benefit recipients have incomes low enough to qualify them for SSI as well and receive benefits from both programs. gainful activity because of a severe physical or mental impairment. The standards for determining whether the severity of an applicant's impairment qualifies him or her for disability benefits are set out in the Social Security Act and SSA regulations and rulings. SSA's disability claims process is complex, multilayered, and lengthy. Potential beneficiaries apply for benefits at any one of SSA's local field offices, where applications are screened for nonmedical eligibility: applicants for DI must meet certain work history requirements, and applicants for SSI must meet financial eligibility requirements. If the applicants meet the nonmedical eligibility requirements, their applications are forwarded to a state disability determination service (DDS), which gathers, develops, and reviews the medical evidence and prior work history to determine the individual's medical eligibility; the DDS then issues an initial determination on the case. Applicants who are dissatisfied with the determination may request a reconsideration decision by the DDS. Those who disagree with this decision may appeal to SSA's Office of Hearings and Appeals (OHA) and have the right to a hearing before one of the administrative law judges (ALJ) located in hearings offices across the country. Individuals who disagree with the ALJ decision may pursue their claim with SSA's Appeals Council and ultimately may appeal to a federal district court. This process can be both time-consuming and confusing for the applicants and may compel many of them to seek help from an attorney. Obtaining representation for a pending case has become increasingly popular because disability representatives have been successful in obtaining favorable decisions for their clients upon appeal.In fiscal year 1997, about 70 percent of all cases decided at the ALJ-hearing level involved representatives. The fees attorneys representing DI and SSI applicants can charge are limited by law and must be approved by SSA. In order to be compensated, attorneys must file either a fee agreement--a formal contract signed by the applicant and the attorney setting the fee as a percentage of the applicant's past-due benefits--or a fee petition that details the specific costs associated with the case. Past-due benefits are calculated by multiplying the monthly benefit amount by the total number of months from the month of entitlement up to, but not including, the month SSA effectuates the favorable disability decision. When fee agreements are filed, attorney fees are limited to 25 percent of the applicant's past-due benefits, up to $4,000 per case.In fee petition cases, however, SSA can approve any fee amount as long as it does not exceed 25 percent of the beneficiary's past-due benefits. For DI cases, SSA usually withholds the amount of the fee from the beneficiaries' past-due benefits and pays the attorneys directly, in effect guaranteeing payment for the attorney. In SSI cases, however, SSA does not have the authority to pay attorneys directly, and only calculates the amount an attorney is due. Attorneys must instead collect their fees from the SSI recipients. Effective February 1, 2000, the Ticket to Work Act imposed a 6.3 percent user fee on attorneys for SSA's costs associated with "determining and certifying" attorney fees on the basis of beneficiaries' past-due benefits. This amount is deducted from the approved attorney's fee. The act also directed us to study a number of issues related to the costs of determining and certifying the attorney fees, "efficiencies" available to reduce these costs, changes to the attorney fee requirements, and the new user fee. While SSA has been paying attorney fees for over 30 years, the payment process itself is inefficient, and the costs of the process are not known. Approving and paying attorney fees is a complex process that involves many steps; a number of staff in different units and locations; and various information systems that are not linked and that, therefore, require considerable manual intervention. Regarding the costs to administer this multistep process, we have not yet fully determined whether SSA's past estimate appropriately captured the costs associated with administering attorney fees; however, the agency is currently developing a way to capture actual costs. Attorneys are compensated for their services through either a fee agreement or a fee petition. Attorneys told us that the fee agreement is usually an easier, quicker way to get paid and that, although the fee petition is useful, it is also a more cumbersome tool used primarily when potential fees exceed the statutory limits or when attorneys were unable to file a fee agreement at the beginning of a case. In 1999, fee agreements accounted for about 85 percent of attorney payments, and fee petitions accounted for the balance. Figure 1 shows the steps involved in processing attorney fee agreements. First, officials in SSA's field offices or ALJs in OHA--depending on where the case is being determined--review fee agreements for DI and SSI cases to assess the reasonableness of the attorney fee charges.If a favorable decision is made on the case and SSA approves the fee agreement, both items--the applicant's case and the fee agreement--are forwarded to a processing center for payment. 5All parties involved--SSA, the beneficiary, and the attorney--may question the amount of the attorney's fee, and the fee may be changed if warranted. The Ticket to Work Act requires SSA to impose an assessment, or user fee, to pay for the costs the agency incurs when paying attorneys directly from a claimant's past-due benefits. For calendar year 2000, the act established the user fee at 6.3 percent of the attorney fees; for calendar years after that, the percentage charged is to be based on the amount the Commissioner determines necessary to fully recover the costs of "determining and certifying" fees to attorneys, but no more than 6.3 percent. The actual costs of administering attorney fees are not yet known because SSA was not required to capture these costs in its information systems and did not have a methodology to do so. The 6.3 percent user fee found in the law was based on an estimate prepared by the agency. Documentation SSA provided us indicates that the percentage was computed by multiplying the numbers of fee petitions and fee agreements the agency processed in 1994 by the amount of time SSA determined it spent on various related activities. When data were not available on the volume of activities or the time spent on them, SSA used estimates. The agency's overall cost estimate included both the time spent by the ALJs reviewing documentation to support the attorney fees--that is, the fee petitions and fee agreements--as well as the processing centers' costs associated with calculating the fees, choosing the notice language, and preparing the notices. In addition, the agency included the cost of administering the user fee itself. We recently received information on the basis for SSA's 6.3 percent user fee calculation and have only begun to analyze the assumptions the agency used to compute it. In order to comply with the Ticket to Work Act, SSA is currently in the process of developing a methodology to capture the current costs of administering the attorney fee provisions. These costs could then provide the foundation for the agency's decisions about what the rate should be to achieve full recovery of costs. SSA has established a work group to identify the components of administering attorney fees and to develop its new methodology. Thus far, the work group has identified four components associated with the cost of administering attorney fees: (1) the time that SSA field office staff spend informing claimants that they are entitled to legal representation when filing an appeal; (2) the time it takes an ALJ to review and approve the fee; (3) the charges incurred by SSA's Office of Systems to program systems to track attorney fee cases and related computing time to generate a payment file/tape for Treasury to use to pay the attorney; and (4) the process for calculating the attorney fee, entering relevant attorney and other key data into SSA's information systems, and certifying related amounts for payment. In April and May of this year, SSA work group officials told us that they do not plan to capture cost information from the first two components because it would be time-consuming to do so, and the methods currently available to SSA for capturing these two types of costs may not produce reliable results. For the third component, SSA officials told us they can readily gather cost information related to time spent on programming SSA's systems to track attorney fees. However, SSA does not have a cost allocation methodology in place to determine related computing time for processing attorney fees. SSA officials indicated that computing time would constitute an insignificant portion of SSA's total costs to administer attorney fees. To capture data on the fourth component, SSA modified one of its information systems in February 2000 to determine the number of attorney fee cases it administers. Using the number of cases it processes, SSA is working on a methodology to estimate the costs involved in this fourth component for paying attorneys. SSA plans to have this cost data available by the end of fiscal year 2000. However, in commenting on a draft of this statement, SSA officials told us that they do plan to capture costs for the second component--the time it takes the ALJ to review and approve the fee. In reviewing the law, the cost of ALJ time spent reviewing and approving fees appears to be part of the cost of "determining and certifying" fees and may represent a significant portion of the total costs. As SSA determines the ALJ costs in its current approach, it will need an allocation methodology that accurately allocates the costs associated with DI cases for which SSA is paying an attorney directly to those cases. Attorneys we talked with told us they are concerned now that they are paying more than their fair share of the cost of the process. Attorneys have expressed concern about the length of time it takes SSA to process their fees and have questioned the appropriateness of charging a user fee for a service that takes so long. In regard to the user fee, you specifically asked us to look at issues surrounding (1) linking the amount of the user fee to the timeliness of the payment to the attorney and (2) expressing the user fee as a fixed amount instead of a percentage. When considering one or both of these changes, certain policy and administrative implications would need to be addressed. According to the National Organization of Social Security Claimants' Representatives (NOSSCR),6 individual attorneys, and SSA officials, SSA often has trouble making timely payments to attorneys. Processing attorney fees represents a small part of SSA's overall activities--in 1999, we estimate that SSA processed about 6 billion beneficiary payments and SSA reported it processed less than 200,000 attorney payments. Additionally, SSA officials told us that they view such responsibilities as paying beneficiaries as more directly linked to their mission than paying attorneys. As a result, SSA has not routinely gathered and monitored performance data on the length of time it has taken to pay attorneys. However, recently tabulated data show that from January 1995 through May 2000, only 10 percent of attorney fees for fee agreements were paid within 30 days from the time of the beneficiary is put on current-pay status to payment of fees. As figure 2 shows, there is a wide range of elapsed processing times for payments. NOSSCR is an interest group for Social Security lawyers. To address timeliness concerns, a recent legislative proposal (H.R. 4633) would permit the user fee to be assessed against attorneys only if SSA pays attorneys within 30 days from the time of initial certification of benefits. Figure 2 above shows that from 1995 to the present, SSA has only been able to meet this timeframe in 10 percent of the cases. However, certain issues related to this proposal should be clearly understood by both SSA and the attorneys. All parties involved must clearly understand at what point in the process the clock starts ticking, when it stops, and what activities are performed during this period. When considering the current legislative proposal or contemplating other options, concerned parties need to weigh the attorneys' right to be paid in a timely manner with SSA's need to ensure the accuracy of its payments. While SSA's current process is inefficient and the agency can make some improvements, not all factors are within SSA's control, such as awaiting fee petition information from attorneys and coordinating workers' compensation offsets. The current legislative proposal states that the clock starts ticking with initial certification of benefits--also referred to as the point when the beneficiary is put in current-pay status. At this point, SSA might be developing the case for final calculation of past-due benefits and might not have control over processing times. Attorneys need to realize that because the proposal starts the clock with initial certification, and additional work may still need to be done to develop the case, the total elapsed time from favorable decision to attorney fee payment might not actually be decreased. Information on these issues needs to be clearly communicated or the frustration and complaints with the process are likely to continue. In addition, having the clock start before SSA has complete control over the process could create perverse incentives that may actually delay payments to attorneys. Because SSA does not have control over all the activities that occur following initial certification of benefits, it is conceivable that some attorneys might view this as an opportunity to delay providing needed information to SSA in hopes of avoiding the user fee. Aside from the delays that are outside its control, SSA is aware that there are steps it could take to make the process more efficient. For example, agency officials have said that instituting direct deposit of attorney fees is more efficient; it could shorten the time it takes for the fee payment to reach the attorney, and could eliminate delays that result when attorneys change their addresses without notifying SSA.SSA currently pays 65 percent of beneficiaries by means of direct deposit and wants to expand this approach to all its transactions. Possible improvements to SSA's information systems may also help reduce processing times. For instance, enhancements to SSA's information systems could eliminate much of the manual workload involved in processing and certifying attorney fees. As stated earlier, various information systems are currently used to process SSA's attorney fee workload associated with DI cases. These systems capture data on various aspects of the disability claims process, but are not linked to one another and, thus, require some manual intervention. As a result, without linked systems or a more streamlined process it is difficult for SSA to capture the data required to measure the timeliness of the total range of activities involved in paying attorneys. To efficiently administer user fees that are based on timeliness of fee payments to attorneys, SSA will need to develop new software code to link these stand-alone information systems, or develop a new system to process the entire attorney fee workload. SSA currently has plans for systems enhancements to improve the attorney fee process, which should help improve case processing time. According to SSA, these enhancements would automate the steps in order for systems to recognize attorney fee agreement cases, compute and withhold the 6.3 percent user fee, pay the actual attorney fee, and release the remainder of the past-due benefits immediately to the beneficiary.9 If SSA were to make the proposed system enhancements to process attorney fees, it may be advisable to revisit requirements for how quickly the agency could be expected to process an attorney fee. A number of issues surround the question of whether the user fee should be expressed as a fixed amount or as a percentage, and these are linked in large part to the question of what costs the user fee should cover. On one hand, expressing the user fee as a percentage of the attorney fee, as is currently the case, assumes that the costs SSA incurs in processing user fees grow in proportion to the fees. This could be the case, for example, if an ALJ spends extra time reviewing a fee petition in cases involving more activity and larger fees. On the other hand, expressing the user fee as a fixed amount assumes that the costs of processing the attorney fees are relatively the same and, therefore, a higher attorney fee does not translate into higher processing costs. This could be the case if the costs are fixed and do not vary from case to case. To adequately weigh the relative merits of both options, we need to further study the cost estimate information SSA used to develop the 6.3 percent user fee, the cost data that SSA is currently capturing, and the percentage of DI versus SSI cases processed. This analysis will be included in our final report, due to the Congress by the end of this year. Attorneys, NOSSCR, and advocates have discussed various changes related to attorney fees: issuing joint checks for past-due benefits to both the attorney and the beneficiary, raising the $4,000 limit on attorney fees allowable under the fee agreement process, and extending the statutory withholding of attorney fees to the SSI program. Each of these proposals involves trade-offs that should be considered before its implementation. Under the current process, when an individual receives a favorable DI decision, SSA makes an effort to issue the beneficiary's past-due benefits as soon as possible and withholds the amount of the attorney fee. After the fee is processed, Treasury issues a check to the attorney. Individual attorneys have suggested changing this process from one in which two separate payments are made to one in which a single check for the total amount of the past-due benefits--made out jointly to the beneficiary and the attorney--is sent directly to the attorney. The attorney would deposit the check into an escrow account and pay the past-due benefits, minus his or her fee, to the beneficiary. Attorneys told us that joint checks would help expedite the attorney fee process because the beneficiary's money and attorney fees would be linked, and SSA views paying beneficiaries as a priority. Such a change could have serious policy implications, however. For instance, SSA currently attempts to pay the beneficiary as soon as possible following a favorable decision. Issuing joint checks might delay payment to the beneficiary because the beneficiary would have to wait until after the attorney deposited the money into an escrow account to receive benefits. In addition, when SSA controls the payment, it is assured that no more than 25 percent is deducted from the past-due benefits. Sending joint checks to the attorney would reduce SSA's ability to enforce attorney fee limits and could increase the risk that attorneys would short change beneficiaries. In turn, control over payment to the beneficiary would shift to the attorney, while accountability for the payment would remain with SSA. In addition, a number of administrative issues dealing with the implementation of joint checks would need to be addressed. First, SSA needs to know when the beneficiary receives his or her benefits. SSA is responsible for sending out benefit statements, SSA-1099s, to beneficiaries because sometimes Social Security benefits are taxable. With joint checks, SSA might have difficulty tracking when beneficiaries received their benefits. If attorneys were responsible for paying the past-due benefits from their escrow accounts, SSA would need a system certifying when--in which tax year--the beneficiary was paid. This reporting system would be needed to ensure the accuracy of the SSA-1099s. Another administrative consideration is that the current information system used for processing DI cases--MCS--would need to be modified so that joint payments could be issued. As noted earlier, this system is designed to effectuate payments to the beneficiary or his or her representative payee only. Another change being discussed is raising the $4,000 cap on attorney fees for the fee agreement process. As I explained earlier, under the fee agreement process, attorneys can receive 25 percent of the past-due benefits up to $4,000, whichever is less. By statute, the Commissioner of SSA has the authority to adjust the cap at his or her discretion. Debate on this issue centers around how legal representation for DI applicants might be affected. Attorneys we spoke with told us that higher fees would increase the attractiveness of DI claims. According to this argument, attractive fees could result in more attorneys for DI cases, which could increase the rate of representation for this population. Further, an increased rate of representation might result in more favorable decisions for DI applicants. The opposing argument is that representation is readily available to DI applicants. According to an SSA official, the agency has not raised the cap because it determined that a higher cap was not needed to support representation. In either case, evaluating this issue is difficult in the absence of such data as historical and current representation rates and without knowing the proportion of applicants who could not secure representation and why. A final change being discussed would be to expand withholding to the SSI program. SSA currently calculates the amount of attorney fees due in SSI cases but does not withhold the fee from beneficiaries' past-due benefits. Current law explicitly differentiates between DI and SSI regarding attorney fees, stating that withholding and paying attorney fees is only permissible for DI cases. Many believe that extending withholding to SSI is appropriate because it would increase representation for SSI applicants and alleviate a perceived equity imbalance for attorneys who represent both DI and SSI applicants. Because there is no guarantee that attorneys will receive fees due to them for SSI cases, some attorneys told us that they are reluctant to accept SSI cases. The attorneys maintained that expanding withholding to SSI would increase the attractiveness of the cases, and representation would increase. In fact 1999 data show that at the hearing level, applicants for DI and combined DI/SSI benefits were more likely to be represented by an attorney than those applying for SSI only. Additionally, according to an official from an association of ALJs, expanding withholding to SSI would be beneficial to the applicants because cases with representation are better presented and have a better chance of receiving a favorable decision than nonrepresented cases. Proponents of extending withholding to SSI also told us that the current situation is unfair to attorneys representing SSI applicants. According to this view, it is inequitable for attorneys to be guaranteed payment for DI cases but not for SSI cases. As with the DI cases, the SSI recipient has an obligation to pay for his or her legal services; however, in DI cases, SSA ensures that this happens. For SSI cases, the attorney must obtain payment directly from the beneficiary. The opposing view of extending withholding to SSI is based on the relative economic status of DI beneficiaries and SSI recipients. SSI recipients tend to be poorer than DI beneficiaries, and some advocates have expressed concern that taking money from a recipient's past-due benefits to pay attorneys would be detrimental to the recipient's economic well-being. SSI recipients often have many financial obligations, such as overdue rent and utility bills that need to be paid. Advocates maintain that deducting the attorney fee from the past-due benefits might make it impossible for recipients to pay these bills. However, if an attorney successfully appeals a case for an SSI recipient, the recipient should be in a better position financially. From an administrative standpoint, if SSA was required to withhold attorney fees for SSI cases, it will need to develop new information systems or significantly modify existing systems to process this new workload. However, as with any system effort, SSA's ability to carry out this task will depend on its available resources and the priority that it gives to this initiative. Mr. Chairman, this concludes my prepared statement. At this time, I will be happy to answer any questions you or other Members of the Subcommittee may have. For information regarding this testimony, please contact Barbara Bovbjerg at (202) 512-7215. Individuals who made key contributions to this testimony include Yvette Banks, Kelsey Bright, Kay Brown, Abbey Frank, Valerie Freeman, Valerie Melvin, Sheila Nicholson, Daniel Schwimer, and Debra Sebastian. (207092)
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GAO discussed issues involving the Social Security Administration's (SSA) process for paying attorneys representing applicants for disability benefits, focusing on three areas of the attorney payment process: (1) the process itself, including the costs of processing the payments; (2) possible changes to the way the user fee is charged; and (3) changes being considered for the attorney fee payment process overall. GAO noted that: (1) while SSA has been paying attorney fees from beneficiaries' past-due benefits for over 30 years, the payment process remains inefficient, and little historical data are available to help GAO analyze proposed changes; (2) under the current procedures, the inefficiencies in processing fee payments to attorneys result from using a number of different staff in different units and various information systems that are not linked, and are not designed to calculate and process all aspects of the attorney fee payment, thus necessitating manual calculations; (3) the Ticket to Work Act includes a provision that requires SSA to charge an assessment to recover the costs of this service; (4) GAO has only begun to analyze the estimate that was used as a basis for the user fee, and SSA does not know the actual cost it incurs in processing attorney fees; (5) however, the agency is developing a methodology to better capture these costs; (6) SSA has trouble with making timely payments to attorneys, and some have questioned the appropriateness of charging a user fee for a service that takes so long; (7) a recent legislative proposal calls for eliminating the user fee if SSA does not pay the attorney within 30 days; (8) in many cases, it will be difficult for SSA to meet these timeframes; (9) attorneys need to realize that, while it is possible for SSA to improve the efficiency of the process it uses to pay them, some factors that delay their payments are outside SSA's control and are unlikely to change at this time; (10) three possible changes to the attorney fee payment process include whether: (a) joint checks for past-due benefits should be issued to the beneficiary and the attorney; (b) the dollar limit on certain attorney fees should be raised; and (c) SSA's attorney fee payment process should be expanded to the Supplemental Security Income program; (11) these changes would have both policy and administrative implications that need to be considered; (12) some of the changes could increase attorney representation for disability applicants, according to attorneys GAO spoke with; (13) however, not everyone agrees with this premise; (14) moreover, there are some drawbacks to these changes; and (15) SSA indicated it may need to make significant modifications to its information systems to issue joint checks or pay attorneys who represent SSI recipients.
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NRC is an independent agency of over 3,200 employees established by the Energy Reorganization Act of 1974 to regulate civilian--that is, commercial, industrial, academic, and medical--use of nuclear materials. NRC is headed by a five-member Commission. The President appoints the Commission members, who are confirmed by the Senate, and designates one of them to serve as Chairman and official spokesperson. The Commission as a whole formulates policies and regulations governing nuclear reactor and materials safety, issues orders to licensees, and adjudicates legal matters brought before it. NRC and the licensees of nuclear power plants share the responsibility for ensuring that commercial nuclear power reactors are operated safely. NRC is responsible for issuing regulations, licensing and inspecting plants, and requiring action, as necessary, to protect public health and safety. Plant licensees have the primary responsibility for safely operating their plants in accordance with their licenses and NRC regulations. NRC has the authority to take actions, up to and including shutting down a plant, if licensing conditions are not being met and the plant poses an undue risk to public health and safety. Nuclear power plants have many physical structures, systems, and components, and licensees have numerous activities under way, 24-hours a day, to ensure that plants operate safely. NRC relies on, among other things, its on-site resident inspectors to assess plant conditions and the licensees' quality assurance programs such as those required for maintenance and problem identification and resolution. With its current resources, NRC can inspect only a relatively small sample of the numerous activities going on during complex plant operations. According to NRC, its focus on the more safety significant activities is made possible by the fact that safety performance at plants has improved as a result of more than 25 years of operating experience. Commercial nuclear power plants are designed according to a "defense in depth" philosophy revolving around redundant, diverse, and reliable safety systems. For example, two or more key components are put in place so that if one fails, there is another to back it up. Plants have numerous built- in sensors to monitor important indicators such as water temperature and pressure. Plants also have physical barriers to contain the radiation and provide emergency protection. For example, the nuclear fuel is contained in a ceramic pellet to lock in the radioactive byproducts and then the fuel pellets are sealed inside rods made of special material designed to contain fission products, and the fuel rods are placed in reactors housed in containment buildings made of several feet of concrete and steel. Furthermore, the nuclear power industry formed an organization, the Institute of Nuclear Power Operations (INPO) with the mission to "promote the highest levels of safety and reliability-to promote excellence- in the operation of nuclear electric generating plants." INPO provides a system of personnel training and qualification for all key positions at nuclear power plants and workers undergo both periodic training and assessment. INPO also conducts periodic evaluations of operating nuclear plants, focusing on plant safety and reliability, in the areas of operations, maintenance, engineering, radiological protection, chemistry, and training. Licensees make these evaluations available to the NRC for review, and the NRC staff uses the evaluations as a means to determine whether its oversight process has missed any performance issues. NRC uses various tools to oversee the safe operation of nuclear power plants, generally consisting of physical plant inspections of equipment and records and objective indicators of plant performance. These tools are risk-informed in that they are focused on the issues considered most important to plant safety. Based on the results of the information it collects through these efforts, NRC takes a graded approach to its oversight, increasing the level of regulatory attention to plants based on the severity of identified performance issues. NRC bases its regulatory oversight process on the principle and requirement that plant licensees routinely identify and address performance issues without NRC's direct involvement. An important aspect of NRC's inspections is ensuring the effectiveness of licensee quality assurance programs. NRC assesses overall plant performance and communicates these results to licensees on a semi- annual basis. During fiscal year 2005, NRC inspectors spent a total of 411,490 hours on plant inspection activities (an average of 77 hours per week at each plant). The majority of these inspection efforts were spent on baseline inspections, which all plants receive on an almost continuous basis. Baseline inspections, which are mostly conducted by the two to three NRC inspectors located at each nuclear power plant site, evaluate the safety performance of plant operations and review plant effectiveness at identifying and resolving its safety problems. There are more than 30 baseline inspection procedures, conducted at varying intervals, ranging from quarterly to triennially, and involving both physical observation of plant activities and reviews of plant reports and data. The inspection procedures are risk-informed to focus inspectors' efforts on the most important areas of plant safety in four ways: 1) areas of inspection are included in the set of baseline procedures based on, in part, their risk importance, 2) risk information is used to help determine the frequency and scope of inspections, 3) the selection of activities to inspect within each procedure is informed with plant-specific risk information, and 4) the inspectors are trained in the use of risk information in planning their inspections. For inspection findings found to be more than minor, NRC uses its significance determination process (SDP) to assign each finding one of four colors to reflect its risk significance. Green findings equate to very low risk significance, while white, yellow, and red colors represent increasing levels of risk, respectively. Throughout its application of the SDP, NRC incorporates information from the licensee, and the licensee has the opportunity to formally appeal the final determination that is made. In addition to assigning each finding a color based on its risk significance, all findings are evaluated to determine if certain aspects of plant performance, referred to as cross-cutting issues, were a contributing cause to the performance problem. The cross-cutting issues are comprised of (1) problem identification and resolution, (2) human performance, and (3) safety consciousness in the work environment. To illustrate, in analyzing the failure of a valve to operate properly, NRC inspectors determined that the plant licensee had not followed the correct procedures when performing maintenance on the valve, and thus NRC concluded the finding was associated with the human performance cross-cutting area. If NRC determines that there are multiple findings during the 12-month assessment period with documented cross-cutting aspects, more than three findings with the same causal theme, and NRC has a concern about the licensee's progress in addressing these areas, it may determine that the licensee has a "substantive" cross-cutting issue. Opening a substantive cross-cutting issue serves as a way for NRC to notify the plant licensee that problems have been identified in one of the areas and that NRC will focus its inspection efforts in the cross-cutting area of concern. When NRC becomes aware of one or more performance problems at a plant that are assigned a risk color greater-than-green (white, yellow, or red), it conducts supplemental inspections. Supplemental inspections, which are performed by regional staff, expand the scope beyond baseline inspection procedures and are designed to focus on diagnosing the cause of the specific performance deficiency. NRC increases the scope of its supplemental inspection procedures based on the number of greater-than- green findings identified, the area where the performance problem was identified, and the risk color assigned. For example, if one white finding is identified, NRC conducts a follow-up inspection directed at assessing the licensee's corrective actions to ensure they were sufficient in both correcting the specific problem identified and identifying and addressing the root and contributing causes to prevent recurrence of a similar problem. If multiple yellow findings or a single red finding is identified, NRC conducts a much more comprehensive inspection which includes obtaining information to determine whether continued operation of the plant is acceptable and whether additional regulatory actions are necessary to address declining plant performance. This type of more extensive inspection is usually conducted by a multi-disciplinary team of NRC inspectors and may take place over a period of several months. NRC inspectors assess the adequacy of the licensee's programs and processes such as those for identifying, evaluating, and correcting performance issues and the overall root and contributing causes of identified performance deficiencies. NRC conducts special inspections when specific events occur at plants that are of particular interest to NRC because of their potential safety significance. Special inspections are conducted to determine the cause of the event and assess the licensee's response. For special inspections, a team of experts is formed and an inspection charter issued that describes the scope of the inspection efforts. At one plant we reviewed, for example, a special inspection was conducted to investigate the circumstances surrounding the discovery of leakage from a spent fuel storage pool. Among the objectives of this inspection were to assess the adequacy of the plant licensee's determination of the source and cause of the leak, the risk significance of the leakage, and the proposed strategies to mitigate leakage that had already occurred and repair the problem to prevent further leakage. In addition to its various inspections, NRC also collects plant performance information through a performance indicator program, which it maintains in cooperation with the nuclear power industry. On a quarterly basis, each plant submits data for 15 separate performance indicators. These objective numeric measures of plant operations are designed to measure plant performance related to safety in various aspects of plant operations. For example, one indicator measures the number of unplanned reactor shutdowns during the previous four quarters while another measures the capability of alert and notification system sirens, which notify residents living near the plant in the event of an accident. Working with the nuclear power industry, NRC established specific criteria for acceptable performance with thresholds set and assigned colors to reflect increasing risk according to established safety margins for each of the indicators. Green indicators reflect performance within the acceptable range while white, yellow, and red colors represent decreasing plant performance, respectively. NRC inspectors review and verify the data submitted for each performance indicator annually through the baseline inspection process. If questions arise about how to calculate a particular indicator or what the correct value should be, there is a formal feedback process in place to resolve the issue. When performance indicator thresholds are exceeded, NRC responds in a graded fashion by performing supplemental inspections that range in scope depending on the significance of the performance issue. Under the ROP, NRC places each plant into a performance category on the agency's action matrix, which corresponds to increasing levels of oversight based on the number and risk significance of inspection findings and performance indicators. The action matrix is NRC's formal method of determining what additional oversight procedures--mostly supplemental inspections--are required. Greater-than-green inspection findings are included in the action matrix for a minimum of four quarters to allow sufficient time for additional findings to accumulate that may indicate more pervasive performance problems requiring additional NRC oversight. If a licensee fails to correct the performance problems within the initial four quarters, the finding may be held open and considered for additional oversight for more than the minimum four quarters. At the end of each 6-month period, NRC issues an assessment letter to each plant licensee. This letter describes what level of oversight the plant will receive according to its placement in the action matrix performance categories, what actions NRC is expecting the plant licensee to take as a result of the performance issues identified, and any documented substantive cross-cutting issues. NRC also holds an annual public meeting at or near each plant site to review performance and address questions about the plant's performance from members of the public and other interested stakeholders. Most inspection reports, assessment letters and other materials related to NRC's oversight processes are made publicly available through a NRC website devoted to the ROP. The website also includes plant-specific quarterly summaries of green or greater inspection findings and all the performance indicators. The ROP has identified numerous performance deficiencies as inspection findings at nuclear power plants since it was first implemented, but most of these were considered to be of very low risk to safe plant operations. Similarly, there have been very few instances in which performance indicator data exceeded acceptable standards. As a result, few plants have been subjected to high levels of oversight. Of more than 4,000 inspection findings identified between 2001 and 2005, 97 percent were green. While green findings are considered to be of "very low" safety significance, they represent a performance deficiency on the part of the plant licensee and thus are important to correct. Green findings consist of such things as finding that a worker failed to wear the proper radiation detector or finding that a licensee did not properly evaluate and approve the storage of flammable materials in the vicinity of safety-related equipment. NRC does not follow-up on the corrective action taken for every green finding identified; rather, it relies on the licensee to address and track their resolution through the plant's corrective action program. NRC does, however, periodically follow-up on some of the actions taken by the licensee to address green findings through an inspection specifically designed to evaluate the effectiveness of the licensee's corrective action program. NRC officials stated that green findings provide useful information on plant performance and NRC inspectors use the findings to identify performance trends in certain areas and help inform their selection of areas to focus on during future inspections. In contrast to the many green findings, NRC has identified 12 findings of the highest risk significance (7 yellow and 5 red), accounting for less than 1 percent of the findings since 2001. For example, one plant was issued a red finding-- the highest risk significance--after a steam generator tube failed, causing an increased risk in the release of radioactive material. Similar to the inspection findings, most performance indicator reports have shown the indicators to be within the acceptable levels of performance. Only 156, or less than one percent of over 30,000 indicator reports from 2001 to 2005, exceeded the acceptable performance threshold. Four of the 15 performance indicators have always been reported to be within acceptable performance levels. In addition, 46 plants have never had a performance indicator fall outside of the acceptable level and only three plants reported having a yellow indicator for one performance measure; no red indicators have ever been reported. On the basis of its inspection findings and performance indicators, NRC has subjected more than three quarters of the 103 operating plants to at least some level of increased oversight (beyond the baseline inspections) for varying amounts of time. Most of these plants received the lowest level of increased oversight, consisting of a supplemental inspection, to follow- up on the identification of one or two white inspection findings or performance indicators. Five plants have received the highest level of plant oversight for which NRC allows plants to continue operations, due to the identification of multiple white or yellow findings and/or the identification of a red finding. One plant received this level of oversight because NRC determined that the licensee failed to address the common causes of two white findings and held them open for more than four quarters. One of these findings involved the recurrent failure of a service water pump because the licensee failed to take adequate corrective action after the first failure. NRC inspectors at the plants we reviewed indicated that, when plant performance declines, it is often the result of ineffective corrective action programs, problems related to human performance, or complacent management, which often results in deficiencies in one or more of the cross-cutting areas. In assessing the results of the ROP data, we found that all plants subjected to NRC's highest level of oversight also had a substantive cross-cutting issue open either prior to or during the time that it was subjected to increased oversight inspections. Overall, NRC's oversight process shows mostly consistent results from 2001 to 2005. For example, the total number of green findings at all plants ranged from 657 to 889 per year and the total number of other findings ranged from 10 to 30 per year with no strong trend (see fig. 1). Only in the area of cross-cutting issues--or inspection findings for which one or more cross-cutting issues was associated--is an increasing trend evident (see fig. 2). According to NRC, the reason for this increase is due in part to the development of guidance on the identification and documentation of cross-cutting issues and its increased emphasis in more recent years. According to NRC officials, the results of its oversight process at an industry or summary level serve as an indicator of industry performance, which to date indicates good safety performance. On an annual basis, NRC analyzes the overall results of its inspection and performance indicator programs and compares them with industry level performance metrics to ensure all metrics are consistent and takes action if adverse trends are identified. While NRC communicates the results of its oversight process on a plant-specific basis to plant managers, members of the public, and other government agencies through annual public meetings held at or near each site and an internet Web site, it does not publicly summarize the overall results of its oversight process, such as the total number and types of inspection findings and performance indicators falling outside of acceptable performance categories, on a regular basis. NRC has taken a proactive approach to improving its reactor oversight process. It has several mechanisms in place to incorporate feedback from both external and internal stakeholders and is currently working on improvements in key areas of the process, including better focusing inspections on areas most important to safety, improving its timeliness in determining the risk significance of its inspection findings, and modifying the way that it measures some performance indicators. NRC is also working to address what we believe is a significant shortcoming in its oversight process by improving its ability to address plants' safety culture, allowing it to better identify and address early indications of deteriorating safety at plants before performance problems develop. According to NRC officials, the ROP was implemented with the understanding that it would be an evolving process and improvements would be made as lessons-learned were identified. Each fall NRC solicits feedback from external stakeholders, including industry organizations, public interest groups, and state and local officials, through a survey published in the Federal Register. NRC also conducts an internal survey of its site, regional, and headquarters program and management staff every other year to obtain their opinions on the effectiveness of the ROP. Additionally, NRC has in place a formal feedback mechanism whereby NRC staff can submit recommendations for improving various oversight components and NRC staff meet with industry officials on a monthly basis--in addition to various meetings, workshops, and conferences--to discuss oversight implementation issues and concerns. NRC staff also incorporates direction provided by the NRC Commissioners and recommendations from independent evaluations such as from GAO and the NRC Inspector General. The results of these efforts are pulled together in the form of an annual self-assessment report, which outlines the overall results of its outreach and the changes it intends to make in the year ahead. According to NRC officials, the changes made to the ROP since its implementation in 2000--including those made in response to the Davis- Besse incident--have generally been refinements to the existing process rather than significant changes to how it conducts its oversight. In the case of Davis-Besse, NRC formed a task force to review the agency's regulatory processes. The task force's report, issued in September 2002, contained more than 50 recommendations, many associated with the ROP. Among the more significant ROP-related recommendations were those to enhance the performance indicator that monitors unidentified leakage to be more accurate, develop specific guidance to inspect boric acid control programs and vessel head penetration nozzles, modify the inspection program to provide for better follow-up of longstanding issues, and enhance the guidance for managing plants that are in an extended shutdown condition as a result of significant performance problems. NRC program officials told us that the task force's most significant recommendations were in areas outside of the ROP, such as improving the agency's operating experience program. According to NRC, it has implemented almost all of the task force's recommendations. Other modifications that NRC has recently made or is in the process of making include the following: NRC recently revised seven of its baseline inspection procedures to better focus the level and scope of its inspection efforts on those areas most important to safety. These revisions resulted from a detailed analysis in 2005 of its more than 30 baseline inspection procedures. The effort involved analyzing the number of findings resulting from each of its inspection procedures and the time spent directly observing plant activities or reviewing licensee paperwork, among other things. NRC has efforts underway to improve what it refers to as its significance determination process (SDP). An audit by the NRC Inspector General, a review by a special task group formed by NRC, and feedback from other stakeholders have pointed to several significant weaknesses with the SDP. For example, internal and external stakeholders raised concerns about the amount of time, level of effort, and knowledge and resources required to determine the risk significance of some findings. Industry officials commented that because most inspection findings are green, one white finding at a plant can place it in the "bottom quartile" of plants from a performance perspective. Therefore, industry officials explained, licensees try to avoid this placement and will expend a great deal of effort and resources to provide additional data to NRC to ensure the risk level of a finding is appropriately characterized. This can add significant time to the process because different technical tools may be used that then must be incorporated with NRC's tools and processes. The delay in assigning a color to a finding while the new information is being considered could also affect a plant's placement on NRC's action matrix, essentially delaying the increased oversight called for if the finding is determined to be greater- than-green. NRC developed a SDP Improvement Plan in order to address these and other concerns and track its progress in implementing key changes. For example, NRC introduced a new process aimed at improving timeliness by engaging decision-makers earlier in the process to more quickly identify the scope of the evaluation, the resources needed, and the schedule to complete the evaluation. NRC is also taking actions to improve its performance indicators. These actions are partly to address concerns that the indicators have not contributed to the early identification of poorly performing plants to the degree originally envisioned as they are almost always within acceptable performance levels (green). There have been several cases where plants reported an acceptable performance indicator and performance problems were subsequently identified. For example, NRC inspectors at one plant noted that while performance indicator data related to its alert and notification system in place for emergency preparedness had always been reported green, the system had not always been verified to be functioning properly. On the other hand, industry officials believe that the high percentage of indicators that are green is indicative of plants' good performance. Several plant managers told us that they closely monitor and manage to the acceptable performance thresholds established for each indicator, and will often take action to address performance issues well before the indicator crosses the acceptable performance threshold. Because NRC inspectors verify indicator data once a year, a potential disagreement over the data might not surface for up to a year after it is reported, and it may take even longer to resolve the disagreement with the licensee. Similar to delays with the SDP, a delay in assigning a color while the disagreement is resolved could affect a plant's placement on NRC's action matrix, and delay the increased oversight called for if the indicator is determined to be greater-than-green. NRC plans to work with the industry to review selected indicator definitions to make interpretation more concise and reduce the number of discrepancies. To date, NRC has focused significant effort on developing a key indicator to address known problems with the performance indicators measuring the unavailability of safety systems. NRC is also in the process of changing the definition for several other indicators, in addition to considering the feasibility of new indicators. I would now like to discuss what we believe is one of NRC's most important efforts to improve its oversight process by increasing its ability to identify and address deteriorating safety culture at plants. NRC and others have long recognized that safety culture and the attributes that make up safety culture, such as attention to detail, adherence to procedures, and effective corrective and preventative action, have a significant impact on a plant's performance. Despite this recognition and several external groups' recommendations to better incorporate safety culture aspects into its oversight process, it did not include specific measures to explicitly address plant safety culture when it developed the ROP in 2000. The 2002 Davis-Besse reactor vessel head incident highlighted that this was a significant weakness in the ROP. In investigating this event, we and others found that NRC did not have an effective means to identify and address early indications of deteriorating safety at plants before performance problems develop. Largely as a result of this event, in August 2004, the NRC Commission directed the NRC staff to enhance the ROP by more fully addressing safety culture. In response to the Commission's directive, the NRC staff formed a safety culture working group in early 2005. The working group incorporated the input of its stakeholders through a series of public meetings held in late 2005 and early 2006. In February 2006, NRC issued its proposed approach to better incorporate safety culture into the ROP. NRC officials expect to fully implement all changes effective in July 2006. NRC's proposed safety culture changes largely consist of two main approaches: first, clarifying the identification and treatment of cross- cutting issues in its inspection processes and second, developing a structured way for NRC to determine the need for a safety culture evaluation of plants. NRC has developed new definitions for each of its cross-cutting issues to more fully address safety culture aspects and additional guidance on their treatment once they are identified. For example, the problem identification and resolution cross-cutting area is now comprised of several components--corrective action program, self and independent assessments, and operating experience. NRC inspectors are to assess every inspection finding to determine if it is associated with one or more of the components that make up each of the cross-cutting areas. Inspectors then determine, on a semi-annual basis, if a substantive cross-cutting issue exists on the basis of the number and areas of cross- cutting components identified. If the same substantive cross-cutting issue is identified in three consecutive assessment periods, NRC may request that the licensee perform an assessment of its safety culture. The intent is to provide an opportunity to diagnose a potentially declining safety culture before significant safety performance problems occur. Under its approach, NRC would expect the licensees of plants with more than one white color finding or one yellow finding to evaluate whether the performance issues were in any way caused by any safety culture components, and NRC might request the licensee to complete an independent assessment of its safety culture, if the licensee did not identify an important safety culture component. For plants where more significant or multiple findings have been identified, the NRC would not only independently evaluate the adequacy of the independent assessment of the licensee's safety culture, but it might also conduct its own independent assessment of the licensee's safety culture. Some of NRC's proposed actions regarding safety culture have been controversial, and not all stakeholders completely agree with the agency's approach. For example, the nuclear power industry has expressed concern that the changes could introduce undue subjectivity to NRC's oversight, given the difficulty in measuring these often intangible and complex concepts. Several of the nuclear power plant managers at the sites we reviewed said that it is not always clear why a cross-cutting issue was associated with finding, or what it will take to clear themselves once they've been identified as having a substantive cross-cutting issue open. Some industry officials worry that this initiative will further increase the number of findings that have cross-cutting elements associated with them and if all of the findings have them they will lose their value. Industry officials also warn that if it is not implemented carefully, it could divert resources away from other important safety issues. Other external stakeholders, on the other hand, suggest that this effort is an important step in improving NRC's ability to identify performance issues at plants before they result in performance problems. Importantly, there will be additional tools in place for NRC to use when it identifies potential safety culture concerns. NRC officials view this effort as the beginning step in an incremental approach and acknowledge that continual monitoring, improvements, and oversight will be needed in order to better allow inspectors to detect deteriorating safety conditions at plants before events occur. NRC plans to evaluate stakeholder feedback and make changes based on lessons learned from its initial implementation of its changes as part of its annual self-assessment process for calendar year 2007. For further information about this statement for the record, please contact me at (202) 512-3841 (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. Raymond H. Smith, Jr. (Assistant Director), Alyssa M. Hundrup, Alison O'Neill, and Dave Stikkers made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Nuclear Regulatory Commission (NRC) has the responsibility to provide oversight to ensure that the nation's 103 commercial nuclear power plants are operated safely. While the safety of these plants has always been important, since radioactive release could harm the public and the environment, NRC's oversight has become even more critical as the Congress and the nation consider the potential resurgence of nuclear power in helping to meet the nation's growing energy needs. Prior to 2000, NRC was criticized for having a safety oversight process that was not always focused on the most important safety issues and in some cases, was overly subjective. To address these and other concerns, NRC implemented a new oversight process--the Reactor Oversight Process (ROP). NRC continues to modify the ROP to incorporate feedback from stakeholders and in response to other external events. This statement summarizes information on (1) how NRC oversees nuclear power plants, (2) the results of the ROP over the past several years, and (3) the aspects of the ROP that need improvement and the status of NRC's efforts to improve them. This statement discusses preliminary results of GAO's work. GAO will report in full at a later date. GAO analyzed program-wide information, inspection results covering 5 years of ROP operations, and detailed findings from a sample of 11 plants. NRC uses various tools to oversee the safe operation of nuclear power plants, including physical plant inspections and quantitative measures or indicators of plant performance. To apply these tools, NRC uses a risk-informed and graded approach--that is, one considering safety significance in deciding on the equipment and operating procedures to be inspected and employing increasing levels of regulatory attention to plants based on the severity of identified performance problems. The tools include three types of inspections--baseline, supplemental, and special. All plants receive baseline inspections of plant operations almost continuously by NRC inspectors. When NRC becomes aware of a performance problem at a plant, it conducts supplemental inspections, which expand the scope of baseline inspections. NRC conducts special inspections to investigate specific safety incidents or events that are of particular interest to NRC because of their potential significance to safety. The plants also self-report on their safety performance using performance indicators for plant operations related to safety, such as the number of unplanned reactor shutdowns. Since 2001, NRC's ROP has resulted in more than 4,000 inspection findings concerning nuclear power plant licensees' failure to comply with regulations or other safe operating procedures. About 97 percent of these findings were for actions or failures NRC considered important to correct but of low significance to overall safe operation of the plants. In contrast, 12 of the inspection findings, or less than 1 percent, were of the highest levels of significance to safety. On the basis of its findings and the performance indicators, NRC has subjected more than three-quarters of the 103 operating plants to oversight beyond the baseline inspections for varying amounts of time. NRC has improved several key areas of the ROP, largely in response to independent reviews and feedback from stakeholders. These improvements include better focusing its inspections on those areas most important to safety, reducing the time needed to determine the risk significance of inspection findings, and modifying the way that some performance indicators are measured. NRC also recently undertook a major initiative to improve its ability to address plants' safety culture--that is, the organizational characteristics that ensure that issues affecting nuclear plant safety receive the attention their significance warrants. GAO and others have found this to be a significant shortcoming in the ROP. Although some industry officials have expressed concern that its changes could introduce undue subjectivity to NRC's oversight, given the difficulty in measuring these often intangible and complex concepts, other stakeholders believe its approach will provide NRC better tools to address safety culture issues at plants. NRC officials acknowledge that its effort is only a step in an incremental approach and that continual monitoring, improvements, and oversight will be needed to fully detect deteriorating safety conditions before an event occurs.
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Under A-76, commercial activities may be converted to or from contractor performance either by direct conversion or by cost comparison. Under direct conversion, specific conditions allow commercial activities to be moved from government or contract performance without a cost comparison study (for example, for activities involving 10 or fewer civilians). Generally, however, commercial functions are to be converted to or from contract performance by cost comparison, whereby the estimated cost of government performance of a commercial activity is compared to the cost of contractor performance in accordance with the principles and procedures set forth in Circular A-76 and the supplemental handbook. As part of this process, the government identifies the work to be performed (described in the performance work statement), prepares an in-house cost estimate based on its most efficient organization, and compares it with the winning offer from the private sector. According to A-76 guidance, an activity currently performed in house is converted to performance by the private sector if the private offer is either 10 percent lower than the direct personnel costs of the in-house cost estimate or $10 million less (over the performance period) than the in- house cost estimate. OMB established this minimum cost differential to ensure that the government would not convert performance for marginal savings. The handbook also provides an administrative appeals process. An eligible appellant must submit an appeal to the agency in writing within 20 days of the date that all supporting documentation is made publicly available. Appeals are supposed to be adjudicated within 30 days after they are received. Under current law, private sector offerors who believe that the agency has not complied with applicable procedures have additional avenues of appeal. Specifically, they may file a bid protest with the General Accounting Office or file an action in a court of competent jurisdiction. Circular A-76 requires agencies to maintain annual inventories of commercial activities performed in house. A similar requirement was included in the 1998 Federal Activities Inventory Reform (FAIR) Act, which directs agencies to develop annual inventories of their positions that are not inherently governmental. The fiscal year 2000 inventory identified approximately 850,000 full-time equivalent commercial-type positions, of which approximately 450,000 were in DOD. OMB has recently indicated that it intends to expand its emphasis on A-76 governmentwide. In a March 9, 2001, memorandum to the heads and acting heads of departments and agencies, the OMB Deputy Director directed agencies to take action in fiscal year 2002 to directly convert or complete public/private competitions of not less than 5 percent of the full-time equivalent positions listed in their FAIR Act inventories. In 1999, DOD began to augment its A-76 program with what it terms strategic sourcing. Strategic sourcing may encompass consolidation, restructuring or reengineering activities, privatization, joint ventures with the private sector, or the termination of obsolete services. Strategic sourcing can involve functions or activities, regardless of whether they are considered inherently governmental, military essential, or commercial. I should add that these actions are recognized in the introduction to the A-76 handbook as being part of a larger body of options, in addition to A-76, that agencies must consider as they contemplate reinventing government operations. Strategic sourcing initially does not involve A-76 competitions between the public and the private sectors, and the Office of the Secretary of Defense and service officials have stressed that strategic sourcing may provide smarter decisions because it determines whether an activity should be performed before deciding who should perform it. However, these officials also emphasized that strategic sourcing is not intended to take the place of A-76 studies and that positions examined under the broader umbrella of strategic sourcing may be subsequently considered for study under A-76. DOD has been the leader among federal agencies in emphasizing A-76 studies. DOD's use of A-76 waned from the late 1980s to the mid-1990s, then grew substantially in 1995 before falling again in1999 to the present. DOD is currently emphasizing a combination of A-76 and strategic sourcing. Available information indicates that A-76 studies in civilian agencies have been minimal, compared with those carried out in DOD. Unfortunately, no central database exists to provide information on the actual number of studies undertaken. From the late 1970s through the mid-1990s, DOD activities studied approximately 90,000 positions under A-76. However, program controversy and administrative and legislative constraints caused a drop in program emphasis from the late 1980s through 1995. In August 1995, the Deputy Secretary of Defense gave renewed emphasis to the A-76 program when he directed the services to make outsourcing of support activities a priority in an effort to reduce operating costs and free up funds to meet other priority needs. The effort was subsequently incorporated as a major initiative under the then-Secretary's Defense Reform Initiative, and the program became known as competitive sourcing--in recognition of the fact that either the public or the private sector could win competitions. The number of positions planned for study and the time frames for accomplishing those studies have changed over time in response to difficulties in identifying activities to be studied. In 1997, DOD's plans called for about 171,000 positions to be studied by the end of fiscal year 2003. In February 1999, we reported that DOD had increased this number to 229,000 but then found it reduced the number of positions to be studied in the initial years of the program. In August 2000, DOD decreased the total number of positions to be studied under A-76 to about 203,000, added about 42,000 Navy positions for consideration under strategic sourcing, and extended the program to fiscal year 2005. The introduction of strategic sourcing came about as the Navy--which was having difficulty identifying sufficient numbers of positions for study--sought and obtained approval to use this broader approach to help meet its A-76 study goals. In March 2001, DOD officials announced that they had again reduced the number of positions to be studied under A-76 to about 160,000 but increased the number of strategic sourcing positions to 120,000. DOD's latest targets include strategic sourcing study goals for each of the military services. Tables 1 and 2 show the number of positions Defense components planned to study under A-76 and strategic sourcing as of March 2001. DOD's data shown above show fewer positions planned to be studied under both A-76 and strategic sourcing in the out-years compared to those projected before 2001. To what extent these numbers will change on the basis of recent program direction from OMB for an expanded A-76 program emphasis is yet to be determined. As these numbers changed, so did savings targets. In 1999, for example, DOD projected that its A-76 program would produce $6 billion in cumulative savings from fiscal year 1997 to 2003 and $2.3 billion in net savings each year thereafter. In 2000, DOD projected savings of about $9.2 billion in 1997-2005, with recurring annual net savings of almost $2.8 billion thereafter. Additional savings were to come from strategic sourcing, which was expected to produce nearly $2.5 billion in cumulative savings by 2005 and recurring annual savings of $0.7 billion thereafter. Together, A-76 and strategic sourcing are expected to produce estimated cumulative savings of almost $11.7 billion, with about $3.5 billion in recurring annual net savings. More recent savings estimates have not yet been made available. Most importantly, these projected savings have become more than ambitious goals, when it developed its fiscal year 2000 budget, DOD reprogrammed about $11.2 billion of these anticipated savings into its modernization accounts, spread over future years' planning period. Our work has consistently shown that while savings are being achieved by DOD's A-76 program, it is difficult to determine precisely the magnitude of net savings. Furthermore, savings may be limited in the short term because up-front investment costs associated with conducting and implementing the studies must be absorbed before long-term savings begin to accrue. Several of our reports in recent years have highlighted these issues. We reported in March 2001 that A-76 competitions had reduced estimated costs of Defense activities primarily by reducing the number of positions needed to perform those activities under study. This is true regardless of whether the government's in-house organization or the private sector wins the competition. Both government and private sector officials with experience in such studies have stated that, in order to be successful in an A-76 competition, they must seek to reduce the number of positions required to perform the function being studied. Related actions may include restructuring and reclassifying positions and using multiskill and multirole employees to complete required tasks. In December 2000, we reported on compliance with a congressional requirement that DOD report specific information of all instances since 1995 in which DOD missions or functions were reviewed under OMB Circular A-76. For the 286 studies for which it had complete information, the Department's July 2000 report to the Congress largely complied with the reporting requirement. We noted that DOD had reported cost reductions of about 39 percent, yielding an estimated $290 million savings in fiscal year 1999. We also agreed that individual A-76 studies were producing savings but stressed that savings are difficult to quantify precisely for a number of reasons: Because of an initial lack of DOD guidance on calculating costs, baseline costs were sometimes calculated on the basis of average salaries and authorized personnel levels rather than on actual numbers. DOD's savings estimates did not take into consideration the costs of conducting the studies and implementing the results, which of course must be offset before net savings begin to accrue. There were significant limitations in the database DOD used to calculate savings. Savings become more difficult to assess over time as workload requirements change, affecting program costs and the baseline from which savings were initially calculated. Our August 2000 report assessed the extent to which there were cost savings from nine A-76 studies conducted by DOD activities. The data showed that DOD realized savings from seven of the cases, but less than the $290 million that Defense components had initially projected. Each of the cases presented unique circumstances that limited our ability to precisely calculate savings--some suggested lower savings. Others suggested higher savings than initially identified. In two cases, DOD components had included cost reductions unrelated to the A-76 studies as part of their projected savings. Additionally, baseline cost estimates used to project savings were usually calculated using an average cost of salary and benefits for the number of authorized positions, rather than the actual costs of the positions. The latter calculation would have been more precise. In four of the nine cases, actual personnel levels were less than authorized. While most baseline cost estimates were based largely on personnel costs, up to 15 percent of the costs associated with the government's most efficient organizations' plans or the contractors' offers were not personnel costs. Because these types of costs were not included in the baseline, a comparison of the baseline with the government's most efficient organization or contractor costs may have resulted in understating cost savings. On the other hand, savings estimates did not reflect study and implementation costs, which reduced savings in the short term. DOD has begun efforts to revise its information systems to better track the estimated and actual costs of activities studied but not to revise previous savings estimates. DOD is also emphasizing the development of standardized baseline cost data to determine initial savings estimates. In practice, however, many of the cost elements that are used in A-76 studies will continue to be estimated because DOD lacks a cost accounting system to measure actual costs. Further, reported savings from A-76 studies will continue to have some element of uncertainty and imprecision and will be difficult to track in the out-years because workload requirements change, affecting program costs and the baseline from which savings are calculated. Given that the Department has reduced operating budgets on the basis of projected savings from A-76 studies, it is important that it have as much and as accurate information as possible on savings, including information on adjustments for up-front investment costs and other changes that may occur over time. In monitoring DOD's progress in implementing the A-76 program, we have reported on a number of issues that should be considered when expanding emphasis on the A-76 process, either in DOD or at other government agencies. These issues include (1) the time required to complete studies, (2) the costs and other resources needed to conduct and implement studies, (3) the difficulties involved in selecting functions to compete, and (4) the timing of budget reductions in anticipation of projected savings. This last issue is a fundamental issue that is directly affected by the first three. Individual A-76 studies have taken longer than initially projected. In launching its A-76 program, some DOD components made overly optimistic assumptions about the amount of time needed to complete the competitions. For example, the Army projected that it would take 13-21 months to complete studies, depending on their size. The Navy initially projected completing its studies in 12 months. The numbers were subsequently adjusted upward, and the most recent available data indicate that studies take about 24 months for single-function and 27 months for multifunction studies. Once DOD components found that the studies were taking longer than initially projected, they realized that a greater investment of resources would be needed than originally planned to conduct the studies. In August 2000, we reported that DOD had increased its study cost estimates considerably since the previous year and had given greater recognition to the costs of implementing the results of A-76 studies. But we expressed concern that the Department was, in some instances, still likely underestimating those costs. The 2001 President's budget showed a wide range of projected study costs, from about $1,300 per position studied in the Army to about $3,700 in the Navy. The Army, the Navy, and the Air Force provide their subcomponents $2,000 per position studied. Yet various officials believe these figures underestimate the costs of performing the studies. Officials at one Army major command estimated that their study costs would be at least $7,000 per position. One Navy command estimated its costs at between $8,500 and $9,500 per position. Our own assessment of a sample of completed A- 76 studies within the Army, the Navy, the Air Force, and Defense agencies showed that study costs ranged from an average of $364 to $9,000 per position. In addition to study costs, significant costs can be incurred in implementing the results of the competitions. Transition costs include the separation costs for civilian Defense employees who lose their jobs as a result of competitions won by the private sector or when in-house organizations require a smaller civilian workforce. Such separation costs include the costs of voluntary early retirement, voluntary separation incentives, and involuntary separations through reduction-in-force procedures. The President's Budget for Fiscal Year 2001 included for the first time all Defense components' estimated costs of implementing A-76 competitions and showed a total of about $1 billion in transition costs resulting from A-76 studies for fiscal years 1997-2005. Selecting and grouping functions and positions to compete can be difficult. Because most services faced growing difficulties in or resistance to finding enough study candidates to meet their A-76 study goals, DOD approved strategic sourcing as a way to complement its A-76 program. The Navy, for instance, had planned to announce 15,000 positions for study under A-76 in fiscal year 1998 but announced only 8,980 (about 60 percent). The following year it planned to announce 20,000 positions but announced 10,807 (about 54 percent). Although DOD's FAIR Act inventory in 2000 identified commercial functions involving about 450,000 civilian positions, including about 260,000 associated with functions considered potentially eligible for competition, DOD does not expect to study all these functions. It remains to be seen to what extent the Department will significantly increase the number of functions it studies under A-76 in the near future. Department officials told us that the process identified few new functions and associated positions that could be studied under A-76 and that the increases in positions identified did not automatically translate into potentially large numbers of additional studies. The number of positions that will actually be studied for possible competition may be limited by a number of factors, including the following: Some activities are widely dispersed geographically. Having positions associated with commercial activities that are scattered over many locations may prevent some of them from being grouped for competition. Some work categorized as commercial may not be separated from inherently governmental or exempted work. In some cases, commercial activities classified as subject to competition are in activities that also contain work that is inherently governmental or exempt from competition, and the commercial workload may not always be separable from the workload performed by the exempted positions. Resources to conduct A-76 studies are limited. Officials of several military service commands have told us that they already have aggressive competition programs under way and that they lack sufficient resources and staff to conduct more competition studies in the near future. Even before it developed its FAIR Act inventory, DOD had already established goals for positions that the services and the Defense agencies should study and the savings to be achieved. For the most part, the services and Defense agencies delegated to their components responsibility for determining which functions to study. DOD then fell behind in its initial timetable for initiating and completing A-76 studies. Service officials told us that they had already identified as many competition opportunities as they could to meet savings goals under the A-76 program, and they believed that their capacity to conduct studies beyond those already underway or planned over the next few years was limited. Difficulties encountered in identifying A-76 study candidates, and in launching and completing the studies in the time frames initially projected, along with greater than expected costs associated with completing the studies, have led to concerns among various service officials about their ability to meet previously established savings targets. Some Defense officials have also voiced uncertainties over cost estimates and savings associated with strategic sourcing and the lack of a rigorous basis for projecting savings from this effort. Data included in the President's fiscal year 2001 budget submission indicated that the Navy estimated that study costs and savings generated by strategic sourcing efforts would be virtually the same as those generated by A-76 studies for each position studied. Office of the Secretary of Defense officials have noted there is a wide variation in the types of initiatives that make up strategic sourcing and, consequently, that there can be wide variation in the resultant savings. These uncertainties led us to previously recommend that DOD periodically determine whether savings are being realized in line with the reductions in operating accounts that are based on projected savings. Increasing emphasis on A-76 has served to underscore concerns expressed by both government employees and industry about the process. Federal managers and others have been concerned about organizational turbulence that typically follows the announcement of A-76 studies. Government workers have been concerned about the impact of competition on their jobs, their opportunity for input into the competitive process, and the lack of parity with industry offerors to appeal A-76 decisions. Industry representatives have complained about the fairness of the process and the lack of a "level playing field" between the government and the private sector in accounting for costs. It appears that everyone involved is concerned about the time required to complete the studies. Amid these concerns over the A-76 process, the Congress enacted section 832 of the National Defense Authorization Act for Fiscal Year 2001. The legislation required the Comptroller General to convene a panel of experts to study the policies and procedures governing the transfer of commercial activities for the federal government from government personnel to a federal contractor. The Panel, which Comptroller General David Walker has elected to chair, includes senior officials from DOD, private industry, federal labor organizations, and OMB. Among other issues, the Panel will be reviewing the A-76 process and implementation of the FAIR Act. The Panel had its first meeting on May 8, 2001, and its first public hearing on June 11. At the hearing, over 40 individuals representing a wide spectrum of perspectives presented their views. The Panel currently plans to hold two additional hearings, on August 8 in Indianapolis, Indiana, and on August 15 in San Antonio, Texas. The hearing in San Antonio will specifically address OMB Circular A-76, focusing on what works and what does not in the use of that process. The hearing in Indianapolis will explore various alternatives to the use of A-76 in making sourcing decisions at the federal, state, and local levels. The Panel is required to report its findings and recommendations to the Congress by May 1, 2002. This concludes my statement. I would be pleased to answer any questions you or other members of the Subcommittee may have at this time. For further contacts regarding this statement, please contact Barry W. Holman at (202) 512-8412 or Marilyn Wasleski at (202) 512-8436. Individuals making key contributions to this statement include Debra McKinney, Stefano Petrucci, Thaddeus Rytel, Nancy Lively, Bill Woods, John Brosnan, and Stephanie May. DOD Competitive Sourcing: Effects of A-76 Studies on Federal Employees' Employment, Pay, and Benefits Vary (GAO-01-388, Mar. 16, 2001). DOD Competitive Sourcing: Results of A-76 Studies Over the Past 5 Years (GAO-01-20, Dec. 7, 2000). DOD Competitive Sourcing: More Consistency Needed in Identifying Commercial Activities (GAO/NSIAD-00-198, Aug. 11, 2000). DOD Competitive Sourcing: Savings Are Occurring, but Actions Are Needed to Improve Accuracy of Savings Estimates (GAO/NSIAD-00-107, Aug. 8, 2000). DOD Competitive Sourcing: Some Progress, but Continuing Challenges Remain in Meeting Program Goals (GAO/NSIAD-00-106, Aug. 8, 2000). Competitive Contracting: The Understandability of FAIR Act Inventories Was Limited (GAO/GGD-00-68, Apr. 14, 2000). DOD Competitive Sourcing: Potential Impact on Emergency Response Operations at Chemical Storage Facilities Is Minimal (GAO/NSIAD-00-88, Mar. 28, 2000). DOD Competitive Sourcing: Plan Needed to Mitigate Risks in Army Logistics Modernization Program (GAO/NSIAD-00-19, Oct. 04, 1999). DOD Competitive Sourcing: Air Force Reserve Command A-76 Competitions (GAO/NSIAD-99-235R, Sept. 13, 1999). DOD Competitive Sourcing: Lessons Learned System Could Enhance A-76 Study Process (GAO/NSIAD-99-152, July 21, 1999). Defense Reform Initiative: Organization, Status, and Challenges (GAO/NSIAD-99-87, Apr. 21, 1999). Quadrennial Defense Review: Status of Efforts to Implement Personnel Reductions in the Army Materiel Command (GAO/NSIAD-99-123, Mar. 31, 1999). Defense Reform Initiative: Progress, Opportunities, and Challenges (GAO/T-NSIAD-99-95, Mar. 2, 1999). Force Structure: A-76 Not Applicable to Air Force 38th Engineering Installation Wing Plan (GAO/NSIAD-99-73, Feb. 26, 1999). Future Years Defense Program: How Savings From Reform Initiatives Affect DOD's 1999-2003 Program (GAO/NSIAD-99-66, Feb. 25, 1999). DOD Competitive Sourcing: Results of Recent Competitions (GAO/NSIAD-99-44, Feb. 23, 1999). DOD Competitive Sourcing: Questions About Goals, Pace, and Risks of Key Reform Initiative (GAO/NSIAD-99-46, Feb. 22, 1999). OMB Circular A-76: Oversight and Implementation Issues (GAO/T-GGD-98-146, June 4, 1998). Quadrennial Defense Review: Some Personnel Cuts and Associated Savings May Not Be Achieved (GAO/NSIAD-98-100, Apr. 30, 1998). Competitive Contracting: Information Related to the Redrafts of the Freedom From Government Competition Act (GAO/GGD/NSIAD-98-167R, Apr. 27, 1998). Defense Outsourcing: Impact on Navy Sea-Shore Rotations (GAO/NSIAD-98-107, Apr. 21, 1998). Defense Infrastructure: Challenges Facing DOD in Implementing Defense Reform Initiatives (GAO/T-NSIAD-98-115, Mar. 18, 1998). Defense Management: Challenges Facing DOD in Implementing Defense Reform Initiatives (GAO/T-NSIAD/AIMD-98-122, Mar. 13, 1998). Base Operations: DOD's Use of Single Contracts for Multiple Support Services (GAO/NSIAD-98-82, Feb. 27, 1998). Defense Outsourcing: Better Data Needed to Support Overhead Rates for A-76 Studies (GAO/NSIAD-98-62, Feb. 27, 1998). Outsourcing DOD Logistics: Savings Achievable But Defense Science Board's Projections Are Overstated (GAO/NSIAD-98-48, Dec. 8, 1997). Financial Management: Outsourcing of Finance and Accounting Functions (GAO/AIMD/NSIAD-98-43, Oct. 17, 1997).
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This testimony discusses the Department of Defense's (DOD) use of the Office of Management and Budget's Circular A-76, which establishes federal policy for the performance of recurring commercial activities. DOD has been a leader among federal agencies in the use of the A-76 process and at one point planned to use the process to study more than 200,000 positions over several years. However, the number of positions planned for study has changed over time and the Department recently augmented its A-76 program with what it terms strategic sourcing. DOD has saved money through the A-76 process primarily by reducing the number of in-house positions. Yet, GAO has repeatedly found that it is extremely difficult to measure the precise amount of savings because available data has been limited and inconsistent. The lessons learned from DOD's A-76 program include the following: (1) studies have generally taken longer than initially expected, (2) studies have generally required higher costs and resources than initially projected, (3) finding and selecting functions to compete can be difficult, and (4) making premature budget cuts on the assumption of projected savings can be risky. Both government groups and the private sector have expressed concerns about the fairness, adequacy, costs, and timeliness of the A-76 process.
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As part of our undercover investigation, we produced counterfeit documents before sending our two teams of investigators out to the field. We found two NRC documents and a few examples of the documents by searching the Internet. We subsequently used commercial, off-the-shelf computer software to produce two counterfeit NRC documents authorizing the individual to receive, acquire, possess, and transfer radioactive sources. To support our investigators' purported reason for having radioactive sources in their possession when making their simultaneous border crossings, a GAO graphic artist designed a logo for our fictitious company and produced a bill of lading using computer software. Our two teams of investigators each transported an amount of radioactive sources sufficient to manufacture a dirty bomb when making their recent, simultaneous border crossings. In support of our earlier work, we had obtained an NRC document and had purchased radioactive sources as well as two containers to store and transport the material. For the purposes of our current undercover investigation, we purchased a small amount of radioactive sources and one container for storing and transporting the material from a commercial source over the telephone. One of our investigators, posing as an employee of a fictitious company, stated that the purpose of his purchase was to use the radioactive sources to calibrate personal radiation detectors. Suppliers are not required to exercise any due diligence in determining whether the buyer has a legitimate use for the radioactive sources, nor are suppliers required to ask the buyer to produce an NRC document when making purchases in small quantities. The amount of radioactive sources our investigator sought to purchase did not require an NRC document. The company mailed the radioactive sources to an address in Washington, D.C. On December 14, 2005, our investigators placed two containers of radioactive sources into the trunk of their rental vehicle. Our investigators - acting in an undercover capacity - drove to an official port of entry between Canada and the United States. They also had in their possession a counterfeit bill of lading in the name of a fictitious company and a counterfeit NRC document. At the primary checkpoint, our investigators were signaled to drive through the radiation portal monitors and to meet the CBP inspector at the booth for their primary inspection. As our investigators drove past the radiation portal monitors and approached the primary checkpoint booth, they observed the CBP inspector look down and reach to his right side of his booth. Our investigators assumed that the radiation portal monitors had activated and signaled the presence of radioactive sources. The CBP inspector asked our investigators for identification and asked them where they lived. One of our investigators on the two-man undercover team handed the CBP inspector both of their passports and told him that he lived in Maryland while the second investigator told the CBP inspector that he lived in Virginia. The CBP inspector also asked our investigators to identify what they were transporting in their vehicle. One of our investigators told the CBP inspector that they were transporting specialized equipment back to the United States. A second CBP inspector, who had come over to assist the first inspector, asked what else our investigators were transporting. One of our investigators told the CBP inspectors that they were transporting radioactive sources for the specialized equipment. The CBP inspector in the primary checkpoint booth appeared to be writing down the information. Our investigators were then directed to park in a secondary inspection zone, while the CBP inspector conducted further inspections of the vehicle. During the secondary inspection, our investigators told the CBP inspector that they had an NRC document and a bill of lading for the radioactive sources. The CBP inspector asked if he could make copies of our investigators' counterfeit bill of lading on letterhead stationery as well as their counterfeit NRC document. Although the CBP inspector took the documents to the copier, our investigators did not observe him retrieving any copies from the copier. Our investigators watched the CBP inspector use a handheld Radiation Isotope Identifier Device (RIID), which he said is used to identify the source of radioactive sources, to examine the investigators' vehicle. He told our investigators that he had to perform additional inspections. After determining that the investigators were not transporting additional sources of radiation, the CBP inspector made copies of our investigators' drivers' licenses, returned their drivers' licenses to them, and our investigators were then allowed to enter the United States. At no time did the CBP inspector question the validity of the counterfeit bill of lading or the counterfeit NRC document. On December 14, 2005, our investigators placed two containers of radioactive sources into the trunk of their vehicle. Our investigators drove to an official port of entry at the southern border. They also had in their possession a counterfeit bill of lading in the name of a fictitious company and a counterfeit NRC document. At the primary checkpoint, our two-person undercover team was signaled by means of a traffic light signal to drive through the radiation portal monitors and stopped at the primary checkpoint for their primary inspection. As our investigators drove past the portal monitors and approached the primary checkpoint, they observed that the CBP inspector remained in the primary checkpoint for several moments prior to approaching our investigators' vehicle. Our investigators assumed that the radiation portal monitors had activated and signaled the presence of radioactive sources. The CBP inspector asked our investigators for identification and asked them if they were American citizens. Our investigators told the CBP inspector that they were both American citizens and handed him their state-issued drivers' licenses. The CBP inspector also asked our investigators about the purpose of their trip to Mexico and asked whether they were bringing anything into the United States from Mexico. Our investigators told the CBP inspector that they were returning from a business trip in Mexico and were not bringing anything into the United States from Mexico. While our investigators remained inside their vehicle, the CBP inspector used what appeared to be a RIID to scan the outside of the vehicle. One of our investigators told him that they were transporting specialized equipment. The CBP inspector asked one of our investigators to open the trunk of the rental vehicle and to show him the specialized equipment. Our investigator told the CBP inspector that they were transporting radioactive sources in addition to the specialized equipment. The primary CBP inspector then directed our investigators to park in a secondary inspection zone for further inspection. During the secondary inspection, the CBP inspector said he needed to verify the type of material our investigators were transporting, and another CBP inspector approached with what appeared to be a RIID to scan the cardboard boxes where the radioactive sources was placed. The instrumentation confirmed the presence of radioactive sources. When asked again about the purpose of their visit to Mexico, one of our investigators told the CBP inspector that they had used the radioactive sources in a demonstration designed to secure additional business for their company. The CBP inspector asked for paperwork authorizing them to transport the equipment to Mexico. One of our investigators provided the counterfeit bill of lading on letterhead stationery, as well as their counterfeit NRC document. The CBP inspector took the paperwork provided by our investigators and walked into the CBP station. He returned several minutes later and returned the paperwork. At no time did the CBP inspector question the validity of the counterfeit bill of lading or the counterfeit NRC document. We conducted corrective action briefings with CBP and NRC officials shortly after completing our undercover operations. On December 21, 2005, we briefed CBP officials about the results of our border crossing tests. CBP officials agreed to work with the NRC and CBP's Laboratories and Scientific Services to come up with a way to verify the authenticity of NRC materials documents. We conducted two corrective action briefings with NRC officials on January 12 and January 24, 2006, about the results of our border crossing tests. NRC officials disagreed with the amount of radioactive material we determined was needed to produce a dirty bomb, noting that NRC's "concern threshold" is significantly higher. We continue to believe that our purchase of radioactive sources and our ability to counterfeit an NRC document are matters that NRC should address. We could have purchased all of the radioactive sources used in our two undercover border crossings by making multiple purchases from different suppliers, using similarly convincing cover stories, using false identities, and had all of the radioactive sources conveniently shipped to our nation's capital. Further, we believe that the amount of radioactive sources that we were able to transport into the United States during our operation would be sufficient to produce two dirty bombs, which could be used as weapons of mass disruption. Finally, NRC officials told us that they are aware of the potential problems of counterfeiting documents and that they are working to resolve these issues. Mr. Chairman and Members of the Subcommittee, this concludes my statement. I would be pleased to answer any questions that you or other members of the committee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-7455 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. 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 address the threat of dirty bombs and other nuclear material, the federal government has programs in place that regulate the transportation of radioactive sources and to prevent illegal transport of radioactive sources across our nation's borders. The Department of Homeland Security through the U.S. Customs and Border Protection (CBP) uses radiation detection equipment at ports of entry to prevent such illicit entry of radioactive sources. The goal of CBP's inspection program is to "...thwart the operations of terrorist organizations by detecting, disrupting, and preventing the cross-border travel of terrorists, terrorist funding, and terrorist implements, including Weapons of Mass Destruction and their precursors." Deploying radiation detection equipment is part of CBP's strategy for thwarting radiological terrorism and CBP is using a range of such equipment to meet its goal of screening all cargo, vehicles, and individuals coming into the United States. Most travelers enter the United States through the nation's 154 land border ports of entry. CBP inspectors at ports of entry are responsible for the primary inspection of travelers to determine their admissibility into the United States and to enforce laws related to preventing the entry of contraband, such as drugs and weapons of mass destruction. Our investigation was conducted at Congressional request as a result of widespread congressional and public interest in the security of our nation's borders, given today's unprecedented terrorism threat environment. Our investigation was conducted under the premise that given today's security environment, our nation's borders must be protected from the smuggling of radioactive sources by terrorists. For the purposes of this undercover investigation, we purchased a small amount of radioactive sources and one container used to store and transport the material from a commercial source over the telephone. One of our investigators, posing as an employee of a fictitious company located in Washington, D.C., stated that the purpose of his purchase was to use the radioactive sources to calibrate personal radiation detection pagers. The purchase was not challenged because suppliers are not required to determine whether a buyer has a legitimate use for the radioactive sources, nor are suppliers required to ask the buyer to produce an NRC document when making purchases in small quantities. The radiation portal monitors properly signaled the presence of radioactive material when our two teams of investigators conducted simultaneous border crossings. Our investigators' vehicles were inspected in accordance with most of the CBP policy at both the northern and southern borders. However, our investigators were able to enter the United States with enough radioactive sources to make two dirty bombs using counterfeit documents. Specifically, they were able to successfully represent themselves as employees of a fictitious company and present a counterfeit bill of lading and a counterfeit NRC document during the secondary inspections at both locations. The CBP inspectors never questioned the authenticity of the investigators' counterfeit bill of lading or the counterfeit NRC document authorizing them to receive, acquire, possess, and transfer radioactive sources.
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The United States is engaged in a comprehensive effort to protect and defend the homeland and defeat terrorism. Using all instruments of national power, the United States and its partners are attacking terrorists both at home and abroad, denying terrorists sanctuary and sponsorship, disrupting the financing of terror, and building and maintaining a united global front against terrorism. After the terrorist attacks of September 11, 2001, military operations began with Operation Noble Eagle, which is aimed at defending the U.S. homeland from terrorist attacks, and Operation Enduring Freedom, which takes place principally in and around Afghanistan, but also covers additional operations in the Horn of Africa, the Philippines, and elsewhere. In 2003, DOD began Operation Iraqi Freedom, which takes place in and around Iraq. DOD and the military services are responsible for carrying out these operations. Recently, DOD reported about 132,000 U.S. military personnel are deployed to Iraq and about 15,000 are deployed to Afghanistan. Diplomatic efforts are also underway to rebuild areas in and around Iraq and Afghanistan, as well as to assist these countries in rebuilding their governments and creating secure nations. State is responsible for all U.S. activities in Iraq except security and military operations. Other U.S. government agencies also play significant roles in this reconstruction effort, including the USAID and the U.S. Army Corps of Engineers. The Multi-National Security Transition Command-Iraq, which operates under the Multi-National Force-Iraq, leads coalition efforts to train, equip, and organize Iraqi security forces. In Afghanistan, USAID manages the majority of reconstruction programs and operations. Other U.S. agencies provide additional assistance, including DOD. Members of the North Atlantic Treaty Organization also play a key role in training and equipping Afghan forces. Since 2001, DOD has prepared reports on the costs of its involvement in GWOT. The costs of military contingency operations are referred to as "incremental costs," which are costs that are directly attributable to the operation and would not otherwise have been incurred, were it not for the operation. Specifically, the costs are above and beyond baseline training, operations, and personnel costs. Incremental costs include the pay of mobilized reservists as well as the special pays and allowances for deployed personnel, such as imminent danger pay and foreign duty pay for those personnel serving in Operation Iraqi Freedom and Operation Enduring Freedom; the cost of transporting personnel and materiel to the theater of operation and supporting them upon arrival; and the operating cost of equipment, such as vehicles and aircraft, among many other costs. Costs that are incurred regardless of whether there is a contingency operation, such as the base pay of active duty military personnel, are not considered incremental. DOD tracks the obligations incurred to support GWOT and produces a monthly cost report, which is distributed throughout the department and used by senior DOD leadership, along with other information, in discussing the cost of the war. It is also used in formulating future budget requests to fund GWOT. The report identifies the monthly and cumulative incremental GWOT obligations. DOD reports the costs by service, defense agency, contingency operation, and appropriation. On October 1, 1998, DOD implemented a standard contingency cost breakdown structure consisting of 55 cost categories to improve contingency cost reporting consistency between its multiple services and agencies. Examples of cost categories include facilities/base support and airlift. Furthermore, this cost breakdown structure was also to facilitate future efforts to understand and interpret differences between estimated and actual costs. DOD Financial Management Regulation 7000.14-R, volume 12, chapter 23, generally establishes financial policy and procedures related to DOD contingency operations. The regulation incorporates the common cost categories and multiple subcategories, which were established in 1998 and updated in September 2005, that are used to report DOD's monthly GWOT costs. Obligations are the foundation of all GWOT cost reporting. For example, operation and maintenance obligations in support of GWOT represent tens of thousands, if not hundreds of thousands, of individual transactions ranging in value from one penny to millions of dollars. When obligations are incurred, the military services enter them into their accounting systems using accounting codes. Using the Army as an example, an Army budget activity, such as an installation or unit, initially obligates funds for acquired goods and services by using the Standard Army Accounting Classification Code. An obligation entry includes information on the funding source; the operational mission, such as Operation Iraqi Freedom; and the category of cost. The cost categories are established by the services. Since 2001, Congress has appropriated about $430 billion to DOD and other U.S. government agencies for military operations and reconstruction and stabilization activities supporting GWOT. Much of the funding has come in the form of supplemental appropriations. Some funding has also come through the normal baseline budget appropriated to the departments. For example, in fiscal years 2005 and 2006, DOD was provided so-called "bridge" funding--$25 billion and $50 billion, respectively--through its regular appropriation, which was intended to fund operations from the beginning of the fiscal year until a supplemental appropriation could be enacted. Also, funds are appropriated to the various appropriations accounts for each department and are not specifically designated for operations in Iraq or Afghanistan. Since September 2001, DOD has received about $386 billion to fund military operations supporting GWOT. In addition, about $44 billion has been made available to U.S. agencies--including DOD, USAID, and State--for reconstruction and stabilization efforts in Iraq ($34.5 billion) and Afghanistan ($9 billion) with an additional $400 million for use in Iraq and Afghanistan through the Commander's Emergency Response Program. These efforts include training and equipping of security forces and repairing critical infrastructure. (See table 1.) For fiscal year 2007, DOD has requested another $50 billion in bridge funding for military operations and other U.S. government agencies have requested $771 million for reconstruction and stabilization activities. The $386 billion DOD has received to fund military operations supporting GWOT also includes funding for homeland defense under Operation Noble Eagle. This operation was funded through supplemental appropriations for DOD until fiscal year 2005, when it was moved into DOD's baseline budget. This movement is consistent with our prior suggestion that, once an operation reaches a known level of effort and costs are more predictable, more funding should be built into the baseline budget. This $386 billion also includes funding for DOD's intelligence programs, as well as other DOD initiatives, such as the Army's efforts to transform its traditional division-based force into a more rapidly deployable modular force that is better able to conduct joint and expeditionary operations. Beginning in fiscal year 2007, the Army's modular transformation will be included in DOD's regular baseline appropriation. Prior to passage of the most recent supplemental appropriation, military service officials told us that they had already spent the $50 billion bridge that was included in the fiscal year 2006 defense appropriations act and had started to use baseline appropriations for GWOT activities, as well as undertake cost-cutting measures until the supplemental was enacted. DOD has requested another $50 billion in bridge funding as part of its fiscal year 2007 budget. In addition to the funding provided to support military operations, Congress has appropriated about $44 billion to DOD and other U.S. government agencies to support important reconstruction and stabilization activities in Iraq and Afghanistan since 2001. These activities support GWOT objectives because they help train and equip local security forces, and help establish the foundations of a sound economy with the capacity to deliver essential services, such as clean water and reliable electricity. A growing economy also provides employment opportunities as an alternative to recruitment efforts made by insurgents. Since 2003, about $34.5 billion has been provided to support these types of activities in Iraq and, since September 2001, about $9 billion to support these activities in Afghanistan. The recent supplemental appropriation also provided an additional $400 million for the Commander's Emergency Response Program for use in Iraq and Afghanistan. This would bring total reconstruction and stabilization funding to over $44 billion. Funding for reconstruction and stabilization efforts has supported the following activities, among others: Training and equipping of Iraqi security forces. Since fiscal year 2003, about $11.7 billion has been made available for U.S. security and justice programs in Iraq, including funds to train and equip the Iraqi security forces. Over the past several months, the Secretaries of State and Defense have cited progress in developing Iraqi security forces, and reported that the numbers of operational army personnel and trained and equipped police have increased from about 142,000 in March 2005 to about 266,000 in June 2006. However, as we have previously reported, the number of trained and equipped forces does not provide reliable information on their capabilities. In addition, the administration received $3.0 billion in the recent fiscal year 2006 supplemental appropriation to continue moving the Iraqi security forces toward stand-alone operational capacity. Restoring Iraq's essential services. Since fiscal year 2003, about $10.5 billion has been made available for restoring essential services in Iraq, specifically activities in the oil, water, health, and electricity sectors. U.S. reconstruction efforts have helped increase electricity generation capacity, restart crude oil production, and restore some water treatment plants. However, key reconstruction goals in the oil, electricity, and water sector have yet to be achieved due to security, management, and sustainment challenges in U.S.-funded projects. The administration received an additional $1.5 billion in the recent supplemental appropriation for reconstruction assistance to Iraq, including $50 million to USAID's Iraq Community Action Program and $50 million for democracy, rule of law, and reconciliation programs. Training and equipping the Afghan national army. The United States led the international effort to train and equip the Afghan national army, which is crucial to both long-term security and U.S. counter- terror efforts. About 26,500 troops have been trained and equipped and the defense force is projected to reach up to 70,000 military and civilian personnel, according to State reporting. The administration has received $1.9 billion in the fiscal year 2006 supplemental appropriation to further prepare Afghan security forces to operate without U.S. support. The U.S. government also funds a variety of other programs that indirectly support GWOT. For example, Congress provides funding for security assistance on a worldwide basis to help train or equip foreign security forces (military and police). In fiscal year 2006, Congress provided an estimated $4.5 billion for two security assistance programs, the International Military Education and Training program and Foreign Military Financing program. In addition, the U.S. government reported costs of $1.2 billion on worldwide public diplomacy programs in fiscal year 2005. Since GWOT began in 2001, U.S. government agencies have reported hundreds of billions of dollars in costs for overseas military and reconstruction operations; however, as we have previously reported, data reliability and reporting concerns make it difficult to know DOD's total GWOT costs. Since 2001, DOD has reported costs of about $273 billion on overseas GWOT military operations through the end of April 2006. The department's reported costs have grown steadily from a reported about $105 million in fiscal year 2001, to begin preparations for operations in Afghanistan, to over $81.5 billion in fiscal year 2005. U.S government agencies have reported costs of about $23 billion for Iraqi reconstruction and stabilization. However, U.S. government agencies, other than DOD, do not formally track all GWOT costs. This, along with DOD's cost reliability and reporting problems, make it difficult for the decision makers to reliably know how much the war is costing, to determine how appropriated funds are being spent, and to use historical data to predict future trends. Since the attacks of September 11, 2001, DOD has reported cumulative incremental costs of about $273 billion, through the end of April 2006, on military operations overseas in support of GWOT. This amount includes almost $215 billion for operations in Iraq and almost $58 billion on operations in Afghanistan, the Horn of Africa, the Philippines, and elsewhere. This does not include obligations for intelligence activities and the Army's modular force transformation. The difference between the amount appropriated and DOD's reported costs through April 2006 can generally be attributed to these unreported obligations for intelligence and Army modular force transformation, as well as funding for procurement, military construction, and research, development, test, and evaluation, which can be obligated over multiple years, that has not yet been obligated. In addition to the costs for overseas operations, DOD has also reported obligations of $27.7 billion through April 2006 for operations in defense of the homeland U.S., under Operation Noble Eagle. To date, the largest reported costs for the overseas GWOT operations have typically been associated with two of DOD's appropriations accounts-- operation and maintenance and military personnel. Operation and maintenance expenses cover a number of things, such as operational support for housing, food, and services; transportation to move people and supplies and equipment into the theaters; and the repair of equipment. Military personnel expenses include military pay and allowances for mobilized reservists, as well as the special payments or allowances, such as imminent danger pay and the family separation allowance that all qualifying military personnel receive. While expenses for operation and maintenance, and military personnel have tended to be among the highest, DOD has also reported incurring costs for procurement of equipment and other items. As we have reported in the past, we have significant concerns about the overall reliability of DOD's reported cost data. As a result, neither DOD nor Congress can reliably know how much the war is costing. As we reported in September 2005, we found numerous problems with DOD's processes for recording and reporting costs for GWOT. Factors affecting the reliability of DOD's reported costs include long-standing deficiencies in DOD's financial management systems and business processes, the use of estimates instead of actual costs, and the lack of supporting documentation. In at least one case, our work showed that some reported costs may have been materially overstated. Specifically, reported obligations for mobilized Army reservists in fiscal year 2004 were based primarily on estimated rather than actual information and differed from related payroll information by as much as $2.1 billion, or 30 percent of the amount DOD reported in its cost report. In addition, we found inadvertent double counting in a portion of DOD's reported costs amounting to almost $1.8 billion from November 2004 through April 2005. In our September 2005 report, we made several recommendations to the Secretary of Defense to (1) undertake a series of steps to ensure that the services' reported GWOT costs are accurate and reliable; (2) direct the Office of the Under Secretary of Defense (Comptroller) to oversee the services' efforts and to develop a systematic process to review and test the reliability of the overall GWOT reports; (3) expand the department's financial management regulation for contingency operations to include contingencies as large as GWOT; and (4) establish guidelines to control costs and require the services to keep the Comptroller's office informed of their efforts in this area. Since the time of our report, we know that DOD has taken some measures in response to our recommendations intended to improve the reliability and accuracy of its cost reports, such as requiring the military services to identify variances in reported costs from month to month, and determine the causes. However, our initial review suggests that DOD and the services have yet to take sufficient action to fully implement these measures and that certain weaknesses in cost reporting continue to exist. Without aggressive action on the part of DOD and the services, the reliability of cost reports will remain in question. Also, there has been an ongoing issue with the timeliness of DOD's cost reporting. For example, the cost reports for October through December 2005 were not issued until March 2006. To address this long-standing problem, Congress, in the National Defense Authorization Act for Fiscal Year 2006, directed that DOD provide the cost reports to GAO no later than 45 days after the end of the month being reported. DOD has now provided GAO with the March and April cost reports on schedule. DOD's reported costs for GWOT operations have grown steadily in each fiscal year through fiscal year 2005--from about $105 million in fiscal year 2001 to about $81.5 billion in fiscal year 2005. For fiscal year 2006, as of April 2006, DOD has reported obligations of about $49 billion; about $41.9 billion for Iraq and about $7.5 billion for Afghanistan. These amounts include about $22.5 billion in operating support, which pays for transportation, fuel, maintenance, housing, food, services, and other items; $5.3 billion for procurement of equipment and other items; $9.9 billion in military personnel costs, including special pays and allowances for deployed military personnel; $2.9 billion for personnel support, including clothing and medical $4.0 billion for transportation, including airlift and sealift; $2.6 billion in support for the Iraq Security Forces; $813 million for the Afghanistan Security Forces; and, $474 million in support of coalition forces. Costs for the remainder of fiscal year 2006 are expected to be higher than DOD anticipated, in part because the Army has been unable to follow through with plans to close a number of forward operating bases and consolidate troops at some of the larger locations. Also, savings resulting from a United States and coalition hand-off of operations in Afghanistan to troops from nations representing the North Atlantic Treaty Organization is not expected to be realized until after fiscal year 2007. Furthermore, the rising cost of fuel is likely to push costs even higher than envisioned at the start of the fiscal year. In examining the historical growth of reported overseas GWOT costs, the largest increase has been in operations and maintenance expenses. For example, between fiscal year 2002 and fiscal year 2005, DOD has reported increases in these expenses from about $7.6 billion to about $48.7 billion. According to DOD, some of this increase is attributable to higher fuel costs and increased operational support costs for contracts to provide housing, food, and services for the military locations in Iraq and Afghanistan. For the same time frames, reported obligations for military personnel have increased from about $3.4 billion to about $14.9 billion, and reported procurement obligations have increased from $0 to about $16.5 billion. With the steady growth in reported GWOT costs, we believe there is a need to ensure that all commands seek to control costs to the extent possible. As we reported in September 2005, individual commands have taken steps to control costs and DOD policy generally advises its officials of their financial management responsibilities to ensure the prudent use of contingency funding. However, DOD has not established guidelines that would require commands to take steps to control costs and keep DOD informed of these steps as we recommended in our prior report. In the absence of such guidelines and reports, DOD cannot be sure that enough is being done to control costs. U. S. government agencies have reported obligating $23 billion for Iraqi reconstruction and stabilization, as of January 2006. However, U.S. government agencies, other than DOD, do not formally track all GWOT costs. Among other uses, these funds have been used for infrastructure repair of the electricity, oil, water, and health sectors; training and equipping of Iraqi security forces (military and police); and administrative expenses. State reports that the remaining funds will not be used for large reconstruction projects, but to sustain the projects that have already been built and to build greater capacity at the national, provincial, and municipal levels for better and more responsive governments. It appears the United State's military and diplomatic commitments in Iraq and Afghanistan will continue for the foreseeable future and are likely to be in the hundreds of billions of dollars. However, costs are difficult to predict because they depend on several direct and indirect cost variables. DOD's future costs will likely be affected by the pace and duration of military operations, the types of facilities needed to support troops overseas, force redeployment plans, and the amount of damaged or destroyed equipment that will need to be repaired or replaced. Other future costs to the U.S. government include nation-building and reconstruction efforts and treating injured GWOT veterans. These costs will require administration decision makers and Congress to consider difficult trade-offs as the nation faces increasing fiscal challenges in the years ahead. The future costs associated with DOD's commitments to GWOT depend on several variables, including (1) the extent and duration of operations, (2) the types of facilities that will be required to support troops overseas, and (3) the amount of equipment that will need to be restored or replaced. As DOD has done with Operation Noble Eagle, we would encourage the department to consider moving other GWOT costs into the baseline budget. This is consistent with our prior suggestion that, once an operation reaches a known level of effort and costs are more predictable, more funding should be built into the baseline budget. Doing so will assist decision makers in determining investment priorities and making trade-offs among funding needs. It is uncertain how long DOD will be engaged in a high pace of military operations associated with GWOT, making it difficult to predict costs associated with future troop levels and mission requirements. There has also been some discussion of reducing the number of troops in Iraq and Afghanistan. However, DOD officials have not announced information about the level or timing of any troop reduction or redeployment plans. While it would appear that reducing the number of troops in theater could lower costs for these operations, we have seen from previous operations in Bosnia and Kosovo that costs may rise due to the increased use of contractors to replace the military personnel. Bases still have to be maintained, even with fewer military members in them. Also, if the pace of operations remains high because of security concerns or hostilities, costs for force protection, fuel, and other items could remain high. The United States does not currently have any basing agreements with Iraq. DOD has constructed facilities in Iraq and neighboring countries supporting missions in both Iraq and Afghanistan. Examples of facilities funded by military construction funds and other appropriations funding include force protection, airfield and road improvements, fuel handling, power and water distribution, and support facilities. The Secretary of Defense recently testified that already some 30 U.S. military bases have been returned to Iraqi control or closed altogether. If the United States decides to enter into agreements with the new governments in Iraq and Afghanistan to have an enduring presence in these countries, costs to make our temporary bases into more permanent facilities could be significant. Sustained GWOT operations have and will continue to take a toll on the condition and readiness of military equipment. The United States faces short-and long-term costs to maintain and restore equipment in theater, as well as reequip units as these missions end and the units return to their home stations. The uncertainties of how long ongoing operations will continue make it difficult to estimate future costs of maintaining and replacing this large amount of equipment. The Army and Marine Corps will have the largest reset costs of the services. DOD has reported Army equipment usage rates have averaged two to eight times those of peacetime rates, while senior Marine Corps officials testified that the ground equipment used by the Corps in ongoing operations has experienced usage rates four to nine times that of peacetime rates. We recently testified that the services are currently funding their reset programs through the use of supplemental appropriations and plan to rely on supplemental appropriations for reset funding through at least fiscal year 2007. According to recent testimony, the Army requirement for reset in fiscal year 2007 is $17.1 billion. The Army expects the requirement beyond fiscal year 2007 to be $12 billion to $13 billion per year through the end of the conflict and for a minimum of two to three years thereafter. In recent testimony, the Marine Corps stated that $11.9 billion is needed to manage the equipment in Operation Iraqi Freedom and Operation Enduring Freedom for fiscal year 2007 and an estimated additional requirement of $5.3 billion for each year that the conflict continues. The uncertainties of pace and duration of ongoing operations as well as the overall condition of major equipment items make it difficult to estimate future equipment reset costs. Equipment used in operations in Iraq will eventually require more intensive repair and overhaul than what is typically expected in peacetime. While the services are working to refine overall requirements, the total requirements and costs are unclear. In addition to resetting a large number of major equipment items, the Army and Marine Corps must also plan to replace active, National Guard, and Reserve equipment left in theater to support ongoing operations. As we previously testified, in late 2003 the Army began to direct redeploying National Guard and Reserve units to leave their equipment in theater for use by deploying forces. DOD policy requires the Army to replace equipment transferred to it from the Reserve Component including temporary withdrawals or loans in excess of 90 days, yet at the time of our report in October 2005, the Army had neither created a mechanism in the early phases of the war to track Guard equipment left in theater nor prepared replacement plans for this equipment, because the practice of leaving equipment behind was intended to be a short-term measure. As of June 2006, only 3 replacement plans have been endorsed by the Secretary of Defense, all to replace National Guard equipment, while 22 plans are in various stages of approval. While the exact dollar estimate for these replacements will not be known until operations in Iraq cease, it will likely cost billions of dollars. Future cost variables for other U.S. government agencies include the efforts to help form national and provincial governments and build management capacity in both Afghanistan and Iraq and build capable and loyal Iraqi and Afghani security forces. Also, there will be further need for funding to restore, sustain, and protect infrastructure. The new Iraqi government will need significant help in building the procurement, financial management, and accountability systems needed to govern and provide basic services to millions of its citizens. In addition, the 18 provincial governments will also require assistance in building management capacity and delivering results to the Iraqi people that make a difference in their daily lives. The costs of sustaining an Iraqi force of 266,000 personnel may require the Iraqi government to spend more money on personnel, maintenance, and equipment than originally anticipated. In addition, the new Iraqi security forces will have recurring training needs, and will need additional assistance in replacing lost or stolen equipment, and in developing improved logistical and sustainment capabilities. While most of the reconstruction money for Iraq has been obligated, additional funds will be needed to finance remaining reconstruction needs, and to restore, sustain, and protect the infrastructure that has been built to date. For example, Iraqi needs are greater than originally anticipated. In the next several years, Iraq will need an estimated $30 billion to reach and sustain oil capacity of 5 million barrels per day, according to industry experts and U.S. officials. For electricity, they will need $20 billion through 2010, according to the Department of Energy's Energy Information Administration. Iraqi budget constraints and limited government managerial capacity limit its ability to contribute to future rebuilding efforts. There is widespread corruption in Iraq. Reconstruction efforts have not taken the risk of corruption into account when assessing the costs of achieving U.S. objectives in Iraq. The International Monetary Fund, the World Bank, Japan, and the European Union officials cite corruption in the oil sector as a special problem. In addition, according to State officials and reporting documents, about 10 percent of refined fuels are diverted to the black market, and about 30 percent of imported fuels are smuggled out of Iraq and sold for a profit. Future international contributions for Iraq may be limited. Most of the U.S. funds have been obligated and about 70 percent of the $13.6 billion in international pledges are in the form of loans. The new U.S. embassy will be costly. The embassy is projected to cost about $592 million, but the full cost of establishing a diplomatic presence across Iraq is still unknown. Additional funds are needed to train and equip Afghan security forces. The United States, other donors, and the new Afghan government face significant challenges to establishing viable Afghan army and police forces. Although DOD and State have not yet prepared official cost estimates, the army and police programs could cost up to $7.2 billion to complete and about $600 million annually to sustain. Moreover, slow progress in resolving other Afghan security problems--the lack of an effective judiciary, the substantial illicit narcotics industry, and the continued presence of armed militias-- threaten to undermine overall progress made toward providing nationwide security and ensuring the stability of the Afghan government. Lastly, one of the variables that can influence how much these efforts will cost the United States is the long-term cost of caring for our veterans. Both improvements in medical care in the field and in body armor have increased the survival rate of those who are seriously injured in combat. However, seriously injured survivors will likely require substantial long- term medical care from the VA, and may require extensive inpatient and home and community-based support services to assist those with traumatic brain injury, spinal cord injury, and other severely disabling conditions. We also know that many servicemembers have been exposed to intense and prolonged combat, which research has shown to be strongly associated with the risk of developing post-traumatic stress disorder. This disorder can occur after experiencing or witnessing a life- threatening event and is the most prevalent mental health disorder resulting from combat. Mental health experts predict that 15 percent or more of the servicemembers returning from operations in Iraq and Afghanistan will develop post-traumatic stress disorder. In addition to an influx of more severely injured patients, the VA health care system will be required to serve large numbers of returning veterans with shorter term, more routine, health care needs. VA has estimated that a little more than 100,000 veterans from operations in Iraq and Afghanistan are currently using VA health care services. VA originally underestimated by 77,000 the number of returning veterans who would use its health care, which in part required the VA to request additional appropriations in both fiscal years 2005 and 2006. Long-term estimates of how many returning veterans will use VA health care and the costs of that care are imprecise for a variety of reasons, including uncertainty about the duration of operations in the theaters as discussed above. But, current levels of usage by returning servicemembers indicate a growing VA health care workload and costs. Furthermore, while we have no clear idea of the magnitude, there will undoubtedly be long-term financial commitments associated with payments to veterans with long- term disabilities. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you and the subcommittee members may have. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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After the terrorist attacks of September 11, 2001, the President announced a Global War on Terrorism (GWOT), requiring the collective instruments of the entire federal government to counter the threat of terrorism. Ongoing military and diplomatic operations overseas, especially in Iraq and Afghanistan, constitute a key part of GWOT. These operations involve a wide variety of activities such as combating insurgents, civil affairs, capacity building, infrastructure reconstruction, and training military forces of other nations. The U.S. has reported substantial costs to date for GWOT related activities and can expect to incur significant costs for an unspecified time in the future, requiring decision makers to consider difficult trade-offs as the nation faces increasing long-range fiscal challenges. GAO has issued several reports on current and future financial commitments required to support GWOT military operations, as well as diplomatic efforts to stabilize and rebuild Iraq. This testimony discusses (1) the funding Congress has appropriated to the Department of Defense (DOD) and other U.S. government agencies for GWOT-related military operations and reconstruction activities since 2001; (2) costs reported for these operations and activities and the reliability of DOD's reported costs, and (3) issues with estimating future U.S. financial commitments associated with continued involvement in GWOT. Since 2001, Congress has appropriated about $430 billion to DOD and other government agencies for military and diplomatic efforts in support of GWOT. This funding has been provided through regular appropriations as well as supplemental appropriations, which are provided outside of the normal budget process. Since September 2001, DOD has received about $386 billion for GWOT military operations. In addition, agencies including the Department of State, DOD, and the Agency for International Development have received since 2001 about $44 billion to fund reconstruction and stabilization programs in Iraq ($34.5 billion) and Afghanistan ($9 billion) and an additional $400 million to be used in both Iraq and Afghanistan. Since 2001, U.S. government agencies have reported significant costs associated with GWOT, but GAO has concerns with the reliability of DOD's reported cost data. Through April 2006, DOD has reported about $273 billion in incremental costs for GWOT-related operations overseas--costs that would not otherwise have been incurred. DOD's reported GWOT costs and appropriated amounts differ generally because DOD's cost reporting does not capture some items such as intelligence and Army modular force transformation. Also, DOD has not yet used funding made available for multiple years, such as procurement and military construction. GAO's prior work found numerous problems with DOD's processes for recording and reporting GWOT costs, including long-standing deficiencies in DOD's financial management systems and business processes, the use of estimates instead of actual cost data, and the lack of adequate supporting documentation. As a result, neither DOD nor the Congress reliably know how much the war is costing and how appropriated funds are being used or have historical data useful in considering future funding needs. GAO made several recommendations to improve the reliability and reporting of GWOT costs. In addition to reported costs for military operations, U.S. agencies have obligated about $23 billion of $30 billion received for Iraqi reconstruction and stabilization, as of January 2006. U.S commitments to GWOT will likely involve the continued investment of significant resources, requiring decision makers to consider difficult trade-offs as the nation faces increasing fiscal challenges in the years ahead; however, predicting future costs is difficult as they depend on several direct and indirect cost variables. For DOD, these include the extent and duration of military operations, force redeployment plans, and the amount of damaged or destroyed equipment needed to be repaired or replaced. Future cost variables for other U.S. government agencies include efforts to help form governments and build capable and loyal security forces in Afghanistan and Iraq, and meet the healthcare needs of veterans, including providing future disability payments and medical services.
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Select agent regulations do not mandate that specific perimeter security controls be present at BSL-4 labs, resulting in a significant difference in perimeter security between the nation's five labs. According to the regulations, each lab must implement a security plan that is sufficient to safeguard select agents against unauthorized access, theft, loss, or release. However, there are no specific perimeter security controls that must be in place at every BSL-4 lab. Although BSL-4 labs may have different levels of inherent risk, we determined that these 15 controls (discussed in more detail in app. I) represent a baseline for strong perimeter security. While three labs had all or nearly all of the key security controls we assessed, our September 2008 report demonstrated that two labs (Labs C and E) had a significant lack of these controls. See table 1 below. Lab C: Lab C had in place only 3 of the 15 key security controls we assessed. The lab was in an urban environment and publicly accessible, with only limited perimeter barriers. During our assessment, we saw a pedestrian access the building housing the lab through the unguarded loading dock entrance. In addition to lacking any perimeter barriers to prevent unauthorized individuals from approaching the lab, Lab C also lacked an active integrated security system. By not having a command and control center or an integrated security system with real-time camera monitoring, the possibility that security officers could detect an intruder entering the perimeter and respond to such an intrusion is greatly reduced. Lab E: Lab E was one of the weakest labs we assessed, with 4 out of the 15 key controls in place. It had only limited camera coverage of the outer perimeter of the facility and the only vehicular barrier consisted of an arm gate that swung across the road. Although the guard houses controlling access to the facility were manned, they appeared antiquated and thus did not portray a strong, professional security infrastructure. The security force charged with protecting the lab was unarmed. Of all the BSL-4 labs we assessed, this was the only lab with an exterior window that could provide direct access to the lab. In lieu of a command and control center, Lab E contracts with an outside company to monitor its alarm in an off- site facility. This potentially impedes response time by emergency responders with an unnecessary layer that would not exist with a command and control center. Since the contracted company is not physically present at the facility, it is not able to ascertain the nature of alarm activation. Furthermore, there is no interfaced security system between alarms and cameras and a lack of real-time monitoring of cameras. Although the presence of the controls we assessed does not automatically ensure a secure perimeter, having most of these controls in place and operating effectively reduces the likelihood of intrusion. As such, we recommended in the September 2008 report that the Director of CDC take action to implement specific perimeter controls for all BSL-4 labs to provide assurance that each lab has a strong perimeter security system in place. As part of this recommendation, we stated that CDC should work with USDA to coordinate its efforts, given that both agencies have the authority to regulate select agents. In its response to the September 2008 report, HHS agreed that perimeter security is an important deterrent against theft of select agents. HHS indicated that the difference in perimeter security at the five labs was the result of risk-based planning; however, they did not comment on the specific vulnerabilities we identified and whether these should be addressed. In regard to requiring specific perimeter controls for all BSL-4 labs, HHS stated that it would perform further study and outreach to determine whether additional federal regulations are needed. Significant perimeter security differences continue to exist among the nation's five BSL-4 labs operational at the time of our most recent assessment. In our July 2009 report, we stated that CDC has taken limited steps to address our recommendation that it should take action to implement specific perimeter security controls for all BSL-4 labs. CDC stated that the following actions have been taken as of May 2009: In late 2007, CDC, along with other federal agencies, established a U.S. Government Trans-Federal Task Force on Optimizing Biosafety and Biocontainment Oversight. The task force was formed to assess the current framework for local and federal oversight of high-containment laboratory research activities and facilities, including the identification and assessment of pertinent laws, regulations, policies, guidelines, and examination of the current state of biosafety oversight systems. The task force held a public consultation meeting in December 2008. According to CDC, the task force will communicate specific recommendations about the nation's lab safety and security issues to the Secretaries of both HHS and USDA. CDC and USDA hosted a workshop series in Greenbelt, Maryland, in December 2008 for all of their registered entities and partners. CDC stated that it included several safety and security topics, including discussion of physical security and operational security. In January 2009, in response to Executive Order 13486, a federal working group (WG) was convened to review current laws, regulations, and guidelines in place to prevent theft, misuse, or diversion to unlawful activity of select agents and toxins. The WG is chaired by HHS and the Department of Defense (DOD) and includes representatives from several federal agencies and includes a subgroup that is focused on physical and facility security of biolabs. The WG is expected to issue its final report to the President. Although CDC has taken some modest steps for studying how to improve perimeter security controls for all BSL-4 labs, CDC has not established a detailed plan to implement our recommendation. Without a detailed plan from CDC on what corrective actions are planned, it is impossible to monitor CDC's progress in implementing our recommendation to improve perimeter security controls for all BSL-4 labs. The ability to monitor progress openly and transparently is especially important because a sixth BSL-4 lab recently became operational, as mentioned above, and CDC expects more BSL-4 labs to be operational in the future. Although CDC has taken limited action to address our findings from our September 2008 report, the two deficient BSL-4 labs have made progress on their own. In our July 2009 report, we stated that one BSL-4 lab made a significant number of improvements to increase perimeter security, thus reducing the likelihood of intrusion. The second one made three changes and formed a committee to consider and prioritize other changes. We confirmed the following improvements at Lab C: Visitors are screened by security guards and issued visitor badges. A command and control center was established. Camera coverage includes all exterior lab entrances. Closed-circuit television (CCTV) is monitored by the command and control center. The cameras currently cover the exterior of the building. Guards can control the cameras by panning, zooming, or tilting. One visible guard is present at the main entrance to the lab, but the guard is not armed. A guard mans the entrance 24-hours a day, 7 days a week. Although the guard is unarmed, this improvement does partially address the requirement for guard presence at lab public entrances. Lab officials described installing armed guards as cost prohibitive. While the loading dock is still located inside the footprint of the main building, Lab C improved its loading dock security by building a loading dock vehicle gate. Moreover, a pedestrian gate with a sign forbidding entry was built to prevent pedestrians from entering the building through the loading dock; pedestrians were previously allowed to enter the building through the loading dock as a way of taking a short-cut into the building. These new gates prevent individuals from walking into the building, or vehicles driving up to the building, unchallenged. Lab officials said additional enhancements would be completed by fall 2009. These include an active intrusion detection system that is integrated with CCTV and the addition of 14 new interior cameras with pan, tilt, and zoom capabilities. The new cameras will enhance the interior perimeter security of the lab. The command and control center also will have access to and control of these new cameras. After these improvements are finished, the lab will have 8 of the 15 controls we tested in place plus 2 others that were partially addressed. We verified three improvements were made at Lab E--heavy concrete planters were added as a vehicle barricade along the roadside adjacent to the building; the window was frosted to block sight lines into the lab from nearby rooftops; and a vehicle barricade is being constructed to block unauthorized access to the parking lot adjacent to the lab, thereby increasing the blast stand-off area. The lab also formed a committee to consider additional perimeter security measures such as widening buffer zones and increasing lighting at the perimeter fence. In all, the lab now has 6 of the 15 controls we assessed in place. Although lab officials made three improvements and are considering others, the lab's head of research operations at the facility objected to the findings of our September 2008 report and has challenged the 15 controls we deemed critical to strong perimeter security. He said that the officials from the lab were not afforded an opportunity to respond to the report and correct "inaccuracies." Specifically, he made the following comments on our previous findings: He questioned the basis for our selection of the specific 15 controls we identified as critical to perimeter security, and noted that CDC also expressed similar concerns in its comments on our September 2008 report. The lab windows do not provide direct access to the lab. He maintained that a number of features prohibited entry by these windows: the lowermost edge of the windows is more than 7 feet 8 inches above ground level, the windows are certified bulletproof glass and are equipped with inside bars, and breaching the integrity of the outer bulletproof glass triggers alarms for the local guard force. Furthermore, he said that having such a window was deemed programmatically important when the laboratory was designed in order to provide light- dark orientation for laboratory workers. Finally, he represented that a group of nationally recognized security experts has opined that the windows are not a security threat, but did not provide evidence of these experts' assessment. Armed guards are present on the campus. He stated that a table in our September 2008 report indicates that armed guards are not present on the campus, although a footnote on a subsequent page acknowledges that an armed security supervisor patrols the facility. A vehicle barrier does surround the perimeter of that portion of the laboratory building housing select agents, including the BSL-4 laboratory. He said it was recommended and approved by the Federal Bureau of Investigation during consultations on the safety of the building and installed in 1999 prior to initiation of research in this facility. We continue to believe that our assessment of perimeter controls at Lab E is accurate. Specifically, we disagree with Lab E's position as follows: As stated in the September 2008 report, we developed the 15 security controls based on our expertise in performing security assessments and our research of commonly accepted physical security principles. Although we acknowledge that the 15 security controls we selected are not the only measures that can be in place to provide effective perimeter security, we determined that these controls (discussed in more detail in app. I) represent a baseline for BSL-4 lab perimeter physical security and contribute to a strong perimeter security system. Having a baseline provides fair representation as to what key perimeter security controls do or do not exist at these facilities. The controls represent commonly accepted physical security principles. A lack of such controls represents a potential security vulnerability. For example, as mentioned above, at the time of our original assessment Lab E had only limited camera coverage of the outer perimeter of the facility. Camera coverage of a building's exterior provides a means to detect and quickly identify potential intruders. As mentioned above, Lab E was the only lab with an exterior window that could provide direct access to the lab. This window allowed for direct "visual" access into the lab area from an adjacent rooftop. Lab E in essence acknowledged this when it informed us in a letter that it "Frosted the BSL-4 laboratory windows to block sight lines from adjacent rooftops." While we credited Lab E for obscuring visual access to the lab by frosting this window, the window continues to pose a security vulnerability because it is not blast proof. Armed guards are not present on the campus. As mentioned above, Lab E's head of research operations pointed out that our September 2008 report acknowledged that an armed security supervisor patrols the facility. However, employing one armed security supervisor does not support the plural definition of "guards." The supervisor also is not generally at the entrances to the facility. He normally responds to incidents and would not generally be in a position to confront an intruder at the point of attack. Furthermore, placing armed guards at entrances also functions as a deterrent. The vehicle barrier did not surround the full perimeter of the BSL-4 lab building as it adjoined another lab building at the time of our original assessment. The facility has since placed additional barriers as noted in this testimony to give full coverage, thus validating our original assessment. Furthermore, part of the barrier in the area between a small parking lot and the BSL-4 lab building did not provide an adequate blast stand-off area. The lab, as noted in the July 2009 report, has since erected barriers to this parking lot to allow only deliveries into the area. The following table summarizes the progress the two labs have made on 9 of the 15 controls we initially assessed. In our July 2009 report, we made two additional observations that concern perimeter security differences among the nation's five BSL-4 labs that were operational at the time of our assessment: All five BSL-4 labs operating in 2008 had a security plan in place when we assessed them. Yet significant perimeter security differences exist among these high-containment labs. A reason for the discrepancies can be found in the additional federal security requirements the three labs with strong perimeter security controls in place had to follow beyond the select agent regulations. For example, Lab B is a military facility subject to far stricter DOD physical security requirements. It had a perimeter security fence and roving patrol guards visible inside and outside this fence. Labs A and D also must meet additional mandates from the federal agencies that oversee them. A lack of minimum perimeter security requirements contributes to sharp differences among BSL-4 labs as well.] CDC inspection officials stated their training and experience had been mainly in the area of safety. They also noted that their philosophy is a layered approach to security and safety. According to CDC officials, they are developing a comprehensive strategy for safety and security of biosafety labs and will adjust the training and inspection process accordingly to match this comprehensive strategy. We made no new recommendations in our July 2009 report. In responding to our report, CDC stated that multiple groups are assessing the issue of laboratory security and developing related recommendations. CDC stated that it will consider our prior recommendation and the reports from the multiple groups together before developing a detailed plan to address security at select agent laboratories. CDC also stated that it is in the process of hiring a Security Officer to provide continued focus on laboratory security. Labs C and E commented on relevant sections of our report, indicating that they have taken or plan to take various actions to improve perimeter security. Mr. Chairman and Members of the Committee, 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. To perform our perimeter security assessment of biosafety level 4 (BSL-4) labs, we identified 15 key perimeter security controls. We based their selection on our expertise and research of commonly accepted physical security principles that contribute to a strong perimeter security system. A strong perimeter security system uses layers of security to deter, detect, delay, and deny intruders: Deter. Physical security controls that deter an intruder are intended to reduce the intruder's perception that an attack will be successful--an armed guard posted in front of a lab, for example. Detect. Controls that detect an intruder could include video cameras and alarm systems. They could also include roving guard patrols. Delay. Controls that delay an intruder increase the opportunity for a successful security response. These controls include barriers such as perimeter fences. Deny. Controls that can deny an intruder include visitor screening that only permits authorized individuals to access the building housing the lab. Furthermore, a lack of windows or other obvious means of accessing a lab is an effective denial mechanism. Some security controls serve multiple purposes. For example, a perimeter fence is a basic security feature that can deter, delay, and deny intruders. However, a perimeter fence on its own will not stop a determined intruder. This is why, in practice, layers of security must be integrated in order to provide the strongest protection. Thus, a perimeter fence should be combined with an intrusion detection system that would alert security officials if the perimeter has been breached. A strong system would then tie the intrusion detection alarm to the closed-circuit television (CCTV) network, allowing security officers to immediately identify intruders. A central command center is a key element for an integrated, active system. It allows security officers to monitor alarm and camera activity--and plan the security response--from a single location. Table 3 shows 15 physical security controls we focused on during our assessment work. In addition to the contact named above, the following individuals made contributions to this testimony: Andy O'Connell, Assistant Director; Matt Valenta, Assistant Director; Christopher W. Backley; Randall Cole; John Cooney; Craig Fischer; Vicki McClure; Anthony Paras; and Verginie Tarpinian. 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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Biosafety laboratories are primarily regulated by either the Department of Health and Human Services (HHS) or the U.S. Department of Agriculture (USDA), depending on whether the substances they handle pose a threat to the health of humans or plants, animals, and related products, respectively. Currently, all operational biosafety level 4 (BSL-4) labs are overseen by HHS's Centers for Disease Control and Prevention (CDC). BSL-4 labs handle the world's most dangerous agents and toxins that cause incurable and deadly diseases. This testimony summarizes GAO's previously issued reports on perimeter security at the nation's BSL-4 laboratories that were issued in September 2008 (GAO-08-1092) and July 2009 (GAO-09-851). Specifically, this testimony describes (1) the findings and recommendation on key perimeter security controls at five of the nation's operational BSL-4 labs, (2) CDC efforts to address our recommendation, (3) improvements that have been made to the perimeter security controls at the two labs found to be deficient, and (4) other observations about the BSL-4 labs GAO assessed. Significant perimeter security differences continue to exist among the nation's five BSL-4 laboratories operational at the time of GAO's assessment. In September 2008, GAO reported that three of the five labs had all or nearly all of the 15 key controls GAO evaluated. Two labs, however, demonstrated a significant lack of these controls, such as camera coverage for all exterior lab entrances and vehicle screening. As a result, GAO recommended that CDC work with USDA to require specific perimeter security controls at high-containment facilities. However, as we reported in July 2009, CDC has taken limited action on the GAO recommendation. In July 2009, GAO reported that the two deficient labs made progress on their own despite CDC's limited action. One made a significant number of improvements, thus reducing the likelihood of intrusion. The second made a few changes and formed a committee to consider and prioritize other improvements. Two additional observations about BSL-4 labs concern the significant perimeter security differences among the five labs GAO originally assessed for our September 2008 report. First, labs with stronger perimeter controls had additional security requirements mandated by other federal agencies. For example, one lab is a military facility subject to far stricter Department of Defense physical security requirements. Second, CDC inspection officials stated their training and experience has been focused on safety. CDC officials said they are developing a comprehensive strategy for safety and security of labs and will adjust the training and inspection process to match this strategy.
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The National School Lunch Program, established in 1946, is intended to safeguard the health and well-being of the nation's children. The program provides nutritionally balanced low-cost or free lunches in participating schools to about 31 million children each month. At the federal level, USDA's Food and Nutrition Service oversees the program, which is administered by states and local SFAs. In fiscal year 2012, the federal government spent over $11 billion on the National School Lunch Program. Specifically, USDA provides reimbursement in the form of cash subsidies and donated commodities based on the number of lunches served that meet certain federal requirements. Although federal requirements for the content of school lunches have existed since the program's inception, as research has documented changes in the diets of Americans and the increasing incidence of overweight and obesity in the U.S., federal lunch requirements have become increasingly focused on improving the nutritional content of lunches. The Healthy, Hunger-Free Kids Act of 2010, which most recently reauthorized the National School Lunch Program, required changes to the federal lunch requirements with the intention of reducing childhood obesity and improving children's diets. Since 1994, federal law has required SFAs to serve school lunches that are consistent with the Dietary Guidelines for Americans, and in 2004, federal law required USDA to issue federal rules providing SFAs with specific recommendations for lunches consistent with the most recently published version of the Guidelines. As a result of that requirement, USDA asked the Institute of Medicine to review the food and nutritional needs of school-aged children in the United States using the 2005 Dietary Guidelines for Americans and provide recommended revisions to meal requirements for the National School Lunch Program. The Institute published its final report in 2010, and also in that year, the Healthy, Hunger-Free Kids Act of 2010 required USDA to update the lunch requirements based on these recommendations. The Institute's report recommended changes to the lunch component and nutrition requirements in place at the time. Regarding the lunch components-- fruits, vegetables, grains, meats, and milk--the Institute recommended offering both fruits and vegetables daily, increasing whole grain-rich foods, offering only fat-free and low-fat milk, and limiting the amount of grains and meats/meat alternates served each week. Regarding the nutrition requirements, the Institute recommended including both minimum and maximum calorie levels for lunches, increasing the emphasis on limiting saturated fat and minimizing trans fat, and reducing sodium content. USDA issued a proposed rule on the new lunch requirements in January 2011 and a final rule in January 2012. The final rule required implementation of many of the new lunch requirements beginning in school year 2012-2013. Since the final rule was issued, USDA has provided extensive guidance, as well as technical assistance and training, to states and SFAs to assist with implementation of the new requirements. Because regulations issued in January 2012 by USDA placed limits on the amounts of meats/meat alternates and grains that can be included in a school lunch, all eight SFAs we visited modified or eliminated some popular menu items, leading to negative student reactions in some districts. USDA's new regulations specify the minimum and maximum weekly number of ounces of meats, cheese, or other meat alternates and the minimum and maximum weekly number of ounces of grains to be served with lunch, which differ by grade level. In comparison, the previous regulations only specified the minimum number of ounces of meats and grains required to be served with lunch each week. (See table 1.) Officials in one of the districts we visited told us that, in response to the new limits, cheeseburgers were removed from the elementary and middle school lunch menus because adding cheese to the district's burger patties would have made it difficult to stay within the weekly meat maximums. In another district, the SFA reported that it switched from using shredded cheese on the chili dog to processed cheese sauce because it does not count as a meat alternate. A similar type of switch occurred in one of the districts we visited because of the grain maximums. That SFA reported that it changed from serving a whole grain chip to a potato chip because the potato chip did not count as a grain. The grain maximums also affected popular lunch items, such as sandwiches. For example, four districts we visited reduced certain grain options used for sandwiches, such as the sub roll and the tortilla wrap, and two districts stopped serving peanut butter and jelly sandwiches as a daily option in elementary schools because the weekly grain maximum did not allow for a sandwich to be served every day. SFAs in four of the districts we visited noted that student reactions to these menu item changes were generally negative, and some said the changes had impacts on participation, that is, the number of students purchasing school lunches. For example, the tortilla wrap size change in one district was followed by a significant decrease in the number of students selecting their lunches from the previously popular deli sandwich line in the high schools, as well as a decrease in the overall percentage of students purchasing school lunches in those schools. Another district's change to its sub roll contributed to a middle and high school student boycott of school lunch that lasted for 3 weeks. To comply with both the meat and grain maximums and the required calorie minimums for lunches, some districts added foods that generally did not improve the nutritional value of lunches. In the new requirements, USDA specified daily minimum and maximum calorie levels for school lunches by grade group (K-5, 6-8, and 9-12), which lunch menus must meet on average over the school week. However, because the entree, typically consisting of meat and grain, generally provides the majority of the calories in the meal, the weekly meat and grain maximums that limit the size of entrees in effect also limited the calories of the lunches. As a result, five SFAs we visited reported that the meat and grain maximums made it difficult to plan menus that met the minimum calorie requirement for grade 9-12 lunches--750 calories. To comply, some SFAs added foods to the menus that, while allowable, generally do not improve the nutritional value of lunches. For example, in three of the districts we visited, the SFAs reported adding pudding to certain high school menus to bring the menus into compliance with the calorie minimum. Some SFAs also added gelatin, ice cream, or condiments such as butter, jelly, ranch dressing, or cheese sauce to become compliant, according to the districts we visited and the SFA and industry groups we spoke with. While these additional menu items provided needed calories to lunches, they also likely increased the amount of sugar, sodium, or fat in the meal, potentially undercutting the federal law's goal of improving the nutritional quality of lunches. Some SFAs noted that obtaining meat and grain products from food vendors that complied with the new requirements was a continual and evolving process during school year 2012-2013 because vendors were continually modifying products throughout the year. For example, four SFAs we visited said they met regularly with vendors during school year 2012-2013 as vendors worked to bring their products into compliance. One of those SFAs reported working closely with food manufacturers and vendors throughout the summer of 2012 to find appropriate products, including a 1.5 ounce burger patty--which is less than half the size of a 1/4 pound burger--that allowed the district to continue to serve cheeseburgers to all students. Representatives from a group of food manufacturers and other relevant industries we spoke with indicated that the meat and grain maximums were challenging to respond to in part because the grain maximums had unexpectedly changed between the proposed and final rules, and the time between issuance of the final regulations and required implementation was short. Some noted that while they were eventually able to reformulate their products to comply with the new requirements, the process took longer than the 6 months available between issuance of the final rule and the required implementation date. In response to feedback from states and SFAs regarding operational challenges caused by the meat and grain maximums, USDA lifted the maximums temporarily. First, in December 2012, USDA issued guidance allowing states to consider SFAs to be in compliance with the requirements for school year 2012-2013 if their menus exceeded the weekly meat and grain maximums. A few months later, in February 2013, USDA provided the same flexibility for school year 2013-2014, acknowledging that SFAs needed guidance to help with meal planning and food procurement for the coming school year, as SFAs often plan menus and order or contract for food beginning in the winter of the previous school year. The February guidance also stated that USDA understands the need for longer term guidance on this issue and is considering options for addressing the meat and grain maximums beyond school year 2013-2014. In May 2013, USDA officials told us that the Department wanted to be responsive to the challenges they had heard about, and they did not see a problem making the temporary change to help with implementation because the meat and grain maximums and the calorie maximums both accomplish the goal of addressing portion size, making them somewhat redundant. Although this implies that USDA may permanently remove the meat and grain maximums, USDA officials told us that the Department is still considering options for a long-term solution to the meat and grain maximums and has not yet made a permanent decision. None of the eight SFAs we visited made substantial changes to their menus in response to USDA's temporary removal of the weekly meat and grain maximums. Reasons that SFAs cited for this decision included: the flexibility was temporary, districts had already modified their menus to comply with the new requirements, products were already ordered for those menus, staff were already trained, and students had been educated about the new requirements. Instead, those SFAs that made some modifications after the flexibility was allowed focused on marginal changes that would ease menu planning and improve student acceptance of lunches. For example, in the district in which students reacted strongly to the decreased size of the tortilla wrap for sandwiches, the SFA brought in a larger wrap, though it was still smaller than the wrap used previously. Further, in the district that experienced a student boycott of lunch in part because of the change to the sub roll, the sub roll used in prior school years returned to the high school lunch menus. In another district that had decreased the amount of mini corn dogs they provided to each elementary school student because of the maximums, additional mini corn dogs were added to each student's portion. SFA directors, food manufacturers, and other relevant industry representatives indicated the need for a timely and permanent federal decision on these maximums. Specifically, some SFA directors we visited told us that it is difficult to know how to proceed with menu planning under the new requirements when the flexibility provided over the maximums continues to be temporary. The School Nutrition Association, which represents SFAs across the country, has indicated that it supports the permanent elimination of the meat and grain maximums, because their removal will give cafeterias more flexibility to design healthy menus that meet nutrition standards and student tastes. Although the flexibility exists for school year 2013-2014, because USDA has given SFAs mixed messages regarding the Department's future plans for the meat and grain maximums, SFAs are currently left guessing about the future outcome, making planning future budgets and food ordering difficult. Several industry representatives said that because some SFAs are planning menus that comply with the maximums, while others are planning menus that include larger meat and grain portion sizes, industry is experiencing difficulties forecasting demand, which leads to food production, inventory, and storage challenges. This situation will soon become more complicated because of the impending federal changes to the content of meals served through the School Breakfast Program and other foods sold in schools. Because the required calorie ranges for grades 6-8 and 9-12 do not overlap, schools with students in both these grade groups faced challenges complying with the calorie requirements. While the grades K-5 and 6-8 average daily calorie ranges for school lunches overlap at 550- 650 and 600-700, the grades 6-8 and 9-12 ranges, which are 600-700 and 750-850, do not. This creates a challenge for schools that include students from both grade groups, including schools in two of the districts we visited. One SFA director, whose district includes schools serving 7th through 12th graders, noted that complying with both of the calorie range requirements is particularly difficult when students in different grades use the same serving lines and share a lunch period. The director noted that cashiers at the point-of-sale may not know each student's grade level, which complicates the accurate identification of a meal that complies with the requirements. In addition, if certain food items are offered to some students and not to others depending on their grade, students may react negatively to the differential treatment. Because of these implementation issues, this district planned its menus to generally provide 725 calorie lunches for all students in these schools, which are not in compliance with either of the required ranges, and could potentially result in fiscal action against the SFA in the future. USDA's response to this issue, provided in part through the Department's guidance on menu planning under the new lunch requirements, has been limited. In the proposed rule on the new lunch requirements, USDA indicated that the new requirements are expected to bring about positive outcomes, including simplification of school lunch administration and operations. However, in comments on the proposed rule, some school districts expressed concerns that the lack of overlap in the calorie ranges may lead to increased costs and administrative burden. Although USDA did not change the ranges in the final rule, in its guidance on the new requirements, the Department acknowledges that the lack of overlap in the calorie ranges for these grade groups can be challenging. Because of this, USDA's guidance suggests that districts serve a menu appropriate for the lower grade level and add a few additional foods for students in the upper grade level. This differs from the previous requirements, which allowed schools to comply with meal requirements for the predominant grade group in schools that included students from two different groups. USDA's guidance also differs to some extent from the approach recommended by the Institute of Medicine in its report on which the federal requirements are based. The report's authors suggested that, for schools serving students from multiple grade groups on the same serving line, the SFA should work with the state agency to find a solution that ensures the basic elements of the standards for menu planning will be maintained, including moderate calorie values. While all eight SFAs we visited expressed support for the goal of improving the nutritional quality of lunches and felt the new requirements were moving in that direction, all eight experienced various challenges related to student acceptance of some of the foods served to comply with the requirements. Under the new requirements, lunches must include whole grain-rich products and vegetables from 5 sub-groups each week, and districts we visited noted that obtaining student acceptance of some whole grain-rich products and vegetables in the beans and peas (legumes) and red-orange sub-groups have been challenging. For example, six districts mentioned student acceptance of whole grain breads or pasta as being a challenge. Regarding vegetable sub-groups, five districts we visited said that they have had difficulty obtaining student acceptance of the beans and peas (legumes) sub-group, and two districts expressed difficulty with sweet potatoes, in the red-orange sub-group. Some noted that they have continued to try new recipes throughout the year to address these challenges, but acceptance has been limited. Challenges with student acceptance of these foods were foreseen by the Institute of Medicine in its report recommending they be required components of school lunch, as national data showed that few students reported eating these types of foods. The researchers noted that implementation of effective educational, marketing, and food preparation strategies, as well as the increased availability of suitable and appetizing products, may improve student acceptance of these foods. Some districts reported that, if the past is an indicator, student acceptance of these foods may improve over time, and student comments regarding other healthy foods they like suggest this as well. In four of the districts we visited, SFA directors noted that they had begun adding whole grains into their menus before the current school year, and they have seen student acceptance of whole grain products improve over time. In addition, one district's SFA director also noted that acceptance of foods in the beans and peas (legumes) sub-group has improved over time. When we talked to students in the schools we visited and asked them about lunch foods they do not like, these specific foods were mentioned by some students in four of the eight districts, but most students focused their comments on other vegetables or specific entrees. Further, most of the students we talked to indicated that they like to eat healthy and nutritious foods, and they think that school lunches generally provide such foods. Although school year 2012-2013 is the first year that students were required to take a fruit or a vegetable with school lunch nationwide, when we asked students what they like about school lunch this year, students in 13 of the 17 schools we visited to observe lunch reported liking certain fruit and vegetable options. Food waste is also an indicator of lack of student acceptance of the new lunch requirements. Students may take the food components they are required to as part of the school lunch, but they may then choose not to consume them. Although none of the districts we visited had fully analyzed food waste over the past few years to determine if it changed during school year 2012-2013, six of the SFAs we visited told us they believe food waste has increased because of the new lunch requirements. In particular, SFAs said that the fruits and vegetables students are now required to take sometimes end up thrown away, and in our lunch period observations in 7 of 17 schools, we saw many students throw some or all of their fruits and vegetables away. However, at the same time, we observed other students take and consume sizable quantities of fruits and vegetables and the other lunch components in the remaining 10 schools in which we observed lunch, resulting in minimal food waste. Four of the SFAs we visited talked about food waste being more of an issue with the youngest elementary school students, possibly because of the amount of food served with the lunch and the amount of time they have to consume it. The Institute of Medicine report acknowledged differences in food intake among elementary students, noting that the amounts of food offered under the new recommendations may be too large for some of the younger elementary school children because they are more likely to have lower energy needs than the older children in the same grade group. In USDA's final rule, the Department discussed the offer versus serve policy, which has been required for senior high schools and optional for all other schools since 1975, as a way to minimize food waste. Under the current regulations, this policy allows students to decline two of the five meal components offered with the lunch, rather than requiring students to be served all five components. However, the SFA director in one of the districts we visited noted that the district has chosen not to implement the offer versus serve policy for the youngest students because they have difficulty making choices, which extends the time spent in the serving line and decreases the time students have to consume their lunch. Student participation in lunch has decreased to some extent in school year 2012-2013, which is another indicator that student acceptance of school lunches may have declined since the changes. Most of the SFAs we visited reported that they experienced decreases in lunch participation in school year 2012-2013 in part because of the new lunch requirements and other factors. USDA's national data, which do not account for adjustments related to changes in monthly serving days or student enrollment across years, also generally show that student lunch participation was lower in school year 2012-2013 than it was the year before. Later this year, when we complete our study of the school lunch changes, we plan to provide additional information on lunch participation trends. SFAs also faced concerns in school year 2012-2013 that the new lunch requirements were leaving some students hungry--an issue raised in five of the districts we visited. For example, in one district, a high school principal told us that during school year 2012-2013, athletic coaches expressed concerns that student athletes were hungrier after school than they were in previous years, and staff reported that more students were distracted during the final period of the school day than in previous years. In the district we visited in which middle and high school students boycotted school lunch at the beginning of the year, the boycott was led by two student athletes in part because they indicated that the lunches were leaving them hungry. These concerns were likely related to decreased entree sizes. During our visits to schools, students in six schools mentioned that they have been hungry this year after eating school lunch because of various reasons. For example, students in three schools attributed this to the smaller entrees, and students in one of those schools also noted that it may be related to the timing of their lunch periods, as their school's first lunch period began around 10:30 a.m. and the school day ended at about 2:30 p.m. In another school, students acknowledged that they had not taken or eaten all of the items offered with the lunch, which we observed resulted in a smaller sized lunch. (See figure 1.) In contrast, when students served themselves all of the lunch components in the districts that we visited, their lunches were substantially larger in size, primarily because of the large amounts of fruits and vegetables they selected. (See figure 2.) School lunches generally provide fewer calories under the new requirements than in past years, likely because of smaller entree sizes. Specifically, the new required lunch calorie maximums for each grade group are either lower or comparable to the calorie minimums previously required. As a result, school lunches generally provided more calories in the past, according to national data, than they are allowed to in school year 2012-2013, particularly for younger students. Although the previous nutrition standards were developed to align school lunches with the Dietary Guidelines for Americans, they were developed in the mid 1990s. Since then, the percentage of children who are overweight and obese has increased, and research has shown that excess food consumption, poor food choices, and decreased physical activity contribute to these trends. The Institute of Medicine's 2010 recommendations for the lunch pattern were developed using a data- based approach, which assessed data on healthy weights and heights, physical activity, and the distribution of calories among meals, and the authors indicate that the recommended lunches are appropriate for the level of physical activity of most children. SFAs also expressed concerns about the impact of compliance with the new lunch requirements on food costs and their budgets. All eight SFAs we visited reported that they have incurred increases in fruit and vegetable costs this year because of the requirement that students take at least one fruit or vegetable with lunch. Further, most indicated that overall costs for school lunch were greater in school year 2012-2013 than in the past, and three expressed concerns about the impact of these changes on their overall financial stability. Because we conducted our visits before the end of the school year, we have not yet obtained data from these SFAs on how they ended the year financially, though we plan to provide information on those results in our final report. All eight SFAs we visited also discussed other challenges implementing the lunch changes during school year 2012-2013, such as additional menu planning issues, food procurement, new requirements related to the price of lunches, the pace of implementation, and USDA's assistance with the changes. When we complete our study of the lunch changes later this year, we will provide additional information about implementation challenges and USDA's assistance to states and SFAs with implementation. In addition to the school lunch changes, the Healthy Hunger-Free Kids Act of 2010 required that USDA specify and require nutrition standards for all foods and beverages sold outside the school meals programs on the school campus during the school day, which are commonly referred to as competitive foods because they compete with school meal programs. Competitive foods are often sold through vending machines, school stores, and fundraisers, and also include SFA sales of a la carte items in the cafeteria. In school year 2009-2010, competitive foods were sold in an estimated 93 percent of schools nationwide, according to a recent USDA study. The proposed rule containing these standards was published by USDA in February 2013, and during our visits to SFAs, many expressed concerns that certain aspects of the proposed rule would be challenging to implement, if finalized. Specifically, seven of the eight SFAs we visited expressed concerns about what they viewed as a lack of clarity in the proposed rule regarding how the nutrition standards for competitive food sales administered by entities other than the SFA will be enforced. In our 2005 report on competitive foods, we found that many different people made decisions about competitive food sales, but no one person commonly had responsibility for all sales in a school. At that time, in a majority of schools nationwide, district officials made competitive food policies, while SFA directors and principals made decisions about specific sales. Other groups, such as student clubs and booster groups, also made competitive food decisions through their direct involvement in sales. The number and variety of groups involved in these sales typically increased as the school level increased. For example, an estimated 48 percent of middle schools nationwide had three or more groups involved in these sales compared to an estimated 83 percent of high schools. Although a 2004 law required districts to implement wellness policies in school year 2006-2007 that addressed nutritional guidelines for all foods available in schools during the school day, some of the SFAs we recently visited told us that these policies have generally not been enforced, in part because no one person was granted enforcement responsibility over all such sales. SFAs we visited also expressed concern that the proposed rule's inclusion of differing nutrition standards based on the type of competitive foods sale will put the SFA at a competitive disadvantage relative to other food sales within a school. For example, five SFA directors expressed concerns about the proposed rule's provision allowing states discretion to make decisions about fundraisers that are exempt from the federal nutrition standards for competitive foods. Some SFA directors expressed concerns that this would potentially result in inconsistent treatment, whereby SFAs' competitive food sales would be required to follow the nutrition standards and fundraisers would not. Similarly, some SFAs expressed concerns about the proposed rule's inclusion of different standards for beverages sold in food service areas during meal periods-- which are typically sold through SFA a la carte sales--and beverages sold outside of meal service areas--such as those through vending machines. Specifically, although the proposed rule allows the sale of milk, water, and juice through any competitive food venue at any time, the rule also allows the sale of other beverages, except for in food service areas during meal periods. However, this restriction is somewhat similar to the current federal requirements on competitive food sales. Across the country, more nutritious school lunches likely were provided to students during school year 2012-2013. All eight SFAs we visited expressed support for the goal of improving the nutritional quality of lunches and felt the new federal requirements were moving in that direction. Many students' positive comments on healthy foods, their views that school lunches generally provide such foods, and their consumption of sizeable quantities of fruits and vegetables in the majority of schools we visited indicate that acceptance of the new lunch requirements will improve over time. However, as the first year of implementation of the new requirements for the content of school lunches has unfolded, the SFAs we visited also faced a variety of challenges. While some of the challenges SFAs faced this year have been addressed and others may become less difficult as time elapses, those caused by the required weekly maximum amounts of meats and grains permitted in lunches and the lack of overlap in the allowable calorie ranges for grades 6-8 and 9-12 likely will not. Because of the meat and grain maximums, some districts made menu decisions that are inconsistent with the goal of improving children's diets, as they added desserts and condiments that increased the amount of sugar, salt, or fat in lunches in order to comply with the required calorie minimums. Acknowledging that the meat and grain maximums created challenges for SFAs, USDA lifted them through school year 2013-2014 and indicated that the maximums may not be needed to accomplish the nutrition goals of the new requirements. However, although USDA has acknowledged the need for a permanent decision on the maximums, they have yet to provide one, hindering the ability of school districts to plan menus, food purchases, budgets, staff training, and student education because they do not know whether the meat and grain restrictions will be reinstated in the future or not. In addition, the requirements that lunches served to students in grades 6-8 provide different amounts of calories than lunches served to students in grades 9-12--even in schools that serve students in both grade groups-- is inconsistent with past practices, expert recommendations, and USDA's intent of simplifying the administration and operations of the school lunch program. Most significantly, the inflexibility of these calorie requirements substantially hinders certain SFAs' ability to comply, which may potentially result in fiscal action against SFAs in future years. Absent a permanent USDA decision to remove the meat and grain maximums and increase flexibility for schools that serve meals to students in both the 6-8 and 9-12 grade groupings, SFAs will continue to face challenges implementing the regulations, potentially impeding their efforts to meet their key goals--healthier foods in school for healthier students. To improve SFAs' ability to design menus that comply with the new lunch requirements, we recommend that the Secretary of Agriculture: permanently remove the weekly meat/meat alternate and grain maximums for school lunch defined in federal regulations, and modify federal regulations or guidance to allow school districts flexibility in complying with the defined calorie ranges for schools with students in both the grades 6-8 and 9-12 groups. We provided a draft of this testimony to USDA for review and comment. In oral comments, USDA officials indicated that they generally agreed with our recommendation regarding meats and grains, and they are currently developing an approach for permanently lifting the meat and grain maximums. Officials added that while they recognize the need to address the challenges posed by lack of overlap in the calorie ranges for grades 6-8 and 9-12, it is important to identify a solution to this issue that ensures calorie ranges remain appropriately targeted to students based on their ages--a point emphasized by the Institute of Medicine. USDA officials also said that they have been collecting information on implementation of the new lunch requirements throughout the year from many school districts and have heard about implementation challenges. However, according to USDA officials, official reporting by states indicates that a majority of districts have been able to comply with the new requirements. USDA also expressed concern that the findings in the testimony did not reflect a nationally representative sample of school districts. We continue to believe that our site visits to eight school districts and our interviews with eight SFA directors from across the country, state officials, and industry representatives enabled us to identify some of the challenges school districts are facing in implementing the new nutrition standards. Our final report will provide additional information and data to inform these issues. Chairman Rokita and Members of the Subcommittee, this concludes my statement. I would be pleased to respond to questions you may have. For further questions on this testimony, please contact me at (202) 512- 7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Jessica Botsford, Robert Campbell, Rachel Frisk, Kathy Larin, Jean McSween, Dan Meyer, and Zachary Sivo. 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 National School Lunch Program served 31.6 million children in fiscal year 2012, in part through $11.6 billion in federal supports. The most recent reauthorization of the program, the Healthy, Hunger-Free Kids Act of 2010 required that nutrition standards for school lunches be updated. As a result, USDA issued final regulations aimed at providing lunches high in nutrients and low in calories that better meet the dietary needs of school children and required that they be implemented beginning in school year 2012-2013. The new rules provide detailed requirements for meal components--fruits, vegetables, grains, meats, and milk; update requirements for calories, sodium, and fats; and require that each student's lunch contain a fruit or vegetable. To provide information on challenges that school districts have faced, this testimony draws on work GAO conducted as part of its ongoing study of implementation of the changes. Specifically, GAO reviewed relevant federal laws, as well as USDA regulations, guidance, and studies; interviewed USDA officials and groups of food service officials and relevant industry representatives; and visited eight school districts. The districts varied by geographic location, size, and certain student and food services characteristics. School districts faced several challenges implementing the new lunch requirements in school year 2012-2013, according to the eight districts GAO visited and food service and industry officials GAO interviewed from across the country; and the U.S. Department of Agriculture's (USDA) response to some of these challenges has been limited. For example, because USDA regulations restrict the amounts of meats and grains that can be served in school lunches each week, all eight districts GAO visited needed to modify or eliminate popular menu items. These changes sometimes led to negative student reactions. The meat and grain restrictions also led to smaller lunch entrees, making it difficult for some schools to meet minimum calorie requirements for lunches without adding items, such as gelatin, that generally do not improve the nutritional quality of lunches. In response to feedback from states and districts regarding operational challenges caused by the meat and grain restrictions, USDA lifted the limits temporarily, first for the remainder of school year 2012-2013 and then for school year 2013-2014. USDA officials said they did not see a problem making the temporary changes to help with implementation because the limits on meats and grains and the limits on the calories in lunches are somewhat redundant, as both address portion size. However, because the change was seen as temporary, the eight districts GAO visited made only marginal changes to their menus. Rather, several district food services officials, as well as relevant industry representatives, indicated the need for a permanent federal decision on these restrictions, which USDA has also acknowledged. The calorie range requirements for lunches also challenged some districts, particularly those with schools that include students from both grades 6-8 and 9-12. Because the required lunch calorie ranges for these two grade groups do not overlap, districts with such schools face difficulties planning menus and serving lunches that comply with both requirements. For example, one food services official, whose district includes schools serving 7th through 12th graders, developed menus with calorie counts between the grades 6-8 maximum and the grades 9-12 minimum, leaving the lunches out of compliance with both sets of restrictions. Although USDA has acknowledged that menu planning in such schools can be challenging, USDA's current guidance does not provide these districts flexibility to assist their efforts to comply. Rather, guidance suggests that students from different grades be provided with different lunches, a solution that may be impractical in schools in which students of different grades share lunch periods and serving lines. Although the eight districts GAO visited expressed support for the improvements to the nutritional quality of school lunch, they reported additional challenges meeting the new requirements, such as student acceptance, food waste, costs, and participation. For example, USDA requires that meals include whole grain-rich products and certain vegetables, but most districts noted that obtaining student acceptance of foods like whole grain pasta and beans has been challenging. If students do not accept these items, the result may be increased food waste or decreased participation in the lunch program, which were concerns in most districts GAO visited. However, student acceptance of the changes will likely improve over time, as indicated by their positive comments about healthy food and consumption of fruits and vegetables in most districts GAO visited. GAO recommends that USDA permanently remove the meat and grain maximum requirements and allow flexibility to help districts comply with the lack of overlap in the calorie ranges for grades 6-8 and 9-12 lunches. USDA generally agreed with GAO's recommendations.
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As of December 31, 1996, a total of 281 FBOs based in 59 countries had banking operations in the United States that were subject to the procedural requirements of the FBO program. FBOs operate in the United States through a number of types of offices with differing powers and oversight. The most common of these types of entities are described in table 1. As shown in table 2, branches and agencies are the most common types of FBO banking offices in the United States, and they account for about 51 percent of the total foreign bank assets in the United States as of December 31, 1996. An individual FBO may have a variety of these types of offices operating in the United States, and each individual office may be supervised by a different federal or state regulator, with FRS having overall authority. Figure 1 shows the organizational structure of the U.S. operations of a hypothetical FBO. It also shows the U.S. supervisor for each office. To address the objectives of this report, we reviewed examination manuals, relevant laws, and guidance issued by the Board of Governors of FRS (Federal Reserve Board). We interviewed officials from the Federal Reserve Board and the Federal Reserve Banks of Atlanta, Chicago, New York, and San Francisco. We also interviewed state bank supervisors from California, Florida, Illinois, and New York, and officials from FDIC, OCC, and the Institute of International Bankers--an association of foreign banking organizations with U.S. operations. The Federal Reserve Banks and state bank supervisors we interviewed are responsible for overseeing most FBO operations in the United States. In addition to our interviews, we developed a data collection instrument (DCI) to help us systematically collect information from each of the FBO products: the country reports, SOSAs, examinations, overall assessments of U.S. offices, and the comprehensive exam plans. The type of information we collected included basic financial information on the FBO and its U.S. operations, results of past examinations of U.S. operations, and information on the supervisory and financial system of the foreign country, among other things. This DCI was designed to help us compare the content of these reports and determine the extent of use of information from SOSAs and country reports in comprehensive exam plans. We used the DCI to review the FBO products from 18 different countries. We chose countries located in Europe, Asia, and North and South America to obtain variation in geographic location and levels of financial development. For each country, we chose two FBOs, if two existed, and reviewed their SOSAs, comprehensive exam plans, and overall U.S. assessment, if available. We chose the FBOs included in our judgmental sample to obtain variation in size, SOSA ranking, and types of offices they had operating in the United States. We obtained written comments on a draft of this report from the Federal Reserve Board. These comments are discussed at the end of this letter and are reprinted in appendix I. We did our work in Washington, D.C.; New York; California; Illinois; and Florida in accordance with generally accepted government auditing standards from September 1996 to January 1997. The FBO Program was designed to provide the U.S. banking supervisory agencies with a collective mechanism for supervising the U.S. operations of FBOs in a highly coordinated, thorough, and efficient manner, according to the Federal Reserve Board. FRS began to implement the FBO Program in March 1995, when it issued its initial guidance on the program. Federal Reserve Board officials told us that the program was scheduled to be implemented over a 3- to 5-year period, but that they hoped to have it fully operational within 3 years. The interagency program--which consists of a number of supervisory steps and assessments that each have their individual requirements regarding content, procedures, and timing--calls for the development and distribution of six supervisory products. The six supervisory products of the FBO Program are to provide information about the home countries of the FBOs, the FBOs themselves, and the FBOs' operations in the United States. The six products are Review of Home Country Financial System, Review of Significant Home Country Accounting Policies and Practices, Strength-of-Support Assessment, Comprehensive Examination Plan, and Summary of Condition and Combined Rating. We refer to the first two products, which focus on a country's financial system and accounting policies and practices, as "the country reports." The contents of the six supervisory products are summarized in table 3. The Federal Reserve has assigned responsibility for preparing the FBO products to the various Reserve Banks that have offices of foreign banks in their districts. Responsibility for the products is generally assigned according to the location of the FBO offices in the United States. Given the preponderance of FBO offices in New York, the Federal Reserve Bank of New York was preparing the majority of products. Draft country and SOSA reports are to be circulated to other relevant U.S. supervisors for comment. Final versions of the reports are also to be provided to the relevant U.S. supervisors. Based on FRS guidance issued in August 1996, SOSA rankings are to be considered final only when they have been formally reviewed and approved by a committee headed by officials of the Federal Reserve Board's international supervision function. One of the principal goals of the SOSA is to identify FBOs that may pose risks to their U.S. operations or to U.S. financial markets due to financial, operational, or other concerns at the FBO as a whole. As table 3 shows, the SOSA utilizes a two-component assessment ranking system for financial and managerial support. Financial support is summarized by A to E rankings, with A representing the lowest level of supervisory concern and E the highest. An asterisk is to be placed beside the letter assessment on an as-needed basis to identify whether there are any factors that raise questions about the ability of the FBO to maintain adequate internal controls and compliance procedures at its U.S. offices, irrespective of the overall financial condition of the FBO. The SOSA--which is supported by the two country reports--is to provide information to the U.S. bank supervisory agencies that they can take into account in reaching decisions regarding the scope and frequency of examinations and whether other supervisory initiatives may be appropriate. The SOSA assessment serves to categorize all FBOs with U.S. banking operations by levels of supervisory concern, highlighting those whose U.S. operations are thought to warrant higher levels of supervisory attention. An FBO's SOSA, along with other information, is to be taken into consideration in setting the examination plan for the FBO's U.S. operations. For example, the U.S. operations of FBOs whose assessments are marked by an asterisk, denoting potential internal controls or compliance risks, may receive examinations in which supervisors investigate those risks. The FBO's SOSA analysis and ranking are to be considered in implementing supervisory follow-up action for the U.S. operations, although specific SOSA rankings are not linked to mandatory supervisory actions. According to procedural guidance for the program, an assessment of C or lower is expected to imply a level of concern that would subject the FBO's U.S. offices to at least periodic monitoring of their net due to/due from positions. Any additional supervisory step, such as imposing an asset pledge or asset maintenance requirement, is to be implemented largely based on the condition and nature of the U.S. operations. If an FBO is accorded an assessment of D or lower, this is generally expected to indicate a higher level of supervisory concern, with some presumption of asset maintenance regardless of the condition of the FBO's U.S. operations. As part of the FBO Program, FRS is to maintain a database containing information on the financial system and on significant accounting policies and practices of each country with bank representation in the United States. The information in the database is to be provided by FRS and other supervisory agencies, and FRS is to make the information available to all of the supervisory agencies. The comprehensive examination plan and the overall assessment of an FBO's U.S. operations--that is, the Summary of Condition and the Combined Rating--are designed to help coordinate agencies' efforts in supervising FBO offices in the United States. To ensure coordination of supervisory efforts and avoid duplication, the FBO Program calls for U.S. banking supervisory agencies to increase interagency communications regarding their examination plans, examination results, and any proposed supervisory follow-up actions. Also, to fulfill its responsibilities for the overall U.S. operations of individual FBOs, FRS is to prepare annually an overall assessment of the combined U.S. operations of each FBO, based largely on input from and discussions with the examining agencies. As noted in figure 2, the comprehensive examination plan is to cover all U.S. operations of an FBO with the exception of commercial banks, which are to be treated as domestic institutions for the purpose of examination planning during the initial implementation of the FBO Program. The FBO Program is to provide for the coordination of examination schedules through the development of an annual comprehensive examination plan for each FBO with banking offices licensed by more than one supervisory agency and/or with significant U.S. nonbanking activities.Other U.S. supervisors of FBO offices in the United States are to provide responsible Federal Reserve Banks with a copy of their preliminary examination schedules. FRS is to use these, in conjunction with the preliminary examination schedules of the Reserve Banks, to derive a draft comprehensive examination schedule for all U.S. operations of individual FBOs. This draft schedule, to be provided to all the supervisory agencies, is designed to permit each agency to coordinate its own schedule with those of other agencies. FRS is to provide the final comprehensive examination schedule to all the supervisory agencies. Likewise, the various supervisors are to provide individual examination plans to be used by FRS in drafting a comprehensive examination plan. According to FRS officials, FBOs that operate in the United States through multiple offices often will have all offices examined using the same "as of" financial statement date; this will provide the supervisory agencies with increased information on the interrelationship among the various offices and can enhance the examination of individual offices and the FBO's overall operations. The U.S. supervisory agencies have committed to advising other agencies' supervising offices of the same FBO of any critical examination findings prior to the exit meeting with FBO officials for that examination. The overall assessment of an FBO's combined U.S. operations is intended to provide the FBO and the U.S. supervisory agencies with a view of the overall condition of the FBO's U.S. operations and help put into context the strengths and weaknesses of individual offices. The assessment is to be prepared by FRS for all U.S. offices supervised by more than one agency. The assessment is to address all risk factors, including (1) all elements of the ROCA rating system, (2) the quality of risk management oversight employed by all levels of management in the FBO's U.S. operations, and (3) the examinations of all offices of the FBO conducted during the year. The system for rating the FBO's combined U.S. operations is to result in the assignment of a single-component rating between 1 and 5, with 1 being the highest. The rating system contains language describing the level of supervisory concern and required supervisory attention. See table 4 for a description of the ratings. This composite assessment is intended to apprise the various U.S. supervisory authorities of the overall condition of the U.S. offices of individual FBOs. These agencies can then factor this information and that in the Summary of Condition into their supervision of the U.S. offices under their jurisdiction. Banking supervisors have made progress in implementing the FBO Program. They have developed and distributed procedural requirements and guidance. As of December 31, 1996, about 43 percent of the SOSA reports and their related home country reports had been finalized, and supervisors were just beginning to use the information in these reports in developing comprehensive examination plans. Supervisors identified some broad benefits of the program--particularly increased communication and cooperation among supervisors and improved access to information about FBOs and their home countries. At the same time, supervisors told us that determining how to use this information to improve their supervision was clearly the biggest challenge they face as they move forward. In addition, we identified a number of weaknesses in SOSA and country reports that could limit the program's effectiveness. These included inconsistent, incomplete, or outdated information, as well as SOSA rankings that did not appear to be justified by data in the report. In late March 1995, the Federal Reserve Board distributed to the Reserve Banks initial guidance for implementing the FBO Supervision Program. Additional guidance was issued as implementation progressed from March 1995 to August 1996. As of December 31, 1996, SOSA reports and accompanying home country reports were completed for 120 (about 43 percent) of the 281 FBOs subject to the requirements of the program.We found only limited use of country and SOSA report information in the comprehensive examination plans that we reviewed. However, at the time of our review, supervisors had just begun to incorporate SOSA and country report information into the supervisory process. Although the FBO Program has not been fully implemented, FRS staff and other banking supervisors told us of a number of benefits of the program--most importantly, improved communication and cooperation among supervisors and bank management, both domestic and foreign, and improved access to information about FBOs and their home countries. Regulators reported many instances of increased coordination and cooperation among federal and state supervisors. Supervisory officials told us that implementing the FBO Program has, in some cases, required supervisors from different agencies to coordinate with each other--whereas before the program, they said coordination was more ad hoc. For example, because an FBO may have subsidiaries or offices in several locations across the United States, the development of a coordinated examination strategy for a given FBO has required supervisors to work cooperatively, sharing information about the subsidiaries or offices they individually supervise. This is important because problems identified at a particular office could manifest themselves at other offices of an FBO. This improved coordination and communication is intended to result in improved supervision of the U.S. operations of FBOs. FRS officials also said preparing home country reports and SOSAs had helped them develop valuable relationships with foreign regulators and foreign central banks. These officials said such preparation has helped them supervise the U.S. operations of foreign banks. They also said the relationships they have developed with foreign regulators have helped them obtain better information on how U.S. banks are doing abroad. Finally, officials at a Federal Reserve Bank told us that providing foreign bank management with a summary of the condition of the FBO's U.S. operations and a combined rating has helped them communicate more effectively with foreign bank officials and has resulted in quicker and better compliance by the foreign banks. These summaries are to be sent directly to the foreign bank's head office and are to highlight the issues that need the most attention. Several supervisors stated that the program has been beneficial in centralizing information about an FBO and its home country. For example, staff at one Federal Reserve Bank said the FBO Program helps examiners by providing a single contact for information about an FBO. The SOSAs and country reports also have provided a benchmark of information on FBOs and home countries--so that all supervisors would have access to the same information about a particular FBO or country. At another Reserve Bank, staff said the reports have also provided a ready and complete source of information for U.S. officials in their meetings with foreign banks and officials from other countries. Staff at another Federal Reserve Bank stated that the FBO Program has given "more form" to their system of supervision. For example, this Reserve Bank has been monitoring the FBOs' conditions in a particular country since 1992. However, the staff were not sure whether other supervisors were doing similar monitoring, and state supervisors told us they did not have adequate resources for such monitoring. Reserve Bank officials said the FBO program reduced the likelihood that problems would fall through the cracks in the supervisory system. According to supervisory officials, the new program's products and information have also helped supervisors get information about FBOs and countries that is not commonly known. FRS has had long-standing relationships with most of the central banks and bank regulators of the major industrialized nations. Particularly for the G-10 countries, officials told us that information sharing has occurred in the past, and that their accounting standards and practices are generally similar to those in the United States. FRS officials said such is not the case for other countries, however, particularly many of the countries with developing financial and supervisory systems that have banking presences in the United States. For this reason, some supervisory officials said that the development of SOSAs and home country reports--including reports on accounting and auditing standards and practices--have been particularly useful. An important goal of the FBO Program is to enhance supervision by integrating the information in SOSAs and country reports into the supervisory and enforcement processes. Officials told us that this phase of the program was just starting at the time of our review. However, based on our review of completed SOSA and country reports and our interviews with supervisory officials and staff, we identified a number of concerns and weaknesses that could limit the program's effectiveness in improving supervisory and enforcement processes in oversight of U.S. operations of FBOs. While supervisors and supervisory staff recognized a variety of benefits of the FBO Program, as discussed earlier, they also expressed concern about the usefulness of information in the SOSA and country reports and about how this information could be integrated into the examination planning process. Further, they expressed concerns about how to use this information to help them make enforcement decisions. Regarding examination planning, some examiners told us that the SOSAs were useful mainly for general background information, while others said the information was not particularly useful. Officials from one Federal Reserve Bank told us they had been experimenting with a new comprehensive examination plan format that incorporated more information from the SOSA and country reports, such as key strengths and weaknesses related to the FBO's lines of business. Officials from another Reserve Bank said they were in the process of developing a strategy for integrating the information from SOSA and country reports into the exam planning process. They said they were also in the process of considering how the SOSAs could be improved to make them more useful. They said some possible improvements might include making the reports shorter and more user friendly for examiners; updating the reports just before the beginning of an exam cycle; and focusing the reports more on risk--for example, analyzing the impact the FBO's overall business strategy might have on its U.S. operations. Many supervisors told us that determining how to use information from the SOSA and country reports to improve their oversight was clearly the biggest challenge they face as they move forward. In order to help meet this challenge, Federal Reserve Board officials told us they commenced development of an FBO training seminar in late 1996 that will emphasize that the FBO Program is a process directed towards ensuring an appropriate supervisory strategy for the U.S. operations of each FBO. Among other things, they said the seminar will place emphasis on creating a greater linkage between the SOSAs and the comprehensive examination planning process. With regard to enforcement decisionmaking, some supervisors told us that they would like to be able to use the SOSAs to some extent to adjust their supervisory requirements, such as capital equivalency deposits. In order to do this, SOSAs must be accurate, consistent, and up-to-date. However, officials told us that they have concerns about whether this will be possible in the future because of the difficulties involved in obtaining consistent information from FBOs and home country regulators. As we reviewed the 36 SOSAs, we found some examples of inconsistent information in individual country reports as well as examples of inconsistency in information between SOSAs and their associated country reports, as illustrated by the following: A discussion of financial disclosure practices in a certain country report mentioned that nonperforming loan (NPL) ratios provide a limited indication of the country's problem loan situation because public disclosure of substandard loans was not required. In addition, the report said the monetary authority's manipulation of accounting practices to ease pressure on bank performance undermines reported financial figures and renders year-to-year analysis difficult. Yet, the final SOSA report for an FBO in that country stated that capital was adequate--with ratios slightly exceeding Bank for International Settlements (BIS) minimum standards--without providing a clear, explicit qualification of the statement. One country report pointed out that external auditors had not yet developed the status or the degree of independence they had in the United States. The report said that qualified audit reports were virtually unheard of in this country and warned that the lack of independence may potentially hinder the reliability of audited financial statements. However, a SOSA for one of the FBOs in the country said that the financial statements were deemed reliable due to an unqualified opinion rendered by an audit firm. Another report on home country supervision stated that banking supervision is considered relatively strong. Yet, the same report noted that reporting of certain key data--such as NPLs, hidden reserves, off balance sheet items, and risk-based capital ratios--was not a supervisory requirement in that country. Based on our review of Federal Reserve Board guidance and discussions with staff at the Federal Reserve Board, Reserve Banks, OCC, and select state banking departments, we developed a basic list of information that most supervisors would expect in the SOSAs. We then reviewed 36 SOSAs and their corresponding country reports to determine whether this information was provided. In reviewing SOSA and country reports, we expected some variation in the types of information provided because of differences in (1) the availability of information and the financial and supervisory systems in various countries and (2) the weight that supervisors would place on different types of information. Although we expected some variation in the information provided, we found that nearly all of the SOSAs failed to provide all of the information on our basic list. Moreover, many seemed incomplete in ways that would reduce the reliability of the reports for supervisory use. For example, some of the SOSAs lacked information central to the purpose of the reports, such as statements of the likelihood of home country support. Important details that we found lacking in some SOSA and country reports were those to clarify the date of the financial data; whether the data were consolidated and, if so, at what level; the date the reports were written and finalized; whether the risk-based capital standards referred to the BIS standards, and if not, how the capital ratios related to the BIS standards. Our findings were consistent with statements of some supervisory officials we interviewed who expressed concern about the usefulness of the reports to supervisors. For example, an official from one banking supervisor told us reports lacked important detail. The same official also said that the reports lacked candor and did not always address controversial issues. A staff member of a federal supervisor also told us that relevant information for planning examinations of some U.S. operations of FBOs could be almost wholly lacking in the SOSA report. This staff member told us that the country reports and SOSAs for the banks he supervised were useless in preparing examination plans because the country and SOSA reports focused on credit and asset quality, while the primary business of the banks in this country is trading in financial products. Some SOSAs and country reports contained outdated information on the FBO's financial condition or the economic or political condition of the FBO's home country. In our review, we found that a number of products completed in 1996 relied on December 1994 or March 1995 data. In addition, some products presented discussions of outdated political or economic conditions. In discussing these products and their usefulness, we found that supervisory officials we interviewed often agreed that outdated information is a problem. Also, staff at a Federal Reserve Bank identified as a problem the time lag between when the information was being analyzed and receipt of the finished product. To help correct this problem, the Federal Reserve Board is in the process of pilot testing a program, called FBO Desktop, with the Federal Reserve Bank of San Francisco. This program is designed to put all of the FBO Program products on-line. The goal of the program is to make it more efficient to share information and review FBO products. An official from the Federal Reserve Board told us the pilot was nearly completed, as of March 1997, and would be rolled out soon to the other Federal Reserve Banks and then to the other state and federal supervisors. However, Federal Reserve Board officials pointed out that, even though this system is expected to help improve timeliness, timeliness will continue to be impaired to some degree due to the fact that FBOs are required to file full financial statements with FRS only on an annual basis, English translations of such filings are often not available until mid-year, and disclosure problems may continue to exist. During our review of SOSA reports, we found some cases where the SOSA rankings did not appear to be justified by the information in the SOSA reports. For example, the program guidance states that an "A" SOSA ranking would indicate an FBO with a financial profile that is regarded as strong, with superior risk-based capital ratios, and that is comprehensively supervised, among other things. Yet, several FBOs that received "A" SOSA rankings were based in countries in which (1) banks were not required to disclose asset quality in reports to supervisors and (2) the reports said that the efficacy of supervision was questionable and that the supervisory system lacked an effective early warning system to identify financially weak institutions. Many of the supervisors we interviewed told us that they expect that the assignment of all SOSA rankings will eventually be consistent with the criteria in program guidance. However, they said achieving this level of consistency may be difficult because of the differences in financial and supervisory systems and types of information available among countries. Banking supervisors have made progress in implementing the FBO Program. Supervisors have identified a number of benefits of the program--most importantly, improved communication and cooperation among supervisors and improved access to information about FBOs and their home countries. At the same time, supervisors have just begun to use the information in SOSA and country reports to improve supervision and enforcement, and some supervisors indicated some skepticism about how useful the information from SOSA and country reports will be in improving FBO oversight. The various Federal Reserve Banks are developing different formats and strategies for integrating the information into the supervisory process. In addition, we identified a number of weaknesses in SOSA and country reports that could limit the program's effectiveness, including inconsistent, incomplete, or outdated information, as well as SOSA rankings that did not appear to be justified by information in the report. SOSA rankings that are unsupported or inconsistent with the ranking system criteria and report information that is inconsistent, incomplete, and out-of-date are obstacles to achieving a principal goal of the SOSA--to identify FBOs that may pose risks to their U.S. operations or to U.S. financial markets. Supervisory use of unreliable SOSA rankings could lead to inefficient levels and types of monitoring and to unequal treatment of FBOs' U.S. operations in enforcement actions, as well as potentially leading to ineffective oversight. The identified weaknesses could also cause supervisors to doubt the credibility of SOSA rankings and reports and thus limit supervisory use of the information resources the FBO supervision program is designed to provide. As FRS continues its implementation of the FBO Program, we recommend that the Board of Governors of the Federal Reserve System identify best practices for using the information in the SOSA and country reports to improve supervision and enforcement, and disseminate these best practices to all Federal Reserve Banks; and monitor the report process to help ensure that SOSA and country reports are consistent, complete, and timely, and that the SOSA rankings are consistent with the ranking system criteria. The Federal Reserve Board provided written comments on a draft of this report, and these comments and our responses are reprinted in appendix I. It also provided technical comments, which we incorporated where appropriate. The Federal Reserve Board generally agreed with the conclusions reached regarding the need for certain improvements in the content and use of the SOSA reports. In a subsequent conversation, a senior Federal Reserve Board official stated that the Federal Reserve Board had no objection to the recommendations. In its written comments, the Federal Reserve Board also noted that its work going forward will be largely concentrated on refining certain areas of the FBO Program to enhance its overall effectiveness, particularly in the areas of integration of the SOSA into examination planning and ensuring that appropriate linkages are established between all products in the program to promote the program's objectives. The Federal Reserve Board noted four steps that are being taken to help achieve this program improvement, which we have incorporated into the report. The Federal Reserve Board also observed that our efforts were directed principally toward a review of the SOSAs and emphasized that the SOSA is one of several tools in the FBO Program designed to assist bank supervisors in meeting the objectives of the program. While we did review a judgmental sample of finalized SOSAs and discuss the weaknesses we found, our efforts were not principally directed toward this review. The report describes each of the products of the FBO program and their interrelationships, and it discusses the benefits of all parts of the program realized to date. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Banking and Financial Services, the Chairman of the Federal Reserve Board, the Chairman of the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and other interested parties. We will also make copies available to others on request. Major contributors to this report are listed in appendix II. Please contact me at (202)512-8678 if you or your staff have any questions. The following are GAO's comments on the Federal Reserve Board's April 28, 1997, letter. 1. We added a footnote on page 19 that states that there is no prescribed list of required information for SOSAs. 2. As we stated on page 19, we expect some variation in the information provided in SOSA reports and as these reports are updated annually for any material changes, we expect this variation will continue. However, this variation is not necessarily a problem provided that important information--such as the likelihood of home country support or other details necessary for accurate analysis--is included in the SOSA reports. 3. We added a description of FRS' training seminar on page 18. 4. We added information on the supervisory implications section of the SOSA report in footnote 7 on page 9. 5. We added information on the procedures to review SOSAs on page 9. However, for the case of inconsistency between the country report and final SOSA we described on page 19, the SOSA had been approved through these new procedures, and this problem had not been corrected. 6. We added information on the likelihood that some problems with the timeliness of information will continue on page 21. Susan S. Westin, Assistant Director Kristi A. Peterson, Evaluator-in-Charge Charles G. Kilian, Senior Evaluator Desiree W. Whipple, Communications Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO provided information on the oversight of the U.S. operations of foreign banking organizations (FBO), focusing on the: (1) FBO program; and (2) banking supervisors' progress in implementing this program. GAO noted that: (1) the FBO Program focuses on integrating into supervisory procedures a common understanding of a given FBO in its entirety, including policies and practices in the FBO's home country as well as the overall condition of the FBO's combined U.S. operations; (2) the program calls for coordinated development and common use of five new products; (3) GAO refers to two of these as "the country reports"; (4) one country report is to provide information about the financial system and the supervisory and governmental policies in the FBO's home country, and the other is to provide information about significant accounting policies and practices in the home country; (5) a third product, the Strength-of-Support Assessment (SOSA), which is to be based on the country reports and other financial data, is to provide analysis and a ranking to reflect the U.S. supervisors' judgment about the FBO's ability to provide its U.S. operations necessary financial and managerial support; (6) a fourth product, the Summary of Condition and Combined Rating, is designed to provide FBO management and U.S. supervisors with an overall assessment of the FBO's U.S. operations; (7) the last new supervisory product, an annual comprehensive examination plan, is intended to better coordinate examinations of U.S. offices of FBOs with multiple U.S. banking operations and/or significant U.S. nonbanking operations; (8) in GAO's review of the FBO Program, GAO found that banking supervisors had made progress in implementing the program and had begun to realize benefits from it; (9) however, GAO also identified areas where improvements could be made; (10) supervisors identified some broad benefits of the program, particularly increased communication and cooperation among supervisors and improved access to information about FBOs and their home countries; (11) at the same time, comments of supervisory officials and staff indicated some skepticism about how useful the information from the SOSA reports will be in improving FBO supervision; (12) however, they also said that the various Federal Reserve Banks are developing different formats and strategies for integrating the information into the supervisory process; and (13) in addition, GAO identified a number of weaknesses in SOSA and country reports that could limit the program's effectiveness, including inconsistent, incomplete, or outdated information.
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GPO was established in 1861 to (1) assist Congress and federal agencies in the production and replication of information products and services, and (2) provide the public with government information products and services. GPO provides printing services to all three branches of government--either by producing work in-house or by procuring it from commercial printers. Information dissemination is accomplished through GPO's Superintendent of Documents, who is to provide public access to government information through (1) the sale of publications; (2) distribution of publications to depository and international exchange libraries, to those recipients designated by law, and for agencies on a reimbursable basis; and (3) compilation of catalogs and indexes containing complete and authoritative descriptions of government publications. The public printing and documents chapters of title 44 of the U. S. Code require GPO to fulfill the printing needs of the federal government and distribute government publications to the public. GPO's activities are financed through a revolving fund, which is reimbursed by payments from client agencies and sales of government publications, and transfers from the Congressional Printing and Binding Appropriation and the Salaries and Expenses Appropriation of the Superintendent of Documents. These annual appropriations are to reimburse GPO for costs incurred while performing congressional work and fulfilling statutory requirements associated with the distribution of government publications. Reimbursements from these appropriations to the revolving fund are recorded as revenues. The sales program operates within the revolving fund and is expected to recover its costs from its sales. According to GPO, the sales program does not receive any direct appropriation. GPO is headed by the Public Printer, who is nominated by the President and confirmed by the Senate. The sales program is led by the Superintendent of Documents, who reports directly to the Public Printer. The sales program provides the public the opportunity to purchase government publications and subscriptions at GPO's 24 bookstores across the country; through telephone, fax, and mail orders; and through consigned sales agents at other agencies. Within the Superintendent of Documents' staff is the Documents Sales Service, which includes staff in the Sales Management Division and Documents Control Branch. Other key players in the sales program include Customer Services, whose printing specialists serve as liaisons with the issuing agencies until the publications are produced, and the Office of the Comptroller, which keeps the financial records, including inventory. For more detail on GPO's organizational makeup, see appendix II. Once a publication is printed and enters the sales program, the Documents Control Branch, within the Sales Management Division, maintains inventory control, determines its continued salability, and makes reprinting and disposal decisions. Working with the issuing agency, Sales Management Division staff establish a life cycle for each publication that represents the period during which sales demand is expected. According to GPO, the average life cycle for a publication in its inventory is now about 12 months. As of September 1996, the sales program carried 13,268 publications in its inventory, valued at about $12.8 million based on printing and binding costs. The sales program did not report a loss between fiscal years 1981 and 1995. For fiscal year 1996, however, the sales program's expenses of $79.4 million exceeded revenues of $70.5 million, for a net loss of $8.9 million. As of June 1997, the sales program was showing a loss of about $537,000 for fiscal year 1997. In May 1996, financial projections indicated that the sales program expected a substantial loss for fiscal year 1996, the first such loss in 15 years. These projections were based on information that indicated that revenue was down and expenses were up for several reasons, including declining sales, the effect of the government shutdown at the beginning of fiscal year 1996, competition from other government sales programs, increasing use of free electronic publications, and a substantial increase in charges to surplus publications expense (i.e., the printing and binding costs of publications in GPO's inventory that are expected to be unsalable). As a result of the projected loss for fiscal year 1996, the Superintendent of Documents tasked a management team with developing an action plan to increase revenue and reduce expenses, with the objective of returning the sales program to full cost-recovery in fiscal year 1997. The plan, dated September 1996, originally contained 44 individual projects and was later amended to include 2 more projects. One original project was a special effort, over and above GPO's routine process for removing excess publications, to move aggressively to reduce the inventory of surplus publications before the new fiscal year began on October 1, 1996. Such a reduction would increase the surplus publications expense for fiscal year 1996 but was expected to decrease those expenses in fiscal year 1997 and subsequent years. In other words, the sales program's losses for fiscal year 1996 would be greater, but GPO officials hoped that this would result in the program breaking even or better for fiscal year 1997 and beyond. The inventory reduction began in early September 1996, even before the action plan was issued, with a deadline for completion of September 30, 1996. The September 1996 inventory reduction involved 2,127 publications that had a printing and binding cost of about $3 million, which was about one-third of the surplus publications expense GPO charged for publications it excessed and disposed of in fiscal year 1996. (See appendix III for examples of the publications disposed of in September 1996.) GPO's records and our discussions with GPO warehouse and contractor personnel indicate that the publications inventory that was excessed during the reduction was sold (for less than 3 cents per pound) to a scrap contractor, who was required by contractual terms to shred and recycle it rather than resell the individual publications. The Superintendent of Documents had issued policies and procedures for determining excess, obsolete, damaged, and destroyed information products and for managing inventory. Superintendent of Documents Policy No. 38, dated May 28, 1984, provides that publication inventories are to be reviewed quarterly to determine the quantities that are to be retained and those that are excess. This policy applies to inventories that are managed by headquarters staff. A separate procedure (Superintendent of Documents Policy No. 38.6) applies to inventories in GPO's bookstores. Under the existing policies and procedures, inventory management specialists (IMS) in the Documents Control Branch are to review quarterly the amount of inventory for the publications they manage. This review is conducted to identify whether the inventory should be reduced based on the sales history and projected life cycle of the publication. As part of the Superintendent of Documents' existing policy, which was issued by the current Public Printer when he was the Superintendent of Documents, once an IMS determines the number (if any) of copies of a publication that are excess, he or she is to call the issuing agency to determine whether it wants the extra copies. As part of the inventory review process for publications of high dollar value or with a large number of copies on hand, the IMS then is to complete Form 3880, which includes such information as the estimated printing and binding cost of the publication, anticipated sales, total copies sold, and whether the issuing agency wants any of the excess copies. (The form does not include the holding cost of retaining the copies in inventory.) This completed form is to be sent to a Documents Survey Board consisting of the Director of Documents Sales Service, the Chief of the Sales Management Division, and the Chief of the Documents Control Branch. If the Survey Board approves the form, the IMS then must prepare a notice to be sent to GPO's warehouse in Laurel, Maryland. At the warehouse, the excessed stock (i.e., stock not wanted by the issuing agency) is to be identified and moved to a separate area for periodic pick up by a contractor, who is required by the contract to shred the documents and have them recycled. The contractor is not permitted to resell the documents other than for recycling. During the major reduction in September 1996, the Superintendent of Documents' staff followed his orders and disregarded policy and normal procedures in order to reduce the inventory of excess publications before October 1, 1996. When the Superintendent of Documents realized that the sales program expected a substantial loss, he told his staff in a June 1996 memorandum that, while developing an action plan to increase revenue and reduce expenses, they should: "Ignore politics and external influences. Disregard current policies and practices that inhibit creativity and impede change." According to the Superintendent of Documents, his instruction to ignore politics and external influences referred to frequent requests from issuing agencies to have more copies of publications in the sales inventory than GPO believes can be sold. The Superintendent further said that he subsequently verbally instructed his staff to begin the inventory reduction before the action plan was approved and told them to disregard policies that would interfere with the removal of as much excess inventory by September 30, 1996, as possible. In order to maximize charges to surplus publications expense in fiscal year 1996, the Superintendent of Documents and GPO's Comptroller advised IMS staff to focus their attention on excessing publications that had high printing and binding costs, large quantities in inventory, and low sales volume. Also, during this major reduction, IMS decisions on what publications to excess did not receive the normal management review, and IMS staff did not call the issuing agencies to see whether they wanted the excess copies of their publications. Superintendent of Documents staff told us that they disregarded policy because they would not have had enough time to contact the issuing agencies and receive answers by September 30. According to these staff and Superintendent of Documents management officials, it would have been very difficult to contact all of the agencies involved with the 2,127 publications being excessed and to wait for their various responses concerning whether they wanted the excess copies. According to GPO, this response period usually takes about 4 weeks, and GPO officials did not believe that the agencies would be able to respond appropriately if given only a few days. According to Documents Control Branch staff, this disregard of policy resulted from the Superintendent's June 1996 memorandum and his oral instructions to his staff regarding the formulation of the action plan to increase revenue and reduce expenses. The IMS responsible for handling congressional publications, and his supervisor in September 1996, acknowledged discussing between themselves whether they should follow GPO's policy to offer excess publications to issuing agencies. They said that they felt they had the authority to dispose of the publications without notifying the issuing agencies because of time constraints and instructions from the Superintendent of Documents to disregard policies. They said that, given the Superintendent of Documents' instructions, they saw no need to tell management officials above them that they were disregarding this policy. The IMS responsible for handling congressional publications told us that he made the decision on which publications to excess based primarily on the criteria he was given--high printing and binding costs, large quantity in inventory, and low projected sales. According to the IMS, his decisions on which publications to dispose of in September 1996 were not reviewed or approved by the Documents Survey Board, as generally would be required. The publications selected for excessing by the IMS were approved by his supervisor, but no one else's approval was noted on the inventory records. The Superintendent of Documents said that he was responsible for policies not being followed and for the inventory reductions that took place at the end of fiscal year 1996. The Superintendent of Documents said that he wanted to dispose of the excess inventory by September 30, 1996, in order to take the losses in fiscal year 1996. He also said that he wanted to identify and dispose of as much excess inventory as possible in fiscal year 1996 rather than in later years, when it otherwise would have been identified, disposed of, and charged to expense. According to the Superintendent of Documents, he instructed staff to dispose of the excess inventory by September 30, 1996, because he mistakenly believed that the inventory had to be physically removed from GPO property before surplus publications expense could be charged. However, the inventory identified as excess by the IMS staff did not have to be disposed of by September 30, 1996, in order that the surplus publications expense could be charged to fiscal year 1996. Neither generally accepted accounting principles nor GPO's own accounting procedures require physically removing the excessed publications from GPO property before surplus publications expense can be charged. Surplus publications expense can be charged whenever GPO staff determine that inventory is obsolete or unsalable. In fact, GPO had another major inventory stock reduction in fiscal year 1981, and at that time, according to GPO's Comptroller, certain publications had been identified as excess but had not yet been disposed of when they were shown as an expense in GPO's financial records. Both GPO's Comptroller and the Superintendent of Documents agree that the latter misunderstood how publications expenses were handled in GPO's accounting system at the time of the major inventory reduction in 1996. They both said that, at that time, GPO had no written guidance or instructions stating that excess inventory does not have to be physically removed from GPO before surplus publications expense can be charged. In July 1997, the Public Printer told us that, while he was notified that a major inventory reduction would be taking place in 1996, he was not made aware of the details of the reduction. He said that he did not know that the policy to offer excess publications to the issuing agency, which he had instituted when he was Superintendent of Documents, was not followed in the September 1996 reduction. As mentioned earlier, according to the IMS responsible for handling congressional publications, the decisions concerning which publications to excess were primarily based on the criteria of high printing and binding costs, large quantity in inventory, and projected sales. The IMS said that the Senate history volumes met these criteria for disposal. According to the IMS, he made his decision concerning the number of copies of the Senate history to retain based on an estimate of future sales, using a 10-year estimated life cycle for each of the four volumes. According to GPO's records, the 10-year life cycle was developed when the volumes were first published, as a result of discussions involving the Senate Historian, House Historian, Joint Committee on Printing staff, and staff from GPO's Documents Sales Service group. GPO records show that, of the inventory that was excessed, 3,258 copies, involving some of each of the four volumes written by Senator Byrd, were disposed of. The 3,258 copies were about 10 percent of the total number originally printed of the four volumes (32,386 at a total cost of $1,572,291). The printing and binding cost of the 3,258 excessed copies was about $83,000. The scrap value received for the shredded copies was about $600. See table 1 for more detail. According to GPO records, GPO retained 1,134 total copies of the Senate history, which GPO inventory management staff kept in inventory based on the estimated quantity needed to meet a sales demand calculated on what they initially agreed with representatives from the Senate Historian's Office and others to be the life cycle for the publications. This life cycle was to be 10 years from the dates the volumes were published; their publication dates were 1988 (volume I), 1991 (volume II), 1994 (volume III), and 1993 (volume IV). Table 2 contains a breakdown of the disposition of the Senate history volumes, including the number on hand as of July 1997. A representative from GPO's Congressional Printing Management Division in Customer Services told us that, in June 1996, he told the IMS responsible for handling congressional publications that the Senate Historian's Office wanted any excess Senate history volumes that GPO might have. The responsible IMS said he knew that in the past the Senate Historian's Office had inquired about the status of the Senate history volumes on several occasions and that, while he recalled the previous inquiries by the Senate Historian's Office, he did not recall being told in June 1996 that the Senate Historian's Office wanted any excess copies. He said that he proceeded with the inventory reduction based on the Superintendent of Documents' instructions to disregard policies and ignore politics. Inventory records showed that he identified the copies as excess on September 6, 1996, and September 9, 1996. Warehouse records show that the copies were removed from the warehouse shelves for pickup by the scrap contractor on September 10, 1996, and September 12, 1996. All of the Superintendent of Documents staff we interviewed who were involved in the September 1996 inventory reduction said that no specific discussion of the Senate history volumes occurred during the September 1996 reduction. The Public Printer said he did not know at the time that the Senate history volumes were among those being excessed and that, if he had, those books would not have been disposed of. GPO has taken action or has actions in process that are aimed at helping to prevent a recurrence of a situation in which excess publications are disposed of without regard to established policies and procedures. While GPO's initial actions could have helped prevent a recurrence, they did not appear to address all of the underlying causes of the problems associated with the September 1996 major inventory reduction. During the course of our review, we identified and brought to GPO's attention several additional actions that we believed would address those causes. As discussed below, GPO officials agreed and took additional steps to prevent a recurrence. In May 6, 1997, and July 11, 1997, letters to Senator Byrd, the Public Printer said that GPO had made an error in disposing of the Senate history volumes and that all four volumes, because of their historical significance, would remain in print and available through the sales program indefinitely. According to the Superintendent of Documents, this action was carried out through oral instructions to his staff in July 1997. In response to these oral instructions, the IMS responsible for handling congressional publications wrote a note saying not to dispose of these volumes without top management's approval and attached the note to the inventory control cards he maintained for these volumes. At our recommendation, the Superintendent of Documents put his oral instructions in writing in August 1997. In response to our inquiries, both the Public Printer and the Superintendent said that some publications, such as the Constitution and the Senate history volumes, should be kept indefinitely because of their historical significance. The Superintendent said that GPO did not have a systematic process for identifying or designating such publications but that, in response to our recommendation, GPO would develop a formal system for identifying publications that should remain in inventory indefinitely. In addition, he said that GPO was already developing a new inventory management system that would allow publications that are to be held indefinitely to be designated as such once they have been identified. The Superintendent of Documents also acknowledged that his lack of awareness about the planned disposal of the Senate history volumes contributed to their being excessed. On July 22, 1997, the Superintendent of Documents sent a memorandum to his staff stating that no further exceptions should be made to the current policy on excess, obsolete, damaged, and destroyed information products and that "excess stocks will be offered to the issuing agency." On July 23, 1997, the Superintendent of Documents asked his staff to revise his formal policy document dated May 28, 1984, to address the problems that arose in connection with the September 1996 inventory reduction. According to the Superintendent of Documents, this revised policy will provide that excessed inventory should be charged to surplus publications expense when it is determined to be excess. The excessed inventory is then to be held in the warehouse for a reasonable period while issuing agencies are contacted to see if they want the excess publications. Under the Superintendent's revised procedures, the policy of offering issuing agencies excess copies before their disposal cannot be waived. We pointed out that we saw no written statement in GPO's policies, procedures, or guidance that specifically said that excessed inventory does not have to be physically removed from GPO's warehouse before it can be charged to surplus publications expense. Both the Superintendent of Documents and the Comptroller agreed that the lack of such a written statement may have contributed to the misunderstanding that took place in 1996. In August 1997, GPO's Comptroller prepared such a statement. Another action GPO has had in process for some time that could also help prevent a recurrence of the problems of the September 1996 reduction is the development of a new Integrated Processing System. The Superintendent of Documents expects this new system, which GPO plans to implement in October 1997, to provide his office with more flexibility in tracking inventory and better information for making decisions to excess publications. According to the Superintendent of Documents, the new system will (1) allow GPO to designate inventory as excess without physically relocating it in the warehouse, and (2) include a comment box where the IMS can indicate that a publication is not to be excessed or make other appropriate notations about its disposition. Until the new system is implemented, notations concerning holding copies indefinitely must be made on records that are maintained manually. Finally, another dilemma GPO has faced in disposing of excess inventory is the lack of authority to donate excess publications to schools or similar institutions. Under existing law and policy, GPO's current options for disposing of excess publications are to offer them to issuing agencies at no cost or to dispose of them as scrap. GPO is also precluded by statute and regulation from offering publications to the public at discount prices except to those who buy 100 or more copies of the same publication or to book dealers who agree to resell the books at GPO's prices--in which case, GPO can only offer a maximum discount of 25 percent. To address this problem, in May 1997, as part of its recommended revision of title 44 of the U. S. Code, GPO forwarded a proposal to the Joint Committee on Printing that would authorize the donation of excess publications to schools or similar institutions if the copies are not wanted by the issuing agency. In a May 6, 1997, letter to Senator Byrd, the Public Printer said that, on the basis of a study GPO had done, it was more cost-effective to maintain an adequate inventory of sales publications based on their projected life cycle and to reprint if necessary, than to hold excess copies of publications in inventory. According to the Superintendent of Documents, who drafted the May 6 letter for the Public Printer, the study cited in the letter referred to data supplied by the GPO's Comptroller in 1996. These data showed that, overall, GPO's inventory of excess publications was growing and was contributing to increasing charges to surplus publications expense. These increased charges were, in turn, contributing to a worsening financial situation for the sales program. To help remedy this problem, according to the Superintendent of Documents, the Comptroller recommended that the Superintendent identify as much excess inventory as possible in fiscal year 1996 to improve the sales program's long-term financial situation. According to the Superintendent of Documents, the statement in the May 6 letter pertained to the typical publication, which he said has a printing and binding cost of about $2 per copy; it did not specifically pertain to the Senate history volumes, which had a printing and binding cost of $19 to $35 per copy. In this regard, we noted that the printing and binding cost of the 3,258 copies of the Senate history volumes disposed of was about $83,000, and that GPO's estimated annual storage costs attributable to these copies was about $2,500. These figures can be compared to GPO's estimated reprinting cost of about $210,000 should GPO reprint the copies disposed of, which it has agreed to do if necessary. During our review of GPO's inventory management records, we also noted that Form 3880, which IMS staff use to make recommendations and supervisory personnel use to review actions on obsolete or excess inventory, does not provide for inclusion of data on storage or holding costs for publications. This omission is inconsistent with a memorandum, dated January 4, 1985, from the Chief, Sales Management Division, to Documents Control Branch staff, which directed that reasonable life cycles should be consistent with economic analysis of the following factors: expected trend, reprint costs, expected revision date, and holding costs. The memorandum also stated that, when reviewing records to identify excess or consider extension of the life cycle, the following factors should be considered: continued marketability, projected revenue, and estimated holding costs. We discussed this inconsistency with the Superintendent of Documents in August 1997. He said storage or holding costs are usually not significant, but he recognized that they should be considered in making decisions on excess inventory. He agreed to modify Form 3880 to incorporate consideration of such costs. To achieve its financial objective, GPO did not have to disregard policy and procedures for notifying the issuing agencies of excess publications. Because of the erroneous belief of the Superintendent of Documents, who heads GPO's sales program, that GPO had to physically remove excess publications from the GPO warehouse by September 30, 1996, in order to record them as an expense for fiscal year 1996, and because of his express instruction to disregard policies and procedures, GPO staff disposed of about 2,100 different publications without first contacting the issuing agencies of those publications. As a result, 3,258 copies of the Senate history were destroyed, even though the Senate Historian's Office had told a GPO representative that it wanted any excess copies. GPO has taken or plans to take actions that, if effectively implemented, should prevent this situation from recurring. We made various recommendations during the course of our work that GPO agreed to and either implemented the corrective action or is in the process of doing so. Thus, we are making no further recommendations. On September 5, 1997, we provided the Public Printer with a draft of this report for comment. We received his written comments, included in their entirety in appendix IV, on September 10, 1997. The Public Printer said that the report fairly represents the events as they occurred during the September 1996 inventory reduction. He also said that actions have been and are being taken to ensure that no sales publications will be disposed of in the future without strict adherence to applicable GPO policies and procedures. We are sending copies of this report to the Public Printer of the Government Printing Office and the Chairman and the Vice Chairman of the Joint Committee on Printing. We will make copies available to others upon request. Major contributors to this report are listed in appendix V. If you have any questions concerning this report, please call me on (202) 512-4232. As agreed with your offices, our objectives were to determine the facts surrounding the September 1996 inventory reduction; whether it followed existing policies and procedures; and the fate of the 3,258 copies of The Senate 1789-1989, a four-volume set written by Senator Byrd, that were destroyed as part of that reduction. In order to obtain information on GPO's sales program and the inventory reduction held in September 1996, we reviewed pertinent documentation, such as GPO's inventory control records, policies and procedures, memoranda, and financial records and reports. We interviewed the Public Printer, the Superintendent of Documents and his staff who were involved in the reduction, the Comptroller and his staff who are responsible for the financial records, and staff in the Congressional Printing and Management Division who serve as the liaison with the Senate Historian's Office for Senate publications, including Senator Byrd's books. We visited GPO's Laurel, Maryland, warehouse where excessed publications are disposed of; reviewed its inventory disposition records; and interviewed a representative of GPO's contractor that had picked up GPO's excessed publications from its Laurel warehouse in September 1996. In addition, we reviewed GPO's authority to donate surplus books. We coordinated our review with GPO's Office of Inspector General. The representative from GPO's contractor told us that his company did not maintain any records that would specifically show that the 3,258 Senate history copies were shredded. Therefore, we had to rely on GPO's records and interviews with GPO staff and the contractor's representative to determine what happened to the 3,258 Senate history copies that were excessed. Further, we did not verify GPO's computerized inventory or financial records or do actual counts of the remaining stock inventory of the Senate history volumes at the Laurel warehouse. In addition to the Senate history volumes, we selected the following examples of excessed publications to provide a mix of publications from both the legislative and executive branches and, in some cases, to reflect publications having high dollar values. John S. Baldwin, Sr., Assistant Director Michael W. Jarvis, Evaluator-in-Charge Kiki Theodoropoulos, Senior Evaluator (Communications Analyst) Victor B. Goddard, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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Pursuant to a congressional request, GAO reviewed the Government Printing Office's (GPO) procedures for managing its inventory of excess publications, particularly its management of a major inventory reduction that took place in September 1996, focusing on: (1) whether GPO followed existing policies and procedures; and (2) how 3,258 copies of The Senate 1789-1989, a four-volume set written by Senator Byrd, were destroyed as part of that reduction. GAO noted that: (1) when for the first time in 15 years a potential financial loss was identified in GPO's sales program in June 1996, the Superintendent of Documents, who heads the sales program, initiated several actions intended to improve the program's long-term financial condition; (2) the Superintendent of Documents said he wanted to dispose of the excess inventory by September 30, 1996, to take the losses in fiscal year (FY) 1996 rather than in later years, when it otherwise would have been identified, disposed of, and charged to expense; (3) the Superintendent of Documents also said he had erroneously believed that it was necessary to physically remove excess publications from inventory storage by September 30, 1996, in order to record them as an expense in the financial records for FY 1996; (4) although the Superintendent of Documents had policies and procedures in place to prevent the disposal of publications that the issuing agency still wanted, in June 1996 he instructed his staff to disregard those policies that would interfere with his goal of disposing of as much excess publications inventory as possible by September 30, 1996; (5) acting under the Superintendent's overall instructions, GPO sales program staff disregarded a policy that has existed since at least 1984, which provides that, before disposing of any excess copies of publications, GPO should offer them to the issuing agencies; (6) in explaining its inventory reduction to Senator Byrd, GPO said that it had found that it was generally more cost-effective to dispose of excess inventory and reprint if necessary, than to hold it in storage indefinitely; (7) however, GPO officials said that they knew that the reprint costs would substantially exceed the holding costs for these copies, given their relatively high printing and binding costs; (8) in July 1997, after Senator Byrd inquired about the major inventory reduction, the Superintendent of Documents orally instructed his staff to retain the remaining volumes of the Senate history and, at GAO's recommendation, put this instruction in writing in August 1997; and (9) the Superintendent further said that GPO was developing a new integrated processing system that would help designate publications that should not be excessed and, at GAO's recommendation, agreed to develop a systematic process for identifying publications to be held indefinitely for valid reasons.
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The private sector, driven by today's globally competitive business environment, is faced with the challenge of improving its service while lowering costs. As a result, many companies have adopted innovative business practices to meet customer needs and retain profitability. Since DOD is facing a similar challenge of providing better service at a lower cost, it has begun to reexamine its business practices. With the end of the Cold War, the DOD logistics system must support a smaller, highly mobile, high technology force with fewer resources. Also, due to the pressures of budgetary limits and base closures, DOD must seek new and innovative ways to make logistics processes as efficient and effective as possible. To supply reparable parts for its approximately 4,900 aircraft, the Navy uses an extensive logistics system based on management concepts largely developed decades ago. The Navy's system, commonly called a "pipeline," consists of many activities that play a key role in providing aircraft parts to end-users when and where needed. This pipeline encompasses several functions, including the purchase, storage, distribution, and repair of parts. Another important function of this pipeline is to provide consumable parts (e.g., nuts, bearings, and fuses) that are used extensively to fix reparable parts and aircraft. The Defense Logistics Agency (DLA) provides most of the consumable parts that Navy repair activities need and handles a large part of the warehousing and distribution of reparable parts. Although not as large as the Navy, commercial airlines have similar operating characteristics to the Navy. They maintain fleets of aircraft that use reparable parts and operate logistics pipelines whose activities are similar. For both the Navy and commercial airlines, time plays a crucial role in the responsiveness of logistics operations and the amount of inventory needed. Pipeline complexity also adds to logistics costs by increasing overhead and adding to pipeline times. Condensing and simplifying pipeline operations, therefore, simultaneously improves responsiveness and decreases costs by reducing inventory requirements and eliminating infrastructure (warehouses, people, etc.) needed to manage unnecessary material. The Navy's overall inventory management philosophy is one of maintaining large inventory levels at many different locations to ensure parts are readily available to meet customers' needs. As of September 1995, the Navy had reparable inventory valued at $10.4 billion. However, a portion of this inventory is not needed to support daily operations and war reserves. Of the $10.4 billion inventory, the Navy classifies $1.9 billion (18 percent) as long supply--a term denoting that more stock is on hand than is needed to meet daily operations and war reserve requirements.The $10.4-billion and the $1.9-billion inventories were valued using DOD's standard valuation methodology--reparables requiring repair were reduced by the estimated cost of repair and excess inventory was valued at salvage prices (2.5 percent of latest acquisition cost). Figure 1 details the Navy's allocation of its inventory to daily operations, war reserves, and long supply. The inventory turnover rate is a measure of how efficiently a business uses its inventory investment and can be expressed as the ratio of the dollar value of repairs to the average inventory value. One commercial airline we visited calculated that, using this ratio, it would turn its reparable inventory over once every 5 months. In comparison, we calculate that, based on fiscal year 1995 repairs, the Navy's wholesale-level inventory of reparable parts would turn over once every 2 years. The Navy incurs significant costs to manage this large inventory investment. At the wholesale level alone, the Navy estimates it spent almost $1.8 billion to repair, buy, and manage reparable parts during fiscal year 1995 (see table 1). This amount does not include the costs to store and maintain parts at operating locations, such as bases and aircraft carriers. Despite the billions of dollars invested in inventory, the Navy's logistics system is still often unable to provide spare parts when and where needed. During fiscal year 1995, Navy aircraft were not mission capable 11.9 percent of the time because spare parts were not available to repair the aircraft (see fig. 2). One reason parts were not available was that the Navy's system often does not provide timely deliveries of parts. The Navy reported that, between October 1994 and June 1995, parts were not immediately available to mechanics at operating locations 25 percent of the time for reparable parts and 43 percent for consumable parts. When a part is not available, an end-user requisitions the part from the wholesale supply system. According to the Navy's data, the length of time from requisition to delivery of a part takes, on average, 16 days to operating bases and 32 days to aircraft carriers. If the Navy's wholesale system does not have the item in stock (32 percent of the time for reparable parts), the Navy places the item on backorder. According to the Navy's data, customers wait over 2.5 months, on average, to receive backordered items. The Navy reported that, as of June 1995, it had more than 31,000 backorders for reparable parts, worth about $831 million. The delay in receiving parts often forces mechanics to cannibalize parts (removing parts from one aircraft to make repairs on another). Between July 1994 and June 1995, the Navy reported that its mechanics at operating bases and on aircraft carriers cannibalized parts at least 70,500 times. This practice is inefficient because the mechanics have to remove a working part from one aircraft and then install the part on a different aircraft. According to Navy guidance, cannibalization is a symptom of a failure somewhere in the logistics system, but, in some instances, can be a viable management tool in keeping aircraft operational. Aircraft squadron officials at several locations we visited, however, told us that cannibalizing parts is a routine practice because the Navy's system does not consistently provide replacement parts on a dependable basis. The Navy's large inventory costs and slow customer service are the result of several factors, but the largest contributor is a slow and complex repair pipeline. According to Navy officials, about 75 percent of component repairs are relatively minor in nature and can be done by maintenance personnel at the operating bases. They also stated that, when a part requires more complex and extensive repair (about 25 percent of the time), the process can create as many as 16 time-consuming steps as parts move through the repair pipeline (see fig. 3). Component parts can accumulate at each step in the process, which increases the total number of parts that are needed to meet customer demands and to ensure a continuous flow of parts. Tracking parts through each of the 16 steps listed in figure 3, we estimate, using the Navy's flow time data, that it can take about 4 months, on average, from the time a broken part is removed from an aircraft until the time it is ready for reissue. Flightline As figure 3 illustrates, a broken part can pass through a number of base- and wholesale-level steps. At the base level, after a mechanic removes a broken part from an aircraft, the item is routed through base maintenance. If the part cannot be repaired at the base, it is then sent to a wholesale storage location, where it sits until scheduled for repair. Once scheduled, it is inducted into repair workshops and fixed, then sent to storage or used to fill a customer's order. The Navy reported that over 190,000 parts were fixed through this process during fiscal year 1995 at a cost of about $957 million. While the repair pipeline time can take as long as 4 months, on average, it could be significantly longer because it does not include the time parts sit in wholesale storage awaiting repair. The Navy does not measure this step in the process; however, this time could be substantial. For example, the Navy does not promptly forward items to repair workshops after they break. Also, because the Navy schedules most repairs quarterly, many broken items could sit in storage for several months before being repaired. Parts may also sit in storage because many broken items in the Navy's system are not needed to support daily operations or war reserves. Of the portions of the pipeline that are measured, the time spent receiving and repairing items at repair facilities accounts for the largest amount of pipeline time. Shown in figure 3 as "repair facility receiving" and "repair workshops," these activities take an average of 73 days to complete. In examining the repair process at two repair facilities, we found that parts can be routed through several different workshops, thereby increasing the time to complete repairs. Functions such as testing, cleaning, machining, and final assembly are sometimes done at different locations at the repair facility. As a result, parts could be handled, packaged, and transported several times throughout the repair process. According to Navy officials, this is a common practice at the Navy's repair facilities. At one repair facility, we examined 10 frequently repaired pneumatic and hydraulic components and found that about 85 percent of the repair time needed for these parts involved activities such as unpacking, handling, and routing the part to different workshops. The remaining 15 percent of the time was spent on the actual repair of the items. One item we examined had a repair time of 232 hours. However, only 20 hours was needed to actually repair the item; the remaining 212 hours involved time to handle and move the part to different locations. In addition to delays caused by routing parts to different locations, mechanics often do not have the necessary consumable parts (nuts, bolts, bearings, fuses, etc.) that are used in large quantities to repair parts. According to Navy officials, having the necessary consumable parts is another important factor affecting the timely repair of components. The Navy calculates that the lack of parts adds as much as 4 weeks to the average repair time. As of February 1996, the Navy had 11,753 reparable aircraft parts, valued at $486 million, in storage because parts were not available during the repair process to complete repairs. These items, which had been packaged and moved to a warehouse next to the repair facility, had been in storage for an average of 9 months. Figure 4 shows aircraft components awaiting parts in a warehouse at the Navy's repair depot at Cherry Point, North Carolina. The Navy's data indicates that DOD's distribution and transportation system is slow in moving material among storage, repair, and end-user facilities and is another factor adding to the length of the repair pipeline. For example, with the current system, it takes an average of 16 days for a customer to receive a part at an operating base after a requisition is placed. As of June 1995, the Navy estimated that over one-half of this time involved DLA's retrieval of the part from the warehouse and shipment of the part to the customer. In recognition of a changing global threat, increasing budgetary pressures, and the need for improvements to logistics system responsiveness, the Navy has recently undertaken three primary initiatives aimed at streamlining logistics operations. These initiatives are the regionalization of supply management and maintenance functions, privatization and outsourcing, and logistics response time reductions. The Navy is in the early stages of developing these initiatives and has not yet identified many of the specific business practices that it will use to achieve its goals. We have not reviewed the feasibility of these initiatives. However, we believe the initiatives provide a framework for improvements by focusing on the speed and complexity of the logistics pipeline. Under its regional supply initiative, the Navy is consolidating certain supply operations that are managed by a number of organizations under regionally managed supply centers. For example, naval bases, aviation repair depots, and shipyards each have supply organizations to manage their parts needs. These activities often use different information systems and business practices and their own personnel and facilities. Under the new process, one supply center in each of seven geographic regions will centrally manage the spare parts for these individual operations, with the objective of improving parts' visibility and reducing the overhead expenses associated with separate management functions. The Navy also hopes this approach will lead to better sharing of inventory between locations, thus allowing it to reduce inventories. The Navy is not consolidating inventories into fewer storage locations; however, it is transferring data and management functions to the centers. Similarly, maintenance activities, such as base-level repair operations and depot-level repair operations, are managed by different organizations. As a result, maintenance capabilities, personnel, and facilities may be unnecessarily duplicated. Under the regional maintenance initiative, the Navy is identifying these redundant maintenance capabilities and consolidating these operations into regionally based repair facilities. For example, in one region, the Navy is consolidating 32 locations used to calibrate maintenance test equipment into 4 locations. The Navy believes that, by eliminating the fragmented management approach to supply management and maintenance, it can decrease infrastructure costs by reducing redundancies and eliminating excess capacity. The Navy also believes that by moving away from highly decentralized operations, it will be better positioned to improve and streamline operations Navy-wide. Both initiatives are in the early phases, however, so broad-based improvements have not yet occurred. The Navy also has an initiative to outsource and privatize functions. This initiative encompasses a broad spectrum of Navy activities, and possible outsourcing of functions within the reparable parts pipeline is only one aspect of this effort. Within the pipeline, the Navy has identified several material management functions, such as cataloging of items and overseas warehousing operations, as potential candidates for outsourcing. In January 1996, the Navy began developing cost analyses to determine whether contracting these functions out would be beneficial. Navy officials told us that they did not know when analyses on all candidates would be completed. One official said, however, that some candidates may be outsourced in 1997 at the earliest. The Navy expects other activities to be targeted for outsourcing in the future. According to Navy officials, those candidates will be identified as the Navy's initiatives to streamline and improve operations progress. The objective of this initiative is to reduce the amount of time it takes a customer, such as a mechanic, to receive a part after placing an order. This initiative takes into account the series of processes that contribute to ensuring customers get the parts they need. These processes include placing and processing orders; storing, transporting, and distributing inventory; and repairing broken items. The Office of the Secretary of Defense (OSD) has established responsiveness goals that the Navy and other services are encouraged to meet. OSD wants to reduce the time it takes to fill a customer's order from wholesale stock to 5 days by September 1996 and to 3 days by September 1998. OSD also wants to reduce the average backorder age to 30 days by October 2001. The Navy hopes to achieve these goals by looking at the pipeline as a whole and improving processes where needed. To identify and carry out improvements, the Navy has established a Logistics Response Time team, consisting of representatives from across the Navy and from DLA. Thus far, the team has focused primarily on collecting the data needed to accurately measure pipeline performance. In the spring of 1996, the team expects to begin identifying areas where process improvements should be applied to achieve the biggest gains in performance. This work will then be used to identify specific practices for carrying out these improvements. The airline industry has developed leading-edge practices that focus on reducing the time and complexity associated with logistics operations. We identified four best practices in the airline industry that have the potential for use in the Navy's system. These practices have resulted in significant improvements and reduced logistics costs, especially for British Airways. These practices include the prompt repair of items, the reorganization of the repair process, the establishment of partnerships with key suppliers, and the use of third-party logistics services. When used together, they can help maximize a company's inventory investment, decrease inventory levels, and provide a more flexible repair capability. In our opinion, they address many of the same problems the Navy faces and represent practices that could be applied to Navy operations. These practices appear particularly suited to Navy facilities that repair aircraft and components, such as repair depots and operating bases. Certain airlines begin repairing items as quickly as possible, which prevents the broken items from sitting idle for extended periods. Minimizing idle time helps reduce inventories because it lessens the need for extra "cushions" of inventory to cover operations while parts are out of service. In addition, repairing items promptly promotes flexible scheduling and production practices, enabling maintenance operations to respond more quickly as repair needs arise. Prompt repair involves inducting parts into maintenance shops soon after broken items arrive at repair facilities. Prompt repair does not mean that all parts are fixed, however. The goal is to quickly fix only those parts that are needed. One airline that uses this approach routes broken items directly to holding areas next to repair shops, rather than to stand-alone warehouses, so that mechanics can quickly access broken parts when it comes time for repair. These holding areas also give mechanics better visibility of any backlog. It is difficult to specifically quantify the benefits of repairing items promptly because it is often used with other practices to speed up pipeline processes. One airline official said, however, that his airline has kept inventory investment down partly because it does not allow broken parts to sit idle. In addition, the Air Force found through a series of demonstration projects that prompt repair, when used with other practices, could enable operations to be sustained with significantly fewer parts. For example, the Air Force reported in February 1995 that after the new practices were put in place at one location, 52 percent ($56.3 million) of the items involved in the test were potentially excess. The Air Force tested the new practices as part of its Lean Logistics program, which aims to improve Air Force logistics operations. One approach to simplify the repair process is the "cellular" concept. This concept brings all the resources, such as tooling and support equipment, personnel, and inventory, that are needed to repair a broken part into one location, or one "cell." This approach simplifies the flow of parts by eliminating the time-consuming exercise of routing parts to workshops in different locations. It also ensures that mechanics have the technical support so that operations run smoothly. In addition, because inventory is placed near workshops, mechanics have quick access to the parts they need to complete repairs more quickly. British Airways adopted the cellular approach after determining that parts could be repaired as much as 10 times faster using this concept. Another airline that adopted this approach in its engine-blade repair shop was able to reduce repair time by 50 to 60 percent and decrease work-in-process inventory by 60 percent. Figure 5 shows a repair cell used in British Airways maintenance center at Heathrow Airport. Several airlines and manufacturers have worked with suppliers to improve parts support while reducing overall inventory. Two approaches--the use of local distribution centers and integrated supplier programs-- specifically seek to improve the management and distribution of consumable items. These approaches help ensure that the consumable parts for repair and manufacturing operations are readily available, which prevents items from stalling in the repair process and is crucial in speeding up repair time. In addition, by improving management and distribution methods, such as using streamlined ordering and fast deliveries, these approaches enable firms to delay the purchase of inventory until a point that is closer to the time it is needed. Firms, therefore, can reduce their stocks of "just-in-case" inventory. Local distribution centers are supplier-operated facilities that are established near a customer's operations and provide deliveries of parts within 24 hours. One airline that used this approach has worked with key suppliers to establish more than 30 centers near its major repair operations. These centers receive orders electronically and, in some cases, handle up to eight deliveries a day. Airline officials said that the ability to get parts quickly has contributed to repair time reductions. In addition, the officials said that the centers have helped the airline cut its on-hand supply of consumable items nearly in half. Integrated supplier programs involve shifting inventory management functions to suppliers. Under this arrangement, a supplier is responsible for monitoring parts usage and determining how much inventory is needed to maintain a sufficient supply. The supplier's services are tailored to the customer's requirements and can include placing a supplier representative in customer facilities to monitor supply bins at end-user locations, place orders, manage receipts, and restock bins. Other services can include 24-hour order-to-delivery times, quality inspection, parts kits, establishment of data interchange links and inventory bar coding, and vendor selection management. One manufacturer that used this approach received parts from its supplier within 24 hours of placing an order 98 percent of the time, which enabled it to reduce inventories for these items by $7.4 million--an 84-percent reduction. We have issued a series of reports on similar private sector practices that could be applied to DOD's consumable inventories. These reports recommended new techniques that would minimize DOD's role in storing and distributing consumable inventories. Companies, such as PPG Industries and Bethlehem Steel, have reduced consumable inventories by as much as 80 percent and saved millions in associated costs by using "supplier parks" and other techniques that give established commercial distribution networks the responsibility to manage, store, and distribute inventory on a frequent and regular basis to end-users. The airlines we contacted provided examples of how third-party logistics providers can be used to reduce costs and improve performance. Third-party firms take on responsibility for managing and carrying out certain logistics functions, such as storage and distribution. Outsourcing these tasks enables companies to reduce overhead costs because it eliminates the need to maintain personnel, facilities, and other resources that are required to do these functions in-house. It also helps companies improve various aspects of their operations because third-party providers can offer expertise that companies often do not have the time or the resources to develop. For example, one airline contracts with a third-party logistics provider to handle deliveries and pickups from suppliers and repair vendors, which has improved the reliability and speed of deliveries and reduced overall administrative costs. The airline receives most items within 5 days, which includes time-consuming customs delays, and is able to deliver most items to repair vendors in 3 days. In the past, deliveries took as long as 3 weeks. Third-party providers can also assume other functions. One third-party firm that we visited, for example, can assume warehousing and shipping responsibilities and provide rapid transportation to speed parts to end-users. The company can also pick up any broken parts from a customer and deliver them to the source of repair within 48 hours. In addition, this company maintains the data associated with warehousing and in-transit activities, offering real-time visibility of assets. The best practices that we observed in the airline industry can prove particularly beneficial when used in an integrated fashion. One airline, British Airways, used all of these practices as part of an overall reengineering effort, and it illustrates the benefits of using such an integrated approach. These efforts have helped transform British Airways from a financially troubled, state-owned airline into a successful private sector enterprise. British Airways today is considered among the most profitable airlines in the world and has posted profits every year since 1983. Table 2 shows several key logistics performance measures of British Airways and the Navy. In addition to implementing the four practices discussed earlier, British Airways took a number of other steps to successfully reengineer its logistics operations. One of the first steps was to undertake a fundamental shift in corporate philosophy, where British Airways placed top priority on customer service and cost containment. This philosophy directed all improvement efforts, and specific practices were assessed on how well they furthered these overall goals. Also, British Airways approached the process of change as a long-term effort that requires a steady vision and a focus on continual improvement. Although the airline has reaped significant gains to date, it continues to reexamine and improve its operations. Additional steps taken by British Airways to reengineer its operations include (1) reorienting the workforce toward the new philosophy; (2) providing managers and employees with adequate information systems to control, track, and assess operations; and (3) refurbishing existing facilities and constructing new ones to accommodate the new practices. As part of the Navy's current efforts to improve the logistics system's responsiveness and reduce its complexity, we recommend that the Secretary of Defense direct the Secretary of the Navy, working with DLA, to develop a demonstration project to determine the extent to which the Navy can apply best practices to its logistics operations. We recommend that the Secretary of the Navy identify several naval facilities to participate in the project and test specific practices highlighted in this report. The practices should be tested in an integrated manner, where feasible, to maximize the interrelationship many of these practices have with one another. The specific practices that should be tested are inducting parts at repair depots soon after they break, consistent with repair requirements, to prevent parts from sitting idle; reorganizing repair workshops using the cellular concept to reduce the time it takes to repair parts; using integrated supplier programs to shift the management responsibilities for consumable inventories to suppliers; using local supplier distribution centers near repair facilities for quick shipments of parts to mechanics; and expanding the use of third-party logistics services to store and distribute spare parts between the depots and end-users to improve delivery times. We recommend that this demonstration project be used to quantify the costs and benefits of these practices and to serve as a means to identify and alleviate barriers or obstacles (such as overcoming a strong internal resistance to change and any unique operational requirements) that may inhibit the expansion of these practices. After these practices have been tested, the Navy should consider expanding and tailoring the use of these practices, where feasible, so they can be applied to other locations. In its comments on a draft of this report, DOD agreed with the findings and recommendations. DOD stated that by September 30, 1996, the Deputy Under Secretary of Defense (Logistics) will issue a memorandum to the Secretary of the Navy and the Director of DLA, requesting that a demonstration project be initiated. According to DOD, this project should be started by the first quarter of fiscal year 1997. The Navy will conduct a business case analysis and assess the leading-edge practices highlighted in this report for their applicability in a Navy setting and, where appropriate, will tailor and adopt a version of these practices for use in its repair process. DOD also stated that it will ask the Navy to submit an in-process review not later than 6 months after the inception of the business case analysis. Finally, DOD agreed that after the practices have been tested, the Navy should consider expanding and tailoring the use of these practices so they can be applied to other locations. DOD's comments are included in appendix I. We reviewed detailed documents and interviewed officials about the Navy's inventory policies, practices, and efforts to improve its logistics operations. We contacted officials at the Office of the Chief of Naval Operations, Washington, D.C.; U.S. Naval Supply Systems Command, Arlington, Virginia; U.S. Naval Air Systems Command, Arlington, Virginia; U.S. Atlantic Fleet Command, Norfolk, Virginia; and the Naval Inventory Control Point, Philadelphia, Pennsylvania. Also at these locations, we discussed the potential applications of private sector logistics practices to the Navy's operations. To examine Navy logistics operations and improvement efforts, we visited the following locations: Naval Aviation Depot, Cherry Point, North Carolina; Naval Aviation Depot, Jacksonville, Florida; Oceana Naval Air Station, Virginia Beach, Virginia; Jacksonville Naval Air Station, Jacksonville, Florida; Norfolk Naval Air Station, Norfolk, Virginia; Fleet and Industrial Supply Center, Norfolk, Virginia; Fleet and Industrial Supply Center, Jacksonville, Florida; Defense Distribution Depot, Cherry Point, North Carolina; Defense Distribution Depot, Jacksonville, Florida; and U.S.S. Enterprise. At these locations we discussed with supply, maintenance, and aircraft squadron personnel, the operations of the current logistics system, customer satisfaction, and the potential application of private sector logistics practices to their operations. Also, we reviewed and analyzed detailed information on inventory levels and usage; repair times; supply effectiveness and response times; and other related logistics performance measures. Except where noted, our data reflects inventory valued by the Navy at latest acquisition costs. We did not test or otherwise validate the Navy's data. To identify leading commercial practices, we used information from our February 1996 report that compared Air Force logistics practices to those of commercial airlines. This information included an extensive literature search to identify leading inventory management concepts and detailed examinations and discussions of logistics practices used by British Airways, United Airlines, Southwest Airlines, American Airlines, Federal Express, Boeing, and Tri-Star Aerospace. We also participated in roundtables and symposiums with recognized leaders in the logistics field to obtain information on how companies are applying integrated approaches to their logistics operations and establishing supplier partnerships to eliminate unnecessary functions and reduce costs. Finally, to gain a better understanding on how companies are making breakthroughs in logistics operations, we attended and participated in the Council of Logistics Management's Annual Conference in San Diego, California. We did not independently verify the accuracy of logistics costs and performance measures provided by private sector organizations. We conducted our review from June 1995 to April 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to the appropriate congressional committees; the Secretaries of Defense and the Navy; the Directors of DLA and the Office of Management and Budget; and other interested parties. We will make copies available to others upon request. Please contact me on (202) 512-8412 if you or your staff have any questions concerning this report. The major contributors to this report are listed in appendix II. Charles I. (Bud) Patton, Jr. Kenneth R. Knouse, Jr. Best Management Practices: Reengineering the Air Force's Logistics System Can Yield Substantial Savings (GAO/NSIAD-96-5, Feb. 21, 1996). Inventory Management: DOD Can Build on Progress in Using Best Practices to Achieve Substantial Savings (GAO/NSIAD-95-142, Aug. 4, 1995). Commercial Practices: DOD Could Reduce Electronics Inventories by Using Private Sector Techniques (GAO/NSIAD-94-110, June 29, 1994). Commercial Practices: Leading-Edge Practices Can Help DOD Better Manage Clothing and Textile Stocks (GAO/NSIAD-94-64, Apr. 13, 1994). Commercial Practices: DOD Could Save Millions by Reducing Maintenance and Repair Inventories (GAO/NSIAD-93-155, June 7, 1993). DOD Food Inventory: Using Private Sector Practices Can Reduce Costs and Eliminate Problems (GAO/NSIAD-93-110, June 4, 1993). DOD Medical Inventory: Reductions Can Be Made Through the Use of Commercial Practices (GAO/NSIAD-92-58, Dec. 5, 1991). Commercial Practices: Opportunities Exist to Reduce Aircraft Engine Support Costs (GAO/NSIAD-91-240, June 28, 1991). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO examined the Navy's aircraft logistics system, focusing on the Navy's efforts to improve and reduce the cost of the system. GAO found that: (1) the best practices identified in the airline industry could improve the responsiveness of the Navy's logistics system and save millions of dollars; (2) the Navy's logistics system is complex and often does not respond quickly to customer needs; (3) the factors contributing to this situation include the lack of spare parts, slow distribution, and inefficient repair practices; (4) some customers wait as long as four months for available parts; (5) the Navy is centralizing its supply management and repair activities, outsourcing certain management functions, and analyzing the effectiveness of its repair pipeline; (6) the best practices employed by the private sector show promise for the Navy because these firms hold minimum levels of inventory, have readily accessible spare parts, and quick repair times; (7) it takes an average of 11 days to repair a broken part in the private sector, as opposed to 37 days in the Navy's repair process; (8) the private-sector average is a result of repairing items immediately after they break, using local distribution centers and integrated supplier programs, and third-party logistic providers; and (9) many of the airline industry's best practices are compatible with the Navy's logistics system.
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The B-1, a long-range heavy bomber that began operations in 1986, was designed primarily to carry nuclear munitions. Effective October 1997, B-1 units were no longer assigned the nuclear mission. The B-1 continues, however, to support Air Force conventional wartime missions, and planned modifications will provide the B-1 the future capability to deliver precision-guided munitions. The Air Force is currently authorized 70 "mission-coded" B-1s, that is, aircraft that are fully funded in terms of operations and maintenance, load crews, and spare parts. Currently, 52 B-1s are operated by active duty units. The remaining 18 are assigned to the reserve component--10 to the Kansas Air National Guard and 8 to the Georgia Air National Guard. The Air Force has announced plans to increase the number of fully funded B-1s to 84 over the next several years by funding aircraft currently held in reserve. It is expected that this fleet of 84 aircraft will be assigned to both active and reserve component units, as shown in table 1. In general, reserve component B-1 units are considered just as capable of carrying out operational missions as their active duty counterparts. Both the Kansas and Georgia B-1 reserve units train to mobilize and deploy fully mission-ready B-1s on short notice to support the conventional war plans of theater commanders in chief. Like their active duty counterparts, reserve component units are routinely subjected to standardized Air Force operational evaluations. In a recent Air Force operational readiness inspection, unit personnel and aircraft from the Kansas Air National Guard demonstrated their ability to satisfactorily perform their assigned wartime mission. The Georgia unit attained initial operational capability status in December 1997 and expects to conduct its first operational inspection in November 1998. Our analysis of five operational factors the Air Force considers in assessing whether a mission is suitable for reserve component participation indicates that assigning more B-1s to the reserve component than the Air Force has announced would not adversely affect peacetime and wartime missions. The following summarizes the results of this analysis. When aircraft are permanently based overseas, enough aircraft must be in the active component to ensure that an adequate number of stateside positions are available for personnel returning from overseas. However, since B-1s are based only in the United States, the assignment of more B-1s to the reserve component would not affect overseas presence and stateside rotations. For a mission to be suitable for the reserve component, peacetime training requirements must allow sufficient lead times to enable part-time reservists to arrange absences from their full-time civilian employment. According to Air National Guard B-1 unit officials, aircrews must fly about four times per month, which can easily be scheduled around part-time reservists' civilian employment. Moreover, the B-1 has not been involved in any peacetime operations that have required frequent or unscheduled participation by reserve component personnel. Except for the additional 24 hours reserve component units are allowed to recall unit personnel and mobilize their forces prior to deployment, there is little distinction between the kinds of wartime missions assigned to reserve component units and their active duty counterparts. Notwithstanding the additional time that reserve component units may require to mobilize, regional combatant commands stated that current conventional threat warning times provide ample time for reserve component B-1 units to mobilize and meet the earliest planned mission response times. Should an unforeseen contingency arise with little or no warning, other active duty bomber units would continue to retain the capability to provide the first response. B-1 personnel have not experienced excessive peacetime personnel tempo rates--frequent and lengthy temporary duty assignments away from their home operating locations. This is due in part to the political sensitivities of other countries to the temporary overseas basing of B-1s during peacetime. Air Force data showed that B-1 personnel were on temporary duty for an average of 48 days during fiscal year 1997, much less than the Air Force's maximum desired standard of 120 days. Thus, personnel tempo rates would not preclude placing more B-1s in the reserve component. The ability to recruit personnel into the reserve component is highly dependent on the location of the unit. Recruiting officials said it is not possible to recruit sufficient reserve component personnel at two of the current five B-1 locations. None of our options include placing more B-1s in the reserve component at these locations. For the three other locations, recruiting officials said that recruiting sufficient reservists was possible given adequate time and resources but that recruiting would be difficult for some of our options. Force mix studies on active and reserve forces have traditionally asserted that it is less costly to operate a reserve component unit than an active duty unit of comparable size and mission. Indeed, the potential for savings was the primary reason cited by the Air Force for establishing reserve component B-1 units with the Kansas and Georgia Air National Guard. In its September 1994 response to the Senate Appropriations Committee's request for details on transferring bombers to the reserve component, the Air Force stated that placing bombers in the reserve component was fiscally prudent, with no anticipated loss in war-fighting capability. The force mix studies we reviewed noted that the cost to operate a reserve component unit is generally lower than for an active duty unit for several reasons. First, reserve component aircrews are more experienced than their active duty counterparts and require fewer flying hours to meet mission training requirements. Second, reserve component units employ fewer full-time military personnel than active units. Additionally, because of the part-time manning of traditional reserve component units, there are fewer requirements for permanent and costly base infrastructure--such as family housing and base medical care facilities--necessary to support full-time active duty personnel and their families. Table 2 describes six options for assigning more B-1s to the reserves and shows the estimated savings the Air Force could achieve by implementing these options. Savings range from $87.1 million to $235.3 million during fiscal years 1999-2003. By way of illustration, option 1--converting in place an existing active squadron of 12 aircraft--could produce $87.1 million in operational savings over the 5-year period. Option 5--consolidating B-1s at one active and two reserve locations--may be more challenging to implement but could result in greater savings. For example, under option 5, the Air Force would need to convert one active duty base to a reserve component base and consolidate B-1 operations at two other existing locations, one active and one reserve. As shown in table 2, this option could save an estimated $230 million over the 5-year period. The savings include $217.7 million from operational savings and $43.3 million from the elimination of B-1 military construction projects programmed at two of the bases where the B-1 would no longer be assigned. In calculating the net savings, we took into account one-time costs of about $26 million to move an active duty C-130 unit at the converted base to another location and $5 million to construct a squadron operations facility to accommodate an additional B-1 unit at another location. It should be noted that the estimated $230-million savings under option 5 and the $208.6-million savings under option 4 do not include additional savings the Air Force expects would result from reducing the number of B-1 operating locations to less than five. According to Air Force active and reserve component logisticians, reducing the requirement to support five B-1 bases would help ease current shortages in B-1 support equipment and war reserve mobilization kit spare parts reported by B-1 operating units and reduce future expenditures for B-1 support equipment and spare parts. Moreover, converting an active base to a reserve component base could result in lower costs to operate hospital, family housing, and other facilities associated with active duty units. Appendix I presents the potential costs and savings related to each option and the actions the Air Force would need to take to implement each option. Whether the Air Force chooses among our options or develops options of its own, we believe millions of dollars could be saved without reducing mission capability by placing more B-1s in the reserve component. Therefore, we recommend that the Secretary of Defense direct the Secretary of the Air Force to prepare a plan to place more B-1s in the reserve component and seek congressional support for the plan. As you know, 31 U.S.C. 720 requires you to submit a written statement on actions taken on this recommendation to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight not later than 60 days after the date of the report and to the Senate and House Committees on Appropriations with the agency's first request for appropriations made more than 60 days after the date of the report. In written comments on a draft of this report, DOD partially concurred with our findings. While DOD agreed that the mix of B-1s at active and reserve components needs further study, it believed that our recommendation that the Secretary of the Air Force develop a plan to place more B-1s in the reserve component is too strong without looking at war mobilization requirements and severe limitations on basing options. DOD believes it has the right mix of B-1s in the active and reserve components and stated that it has no plans at this time to move more B-1s to the reserves or to implement any of our force mix options. DOD agreed, however, to (1) use our report, along with other analyses, to develop a mission-capable, cost-effective force mix; (2) study in detail our force mix options where savings may exist; and (3) ask the Secretary of the Air Force to thoroughly review our report to determine whether it is operationally feasible and cost-effective to move more B-1s to the reserves. DOD also said that after the Air Force conducts a thorough review of the bomber force mix, the results will be incorporated into the upcoming budget cycles. We agree that war mobilization requirements and basing options are important factors and, in fact, considered them in our analysis. Specifically, we assessed five operational factors, including mission response times, that the Air Force considers in determining whether a mission is suitable for reserve component participation. Except for the additional 24 hours reserve component units are allowed to recall unit personnel and mobilize their forces prior to deployment, there is little distinction between the kinds of wartime missions assigned to reserve component B-1 units and their active duty counterparts. Furthermore, we note that in its September 1994 response to the Senate Appropriations Committee's request for details on transferring bombers to the reserve component, the Air Force stated that placing bombers in the reserve component could be done with no anticipated loss in war-fighting capability. Because our audit revealed no operational reason to limit the number of B-1s in the reserve component to the current level, and a range of basing options is available, we continue to believe that our recommendation is sound. DOD further expressed concern that some of our options would significantly change bases' loading patterns and that it lacks continuing base closure authority. We agree with DOD that several of our options could result in changes to the base aircraft loading patterns. However, DOD has a range of options for moving more B-1s into the reserve component that could be accomplished within existing authority. We met with Air Combat Command civil engineering officials and were assured that the B-1 bases included in our force mix options have the capacity to accommodate additional B-1s being moved to the reserves. Lastly, DOD stated that the Congressional Budget Office's model appears to overstate the savings for our options by excluding modernization and initial training costs. Since the entire B-1 fleet is already being modernized, the same modernization costs will be incurred whether the B-1s are in the active or reserve component. We acknowledge that the model did not capture some of the one-time costs, including initial training costs, that would be incurred. However, additional costs would be relatively small and would be recouped from the annual operational savings realized by adding B-1s to the reserve component. DOD's comments are reprinted in their entirety in appendix II. We held extensive discussions with Air Force officials in Headquarters, U.S. Air Force; the Air Force Reserve Command; the Air National Guard; and the Air Combat Command and researched reports, documents, and prior studies to determine the operational factors the Air Force uses to assess the suitability of missions for the reserve component. We used these factors to develop criteria to assess the feasibility of increasing the reserve component's participation in the B-1 mission. We visited all five B-1 bases and the Air Combat Command to assess the active and reserve component units' mission requirements and operational capabilities. We discussed force mix issues with operations, plans, and training officials. From these visits, we obtained information such as planned force structure, base capacity, recruiting potential, and military construction costs and used it to develop force mix options. We analyzed the recruiting, response times, and cost implications for each option. Estimates of recruiting potential were developed by the Air Force Reserve and the Air National Guard. To assess how more B-1s in the reserve component would impact wartime mission response requirements, we obtained information from operational plans, unit capability requirements, and the combatant commands for the theaters in which the B-1 would be employed. To assess the potential savings from placing more B-1s in the reserve component, we used operational cost estimates developed by the Congressional Budget Office and other costs Air Force officials provided such as for the military construction and movement of an operational unit that would be required to implement some of our options. We did not determine whether any of the options we presented would require congressional notification under 10 U.S.C. 2687, base closures and realignments. Neither did we obtain estimates of one-time personnel costs, such as severance pay for civilian employees or change of station costs for active duty personnel. We performed our review from September 1996 to December 1997 in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees and members, the House National Guard and Reserve Caucus and the Senate National Guard Caucus, the Secretary of the Air Force, the Commander of the Air Combat Command, the Commander of the Air Force Reserve Command, the Director of the Air National Guard, the Director of the Congressional Budget Office, and the Director of the Office of Management and Budget. Please contact me at (202) 512-3504 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix III. Convert an existing active 12-aircraft squadron at Dyess Air Force Base, Texas, to a reserve squadron at Dyess. No change at the other four B-1 locations. Table I.1 shows the number of B-1s at each base under the Air Force's announced plan and under our option 1. The Congressional Budget Office estimated that this option would save $87.1 million in operational expenses. These expenses include direct and indirect costs such as fuel, maintenance, military pay, training, and medical care. According to Air Force Reserve and Air National Guard recruiters, recruiting to implement this option is possible. These officials estimate that an additional three to eight recruiters would be needed for about 2 years to recruit the required personnel. The cost for these additional recruiters is relatively minor and was not deducted from the savings shown above. Convert an existing active 18-aircraft aircrew training squadron at Dyess Air Force Base, Texas, to a reserve squadron at Dyess. No change at the other four B-1 locations. Table I.2 shows the number of B-1s at each base under the Air Force's announced plan and under our option 2. The Congressional Budget Office estimated that this option would save $130.6 million in operational expenses. Air Force Reserve and Air National Guard recruiters concluded that recruiting for this option would be difficult. They estimated that an additional three to eight recruiters would be needed for about 2 years to recruit the required personnel. The cost for these additional recruiters is relatively minor and was not deducted from the savings shown above. Convert an existing active 18-aircraft aircrew training squadron and a 6-aircraft squadron at Dyess Air Force Base, Texas, to reserve squadrons at Dyess. No change at the other four B-1 locations. Table I.3 shows the number of B-1s at each base under the Air Force's announced plan and under our option 3. The Congressional Budget Office estimated this option would save $174.2 million in operational expenses. Air Force Reserve and Air National Guard recruiters concluded that recruiting for this option would be difficult but not impossible. They estimated an additional four to eight recruiters would be needed for 2 years to recruit the required personnel. The cost for these additional recruiters is relatively minor and was not deducted from the savings shown above. Establish a reserve component unit of 54 B-1s at Dyess Air Force Base by reducing to zero both the active duty unit of 36 B-1s at Dyess and the reserve component units of 10 and 8 B-1s at McConnell and Robins Air Force bases, respectively. Convert Dyess from an active to a reserve component base. Increase the active duty unit at Ellsworth from 24 to 30 B-1s by reducing the active duty B-1 unit at Mt. Home from 6 to zero. Move an active duty C-130 unit at Dyess to another (unspecified) location. Table I.4 shows the number of B-1s at each base under the Air Force's announced plan and under our option 4. The Congressional Budget Office estimated that this option would save $261.3 million in operational expenses. Additionally, $43.3 million in military construction funds planned for fiscal years 1999-2003 would be saved by removing the B-1 units from Mt. Home and Robins. However, according to estimates from Air Force officials, these savings would have to be reduced by $26 million to cover the cost of relocating the C-130 unit at Dyess and by $70 million for military construction costs at Dyess to accommodate the additional 18 B-1s. Thus, the net potential savings are estimated at $208.6 million. This option could produce other savings that are not shown in table I.4. For example, reducing the B-1 operating bases to two could help ease the shortages in B-1 support equipment and mobilization kit spare parts reported by B-1 operating units and reduce future expenditures for B-1 support equipment and spare parts. Converting Dyess from an active to a reserve component base could also produce an undetermined amount of savings from reduced permanent and costly base infrastructure--such as family housing and base medical care facilities--necessary to support full-time active duty personnel and their families. Moreover, by placing additional B-1s at Dyess and Ellsworth, the Air Force could take advantage of unused capacity at those locations. Air Force Reserve and Air National Guard recruiters concluded that recruiting for this option at Dyess would be difficult but not impossible. They estimated an additional six to eight recruiters would be needed for about 2 years to recruit the required personnel. The cost for these additional recruiters is relatively minor and was not deducted from the savings shown above. Establish a reserve component unit of 38 B-1s at Dyess Air Force Base by reducing the active duty unit at Dyess from 36 to zero B-1s and adding 2 more B-1s to Dyess from Robins. Convert Dyess from an active to a reserve component base. Increase the active duty unit at Ellsworth from 24 to 36 B-1s by reducing the active duty unit B-1s at Mt. Home from 6 to zero and the reserve unit B-1s at Robins from the remaining 6 to zero. Move an active duty C-130 unit at Dyess to another (unspecified) location. No change to the reserve component unit at McConnell. Table I.5 shows the number of B-1s at each base under the Air Force's announced plan and under our option 5. The Congressional Budget Office estimated that this option could save $217.7 million in operational expenses. Additionally, $43.3 million in military construction funds planned for fiscal years 1999-2003 could be saved by removing the B-1 units from Mt. Home and Robins. However, according to estimates from Air Force officials, these savings would have to be reduced by $26 million to relocate the C-130 unit at Dyess and $5 million to construct a squadron operations facility at Ellsworth to accommodate an additional operational unit. Therefore, net potential savings under this option are estimated at $230 million. This option could produce savings that are not shown in table I.5. For example, reducing the requirement to support fewer than five operating bases could help ease the shortages in B-1 support equipment and mobilization kit spare parts reported by B-1 operating bases and reduce future expenditures for B-1 support equipment and spare parts. Converting Dyess from an active to a reserve component base could also produce an undetermined amount of savings from reduced permanent and costly base infrastructure--such as family housing and base medical care facilities--necessary to support full-time active duty personnel and their families. Moreover, by moving 12 additional B-1s to Ellsworth, the Air Force could take advantage of the unused capacity at Ellsworth. Air Force Reserve and Air National Guard recruiters determined that recruiting at Dyess would be very difficult but not impossible. They estimated that an additional four to eight recruiters would be needed for at least 2 years to recruit the required personnel. The cost for these additional recruiters is relatively minor and was not deducted from the savings shown above. Establish a reserve component unit of 36 B-1s at Dyess Air Force Base by reducing the active duty unit at Dyess from 36 to zero. Convert Dyess from an active to a reserve component base. Move an active duty C-130 unit at Dyess to another (unspecified) location. No change at the other four B-1 locations. Table I.6 shows the number of B-1s at each base under the Air Force's announced plan and under our option 6. The Congressional Budget Office estimated that this option would save $261.3 million in operational expenses. However, to convert Dyess to a reserve component base, the active C-130 unit at Dyess would have to be moved at an estimated cost of $26 million. Therefore, net potential savings under this option are estimated at $235.3 million. Converting Dyess from an active to a reserve component base could produce an undetermined amount of savings from reduced permanent and costly base infrastructure--such as family housing and base medical care facilities--necessary to support active duty personnel and their families. Air Force Reserve and Air National Guard recruiters assessed the recruiting for this option to be difficult but not impossible. They estimated that an additional six or more recruiters would be needed for about 2 years to recruit the required personnel. The cost for these additional recruiters is relatively minor and was not deducted from the savings shown above. George O. Morse, Evaluator-in-Charge Leslie M. Gregor, Senior Evaluator Suzanne K. Wren, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO reviewed the cost and operational implications of assigning more B-1 bombers to the reserve component, focusing on: (1) whether operational factors preclude greater reserve component participation in the B-1 mission; and (2) options for increasing the number of B-1s assigned to reserve component units and their effect on operations and costs. GAO noted that: (1) Air Force active and reserve components consider essentially the same operational factors in determining whether a mission is suitable for the reserve component; (2) factors Air Force officials consider include: (a) overseas presence; (b) peacetime training; (c) mission response times; (d) personnel tempo; and (e) personnel recruiting; (3) GAO's assessment of these factors showed that they do not preclude assigning more B-1s to the reserve component; (4) B-1s are not based overseas, peacetime training can be scheduled around part-time reservists' civilian employment, reserve units could mobilize to meet mission response times, and personnel tempo rates for B-1 unit personnel do not exceed the Air Force's maximum desired standard; (5) however, the lack of availability of recruitable personnel in some locations limits where reserve units can operate; (6) if the Air Force were to assign more B-1s to the reserve component than are currently planned, the cost to operate the B-1 fleet could be reduced--without adversely affecting day-to-day peacetime training or critical wartime missions or closing any bases; (7) GAO developed six options for assigning more B-1s to the reserves; and (8) based on Congressional Budget Office cost savings projections and GAO's analysis of other one-time costs, GAO estimates that implementing these options could produce savings ranging from $87.1 million to $235.3 million during the last 5 years (1999-2003) of the current Future Years Defense Program.
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During the past 20 years, state, local, and tribal governments as well as businesses have expressed concerns about congressional and regulatory preemption of traditionally nonfederal functions and the costs of complying with federal regulations. The executive and the legislative branch have each attempted to respond to these concerns by issuing executive orders and enacting statutes requiring rulemaking agencies to take certain actions when they issue regulations with federalism or intergovernmental relations effects. Two prime examples of these responses are Executive Order 12612 ("Federalism") and the Unfunded Mandates Reform Act of 1995 (UMRA). Executive Order 12612, issued by President Reagan in 1987, established a set of fundamental principles and criteria for executive departments and agencies to use when formulating and implementing policies that have federalism implications. The executive order says that federal agencies should refrain from establishing uniform, national standards for programs with federalism implications, and when national standards are required, they should consult with appropriate officials and organizations representing the states in developing those standards. The order says that regulations and other policies have federalism implications if they "have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government." Executive Order 12612 also contains specific requirements for agencies. For example, the order requires the head of each agency to designate an official to be responsible for ensuring the implementation of the order. That official is required to determine which proposed policies have sufficient federalism implications to warrant preparation of a "federalism assessment." The assessment must contain certain elements (e.g., identify the extent to which the policy imposes additional costs or burdens on the states) and must accompany any proposed or final rule submitted to the Office of Management and Budget (OMB) for review under Executive Order 12866. OMB, in turn, is required to ensure that agencies' rulemaking actions are consistent with the policies, criteria, and requirements in the federalism executive order. In May 1998, President Clinton issued Executive Order 13083 ("Federalism"), which was intended to replace both Executive Order 12612 and Executive Order 12875 ("Enhancing the Intergovernmental Partnership"). However, in August 1998, President Clinton suspended Executive Order 13083 in response to concerns raised by state and local government representatives and others about both the content of the order and the nonconsultative manner in which it was developed. Therefore, Executive Order 12612 remains in effect. rulemaking process. We focused on the April 1996 through December 1998 time frame because we were able to use our database to identify which rules were "major" under the Small Business Regulatory Enforcement Fairness Act (SBREFA) (e.g., those that have a $100-million impact on the economy). As a result, we cannot comment on rules issued outside of that time frame. Although Executive Order 12612 does not require agencies to mention the order in the preamble to their final rules or to note in those preambles whether a federalism assessment was prepared, doing so is a clear indication that the agency was aware of and considered the order's requirements. Also, if an agency prepared a federalism assessment for a final rule, it would be logical for the agency to describe the assessment in the preamble to the rule. Our work showed that Executive Order 12612 had relatively little visible effect on federal agencies' rulemaking actions during this time frame. To summarize the nearly 3 years of data depicted in figure 1, agencies covered by the order mentioned it in the preambles to about 26 percent of the 11,414 final rules they issued between April 1996 and December 1998. Many of the final rules that federal agencies issue are administrative or routine in nature, and therefore unlikely to have significant federalism implications. As a result, it is not particularly surprising that agencies would not prepare federalism assessments for many of those rules. However, rules that are "major" under SBREFA and that involve or affect state and local governments would seem more likely to have federalism implications that would warrant preparation of an assessment. However, that does not appear to have been the case. As figure 3 shows, of the 117 major final rules issued by covered agencies between April 1996 and December 1998, the preambles indicated that only 1 had a federalism assessment. The agencies had previously indicated that 37 of these rules would affect state and local governments, and the preambles to 21 of the rules indicated that they would preempt state and local laws in the event of a conflict. At least one of the four state and local government organizations that we consulted during the review said that federal agencies should have done assessments for most of these 117 major rules. In response, the agencies said that their rules did not have sufficient federalism implications to trigger the executive order's requirements. action would directly create significant effects on states even if the action was mandated by law or the department otherwise had no discretion. The criteria in EPA's guidance established a high threshold for what constitutes "sufficient" federalism implications--perhaps explaining why none of the agency's more than 1,900 final rules issued during the April 1996 to December 1998 time frame had a federalism assessment. For example, in order for an EPA rule to require an assessment, the agency's guidance said the rule must meet all four of the following criteria: have an "institutional" effect on the states, not just a financial effect (regardless of magnitude); change significantly the relative roles of federal and state governments in a particular program context, lead to federal control over traditional state responsibilities, or decrease the ability of states to make policy decisions with respect to their own functions; affect all or most of the states; and have a direct, causal effect on the states (i.e., not a side effect). At least one of these criteria appeared to go beyond the executive order on which it is based. Although EPA said a rule must affect all or most of the states in order to have sufficient federalism implications to warrant preparation of an assessment, Executive Order 12612 defines "state" to "refer to the States of the United States of America, individually or collectively." (Emphasis added.) EPA's guidance also said that, even if all four of these criteria are met, a rule would not require a federalism assessment if a statute mandates the action or the means to carry it out are implied by statute. However, EPA's actions appear to be allowable because the executive order does not define what is meant by "sufficient" federalism implications, leaving that determination up to the agencies. OMB officials told us that they had taken little specific action to ensure implementation of the executive order, but said the order is considered along with other requirements as part of the regulatory review process under Executive Order 12866. They said that agencies had rarely submitted separate federalism assessments to OMB but have addressed federalism considerations, when appropriate, as a part of the cost-benefit analysis and other analytical requirements. order was soon to be revised by Executive Order 13083. However, he also said that Executive Order 12612 had not been implemented to any significant extent by the Reagan Administration "or its successors," suggesting that the lack of implementation was unrelated to any pending revision of the order. In addition, the Acting Administrator said that the primary vehicles for improving federal-state consultation in the past 6 years have been Executive Order 12875 and UMRA. We have not examined the implementation of Executive Order 12875. However, we have examined the implementation of UMRA, and concluded that it has had little effect on agencies' rulemaking activities. Title II of UMRA is one of Congress' primary efforts to address the effects of federal agencies' rules on state and local governments. Section 202 of the act generally requires federal agencies (other than independent regulatory agencies) to prepare "written statements" containing specific information for any rule for which a notice of proposed rulemaking was published that includes a federal mandate that may result in the expenditure of $100 million or more in any 1 year by state, local, and tribal governments, in the aggregate, or the private sector. UMRA defines a "mandate" to be an "enforceable duty" that is not a condition of federal assistance and does not arise from participation in a voluntary federal program. For rules requiring a written statement, section 205 requires agencies to consider a number of regulatory alternatives and select the one that is the least costly, most cost-effective, or least burdensome and that achieves the purpose of the rule. Other sections of the act focus even more specifically on the interests of state and local representatives. For example, section 203 states that agencies must develop plans to involve small governments in the development of regulatory proposals that have a significant or unique effect on those entities. Section 204 requires agencies to develop processes to consult with representatives of state, local, and tribal governments in the development of regulatory proposals containing "significant ederal intergovernmental mandates." a condition of federal financial assistance or as a duty arising from participation in a voluntary program. Other rules did not result in "expenditures" of $100 million. Because no written statement was required for these rules, the requirements in section 205 regarding the identification and selection of regulatory alternatives were not applicable to these rules. Also, title II of UMRA contains exemptions that allowed agencies not to take certain actions if they determined the actions were duplicative or not "reasonably feasible." Other provisions in title II also had little effect. During the first 2 years of UMRA's implementation, the requirement in section 204 that agencies develop an intergovernmental consultation process appears to have applied to no more than four EPA rules and no rules from other agencies. EPA generally used a consultation process that was in place before UMRA was enacted. Also, section 203 small government plans were not developed for any of the 73 final rules promulgated during this 2-year period. Officials in the four agencies that we contacted said none of their final rules had a significant or unique effect on small governments. Section 208 of UMRA requires the Director of OMB to submit an annual report to Congress on agency compliance with UMRA. The fourth such report is scheduled to be delivered within the next few weeks. In his third UMRA report published in June 1998, the OMB Director noted that federal agencies had identified only three rules in the more than 3 years since the act was passed that affected the public sector enough to trigger the written statement requirements. Nevertheless, he said federal agencies had embraced the act's "overall philosophy," as evidenced by the range of consultative activities the report described. On its surface, H.R. 2245 contains several provisions that are similar to requirements in both Executive Order 12612 and UMRA. For example, section 7 of the bill would, if enacted, require agencies to publish "federalism impact assessments" that are somewhat similar in content to the federalism assessments in the executive order and the written statements required by UMRA. All of those assessments and statements require agencies to develop estimates of the costs attendant to the implementation of the regulation at issue. Also, both the bill and the executive order require identification of regulatory provisions that preempt state government authority or functions. not have federalism implications or prepare a federalism impact assessment. Neither Executive Order 12612 nor UMRA requires agencies to declare whether each of their proposed and final rules has federalism implications. As I noted previously, UMRA does not apply to most economically significant rules, and the executive order does not require agencies to publish the designated officials' federalism determinations. If the bill is modified in this manner, this requirement will be similar to a provision in the Regulatory Flexibility Act of 1980 (RFA), which requires agencies to state whether their rules have a "significant economic impact on a substantial number of small entities." Therefore, the implementation of the RFA may prove instructive as to how this portion of the bill will be implemented. For example, according to the Small Business Administration's (SBA) Office of Advocacy, a perennial problem with the implementation of the RFA has been agencies' use of "boilerplate" certifications indicating that their rules do not have a significant economic impact on a substantial number of small entities. Contributing to this problem is the fact that the RFA does not define the terms "significant economic impact" and "substantial number of small entities," and no federal agency is responsible or authorized to define the terms. As a consequence, different agencies have different interpretations of the statute. We have recommended that Congress consider giving SBA or some other entity the responsibility or authority to define key terms in the act. Therefore, applying the lessons of the RFA to the proposed legislation, Congress may want to carefully define what it believes constitutes "federalism implications" or assign that responsibility to some other entity. Finally, I would like to briefly comment on section 6 of H.R. 2245, which says that federal agencies may not include any agency activity that is a state-administered federal grant program in its annual performance plans developed pursuant to the Government Performance and Results Act of 1993 (Results Act) "unless the performance measures for the activity are determined in cooperation with public officials." The bill defines "public officials" as elected officials of state and local governments, including certain organizations that represent those officials (e.g., the National Governors' Association and the United States Conference of Mayors). The Results Act already requires agencies developing their strategic plans to "solicit and consider the views and suggestions of those entities potentially affected by or interested in the plan." The Senate Governmental Affairs Committee report on the Results Act noted that the strategic plan "is intended to be the principal means for obtaining and reflecting, as appropriate, the views of Congress and those governmental and nongovernmental entities potentially affected by or interested in the agencies' activities." In that regard, we believe that working with state and local governments or their representative organizations to develop goals and performance measures in federal grant-in-aid programs can strengthen the intergovernmental partnerships embodied in those programs. For example, in 1996, we reported on a joint goal and performance measure-setting effort between the federal Office of Child Support Enforcement (OCSE) and state governments. Initially, the federal-state relationship was not so cooperative. In 1994, OCSE specified the performance levels that states were expected to achieve in such areas as the establishment of paternity and collections of child support. State program officials strongly objected to this federal mandate because they did not have an opportunity to participate in the planning process. Following these initial planning efforts, OCSE sought to obtain wider participation from program officials at the federal, state, and local government levels. OCSE also established task forces consisting of federal, state, and local officials to help focus management of the program on long- term goals. During the planning process, participants agreed that the national goals and objectives would be based on the collective suggestions of the states and that the plan's final approval would be reached through a consensus. For each goal, the participants identified interim objectives that, if achieved, would represent progress toward the stated goal. At the time of our review, OCSE and the states were also developing performance measures to identify progress toward the goals, and planned to develop performance standards to judge the quality of state performance. They created a Performance Measures Work Group to develop statistical measures for assessing state progress toward achieving national goals and objectives. OCSE also encouraged its regional staff to develop performance agreements with states, specifying both general working relationships between OCSE regional offices and state program officials and performance goals for each state. Overall, OCSE and most state officials that we contacted said the joint planning process strengthened the federal/state partnership by enabling them to help shape the national program's long-term goals and objectives. State and local government stakeholder involvement has also been important in the development of practical and broadly accepted performance measures in other federal programs, including some block grants. We believe that these kinds of intergovernmental cooperation can serve as models for the kinds of efforts that section 6 of the Federalism Act of 1999 seeks to encourage. Mr. Chairman, this completes my prepared statement. I would be pleased to answer any questions. Contacts and Acknowledgment For future contacts regarding this testimony, please contact L. Nye Stevens at (202) 512-8676 or Curtis Copeland at (202) 512-8101. Individuals making key contributions to this testimony included Elizabeth Powell, Joseph Santiago, and Alan Belkin. 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 touch-tone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO discussed House Resolution (H.R.) 2245, the Federalism Act of 1999, focusing on the agency rulemaking and performance measurement requirements of the bill. GAO noted that: (1) during the past 20 years, state, local, and tribal governments as well as businesses have expressed concerns about congressional and regulatory preemption of traditionally nonfederal functions and the costs of complying with federal regulations; (2) the executive and the legislative branch have each attempted to respond to these concerns by issuing executive orders and enacting statutes requiring rulemaking agencies to take certain actions when they issue regulations with federalism or intergovernmental relations effects; (3) two prime examples of these responses are Executive Order 12612 and the Unfunded Mandates Reform Act of 1995 (UMRA); (4) GAO's work showed that Executive Order 12612 had relatively little visible effect on federal agencies' rulemaking actions during this timeframe; (5) agencies covered by the order mentioned it in the preambles to about 26 percent of the 11,414 final rules they issued between April 1996 and December 1998; (6) however, mentioning the order in the preamble to a rule does not mean the agency took any substantive action; (7) the agencies usually just stated that no federalism assessment was conducted because the rules did not have federalism implications; (8) the preambles to only 5 of the 11,414 final rules that the agencies issued between April 1996 and December 1998 indicated that a federalism assessment had been done; (9) many of the final rules that federal agencies issue are administrative or routine in nature, and therefore unlikely to have significant federalism implications; (10) the criteria the agencies used to determine whether federalism assessments were needed varied among the agencies; (11) Office of Management and Budget officials told GAO that they had taken little specific action to ensure implementation of the executive order, but said the order is considered along with other requirements as part of the regulatory review process under Executive Order 12866; (12) GAO reported that requirements in title II of UMRA appeared to have had only limited direct impact on agencies' rulemaking actions in the first 2 years of the act's implementation; (13) as introduced, H.R. 2245 would require federalism impact assessments for all proposed and final rules; and (14) GAO believes that working with state and local governments or their representative organizations to develop goals and performance measures in federal grant-in-aid programs, as required by H.R. 2245, can strengthen the intergovernmental partnerships embodied in those programs.
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The Defense Environmental Restoration Program promotes and coordinates cleanup of hazardous substances associated with past DOD activities. Funding for cleanup at operational installations and formerly used defense sites has come from the Defense Environmental Restoration Account (DERA) since 1984. Cleanup associated with installations designated for closure or realignment has been funded through the Base Realignment and Closure (BRAC) process since 1991. Under its statutory reporting requirements, DOD annually reports to Congress by providing information on installation cleanup sites, including, for example, background, status, progress made, and cost incurred and remaining to complete cleanup. Since fiscal year 1993, the report has listed when installation cleanup activity schedules are impeded by a lack of funding. The Deputy Under Secretary of Defense, Environmental Security, formulates policy and provides oversight for the Defense Environmental Restoration Program at operational and BRAC installations and formerly used defense sites. In fiscal year 1997, the centralized DERA was partitioned into five environmental restoration accounts: Army, Navy (including Marine Corps), Air Force, formerly used defense sites, and defense-wide. The components plan, program, and budget for the individual installation cleanup projects. The Army, as executive agent for DOD, implements the program at formerly used defense sites through the U.S. Army Corps of Engineers. DOD planning and budget guidance, as well as headquarters and component instructions, govern departmentwide planning, programming, and budgeting for the environmental restoration program. The Army, the Navy, and the Air Force headquarters allocate funds to intermediate commands, which ultimately allocate funds for cleanup at specific installations. Other defense components, such as the Defense Logistics Agency (DLA), directly allocate funds to specific locations for cleanups, and the Army Corps of Engineers executes funding for formerly used defense sites. The impact of overall planning and budget guidance is not necessarily traceable to specific installations or sites. The way components allocate funding is described in appendix II. For fiscal year 1995, Congress appropriated $400 million less than DOD requested for cleanup at operational installations and formerly used defense sites and rescinded another $300 million from the amount that had been appropriated. For fiscal year 1996, Congress appropriated $200 million less than DOD requested. Table 1 shows fiscal years' 1993 to 1997 DERA funding decreased from $1.638 billion to $1.314 billion. For fiscal years 1995 and 1996, appropriations for DOD's environmental cleanup program were less than requested. For fiscal year 1995, Environmental Security either provided written guidelines on how to determine which projects to fund or conferred with component officials verbally on how funds should be used. For fiscal year 1996, no guidance was given because the congressional appropriation specified distribution of funds among services. Environmental Security's November 1994 guidance to the defense components emphasized cleanup of sites that are the highest priority to stakeholders (those having interest in cleanup activities, such as the community surrounding the installation) and regulators' considerations included by (1) involving stakeholders in decision-making, (2) taking interim remedial actions (early response action that is identified and implemented at any time during the study or design phases of cleanup) instead of continuing studies, (3) giving priority to higher relative risk sites, (4) deferring studies that are not essential for safety or compliance with agreements, (5) reviewing expense data, (6) considering innovative technologies and generic remedies, and (7) funding field locations according to their fair share. The guidance was not installation specific and service officials made the site decisions. Environmental Security officials stated that they discussed guidance with the defense components on how to implement the rescission. Considerations addressed included not deobligating funds for site projects already underway, limiting medium or low relative risk site work, limiting studies while ensuring a proper mix of study and cleanup, and deferring projects scheduled to begin in the later months of the fiscal year. The officials stated that they were unable to issue written guidance because there was about a month between hearing about the proposed rescission and the actual rescission. DOD's fiscal year 1996 appropriations act stipulated how the $1.42 billion for environmental restoration was to be distributed to the components. Environmental Security officials stated that, as a consequence, no further guidance was provided to defense components regarding the funding change. DOD's annual reports to Congress for fiscal years 1995 and 1996 show that an increasing number of installations reported that their cleanup schedules were affected by fund limits. Some installations that received less funding than planned reported schedule delays, while others did not. However, some installations that received more funding than planned also reported unspecified schedule delays. Reported cleanup schedule delays increased from 6 in fiscal year 1993 to 204 and 481 in fiscal years 1995 and 1996, respectively. In fiscal year 1997, reported funding schedule delays decreased to 135. Installations with the largest budget increases and decreases reported schedule delays with about equal frequency, and not all of the installations with the largest decreases reported schedule delays due to funding. Beginning in fiscal year 1993, DOD's annual cleanup reports to Congress have identified installations where cleanup schedules were delayed by funding. Other causes for delays identified in the annual reports were technical, contracting, personnel, and regulatory. The reports further specified which of the four phases of cleanup (studies, interim actions, design, or actual cleanup) were affected. The greatest number of installations reporting cleanup schedule delays due to funding was in fiscal years 1995 and 1996. Figure 1 shows delays of cleanup schedules due to funding at installations, as reported by DOD, for fiscal years 1993-97. Among the installations that reported cleanup delays caused by funding limitations were facilities that received some of the largest increases in funding as well as facilities that received less funding than planned. Twelve of 23 Army facilities with the greatest total decreases between budget requests and funding in 1995 and 1996 reported schedule delays in one or both years. However, 16 of 23 Army facilities with the largest increases in funding also reported schedule delays. None of the 16 facilities that reported schedule delays despite receiving more funding than originally planned identified specific delays in the annual reports. Some facilities--for example, White Sands Missile Range, New Mexico--reported that their ability to undertake certain future actions depended on the availability of funding. Table 2 identifies selected installations that reported schedule impacts caused by funding. The table includes installations receiving net funding of at least $9 million less than planned for fiscal years 1995 and 1996 combined and shows which of the four cleanup phases were reported to be affected. DOD's annual reports contain narratives of activity progress associated with a specific installation. Sometimes included in this description is reference to funding effects. Examples of report narrative in fiscal year 1995 are: Adak Naval Air Facility: "Several activities planned in were deferred due to funding cutbacks, including IRAs [interim remedial action] at SWMUs . Removal Actions at two PCB sites; and a basewide Remedial Investigation and Feasibility Study." Aberdeen Proving Ground: "Several activities were not completed or delayed because of funding cutbacks, including, the J-Field FS [feasibility study], RI characterization activities at Canal Creek, and RI/FS activities at the Westwood and Other Aberdeen Areas." Twin Cities Army Ammunition Plant: "Closure of the [Grenade Range and Outdoor Firing Range] areas was hindered as a result of funding cutbacks." However, not all installations that reported schedule delays due to funding provided a narrative reference to the effect in DOD's annual reports. For example, although funding schedule delays were reported for Robins AFB and Oceana Naval Air Station as shown in table 2, no description of these delays were provided in narratives. Overall, of the 204 installations reporting a schedule delay due to funding in fiscal year 1995, 42 described the nature of the effect in the report's progress narratives. In fiscal year 1996, 190 of 481 installations described the effect in narratives. In discussing these reports, DOD and service officials stated that there is no requirement to provide detailed narratives. In discussing defensewide reports of funding impacts, an Environmental Security official noted that installations may be aware of some changes in funding planned and allocated by projects but not others. The official said his experience indicated that specific funding changes may sometimes be affected by other changes, especially among installations with similar priorities. Although DOD developed information on the effect of receiving less funding than it requested, the actual changes were often different than envisioned. Environmental Security officials prepared a May 1995 list that identified specific locations and sites that could be potentially affected by the $500 million in budget decreases. That list identified 5 programs and specific sites at 409 potentially affected locations. In discussing a draft of this report, DOD and service officials emphasized that variances should be expected in envisioned versus actual impacts in quick reaction responses such as the May 1995 list. Officials said this was especially true in this case because actual expenditures by mid-year would already have varied from plans available at headquarters. The May 1995 list and our visits to locations selected from it indicated that as DOD components made specific decisions, the potential effects of receiving less than requested during fiscal years 1995 and 1996 did not always occur as initially envisioned by DOD and that the results of funding changes varied widely at the affected locations. For example: Dugway Proving Ground, Utah, was identified to receive about $22 million less than requested, according to the list, for a medium relative risk priority site and a site not yet evaluated. However, Army records showed that the installation has 199 sites identified and actually received an increase of $631,000. An installation official stated that they were not aware of a potential reduction during that time period. Dahlgren Naval Surface Warfare Center, Virginia, was identified to receive $1.6 million less than requested according to the list but received $9.5 million less according to Navy data. Command officials overseeing cleanup at the center stated that funding was reduced because its projects were not known to be executable. However, center officials stated that the projects had been delayed and that they knew of no impediments to beginning work on the affected sites if funds had been made available. Center officials also said that they did not provide input for DOD's 1995 annual report and did not know why a funding impact was not reported. The former Lake Ontario Ordnance Works, New York, was identified to receive about $10.9 million less than requested, according to the list. But Army officials responsible for the location said that the site was still in the design phase and that they knew of no plan to spend $10.9 million in fiscal years 1995 or 1996. Regarding your specific interest in the Badger Army Ammunition Plant, Wisconsin, DOD's May 1995 list identified the plant to potentially receive about $1.3 million less than requested. DOD's annual reports for fiscal years 1995 and 1996 indicated that the plant had schedule delays due to funding for projects in cleanup design and actual cleanup phases. Although plant officials told us that they did not receive the full amounts they had requested in fiscal years 1995 and 1996, they did not know of funding differences attributable to changes in actual funds versus requested funds made by Congress. Funding data for the plant varied by reporting source. For example, Environmental Security office data attributed $2.7 million of the President's budget for fiscal year 1995 to the Badger plant, increasing to $6.5 million after the $300-million rescission. Army Environmental Center data initially attributed $17.2 million to the plant rather than $2.7 million, but showed a figure similar to Environmental Security's figure after the rescission ($6.5 million). At the times of our visits, Army, state, and contractor officials were working together to optimize results within available funds. For example, plant officials had proposed reducing ground water monitoring wells while increasing actual cleanup, such as for contaminated soil. Also, the Army Industrial Operations Command determined, subsequent to our visits, that the plant is excess to its production mission, requiring some additional demolition of the facilities. DOD uses its planning, programming, and budgeting process for making funding decisions, and DOD components ultimately make site-specific decisions. When DOD received less funds than requested or rescissions occurred, Environmental Security provided written or oral guidance for DOD components' actions. Cleanup schedule delays occurred at installations when the funding received was more or less than planned. Reports of cleanup schedule and other impacts varied according to individual project circumstances and were not clearly linked to installation planned and allocated funding levels. We requested comments on a draft of this product from the Secretary of Defense or his designee. An official of the Office of the Deputy Under Secretary of Defense for Environmental Security stated that DOD concurred with our presentation of the issues. Technical comments have been incorporated as appropriate. As arranged with your office, we plan no further distribution of this letter until 30 days from its issue date, unless you publicly announce the letter's contents earlier. At that time, we will make copies available to the appropriate congressional committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant, Marine Corps; the Directors, Defense Logistics Agency and Defense Special Weapons Agency; and other interested parties. Please contact me on (202) 512-8412 if you have any questions about this report. Major contributors to this report are listed in appendix IV. To describe the Department of Defense's (DOD) process for allocating funds, we reviewed DOD's April 1994 management guidance that addressed how DOD handles funding responsibilities for the defense restoration program, and a March 1998 update to this guidance. In addition, we reviewed supplemental program guidance, DOD's April 1996 defense instruction on the Defense Environmental Restoration Program, and components' restoration guidance. We interviewed officials at the Environmental Security office, the Defense Logistics Agency (DLA), the Defense Special Weapons Agency, and the military services about the implementation of DOD's guidance for allocating funds. To identify reported schedule changes due to funding, we compared automated funding data obtained from the defense components showing planned and obligated cleanup funding by installation with automated information from DOD's annual reports on cleanup schedules affected by funding. We discussed funding changes and effects with environmental and budget officials and compared what was reported for the installations in DOD's annual reports for fiscal years 1995 and 1996 with command and installation records at the following selected commands and field installations. Army Materiel Command, Alexandria, Virginia Naval Facilities Engineering Command, Chesapeake Activity, Washington, D.C. Naval Facilities Engineering Command, Atlantic Division, Norfolk, Virginia Air Force Aeronautical Systems Center, Dayton, Ohio DLA Defense Distribution Region East, New Cumberland, Pennsylvania Dugway Proving Ground, Utah Badger Army Ammunition Plant, Wisconsin Dahlgren Naval Surface Warfare Center, Virginia Yorktown Naval Weapons Station, Virginia Camp Lejeune Marine Corps Base, North Carolina Tinker Air Force Base, Oklahoma Air Force Plant Number 4, Texas former Lake Ontario Ordnance Works, New York We conducted our review from March 1997 to July 1998 in accordance with generally accepted government auditing standards. Beginning in fiscal year 1997, with the devolvement of the Defense Environmental Restoration Account (DERA), the responsibility for planning, programming, and budgeting transferred from the Office of the Secretary of Defense to the individual military components. According to March 1998 management guidance for the Defense Environmental Restoration Program, the Office of the Under Secretary of Defense for Environmental Security formulates policy and provides oversight for the environmental restoration program at operational and Base Realignment and Closure installations and formerly used defense sites. The components, the Defense Logistics Agency (DLA), and the Defense Special Weapons Agency execute their own restoration programs. Environmental Security's April 1994 guidance for the execution of the Defense Environmental Restoration Programs of fiscal years 1994-95 and development of the program for fiscal year 1996 directed defense components to submit funding requirements to Environmental Security, which would transfer funding to military component appropriation accounts like operations and maintenance. Furthermore, the guidance states that the risk to human health and the environment presented by a site should be the main factor in determining priority and be considered in scheduling site cleanup with regulatory agencies. Although the previously single DERA was devolved to five separate accounts, Environmental Security is still involved in setting policy and oversight for component execution of DOD's cleanup program. The Assistant Secretary of the Army for Installations, Logistics, and Environment, through the Deputy Assistant Secretary of the Army for Environment, Safety, and Occupational Health, is responsible for policy on all Army environmental programs. The Assistant Chief of Staff for Installation Management, through the Director of Environmental Programs, oversees the Army's environmental program. The U.S. Army Environmental Center, as the program manager, develops the budget and workplan and coordinates program activities and requirements with the major Army commands. Before fiscal year 1997, the Army Environmental Center allocated funds to the installations, but that function is now the responsibility of the major commands. Army officials indicated that, before allocating funds to major commands for program execution, funding is first set aside for priority installations, program management, defensewide programs, and certain sites with either medium or low relative risk. The Assistant Secretary of the Navy for Installations and Environment is responsible for the Navy program and coordinates Navy and Marine Corps policy. The Chief of Naval Operations establishes policy, directs and monitors the program, and coordinates sites with the Marine Corps. The Naval Facilities Engineering Command executes the Navy and the Marine Corps programs, provides technical support, develops and supports resource requests and programs, and manages funds allocated for program execution. The command implements the program through its engineering field divisions and activities, which are responsible for executing the program at the installation level. These field divisions and activities provide information for the Navy, manage and administer cleanup contracts, coordinate and negotiate remediation agreements with regulators, develop and perform site-specific projects in coordination with installations, track project progress, and provide technical and financial oversight. The Deputy Assistant Secretary of the Air Force for Environmental, Safety and Occupational Health, is responsible for interpreting and disseminating environmental guidance, and overseeing the development and dissemination of Air Force restoration policy and program guidance. The Air Force Civil Engineer has overall responsibility for the Air Force program and oversees the related policy and guidance. The Civil Engineer develops Air Force policy and guidance, develops Air Force goals, submits the budget, and monitors its execution. Air Force major commands are responsible for providing guidance to their installations, validating and programming funding requirements, and executing the program. The Civil Engineer allocates funds to Air Force commands, which allocate funds to their installations. DLA and the Defense Special Weapons Agency both centrally manage funding of their installations. Environmental Security determines how much funding each agency will receive based on cleanup requirements submitted to support their budget requests. Funding plans are developed by the agencies for executing cleanup. DLA uses the Army Corps of Engineers to implement and oversee cleanup operations at its installations. The Army serves as the executive agent for formerly used defense sites, and its program is executed by the Army Corps of Engineers. Corps districts implement and oversee projects. Corps officials stated that the Corps consolidates and prioritizes requirements workplans, which are provided to the Army for approval. Environmental Security programs and budgets funding to the Army, which then provides funds to the Corps, for formerly used defense sites. Corps districts allocate funds for site cleanup and oversee action. Because of the devolvement of DERA, a separate environmental restoration account exists for the formerly used defense sites program. Margaret Armen 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) the Department of Defense's (DOD) process for allocating approved environmental cleanup budgets when funds received are less than requested or budget rescissions occur; and (2) reported cleanup schedule delays due to lack of funding. GAO noted that: (1) DOD develops and allocates approved budgets through its departmentwide planning, programming, and budget process; (2) the components used DOD guidance to establish priorities and distribute funds to the various installations, but the impact of that guidance is not necessarily traceable to specific installations or sites; (3) during fiscal years (FY) 1993 to 1997, Congress took three actions that significantly affected funding for DOD cleanup activities; (4) in FY 1995, Congress appropriated $400 million less than DOD requested and then rescinded an additional $300 million of the amount appropriated; (5) Congress appropriated $200 million less than DOD had requested for FY 1996; (6) in each case, DOD components adjusted funding priorities in light of the congressional actions and DOD guidance; (7) while specific guidance varied, both written and verbal guidance encouraged priority for sites of high risk and discouraged cleanup studies that were not essential; (8) data contained in DOD's annual reports to Congress and in DOD components' records do not show a direct relationship between installations receiving less or more funding than planned and those reporting cleanup schedule delays due to funding; (9) for example, during FY 1995 and FY 1996, about half of the Army installations with the largest decreases in funding reported cleanup schedule delays--a frequency similar to Army installations with the largest increases in funding; (10) during this period, GAO also found that actual funding changes under the DOD process often varied from that initially envisioned because of such reasons as inherent uncertainty during cleanup planning; and (11) for example, DOD initially identified a potential decrease in funding for two sites at Dugway Proving Ground, Utah, whereas the Army allocated a slight overall funding increase to that installation, which has 205 cleanup sites.
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We are unable to give an opinion on the Statement of Financial Position as of September 30, 1996, because IRS could not provide adequate documentation to support the classification of its inventory of unpaid assessments as federal tax receivables and compliance assessments. Because we were unable to determine the appropriateness of IRS' classifications of its inventory of unpaid assessments, we were unable to determine whether the amounts reported for net federal tax receivables and the related allowance for doubtful accounts as reflected on the Statement of Financial Position as of September 30, 1996, were fairly stated. Also, because of this limitation, which affects over 95 percent of the custodial assets on the Statement of Financial Position and which prevented us from being able to give an opinion, we did not perform testing of other line items on the Statement of Financial Position, such as Frozen Tax Refunds and Credits, Tax Refunds Payable, Advances, and Commitments and Contingencies. As we have reported in the past and as discussed in a later section of this report, IRS lacks an accounts receivable subsidiary ledger or other similar mechanism which routinely tracks receivables individually from period to period. This condition requires that IRS use alternative methods to identify the amounts to be recorded as federal tax receivables on its financial statements. However, these methods thus far have not provided IRS with the capability to report accurate and supportable amounts for federal tax receivables. Further, these methods have not provided the means necessary for IRS to effectively manage and routinely monitor the status of amounts owed by taxpayers. This makes it difficult to determine a reasonable estimate of amounts deemed collectible and could minimize the amounts IRS may ultimately be able to collect on its federal tax receivables. Because IRS could not provide sufficient evidence to support the classification of certain itemized taxes collected and refunded, we could not determine if the classifications of collection and refund amounts by tax type--for example, payroll versus corporate taxes--as reflected on the Statement of Custodial Activity were reliable. Otherwise, in our opinion, the Statement of Custodial Activity presents fairly, in all material respects, in conformity with a comprehensive basis of accounting other than generally accepted accounting principles as described in note 1, IRS' custodial activities for taxes collected, refunded, and distributed. We evaluated management's assertion about the effectiveness of its internal controls designed to safeguard assets against loss from unauthorized acquisition, use, or assure the execution of transactions in accordance with laws and regulations that have a direct and material effect on the Custodial Financial Statements or are listed in Office of Management and Budget (OMB) audit guidance and could have a material effect on the Custodial Financial Statements; and properly record, process, and summarize transactions to permit the preparation of reliable financial statements and to maintain accountability for assets. IRS management stated that, except for the material weaknesses in internal controls presented in the agency's fiscal year 1996 FMFIA report on compliance with the internal control and accounting standards, internal controls provide reasonable assurance that the following would be prevented or detected for amounts material in relation to the financial statements: unauthorized acquisition, use, or disposition of assets, that could lead to noncompliance with laws and regulations; and misstatements in amounts reported in the financial statements. Management made this assertion based upon criteria established under FMFIA and the OMB Circular A-123, Management Accountability and Control. For financial statement reporting, a material weakness is a condition that precludes the entity's internal control from providing reasonable assurance that losses, noncompliance, or misstatements material in relation to the financial statements will be prevented or detected in a timely basis. The following material weaknesses, which we also found in our prior audits of IRS, were reported in IRS' FMFIA report for fiscal year 1996, with the exception of the computer security issues discussed below. These deficiencies in internal controls may adversely affect any decision by management that is based, in whole or in part, on information that is inaccurate because of the deficiencies. Our internal control work would not necessarily disclose material weaknesses not reported by IRS. Unaudited financial information reported by IRS may also contain misstatements resulting from these deficiencies. The nature of these weaknesses was such that they affected our ability to (1) render an opinion on IRS' fiscal year 1996 financial statements taken as a whole and (2) conclude on IRS' compliance with laws and regulations we tested as discussed in a later section of this report. Consequently, we believe that the internal controls were not effective in satisfying the objectives discussed above during fiscal year 1996. As discussed above, IRS does not maintain an accounts receivable subsidiary ledger or other similar mechanism that routinely tracks receivables and their related activity on an ongoing basis. Consequently, IRS does not have readily available the information on receivables it needs to prepare its financial statements. To compensate for this, IRS runs computer programs against its masterfiles--the only detailed record of taxpayer information it maintains--to identify taxpayer accounts for which assessments or other debits exceed receipts received or other credits made to taxpayers' accounts. After these accounts--unpaid assessments--have been identified, IRS runs computer programs that utilize transaction and other codes within the masterfiles to separately classify these accounts as financial receivables or compliance assessments. Those accounts that are classified as financial receivables are then evaluated on a statistical basis by IRS to estimate what amount IRS ultimately believes it will collect on its receivables. The total amount deemed collectible by IRS, based on a projection of its statistical sample, is reported as federal tax receivables on its custodial Statement of Financial Position. The difference between the amount estimated to be collectible and the total amount identified as financial receivables is reported on the custodial Statement of Financial Position as an allowance for doubtful accounts. In our audit of IRS' fiscal year 1995 financial statements, we reported that IRS was unsuccessful in deriving reliable receivables information for use in preparing the financial statements. We reported that errors we identified in the transaction and other coding of assessments within the masterfiles, coupled with mistakes IRS made in performing the statistical procedures, resulted in IRS' sampling results being unreliable for purposes of projecting both the gross and net receivable amounts for financial reporting. For our fiscal year 1996 audit, we again reviewed IRS' process for extracting and classifying taxpayer assessments into financial receivables and compliance assessments. We also tested samples of assessments classified by IRS as both financial receivables and compliance assessments to determine whether IRS' classifications were appropriate. To test for proper classification, we attempted to review supporting documents in taxpayer files, such as tax returns, receipt deposits, correspondence between the taxpayer and IRS, and other pertinent information. We found that IRS could not locate sufficient supporting documentation (such as tax returns and installment agreements) for us to determine whether IRS had properly classified its inventory of unpaid assessments as either federal tax receivables or compliance assessments. Thus, we were unable to determine whether IRS had appropriately recognized federal tax receivables on the Statement of Financial Position. IRS officials stated that the missing documents had either been destroyed based on the agency's record retention policies or simply could not be located. The lack of a detailed listing, or subsidiary ledger, for receivables, coupled with IRS not readily maintaining supporting documents on outstanding accounts receivable, increases the risk that material amounts may be inappropriately included or excluded from the financial statements. Additionally, IRS' not maintaining adequate documentation, in many cases, to support the underlying assessments, could affect IRS' ability to pursue collection from taxpayers on amounts owed, resulting in lost tax revenue, including interest and penalties, to the government. In an effort to address some of the concerns noted above, IRS is continuing to review all individual assessments in excess of $10 million identified through its computer programs as financial receivables and compliance assessments to ensure their proper classification. Additionally, IRS is continuing to refine its efforts to more accurately classify its unpaid assessments inventory through various enhancements to the computer programs it uses to classify these assessments. As part of a larger and long-term effort to modernize its systems, IRS is also identifying and refining the business and system requirements necessary to assess the status of its unpaid assessments and manage its receivables. IRS' efforts are consistent with our recommendations from prior years' audits that IRS take steps to ensure that (1) in the long-term, tax system modernization efforts provide for a mechanism to enable IRS to readily identify and routinely track and report on the status of federal tax receivables and (2) in the short-term, continue to identify ways to improve the accuracy of receivables reporting through further enhancements to its computer programs and detailed reviews of taxpayer accounts. (See appendix I.) As we have reported in our prior financial audits, IRS' custodial financial management system was not designed to readily support the preparation of financial statements. Specifically, IRS' Revenue Accounting Control System--its general ledger--is unable to sufficiently identify detailed tax revenues collected and related refunds paid to permit the preparation of its Custodial Financial Statements. For fiscal year 1995, we reported that IRS had attempted to extract taxpayer information from its masterfiles to support the amounts it reported as revenues on the fiscal year 1995 Custodial Financial Statements. We reported that, while IRS extracted taxpayer information from its masterfiles, it could not adequately reconcile this information to its general ledger and the Department of Treasury's Financial Management Service's (FMS) records. For fiscal year 1996, IRS again extracted detailed taxpayer information from its masterfiles to derive the reported amounts for revenue collections and refunds by tax types on the Custodial Financial Statements. IRS then performed reconciliations between the information used to derive the financial statements and (1) summary amounts recorded in its general ledger and (2) amounts reported for tax revenues collected and refunds paid by FMS. We found that, for fiscal year 1996, IRS' overall reconciliation between its masterfile, general ledger, and amounts reported by FMS, in total, were materially the same. Based on this, and on our detailed tests of revenue collection and refund transactions, we were able to determine that the total Net Collections of Federal Revenue as reported on the fiscal year 1996 Statement of Custodial Activity was fairly stated in all material respects in relation to the financial statements taken as a whole. However, we were unable to determine whether revenue collection and refund amounts reported by tax types on the financial statements were properly classified. The primary reasons we were unable to make this determination were because (1) IRS could not always provide documentation to support certain transactions and (2) its record retention policies and practices resulted in the destruction of other key documents. By not maintaining the necessary documentation to support revenue collection and refund activity, IRS' ability to accurately report such activity by tax type on its financial statements is significantly reduced. To address its record retention problems, IRS is performing an in-depth review to determine for what period, and in what form, records will be retained to ensure that it has the information necessary to support tax revenue collections and refunds. IRS relies on computerized information systems to process and account for its revenue and taxpayer data. These systems should include controls to prevent or detect unauthorized access and intentional or inadvertent unauthorized modifications to the data and related computer programs. In our prior audits of IRS' financial statements, we reported material weaknesses in IRS' computer security. Also, in April 1997 we reported that IRS continues to have serious weaknesses in the controls used to safeguard IRS computer systems, facilities and taxpayer data. Our review of controls, done to support our audit of IRS' fiscal year 1996 financial statements, found that such controls continued to be ineffective. Many issues we previously identified at five IRS sites remained unresolved at the completion of our review of IRS computer security controls in May 1997. These include serious weaknesses in the areas of (1) physical security, (2) logical security, (3) data communications management, (4) risk analysis, (5) quality assurance, (6) internal audit and security, (7) security awareness, and (8) contingency planning. As a result, we consider computer security as a material weakness because IRS data or programs could be added, altered, or deleted and not detected in a timely manner. Further, we identified examples of weaknesses in our current review that allowed for unauthorized access and modification to computer resources, including computer programs and data. The more significant weaknesses include the following: Computer support personnel were granted excessive access to read or change sensitive system files or resources. This access gave them the ability to change, alter, or delete taxpayer data and associated programs. Access to such data files, which include the basic operating system software, should be limited to the minimum number of computer support personnel needed for maintenance and review. For example, at one facility, 88 computer support personnel had the ability to implement programs not controlled by the security software. Computer support personnel were granted inappropriate access, including the ability to both obtain access to data or programs and alter the automated audit trail that identifies who entered or changed data. The inherent risk in these privileges is that data or programs can be added, modified, or deleted and the related audit trail masked or deleted. Computer support personnel access to system resources was not adequately monitored. Monitoring the access activities of employees, especially those who have the ability to alter sensitive programs and data, can help identify any significant problems and deter employees from inappropriate and unauthorized activities. IRS systems record user and system activity in automated audit logs. However, when thousands of transactions are involved, reviews cannot be effective unless reports are available to managers that highlight activity that is unusual or suspicious so that such activity can be investigated. Proper supervision of employee actions, especially those having broad access privileges, requires routine assurance concerning the propriety of their activities. IRS sites had incomplete disaster recovery plans. The absence of a comprehensive, current plan increases the likelihood that IRS would not be able to restore the operations on a timely basis in the event of a local disaster and increases the risk of unavailability of the computerized information systems at IRS. At one site, IRS allowed improper access to the commands used to authorize and generate taxpayer refund checks. Having access to commands would allow an individual to process a refund payment without review and approval by a second party. In addition, although there were methods available for reviewing such access, there were no monitoring nor any review processes in place to detect improper refund transactions. This increases the likelihood that a person with such privileges could perform unauthorized refund activities. Further, without timely review, the likelihood of identifying such incidents is decreased. As discussed above, IRS could not provide adequate documentation to support the classification of its inventory of unpaid assessments with respect to federal tax receivables, and of certain itemized taxes with respect to tax collections and tax refunds. As a result, we were unable to (1) determine whether federal tax receivables as reported were valid and collectible, (2) determine whether tax collections and refunds were properly classified within the appropriate tax class, and (3) test for compliance with laws deemed significant to the financial statements.Accordingly, we are unable to report on IRS' compliance with laws and regulations. When sufficient evidence to support information reported in the financial statements is not available for audit, we cannot determine whether IRS complied with laws and regulations deemed significant to the financial statements. For example, as discussed earlier, IRS was unable to provide documentation in many cases to support unpaid tax assessments. Similarly, as discussed earlier, IRS was unable to provide documentation to support its reporting of tax collections and refunds by tax type. Consequently, in both of these cases, we were unable to determine whether the transactions recorded in IRS' accounting records complied with laws and regulations. However, we did note that one issue we have reported in our prior audits continued to exist during fiscal year 1996. Specifically, IRS did not base its certifications of excise tax amounts distributed to specific trust funds on the basis of amounts actually collected. As we have reported in prior audits, IRS based its certifications of excise tax distributions to specific trust funds on the assessed amount, or amount owed, as reflected on the tax returns filed by taxpayers. This is because IRS does not require taxpayers to provide the necessary information at the time taxes are collected to certify the distributions on the basis of amounts actually collected. By law, distributions of excise taxes to specific trust funds are to be based on actual collections. IRS has studied various options to enable it to make final certifications of amounts distributed based on actual collections and to develop the underlying information needed to support such distributions. IRS has finalized a methodology for addressing this issue and intends to implement it in fiscal year 1998. We will assess IRS' implementation of its proposal in future audits. IRS' Overview and Supplemental Information contain various data, most of which is not directly related to the Custodial Financial Statements. We do not express an overall opinion on this information. Additionally, because we were unable to express an opinion on the financial statements taken as a whole due to IRS' inability to provide sufficient evidence to support amounts reported in its financial statements and the material weaknesses in internal controls discussed above, we did not pursue further work on this information. In our prior reports, we made 30 recommendations aimed at improving IRS' custodial accounting operations. In our assessment this year, we determined that, to date, IRS had completed action on eight of these recommendations. IRS believes that it has resolved an additional 13 recommendations and anticipates closing the remaining nine in fiscal year 1998. We will review IRS' actions to resolve the 13 recommendations IRS believes it has closed as part of our fiscal year 1997 financial statement audit. With respect to six of the 22 recommendations, we provided more specific recommendations that are contained in our April 1997 report on IRS systems security. Progress has been made and actions are underway by IRS to try to resolve the material weaknesses in internal controls and financial management problems reported in our audits. Additional corrective actions are still needed, and IRS continues to state its intention to commit the necessary resources and management oversight to resolve these weaknesses. We will continue to advise IRS on how to resolve these long-standing financial management problems. Appendix I provides a status of IRS' implementation efforts on the remaining outstanding recommendations. preparing the annual Custodial Financial Statements in conformity with the basis of accounting described in note 1; establishing, maintaining, and assessing internal control to provide reasonable assurance that the broad control objectives of FMFIA are met; and complying with applicable laws and regulations. We are responsible for obtaining reasonable assurance about whether (1) the Statement of Custodial Activity is reliable (free of material misstatements and presented fairly, in all material respects, in conformity with the basis of accounting described in note 1), and (2) management's assertion about the effectiveness of internal controls is fairly stated, in all material respects, based upon criteria established under the Federal Managers' Financial Integrity Act of 1982 and the Office of Management and Budget Circular A-123, Management Accountability and Control. In order to fulfill these responsibilities, we examined, on a test basis, evidence supporting the amounts in the Statement of Custodial Activity and related disclosures; assessed the accounting principles used and significant estimates made by management in the preparation of the Statement of Custodial Activity; evaluated the overall presentation of the Statement of Custodial Activity; obtained an understanding of the internal control structure related to safeguarding assets, compliance with laws and regulations, and financial reporting, except in the above-noted areas where IRS was unable to provide sufficient evidence to support amounts reported in its financial statements; and tested relevant internal controls over safeguarding, compliance, and financial reporting and evaluated management's assertion about the effectiveness of internal controls, except in the above-noted areas where IRS was unable to provide sufficient evidence to support amounts reported in its financial statements. We did not evaluate all internal controls relevant to operating objectives as broadly defined by FMFIA, such as those controls relevant to preparing statistical reports and ensuring efficient operations. We limited our internal control testing to those controls necessary to achieve the objectives outlined in our opinion on management's assertion about the effectiveness of internal controls. We attempted to perform audit procedures on the limited information IRS provided; however, for the reasons stated above, we were unable to perform the necessary audit procedures to opine on IRS' Custodial Statement of Financial Position or report on IRS' compliance with laws and regulations. We did our work in accordance with generally accepted government auditing standards and OMB Bulletin 93-06, Audit Requirements for Federal Financial Statements. In commenting on a draft of this report, IRS stated that its ability to obtain a qualified opinion on its Statement of Custodial Activity was a significant accomplishment. IRS also reaffirmed its commitment to improving its revenue reporting and to developing a revenue accounting system that will address the shortcomings cited in this report. IRS stated that it generally agreed with the findings and conclusions in this report; however, it questioned our inability to express an opinion on the financial statements taken as a whole because of concerns with internal controls. IRS officials based that view on their interpretation of auditing standards. In referring to these standards, IRS stated that internal control weaknesses do not preclude rendering an opinion on the financial statements since the assessment of internal controls is performed to determine the extent of reliance that can be placed on internal controls and hence the nature, timing, and extent of substantive testing required. While this statement is conceptually correct, the nature of one of the significant internal control weaknesses discussed in this report--specifically the lack of supporting documentation--prevented us from substantiating significant line items on IRS' financial statements. In planning the fiscal year 1996 audit, we had to consider the weak internal control environment at IRS and, in fact, designed our audit procedures based on the assumption that we could not rely on internal controls. This resulted in our having to increase the level of testing necessary to support our opinion. However, the lack of sufficient evidence to support (1) the validity of amounts included in its tax accounts receivable and (2) classifications of receipts and refunds by tax class precluded us from being able to opine on the financial statements taken as a whole. As discussed in this report, among the basic documents that IRS could not locate and, therefore, were not available to us were tax returns and other agreements which are typically generated or signed by the taxpayer. As a result, we were unable to verify the amounts reported in the financial statements for taxes receivable and receipts and refunds by tax class, which are material to the financial statements taken as a whole, and to report on IRS' compliance with laws and regulations. The existence of an audit trail to substantiate transactions is fundamental to good accounting practices, and appropriate documentation is necessary to permit audit assurance absent other means to validate these transactions. Further, while IRS believes it provided enough alternative supporting documentation for the majority of tax accounts receivable cases where it could not obtain supporting documentation, we considered the alternatives provided and found that they were unacceptable. Specifically, we found that the information that was generated from IRS systems could not be corroborated with sources external to IRS. While acknowledging that material internal control and system weaknesses related to tax accounts receivable existed, IRS disagreed that these weaknesses would impact its ability to effectively manage and routinely monitor the status of amounts owed by taxpayers or its ability to pursue collection. We disagree. As we reported in prior years, improved internal controls and systems would allow IRS to more effectively manage its tax accounts receivable. For example, IRS could better manage its collection efforts if it had readily available detailed subsidiary records of collection activity to augment data used to establish collection priorities. Also, not having available relevant supporting documentation, such as tax returns filed and collection files, can impact the collection process when taxpayers dispute amounts owed. The results of our efforts to audit IRS' fiscal year 1992, 1993, 1994, and 1995 Principal Financial Statements were presented in our reports entitled Financial Audit: Examination of IRS' Fiscal Year 1992 Financial Statements (GAO/AIMD-93-2, June 30, 1993), Financial Audit: Examination of IRS' Fiscal Year 1993 Financial Statements (GAO/AIMD-94-120, June 15, 1994), Financial Audit: Examination of IRS' Fiscal Year 1994 Financial Statements (GAO/AIMD-95-141, August 4, 1995), and Financial Audit: Examination of IRS' Fiscal Year 1995 Financial Statements (GAO/AIMD-96-101, July 11, 1996). In these prior reports, we made numerous recommendations to improve IRS' custodial accounting operations. We determined the status of recommendations based on our audit work on IRS' fiscal year 1996 Custodial Financial Statements and on our discussions with IRS officials. Our assessments of IRS' actions for several recommendations are discussed in the report. However, we have not fully assessed the effectiveness of all of the responses identified in the following table. Financial Audit: IRS Significantly Overstated Its Accounts Receivable (GAO/AFMD-93-42, May 6, 1993) Provide the IRS Chief Financial Officer authority to ensure that IRS accounting system development efforts meet its financial reporting needs. At a minimum, the Chief Financial Officer's approval of related system designs should be required. Take steps to ensure the accuracy of the balances reported in IRS financial statements. In the long term, this will require modifying IRS systems so that they are capable of (1) identifying which assessments currently recorded in the Master File System represent valid receivables and (2) designating new assessments that should be included in the receivables balance as they are recorded. Until these capabilities are implemented, IRS should rely on statistical sampling to determine what portion of its assessments represent valid receivables. Clearly designate the Chief Financial Officer as the official responsible for coordinating the development of performance measures related to receivables and for ensuring that IRS financial reports conform with applicable accounting standards. (continued) Modify the IRS methodology for assessing the collectibility of its receivables by --including only valid accounts receivable in the analysis; --eliminating, from the gross receivables balance, assessments determined to have no chance of being collected; --including an analysis of individual taxpayer accounts to assess their ability to pay; --basing group analyses on categories of assessments with similar collection risk characteristics; and --considering current and forecast economic conditions, as well as historical collection data, in analyses of groups of assessments. Once the appropriate data are accumulated, IRS may use modeling to analyze collectibility of accounts on a group basis, in addition to separately analyzing individual accounts. Such modeling should consider factors that are essential for estimating the level of losses, such as historical loss experience, recent economic events, and current and forecast economic conditions. In the meantime, statistical sampling should be used as the basis for both individual and group analyses. IRS Information Systems: Weaknesses Increase Risk of Fraud and Impair Reliability of Management Information (GAO/AIMD-93-34, September 22, 1993) Limit access authorizations for individual employees to only those computer programs and data needed to perform their duties and periodically review these authorizations to ensure that they remain appropriate. Monitor efforts to develop a computerized capability for reviewing user access activity to ensure that it is effectively implemented. Establish procedures for reviewing the access activity of unit security representatives. Use the security features available in IRS' operating systems software to enhance system and data integrity. Require that programs developed and modified at IRS headquarters be controlled by a program librarian responsible for (1) protecting such programs from unauthorized changes including recording the time, date, and programmer for all software changes, and (2) archiving previous versions of programs. Establish procedures requiring that all computer program modifications be considered for independent quality assurance review. Formally analyze Martinsburg Computing Center's computer applications to ensure that critical applications have been properly identified for purposes of disaster recovery. (continued) Monitor service center practices regarding the development, documentation, and modification of locally developed software to ensure that such software use is adequately controlled. Review the current card key access system in the Philadelphia Service Center to ensure that only users who need access to the facilities protected by the system have access and that authorized users each have only one unique card key. Establish physical controls in the Philadelphia Service Center to protect computers with access to sensitive data that are not protected by software access controls. Financial Management: Important IRS Revenue Information Is Unavailable or Unreliable (GAO/AIMD-94-22, December 21, 1993) Develop a method to determine specific taxes collected by trust fund so that the difference between amounts assessed and amounts collected is readily determinable and excise tax receipts can be distributed as required by law. This could be done by obtaining specific payment detail from the taxpayer, consistent with our April 1993 FTD report. Alternatively, IRS might consider whether allocating payments to specific taxes based on the related taxpayer returns is a preferable method. Determine the trust fund revenue information needs of other agencies and provide such information, as appropriate. If IRS is precluded by law from providing needed information, IRS should consider proposing legislative changes. Identify reporting information needs, develop related sources of reliable information, and establish and implement policies and procedures for compiling this information. These procedures should describe any (1) adjustments that may be needed to available information and (2) analyses that must be performed to determine the ultimate disposition and classification of amounts associated with in-process transactions and amounts pending investigation and resolution. Establish detailed procedures for (1) reviewing manual entries to the general ledger to ensure that they have been entered accurately and (2) subjecting adjusting entries to supervisory review to ensure that they are appropriate and authorized. Monitor implementation of actions to reduce the errors in calculating and reporting manual interest, and test the effectiveness of these actions. Give a priority to the IRS efforts that will allow for earlier matching of income and withholding information submitted by individuals and third parties. (continued) Financial Audit: Examination of IRS' Fiscal Year 1993 Financial Statements (GAO/AIMD-94-120, June 15, 1994) Ensure that system development efforts provide reliable, complete, timely, and comprehensive information with which to evaluate the effectiveness of its enforcement and collection programs. Establish and implement procedures to analyze the impact of abatements on the effectiveness of assessments from IRS' various collection programs. Reconcile detailed revenue transactions for individual taxpayers to the master file and general ledger. Establish and implement procedures to proactively identify errors that occur during processing of data, and design and implement improved systems and controls to prevent or detect such errors in the future. Develop and implement systems and standard operating procedures that incorporate controls to ensure that seized asset inventory records are accurately maintained, which include Establishing specific procedures to ensure the prompt and accurate recording of seizures and disposals, including guidance addressing the valuation of seized assets; Reconciling accounting and inventory records monthly as an interim measure until the successful integration of inventory and accounting systems is completed; and Implementing mechanisms for ensuring that annual physical inventories at field locations are effectively performed, that discrepancies are properly resolved, and that inventory records are appropriately adjusted. Determine what information related to seized assets, such as proceeds and liens and other encumbrances, would be most useful to IRS managers for financial management purposes and develop a means for accounting for these data. 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Pursuant to a legislative requirement, GAO examined the Internal Revenue Service's (IRS) custodial financial statements for fiscal year (FY) 1996. GAO noted that: (1) GAO was unable to give an opinion on the statement of financial position because IRS could not provide adequate documentation to support its balance of federal taxes receivable; (2) the statement of custodial activity was reliable in all material respects, except that sufficient evidence supporting the classification of itemized tax collections and refunds was not available; (3) while GAO found that total collections of federal revenue (net) and total transfers to Treasury, net of refund appropriations, as reported on the statement of custodial activity, are fairly presented in all material respects in relation to the financial statements taken as a whole, the classification of itemized collections and refunds of federal taxes presented on the statement may not be reliable; (4) IRS management asserted that, except for the material weaknesses identified in IRS' FY 1996 Federal Managers' Financial Integrity Act of 1982 report, internal controls were effective in: (a) safeguarding assets; (b) assuring material compliance with laws and regulations; and (c) assuring that there were no material misstatements in amounts reported in the financial statements; (5) consequently, the internal controls were not effective in satisfying the objectives discussed during FY 1996; and (6) material weaknesses in internal control and recordkeeping systems also precluded the tests necessary to provide a basis for any report on compliance with pertinent laws and regulations.
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RECA established 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 the uranium industry. In addition to creating eligibility criteria for compensation, RECA created a Trust Fund to pay claims. The Attorney General is 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 has issued implementing regulations. The regulations established RECP within DOJ's Civil Division and charged it with administering claims adjudication and compensation under the act. To file for compensation, the claimant or eligible surviving beneficiary, either acting on his or her own behalf or represented by counsel, submits the appropriate claim forms along with corroborating documentation to RECP, whose claims examiners and legal staff review and adjudicate the claims. If the claim is approved, a letter is sent notifying the person of the approval and enclosing an "acceptance of payment" form for the claimant to return to RECP. According to program officials, upon receipt of a signed acceptance of payment form, DOJ authorizes the Treasury Department to make payment from the Trust Fund. The RECA Amendments of 2000 require that the Attorney General pay claims within 6 weeks of approval. If the victim is deceased, compensation may be awarded to the victim's eligible survivors (e.g., the victim's spouse or children). Appendix III shows RECP's claims adjudication process, including the procedures for refiling and administratively appealing denied claims. If a RECP claim does not satisfy the eligibility criteria, the claimant is notified of the deficiency in writing. The claimant is allowed 60 days in which to provide documentation correcting the deficiency. At the expiration of the 60-day period, if the claim remains deficient, DOJ issues a final denial decision explaining the reasons for the denial, and a copy is sent to the claimant. Claimants may refile a claim with new information to RECP up to two more times. DOJ's decision denying the claim may be appealed administratively to a DOJ Appeals Officer, who can affirm or reverse the original decision or remand the claim back to RECP for further action. Claimants who are denied may also seek judicial review in a U.S. district court. Under DOJ implementing regulations, claimants must first exhaust their administrative remedies within DOJ prior to seeking judicial review. Program officials said that from program inception in 1992 through September 30, 2002, only eight claims denied by the RECP have been brought to district court. The RECA Amendments of 2000 broadened the scope of eligibility for benefits coverage, including increasing the geographical areas covered, allowing more individuals to qualify, and establishing a prompt payment period. Figure 1 shows the affected areas under RECA. Some of the major changes resulting from the amendments include permitting eligible aboveground uranium mine employees, uranium mill workers, and uranium ore transporters to qualify for compensation; increasing the geographic areas included for eligibility and increasing 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 cancers and also noncancers; decreasing the level of radiation exposure that is necessary to qualify for compensation for uranium mine employees; making certain medical documentation requirements are less stringent; eliminating distinctions between smokers and nonsmokers pertaining to diseases such as lung cancer and nonmalignant respiratory diseases; construing all reasonable doubts about the eligibility of a claimant in favor of the claimant; allowing previously denied claimants to file up to three more times; and requiring the Attorney General to ensure that a claim is paid within 6 weeks of approval. On November 2, 2002, the 21st Century Department of Justice Appropriations Authorization Act was enacted. This law included several provisions that further amended RECA. The amendments affect eligibility criteria and revise claims adjudication procedures. These provisions were enacted near the end of our review, and we did not assess their potential impact on the program. Some of the major changes include re-insertion of a Downwinder area that was inadvertently eliminated when RECA was amended in July 2000; requiring that lung cancer must, like other compensable cancers, be "primary" (i.e., originate in the specified organ or tissue); allowing uranium miners to qualify by meeting either the 40 Working Level Months (WLM) exposure standard or the 1-year duration of employment standard; and striking the requirement that, in cases where the claimant is living, a claimant with lung cancer must submit the medical documentation required for proof of a "non-malignant respiratory disease." Appendix II provides a more comprehensive summary of the key provisions of RECA by claimant category. In addition to RECP, other programs are authorized to 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 provides, in general, monthly compensation for specific diseases to veterans who were present at certain atomic bomb exercises, served at Hiroshima and Nagasaki during specific periods of the post World War II occupation of Japan, or were prisoners of war in Japan. In addition, Title XXXVI of the Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001 establishes the "Energy Employees Occupational Illness Compensation Program" to compensate covered employees or their survivors 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. Specifically, uranium miners, uranium mill workers, and uranium ore transporters, approved under Section 5 of RECA, are eligible to receive under title XXXVI an additional $50,000 lump-sum payment plus medical benefits. The enactment of the RECA Amendments of 2000 was followed by a significant increase in the number of claims. Although RECP received and processed record numbers of claims in fiscal years 2001 and 2002, claims are taking longer to process. In addition, the percentage of claims that are adjudicated within 12 months has dropped, and the number of pending claims has grown sharply. Since its inception in April 1992 through the end of fiscal year 2002, RECP has received 14,987 claims for compensation. The total number of RECA claims filed has increased 92 percent, from 7,819 at the end of fiscal year 2000 to 14,987 by the end of fiscal year 2002. In fiscal year 2001, the year following the enactment of the RECA 2000 Amendments, RECP received over 3,800 claims--more claims than were filed in the prior 6 fiscal years combined. There were over 3,300 claims filed in fiscal year 2002. At the end of fiscal year 2002, there were 2,654 claims pending adjudication. In fiscal year 2003, about 3,200 new filings are anticipated. Figure 2 shows the number of claims filed each fiscal year. When RECP reviews a claim, the review process ends in one of two possible outcomes--approval or denial of the claim. If approved, the claim is forwarded to Treasury for payment. If denied, applicants may refile their claims or pursue other avenues of appeal. Of the total 14,987 claims filed, RECP reached a disposition on 12,333. The remaining 2,654, or about 18 percent of claims, were pending, as of September 30, 2002. Of the claims that were adjudicated, 7,915, or about 64 percent, were approved and 4,418, or about 36 percent, were denied. Excluding pending claims, RECP approved about 56 percent of the uranium mine employee claims, about 75 percent of the downwinder claims, about 34 percent of the onsite participant claims, about 82 percent of the uranium mill claims, and about 81 percent of the ore transporter claims. Table 1 shows the number of claims approved, denied, and pending as of September 30, 2002. Through the end of fiscal year 2002, RECP approved about $530.5 million to claimants. RECP approved $230.5 million to eligible individuals based on uranium mine employee applications (or about 43 percent of the total); $247.2 million based on Downwinder applications (or about 47 percent of the total); $33.4 million based on onsite participant applications (or about 6 percent of the total); $15.6 million based on uranium miller participant applications (or about 3 percent of the total); and $3.8 million based on ore transporter participant applications (or about 1 percent of the total). The RECA legislation requires that applications be processed within 1 year. However, the law permits applicants' additional time to submit more documentation to support their claims. About 89 percent of the RECA applications were processed within 12 months over the period fiscal years 1992 through 2000. By the end of fiscal year 2002, the percentage of claims processed within 12 months was 79 percent. Table 2 shows the processing times in months for applicants over the course of RECP. We could not readily determine to what extent the 2,559 applications that were not processed within 1 year were due entirely to the granting of additional time. As shown in table 3, the average number of days to process a claim has increased in each category since our previous review. According to data provided by DOJ officials, for fiscal years 1992 through 2002, the overall average processing time from the date an application is filed until its disposition was 327 days for uranium miner employee claims. This is up from 269 days when we last reported. The average processing time for Downwinder claims is 244 days. This is up from 190 days when we last reported. The average processing time for onsite participant claims is 263 days. This is up from 245 days when we last reported. Uranium mill employee claims and ore transporter employee claims are new categories since we last reported. However, each of these claimant categories, on average, took well over a year to process, 459 days and 392 days, respectively. Table 3 shows the average number of days to process a claim for fiscal years 1992 through 2002 and the increase in processing time by claimant category since we last reported. RECP officials attributed the increase in average time required to process claims to differing characteristics associated with each claim and the different factors involved in the review and application of the RECA legislation, as amended, for the five claims categories. RECP officials told us that since the inception of the program, its policy has been to assist claimants in any way that it can. For example, rather than denying a claim for a lack of documentation, program officials said that they allow claimants additional time to provide corroborating documentation. In many cases, claimants in the uranium industry were employed as millers, miners, and ore transporters over the course of their career. RECP officials said that if a claimant filed a uranium miner claim, but could not provide sufficient documentation to satisfy RECA's uranium miner requirements, RECP would work with the claimant to obtain additional documentation in order to satisfy the uranium miller or transporter requirements where appropriate. RECP officials cited other reasons for delays in processing claims, including RECP's need, in certain cases, to gather medical records to address RECA's statutory requirements for certain compensable diseases. 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 meet the eligibility criteria. In addition to the increase in the volume of claims, program officials said that the adjudication of the newly added claimant categories (uranium millers and ore transporters) presented challenges in terms of deciding the types of employment records that existed and which records should be required and, therefore, required additional processing time in some instances. Similarly, RECP had to determine the medical evidence that would be sufficient to establish proof of the new compensable diseases and illnesses added to RECA. Since the amendments of 2000, RECA claims are coming in more rapidly, and the processing of these claims is taking longer. As a result, the number of pending claims has grown sharply, from 653 at the end of fiscal year 2000 to 2,654 by the end of fiscal year 2002, about a 300-percent increase. In fiscal year 2003, RECP program officials estimate that 3,185 new claims will be filed. It is likely that the number of pending claims will grow further. According to DOJ budget justification documents for fiscal year 2003, because the 2000 amendments eased eligibility requirements, many of the claims submitted in 2002 were re-filings from previously denied claimants. According to program officials, the resolution of refiled claims is more straightforward. Therefore, these claims were processed first to speed payments to deserving claimants. But, program officials anticipate that the pace of claims processing will be slower in fiscal year 2003 than in fiscal year 2002, because the adjudications of the remaining claims in process will be more time-consuming and difficult. RECA program funding is provided from two sources. The RECA Trust Fund receives appropriated funds from which compensation is paid to eligible claimants. Funding for DOJ to administer the program is provided in a separate appropriation account for radiation exposure compensation administrative expenses. Table 4 shows the RECA Trust Fund activity from fiscal years 1992 through 2002, including the amounts appropriated each year and the balance at the end of each fiscal year. Money remaining in the Trust Fund at the end of any given fiscal year is generally carried forward to the next fiscal year. The RECA Trust Fund received over $200 million in the first 2 years of the program. Between fiscal years 1994 and 1996, the program was funded entirely by funds carried over from prior year appropriations. Beginning in fiscal year 1997, Congress resumed making annual appropriations to the RECA Trust Fund with the exception of fiscal year 1999 when no funds were appropriated to the Trust Fund. For fiscal year 2000, $11.6 million was available in the Trust Fund. This amount included $8.4 million carried forward from the prior year and a fiscal year 2000 appropriation of $3.2 million. For fiscal year 2001, $10.8 million was appropriated and $431,000 was carried over from fiscal year 2000. Later, in fiscal year 2001, the RECA program received a supplemental appropriation for "such sums as may be necessary" to pay claims only through the end of that fiscal year. This resulted in payments of $107.9 million for fiscal year 2001. Table 4 shows the Radiation Exposure Compensation Trust Fund Activity. The National Defense Authorization Act for fiscal year 2002 provided funding for the RECA Trust Fund to cover a 10-year period--fiscal years 2002 through 2011 up to a specified maximum amount per fiscal year. In past years, Congress appropriated money each fiscal year. This act, instead, provided specified amounts for subsequent fiscal years 2002 through 2011, obviating the need for new congressional action in each of those fiscal years unless the Congress determined that additional funding was necessary. Table 5 shows the Trust Fund appropriations established in law. According to estimates by CBO and RECA program officials, beginning in fiscal year 2003, higher funding levels will be necessary or millions of dollars in claims may be delayed. As shown in table 6, CBO estimates that there will be a shortfall of $101 million in the Trust Fund through fiscal year 2007, of which about $44 million will occur in fiscal year 2003. Overall, CBO estimates a net shortage of $78 million through 2011. Table 7 shows the RECA program estimate, which is similar to, but slightly higher than CBO's estimate. Overall, RECA estimates a shortage of $107 million through 2011. Both organizations agree that most of the funding shortfall will occur over the next 3 years. Figure 3 shows the gap between the amount of funding currently appropriated to the Trust Fund and CBO's estimate through fiscal year 2011. RECP officials' estimates through fiscal year 2011 are similar to, but slightly higher than, that of CBO's. According to program officials, recent trends indicate that projected claims will total about $762 million for fiscal years 2002 through 2011. This would exceed the current total of annual Trust Fund appropriations by a total of about $107 million and CBO's overall estimate by $29 million. DOJ's estimate agrees with that of CBO, in that most of the funding shortfall, about $72 million, will occur over the next 3 years. According to RECP officials, a shortfall of funding available in the Trust Fund in any given year can result in the claims going unpaid until funds become available the following year. For example, RECA officials said that in fiscal year 2002, funding was exhausted 3 weeks before the close of the fiscal year, and based on the shortfalls projected, funding is likely to be exhausted before the close of fiscal years 2003 through 2005. Table 7 shows RECP's estimate of unfunded requirements for Radiation Exposure Compensation compared with the current Trust Fund appropriations as established in law. RECP officials told us that in addition to the significant increase in the number of claims submitted, RECP received an unprecedented number of telephone and written inquiries for forms and information, a development that has further stretched the program's operational resources. According to a budget official, this has led to upward pressure on the overall costs to administer the program. In an effort to keep up with the demand, program officials began adding additional staff in fiscal year 2000. Table 8, shows that RECP's full-time equivalent (FTE) staff levels and spending on program administration have increased in fiscal years 2001 and 2002 commensurate with a resurgence of claims. Since fiscal year 1993, funding for DOJ administration of the program has been provided in a separate appropriation account for Radiation Exposure Compensation administrative expenses. The administrative expense appropriation for the program was $1.996 million each for fiscal years 2001 and 2002. There is an outstanding issue with respect to the program's administrative expenses for fiscal years 2001 and 2002 in that spending may have exceeded its appropriations for those years. The Antideficiency Act provides that an officer or employee of the U.S. government may not make or authorize an expenditure or obligation exceeding an amount available in an appropriation or fund, or enter into a contract or other obligation for payment of money before an appropriation is made. It is our understanding, on the basis of information provided to us during our review, that total administrative expenses were $2.1 million for fiscal year 2001 and $3 million for fiscal year 2002, while the appropriation for Radiation Exposure Compensation administrative expenses was $1.996 million for each of those fiscal years. Regarding fiscal year 2001, it is our understanding that following an increase in the number of RECA claims filed, around July 2001, the increase in spending arose from a task order that was issued for $1 million to hire contract staff during fiscal years 2001 and 2002. These expenses were paid with funds from DOJ's Legal Activities, Salaries and Expenses, General Legal Activities account. The additional staff was reportedly used to assist in processing claims. According to DOJ, an investigation has been initiated to ascertain if possible Antideficiency Act violations occurred with respect to the Radiation Exposure Compensation administrative expenses account. Whenever an agency discovers evidence of a possible over obligation or over expenditure, it must investigate that evidence. If the investigation shows that the appropriation, in fact, is over obligated or over expended, the Antideficiency Act requires reporting the over obligation or over expenditure to the President and the Congress. OMB guidance on budget execution, including requirements contained in the Antideficiency Act, is included in OMB Circular A-11, Part 4 which requires, among other things, that agencies include in such reports the primary reason for the violation, a statement of any circumstances the agency believes to be extenuating, a statement of the adequacy of the agency's funds control system, and a statement of whether any additional action need be taken to prevent recurrence of the same type of violation. Given that DOJ has initiated an investigation, we will monitor DOJ's investigation of possible Antideficiency Act violations in fiscal years 2001 and 2002 relating to the Radiation Exposure Compensation administrative expenses account and take appropriate actions, if necessary, at the conclusion of DOJ's investigation. Fiscal year 2003 appropriations contained several changes to the program's administrative expenses appropriation. First, the Consolidated Appropriations Resolution, 2003, appropriated funds for the program's administrative expenses in DOJ's Legal Activities, Salaries and Expenses, General Legal Activities account rather than in a separate appropriation. Second, the language of the administrative expenses appropriation was changed from a specified amount to a specified minimum amount. Specifically, whereas fiscal year 2002 appropriations provided for "necessary administrative expenses in accordance with the Radiation Exposure Compensation Act, $1,996,000," the fiscal year 2003 appropriation provides, in part, that "not less than $1,996,000 shall be available for necessary administrative expenses in accordance with the Radiation Exposure Compensation Act." In accompanying Conference Report language, the conferees said that they "expect the Civil Division to absorb any additional requirements for processing RECA claims from other resources available to the Civil Division." We provided a draft of this report to the Attorney General for review and comment. The Justice Department advised us they had no formal comments. The Civil Division and the Justice Management Division reviewed the report for accuracy and provided technical comments which have been incorporated in this report where appropriate. Funding available to pay claims under the RECA may be inadequate to meet projected needs. Since the end of fiscal year 2000, the number of unadjudicated claims has grown 300 percent from 653 to 2,654, and nearly 3,200 new claims are anticipated during fiscal year 2003. Both CBO and DOJ estimate that money in the Trust Fund will be insufficient to pay all the claims that are projected to be approved over the 2003-2011 period. For fiscal years 2001 and 2002, RECP officials spent more for administrative expenses than was appropriated. For fiscal year 2003, Congress authorized DOJ's Civil Division to absorb any additional funding required for administrative expenses above the amount appropriated. However, the availability of additional funds, if needed, for administrative expenses is contingent on the Civil Division's ability to absorb any additional costs. We recommend that the Attorney General consult with the congressional committees of jurisdiction to develop a strategy to address the gap between current funding levels and the amount of funding needed to pay claims projected to be approved over the 2003-2011 period. Copies of this report are being sent to the Attorney General; the Director, Office Management and Budget; and any other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact William Crocker or me at (202) 512-8777 or [email protected]. R. Rochelle Burns, Geoffrey R. Hamilton, and Leo M. Barbour made key contributions to this report. To determine the outcomes of the claims adjudication process, including the number of approved and denied claims, the timeliness of the claims adjudication process, and the amount of money awarded, we interviewed Radiation Exposure Compensation Program (RECP) officials and obtained RECA-related case information from the Department of Justice's (DOJ) Civil Division's case histories database for fiscal years 1992 through 2002. The Civil Division's Office of Planning, Budget and Evaluation (OPB&E) provided financial information. We discussed the basis for any major fluctuations with RECP officials. We did not independently verify the accuracy of the RECA data extracted from the database. To determine the cost of administering RECP, we obtained data from OPB&E by object class for the end of fiscal years 1992 through 2002. The cost provided includes items such as personnel compensation and benefits, travel and transportation of persons, and printing and reproduction costs. To determine full-time equivalent (FTE) staffing levels, the office provided us with FTE staff levels for RECP at the end of fiscal years 1992 through 2002. To determine the nature of expenditures from the Trust Fund, we evaluated annual Trust Fund activity from fiscal years 1992 through 2002 provided by OPB&E. During our initial review of the RECP in 2001, we verified that payments made were consistent with data contained in DOJ's Civil Divisions case histories database. We did not revalidate the information from the database during this review. To validate the estimates of future Trust Fund requirements, we met with Congressional Budget Office (CBO) officials and examined their source data, methodology, assumptions, calculations, and results. On the basis of our examination, we found that CBO's estimates were sound and reasonable. RECA program officials said that they are confident in the data necessary to support improved estimates for the next 3 years (fiscal years 2003 through 2005); however, beyond that, their best educated guess is to extend the slope of the funding curve out another 5 or more years for RECP. We focused on DOJ's administration of RECA from its inception in fiscal year 1992 through the end of fiscal year 2002. We conducted our review from August 2002 through February 2003, in accordance with generally accepted government auditing standards. Location Colorado, New Mexico, Arizona, Wyoming, South Dakota, Washington, Utah, Idaho, North Dakota, Oregon, and Texas. Examples of diseases covered Other Lung cancer and nonmalignant respiratory disease. A period of at least 2 years from January 21, 1951-October 31, 1958, or for the period between June 30 and July 31, 1962. Certain Utah, Nevada, and Arizona counties downwind from the Nevada test site. Certain types of leukemia, lung cancer, multiple myeloma, lymphomas, and primary cancer of the thyroid, male or female breast, esophagus, stomach, pharynx, small intestine, pancreas, bile ducts, gall bladder, salivary gland, urinary bladder, brain, colon, ovary, or liver. Victims must have been exposed to at least 40 working level months of radiation or determine employment in a mine for 1 full year. Aboveground miners are included. Additional states may apply for inclusion as a covered state. For those exposed prior to age 21, and subsequently contract any medically recognized form of acute or chronic leukemia, other than chronic lymphocytic leukemia, a period of only 1 year, from January 21, 1951 to October 31, 1958, is required atmospheric nuclear tests from July 16, 1945-December 31, 1962. Onsite testing areas include the Nevada, Pacific, Trinity, and the South Atlantic test sites. Certain types of leukemia, lung cancer, and lymphomas, multiple myeloma, and primary cancer of the thyroid, male or female breast, esophagus, stomach, pharynx, small intestine, pancreas, bile ducts, gall bladder, salivary gland, urinary bladder, brain, colon, ovary, or liver (certain types). The payment to the victim may be offset by payments received by the victim from the Department of Veterans Affairs based on the same radiation-related illness. Time periods Any time from January 1, 1942-December 31, 1971. Location Colorado, New Mexico, Arizona, Wyoming, South Dakota, Washington, Utah, Idaho, North Dakota, Oregon, and Texas. Examples of diseases covered Other Lung cancer, nonmalignant respiratory diseases, renal cancer, and other chronic renal disease, including nephritis and kidney tubal tissue injury. Victims must have worked for at least 1 year during the relevant time period. Any time from January 1, 1942-December 31, 1971. Colorado, New Mexico, Arizona, Wyoming, South Dakota, Washington, Utah, Idaho, North Dakota, Oregon, and Texas. Lung cancer, nonmalignant respiratory diseases, renal cancer, and other chronic renal disease, including nephritis and kidney tubal tissue injury. Victims must have worked for at least 1 year during the relevant time period. Also includes victim's survivors. Appendix III: RECP's Claims Adjudication Process The RECP attorney may request additional supporting information before making a recommendation (for approval or denial) to the Assistant Director. As of July 10, 2000, based on the 2000 amendments, an applicant can file a claim for consideration up to three times. Applicants whose claims have been denied are permitted to refile their claims if (1) they provide information to correct the deficiency that was the basis for the last denial under the original RECA legislation or (2) they believe that they are now eligible as a result of the 1999 regulatory changes and/or the 2000 amendments. The Appeals Officer may (1) reverse the denial (award compensation to the claimant), (2) affirm the denial (deny compensation to the claimant), or (3) remand the case to RECP. The decision is equivalent to a negative determination for the other two options.
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On October 15, 1990, the Radiation Exposure Compensation Act (RECA) was enacted providing for payments to individuals who contracted certain cancers and other serious diseases presumably as a result of their exposure to radiation released during aboveground nuclear weapons tests or as a result of their employment associated with the uranium mining industry during the Cold War era. The RECA Amendments of 2000 required that GAO report to the Congress on the Department of Justice's administration of RECA not later than 18 months after the enactment of the amendments and every 18 months thereafter. GAO originally reported on the status of the program in September 2001. The objectives of this report are to update information on claims processing, payments from the Trust Fund, and administrative expenses. Since the enactment of the RECA Amendments of 2000, which expanded eligibility for benefits, the RECA program has experienced a significant increase in the number of claims filed. Claims also are taking longer to process, and the number of pending claims has grown sharply. Since we last reported in September 2001, claims have increased from 7,819 to 14,987. Pending claims have increased 300 percent, from 653 to 2,654. About 3,200 new claims are anticipated in fiscal year 2003. In addition, the average time to process claims increased for each category of claimant. Given these circumstances, current funding for the RECA program to pay claims may be inadequate to meet projected needs. In fiscal year 2002, RECA was appropriated funds to cover a 10-year period--fiscal years 2002 through 2011 up to a specified amount per year--totaling $655 million. The Congressional Budget Office (CBO) and the Department of Justice (DOJ) estimate that funding levels appropriated to the Trust Fund are insufficient to meet the projected claims. As a result, claims may be delayed, particularly through 2007. Since 1993, funding for DOJ administration of the program has been provided in a separate appropriation account for Radiation Exposure Compensation administrative expenses. There has been upward pressure on the program's administrative costs in recent years. For fiscal years 2001 and 2002, the RECA program may have exceeded its budget authority for administrative expenses. According to a program budget official, the RECA program spent about $100,000 in fiscal year 2001 and about $1 million for fiscal year 2002 in administrative expenses over the $1.996 million appropriated to the Radiation Exposure Compensation administrative expenses account in those fiscal years.
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In 1990, the Congress enacted the Global Change Research Act. This act, among other things, required the administration to (1) prepare and at least every 3 years revise and submit to the Congress a national global change research plan, including an estimate of federal funding for global change research activities to be conducted under the plan; (2) in each annual budget submission to the Congress, identify the items in each agency's budget that are elements of the United States Global Change Research Program (USGCRP), an interagency long-term climate change science research program; and (3) report annually on climate change "expenditures required" for the USGCRP. In response to the requirements of the 1990 act, the administration reported annually from 1990 through 2004 on funding for climate change science. From 1990 through 2001, the reports presented detailed science funding data for the USGCRP. Federal climate change science programs were reorganized in 2001 and 2002. In 2001, the Climate Change Research Initiative (CCRI) was created to coordinate short-term climate change research focused on reducing scientific uncertainty, and in 2002, CCSP was created to coordinate and integrate USGCRP and CCRI activities. CCSP is a collaborative interagency program designed to improve the government wide management of climate science and research. With respect to federal research, OMB, in annual reports and testimony before the Congress, reported climate change funding for 1993 through 2004 using four categories: Technology, which includes the research, development, and deployment of technologies and processes to reduce greenhouse gas emissions or increase energy efficiency. Funding for this category focuses on programs for energy conservation, renewable energy, and related efforts. Science, which includes research and monitoring to better understand climate change, such as measuring changes in forest cover and land use. International assistance, which helps developing countries address climate change by, for example, providing funds for energy efficiency programs. Tax expenditures related to climate change, which are federal income tax provisions that grant preferential tax treatment to encourage emission reductions by, for example, providing tax incentives to promote the use of renewable energy. Over the same time period, the administration also has reported annually on funding specifically for climate change science. CCSP is currently responsible for preparing these climate change science reports, which duplicate to some extent data provided by OMB in the science category. In 1992, the United States ratified the United Nations Framework Convention on Climate Change, which has as its objective the stabilization of greenhouse gas concentrations in the earth's atmosphere but does not impose specific goals or timetables for limiting emissions. In response, federal agencies developed a plan for reducing greenhouse gas emissions, primarily through voluntary efforts by companies, state and local governments, and other organizations. Since that time, federal agencies have sponsored voluntary programs that encourage private and public sector entities to curb their greenhouse gas emissions by providing technical assistance, education, research, and information sharing. The administration has promoted such voluntary programs, along with other measures, as an alternative to mandatory emissions reductions. In February 2002, the president announced a Global Climate Change Initiative to reduce the rate of increase in greenhouse gas emissions in the United States. Specifically, he established the goal of reducing the emissions intensity of the United States by 18 percent between 2002 and 2012. Emissions intensity is a ratio calculated by dividing emissions in a given year by economic output for that year. In support of this goal, the president announced two new voluntary programs aimed at securing private sector agreements to voluntarily reduce greenhouse gas emissions or emissions intensity. Climate Leaders, an Environmental Protection Agency (EPA)-sponsored government-industry partnership established in February 2002, works with firms to develop long-term climate change strategies. According to EPA officials, as of November 2005, 74 firms were participating in the program. Climate VISION (Voluntary Innovative Sector Initiatives: Opportunities Now), introduced in February 2003 and coordinated by the Department of Energy (DOE) in cooperation with EPA and other federal agencies, works with trade groups to develop strategies to reduce their members' greenhouse gas emissions intensity. Most industries participating in the program are represented by a single trade group. As of November 2005, 14 industry sectors and the Business Roundtable--an association of chief executive officers representing diverse sectors of the economy--were participating in the program. According to DOE, the trade groups participating in Climate VISION typically have high energy requirements. OMB reports indicated that federal funding on climate change increased from $2.35 billion in 1993 to $5.09 billion in 2004, or from $3.28 billion to $5.09 billion after adjusting for inflation, and that funding increased in three of the four categories between 1993 and 2004. However, changes in reporting methods limit the comparability of funding data over time, making it unclear whether total funding actually increased as reported. OMB reports also indicated that 12 of the 14 federal agencies receiving funding for climate change programs in 2004 received more funding in that year than they had in 1993, but again, unexplained modifications in the reports' contents limit the comparability of agencies' funding data, making it difficult to determine whether funding increased as OMB reported. We found that federal funding for climate change, as reported by OMB, increased from $2.35 billion in 1993 to $5.09 billion in 2004 (117 percent), or from $3.28 billion to $5.09 billion (55 percent) after adjusting for inflation, and reported funding increased for three of the four categories between 1993 and 2004. However, changes in reporting methods limit the comparability of funding data over time, and therefore it was unclear whether total funding actually increased as OMB reported. We were unable to compare changes in the fourth category-climate-related tax expenditures-because OMB reported estimates for proposed but not existing tax expenditures from 1993 to 2004. Specifically, for 1993 through 2004, we found the following: Technology funding, as reported by OMB, increased from $845 million to $2.87 billion (240 percent), or from $1.18 billion to $2.87 billion (143 percent) in inflation-adjusted dollars. The share of total climate change funding devoted to technology increased from 36 percent to 56 percent. However, we identified several ways that technology funding presented in OMB's more recent reports may not be comparable to previously reported technology funding. For example, OMB added accounts to the technology category that were not reported before or were presented in different categories and did not explain whether these accounts reflected the creation of new programs or a decision to count existing programs for the first time. OMB also expanded the definitions of some accounts to include more activities without clarifying how the definitions were changed. Furthermore, OMB reports include a wide range of federal climate-related programs and activities, some of which-such as scientific research on global environmental change-are explicitly climate change programs, whereas others-such as technology initiatives promoting emissions reduction or encouraging energy conservation-are not solely for climate change purposes. Science funding increased from $1.31 billion to $1.98 billion (51 percent), according to both OMB and CCSP, or from $1.82 billion to $1.98 billion (9 percent) in inflation-adjusted dollars. However, science's share of total climate change funding decreased from 56 percent to 39 percent. OMB and CCSP generally presented consistent climate change science funding totals from 1993 through 2004. CCSP reports also presented more detailed data, but these data were difficult to compare over the entire period because CCSP periodically introduced new categorization methods without explaining how the new methods related to the ones they replaced. Specifically, over the period CCSP used seven different methods to present detailed science funding data, making it impossible to develop consistent funding trends for the entire timeframe. International assistance funding reported by OMB increased from $201 million to $252 million (25 percent), but decreased from $280 million to $252 million (10 percent) in inflation-adjusted dollars. Moreover, its share of total climate change funding decreased from 9 percent to 5 percent. International assistance funding reported by OMB was generally comparable over time, although several new accounts were added without explanation. Tax expenditures were not fully reported by OMB for any year, even though climate-related tax expenditures amounted to hundreds of millions of dollars in forgone federal revenue in fiscal year 2004. Although not required to do so, OMB reported proposed climate-related tax expenditures. However, OMB did not report revenue loss estimates for existing climate change-related tax expenditures. Whereas OMB reported no funding for existing climate change-related tax expenditures in 2004, the federal budget for that year listed four tax expenditures related to climate change, including estimated revenue losses of $330 million for incentives to develop certain renewable energy sources. Table 1 shows federal climate change funding by category between 1993 and 2004. Table 2 shows funding data for the seven largest technology accounts, which accounted for 92 percent of technology funding in 2004. OMB and CCSP officials told us that time constraints and other factors contributed to changes in report structure and content over time. For example, OMB officials said that the short timeline for completing the report required by the Congress (within 45 days of submitting the upcoming fiscal year's budget for the three most recent reports) limited OMB's ability to analyze data submitted by agencies. OMB and CCSP officials also noted that each report was prepared in response to a one- time requirement and that they were not directed to use the same report format over time or to explain differences in methodology from one report to another. The director of CCSP told us that changes to climate change science reports, such as the creation and deletion of different categorization methods, were made because CCSP was changing towards a goals-oriented budget, and categorization methods changed as the program evolved. The director also said that future reports will explicitly present budget data as it was reported in prior reports to retain continuity, even if new methods are introduced. Regarding tax expenditures, OMB officials said that they consistently included in the reports those proposed tax expenditures where a key purpose was specifically to reduce greenhouse gas emissions. They also stated that they had not included existing tax expenditures that may reduce greenhouse gas emissions but that were enacted for other purposes, and that the Congress had not provided any guidance to suggest that additional tax expenditure data should be included in the annual reports. OMB reported that 12 of the 14 agencies receiving funding for climate change programs in 2004 received more funding in that year than they had in 1993. However, it is unclear whether funding changed as OMB reported because of, among other things, unexplained changes in what was defined as climate change funding. Reported funding for the Department of Energy (DOE), the agency with the most reported climate-related funding in 2004, increased from $963 million to $2.52 billion (162 percent), or from $1.34 billion to $2.52 billion (88 percent) after adjusting for inflation. DOE and NASA accounted for 81 percent of the reported increase in funding from 1993 through 2004. However, because agency funding totals are composed of individual accounts, changes in the reports' contents, such as the unexplained addition of accounts to the technology category, limit the comparability of agencies' funding data over time, making it difficult to determine if these are real or definitional increases. OMB stated that it consistently reported funding data for the 3 years presented in each of its reports and that there had been no requirement to use a consistent format from one report to the next or to explain differences in methodology from one report to another. We recommended that OMB and CCSP use the same format for presenting data from year-to-year, explain changes in report content or format when they are introduced, and provide and maintain a crosswalk comparing new and old report structures when changes in report format are introduced. We also recommended that OMB include data on existing climate-related tax expenditures in future reports. OMB agreed with the recommendations relating to report content and format and said it was studying the other recommendations. CCSP agreed with all of our recommendations. Both agencies appear to have taken actions in response to our recommendations, but we have not comprehensively reviewed the extent to which they may have done so. EPA and DOE expect participants in their respective programs to complete a number of actions within certain timeframes. However, participants' progress toward completing those actions was mixed, and neither agency had a written policy for dealing with this situation. EPA estimated that the first fifty Climate Leaders participants accounted for at least 8 percent of U.S. emissions on average for the years 2000 through 2003, and DOE estimated that Climate VISION participants account for over 40 percent of U.S. greenhouse gas emissions; both agencies believe these to be conservative estimates. While EPA and DOE are participating in an interagency process to estimate the impact of their programs on emissions, we found that accurately attributing specific emissions reductions to either program would be difficult. EPA and DOE expect participants in their voluntary emissions reduction programs to complete a number of actions; however, participants' progress toward completing those actions, as well as the agencies' efforts to track accomplishments, varied. For example, within about 1 year of joining the program, EPA expects firms to enter into discussions with the agency to establish an emissions reduction goal and to complete these negotiations, generally within another year. As of November 2005, 38 of the 74 firms had established goals, while most of the other 36 firms, including 13 that joined in 2002, were still working to establish goals; most of the remaining firms had joined the program recently and had not yet established goals. EPA officials told us that they were developing a system for tracking firms' progress in accomplishing the key steps associated with participating in the program, but were still in the process of obtaining and validating data from participants. While EPA officials told us that they would be willing to remove participants from the program if they were not progressing as expected, they had not specified the conditions under which they would do so. DOE asks that trade groups participating in its Climate VISION program develop a work plan for measuring and reporting emissions information within about 1 year after joining the program and report their emissions levels. As of November 2005, 11 of the 15 participating trade groups had completed their work plans and 5 groups had reported on emissions. As of November 2005, DOE officials said that the agency did not have a system for tracking how long each group takes to complete its work plan and report emissions data. Furthermore, while DOE officials said that the agency would remove groups from the program if they did not seem to be taking sufficient action, DOE had not yet established specific deadlines for reporting emissions. Because DOE did not have a system for tracking how long participants take to complete key program steps--and neither DOE nor EPA had established written policies for taking action against participants not progressing as expected--it will be difficult for them to ensure that all participants are meeting program expectations. We recommended that DOE develop a system for tracking participants' progress in completing key steps associated with its Climate VISION Program, and that both EPA and DOE develop written policies establishing the actions the agencies will take if participants are not completing program steps on time. DOE and EPA appear to have taken steps to implement our recommendation regarding a written policy, but we have not conducted a comprehensive review to determine the extent to which the recommendations have been implemented. The specific types of emission reduction goals being established by Climate Leaders firms and Climate VISION groups varied. Of the 38 firms participating in Climate Leaders that had established emission reduction goals as of November 2005, 19 had committed to reduce their total greenhouse gas emissions, 18 had committed to reduce their emissions intensity (emissions per unit of output), and 1 firm had committed to reduce both its total emissions and its emissions intensity. Furthermore, firms' goals differed in their geographic scope and the time period they covered. For example, Cinergy Corporation pledged to reduce its total U.S. domestic greenhouse gas emissions by 5 percent from 2000 to 2010, while Pfizer, Inc., pledged to reduce its worldwide emissions by 35 percent per dollar of revenue from 2000 to 2007. Table 3 presents information on the 38 firms' goals. In contrast to EPA's program, 14 of the 15 trade groups participating in DOE's Climate VISION established an emissions-related goal in collaboration with DOE or another federal agency upon joining the program. (The remaining group, the Business Roundtable, did not establish a quantitative emissions goal because of the diversity of its membership). According to a DOE official, participants need not establish new goals as a condition of joining the program. Nine of the 14 groups had set goals to improve their emissions intensity, 2 groups had established a goal of reducing emissions of specific greenhouse gases, 2 groups had set goals to improve energy efficiency, and 1 group had established a goal of both reducing its total emissions and improving its energy efficiency. For example, the American Forest & Paper Association pledged to reduce emissions intensity by 12 percent between 2002 and 2012, while the American Iron and Steel Institute agreed to a 10-percent, sector wide increase in energy efficiency by 2012. Some of these groups stated that their goals would be difficult to achieve, however, without reciprocal federal actions, such as tax incentives or regulatory relief. Table 4 presents information on Climate VISION industry groups' goals. EPA and DOE both estimated the share of total U.S. greenhouse gas emissions attributable to participants in their respective programs and were working to develop an estimate of the programs' impacts. EPA estimated that Climate Leaders participants accounted for at least 8 percent of U.S. emissions. According to EPA, this was a conservative estimate, because it was based solely on emissions from the program's first 50 participants. DOE estimated that Climate VISION participants accounted for over 40 percent of U.S. greenhouse gas emissions and noted that this was a conservative estimate. Both agencies were participating in an interagency process to estimate the effect of their programs on reducing emissions, which was expected to be completed in 2006. However, preparing accurate estimates of these programs' impacts will be difficult. First, there is considerable overlap between these two programs and other voluntary programs. For example, 60 of the 74 Climate Leaders participants also participated in one or more other EPA programs, and 3 of the 14 Climate VISION participants with quantitative goals also participated in EPA voluntary programs. Such overlap makes it difficult to determine the effects that are attributable to a given program. Second, it will be difficult to determine how much of a firm's or trade group's emissions reductions can be attributed to its participation in the program because the level of a participant's emissions in the absence of the program is unknown. For example, higher energy prices or changes in business operations could lead to emissions reductions, making it difficult to distinguish reductions attributable to participation in the program versus other causes. In conclusion, we found that the lack of consistency and clarity in OMB's and CCSP's reports made it difficult to identify trends in federal climate change funding. A better understanding of these expenditures is needed before it is possible to assess CCSP's and other federal agencies' progress towards their climate change goals. We therefore made a total of seven recommendations to OMB and three to CCSP to clarify how they present climate change funding information. OMB agreed with most of our recommendations and CCSP agreed with all of our recommendations. Both agencies appear to have taken steps to implement our recommendations, but we have not comprehensively reviewed the extent to which they have done so. We found that opportunities remain to improve the progress of both voluntary programs, since some industry participants in both programs appeared not to be progressing at the rate expected by the agencies. We also found that it will be difficult for the agencies to estimate the emissions reductions attributable to their programs, due to overlaps between organizations participating in more than one voluntary program and to the fact that it was difficult to know how much of a participant's emissions reductions were a direct result of the program or other factors, such as higher energy prices, which generally lead to lower emissions. Therefore, we recommended that DOE develop a system for tracking participants' progress in completing key steps associated with the program, and that both EPA and DOE develop written policies that establish the actions the agencies will take if participants are not completing program steps on time. EPA did not comment on our recommendation; DOE stated that it agreed with our recommendation regarding a tracking system and would consider our recommendation regarding establishing a written policy. We have not fully reviewed the extent to which the recommendations have been implemented. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. For further information regarding this testimony, please contact me at (202) 512-3841 or [email protected]. John Healey, Anne K. Johnson, and Vincent P. Price made key contributions to this testimony. John Delicath, Karen Keegan, and Charles Egan also made important contributions. 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 Office of Management and Budget (OMB) reports on federal funding for climate research and to develop technologies to reduce greenhouse gas emissions, among other things. The Climate Change Science Program (CCSP), which coordinates many agencies' activities, also reports on science funding. The Environmental Protection Agency's (EPA's) Climate Leaders and the Department of Energy's (DOE's) Climate VISION programs aim to reduce such emissions through voluntary industry efforts. This testimony is based on GAO's August 2005 report Climate Change: Federal Reports on Climate Change Funding Should Be Clearer and More Complete (GAO-05-461) and its April 2006 report Climate Change: EPA and DOE Should Do More to Encourage Progress Under Two Voluntary Programs (GAO-06-97), which addressed (1) reported changes in federal climate change funding and (2) the status and progress of two federal voluntary climate programs. Federal funding for climate change, as reported by OMB, increased from $2.35 billion in 1993 to $5.09 billion in 2004 (117 percent), or from $3.28 billion to $5.09 billion (55 percent) after adjusting for inflation. OMB reports show that, during this period, funding increased for technology, science, and--before adjusting for inflation--international assistance. CCSP, which reports only science funding, generally presented totals that were consistent with OMB's, but provided more detail. However, changes in reporting methods used by both OMB and CCSP limit the comparability of funding data over time, and therefore it was unclear whether total funding actually increased as reported. Furthermore, we were unable to compare changes in the fourth category (climate-related tax expenditures), because from 1993 to 2004 OMB reported estimates for proposed but not existing tax expenditures. With regard to individual agencies' funding, OMB reported that 12 of the 14 agencies receiving funding for climate change programs in 2004 received more funding in that year than they had in 1993, but it is unclear whether funding changed as OMB reported because of unexplained changes in what was defined as climate change funding. Reported funding for DOE, the agency with the most reported climate-related funding in 2004, increased from $963 million to $2.52 billion (162 percent), or from $1.34 billion to $2.52 billion (88 percent) after adjusting for inflation. DOE and the National Aeronautics and Space Administration accounted for 81 percent of the reported increase in funding from 1993 through 2004. However, because agency funding totals are composed of individual accounts, changes in the reports' contents, such as the unexplained addition of accounts to the technology category, limit the comparability of agencies' funding data over time, making it difficult to determine if these are real or definitional increases. EPA and DOE expected participants in their voluntary climate programs to complete several program steps within general time frames, but participants' progress in completing those steps within the time frames was mixed. Furthermore, DOE did not have a system for tracking groups' progress in completing program steps, and neither DOE nor EPA had a written policy specifying the consequences for participants not proceeding as expected. In addition, EPA and DOE had both estimated the share of total U.S. greenhouse gas emissions attributable to participants in their respective programs and were working through an interagency process to quantify emissions reductions attributable to their programs. However, determining reductions attributable to each program will be challenging because of the overlap between these programs and other voluntary programs and because it is difficult to determine how much of a participant's emissions reductions can be attributed to its participation in the program, since the participant's emissions in the absence of the program cannot be known.
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TSA is responsible for securing all modes of transportation while facilitating commerce and freedom of movement for the traveling public. In performing its responsibilities, TSA is guided by risk-based planning, which generally involves a consideration of threats, vulnerabilities, and the criticality or consequence of an attack if it were to be carried out. Specifically, in its approach to securing the domestic aviation sector, TSA maintains numerous programs that provide a layered approach to security, including intelligence gathering and analysis, checking passenger manifests against watch lists, and assigning undercover air marshals to certain flights. The general public associates TSA mainly with its security effort at airport passenger checkpoints. One primary goal of the passenger checkpoint screening program is to provide for the safety and security of persons and property on an aircraft against the introduction of an unauthorized weapon, explosive, or incendiary. As we reported in April 2007, TSA continues to modify its checkpoint screening program based on a number of factors including passenger feedback, risk-based planning, and its own internal review and testing process. TSA's well-publicized recent policy change in response to the alleged transatlantic bomb plot of August 2006 is an important example of risk-based planning. Known as the 3-1-1 rule, this procedural change prohibits liquid, gel, or aerosol items over 3.4 fluid ounces in carry-on luggage; in addition, all liquid and gels should be placed in a 1-quart bag, and only one 1-quart bag is allowed per passenger. TSA focuses on the checkpoint screening process as a primary means of detecting prohibited items. Items that TSA has prohibited passengers from bringing aboard an aircraft include, among other things, firearms and knives; gasoline and lighter fluid; disabling chemicals, including chlorine and liquid bleach; and many additional items that may be seemingly harmless but could be used as weapons. During the passenger screening process, transportation security officers follow standard operating procedures and utilize technology such as walk-through metal detectors and X-ray machines to detect prohibited items either on a passenger's person or in his or her carry-on luggage. The passenger checkpoint screening process is composed of the following three elements: Transportation security officers (also known as TSOs) screen all passengers and their carry-on luggage prior to allowing passengers access to their departure gates. Among other responsibilities, transportation security officers attempt to detect prohibited items that passengers may try to carry beyond the security checkpoint. Technology is used during the screening process, which primarily consists of walk-through metal detectors, X-ray machines, handheld metal detectors, and explosive trace detection (ETD) equipment. Standard operating procedures establish the process and standards by which transportation security officers are to screen passengers and their carry-on items at screening checkpoints. The process of screening a passenger who continues to alarm the walk- through metal detector provides an example of how these three elements intersect. According to TSA's Screening Checkpoint Standard Operating Procedures manual, a passenger who continues to alarm the walk-through metal detector must be screened using a hand-wand search. Passengers may alternatively request a full-body pat-down search. The manual describes the process that transportation security officers are to follow during the additional screening, which includes the use of ETD swabbing and a pat-down of the passenger to detect any irregularities in their body contour that could represent concealed items. TSA faces a significant challenge in balancing security concerns with efficient passenger movement. In our April 2007 report, we described how TSA monitors transportation security officer compliance with passenger checkpoint screening procedures through its performance accountability and standards system and through testing. Compliance assessments include quarterly observations of transportation security officers' ability to perform particular screening functions in the operating environment, quarterly quizzes to assess their knowledge of procedures, and an annual knowledge and skills assessment. TSA conducts tests to evaluate, in part, the extent to which transportation security officers are able to detect simulated threat items hidden in accessible property or concealed on a person. TSA modifies its standard operating procedures based on the professional judgment of TSA senior-level officials and program-level staff, daily experiences of airport staff, complaints and concerns raised by the traveling public, and an analysis of risks to the aviation system. For example, in December 2005, TSA modified its prohibited items list to allow passengers to carry certain scissors and tools as long as they did not exceed a certain length. TSA's stated purpose in removing certain scissors and tools from the prohibited items list was to shift the focus of transportation security officers from items considered by TSA to pose a low threat to items considered to pose a high threat. Investigators found instructions on the Internet for creating both an IED and IID and purchased the components from the Internet and from a local store for approximately $150. The IED was conceived as a two-part device--a detonator component that, on its own, could function as an IED, and a mixture of fuel and oxidizer that would require the explosion of the detonator. Although the detonator component could be considered an IED, for the purposes of this report, we are referring to the combination of the detonator and the liquid explosive as a single IED. Information about liquid explosives was publicly available on several Web sites and discussed in media articles related to various terror plots, including the failed London subway bombing of July 21, 2005, and the transatlantic bomb plot of August 2006. In addition, we obtained information about creating an IID from the Internet. We also found videos on the Internet of the intense fire resulting from an IID. One of the components for the IID is a liquid that TSA prohibits passengers from bringing through security checkpoints. Specific details regarding the device components and the methods of concealment we used during our covert testing are classified by TSA; as such, they are not discussed in this testimony. A group of tests conducted in February 2006 and July 2007 show that the IED proposed for this investigation functions as intended. In 2006, within the scope of our original covert testing report, we worked with a law enforcement organization in the Washington, D.C., metro area to confirm that the detonator would function as an IED. A test performed by local law enforcement officials confirmed that the detonator would cause damage to an aircraft and threaten the safety of passengers. Because our proposed IED for this investigation was composed of two parts (the detonator and the liquid explosive), in July 2007 we sought assistance to confirm that this more complex IED would function as intended. Several tests conducted at a national laboratory demonstrated that this IED can function as intended, with the initial explosion by the detonator successfully causing the liquid explosive to detonate in several tests. Explosion data indicate that this device exploded with a force sufficient to cause severe damage to an aircraft. The IID is a far simpler device. Our work with a law enforcement organization in the Washington, D.C., metro area in February 2006 confirmed that the components of the IID (one of which is a liquid) could function as intended, causing damage to an aircraft and threatening the safety of passengers. Our investigators devised methods that would allow them to conceal the prohibited components for these devices from transportation security officers. During this planning phase, they considered publicly advertised TSA policies related to liquids and other items, including prohibited items. They also judged that some components could be hidden in either their carry-on luggage or on their persons. They developed covert test procedures to challenge TSA screening measures using these components and methods. Specific details regarding the methods of concealment we used are classified by TSA; as such, these details are not discussed in this testimony. By using various concealment methods, our investigators demonstrated that it is possible to bring the components for several functioning IEDs and one functioning IID through checkpoints and onto airline flights without being challenged by transportation security officers. In most cases, transportation security officers appeared to follow TSA procedures and used technology appropriately; however, we uncovered weaknesses in TSA screening procedures and other vulnerabilities as a result of these tests. For example, although transportation security officers generally enforced TSA's 3-1-1 rule, we were able to bring a liquid component of the IID undetected through checkpoints by taking advantage of weaknesses we identified in TSA's policies based on a review of public information. TSA determined that specific details regarding these weaknesses are sensitive security information and are therefore not discussed in this testimony. We did not notice any difference between the performance of private screeners and transportation security officers during our tests. From March 19 through March 23, 2007, two investigators tested the TSA checkpoint screening process at a number of U.S. airports. Transportation security officers did not interact with our investigators at every airport. Interactions that did occur included the following: On March 19 and March 20, 2007, transportation security officers advised our investigators to use a 1-quart clear plastic bag rather than the larger bags they were using, but did not require them to do so before passing through the checkpoint. Also at another airport, on March 23, 2007, a transportation security officer did not allow one investigator to bring a small, unlabeled bottle of medicated shampoo through the checkpoint. This was a legitimate toiletry item used by one of our investigators. The officer cited TSA policy and stated that since the bottle was not labeled, "it could contain acid." She did not allow our investigator to bring the unlabeled medicated shampoo bottle through the checkpoint. However, a liquid component of the IID--despite being prohibited by TSA--was allowed to pass undetected through the checkpoint. We had identified this weakness based on a review of public information before performing our tests. From May 7 through May 9, 2007, two investigators tested the TSA checkpoint screening process at a number of U.S. airports. Transportation security officers did not interact with our investigators aside from the following: On May 8, 2007, one investigator deliberately placed coins in his pockets to ensure that he would receive a secondary inspection. The transportation security officer used a hand-wand and performed a pat- down search of our investigator. However, the transportation security officer did not detect any of the prohibited items our investigator brought through the checkpoint. From June 5 through June 8, 2007, two investigators tested the TSA checkpoint screening process at a number of U.S. airports. Transportation security officers did not interact with our investigators at every airport. Interactions that did occur included the following: Inclement weather forced our investigators to change their flight plans at one airport. After changing their plans, they were selected for secondary inspection at the TSA security checkpoint. Transportation security officers performed pat-downs at the checkpoint. However, the transportation security officers did not detect any of the prohibited items our investigators brought through the checkpoint. We briefed TSA officials on August 16, 2007, and September 5, 2007, to discuss our findings. Officials from TSA's Security Operations Office were present during our second briefing. At these briefings, we suggested that TSA consider how the results of our covert testing should affect its risk- based approach to airport security. This could include implementing one or more measures to reduce the likelihood that terrorists could successfully bring IED and IID components through checkpoints using a similar methodology to ours in the future. The specific nature of our suggestions to TSA is considered sensitive security information. Put generally, we suggested that, among other things, TSA (1) establish, depending on airport capacity, one or more special passenger screening lines to screen individuals based on risk and individuals with special needs; (2) introduce more aggressive, visible, and unpredictable deterrent measures into the passenger screening process at airports nationwide, to potentially include the implementation of enhanced individual search procedures (e.g., pat-downs and hand-wand screening) to detect concealed components; and (3) continue to develop and deploy new technology to be used at passenger screening checkpoints that would be able to better detect concealed components. TSA officials indicated that they did not disagree with our suggestions in principle and that they would examine them closely to determine whether and how they should be implemented. They acknowledged vulnerabilities in human capital, processes, and technology. They also indicated that they are deploying additional specialized personnel to enhance security at existing checkpoints and that they are exploring methods for enhancing transportation security officer training and transforming the culture of their workforce. Regarding standard operating procedures, officials said that they are continuously revisiting and revising their policies. They also indicated that they were moving forward to develop a "checkpoint of the future" that would incorporate new and emerging technology to address terror threats. Such technology could include innovative imaging techniques. Our tests clearly demonstrate that a terrorist group, using publicly available information and few resources, could cause severe damage to an airplane and threaten the safety of passengers by bringing prohibited IED and IID components through security checkpoints. Given our degree of success, we are confident that our investigators would have been able to evade transportation security officers at additional airports had we decided to test them. We understand the challenges TSA faces in balancing security risks with the efficient movement of passengers; however, from a strict security standpoint, current policies allowing substantial carry-on luggage and related items through TSA checkpoints increases the risk of a terrorist successfully bringing an IED, an IID, or both onto an aircraft undetected. Even if current carry-on luggage policies are left unchanged, our testing shows that risks can be reduced through improvements in human capital, improved processes, and continued advances in technology. GAO is currently performing a more systematic review of these issues and expects to issue a comprehensive public report with recommendations for TSA in early 2008. Mr. Chairman and Members of the committee, this concludes our statement. We would be pleased to answer any questions that you or other members of the committee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. 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 August 2006, the Transportation Security Administration (TSA) substantially modified its passenger screening policies based on the alleged transatlantic bomb plot uncovered by British authorities. With the aim of closing security gaps revealed by the alleged plot, the revised policies severely restricted the amount of liquids, gels, and aerosols TSA allowed passengers to bring through the checkpoint. At the Committee's request, GAO tested whether security gaps exist in the passenger screening process. To perform this work, GAO attempted to (1) obtain the instructions and components needed to create devices that a terrorist might use to cause severe damage to an airplane and threaten the safety of passengers and (2) test whether GAO investigators could pass through airport security checkpoints undetected with all the components needed to create the devices. GAO conducted covert testing at a nonrepresentative selection of 19 airports across the country. After concluding its tests, GAO provided TSA with two timely briefings to help it take corrective action. In these briefings, GAO suggested that TSA consider several actions to improve its passenger screening program, including aspects of human capital, processes, and technology. GAO is currently performing a more systematic review of these issues and expects to issue a comprehensive public report with recommendations for TSA in early 2008. GAO investigators succeeded in passing through TSA security screening checkpoints undetected with components for several improvised explosive devices (IED) and an improvised incendiary device (IID) concealed in their carry-on luggage and on their persons. The components for these devices and the items used to conceal the components were commercially available. Specific details regarding the device components and the methods of concealment GAO used during its covert testing were classified by TSA; as such, they are not discussed in this testimony. Using publicly available information, GAO investigators identified two types of devices that a terrorist could use to cause severe damage to an airplane and threaten the safety of passengers. The first device was an IED made up of two parts--a liquid explosive and a low-yield detonator. Although the detonator itself could function as an IED, investigators determined that it could also be used to set off a liquid explosive and cause even more damage. In addition, the second device was an IID created by combining commonly available products (one of which is a liquid) that TSA prohibits in carry-on luggage. Investigators obtained the components for these devices at local stores and over the Internet for less than $150. Tests that GAO performed at a national laboratory in July 2007, in addition to prior tests in February 2006 that GAO performed in partnership with a law enforcement organization in the Washington, D.C., metro area, clearly demonstrated that a terrorist using these devices could cause severe damage to an airplane and threaten the safety of passengers. Investigators then devised methods to conceal the components for these devices from TSA transportation security officers, keeping in mind TSA policies related to liquids and other items, including prohibited items. By using concealment methods for the components, two GAO investigators demonstrated that it is possible to bring the components for several IEDs and one IID through TSA checkpoints and onto airline flights without being challenged by transportation security officers. In most cases, transportation security officers appeared to follow TSA procedures and used technology appropriately; however, GAO uncovered weaknesses in TSA screening procedures and other vulnerabilities as a result of these tests. For example, although transportation security officers generally enforced TSA's policies, investigators were able to bring a liquid component of the IID undetected through checkpoints by taking advantage of weaknesses identified in these policies. These weaknesses were identified based on a review of public information. TSA determined that specific details regarding these weaknesses are sensitive security information and are therefore not discussed in this testimony. GAO did not notice any difference between the performance of private screeners and transportation security officers during our tests.
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In October 2001, an American Media Incorporated employee died from inhalation anthrax disease. In the same month, contaminated letters laced with Bacillus anthracis, or anthrax spores, were sent through the mail to Senators Thomas Daschle and Patrick Leahy. The response to the incident in the American Media Incorporated building in Florida in September 2001 led to the identification of mail as the potential source of contamination; eventually, it led to the sampling of the postal facilities. The agencies began sampling on October 12, 2001, in Florida and stopped on April 21, 2002, when the Wallingford, Connecticut, facility was sampled for the last time. The letters led to the first cases of anthrax disease related to bioterrorism in the United States. In all, 22 individuals contracted anthrax disease in Connecticut, Florida, New Jersey, and New York, as well as in Washington, D.C., and 5 died. The federal agencies involved in the response in the postal facilities have different responsibilities. CDC and state and local health departments primarily provided public health advice and assistance to USPS. CDC has primary responsibility for national surveillance of specific diseases, including anthrax; it also conducts epidemiologic investigations to determine, among other things, the source of the disease, and it participates in environmental sample collection and analysis activities. The FBI is responsible for criminal investigations involving interstate commerce and the mail and crimes committed on federal property. EPA is the nation's lead agency for responding to a release of hazardous substances into the environment and subsequent decontamination. On October 8, 2001, the President created the Office of Homeland Security to develop and coordinate a comprehensive national strategy for dealing with domestic terrorist threats or attacks. The office, which had limited involvement in the 2001 response, was superseded by the Homeland Security Act of 2002, which transferred many of its functions to DHS, which became operational in 2003. DHS was created by combining many previously separate agencies and is assigned a lead role in coordinating the efforts of federal agencies that respond to acts of terrorism in the United States. The federal agencies primarily used a targeted strategy--they collected samples from specific areas considered more likely to be contaminated, based on judgments. Such judgments can be effective in some situations-- for example, in determining whether a facility is contaminated when information on the source of potential contamination is definitive. However, in the case of a negative finding, when the source of potential contamination is not definitive, the basic question--Is this building contaminated?--will remain unanswered. CDC and USPS officials said that they used a targeted strategy for several reasons, including limitations on how many samples could be collected and analyzed. They also said that in 2001, they lacked the data from empirical research to develop an initial sampling strategy that incorporated probability sampling. We disagree with this interpretation. Probability sampling is statistically based and does not depend solely on empirical criteria regarding the details of possible contamination. The situation in 2001 was unique, and the agencies were not fully prepared to deal with environmental contamination. In the future, if the agencies decide to use a targeted rather than a probability sampling strategy, they must recognize that they could lose a number of days if their targeted sampling produces negative test results. In this case, additional samples would have to be collected and analyzed, resulting in the loss of critical time for public health interventions. This was so at the Wallingford postal facility in the fall of 2001, when about 3 weeks elapsed between the time the first sampling took place and the results of the fourth testing, which revealed positive results. Furthermore, about 5 months elapsed between the time of the first sampling event and the time anthrax was found in the Wallingford facility's high-bay area. Therefore, strategies that include probability sampling need to be developed in order to provide statistical confidence in negative results. Further, even if information on all the performance characteristics of methods is not yet available, a probability sampling strategy could be developed from assumptions about the efficiency of some of the methods. And even if precise data are not available, a conservative, approximate number could be used for developing a sampling strategy. This would give agencies and the public greater confidence in negative test results than was associated with the sampling strategy used in 2001. CDC, EPA, and USPS, the federal agencies involved in sampling the postal facilities in 2001 to detect anthrax, undertook several activities. These included development of a sampling strategy followed by collecting samples, using a variety of methods, and transporting, extracting, and analyzing the samples. Neither these activities nor the overall process was validated for anthrax testing. Consequently, the agencies were challenged by limited information for reliably choosing one method over another and by lack of information on the detection limit to use when evaluating negative results. Federal agencies used different methods for collecting samples. While USPS generally used dry swabs to collect samples (the least effective method), CDC and EPA used multiple methods--dry swabs, premoistened swabs, wet wipes, and a high-efficiency particulate air (HEPA) vacuum-- in various combinations or alone. However, none of the agencies' collection methods were evaluated for anthrax detection in environmental samples. In the absence of empirical research, agencies had no information available for reliably choosing one method over another and no information on the limits of detection to use when evaluating negative results. The majority of the samples collected from the postal facilities tested negative. In all, federal agencies collected about 10,000 samples during initial testing. It is interesting that of the 9,807 samples that the agencies collected, more than 98 percent, or 9,648, were negative; a little more than 1 percent, or 159, were positive. In all, 286 facilities were tested for anthrax contamination. Of these, Brentwood, Trenton, and Morgan were primary facilities; that is, these 3 facilities processed the original letters containing the anthrax. The results of the CDC, EPA, and USPS testing in 286 postal facilities were largely negative. Of 286 facilities, 23 tested positive. For 2 of these 23 facilities, test results were negative at first but positive on a subsequent testing. However, in 1 of these facilities--the Wallingford, Connecticut, facility--it was not until the fourth testing that positive results were obtained. Testing results differed between the primary facilities and Wallingford. In the 3 primary facilities, results were positive each time a facility was tested, with the important exception of the two quick tests in Brentwood. In Wallingford, considered less likely to be contaminated, results were positive only on the fourth sampling. These results underscore the importance of retesting and cast doubt on the efficiency of the judgmental sampling strategy. Of the 263 facilities that tested negative, only 9 were sampled more than once. A facility in West Trenton tested negative, even though an employee had contracted cutaneous anthrax. The facility in West Trenton was tested twice by the FBI and once by CDC, during which a total of 57 samples were collected, with negative results. Final, or confirmed, results will be negative if contamination is not present in a facility. However, a result can be erroneously negative for several other reasons, such as (1) the sampling method was not efficient enough, (2) samples were not collected from places where contamination was present, (3) not enough samples were collected, (4) not enough spores were recovered from the sample material, or (5) analysis of the sample extract was not sensitive enough to detect anthrax spores that were present. The agencies that sampled postal facilities in 2001--USPS, CDC, and EPA--did not use validated sample collection and analysis methods to perform their tests. According to these agencies, validated methods were not available at that time. They conducted several interdependent activities, including sample strategy development, followed by sample collection, transportation, and analysis of the samples to detect anthrax. Neither these activities nor the overall process had been validated for anthrax testing. Validation is a formal, empirical process in which an authority determines and certifies the performance characteristics of a given method. Therefore, investments are also needed to validate these methods, as well as the overall anthrax detection process. Validating the overall process, as well as the individual activities, is important because operational and health-related decisions are made on the basis of testing results that the process generates. CDC and USPS officials said that they used targeted sampling; that is, they collected samples from specific areas considered--based on agencies' technical judgments--more likely to be contaminated. Such judgments can be effective in some situations, for example, in determining the source of contamination in a disease outbreak investigation, provided results are positive. However, if the results are negative, the basic question--Is this building contaminated?--cannot be answered with statistical confidence. When the level of contamination is extremely high and dispersed in a facility, the method of sampling (for example, wipes versus swabs) is not as critical if the purpose is to find some contaminant. However, at lower levels, a way of interpreting the significance of negative results is needed, and this requirement emphasizes the importance of validation of the methods and the need for statistically based sampling strategies. This emphasizes the need for methods that have been validated, and sampling strategies that are likely to find contamination at low levels. Probability- based sampling does allow conclusions, at specific levels of confidence, about testing results. Using a probability-based sampling strategy, together with validated methods for detecting contamination, would provide a known level of confidence with which to interpret any negative results. This would allow agencies to be more definitive in determining necessary actions. Figure 1 shows how lack of validation could affect individual activities--including the sampling strategy--as well as the results generated by the overall process. The lack of validated methods for assessing contamination in postal facilities impeded the agencies in responding to the incidents. The significance of the lack of validated methods was exemplified in the case of the one postal facility where negative preliminary results were obtained by field-based methods of analysis, with limitations that appear not to have been well understood by some agencies. Negative results do not necessarily mean a facility is free from contamination. As we reported, results can be negative if (1) samples were not collected from places where anthrax was present, (2) the detection limit of the method was greater than the actual contamination level, (3) not enough samples were recovered from the sample material, (4) analysis of the sample extract did not detect spores, or (5) anthrax was not present in the facility. In addition, while the 2001 events involved anthrax, many other biothreat agents exist. Differences in their characteristics mean different solutions. Accordingly, efforts to develop sampling strategies and to validate methods should address requirements specific to those threat agents as well. However, since addressing other agents would consume resources and time, all these efforts should be prioritized in a long-term strategy. The several agencies that dealt with the anthrax attacks generally worked well together, but we have identified areas that would have benefited from one agency's taking the lead in coordinating the response. Given the mission of DHS and its responsibilities, it appears that DHS is now well positioned to take a lead role in promoting and coordinating the activities of the various agencies that have technical expertise related to environmental testing. In addition, it is important that all participating agencies recognize and support DHS in that role and that they have an effective structure for participating in identifying and addressing the appropriate issues. Given the lack of validated methods for detecting anthrax contamination in facilities, we recommended in our 2005 report that the Secretary of Homeland Security develop a coordinated approach to (1) improve the overall process for detecting anthrax and (2) increase confidence in negative test results generated by that process. This approach would include working with agencies to ensure that appropriate validation studies of the overall process of sampling activities, including the methods, are conducted. Specifically, we recommended that the Secretary 1. take a lead role in promoting and coordinating the activities of the various agencies that have the technical expertise related to environmental testing; 2. ensure that a definition of validation is developed and agreed on; 3. guarantee that the overall process of sampling activities, including methods, is validated so that performance characteristics, including limitations, are clearly understood and results can be correctly interpreted; 4. see that appropriate investments are made in empirical studies to develop probability-based sampling strategies that take into account the complexities of indoor environments; 5. ensure that appropriate, prioritized investments are made for all 6. make sure that agency policies, procedures, and guidelines reflect the results of such efforts. When we issued our report, CDC, DHS, and USPS agreed with our conclusion--that methods for detecting anthrax contamination in facilities were not validated--and with the thrust of our recommendations--calling for a coordinated, systematic effort to validate the methods to be used for such testing. But they (1) disagreed with or expressed concern about our conclusions or the recommendation dealing with targeted versus probability sampling, (2) emphasized that validated testing methods for anthrax were not available in 2001 and that federal and state organizations did the best they could under the circumstances, and (3) identified factors or issues that need to be considered in validating testing methods. After we issued our 2005 report, it became evident that there was uncertainty over which agency would take the lead role in improving the overall process for detecting anthrax and how studies were to be funded. For example, DHS stated that while it has overall responsibility for coordinating the federal response during future biological attacks, EPA had the "primary responsibility for establishing the strategies, guidelines, and plans for the recovery from a biological attack" and HHS had the lead role for any related public health response and guidelines. DHS also stated that it coordinated regularly with EPA's National Homeland Research Center to exchange information on research needs and to discuss priorities and gaps for a wide range of security-related research areas. DHS stated that it would coordinate with EPA to ensure that appropriate investments were made to explore improved sampling. However, it is unclear to us how DHS would ensure that appropriate prioritized investments are made for all biothreat agents and how such priorities and gaps would be addressed. On the basis of these uncertainties, we recommended in our May 9, 2006, testimony that DHS's approach to validating the overall process should start with a strategic plan that includes a road map outlining how individual agencies efforts would lead to the validation of the individual activities as well as the overall process, noting that such a plan would assist DHS in monitoring progress and measuring agency performance toward improving the detection of anthrax and other prioritized threat agents. On May 19, 2006, DHS officials stated that while they concurred with the recommendations from our report and accepted the overall responsibility to ensure the methods will be validated, they stated that "there are legal limitations in DHS authority to direct the activities of other agencies." They said that while they take a lead role in coordinating the meetings and in bringing people from different agencies together, they cannot guarantee that the overall process of sampling will be validated because different agencies have responsibility for different aspects of validation, and DHS's control over other agencies actions and budgets is ultimately limited. They stated that DHS cannot ensure and guarantee that validation studies would be done, since this is a shared responsibility among different agencies. Also, since validation would require a sustained effort over a long period, DHS noted that it could not mandate commitment of other agencies' funds, over which it has no control. DHS officials told us in July 2006 that they recognize that DHS is the principal agency responsible for coordinating the federal response and they would work with a good faith effort toward developing a strategy for validation studies and a road map by the end of calendar year 2006 outlining how individual agencies' efforts would lead to the validation of the overall sampling process. On March 27, 2007, DHS told us that it had developed a working draft of the strategic plan and the road map by December 2006 but it could not share these with us because they were not final. Until responsibility is accepted for ensuring that sampling activities will be validated, the fate of the validation process will remain uncertain. Without validation, if another anthrax attack were to occur tomorrow, federal civilian agencies would not be able to conclude with any given level of statistical confidence, in cases of negative results, that a building is free of contamination. Mr. Chairman, this concludes my prepared remarks. I would be happy to respond to any questions that you or other members of the subcommittee may have at this time. For further information regarding this statement, please contact Keith Rhodes at (202) 512-6412, or [email protected], or Sushil K. Sharma, Ph.D., Dr.PH, at (202) 512-3460, or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. William Carrigg, Barbara Chapman, Crystal Jones, Penny Pickett, and Elaine Vaurio made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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In September and October 2001, contaminated letters laced with Bacillus anthracis were sent through the mail to two U.S. senators and members of the media. Postal facilities in New Jersey, Washington, D.C., and elsewhere became heavily contaminated. The anthrax incidents highlighted major gaps in civilian preparedness to detect anthrax contamination in buildings. GAO was asked to describe and assess federal agencies' activities to detect anthrax in postal facilities, assess the results of agencies' testing, and assess whether agencies' detection activities were validated. Federal agencies conducted several sampling activities, including developing a sampling strategy and collecting, transporting, extracting, and analyzing samples. They primarily collected samples from specific areas, such as mail processing areas, using their judgment about where anthrax would most likely be found--that is, targeted sampling. The agencies did not use probability sampling, which would have allowed agencies to determine, with some defined level of confidence, when all results are negative, whether a building is contaminated. The results of the agencies' testing in 286 postal facilities were largely negative--no anthrax was detected. However, agencies did not use validated sample collection and analytical methods. Thus, there can be little confidence in negative results. With a validated process, agencies and the public could be reasonably confident that any test results generated by that process would be reliable. The Department of Homeland Security (DHS) is the principal agency responsible for coordinating the federal response. Thus, in its 2005 report, GAO recommended that the Secretary of Homeland Security develop a coordinated approach to improve the overall process for detecting anthrax and increase confidence in negative test results generated by that process. DHS stated that while it has overall responsibility for coordinating the federal response during future biological attacks, other agencies have the lead responsibility for validation. Therefore, uncertainty over which agency would take the lead role--that is, who is in charge--in improving the overall process for detecting anthrax, including validation of the methods, continued after GAO issued its report. On the basis of these uncertainties, GAO recommended in its May 9, 2006, testimony that DHS's approach to validating the overall process start with a strategic plan that would include a road map outlining how individual agencies' efforts would lead to the validation of the individual activities as well as the overall process, noting that such a plan would assist DHS in monitoring progress and measuring agency performance toward improving the detection of anthrax and other prioritized threat agents. While DHS generally agreed with these recommendations, it stated that it cannot ensure validation studies would be done, since "there are legal limitations in DHS authority to direct the activities of other agencies." Also, since validation would require a sustained effort over a long period, DHS noted that it could not mandate commitment of other agencies' funds, over which it has no control. Until responsibility is accepted for ensuring that sampling activities will be validated, the fate of the validation process will remain uncertain. Without validation, if another anthrax attack were to occur tomorrow, federal civilian agencies would not be able to conclude with any given level of statistical confidence, in cases of negative results, that a building is free of contamination.
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Ex-Im is an independent agency operating under the Export-Import Bank Act of 1945, as amended. Its mission is to support the export of U.S. goods and services overseas, through the provision of loans, loan guarantees, and insurance, thereby supporting U.S. jobs. Ex-Im is generally prohibited by law from financing any credit sale of defense articles and services for any country. However, in an exception to this rule, Ex-Im was granted authority to facilitate the financing of U.S. exports of defense articles and services, provided that it determines that these items are nonlethal and primarily meant for civilian end use. Such items are known as dual-use exports. Ex-Im's Engineering and Environment Division, with assistance from the General Counsel, Congressional and External Affairs Division, and the Policy and Planning Division, is responsible for implementing the dual-use authority. According to Ex-Im's Military Policy, its definitions of "defense articles" and "defense services" are based on who the end user is, and then by the nature of the item and the use to which it will be put. In addition, if the item is designed primarily for military use, it is presumed to be a defense article. For example, according to Ex-Im, furniture sold to a military organization for military use (e.g., for offices or homes occupied by military personnel) is deemed a defense article. However, according to Ex-Im, helicopters sold to a private firm or civilian police force are not defense articles. According to Ex-Im policy, an export is eligible for financing as a dual-use item if convincing evidence exists that the export is nonlethal in nature and will be used mainly for civilian activities. The determination of eligibility for dual-use financing may require applicants for Ex-Im financing to provide additional information beyond the contract and transaction data the bank normally requires for a loan or guarantee. For example, before approving the three fiscal year 2012 dual-use export transactions, Ex-Im obtained written certification from each borrower that the items to be exported were nonlethal and would be primarily for civilian use. Ex-Im may also seek to corroborate the information submitted by applicants by contacting other U.S. government agencies, such as the Department of State. Eutelsat, primarily for telecommunications (television and internet service). Ex-Im is treating this item as dual-use because a small portion of the satellite is being used by the Qatari military for communications purposes and is not being financed by Ex- Im. 3. 150 pieces of new and used construction equipment from U.S. manufacturers exported by Hoffman International, Inc., for the government of Cameroon. Three satellites for the government of Mexico: one fixed service satellite and two mobile service satellites. Fixed service satellites provide service to a geographically fixed end user, such as a television station, and mobile service satellites provide service to mobile end users, such as personnel in vehicles. The satellites are for civilian communications and for humanitarian and drug interdiction operations by the Mexican military. These three transactions accounted for $1.03 billion in Ex-Im financing, or just under 3 percent of Ex-Im's financing for fiscal year 2012 of $35.8 billion. The Mexico satellite transaction is the bank's single largest dual- use financing transaction to date, with a loan guarantee of $922 million. Prior to approving the fiscal year 2012 transactions, Ex-Im vetted the Eutelsat and Cameroon transactions with the Department of State, and vetted the Mexico transaction with the U.S. embassy military attache in Mexico. government of Cameroon's military engineering corps for civilian infrastructure development and a small number of military construction projects. Ex-Im generally requires buyers of dual-use exports to submit an annual "end-use certification and report," which describes the civilian and military use of the exported item(s) and includes a certification by the buyer that the item(s) are being used primarily for civilian purposes. In addition, credit and guarantee agreements for dual-use transactions may include provisions for annual, semiannual, or periodic "progress reports" and "technical operating reports" to monitor the status and usage of the items. Such information helps inform bank officials and provides them greater assurance about the exports' end use. These reports are to be submitted to Ex-Im until the loan or guarantee is repaid. According to Ex-Im officials, the credit agreements for the three fiscal year 2012 dual-use transactions were negotiated on a case-by-case basis to incorporate the specific circumstances related to the buyer and the item(s) being exported. The agreements with the governments of Mexico and Cameroon require an annual end-use certification and report. The agreements for the two satellite transactions require the buyer (Eutelsat and the government of Mexico) to submit to Ex-Im (1) periodic progress reports covering the satellite(s)' construction, launch, and in-orbit testing, and (2) technical operating reports that include information concerning the operation and maintenance of the satellite(s) and related telemetry, tracking and command stations, and transponder capacity and use. Ex-Im addressed weaknesses in monitoring the end use of dual-use items by revising and implementing its guidance for monitoring these items, consistent with our August 2014 recommendation. The revised guidance clarified the responsibilities of Ex-Im staff for monitoring the end use of exported dual-use items after the bank's board of directors authorizes an export transaction. As a result of implementing the revised guidance, Ex-Im has received in a timely manner all documents required through June 2015 since our last report, issued in August 2014. Ex-Im revised its 1997 memorandum on the implementation of its dual- use policy for military applications--which had not been updated prior to our 2014 review--and disseminated the revised memorandum to relevant staff on March 11, 2015. The revised memorandum adds to the responsibilities of Ex-Im staff for monitoring the end use of exported dual- use items after the bank's board of directors has authorized an export transaction. Specifically, the new memorandum calls for the engineer assigned to monitor the transaction to take the following actions: Notify buyers. The engineer is to communicate with the bank's Asset Management Division--Ex-Im's primary contact with the buyer after the bank approves the transaction--to ensure that a process is established to notify the buyer in advance of any reporting due to be submitted to the bank. The memorandum specifies that if a dual-use report or related document becomes overdue, the assigned engineer, in conjunction with the asset management officer, will notify the buyer and alert the bank's Office of the General Counsel within 30 days of the date when the report or related information was due so that appropriate action can be taken to expedite the submission of the required information. Document monitoring activities. The engineer is to keep a record of his or her activities in an electronic folder, which is to contain a number of specified documents, including requirements set forth in the bank's loan or guarantee agreement pertaining to the scope and frequency of post-authorization reporting, all post-authorization reports on end use, and any correspondence between Ex-Im and the buyer or end user relating to the end use of the exports. Determine compliance. The engineer is to make an annual determination as to whether information received during the previous year was adequate to demonstrate that the transaction complied (or failed to comply) with the requirements of the bank's dual-use policy, as set forth in the financing agreement and the bank's charter. Should the engineer determine or become concerned that the dual-use transaction is or may be out of compliance with these requirements, the engineer should notify the Vice President of the Engineering and Environment Division, who oversees the monitoring of dual-use transactions, and other Ex-Im officials; these determinations and any such referrals and related correspondence should be documented in the electronic files. We found that the engineers responsible for monitoring the three fiscal year 2012 dual-use transactions financed by Ex-Im had taken the actions called for in the revised dual-use policy memorandum. In accordance with its revised guidance, Ex-Im has established an internal e-mail reminder system that automatically alerts the appropriate Ex-Im officials to notify the buyer that the annual end-use certification and report is coming due. The engineers received an e-mail alert several months prior to the due date and communicated with the asset management officer, who then notified the governments of Cameroon and Mexico that the due date for this documentation was approaching. As a result, Ex-Im received the 2014 end-use certification and report from each of these governments in a timely manner. Ex-Im also received on time any applicable progress and technical operating reports for the fiscal year 2012 dual-use transactions. For a summary of the reports required in the financing agreements, their due dates, and when they were received, see figure 1. While Ex-Im's financing agreement with the government of Mexico calls for separate progress and technical operating reports for each satellite, Ex-Im officials decided to allow the government of Mexico to combine the progress reports for the two Mexican satellites that are not yet operational with the technical operating report for the one satellite already in use. The Vice President for Engineering and Environment approved this decision, and the engineer responsible for monitoring the transaction documented it. The combined report adheres to the timing specified in the Mexico financing agreement for the progress reports and exceeds the timing specified for technical operating reports. Submitting one combined report means that the technical operating report is submitted more frequently than required--twice a year instead of annually, according to Ex-Im officials. They also stated that combining these reports is more efficient because it allows Mexican officials to submit and Ex-Im officials to review a single document instead of three separate documents submitted at different times. In accordance with Ex-Im's revised guidance, the engineers responsible for monitoring each dual-use transaction have created an electronic folder system to document their monitoring activities. This system contains separate folders for each of the three fiscal year 2012 dual-use transactions. We examined these folders and found that they contained the required information. Each transaction folder contained, among other things, information associated with monitoring the end use of the exported item(s), such as annual end-use certification and reports; the engineer's annual determination regarding compliance with the bank's dual-use policy; correspondence determined by the engineer to be key to monitoring end use, such as an e-mail from the buyer transmitting required reports; and any applicable progress or technical operating reports or documentation of trips to inspect end use. In accordance with Ex-Im's revised guidance, the engineers responsible for monitoring the Cameroon and Mexico transactions have each made a determination that the information received during the previous calendar year (2014) was adequate to demonstrate that the transaction complied with the requirements of the bank's dual-use policy. The engineer responsible for monitoring the Eutelsat transaction did not make such a determination because none was required. Further details for each transaction are described below. Cameroon. The engineer monitoring the Cameroon transaction conducted a detailed analysis of equipment usage data within the 2014 calendar year in Cameroon's end-use certification and report and determined that the use of the equipment was overwhelmingly civilian in nature and thus met the bank's dual-use requirement of being used primarily for civilian purposes. After meeting with military officials during a trip to Cameroon in early June 2015 and inspecting their operations, visiting current projects and assessing current and future needs, the engineer confirmed his determination that the use of the equipment was overwhelmingly civilian in nature. Mexico. The engineer monitoring the Mexico transaction determined that, while all three satellites are not yet fully operational, the government of Mexico continues to project a ground terminal allocation of 40 percent military and 60 percent civilian as the basis for its dual-use compliance. The Mexican government submitted an annual end-use certification and report for 2014 listing the civilian and military entities to which a total of 115,424 terminals would be allocated and the number of terminals allocated to each entity; 46,324 (40 percent) were allocated to military entities. This information is identical to that submitted by the Mexican government for 2013. Ex-Im officials stated that any end-use monitoring the bank might conduct would likely involve meeting with the U.S. military attache in Mexico and obtaining information from a small sample of terminals. The officials acknowledged that once all the satellites are operational, it will be very difficult to ascertain actual end use, since that would involve monitoring over 100,000 ground terminals, obtaining logs showing bandwidth usage, and examining the bandwidth use associated with each terminal. They said the engineer responsible for monitoring this transaction would instead base his annual determination on the percentage of ground terminals allocated to military entities, although they identified limitations with using this percentage measure. However, the officials said that, based on pre- approval vetting with the U.S. military attache in Mexico, the bank determined that it is highly unlikely that the satellites would be used for mostly military purposes. According to the bank's board memorandum authorizing the Mexico satellite transaction, and as we noted in our August 2014 report, the Mexican Secretariat of Communications and Transportation--and not the Mexican military--is operating the satellites. One of the mobile service satellites was destroyed during a failed launch in May 2015, leaving two satellites--the fixed service satellite launched in 2012 and already in use, and one more mobile service satellite with a planned launch in the fall of 2015. According to the engineer, the three-satellite system requires only one mobile service satellite to operate at a time, with the other functioning as a spare; the two mobile service satellites would thus be able to exchange operational and spare roles as needed. He said the government of Mexico has not yet determined whether to replace the destroyed satellite. Eutelsat. No annual determination regarding end use is required for the Eutelsat transaction because, as we noted in our August 2014 report, once the satellite became airborne in 2013, the number and capacity (bandwidth) of the military transponders on the satellite could not be modified. As we previously reported, these transponders, which are dedicated to nonlethal military use by the government of Qatar, were not financed by Ex-Im and represent only 6 of the satellite's 46 transponders and less than half its total transponder capacity. A senior Ex-Im official stated that if Eutelsat were to sell any of its transponders on the satellite to the Qatari government--thereby increasing the number of transponders that could potentially be used by that government's military for military purposes--the French company would have to report this information in its technical operating report and in financial reports required in its credit agreement with the bank. According to Eutelsat's two most recent technical operating reports, submitted in July 2014 and February 2015, there has been no change in transponder ownership. Ex-Im did not finance any new exports under its dual-use authority in fiscal year 2014, according to Ex-Im officials and our review of relevant data on Ex-Im authorizations. According to Ex-Im officials, each application for financing requires the entry of numerous data elements for the application record. Several of these elements relate to whether there are any military implications in the application, and one field relates to whether or not the application would go forward under the bank's dual- use authority. The Engineering and Environment Division, which administers the bank's military policy and consequently its dual-use policy, is responsible for filling in this data field. We provided Ex-Im a draft of this report and Ex-Im provided comments on June 12, 2015 (see app. II). Ex-Im agreed with our findings and stated that it is the bank's understanding that it has implemented the recommendation in our August 2014 report. This understanding is correct and we will close that recommendation. We also received technical comments from Ex-Im officials. The officials updated information on their monitoring of the end use of the Cameroon equipment and clarified information about progress and technical operating reports and the expected use of the Mexican satellites. We made changes to our report in response to these comments where appropriate. We are sending copies of this report to interested congressional committees. We are also sending copies to the President and Chairman of Ex-Im, the Secretary of Defense, and the Secretary of State. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8612 or [email protected]. To examine how the Export-Import Bank of the United States (Ex-Im) addressed weaknesses in monitoring the end uses of the dual-use exports it continued to finance in fiscal year 2013, and to identify what dual-use exports, if any, Ex-Im reported it financed in fiscal year 2014, we reviewed Ex-Im documentation regarding its dual-use policy, including a 1997 memorandum on implementing that policy; a revised 2015 memorandum; Ex-Im documentation associated with each of the three dual-use transactions Ex-Im financed in fiscal year 2012; and data on dual-use determinations. In addition, we examined Ex-Im's new electronic filing system for dual-use transactions, including the folder and subfolder structure and enclosed documents, so that we could determine what documents were filed in the system, and interviewed the official who created the system. We also observed a demonstration of the automatic e-mail reminders that prompt the appropriate Ex-Im official to notify buyers of upcoming due dates for end-use documents. We interviewed Ex-Im officials in Washington, D.C., who review applications for the financing of dual-use exports and monitor end-user compliance with dual- use requirements, including the Vice President of the Engineering and Environment Division. We did not independently verify the information provided to Ex-Im or assess the appropriateness of the metrics or the effectiveness of the controls Ex-Im was using to determine end use. Through interviews with cognizant agency officials about Ex-Im's procedures for identifying and categorizing dual-use transactions in its Application Processing System, we determined that Ex-Im data were sufficiently reliable for the purpose of identifying dual-use exports financed under Ex-Im's dual-use authority in fiscal year 2014. We conducted this performance audit from February 2015 to June 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. Kimberly Gianopoulos, (202) 512-8612 or [email protected]. In addition to the contact named above, Adam Cowles, Assistant Director, and Kay Halpern made key contributions to this report. In addition, Ashley Alley, Nabajyoti Barkakati, Tina Cheng, Debbie Chung, Martin De Alteriis, Michael Kaeser, and Hai Tran provided technical assistance. Export-Import Bank: Status of Actions to Address GAO Recommendations since the Bank's 2012 Reauthorization. GAO-15-557T. Washington, D.C.: April 15, 2015. Export-Import Bank: Monitoring of Dual-Use Exports Should Be Improved. GAO-14-719. Washington, D.C.: August 28, 2014. Export-Import Bank: Financing of Dual-Use Exports. GAO-13-628R. Washington, D.C.: May 29, 2013. Export Promotion: The Export-Import Bank's Financing of Dual-Use Exports. GAO-12-628R. Washington, D.C.: April 12, 2012. Export Promotion: The Export-Import Bank's Financing of Dual-Use Exports. GAO-10-1052R. Washington, D.C.: September 15, 2010. Export Promotion: The Export-Import Bank's Financing of Dual-Use Exports. GAO-08-1182R. Washington, D.C.: September 30, 2008. Ex-Im Bank: The U.S. Export-Import Bank's Financing of Dual-Use Exports. GAO-07-1234R. Washington, D.C.: September 27, 2007. Export-Import Bank: The U.S. Export-Import Bank's Financing of Dual- Use Exports. GAO-01-1110R. Washington, D.C.: August 31, 2001. Export-Import Bank: The U.S. Export-Import Bank's Financing of Dual- Use Exports. NSIAD-00-231R. Washington, D.C.: September 1, 2000. International Affairs: U.S. Export-Import Bank's Financing of Dual-Use Exports. NSIAD-99-241R. Washington, D.C.: September 1, 1999. International Affairs: U.S. Export-Import Bank's Financing of Dual-Use Exports. NSIAD-98-244R. Washington, D.C.: September 1, 1998. U.S. Export-Import Bank: Process in Place to Ensure Compliance With Dual-Use Export Requirements. NSIAD-97-211. Washington, D.C.: July 17, 1997.
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Since 1994, Ex-Im has had the authority to facilitate the financing of dual-use exports, which include construction equipment used by foreign militaries to build roads. After a 9-year hiatus, Ex-Im financed three dual-use exports in fiscal year 2012, accounting for $1.03 billion, or just under 3 percent of Ex-Im's $35.8 billion financing for that year. The Consolidated and Further Continuing Appropriations Act, 2015, extends a provision for GAO to report annually on the end uses of dual-use exports financed by Ex-Im during the second preceding fiscal year. In August 2014, GAO reported that monitoring-related documents from borrowers required by the financing agreements were missing or late and that Ex-Im's dual-use monitoring policy did not specify what actions Ex-Im officials should take if the bank did not receive the required documents. GAO recommended that Ex-Im establish steps staff should take in cases where borrowers do not submit required end- use documentation within the time frames specified in their financing agreements and ensure that these efforts are well documented. Ex-Im agreed with GAO's recommendation and revised its guidance. This report (1) examines how Ex-Im addressed weaknesses in monitoring the end uses of the dual-use exports it finances and (2) identifies what dual-use exports, if any, Ex-Im reported it financed in fiscal year 2014. GAO reviewed Ex-Im documents and interviewed Ex-Im officials. The Export-Import Bank of the United States (Ex-Im) addressed weaknesses in monitoring the end use of exported "dual-use" items by revising and implementing its guidance for monitoring these items, as GAO recommended in August 2014. Dual-use items are defense articles and services that Ex-Im has determined are nonlethal and primarily meant for civilian use. Specifically, Ex-Im revised its 1997 memorandum on the implementation of its dual-use policy for military applications and disseminated it to relevant staff on March 11, 2015. The updated memorandum clarified the responsibilities of Ex-Im staff for monitoring end use, and GAO found that bank staff have now taken the following steps: made determinations , in what is to be an annual process, as to whether the information received was adequate to demonstrate that the transaction complied or failed to comply with the bank's dual-use policy. As a result, Ex-Im has received in a timely manner all documents required since GAO's last report, issued in August 2014. Ex-Im did not finance any new exports under its dual-use authority in fiscal year 2014, according to Ex-Im authorizations data and Ex-Im officials.
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For tax years beginning after 2000, the Economic Growth and Tax Relief Reconciliation Act of 2001 applied a new 10-percent income tax rate to a portion of an individual's income that was previously taxed at 15 percent. To stimulate the economy more rapidly than would be achieved if taxpayers had to wait until they filed their tax year 2001 tax returns to realize the full impact of this rate reduction, the Act provided for eligible taxpayers to receive an advance 2001 tax refund. To be eligible for an advance refund, taxpayers (1) had to have a federal income tax liability on their tax year 2000 return, (2) could not be claimed as a dependent on someone else's tax year 2000 return, and (3) could not be a nonresident alien. The amount of advance tax refund that taxpayers could receive depended on the filing status and amount of taxable income shown on the taxpayer's tax year 2000 return. The maximum refund amount was $600 for a married couple filing jointly or a qualified widow(er), $500 for a head of household, and $300 for a single individual or married person filing separately. Before issuance of the advance tax refund checks, IRS was to send every individual who filed a return for tax year 2000 a notice either informing them of the refund amount they were to receive and the week in which they were to receive it or telling them that they were ineligible for a refund and why. FMS was to issue the advance tax refund checks for IRS with assistance from the Defense Finance and Accounting Service (DFAS).Before issuing any check, IRS and FMS were to reduce the amount of the check by the amount of any delinquent federal tax or certain other debts, such as delinquent child support payments, owed by the taxpayer. Most advance refund checks were to be issued over a 10-week period from the week of July 23, 2001, through the week of September 24, 2001, based, in general, on the last two digits of a taxpayer's Social Security number (SSN). For example, taxpayers with 00 through 09 as the last two digits of their SSN were to receive their checks the week of July 23, 2001, while taxpayers with 90 through 99 as the last two digits of their SSN were to receive their checks the week of September 24, 2001. Taxpayers who filed their tax year 2000 returns after April 16 were to receive their advance tax refund checks later in the fall. All checks were to be issued by December 31, 2001. IRS, through FMS, mailed out advance tax refunds according to a schedule that called for taxpayers to begin receiving checks the week of July 23, 2001. As shown in table 1, from then through the end of September, about 84.1 million taxpayers were to have received about $35.5 billion in advance tax refunds. According to IRS officials, it cost IRS about $104 million to administer the advance tax refund program through the end of fiscal year 2001. Included in these costs were $36 million for contract costs, $33 million for postage, $30 million for labor, and $5 million for printing. IRS expected to incur an additional $12 million in labor costs during fiscal year 2002 related to the advance tax refunds, because refund payments were to be made through the end of December 2001. FMS expected to incur about $34 million in total costs to issue the checks on behalf of IRS, including the assistance provided by DFAS. To administer the advance tax refund program, IRS, among other things, had to develop the computer programming necessary to determine taxpayer eligibility for the refund and the amount of each refund, including any related federal tax offset; arrange for printing and mailing of notices that informed taxpayers prepare adjustment notices for refunds that were offset due to federal tax whether they would receive a refund; respond to telephone calls and correspondence from taxpayers concerning the refund; resolve undelivered and returned advance refund checks; and debts. According to an IRS official, it took about 3 months between March 2001 and June 2001 to develop the necessary computer programming and to arrange for printing and mailing of notices needed to implement the advance tax refund program. IRS temporarily reassigned staff from other functions to assist with taxpayer telephone calls and correspondence related to the advance tax refunds. For example, IRS recalled furloughed staff at its forms distribution centers to assist taxpayers who called IRS with questions about the advance refund that were relatively easy to answer. In addition, IRS used submission processing staff from its Philadelphia Service Center to help respond to over 90,000 written inquiries from taxpayers concerning the advance tax refunds. For any taxpayer whose account involves a federal tax debt, IRS is to offset the advance tax refund due to the taxpayer, either in whole or in part, to collect the debt. In addition, FMS is to offset the advance tax refunds to collect other types of debt via the Treasury Offset Program.The notice IRS sent to taxpayers who were eligible to receive an advance tax refund included a statement that the amount of the refund could be reduced by any outstanding debt owed, such as past due federal and state taxes or child support. According to data obtained from IRS and FMS, the two agencies had offset the advance tax refunds by almost $2.7 billion because of taxpayer debt. As of September 30, 2001, IRS had offset about $2.1 billion to recover delinquent federal tax. As of October 31, 2001, FMS had offset about $469 million for the following reasons: $263 million for delinquent child support. $191 million for federal debts other than delinquent taxes. $15 million for delinquent state taxes. The following problems were encountered in implementing the advance tax refund program: A computer programming problem resulted in about 523,000 taxpayers receiving inaccurate refund notices. About 5.3 million taxpayers received untimely refund notices because of IRS' procedures for processing returns and the way programming was developed to generate advance refund notices. About 2 million notices were returned to IRS due to incorrect addresses and, as of October 30, 2001, IRS had about 300,000 undeliverable checks for which it was seeking updated addresses. Taxpayers who called IRS during the advance tax refund period had greater difficulty reaching IRS assistors than did taxpayers who called during the same timeframe in 2000 or during the 2001 tax filing season. A small number of taxpayers received duplicate checks in the early stages of the program. TIGTA identified an IRS computer programming problem that resulted in about 523,000 taxpayers receiving inaccurate advance refund notices. As noted earlier, the maximum amount of a taxpayer's advance refund was to be $600, $500, or $300 depending on the taxpayer's filing status. However, the actual amount of the advance refund was limited to the lesser of (1) 5 percent of the taxable income on the taxpayer's tax year 2000 return and (2) the net income tax from the tax year 2000 return after subtracting nonrefundable credits, such as the credit for child and dependent care expenses, child tax credit, credit for the elderly, and education credit. TIGTA found that IRS had erred in developing its computer program by not limiting advance refund amounts to the net income tax after credits, thus resulting in the inaccurate advance refund notices. TIGTA informed IRS of this problem on July 3, 2001, and IRS was able to correct the problem before any advance refunds were issued--thus avoiding overpayments of about $118 million. IRS also sent corrected notices to the affected taxpayers. TIGTA also determined that 5.3 million taxpayers who filed their tax returns by the April 16 filing deadline would have delays from 1 week to 9 weeks in receiving their advance refund notices. TIGTA attributed the delays to the following two reasons. IRS' normal procedure is to process income tax returns filed by taxpayers who are due to receive a tax refund before processing income tax returns filed by other taxpayers. Thus, many nonrefund returns filed by April 16 had not been processed by the time IRS prepared the list of taxpayers who would receive the first mailout of advance refund notices. When IRS developed the programming to generate the advance refund notices for taxpayers affected by the above processing procedure, it decided to have the notices mailed to the taxpayers just before they were to receive their advance refund checks instead of having the notices mailed as soon as the tax return was processed. In response to a TIGTA recommendation, IRS issued a news release explaining that some taxpayers might experience a delay in receiving their advance tax refund notices. One problem that IRS encountered throughout the implementation of the advance tax refund program involved undeliverable refund notices and checks due to incorrect addresses. Undeliverable advance refund notices were to be returned to IRS' Philadelphia Service Center, and undeliverable advance refund checks were to be returned to the FMS payment center from which they were issued. Through September 30, 2001, almost 2 million advance tax refund notices were returned to IRS as undeliverable, including about 1.1 million notices sent to taxpayers who were to receive a refund and about 900,000 notices sent to taxpayers who were ineligible for a refund. According to an IRS official, the undeliverable notices were sorted and counted by type of notice and then destroyed. Because these notices were sent to taxpayers via first class mail, the Postal Service was to forward notices for which taxpayers had provided an address change. Therefore, IRS decided that it would not be cost effective to follow up on the undeliverable notices. Even if a notice to a taxpayer who was to receive an advance tax refund was returned as undeliverable, a check would still have been sent to that taxpayer. In a news release dated October 30, 2001, IRS indicated that there were almost 300,000 undeliverable advance refund checks valued at about $95 million for which they urged taxpayers to contact IRS so that the checks could be reissued to the correct address. According to an FMS official, undeliverable tax refund checks are cancelled and information concerning the cancelled checks is sent to IRS. IRS is to then research a taxpayer's account to determine if there is an updated address to which another check can be sent. IRS updates taxpayer addresses each week through a National Change of Address Database maintained by the Postal Service. Taxpayers can also update their addresses with IRS by submitting an IRS Form 8822 "Change of Address." In addition, IRS authorized its customer service representatives to accept change of address information over the telephone from taxpayers who call about their advance tax refund. According to IRS Philadelphia Service Center officials, much of the written correspondence they received involved address changes from taxpayers who wanted to ensure that they would receive their advance refunds. Although the number of undeliverable advance refund checks was substantial, the percentage of checks returned as undeliverable (less than 1 percent) was less than the approximate 4 percent rate that an FMS official indicated was normal for undeliverable tax refunds. At the time we prepared this report, we had data on the accessibility of IRS' telephone assistance for the first 3 months of the advance tax refund period. The data showed that taxpayers calling IRS during those 3 months had problems reaching an assistor. Overall, when compared with the same 3-month period in 2000 and with the 2001 tax filing season, the accessibility of IRS' telephone assistance during the advance tax refund period generally declined. IRS had a two-pronged approach for responding to the increased demand for telephone assistance that it expected during the advance tax refund period. The first prong of IRS' strategy was to handle as many calls as possible through automation, thereby freeing up assistors to handle calls that required live assistance. To accomplish this, IRS publicized its TeleTax phone number on notices sent to taxpayers and though an announcement played on IRS' main telephone assistance line. The TeleTax line had recorded information on the rebate program and an interactive service that told the taxpayer the expected date the check would be mailed based on the last two digits of the Social Security number entered by the taxpayer. The second prong of IRS' strategy was to increase the staffing devoted to telephone assistance. We are continuing to obtain information on the extent of IRS' efforts in this regard. Among other things, however, IRS' forms distribution centers recalled 450 employees from furlough and trained them to handle simpler calls related to the rebate. Despite IRS' efforts to meet the increased demand for telephone assistance during the advance tax refund period, taxpayers had greater difficulty in accessing that assistance. IRS has four measures for judging its performance in providing access to telephone assistance. As shown in table 2, IRS' performance during the first 3 months of the advance tax refund period declined for all four measures compared with the same time period in 2000 and declined for three of the four measures compared with the 2001 filing season. We are inquiring into reasons for the decline in telephone accessibility during the advance tax refund period and will include that information in our final report. However, one possible explanation is that the demand for telephone assistance exceeded IRS' expectations. Although we did not have usable information on IRS' expectations when we wrote this report, we did have IRS data on actual demand. IRS measures demand in two ways--total call attempts and unique telephone number attempts.According to IRS data for both of those measures, the demand for telephone assistance was about twice as high during the first 3 months of the advance tax refund period as it was during the same time period in 2000. In the first 3 months of the advance tax refund period, IRS received about 23.8 million total call attempts and about 13.3 million unique number attempts, compared to about 11.4 million and 7.1 million, respectively, during the same period in 2000. In commenting on a draft of this report, the Commissioner of Internal Revenue said that although IRS made "extraordinary efforts to handle advance refund calls," the high volume of telephone calls resulted in a reduced level of service. The Commissioner's letter, which is in appendix I, cites various statistics to document the increase in demand. Because those statistics include calls to TeleTax, they differ from the statistics cited in the preceding paragraph. Another problem related to the advance tax refunds was identified within the first 2 weeks of the advance refund period and promptly corrected. The problem involved duplicate checks sent to taxpayers by one of the three DFAS centers that assisted FMS in issuing the advance tax refund checks. The problem surfaced when two taxpayers who had received duplicate checks tried to cash the second check and a third taxpayer notified IRS about receiving a duplicate check. Once the problem was identified, FMS decided to suspend use of the DFAS center from which the duplicate checks had emanated. According to FMS, due to significantly lower check volumes than originally anticipated, the DFAS center was subsequently retained as a contingency site, rather than being returned to full check production. According to an FMS official, as of November 2001, about 25 instances of duplicate checks had been identified. Of the 25 taxpayers who received duplicate checks, 14 taxpayers had either fully repaid the extra payment or had returned the duplicate check and 2 taxpayers had partially repaid the extra payment. FMS was in the process of recovering the duplicate payments from the other nine taxpayers. In commenting on a draft of this report, the Commissioner of Internal Revenue and the Commissioner of FMS provided some clarifying information that we used to revise the report where appropriate. In commenting on the advance tax refund program in general, the Commissioner of Internal Revenue said that IRS was able to accomplish what it did by "applying the maximum resources possible and giving it top priority management attention." The Commissioner of FMS said that the program was "extremely successful particularly considering the time constraints placed upon us to plan and execute this critically important and highly visible program." As we agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then send copies to others who are interested and make copies available to others who request them. This report was prepared under the direction of David J. Attianese, Assistant Director. If you have any questions about this report, please contact me or Mr. Attianese at (202) 512-9110. Key contributors to this assignment were Ronald W. Jones and Robert C. McKay.
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The Economic Growth and Tax Relief Reconciliation Act of 2001 directed the Treasury to issue advance 2001 tax refunds to individual taxpayers who filed a tax year 2000 return. As a result, the Internal Revenue Service (IRS) had to identify eligible taxpayers so that checks could be sent to these taxpayers by December 31, 2001. The Department of the Treasury's Financial Management Service was to issue the checks on behalf of IRS, with the first checks to be received during the week of July 23, 2001. As of September 30, 2001, 84 million taxpayers were to have received $36 billion in advance tax funds. IRS offset about $2.1 billion from these advance tax refunds to recover delinquent federal taxes. IRS spent $104 million to run the program through September 2001, which included IRS staffing costs as well as the costs associated with contracts, postage, and printing. The Treasury Inspector General for Tax Administration identified two initial problems that affected either the accuracy or timeliness of the advance refund notices. One involved computer programming errors that resulted in 523,000 taxpayers receiving notices indicating that they would receive larger advance tax refunds than they were entitled to receive. The IG also determined that 5.3 million taxpayers who had filled their tax returns by the April 16 filing deadline would have delays of up to nine weeks in receiving their advance refund notices. Two problems that continued throughout the advance tax refund period involved (1) undeliverable refund notices and checks due to incorrect addresses and (2) taxpayer difficulties in reaching IRS telephone assistors. Another problem that was quickly identified and corrected during the early stages of the advance tax refund period involved duplicate checks sent to about 25 taxpayers.
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A basic management objective for any organization is to protect the resources that support its critical operations from unauthorized access, use, destruction, or disruption. Organizations accomplish this objective by designing and implementing controls that are intended to, among other things, prevent, limit, and detect unauthorized access to computing resources, programs, information, and facilities. At LANL, these assets include Category I special nuclear material, such as plutonium and highly enriched uranium; thousands of classified nuclear weapons parts and components; millions of classified documents; thousands of pieces of classified removable electronic media that contain nuclear weapon design information; over 100 vaults and vault-type rooms that store classified assets; and computer networks and the hardware on which these networks run that protect classified information as well as sensitive unclassified information. LANL is subject to a series of DOE security orders that outline requirements for implementing effective physical and cyber security protection strategies. These orders include an assessment of the potential size and capabilities of terrorist forces that could physically attack a laboratory and against which a laboratory must be prepared to defend. The orders further describe different levels of physical protection for sensitive and classified assets, depending on the risk they would pose if they were lost, stolen, or otherwise compromised. Appropriate physical protection safeguards include locks and keys, fences, means to detect unauthorized entry, perimeter alarms, vehicle barriers, and armed guards. In addition, the Congress enacted the Federal Information Security Management Act (FISMA) in December 2002 to strengthen the security of information and information systems across the federal government. FISMA requires each agency to develop, document, and implement an agencywide information security program that supports the operations and assets of the agency, including those provided or managed by another agency or contractor on its behalf. Examples of appropriate information security controls include user identification and authentication that allow computer systems to differentiate between users and verify their identities; cryptography that ensures the confidentiality and integrity of critical and sensitive information; configuration management that identifies and manages security features for all hardware, software, and firmware components of an information system and controls changes to them; and audit and monitoring controls that help establish individual accountability and monitor compliance with security policies. LANL is managed and operated by a corporate entity, Los Alamos National Security LLC (LANS). NNSA's Los Alamos Site Office serves as the primary federal overseer of laboratory security performance. Annually, the Site Office determines how much money LANS will earn for its management of the laboratory according to a maximum available performance-based fee established in the laboratory's contract. The Site Office bases its determination on the laboratory's success in meeting the goals laid out in performance evaluation plans. These plans allocate portions of the maximum available performance award fee to NNSA performance objectives, including measures related to both physical and cyber security. In addition, two DOE organizations are required to periodically review physical and cyber security at LANL. NNSA's Los Alamos Site Office is required to conduct security surveys annually. These surveys are based on observations of performance, including compliance with DOE and NNSA security directives. In fiscal year 2008, the results of this survey are directly tied to NNSA's performance evaluation plan, and are therefore a factor in LANS' ability to earn the maximum available performance award fee. DOE's Office of Independent Oversight also conducts evaluations, typically every 18 months for facilities that store Category I special nuclear material. These evaluations identify weaknesses in the laboratories' security programs and produce findings that laboratory officials must take action to correct. The reviews overlap substantially, but each is required to provide a comprehensive assessment of the laboratory's security programs. Physical security at LANL is in a period of significant improvement, and LANL is implementing over two dozen initiatives to reduce, consolidate, and better protect its classified assets, as well as reduce the physical footprint of the laboratory by closing unneeded facilities. LANL officials believe that these initiatives will reduce the risk of incidents that can result in the loss of control over classified assets. For example, to reduce and consolidate classified assets and its physical footprint, as of March 2008, LANL had (1) reduced from nine to one the number of areas containing Category I special nuclear material; (2) reduced the amount of accountable classified removable electronic media from 87,000 pieces to about 4,300 and made information previously accessible on removable media available only through the laboratory's classified computer network; (3) eliminated about 30,000 classified nuclear weapon parts; and (4) reduced the number of vault-type rooms from 142 to 111. In addition, during fiscal year 2007, LANL reduced the physical footprint of existing facilities by over 500,000 square feet. In concert with these actions, LANL is implementing a series of engineered and administrative controls to better protect and control classified assets, such as removing the functions from classified computers that enable them to create new pieces of removable electronic media and streamlining physical security procedures to make them easier to implement across the laboratory. We found that DOE's Office of Independent Oversight and the Los Alamos Site Office identified significant physical security problems at LANL that the laboratory had not fully addressed. Specifically, while LANL's storage of classified parts in unapproved storage containers and its process for ensuring that actions to correct identified security deficiencies have been cited in external security evaluations for years, complete security solutions in these areas had not yet been implemented at the time of our review. In addition, external security evaluations had repeatedly identified concerns about the adequacy of LANL's assessments of its own security performance. The security self-assessment program provides LANL with the opportunity to self-identify security deficiencies and address them before they can be exploited. External security evaluations found that LANL's self-assessments were not comprehensive and did not include discussions of all internal findings. These evaluations also noted that findings identified through self-assessments were not always analyzed and addressed through corrective actions. At the time of our review, Los Alamos Site Office and DOE Office of Independent Oversight officials noted that LANL's self-assessment program was improving. LANL officials identified three management approaches that they asserted would sustain security improvements over the long term. However, these approaches were either in an early stage of development or contained important weaknesses that may impair their ability to ensure the sustainability of security improvements at the laboratory for the foreseeable future. First, LANL officials identified completing the management actions required by the Secretary of Energy's Compliance Order issued as a result of the October 2006 thumb drive incident as an approach to ensure that security improvements are sustained, yet the Compliance Order itself does not provide a mechanism to sustain security improvements over the long-term. Second, LANL officials told us they will track the implementation of longer-term actions, including those required by the Compliance Order, by developing and implementing the Contractor Assurance System required under the LANS contract. However, the extent to which LANL can rely on the Contractor Assurance System to ensure the long-term sustainability of security improvements is unclear. According to a Los Alamos Site Office official, the Contractor Assurance System will not be fully completed for 3 to 4 years and, thus, will not be fully implemented by the time actions under the Compliance Order are completed. Finally, according to LANL officials, the laboratory plans to realize security improvements by meeting the security-related performance incentives in the annual performance evaluation plans NNSA uses to measure performance and determine an award fee for LANS. However, the annual performance evaluation plans focus principally on compliance with DOE requirements and do not sufficiently reward security program improvement. In that regard, according to a senior NNSA security official, compliance with current DOE requirements does not assure that LANL's security program is functioning effectively. Indeed, we found that all but $30,000 of the total $1.43 million fiscal year 2008 performance fee allocated to physical security was associated with LANL's achievement of compliance-oriented milestones, such as issuing plans, publishing policies, and completing equipment maintenance requirements. The management attention dedicated to improving physical security following the October 2006 thumb drive incident mirrors the level of attention that followed LANL's 2004 shutdown, when over 3,400 safety and security deficiencies were identified for correction. This shutdown lasted up to 10 months for some laboratory activities and cost as much as $370 million. Given how quickly LANL's security performance declined between the full resumption of laboratory activities in May 2005 and the discovery of the thumb drive on private property, LANL's ability to sustain the improved security posture it has recently achieved is unproven. Strong federal oversight will help ensure that these improvements are sustained. However, we reported that the Los Alamos Site Office suffers from a shortage of security personnel and lacks funding needed for training. Specifically, as of October 2007, the Los Alamos Site Office employed 13 security staff--enough for 1 person to oversee each of the topical areas the Site Office had to evaluate. This staffing level, officials said, was sufficient to cover only 15 percent of LANL's facilities. In April 2008, a senior security official at the Site Office said security staffing levels had decreased since October 2007. Furthermore, while NNSA had identified the need to train and certify Site Office security personnel in specific subject matters, according to Site Office officials no specific training funds had been made available. We made three recommendations to the Secretary of Energy and the Administrator of NNSA that, if effectively implemented, will improve physical security at LANL and help ensure that improvements LANL has achieved are sustained over the long term. Specifically, we recommended that LANL be required to develop a comprehensive strategic plan for laboratory security that addresses all previously identified security weaknesses and focuses on improving security program effectiveness. Furthermore, we recommended that NNSA provide meaningful financial incentives in future performance evaluation plans for implementation of this comprehensive strategic plan for laboratory security. In June 2008, the Committee requested that we review the security status at Livermore. This request came as a result of an evaluation by DOE's Office of Independent Oversight in April 2008, in which Livermore received the lowest possible ratings for protective force performance and for physical protection of classified resources. The evaluation also identified issues in other areas, such as security sensors and alarms, and security program management. We are currently verifying the findings of the evaluation and Livermore's actions to correct security deficiencies. Specifically: Self-assessment and performance assurance testing programs at Livermore need improvement. DOE's Office of Independent Oversight evaluations and Livermore Site Office security surveys found shortcomings in Livermore's fiscal year 1999, 2000, 2002, and 2008 self- assessment programs. In addition, Livermore and NNSA security officials acknowledged that a lack of comprehensive performance assurance testing was a significant contributing factor to the poor performance of Livermore protective forces during their April 2008 exercise. Between December 2006 and April 2008, Livermore did not hold an integrated performance assurance test of its protective forces or operationally test equipment key to the laboratory's protective strategy. During our visit to the laboratory 2 weeks ago, Livermore officials told us they are finalizing corrective action plans to address deficiencies in their performance assurance and self-assessment programs and have already conducted a significant number of performance assurance tests with the protective force and on equipment since the completion of the Office of Independent Oversight's 2008 evaluation. NNSA and the Livermore Site Office have not always provided effective security oversight. Six months before the Office of Independent Oversight's 2008 evaluation, the 2007 Livermore Site Office's annual security survey gave the laboratory a 100-percent satisfactory rating on its security performance, the highest possible rating. The results of the Office of Independent Oversight inspection not only differed markedly, but also found that the Livermore Site Office survey was not comprehensive and the ratings provided did not reflect what was actually observed. The Livermore Site Office is currently in the process of fundamentally rebuilding and restructuring its survey program and has embarked on a training program for its security personnel. Though our observations are preliminary, Livermore appears to be experiencing difficulties similar to LANL's in sustaining physical security performance. For example, in 1999, DOE's Office of Independent Oversight identified significant weaknesses in Livermore's programs to secure the laboratory's Category I special nuclear material facility against a potential terrorist attack. Livermore then embarked on a major program to improve security and, according to the Office of Independent Oversight, addressed most issues by 2002. This improved level of security performance appears to have been sustained through 2006. Between December 2006--when Livermore's protective force performed well in an exercise--and April 2008, security performance at Livermore declined. In response to the negative results of the 2008 Office of Independent Oversight evaluation, Livermore appears to be refocusing management attention on security performance. While our work is preliminary, we believe the actions taken by Livermore, the Livermore Site Office, and NNSA, if and when fully implemented, will address identified physical security issues. However, just as at LANL, sustaining attention on physical security performance will continue to be a challenge. LANL has implemented measures to enhance its cyber security, but weaknesses remain in protecting the confidentiality, integrity, and availability of information on its unclassified network. In particular, LANL has implemented a network security system that is capable of detecting potential intrusions on the network. However, LANL has vulnerabilities in several critical areas, including (1) identifying and authenticating users of the network, (2) encrypting sensitive information, (3) monitoring and auditing compliance with security policies, (4) controlling and documenting changes to a computer system's hardware and software, and (5) restricting physical access to computing resources. For example, although LANL had implemented strong authentication measures for accessing the network, these measures were not always used. Once a user successfully accessed the network, the user could create a separate, simple password that would allow alternative access to certain sensitive information. Furthermore, LANL neither conducted comprehensive vulnerability scans of the unclassified network nor included sensitive applications in these scans, thus leaving the network at increased risk of compromise or disruption. In addition to these weaknesses, LANL's computing facilities had physical security weaknesses and could be vulnerable to intentional disruption. Specifically, we observed lax restriction of vehicular traffic entering the laboratory and inadequate fencing. A key reason for the information security weaknesses we identified is that LANL has not yet fully implemented an information security program to ensure that controls are effectively established and maintained. Although LANL has implemented a security awareness training program, we identified a number of shortcomings in its overall information security management program. For example, (1) its risk assessment was not comprehensive, (2) specific guidance was missing from policies and procedures, (3) the network security plan was incomplete, (4) system testing had shortcomings, (5) remedial action plans were incomplete and corrective actions were not always timely, and (6) the network contingency plan was incomplete and inadequately tested. Until LANL ensures that the information security program associated with its unclassified network is fully implemented, it will have limited assurance that sensitive data are adequately protected against unauthorized disclosure or modification or that network services will not be interrupted. Many of LANL's cyber security deficiencies have been the subject of prior evaluations conducted by DOE's Office of Independent Oversight and the Los Alamos Site Office. The most recent reports, covering fiscal years 2006 and 2007, documented significant weaknesses with LANL's unclassified information security program, including foreign nationals' access to the laboratory's unclassified network. As of May 2008, LANL had granted unclassified network access to 688 foreign nationals, including about 300 from countries identified as sensitive by DOE, such as China, India, and Russia. In addition, foreign nationals from sensitive countries have been authorized remote access to LANL's unclassified network. The number of foreign nationals who have access to the unclassified network has raised security concerns among some laboratory and NNSA officials because of the sensitive information contained on the network. According to LANL, the percentage of foreign nationals with authorized remote access to the unclassified network has steadily declined over the last 5 years. NNSA and LANL have not agreed on the level of funding necessary for protecting the unclassified network. From fiscal years 2001 through 2007, LANL spent $51.4 million to protect and maintain its unclassified network. Although LANL cyber security officials told us that funding has been inadequate to address some of their security concerns, NNSA officials raised questions about the basis for LANL's funding request for cyber security. NNSA's Chief Information Officer told us that LANL has not adequately justified requests for additional funds to address the laboratory's stated shortfalls. In addition, NNSA officials informed us that LANL's past budget requests were prepared on an ad hoc basis and were not based on well-defined threat and risk assessments. In response to these concerns, in fiscal year 2006, NNSA implemented a more systematic approach to developing cyber security budgets across the nuclear weapons complex, including LANL. This effort, however, does not provide guidance that clearly lays out funding priorities. Furthermore, NNSA does not consistently document resource allocation decisions and identify how funding shortfalls affect critical cyber security issues. To help strengthen information security controls over LANL's unclassified network, we made a series of recommendations to the Secretary of Energy and the Administrator of NNSA, 11 of which focus on improving LANL's information security program and determining resource requirements for the unclassified network. For example, we recommended that the Secretary of Energy and the NNSA Administrator require the Director of LANL to, among other things, (1) ensure that the risk assessment for the unclassified network evaluates all known vulnerabilities and is revised periodically and (2) strengthen policies with a view toward further reducing, as appropriate, foreign nationals' access to the unclassified network, particularly those from countries identified as sensitive by DOE. We made an additional 41 recommendations in a separate report with limited distribution. These recommendations consist of actions to be taken to correct the specific information security weaknesses related to identification and authentication, cryptography, audit and monitoring, configuration management, and physical security that we identified. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions that you or Members of the Subcommittee may have at this time. For further information on this testimony, please contact Gene Aloise at (202) 512-3481 or [email protected]; Nabajyoti Barkakati at (202) 512-6412 or [email protected]; and Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Jonathan Gill, Ed Glagola, Jeff Knott, and Glen Levis, Assistant Directors; Allison Bawden; Preston Heard; Tom Twambly; Ray Rodriguez; John Cooney; Carol Herrnstadt Shulman; and Omari Norman made key contributions to this testimony. 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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Los Alamos National Laboratory (LANL) is one of three National Nuclear Security Administration (NNSA) laboratories that designs and develops nuclear weapons for the U.S. stockpile. LANL employees rely on sensitive and classified information and assets that are protected at different levels, depending on the risks posed if they were lost, stolen, or otherwise compromised. However, LANL has experienced several significant security breaches during the past decade. This testimony provides GAO's (1) views on physical security at LANL, as discussed in Los Alamos National Laboratory: Long-Term Strategies Needed to Improve Security and Management Oversight, GAO-08-694 (June 13, 2008); (2) preliminary observations on physical security at Lawrence Livermore National Laboratory; and (3) views on cyber security at LANL as discussed in Information Security: Actions Needed to Better Protect Los Alamos National Laboratory's Unclassified Computer Network, GAO-08-1001 (Sept. 9, 2008). To conduct this work, GAO analyzed data, reviewed policies and procedures, interviewed laboratory officials, and conducted site visits to the two laboratories. Physical security at LANL is in a period of significant improvement, and LANL is implementing over two dozen initiatives to better protect its classified assets. However, while LANL's current initiatives address many physical security problems previously identified in external security evaluations, other significant security problems have received insufficient attention. In addition, the management approaches that LANL and NNSA intend to use to sustain security improvements over the long term are in the early stages of development or contain weaknesses. Furthermore, LANL's ability to sustain its improved physical security posture is unproven because (1) the laboratory appears not to have done so after a significant security incident in 2004, with another significant security breach in 2006, and (2) NNSA's Los Alamos Site Office--which is responsible for overseeing security at LANL--may not have enough staff or the proper training to execute a fully effective security oversight program. GAO's report made recommendations to help further improve physical security at LANL and ensure that these improvements are sustained over the long term. As a result of poor performance on an April 2008 physical security evaluation conducted by the Department of Energy's (DOE) Office of Independent Oversight, GAO is reviewing physical security at Lawrence Livermore National Laboratory (Livermore). GAO's preliminary observations are that Livermore appears to experience difficulties similar to LANL's in sustaining security performance. Furthermore, it appears that NNSA has not always provided effective oversight of Livermore. Specifically, an NNSA security survey conducted only 6 months prior to the April 2008 DOE evaluation gave Livermore the highest possible rating on its security program's performance. These results differ markedly from those documented by DOE's Office of Independent Oversight. LANL has implemented measures to enhance cyber security, but weaknesses remain in protecting information on its unclassified network. This network possesses sensitive information such as unclassified controlled nuclear information, export control information, and personally identifiable information about LANL employees. GAO found vulnerabilities in critical areas, including (1) identifying and authenticating users, (2) encrypting sensitive information, and (3) monitoring and auditing security policy compliance. A key reason for these information security weaknesses is that the laboratory has not fully implemented an information security program to ensure that controls are effectively established and maintained. Furthermore, deficiencies in LANL's policies and procedures raise additional concern, particularly with respect to foreign nationals' accessing the network from the laboratory and remotely. Finally, LANL cyber security officials told GAO that funding to address some of their security concerns with the laboratory's unclassified network has been inadequate. However, NNSA officials asserted that LANL had not adequately justified its requests for additional funds. GAO made 52 recommendations to help strengthen LANL's information security program and controls over the unclassified network.
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Subject to EPA's oversight, state and local permitting agencies generally administer NSR and operate under one of two arrangements. Under the first arrangement, state and local agencies receive "delegated authority" from EPA under which they implement EPA's NSR regulations. Under the second arrangement, states and localities are also responsible for administering NSR, but instead of implementing EPA's NSR regulations, state and local agencies develop plans, known as state implementation plans, that regulate the construction and modification of stationary sources. These plans provide assurances that the states and localities will have adequate personnel, funding, and authority under state law to carry out the plan, among other provisions. State implementation plans also must include NSR regulations that are at least as stringent as EPA's NSR regulations, although states and local agencies are authorized to include more stringent or additional requirements. States and localities must submit these plans, as well as any revisions to them, to EPA for approval. Once EPA approves the plans, they become federally enforceable requirements. Although this report focuses on NSR, the Clean Air Act and its implementing regulations subject electricity generating units to additional emissions control requirements. For example, the Acid Rain Program, created by the Clean Air Act Amendments of 1990, established a cap on the amount of sulfur dioxide that may be emitted by electricity generating units nationwide and authorizes those generating units to trade emissions allowances for sulfur dioxide. These facilities must also continuously monitor their emissions and report them to EPA. Furthermore, EPA has recently finalized or proposed several other regulations that will affect many fossil fuel generating units. These regulations include the (1) Mandatory Reporting of Greenhouse Gas rule finalized in 2009, which established reporting requirements for greenhouse gas emissions above certain thresholds; (2) Cross-State Air Pollution Rule, finalized in 2011, which limits sulfur dioxide and nitrogen oxides emissions from a number of states that contribute significantly to nonattainment or interference with maintenance of certain national ambient air quality standards in downwind states; (3) National Emissions Standards for Hazardous Air Pollutants from Coal- and Oil-Fired Electric Utility Steam Generating Units, also known as the Mercury and Air Toxics Standards, which establish emissions limitations on mercury and other pollutants and was finalized on February 15, 2012; and (4) Standards of Performance for Greenhouse Gas Emissions for New Stationary Sources for Electric Utility Generating Units, proposed in April 2012, which establishes new source performance standards for emissions of carbon dioxide for certain new fossil fuel electricity generating units. EPA does not maintain complete information on NSR permits issued to fossil fuel electricity generating units. State and local permitting agencies track the NSR permits they issue, but EPA does not maintain data on these permits in a complete and centralized source of information, which limits the agency's ability to assess the impact of NSR. In addition, EPA has the opportunity to review and comment on every draft NSR permit issued by state and local permitting agencies, but the agency does not compile data on which permitting authorities address EPA's comments. The absence of this information makes it difficult for EPA to measure the impact of its comments and may impede its ability to assess how state and local permitting agencies may differ from EPA in their interpretation of NSR requirements. EPA does not maintain complete information on NSR permits issued for construction of new fossil fuel electricity generating units or for major modifications to existing units. State and local permitting agencies, which issue NSR permits in most parts of the country, track the NSR permits they issue. (Figure 1 describes the roles of state and local permitting agencies and EPA in issuing NSR permits.) State and local agencies vary widely in the types of data they collect on NSR permits and the systems they use to compile the data. Some states maintain detailed information on NSR permits in electronic form available on publicly accessible websites. For instance, in seven of the nine states where we conducted interviews, state officials maintain information online that can be used to identify the electricity generating units that have received NSR permits, as well as the requirements of the permits.maintained in different formats across these states and cannot be readily compiled into a complete source of information on NSR permitting for the electricity generating sector. In addition to a lack of comprehensive permitting data, EPA and state and local agencies face other challenges in ensuring that owners of fossil fuel electricity generating units comply with requirements to obtain NSR permits. Many of the challenges stem from two overarching issues: (1) determining whether an NSR permit is required and (2) identifying instances where unit owners should have obtained NSR permits but did not. As a result, EPA's enforcement efforts involve long, resource- intensive investigations. A major challenge to EPA, states, and local agencies in ensuring NSR compliance is that it can be difficult for unit owners and regulators to know whether an NSR permit is needed, because NSR's rules governing applicability are complex and because NSR applicability is determined on a case-by-case basis. EPA and state officials we spoke with said that NSR as it applies to new units is fairly straightforward, because newly constructed units generally must obtain NSR permits before starting operation. In contrast, determining what constitutes a major modification of an existing unit, and, thus, what requires an NSR permit, is more complex. Under NSR regulations, owners are to apply for an NSR permit before making any physical or operational change that would result in a significant net increase of emissions. These changes, such as adding new equipment, must be evaluated in the specific context of the unit and its intended use. State officials and industry representatives we interviewed said it can be difficult to determine whether these activities trigger NSR because the two steps for determining applicability--first, whether the unit is making a physical or operational change and, second, whether this change would result in a significant net increase of emissions--are not categorically defined and have changed over time. The first step for determining NSR applicability can be complicated because the definition of "physical or operational change" excludes activities that are considered routine maintenance, repair, and replacement. NSR regulations, first finalized in 1978, contained no description or definition of the "routine maintenance" exclusion, instead relying on a case-by-case approach that involves weighing several factors, including the nature, extent, purpose, frequency, and cost of proposed activities. Federal courts, however, have issued inconsistent decisions on whether the factors should be analyzed with respect to industry practice or a particular unit's history. In 2003, in part because of concerns about the case-by-case approach, EPA finalized a rule that categorically excluded certain activities from NSR by defining them as "routine maintenance, repair, and replacement" to provide more certainty to generating units and permitting agencies. Specifically, the rule categorically deemed certain replacement activities to be routine maintenance, repair, and replacement if certain conditions were met, such as replacement activities' costs not exceeding a specified threshold. In 2006, however, a federal appeals court struck down this rule because it was contrary to the plain language of the Clean Air Act. As a result, a case-by-case approach is still used to determine which activities qualify for the exclusion. Several state officials and industry representatives we interviewed said that the case-by-case approach makes it difficult to know when NSR applies. A number of industry representatives also said that uncertainty around NSR applicability can deter owners from making improvements to units that would improve efficiency. One senior EPA enforcement official we interviewed, however, noted that NSR regulations are written broadly to cover many disparate industries and said it would not be possible for EPA to develop detailed regulations tailored to each industry. One state official we spoke with also said that attempts to more precisely specify what activities are considered routine maintenance might not be worthwhile, since EPA's previous efforts to do so were struck down in court. The second step in determining NSR applicability--assessing whether a change results in a significant net increase in emissions--presents additional complications. Like the routine maintenance exclusion, regulations governing what constitutes an increase in emissions have been subject to litigation, leading to changes in the process used to measure emissions increases over time. For example, in 1992, in response to a court decision, EPA finalized a regulation changing how future emissions from generating units are to be calculated. Rather than calculating future emissions based on a unit's potential to emit, under the revised regulation, future emissions are calculated based, in part, on the maximum emissions that can be generated while operating the unit as it is intended to be operated and as it is normally operated. Some state officials and industry representatives we interviewed said that calculating emissions increases can be challenging because the regulations are complex, and EPA's interpretation has changed over time. NSR's complexity can be particularly difficult for owners of smaller generating units who may lack the legal and technical expertise to properly comply with NSR, according to an EPA official and industry representative we interviewed. EPA officials acknowledged that the process is not always simple, but they also noted that it is much easier for companies to make these calculations than for permitting agencies to verify them, since permitting agencies are less familiar with--and have less access to-- information about a generating unit, its activities, and its data systems, than the companies. According to several state officials and industry representatives we interviewed, assessing whether a change results in a significant net increase in emissions can also be complicated because EPA regulations authorize certain emissions increases to be excluded from this assessment--specifically, those emissions increases that are attributable to growth in demand. Several state officials we interviewed said that some owners have had difficulty distinguishing between emissions increases due to projected growth in demand and emissions increases resulting from the change to the unit, a process made more difficult because EPA has not offered clarification or guidance regarding this exclusion. One senior EPA enforcement official disagreed with this assessment, noting that utilities commonly employ models that help project demand as a way to guide their operations and investment decisions. According to this official, EPA's approach is based on methods already widely employed throughout the electricity sector. EPA and state agency officials, who are responsible for verifying owners' calculations when they apply for a permit or seek guidance on NSR applicability, said that verifications are further complicated by other NSR provisions that exclude certain activities from NSR. For example, a change that significantly increases a generating unit's emissions will not trigger NSR if it does not cause a net increase in emissions. Specifically, an NSR permit is not required if the increase in emissions resulting from a change is offset by certain contemporaneous emissions reductions, a process called "netting." EPA has defined "contemporaneous" as within 5 years before construction on the change commences, although states can define the term differently. Thus, an owner could compensate for an emissions increase in a given year by subtracting emissions decreases that were made in the previous 5 years, although any other emissions increases during that 5-year period must also have been included in the calculation. Several state agency officials we spoke with said that unit owners often pursue this option so they do not have to obtain an NSR permit and install costly emissions controls. Several EPA and state officials we interviewed also said, however, that it can be difficult to verify that calculations are valid, in part because they must rely on information provided by the unit owners. Some of these officials said it can be difficult to determine what types of emissions reductions and increases may be aggregated together under the netting option. One EPA regional office official said that, overall, options such as netting complicate and lengthen the permitting process because they require unit owners to submit additional documentation that the regulator must in turn review. To aid owners and regulators in determining when NSR should apply, EPA and state officials identified several sources of available guidance, including the following: Consultations with state and local agencies. Before seeking a permit, owners of units can request assistance from state and local permitting agencies in determining whether NSR applies. Some state agency officials said that unit owners in their state regularly seek guidance, particularly on how to qualify for one of NSR's exclusions. However, other EPA and state officials we spoke with said that such requests are uncommon; many unit owners may hesitate to contact a regulatory agency because regulators may have a different interpretation of NSR that could require them to install costly emissions controls. EPA's 1990 draft NSR workshop manual. Several state agency officials we spoke with said they rely on a draft EPA manual from 1990 issued as guidance for implementing the federal NSR permitting process, although the manual was never finalized and has not been updated. Regionally maintained databases. Through one of its regional offices, EPA maintains an online database containing more than 600 EPA- issued policy and guidance documents. Several EPA and state officials we interviewed said that the database was helpful in providing current information on how to apply NSR, although one state official said that these determinations are not always consistent. Court decisions. Several EPA and state permitting officials we interviewed said they rely primarily on court rulings for guidance on interpreting NSR regulations to ensure that their determinations are up-to-date. EPA officials said that the agency's ability to generate comprehensive, nationwide guidance is limited because of the case-by-case nature of NSR, ongoing litigation, and the variation in NSR requirements across states. For example, some states and localities have adopted NSR requirements that are more stringent than the federal regulations. Furthermore, some states' regulations differ because they have not revised their state implementation plans to incorporate the 2002 NSR reforms or had those revisions approved by EPA. The second major challenge EPA and state and local agencies face in ensuring compliance with NSR is that it is often difficult for regulators to identify noncompliance--that is, instances where owners did not obtain NSR permits before making major modifications to their generating units. According to several EPA officials we interviewed, identifying noncompliance can be challenging because unit owners--not regulatory agencies--have responsibility for determining whether they need an NSR permit. Most owners do not ultimately obtain NSR permits before making changes to their units, according to EPA officials we interviewed, because the owners determine that the changes fall under one of NSR's exclusions, such as routine maintenance, or because they offset emissions increases through netting. These unit owners are generally not required to notify EPA or state or local permitting agencies when they use these exclusions. Therefore, EPA would not review the owners' determinations unless (1) the owner proactively sought a permit and the state or local permitting agency determined that an NSR permit was required or (2) EPA initiated an investigation. In instances where a unit did not apply for and receive a permit as required, it can take EPA several years to identify the noncompliance and take corrective action. Moreover, under an EPA rule finalized in 2007, known as the "reasonable possibility recordkeeping" rule, a unit owner who determines that a change will not trigger NSR is not required to keep records of the change and its resulting emissions unless the owner believes there is a reasonable possibility that the change could result in a significant emissions increase, and other conditions are met. According to one state official we interviewed, this rule may complicate efforts to identify noncompliance because EPA and state regulators generally have to retroactively determine whether an NSR permit should have been obtained for past activities, and without the benefit of company records, such a determination is difficult. According to EPA and state officials we interviewed, state and local permitting agencies are generally not well positioned to identify noncompliance. State and local permitting agencies routinely inspect units, but officials told us these inspections focus on compliance with the terms of existing operating permits, not on whether an owner failed to obtain a permit. Several EPA and state officials told us that, given the complexity of most units, routine compliance inspections are not well suited to detect NSR violations, in part because it is difficult to distinguish work that might be considered a major modification from other work that is routine. According to one EPA official, to identify noncompliance with NSR, agency investigators need to identify what changes have already occurred; gather information on the nature of these changes; and determine whether NSR should have applied at the time the changes occurred, considering all possible exclusions and other factors. EPA officials we spoke with said that this process requires investigators to analyze information on historic emissions and a large volume of records on work conducted over the course of a unit's life. According to these and other EPA officials, such extensive review would not be possible during routine compliance inspections. Several state and EPA officials we spoke with also said that, given the complexity and case-by-case nature of NSR, state and local agencies generally do not have the resources--and in some cases expertise--to detect noncompliance. As result, several state officials we spoke with said they rely on EPA to identify instances of noncompliance with NSR. EPA has therefore taken a lead role in enforcing NSR, beginning in the mid-1990s and continuing to the present. In 1996, EPA began targeting older, coal-fired generating units for compliance assessments and, on the basis of its investigations, alleged that several of the largest coal-fired electricity generating units in the country had violated NSR provisions by making major modifications without obtaining an NSR permit. In 1999 and early 2000, after receiving a number of cases from EPA, DOJ filed seven enforcement actions in U.S. federal courts in what is known as EPA's Coal-Fired Power Plant Enforcement Initiative. For their part, owners of units targeted by the NSR enforcement initiative contended that, among other things, their projects should have qualified for the routine maintenance exclusion. Nonetheless, almost all of these cases ultimately resulted in settlements mandating the installation of emissions controls and civil penalties. Since then, EPA and DOJ have continued this enforcement initiative and secured additional settlements for alleged noncompliance with NSR. According to EPA, steps to develop an NSR enforcement case include: 1. Section 114 requests. Under Section 114 of the Clean Air Act, EPA may obtain information from owners of generating units to determine whether violations have occurred. Such information includes detailed cost information on capital construction projects suspected to be NSR violations. According to EPA officials, collecting and reviewing such information can take several months to over a year. 2. Settlement negotiations. After reviewing generating units' records, EPA determines whether NSR violations have occurred. If EPA determines that the unit is not in compliance, it will notify owners of generating units and encourage the owner to install emissions controls. EPA initially tries to resolve noncompliance through a settlement. 3. Referral. If settlement negotiations are unsuccessful, EPA will determine whether enough evidence exists to refer the case to DOJ for potential litigation. DOJ then reviews the accumulated evidence and determines whether there is merit to file suit against the company. Before filing the case in court, DOJ generally discusses the matter with the owner in a further attempt to settle. According to EPA and DOJ officials, EPA's investigations for NSR compliance, and subsequent enforcement actions, take a long time to conclude and involve substantial EPA resources. In instances where EPA's investigations have uncovered suspected violations, it can take years to litigate a case or bring it to conclusion through a settlement. Specifically, the 22 settlements resulting from EPA's enforcement initiative took, on average, 7 years to conclude. According to several industry representatives we interviewed, these efforts have also placed a large burden on owners and operators of generating units, given the amount of information required on past activities at the unit. Available data, while not complete, suggest that a substantial number of generating units have not complied with requirements to obtain NSR permits. Complete data on NSR compliance do not exist for two primary reasons. First, EPA has not yet investigated all electricity generating units for compliance with requirements to obtain NSR permits. Second, NSR compliance is determined at a point in time, and EPA's interpretation of compliance has, in some cases, differed from that of federal courts. Nonetheless, EPA has investigated a majority of coal-fired generating units, and data from these investigations suggest that a substantial number of generating units have not complied. From our review of relevant documentation and EPA-provided data, we identified two primary reasons why complete data on NSR compliance are not available. First, EPA has not yet investigated all generating units for NSR compliance, and second, available data do not provide a complete picture of compliance. EPA has investigated most--but not all--coal-fired generating units for compliance with NSR at least once. According to our review of EPA- provided documents and data, EPA has investigated 831 generating units at least once since it began its Coal-Fired Power Plant Enforcement Initiative. These 831 units represent about 81 percent of all coal-fired units that generated electricity in 2010 and about 24 percent of all fossil fuel-fired units (those using coal, natural gas, or oil) that produced electricity in 2010.coal-fired units--have not been investigated by EPA. According to EPA officials we interviewed, the agency has focused most of its NSR compliance efforts on large, coal-fired units because they produce dramatically higher levels of harmful air emissions. Most natural gas units--as well as some smaller Data on units investigated by EPA are not conclusive because compliance is determined at a point in time; therefore, subsequent changes to the unit could affect its future compliance with NSR. NSR is required each time an existing generating unit undertakes a major modification. Thus, an owner of electricity generating unit that has obtained an NSR permit in the past--or was subject to an EPA investigation--is not exempt from the requirement to obtain an NSR Moreover, allegations of permit for any future major modifications. noncompliance stemming from EPA's investigations do not necessarily mean that a violation has occurred, because in some cases federal courts have ultimately disagreed with EPA about the need for an NSR permit. Given these issues, it is difficult to provide a comprehensive assessment of NSR compliance at any given time. Although units must undergo NSR review for major modifications, some of the settlement agreements EPA has reached with electricity generating units include a provision precluding EPA, in certain circumstances, from suing the owner for making a major modification and not undergoing NSR. of coal-fired units that produced electricity in 2010, and about 14 percent of all fossil fuel-fired units that produced electricity in 2010. According to EPA, the Coal-Fired Power Plant Enforcement Initiative is perhaps the most comprehensive and coordinated enforcement effort under the Clean Air Act to date. The initiative has led to 22 settlements covering a total of 263 units, or approximately 32 percent of the units EPA has investigated. According to our analysis of EPA data, the settlements will require affected unit owners to install and operate emissions controls costing an estimated $12.8 billion in total and levy civil penalties totaling around $80 million. Some companies are also required to fund environmentally beneficial projects, such as restoring watersheds and forests in national parks. These settlements are projected to reduce sulfur dioxide emissions by more than 1.8 million tons annually and nitrogen oxides emissions by about 596,000 tons annually. reached companywide settlements in which companies agreed to put emissions controls on units constituting most of their production capacity. Two of the largest settlements--with American Electric Power and the Tennessee Valley Authority--represent 105 units, around 40 percent of the total, and about $8.6 billion in control costs, or around two-thirds of the total. A senior Department of Justice official we interviewed said that, in addition to the 22 concluded settlements, 7 additional NSR cases are in various stages of litigation. See appendix III for more details on EPA's concluded NSR settlements. These reductions are to be phased in over an agreed-upon time frame, often 10 years. substantial number of generating units EPA investigations have allegedly found to be noncompliant suggests that many generating units have not obtained NSR permits as required. Addressing NSR's complexity and improving compliance could reduce the need for long and resource- intensive enforcement actions and more effectively protect air quality by averting emissions before they occur. Yet EPA's ability to simplify NSR or develop comprehensive, nationwide guidance is limited for several reasons, including the case-by-case nature of NSR applicability, ongoing litigation, and the variation in NSR requirements across states. Nonetheless, EPA has an opportunity to improve its efforts by collecting more comprehensive NSR permitting data. Several EPA regional offices maintain some information on the NSR permits issued by the state and local permitting agencies in their regions, but this information is in different formats and not compiled by EPA into a complete and centralized source of information on NSR permits issued nationwide, as recommended by the National Research Council in 2006. More complete information on NSR permitting would help EPA and external parties gauge the extent to which fossil fuel generating units have obtained NSR permits and help inform enforcement efforts that have already found widespread alleged noncompliance. In cases where unit owners apply for permits before making physical or operational changes that would result in a significant net increase of emissions, EPA plays an important role because it has an opportunity to comment on every draft NSR permit under consideration by state and local permitting agencies and to influence decisions about the appropriate level of pollution control, among others. A key benefit of EPA's involvement in the permitting process is that the agency can review and comment on permits issued in different geographic areas and assess various aspects of draft permits, including the level of emissions control required. Because emissions controls can cost owners and operators of generating units hundreds of millions of dollars, EPA's review of the required level of emissions control is critically important. Although EPA and headquarters staff devote resources to commenting on draft permits, EPA does not track whether state and local permitting agencies incorporate the agency's comments. Without such information, EPA cannot fully assess the extent to which state and local agencies incorporate its comments in NSR permits or the extent to which emissions control requirements imposed by state and local permitting agencies reflect suggestions made by EPA in its comments. To help improve EPA's implementation of NSR, we recommend that the EPA Administrator direct the entities responsible for implementing and enforcing NSR--specifically, the Office of Enforcement and Compliance Assurance, Office of Air Quality Planning and Standards, and EPA regions--to take the following two actions: Working with EPA regions and state and local permitting agencies, consider ways to develop a centralized source of information on NSR permits issued to fossil fuel electricity generating units, and Using appropriate methods, such as sampling or periodic assessments, develop a process for evaluating the effects of its comments on draft NSR permits. We provided a draft of this report to the Department of Energy, the Department of Justice, and Environmental Protection Agency (EPA). The Department of Energy said they had no comments on the report's findings and recommendations. The Department of Justice provided technical comments, which we incorporated as appropriate. EPA provided written comments, a copy of which can be found in appendix IV. In its written comments, EPA agreed with the importance of having good systems for tracking and compiling information to efficiently and effectively administer its programs, while enhancing accountability and transparency, but disagreed with the need for the actions called for in our recommendations. Regarding our first recommendation that EPA work with state and local permitting authorities to consider ways to develop a centralized source of information on permits issued to electric generating units, EPA said that it believes it has a number of permit tracking mechanisms in place, and raised four concerns about our recommendation. First, EPA said that it has maintained a centralized permit information database for many years--the RACT/BACT/LAER Clearinghouse, which is capable of capturing and sharing information on NSR permits that have been issued. However, EPA acknowledged that this database is incomplete--including about half of issued NSR permits--primarily because, in some areas, state and local agencies are not required to enter information about the permits they issue. Nonetheless, EPA said it is taking steps to improve participation. We continue to believe that comprehensive permitting data would enable EPA, Congress, and other interested parties to better understand the scope and impact of NSR. Second, EPA said that its regional offices track NSR permitting by the states in their jurisdiction and that the agency believes it is most appropriate for the regional offices, rather than headquarters, to be responsible for this information. However, our work found that the tracking of NSR permits by EPA's regional office varied in completeness. For example, of the four regions we included in our sample, one region had a robust system for tracking issued NSR permits, and one had no system at all. EPA also said that its regional offices provide oversight of state and local agencies and that an EPA-wide compilation of permit data would be redundant, add costs, and provide little benefit to its oversight function. We continue to believe that a centralized source of complete information on NSR permits would enhance EPA's oversight of state and local permitting agencies and help ensure consistency across regions. EPA headquarters could build on the ongoing efforts of some regional offices and develop more complete data using a simple, low-cost system. For example, we found that two regional offices use a spreadsheet to compile and maintain basic data on permits issued by state and local agencies. Additionally, we believe that any costs incurred in developing more comprehensive data should be considered relative to the benefits that could accrue from having better information on the universe of permitted facilities including, as noted by the National Research Council, the ability to assess the impact of policy changes. Third, EPA said that a centralized database of all NSR permits would not help most members of the public because most members of the public are interested in permits issued to specific facilities rather than the entire universe of all permits issued. Our report focused on the importance of more complete data to enhance programwide oversight of NSR permitting and targeting of enforcement efforts. More complete data could potentially assist the public and other interested parties in understanding the extent of NSR permitting for individual facilities, but this was not the basis of our findings and recommendations. We continue to believe that a centralized source of permitting data is important for EPA's oversight of state and local permitting agencies and to enhance its enforcement efforts. Fourth, EPA questioned the value of more comprehensive information in targeting noncompliance with requirements to obtain permits. Specifically, EPA said that identifying noncompliance involves targeting facilities that should have obtained permits but did not and that information on facilities that have obtained permits would not assist in these efforts. Moreover, EPA said that getting data on noncompliant sources is time- and resource-intensive. We continue to believe that compiling complete information on facilities that have obtained permits could help identify facilities that have not obtained permits and enhance targeting of these facilities for potential noncompliance. We also believe that understanding which facilities have obtained permits as required could decrease these time and resource demands because the agency would have a better starting point for identifying noncompliance. Regarding our second recommendation that EPA develop a process for evaluating the effect of its comments on issued permits, the agency said that its regional offices already do so and described the interactions between these offices and state and local agencies during the permitting process. EPA also said that its regional offices already conduct oversight of state and local permitting agencies, including whether these agencies adequately address EPA's comments on draft permits. We acknowledge these efforts in the report and believe that, as part of its overall oversight of nationwide permitting efforts, EPA headquarters could benefit from a broader and more comprehensive assessment of the extent to which its comments on draft permits were adequately considered and incorporated. Because the terms of issued permits can result in the installation of pollution controls that cost hundreds of millions of dollars, it is important to conduct higher level review of issued permits to identify variability in the terms of issued permits across geographic areas. We therefore continue to believe that implementing this recommendation would enhance oversight of NSR permitting nationwide and that EPA has an opportunity to build on the information already collected through the oversight activities of its regional offices. EPA also provided technical comments that we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Administrator of EPA, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact David Trimble at (202) 512-3841 or [email protected] or Frank Rusco 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 contributors to this report are listed in appendix V. To assess what information the Environmental Protection Agency (EPA) maintains on New Source Review (NSR) permits issued for fossil fuel electricity generating units, we gathered information from EPA and selected states on the status of their NSR permitting programs and efforts to collect and maintain permitting data. We selected a nonprobability sample of nine states on the basis of (1) the number of older electricity generating units in the state; (2) the quantity of electricity generated by such units in those states; (3) the volume of sulfur dioxide, nitrogen oxides, and carbon dioxide emitted by units in those states; and (4) the region in which the generating unit was located. We obtained these data from the Ventyx Velocity Suite EV Market-Ops database, a proprietary database containing consolidated energy and emissions data from EPA, the Energy Information Administration (EIA), and other sources. To assess the reliability of the Ventyx data, we reviewed documentation provided by Ventyx and tested key variables to verify their accuracy and determined the Ventyx data to be sufficiently reliable for our purposes. The nine states we selected were Alabama, Georgia, Indiana, Kentucky, Missouri, New York, North Carolina, Ohio, and Pennsylvania. To assess how permitting information is collected and used, we reviewed relevant documentation from these nine states and from EPA. We also interviewed permitting officials from these nine states, the four EPA regional offices that oversee these states, EPA's Office of Air and Radiation, its Office of Inspector General, and its Office of Enforcement and Compliance Assurance. In three of the states, some localities are responsible for NSR permitting; we also spoke with officials at two of those localities, which we selected on the basis of the number of older units in their jurisdictions. To examine what challenges, if any, EPA, state, and local agencies face in ensuring compliance by electricity generating units with requirements to obtain NSR permits, we reviewed relevant provisions of the Clean Air Act and NSR regulations; guidance and other information on implementing NSR maintained by EPA; and literature on NSR from government agencies, academic and research institutions, environmental organizations, and industry groups. We also interviewed knowledgeable officials and stakeholders from these agencies and institutions, as well as officials from the selected states and localities. To review what available data show about compliance with requirements to obtain NSR permits, we reviewed information published by EPA on the estimated rate of noncompliance by industrial sectors. We also reviewed information on EPA's enforcement activities maintained by enforcement officials in EPA's Office of Enforcement and Compliance Assurance, including (1) data on notices of violation sent to owners of generating units alleging noncompliance with NSR; (2) lawsuits filed in court for alleged NSR violations; and (3) information on the settlements concluded by EPA and the Department of Justice with owners of generating units, which ended or prevented lawsuits alleging noncompliance. To assess the reliability of the EPA-provided data, we interviewed knowledgeable agency officials and tested key variables to verify their accuracy. We determined these data to be sufficiently reliable for the purposes of our analysis. We also interviewed knowledgeable enforcement and compliance officials from EPA's headquarters Office of Enforcement and Compliance Assurance and four regional offices. We conducted this performance audit from April 2011 to June 2012, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individuals named above, Michael Hix (Assistant Director), Ellen W. Chu, Philip Farah, Cindy Gilbert, Jessica Lemke, Jon Ludwigson, Nancy Meyer, Mick Ray, and Jeanette Soares made key contributions to this report.
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Electricity generating units that burn fossil fuels supply most of the nation's electricity and are major sources of air pollution. Under the Clean Air Act, such units are subject to NSR, a permitting process that applies to (1) units built after August 7, 1977, and (2) existing units that undertake a major modification. Owners of such units must obtain from the appropriate permitting agency a preconstruction permit that sets emission limits and requires the use of certain pollution control technologies. EPA oversees states' implementation of NSR, including reviewing and commenting on draft permits issued by state and local permitting agencies. GAO was asked to examine (1) what information EPA maintains on NSR permits issued to fossil fuel electricity generating units; (2) challenges, if any, that EPA, state, and local agencies face in ensuring compliance with requirements to obtain NSR permits; and (3) what available data show about compliance with requirements to obtain NSR permits. GAO reviewed relevant documentation and interviewed EPA, state, and local officials, as well as representatives from industry, research, and environmental groups. The Environmental Protection Agency (EPA) does not maintain complete information on New Source Review (NSR) permits issued to fossil fuel electricity generating units. State and local permitting agencies track the NSR permits they issue, but EPA does not maintain complete or centralized information on permits, despite a 2006 recommendation by the National Research Council that it do so. EPA maintains several databases that compile data on draft and issued NSR permits, but these sources are incomplete and thus cannot be used to identify all of the NSR permits that have been issued nationwide. In addition, EPA has the opportunity to review and comment on every draft NSR permit issued by state and local permitting agencies, but it does not compile data on whether the permitting agencies address EPA's comments in final permits. The absence of more complete information on NSR permitting makes it difficult to know which units have obtained NSR permits or to assess how state and local permitting agencies vary from EPA in their interpretations of NSR requirements. Officials from EPA, state, and local agencies face challenges in ensuring that owners of fossil fuel electricity generating units comply with requirements to obtain NSR permits. Many of these challenges stem from two overarching issues. First, in some cases it is difficult to determine whether an NSR permit is required. NSR applicability depends on, among other factors, whether a change to a unit qualifies as routine maintenance, repair, and replacement; and whether the change results in a significant net increase in emissions. The rules governing NSR are complex, however, and applicability is determined on a case-by-case basis. Second, it is often difficult to identify noncompliance--instances where unit owners made a major modification without first obtaining an NSR permit--partly because owners of generating units determine whether a permit is needed, and in many cases their determinations are not reviewed by permitting agencies or EPA. State permitting agencies generally issue NSR permits, but EPA typically leads enforcement efforts, since identifying instances of noncompliance involves extensive investigations that go beyond the routine inspections conducted by state and local permitting agencies. EPA identifies NSR noncompliance through a lengthy, resource-intensive process that involves reviewing large amounts of information on units' past emissions and construction activities. Available data on compliance, although incomplete, suggest that a substantial number of generating units did not comply with requirements to obtain NSR permits. Complete NSR compliance data do not exist for two main reasons: (1) EPA has not yet investigated all generating units for compliance, and (2) NSR compliance is determined at a point in time, and in some cases federal courts have disagreed with EPA about the need for an NSR permit. Nonetheless, EPA has investigated most coal-fired generating units at least once, and has alleged noncompliance at more than half of the units it investigated. Specifically, of the 831 units EPA investigated, 467 units were ultimately issued notices of violation, had complaints filed in court, or were included in settlement agreements. In total, EPA reached 22 settlements covering 263 units, which will require affected unit owners to, among other things, install around $12.8 billion in emissions controls. These settlements will reduce emissions of sulfur dioxide by an estimated 1.8 million tons annually, and nitrogen oxides by an estimated 596,000 tons annually. GAO recommends that EPA, among other actions, consider ways to develop a centralized source of data on NSR permits issued to electricity generating units. EPA expressed its commitment to filling gaps in its data systems, but disagreed with the actions GAO recommended. GAO believes that its recommendations would enhance oversight of NSR permitting and enforcement.
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According to ONDCP, disrupting the illicit flow of drugs will reduce their availability, increase their cost, and eventually, reduce the rate of illicit drug usage. One part of the ONDCP strategy to disrupt the illicit drug market focuses interdiction efforts on seizing cocaine and other illicit drugs in the transit zone that are bound for the United States (arrival zone) from South America (source zone). Virtually all of the cocaine shipped to the United States travels through the transit zone from South America--entering Central America, Mexico, and the Caribbean en route to the United States. The transit zone is a 6 million square mile area that encompasses Central America, Mexico, the eastern Pacific Ocean, the Gulf of Mexico, and the Caribbean Sea. The transit zone is divided into four maritime trafficking routes: Eastern Pacific, Western Caribbean, Central Caribbean, and Eastern Caribbean. Drug traffickers use go-fast boats, fishing vessels, submersible vessels, noncommercial aircraft, and other types of conveyances to smuggle cocaine from the source zone to Central America, Mexico, and the Caribbean en route to the United States. ONDCP's strategy for drug interdiction in the transit zone is focused on cocaine because ONDCP has identified cocaine as a leading drug threat to the United States. According to Coast Guard officials, the largest estimated share of cocaine has been smuggled through the Eastern Pacific and Western Caribbean routes of the transit zone for nearly two decades. For example, the principal source of information about cocaine flow in the transit zone is the CCDB. According to the CCDB, in fiscal year 2013, approximately 84 percent of the estimated cocaine flow, as measured in metric tons, was by noncommercial maritime means through these two routes. Figure 1 shows a map indicating the source, transit, and arrival zones--with the fiscal year 2013 estimated noncommercial maritime cocaine flow through the four smuggling routes and the locations of Puerto Rico and the U.S. Virgin Islands within the transit zone. As the southernmost points of entry into the United States and the only U.S. territories within the transit zone, Puerto Rico and the U.S. Virgin Islands are key entry points for illicit drugs being smuggled into the United States. Like the continental United States, Puerto Rico and the U.S. Virgin Islands are considered part of the arrival zone, yet they are located geographically within the Eastern Caribbean route of the transit zone. According to a 2011 Department of Justice National Drug Intelligence Center report, Puerto Rico and the U.S. Virgin Islands are attractive targets for illicit drug smuggling because of their proximity to the source zone and Puerto Rico's location within the United States' Customs zone. According to Coast Guard officials, the illicit drug flow through the Central and Eastern Caribbean routes generally consists of maritime smuggling from South America to the Dominican Republic and eventual transshipment to Puerto Rico (secondary flow) and, to a lesser extent, maritime smuggling directly from South America to Puerto Rico and the U.S. Virgin Islands (primary flow). CCDB drug flow estimates show that in fiscal year 2013, about 3 percent of the cocaine flow in the transit zone was smuggled toward Puerto Rico and the U.S. Virgin Islands. The Department of Justice has reported that most of this flow is destined for the continental United States--with the rest remaining on the islands for local consumption. However, estimates indicate that illicit cocaine smuggling toward Puerto Rico and the U.S. Virgin Islands has increased each year since fiscal year 2009. For example, according to CCDB estimates, cocaine flow toward Puerto Rico and the U.S. Virgin Islands has more than doubled in recent years, from 6.4 metric tons in fiscal year 2009 to 17.3 metric tons in fiscal year 2013. Federal and local government officials in Puerto Rico and the U.S. Virgin Islands have raised concerns about the illicit drug flow and have identified it as a key contributor to the high levels of murder and other violent crime on the islands. In particular, homicide rates in the two territories have risen in recent years, and federal and local officials have linked the rise of the homicide rates, in part, to illicit cocaine trafficking on the Island. According to a 2014 study by the United Nations Office on Drugs and Crime, the 2010 homicide rate in Puerto Rico was about 27 per 100,000 persons and in the U.S. Virgin Islands it was about 53 per 100,000 persons--more than 5 times (Puerto Rico) and 11 times (U.S. Virgin Islands) the U.S. national rate. According to a 2011 report issued by the High Intensity Drug Trafficking Area office that oversees the territories, most of this violence is associated with turf wars for control over the local drug market. JIATF-S relies on DHS (Coast Guard and CBP) and the Department of Defense (Navy) to provide vessels and aircraft for conducting drug interdiction operations in the transit zone. JIATF-S also receives operational resources from allied countries, with Canada, the Netherlands, and the United Kingdom providing maritime detection and monitoring assistance. According to JIATF-S and Coast Guard officials, the JIATF-S strategy is to use its available vessel and aircraft resources to patrol the transit zone far from U.S. shores and close to the source zone countries in South America in order to increase chances the interdictions are of larger load sizes and higher purity than would otherwise be the case and to cause greater disruption to illicit drug- smuggling organizations. JIATF-S officials reported deploying the majority of available vessels and aircraft to patrol the Eastern Pacific and Western Caribbean routes of the transit zone because the routes have accounted for the largest drug flow--and therefore deploying resources to these routes will have the greatest impact on efforts to disrupt cocaine flow. The Coast Guard is the lead federal agency for maritime drug interdiction in the transit zone, and its operations with JIATF-S are a key element of the Coast Guard's counter-drug efforts. Overall, the Coast Guard is a major contributor of JIATF-S vessel and aircraft resources. The resources the Coast Guard provides to JIATF-S generally include major cutters, maritime patrol aircraft (planes), and helicopters capable of deploying airborne use of force (AUF). In addition, the Coast Guard provides JIATF-S with deployable specialized forces--specifically Law Enforcement Detachments (LEDET)--embarked on U.S. naval and allied vessels. We discuss AUF and LEDETs in more detail later in this report. The Coast Guard's process for allocating drug interdiction resources is focused on meeting commitments for strategic priorities, such as JIATF-S transit zone operations, first, before dividing up its remaining resources between its Atlantic and Pacific Area Commands. According to Coast Guard guidance and discussions with DHS officials, the Coast Guard determines the amount of resource levels--targets for the amount of time selected vessels, aircraft, and LEDETs are provided to JIATF-S--through an annual operational planning process that considers factors, including resource requirements for strategic priorities, evolving maritime risks, and the availability of the Coast Guard's fleet of vessels and aircraft. JIATF-S requests for resource requirements specify the capabilities (types of vessels or aircraft) and corresponding capacities (number of days for vessels or resource hours for aircraft) for the Coast Guard, CBP, and the Department of Defense. The Coast Guard reviews JIATF-S resource requirement requests, sets resource deployment targets for JIATF-S, and communicates these targets to DHS for inclusion in a DHS-wide Statement of Intent of planned deployments to JIATF-S. The Coast Guard then allocates its remaining available resources to the Atlantic and Pacific Area Commands, which further allocate the resources for implementing the Coast Guard's 11 missions, including drug interdiction. See appendix I for more details on the Coast Guard's drug interdiction mission resource allocation process. Unlike with overall transit zone operations, JIATF-S does not oversee detection and monitoring efforts for drug smuggling in the U.S. territories.and coordinating operations to interdict the maritime flow of illicit drugs in Puerto Rico and the U.S. Virgin Islands because they are U.S. territories and part of the arrival zone. In addition to the Coast Guard, CBP's Puerto Rico-based Caribbean Air and Marine Branch conducts marine interdiction and patrol operations using a mix of planes, helicopters, and Rather, DHS has the lead federal responsibility for planning small boats for coastal drug interdiction operations, generally within U.S. territorial waters. The Puerto Rico Police Department also deploys small boats for drug interdiction operations. Overall, from fiscal years 2009 through 2013, the amount of resources the Coast Guard provided to JIATF-S--including vessels, aircraft, and LEDETs--varied. During this period, the Coast Guard generally did not meet annual targets for its primary drug interdiction mission performance measure. Coast Guard officials cited the declining readiness of the Coast Guard's aging major cutter fleet; delays in the delivery of new, more capable replacement cutters; and budget constraints, including sequestration, as key factors affecting the Coast Guard's ability to meet its resource deployment and drug interdiction mission performance targets. Figure 2 shows the key resources the Coast Guard uses to support drug interdiction operations. The Coast Guard's deployment of vessels to JIATF-S to carry out drug interdiction operations in the transit zone varied during fiscal years 2009 through 2012, and then sharply declined in 2013. Specifically, the Coast Guard's coverage targets--the planned number of days major cutters (national security cutters, high endurance cutters, and medium endurance cutters) are to operate under JIATF-S tactical control throughout the year--have varied since fiscal year 2009, and the Coast Guard has not fully met them. For example, according to Coast Guard documents, in fiscal year 2009, the Coast Guard's cutter coverage target was 2,555 days (the equivalent of 7 major cutters under JIATF-S tactical control throughout the year) and the Coast Guard provided 2,036 days--about 80 percent of its target. In fiscal year 2013, the cutter coverage target was 2,008 days (or 5.5 major cutters) and the Coast Guard provided 1,346 days--about 67 percent of its target. Overall, the Coast Guard met an average of 76 percent of its annual JIATF-S cutter coverage targets Figure 3 compares the Coast during fiscal years 2009 through 2013.Guard's cutter coverage targets with the actual cutter days provided to JIATF-S for fiscal years 2009 through 2013. The Coast Guard's primary aircraft deployments to JIATF-S are long- range maritime patrol aircraft--generally the HC-130--to detect and monitor drug smuggling activity in the transit zone. The Coast Guard also deploys helicopters--generally modified MH-65s--with marksmen on board in what is known as airborne use of force. AUF-capable helicopters are deployed aboard major cutters and allied vessels to conduct short-range patrols and pursuit actions in the transit zone using marksmen who are trained to shoot out and disable the engines of fleeing drug-smuggling vessels--a capability JIATF-S and Coast Guard officials cite as being critical to drug interdiction success. Maritime patrol aircraft: According to Coast Guard data, the number of maritime patrol aircraft hours the Coast Guard provided to JIATF-S varied during fiscal years 2009 through 2012, ending with an overall decline in 2013, although the numbers remained below target levels. As can be seen in figure 4, since fiscal year 2009, the Coast Guard's annual maritime patrol aircraft hour allocation target (the number of hours the aircraft are to be under JIATF-S tactical control) has been 4,700 hours. According to Coast Guard data, the Coast Guard approached the target in fiscal year 2011, when the Coast Guard provided 4,416 resource hours--or about 94 percent of its target. Since 2011, though, the Coast Guard has reduced the number of maritime patrol aircraft hours that it has provided to JIATF-S. Coast Guard officials attributed this reduction to a smaller HC-130 fleet size and maintenance needs, including modifications to extend the HC-130s' airframe life. In fiscal year 2013, the Coast Guard provided 3,506 maritime patrol aircraft resource hours-- roughly 75 percent of its targeted level. Airborne use of force: The Coast Guard measures its deployment of AUF to JIATF-S in the number of days AUF-capable helicopters are deployed under JIATF-S tactical control. Coast Guard data show the Coast Guard increased its AUF deployments to JIATF-S during fiscal years 2009 through 2012, before declining in 2013, while remaining below target levels. Specifically, the Coast Guard's AUF deployments increased from 1,030 days in 2009 to 1,232 days in fiscal years 2012, before declining to 1,169 days in fiscal year 2013. According to Coast Guard data, in fiscal year 2013, the Coast Guard's AUF deployment target was 1,460 days and the Coast Guard provided 1,169 days--approximately 80 percent of its AUF days target goal. Figure 5 shows the AUF deployment day targets compared with actual AUF days provided to JIATF-S during fiscal years 2009 through 2013. Beyond vessels and aircraft, the Coast Guard provides JIATF-S with LEDETs--specially trained personnel who deploy primarily aboard U.S. Navy and allied vessels to conduct maritime law enforcement operations such as boarding suspect vessels and taking custody of suspected drug smugglers in the transit zone. The Coast Guard is the only JIATF-S resource provider that has law enforcement authority and LEDET personnel deployed in maritime areas far from U.S. waters. By deploying LEDETs on Navy and allied vessels, JIATF-S increases the resources it has available for apprehending suspected drug smugglers, their contraband, and their vessels. According to Coast Guard data, and as shown in figure 6, the Coast Guard's deployment of LEDETs to JIATF-S (as measured in days) varied from fiscal years 2009 through 2013, but experienced an overall decline during this time period. The Coast Guard has not met its LEDET allocation target levels to JIATF-S since establishing targets in fiscal year 2010. The Coast Guard provided its lowest LEDET allocation to JIATF-S in fiscal year 2013, when it provided 895 days, or just under half of its targeted level of 1,825 days. According to Coast Guard officials, the Coast Guard's ability to deploy LEDETs to JIATF-S is largely dependent on the availability of Navy and allied vessels, as discussed later in this report. The Coast Guard has generally not met targets for its primary drug interdiction performance measure--removal rate for cocaine from noncommercial vessels in the maritime transit zone. According to Coast Guard officials, this measure focuses on transit zone drug operations because the Coast Guard's drug interdiction mission priority is removing illicit drugs as close to their origins in South America and as far from U.S. shores as possible, where drug shipments are in their most concentrated bulk form. The measure assesses the percentage of cocaine directly seized or observed being jettisoned, scuttled, or destroyed as a result of Coast Guard actions relative to the total known flow of cocaine through the transit zone using noncommercial maritime vessels, as estimated in the CCDB. According to Coast Guard data, since establishing performance targets for this measure in fiscal year 2009, the Coast Guard met its target in 1 year--fiscal year 2013.Coast Guard reported a cocaine removal rate of 15.3 percent in the transit zone, exceeding its performance target rate of 14.1 percent. Figure 7 shows the Coast Guard's performance in meeting this primary drug interdiction performance measure from fiscal years 2009 through 2013. The Coast Guard is supporting a DHS-wide effort to combat the growing level of violence associated with drug trafficking in Puerto Rico and the U.S. Virgin Islands. Specifically, in September 2012, DHS implemented Operation Caribbean Guard to address violence and drug trafficking into The Coast Guard's and within Puerto Rico and the U.S. Virgin Islands.role in this DHS-wide effort has been to increase vessel and aircraft operations to interdict the flow of drugs being trafficked by noncommercial maritime vessels toward the islands. Since September 2012, the Coast Guard's Seventh District has implemented a surge operation, known as Operation Unified Resolve, which has provided Sector San Juan--the Coast Guard field unit whose area of responsibility includes Puerto Rico and the U.S. Virgin Islands--with additional vessels and aircraft to regularly patrol Puerto Rico and the eastern approaches of the U.S. Virgin Islands. Operation Unified Resolve initially began as a surge operation, but in October 2013, the Coast Guard made the surge operation a standing operation--and, according to Coast Guard officials, established a new baseline for drug interdiction operations in support of Puerto Rico and the U.S. Virgin Islands. Under Operation Unified Resolve, the Coast Guard has placed special emphasis on targeting the primary and secondary flow of illicit drugs from South America to Puerto Rico and the U.S. Virgin Islands. According to Sector San Juan officials, a key challenge for the Coast Guard is the relatively short distance between the Dominican Republic and Puerto Rico. For example, officials noted that it would take approximately 4 hours for a go-fast vessel to transit the 70 to 80 miles between the Dominican Republic and Puerto Rico. Coast Guard officials reported that this places a premium on the need for good intelligence on potential drug-smuggling vessels and the effective placement of assets to interdict them. According to Coast Guard officials, the Coast Guard's decision to provide additional resources to Sector San Juan resulted from Coast Guard analyses that found Sector San Juan lacked sufficient vessels and aircraft to reduce maritime drug smuggling into Puerto Rico and the U.S. Virgin Islands. For example, according to an August 2012 Coast Guard memorandum, Sector San Juan's fleet of vessels faced readiness concerns and lacked the capability to effectively conduct operations against the primary drug flow of go-fast boats smuggling illicit drugs from South America into Puerto Rico and the U.S. Virgin Islands. Further, the memorandum notes that the Coast Guard did not have maritime patrol aircraft permanently assigned to the territories. According to the memorandum, the only permanently assigned Coast Guard aircraft in Puerto Rico were helicopters based in the northwest corner of the island and their endurance and position made them impractical for patrolling the eastern approaches to Puerto Rico and the U.S. Virgin Islands. Coast Guard officials reported that the Coast Guard has not received additional resources to support Operation Unified Resolve. Rather, to implement the operation, the Coast Guard reported that it supplemented its annual allocation of vessels and aircraft to Sector San Juan by reallocating medium endurance cutters and maritime patrol aircraft to Puerto Rico from other locations within the Coast Guard--largely from the Coast Guard's Seventh District. According to Coast Guard officials, these vessels and aircraft, in general, had previously been allocated for alien migrant interdiction operations. As noted earlier and as further described in appendix I, the Coast Guard's process for allocating drug interdiction resources is focused on meeting commitments for strategic priorities, such as JIATF-S transit zone operations, first, before dividing up its remaining resources among its field locations such as Sector San Juan. In this way, the Coast Guard reported that the additional resources provided for Operation Unified Resolve did not come at the expense of its JIATF-S deployments. Beyond Operation Unified Resolve, the Coast Guard is scheduled to modernize Sector San Juan's vessel fleet. According to Coast Guard officials, during fiscal years 2015 and 2016, the Coast Guard plans to replace Sector San Juan's six 110-foot patrol boats with six new 154-foot fast response cutters (FRC). According to Coast Guard officials, the FRCs' impact on the drug interdiction mission will be significant, as the FRC is expected to provide (1) increased interdiction capabilities; (2) improved sea keeping; (3) greater endurance; (4) the ability to deploy a pursuit-capable small boat; (5) improved weapons systems; and (6) improved command, control, and communications systems. Coast Guard officials reported that Sector San Juan would accommodate a mix of the new FRCs and 110-foot patrol boats until the 110-foot patrol boats are phased out by the end of fiscal year 2016. According to senior officials from Sector San Juan, the additional resources Sector San Juan is utilizing for Operation Unified Resolve, along with the scheduled arrival of the six FRCs by the end of 2016, will put Sector San Juan in a better position to meet its mission needs. According to Coast Guard data, the total amount of vessel hours in support of drug interdiction operations in the Sector San Juan area of responsibility more than tripled in recent years--from 2,051 hours in fiscal year 2009 to 6,839 hours in fiscal year 2013. According to the data, much of the increase in vessel drug interdiction operational hours occurred from fiscal years 2012 through 2013, when the Coast Guard was implementing Operation Unified Resolve. Coast Guard data show that medium endurance cutters accounted for a rising share of the drug interdiction vessel operational hours, increasing from 3 percent in fiscal year 2011 to 28 percent in fiscal year 2013. In fiscal year 2013, drug interdiction operations accounted for 40 percent of reported medium endurance cutter and patrol boat hours in the Sector San Juan area of responsibility.operational hours in support of the drug interdiction mission has risen since 2009 in response to increased drug-smuggling events and the additional resources provided for Operation Unified Resolve beginning in late fiscal year 2012. According to Coast Guard officials, the number of vessel Figure 8 shows the total vessel hours (major cutter and patrol boat hours) the Coast Guard reported for conducting drug interdiction operations in the Sector San Juan area of responsibility during fiscal years 2009 through 2013, as well as, the relative share of the vessel hours provided by Sector San Juan and other Coast Guard locations. According to Coast Guard data, maritime patrol aircraft resource hours reported for drug interdiction operations in the Sector San Juan area of responsibility declined during fiscal years 2009 through 2011, before increasing considerably in fiscal years 2012 and 2013. For example, in fiscal year 2011, the Coast Guard reported conducting 148 flight hours patrolling Puerto Rico and the U.S. Virgin Islands, and this number more than tripled to 502 hours in fiscal year 2012 before doubling to 1,000 hours in fiscal year 2013. The Coast Guard attributes this considerable increase of flight hours in recent years to increased aircraft provided in support of Operation Unified Resolve. Since implementing Operation Unified Resolve in September 2012, the Coast Guard has conducted surveillance patrols of Puerto Rico and the U.S. Virgin Islands using maritime patrol aircraft and crews forward deployed from Coast Guard field locations in the continental United States. Figure 9 shows the Coast Guard's maritime patrol aircraft hours in support of drug interdiction operations in the Sector San Juan area of responsibility during fiscal years 2009 through 2013. Coast Guard officials reported that the additional resources the Coast Guard provided for Operation Unified Resolve have led to increasing interdictions of illicit drugs being smuggled in and around Puerto Rico and the U.S. Virgin Islands. According to Coast Guard officials, as of March 25, 2014, Operation Unified Resolve had led to the removal of 32,669 kilograms of cocaine and roughly 11,000 pounds of marijuana. Further, Coast Guard officials reported that since deploying additional vessels and aircraft for Operation Unified Resolve in September 2012, the Coast Guard found the estimated primary flow of cocaine into Puerto Rico to be considerably higher than previously thought. For example, according to CCDB data provided by the Coast Guard, the estimated noncommercial maritime primary flow of cocaine toward Puerto Rico and the U.S. Virgin Islands more than doubled, from 7.1 metric tons in fiscal year 2012 to 14.9 metric tons in fiscal year 2013.and secondary noncommercial maritime drug flow toward Puerto Rico and the U.S. Virgin Islands during fiscal years 2009 through 2013. We are not making recommendations in this report. We provided a draft of this report to DHS, the Department of Justice, ONDCP, and JIATF-S for review and comment. We received technical comments that we have incorporated, as appropriate. We are sending copies of this report to the Secretary of Homeland Security, the Commandant of the Coast Guard, and appropriate congressional committees. In addition, this report is available at no charge on GAO's web-site at http://gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9610 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Staff acknowledgments are provided in appendix III. This appendix provides a summary of the Coast Guard's process for allocating vessels, aircraft, and other resources for its drug interdiction mission. The Coast Guard's process for allocating drug interdiction resources is focused on meeting commitments for strategic priorities, including for the Joint Interagency Task Force South (JIATF-S)--a reporting unit of the Department of Defense's Southern Command that oversees detection and monitoring operations of drug-smuggling events in the transit zone. The Coast Guard allocates drug interdiction resources for these strategic priorities, first, before dividing up its remaining resources among its Atlantic and Pacific Area Commands for further allocation to Coast Guard districts and sectors across the United States. The Coast Guard determines the targets for the amount of time selected vessels, aircraft, and law enforcement detachments (LEDET) are provided to JIATF-S for transit zone operations--through an annual operational planning process that considers factors including resource requirements for strategic priorities, evolving maritime risks, and the availability of vessels and aircraft. Through this process, the Coast Guard reviews JIATF-S resource requests and sets resource targets. The Coast Guard then allocates the remaining resources among its field locations across the United States for implementing 11 missions, including drug interdiction. In general, the Coast Guard's annual drug interdiction resource allocation planning process includes four steps. First, JIATF-S submits its resource allocation requirements for meeting National Drug Control Strategy targets to the Department of Homeland Security (DHS) and the Department of Defense as directed by the National Interdiction Command and Control Plan. These requirements specify the capabilities (types of vessels or aircraft) and corresponding capacities (number of days for vessels or resource hours for aircraft). The DHS Office of Policy's Counter Illicit Trafficking Section communicates the resource requests to the Coast Guard with resource hour requests for Coast Guard cutters, boats, aircraft, and LEDETs. Second, Coast Guard planners determine the amount of resources that the Coast Guard intends to provide in the upcoming fiscal year. The Coast Guard considers its support for JIATF-S drug interdiction operations as one of three strategic commitment priorities. In this way, Coast Guard planners determine the number of vessel days and aircraft hours to provide to JIATF-S before allocating remaining vessels and aircraft to its field locations across the United States for other missions (as described in more detail below). The Coast Guard determines its JIATF-S resource targets based on various factors, including strategic priority and resource availability. Third, the Coast Guard provides its JIATF-S resource target--or Statement of Intent--to the DHS Office of Counter Illicit Trafficking, which liaises with JIATF-S and the Office of National Drug Control Policy (ONDCP). The Statement of Intent details target levels of resources the Coast Guard intends to provide to JIATF-S for the next fiscal year. The Statement of Intent outlines asset availability level targets for major cutters, maritime patrol aircraft, and other resources, such as deployable forces. DHS then combines the Coast Guard Statement of Intent with those of Customs and Border Protection (CBP) and submits an overall DHS Statement of Intent to ONDCP and JIATF-S. Fourth, after allocating resources for JIATF-S and other strategic commitments, the Coast Guard divides its remaining resource hours for vessels and aircraft between its Pacific and Atlantic Area Commands. Coast Guard officials reported that the Coast Guard's field units use a greater variety of vessels for coastal drug interdiction operations than provided to JIATF-S. These generally include the 110-foot patrol boats in addition to a variety of smaller boats. For example, whereas the Coast Guard generally provides major cutters to JIATF-S, field units rely on a greater variety of smaller vessels to conduct coastal drug interdiction operations because the missions are conducted much closer to shore than are JIATF-S operations. Outside of JIATF-S, the Coast Guard's Seventh District (headquartered in Miami, Florida, and having responsibility for the Caribbean area including Puerto Rico and the U.S. Virgin Islands) and Eleventh District (headquartered in Alameda, California, and having responsibility for the Eastern Pacific area, including coastal areas from the U.S.-Mexico border to South America) have accounted for the largest shares of the Coast Guard's drug interdiction resource hours. According to Coast Guard officials, these districts' areas of responsibility include high drug-trafficking areas, and therefore drug interdiction accounts for a larger mission focus than at other Coast Guard districts. From fiscal years 2009 through 2013, the Coast Guard's budget included about $1.2 billion per year for its drug interdiction mission. This mission accounted for between 10 and 12 percent of the Coast Guard's budget during this time. The Coast Guard reported, based on the enacted fiscal year 2014 budget, that its fiscal year 2014 estimate to perform the drug interdiction mission is $1,305,271,000. Figure 10 shows the flow of the Coast Guard drug interdiction resource allocation process. This appendix identifies and describes the Department of Homeland Security (DHS) component agencies involved in Operation Caribbean Guard. In September 2012, DHS implemented Operation Caribbean Guard to intercept illegal weapons, drugs, and money flowing to and from Puerto Rico and the U.S. Virgin Islands. Operation Caribbean Guard is a DHS-wide surge effort involving multiple component agencies. Table 2 identifies DHS component agencies involved in Operation Caribbean Guard and reported examples of actions they have taken. In addition to the contact named above, Christopher Conrad (Assistant Director), Jason Berman, Michele Fejfar, Eric Hauswirth, Susan Hsu, Tracey King, and Lerone Reid made key contributions to this report. Coast Guard: Observations on Progress Made and Challenges Faced in Developing and Implementing a Common Operational Picture. GAO-13-784T. Washington, D.C.: July 31, 2013. Coast Guard: Clarifying the Application of Guidance for Common Operational Picture Development Would Strengthen Program. GAO-13-321. Washington, D.C.: April 25, 2013. International Affairs: Status of Funding, Equipment, and Training for the Caribbean Basin Security Initiative. GAO-13-367R. Washington, D.C.: March 20, 2013 Coast Guard: Portfolio Management Approach Needed to Improve Major Acquisition Outcomes. GAO-12-918. Washington, D.C.: September 20, 2012. Coast Guard: Legacy Vessels' Declining Conditions Reinforce Need for More Realistic Operational Targets. GAO-12-741. Washington, D.C.: July 31, 2012. Observations on the Coast Guard's and the Department of Homeland Security's Fleet Studies. GAO-12-751R. Washington, D.C.: May 31, 2012. Coast Guard: Action Needed as Approved Deepwater Program Remains Unachievable. GAO-11-743. Washington, D.C.: July 28, 2011. Coast Guard: Deepwater Requirements, Quantities, and Cost Require Revalidation to Reflect Knowledge Gained. GAO-10-790. Washington, D.C.: July 27, 2010. Drug Control: Cooperation with Many Major Drug Transit Countries Has Improved, but Better Performance Reporting and Sustainability Plans Are Needed. GAO-08-784. Washington, D.C.: July 15, 2008. Drug Control: Agencies Need to Plan for Likely Declines in Drug Interdiction Assets, and Develop Better Performance Measures for Transit Zone Operations. GAO-06-200. Washington, D.C.: November 15, 2005.
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One part of the U.S. National Drug Control Strategy is to disrupt the flow of cocaine through the transit zone. Puerto Rico and the U.S. Virgin Islands, the only U.S. territories located geographically within the transit zone, have served as entry points for cocaine destined for the continental United States. In recent years, federal and local government agencies have cited growing levels of violent crime in these territories and attribute this violence to illicit drug trafficking. Within DHS, the U.S. Coast Guard is the lead federal agency for maritime drug interdiction and a key provider of resources to support drug interdiction operations in the transit zone and the two territories. GAO was asked to examine the Coast Guard's drug interdiction efforts in the transit zone, Puerto Rico, and the U.S. Virgin Islands. This report addresses (1) trends in the Coast Guard's deployment of resources in the transit zone and the extent to which the Coast Guard met its performance targets; and (2) actions taken by the Coast Guard to combat drug smuggling into Puerto Rico and the U.S. Virgin Islands, and trends in vessel and aircraft deployments. GAO analyzed Coast Guard data for fiscal years 2009 through 2013 on drug interdiction resource deployments and mission performance, and interviewed Coast Guard and DHS officials involved in drug interdiction operations. The Coast Guard provided varying levels of resources for drug interdiction operations in the "transit zone"--the area from South America through the Caribbean Sea and the eastern Pacific Ocean that is used to transport illicit drugs to the United States--during fiscal years 2009 through 2013, and generally did not meet its performance targets for several reasons. As the figure shows, Coast Guard resources included vessels (cutters), aircraft, and law enforcement detachments. The number of cutter days, aircraft hours, and law enforcement detachment days the Coast Guard provided for drug interdiction operations in the transit zone varied during fiscal years 2009 through 2012, and then sharply declined in fiscal year 2013. For example, in fiscal year 2012, the Coast Guard provided 1,947 cutter days for transit zone operations and in fiscal year 2013 the Coast Guard provided 1,346 days--a 30 percent decline. During fiscal years 2009 through 2013, the Coast Guard met targets for its primary drug interdiction mission performance measure--the removal rate of cocaine from noncommercial vessels in the transit zone--once, in fiscal year 2013. Coast Guard officials cited the declining readiness of its aging vessels, delays in the delivery of replacement vessels, and sequestration as factors affecting Coast Guard resource deployments and the ability to meet its drug interdiction mission performance targets. In support of a Department of Homeland Security (DHS) effort to address the increased violent crime associated with illicit drug smuggling into Puerto Rico and the U.S. Virgin Islands, the Coast Guard has increased vessel and aircraft operations for drug interdiction efforts in these territories by reallocating resources from elsewhere in the Coast Guard. According to Coast Guard officials, these additional resources are drawn from other missions, such as alien migrant interdiction. Beginning in September 2012, the Coast Guard implemented a surge operation to provide additional vessels and aircraft to regularly patrol Puerto Rico and the U.S. Virgin Islands. According to Coast Guard officials, the increased vessel and aircraft deployments have since become the new baseline level of resources to be provided for drug interdiction operations there. According to Coast Guard data, the number of vessel hours spent conducting drug interdiction operations in these territories more than tripled from fiscal years 2009 through 2013. Similarly, the number of maritime patrol aircraft hours spent conducting drug interdiction operations in the territories increased--from about 150 flight hours in fiscal year 2011 to about 1,000 hours in fiscal year 2013. GAO is not making recommendations in this report. DHS provided technical comments on a draft of this report, which were incorporated, as appropriate.
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In July 2002, President Bush issued the National Strategy for Homeland Security. The strategy set forth overall objectives to prevent terrorist attacks within the United States, reduce America's vulnerability to terrorism, and minimize the damage and assist in the recovery from attacks that occur. The strategy set out a plan to improve homeland security through the cooperation and partnering of federal, state, local, and private sector organizations on an array of functions. The National Strategy for Homeland Security specified a number of federal departments, as well as nonfederal organizations, that have important roles in securing the homeland. In terms of federal departments, DHS was assigned a leading role in implementing established homeland security mission areas. In November 2002, the Homeland Security Act of 2002 was enacted into law, creating DHS. This act defined the department's missions to include preventing terrorist attacks within the United States; reducing U.S. vulnerability to terrorism; and minimizing the damages, and assisting in the recovery from, attacks that occur within the United States. The act also specified major responsibilities for the department, including to analyze information and protect infrastructure; develop countermeasures against chemical, biological, radiological, and nuclear, and other emerging terrorist threats; secure U.S. borders and transportation systems; and organize emergency preparedness and response efforts. DHS began operations in March 2003. Its establishment represented a fusion of 22 federal agencies to coordinate and centralize the leadership of many homeland security activities under a single department. A variety of factors have affected DHS's efforts to implement its mission and management functions. These factors include both domestic and international events, such as Hurricanes Katrina and Rita, and major homeland security-related legislation. Figure 1 provides a timeline of key events that have affected DHS's implementation. Our report assesses DHS's progress across 14 mission and management areas. We based these areas on those identified in the National Strategy for Homeland Security, the goals and objectives set forth in the DHS strategic plan and homeland security presidential directives, our reports, and studies conducted by the DHS IG and other organizations and groups, such as the 9/11 Commission and the Century Foundation. The 14 we identified are 5. Surface transportation security 7. Emergency preparedness and response 8. Critical infrastructure and key resources protection 9. Science and technology 12. Human capital management 13. Information technology management 14. Real property management For each mission and management area, we identified performance expectations and vetted them with DHS officials. These performance expectations are a composite of the responsibilities or functions--derived from legislation, homeland security presidential directives and executive orders, DHS planning documents, and other sources--that the department is to achieve. Our analysts and subject matter experts reviewed our prior work, DHS IG work, and evidence DHS provided between March and July 2007, including DHS officials' assertions when supported by documentation. On the basis of this analysis and our experts' judgment, we then assessed the extent to which DHS had achieved each of the expectations we identified. We made preliminary assessments for each performance expectation based solely on GAO and DHS IG work. In March through July, we received additional information from DHS, which we reviewed and used to inform our final assessments. In some cases the assessments remained the same as our preliminary ones, and in other cases they changed. When our review of our prior work, the DHS IG's work, and DHS's documentation indicated that DHS had satisfied most of the key elements of a performance expectation, we concluded that DHS had generally achieved it. When our reviews showed that DHS had not yet satisfied most of the key elements of a performance expectation, we concluded that DHS had generally not achieved it. More specifically, where our prior work or that of the DHS IG indicated DHS had not achieved a performance expectation and DHS did not provide documentation to prove otherwise, we concluded that DHS had generally not achieved it. For a small number of performance expectations we could not make an assessment because neither we nor the DHS IG had completed work and the information DHS provided did not enable us to clearly assess DHS's progress. We used these performance expectation assessments to determine DHS's overall progress in each mission and management area. After making an assessment for each performance expectation, we added up those rated as generally achieved. We divided this number by the total number of performance expectations for the mission or management area, excluding those performance expectations for which we could not make an assessment. If DHS generally achieved more than 75 percent of the identified performance expectations, we identified its overall progress as substantial. When the number achieved was more than 50 percent but 75 percent or less, we identified its overall progress as moderate. If DHS generally achieved more than 25 percent but 50 percent or less, we identified its overall progress as modest. For mission and management areas in which DHS generally achieved 25 percent or less of the performance expectations, we identified overall progress as limited. We and the DHS IG have completed varying degrees of work for each mission and management area, and DHS's components and offices provided us with different amounts and types of information. As a result, our assessments of DHS's progress in each mission and management area reflect the information available for our review and analysis and are not equally comprehensive across all 14 mission and management areas. It is also important to note that while there are qualitative differences between the performance expectations, we did not weigh some more heavily than others in our overall assessments of mission and management areas. We also recognize that these expectations are not time bound, and DHS will take actions to satisfy these expectations over a sustained period of time. Our assessment of DHS's progress relative to each performance expectation refers to the progress made by the department since March 2003 and does not imply that DHS should have fully achieved each performance expectation at this point. In commenting on a draft of our report, DHS took issues with our methodology. First, DHS believed that we altered the criteria we used to judge the department's progress. We did not change our criteria; rather we made a change in terminology to better convey the intent behind the performance expectations that DHS achieve them instead of merely take actions that apply or relate to them. Second, DHS took issue with the binary standard approach we used to assess each performance expectation. We acknowledge the limitations of this standard in our report but believe it was appropriate for our review given that the Administration has generally not established quantitative goals and measures for the expectations. Therefore, we could not assess where along a spectrum of progress DHS stood in achieving each performance expectation. Third, DHS was concerned about an apparent shift in criteria we applied after the department provided us additional information and documents. What DHS perceived as a change in criteria for certain performance expectations was really the process by which we disclosed our preliminary assessment; analyzed additional documents and information from DHS; and updated and, in many cases revised, our assessments based on the additional inputs. Fourth, DHS raised concerns with consistency in our application of the methodology. Our core team of GAO analysts and managers reviewed all inputs from GAO staff to ensure consistent application of our methodology, criteria, and analytical process, and our quality control process included detailed reviews of the report's facts as well as assurances that we followed generally accepted government auditing standards. Finally, DHS points outs that we treated all performance expectations as if they were of equal significance. In our report, we acknowledged that differences exist, but we did not weight the performance expectations because congressional, departmental, and others' views on the relative priority of each expectation may be different, and we did not believe it was appropriate to substitute our judgment for theirs. Overall, we appreciate DHS's concerns and recognize that in such a broad- based endeavor, some level of disagreement is inevitable, especially at any given point in time. However, we have been as transparent as possible regarding our purpose, methodology, and professional judgments and believe that our methodology provides a sound basis for the progress report. Going forward, we will work with DHS to further clarify the performance expectations we identified and our criteria for assessing DHS's progress in meeting those expectations. By engaging in a constructive dialogue with DHS, we hope to establish a mutually agreed- upon basis for any future evaluation of DHS's progress. Our report shows that since March 2003, DHS has attained some level of progress in implementing the performance expectations in all of its major mission and management areas, but the rate of progress among these areas has varied. Overall, DHS has made more progress in its mission areas than in its management areas, reflecting an understandable focus on implementing efforts to secure the homeland. As DHS continues to mature as an organization, we believe it will be able to put more focus--and achieve more expectations--in the management areas. Within its mission areas, DHS has made more progress in developing strategies, plans, and programs than in implementing them. For example, in the area of border security we found that DHS has developed a multiyear strategy and initiative for identifying illegal border crossings between ports of entry. However, DHS is in the early stages of implementing this strategy, and we and the DHS IG identified problems with implementation of past programs with similar objectives. Likewise, in the area of emergency preparedness and response, DHS has developed the National Incident Management System. However, we have reported that much more work remains for DHS to effectively coordinate its implementation. Below we provide more information on progress made by DHS in its mission and management areas. DHS's border security mission includes detecting and preventing terrorists and terrorist weapons from entering the United States; facilitating the orderly and efficient flow of legitimate trade and travel; interdicting illegal drugs and other contraband; apprehending individuals who are attempting to enter the United States illegally; inspecting inbound and outbound people, vehicles, and cargo; and enforcing laws of the United States at the border. As shown in table 2, we identified 12 performance expectations for DHS in the area of border security and found that DHS has generally achieved 5 of them and has generally not achieved 7 others. DHS's immigration enforcement mission includes apprehending, detaining, and removing criminal and illegal aliens; disrupting and dismantling organized smuggling of humans and contraband as well as human trafficking; investigating and prosecuting those who engage in benefit and document fraud; blocking and removing employers' access to undocumented workers; and enforcing compliance with programs to monitor visitors. As shown in table 3, we identified 16 performance expectations for DHS in the area of immigration enforcement and found that DHS has generally achieved 8 of them and has generally not achieved 4 others. For 4 performance expectations, we could not make an assessment. DHS's immigration services mission includes administering immigration benefits and working to reduce immigration benefit fraud. As shown in table 4, we identified 14 performance expectations for DHS in the area of immigration services and found that DHS has generally achieved 5 of them and has generally not achieved 9 others. DHS's aviation security mission includes strengthening airport security; providing and training a screening workforce; prescreening passengers against terrorist watch lists; and screening passengers, baggage, and cargo. As shown in table 5, we identified 24 performance expectations for DHS in the area of aviation security and found that DHS has generally achieved 17 of them and has generally not achieved 7 others. DHS's surface transportation security mission includes establishing security standards and conducting assessments and inspections of surface transportation modes, which include passenger and freight rail; mass transit; highways, including commercial vehicles; and pipelines. As shown in table 6, we identified 5 performance expectations for DHS in the area of surface transportation security and found that DHS has generally achieved 3 of them and has generally not achieved 2. DHS's maritime security responsibilities include port and vessel security, maritime intelligence, and maritime supply chain security. As shown in table 7, we identified 23 performance expectations for DHS in the area of maritime security and found that DHS has generally achieved 17 of them and has generally not achieved 4 others. For 2 performance expectations, we could not make an assessment. DHS's emergency preparedness and response mission includes preparing to minimize the damage and recover from terrorist attacks and disasters; helping to plan, equip, train, and practice needed skills of first responders; and consolidating federal response plans and activities to build a national, coordinated system for incident management. As shown in table 8, we identified 24 performance expectations for DHS in the area of emergency preparedness and response and found that DHS has generally achieved 5 of them and has generally not achieved 18 others. For 1 performance expectation, we could not make an assessment. DHS's critical infrastructure and key resources protection activities include developing and coordinating implementation of a comprehensive national plan for critical infrastructure protection, developing partnerships with stakeholders and information sharing and warning capabilities, and identifying and reducing threats and vulnerabilities. As shown in table 9, we identified 7 performance expectations for DHS in the area of critical infrastructure and key resources protection and found that DHS has generally achieved 4 of them and has generally not achieved 3 others. DHS's science and technology efforts include coordinating the federal government's civilian efforts to identify and develop countermeasures to chemical, biological, radiological, nuclear, and other emerging terrorist threats. As shown in table 10, we identified 6 performance expectations for DHS in the area of science and technology and found that DHS has generally achieved 1 of them and has generally not achieved 5 others. DHS's acquisition management efforts include managing the use of contracts to acquire goods and services needed to fulfill or support the agency's missions, such as information systems, new technologies, aircraft, ships, and professional services. As shown in table 11, we identified 3 performance expectations for DHS in the area of acquisition management and found that DHS has generally achieved 1 of them and has generally not achieved 2 others. DHS's financial management efforts include consolidating or integrating component agencies' financial management systems. As shown in table 12, we identified 7 performance expectations for DHS in the area of financial management and found that DHS has generally achieved 2 of them and has generally not achieved 5 others. DHS's key human capital management areas include pay, performance management, classification, labor relations, adverse actions, employee appeals, and diversity management. As shown in table 13, we identified 8 performance expectations for DHS in the area of human capital management and found that DHS has generally achieved 2 of them and has generally not achieved 6 others. DHS's information technology management efforts include developing and using an enterprise architecture, or corporate blueprint, as an authoritative frame of reference to guide and constrain system investments; defining and following a corporate process for informed decision making by senior leadership about competing information technology investment options; applying system and software development and acquisition discipline and rigor when defining, designing, developing, testing, deploying, and maintaining systems; establishing a comprehensive, departmentwide information security program to protect information and systems; having sufficient people with the right knowledge, skills, and abilities to execute each of these areas now and in the future; and centralizing leadership for extending these disciplines throughout the organization with an empowered Chief Information Officer. As shown in table 14, we identified 13 performance expectations for DHS in the area of information technology management and found that DHS has generally achieved 2 of them and has generally not achieved 8 others. For 3 performance expectations, we could not make an assessment. DHS's responsibilities for real property management are specified in Executive Order 13327, "Federal Real Property Asset Management," and include establishment of a Senior Real Property Officer, development of an asset inventory, and development and implementation of an asset management plan and performance measures. As shown in table 15, we identified 9 performance expectations for DHS in the area of real property management and found that DHS has generally achieved 6 of them and has generally not achieved 3 others. Our report contains detailed information on DHS's progress in achieving each of the performance expectations, including a detailed summary of our work, the DHS IG's work, and DHS documentation and officials' statements. We also provide our basis for each assessment. In commenting on a draft of our report, DHS disagreed with our assessments for 42 of the 171 performance expectations noted above. In our report, we provide detailed responses to DHS's comments on the 42 performance expectations. We look forward to discussing our assessments in all the mission and management areas in more detail with the committee and subcommittees to help inform their ongoing oversight efforts. Our work has identified cross-cutting issues that have hindered DHS's progress in its mission and management areas. These issues include: (1) transforming and integrating DHS's management functions; (2) establishing baseline performance goals and measures and engaging in effective strategic planning efforts; (3) applying and improving a risk management approach for implementing missions and making resource allocation decisions; (4) sharing information with key stakeholders; and (5) coordinating and partnering with federal, state, local, and private sector agencies entities. The creation of DHS is an enormous management challenge, and DHS faces a formidable task in its transformation efforts as it works to integrate over 170,000 federal employees from 22 component agencies. Each component agency brought differing missions, cultures, systems, and procedures that the new department had to efficiently and effectively integrate into a single, functioning unit. At the same time it weathers these growing pains, DHS must still fulfill its various homeland security and other missions. DHS has developed a strategic plan, is working to integrate some management functions, and has continued to form necessary partnerships to achieve mission success. Despite these efforts, we reported earlier this year that DHS implementation and transformation remains high-risk because DHS has not yet developed a comprehensive management integration strategy and its management systems and functionsespecially related to acquisition, financial, human capital, and information managementare not yet fully integrated and wholly operational. Additionally, transparency plays an important role in helping to ensure efficient and effective transformation efforts. DHS has not made its management or operational decisions transparent enough so that Congress can be sure that it is effectively, efficiently, and economically using the billions of dollars in funding it receives annually. Moreover, we have encountered access issues in numerous engagements, and the lengths of delay have been both varied and significant and have affected our ability to do our work in a timely manner. The Secretary of DHS and the Under Secretary for Management have stated their desire to work with us to resolve access issues and to provide greater transparency, but have not yet proposed any change to DHS's policies or procedures for how DHS officials are to interact with GAO. A number of DHS's programs lack outcome goals and measures, a fact that may hinder the department's ability to effectively assess the results of program efforts or fully assess whether the department is using resources effectively and efficiently, especially given various agency priorities for resources. In particular, we have reported that some of DHS's components have not developed adequate outcome-based performance measures or comprehensive plans to monitor, assess, and independently evaluate the effectiveness of their plans and performance. For example, in August 2005 we reported that U.S. Immigration and Customs Enforcement lacked outcome goals and measures for its worksite enforcement program and recommended that the agency set specific time frames for developing these goals and measures. Further, we have reported that many of DHS's border- related performance goals and measures are not fully defined or adequately aligned with one another, and some performance targets are not realistic. We have also recognized that DHS faces some inherent difficulties in developing performance goals and measures to address its unique mission and programs, such as in developing measures for the effectiveness of its efforts to prevent and deter terrorist attacks. Within its sphere of responsibility, DHS cannot afford to protect everything against all possible threats. As a result, DHS must make choices about how to allocate its resources to most effectively manage risk. In April 2007, DHS established the new Office of Risk Management and Analysis to serve as the DHS Executive Agent for national-level risk management analysis standards and metrics; develop a standardized approach to risk; develop an approach to risk management to help DHS leverage and integrate risk expertise across components and external stakeholders; assess DHS risk performance to ensure programs are measurably reducing risk; and communicate DHS risk management in a manner that reinforces the risk-based approach. It is too early to tell what effect this office will have on strengthening departmentwide risk management activities. Several DHS component agencies have taken steps toward integrating risk- based decision making into their decision-making processes. For example, the Coast Guard has developed security plans for seaports, facilities, and vessels based on risk assessments. Other components have not always utilized such an approach. In addition, DHS has not performed comprehensive risk assessments in transportation, critical infrastructure, and the immigration and customs systems to guide resource allocation decisions. For example, DHS has not fully utilized a risk-based strategy to allocate resources among transportation sectors. Although the Transportation Security Administration (TSA) has developed tools and processes to assess risk within and across transportation modes, it has not fully implemented these efforts to drive resource allocation decisions. In 2005, we designated information sharing for homeland security as high-risk and continued that designation in 2007. We recently reported that the nation still lacked an implemented set of governmentwide policies and processes for sharing terrorism-related information but has issued a strategy on how it will put in place the overall framework, policies, and architecture for sharing with all critical partners--actions that we and others have recommended. DHS has taken some steps to implement its information-sharing responsibilities. For example, DHS implemented a network to share homeland security information. States and localities are also creating their own information "fusion" centers, some with DHS support. However, DHS did not fully adhere to key practices in coordinating efforts on its homeland security information network with state and local information sharing initiatives and faces other information-sharing challenges, including developing productive information-sharing relationships among the federal government, state and local governments, and the private sector. To secure the nation, DHS must form effective and sustained partnerships among legacy component agencies and also with a range of other entities, including other federal agencies, state and local governments, the private and nonprofit sectors, and international partners, but has faced difficulties in doing so. Thirty-three of the 43 initiatives the National Strategy for Homeland Security are required to be implemented by three or more federal agencies. In addition, the private sector is a key homeland security partner. For example, DHS must partner with individual companies and organizations to protect vital national infrastructure, such as the nation's water supply, transportation systems, and chemical facilities. In October 2006 we reported that all 17 critical infrastructure sectors had established their respective government councils, and nearly all sectors had initiated their voluntary private sector councils in response to the National Infrastructure Protection Plan. In addition, through its Customs-Trade Partnership Against Terrorism Program, U.S. Customs and Border Protection (CBP) has worked in partnership with private companies to review their supply chain security plans. However, DHS has faced some challenges in developing other effective partnerships and in clarifying the roles and responsibilities of various homeland security stakeholders. For example, federal and private sector stakeholders stated that the TSA has not provided them with the information they would need to support TSA's efforts for the Secure Flight program. Further, lack of clarity regarding roles and responsibilities caused DHS difficulties in coordinating with its emergency preparedness and response partners in responding to Hurricanes Katrina and Rita. Given the leading role that DHS plays in securing the homeland, it is critical that the department's mission programs and management systems and functions operate as efficiently and effectively as possible. In the more than 4 years since its establishment, the department has taken important actions to secure the border and the transportation sector and to defend against, prepare for, and respond to threats and disasters. DHS has had to undertake these critical missions while also working to transform itself into a fully functioning cabinet department--a difficult undertaking for any organization and one that can take, at a minimum, 5 to 7 years to complete even under less daunting circumstances. At the same time, a variety of factors, including Hurricanes Katrina and Rita, threats to and attacks on transportation systems in other countries, and new responsibilities and authorities provided by Congress have forced the department to reassess its priorities and reallocate resources to address key domestic and international events and to respond to emerging issues and threats. As it moves forward, DHS will continue to face the challenges that have affected its operations thus far, including transforming into a high- performing, results-oriented agency; developing results-oriented goals and measures to effectively assess performance; developing and implementing a risk-based approach to guide resource decisions; and establishing effective frameworks and mechanisms for sharing information and coordinating with homeland security partners. DHS has undertaken efforts to address these challenges but will need to give continued attention to these efforts in order to efficiently and effectively identify and prioritize mission and management needs, implement efforts to address those needs, and allocate resources accordingly. Efforts to address these challenges are especially important given the threat environment and long-term fiscal imbalance facing the nation. While this testimony contains no new recommendations, in past products GAO has made approximately 700 recommendations to DHS. DHS has implemented some of these recommendations and taken actions to implement others. However, we have reported that the department still has much to do to ensure that it conducts its missions efficiently and effectively while it simultaneously prepares to address future challenges that face the department and the nation. A well-managed, high-performing Department of Homeland Security is essential to meeting the significant homeland security challenges facing the nation. As DHS continues to evolve, implement its programs, and integrate its functions, we will continue to review its progress and performance and provide information to Congress and the public on its efforts. This concludes my prepared statement. I would be pleased to answer any questions you and the Committee members may have. For further information about this testimony, please contact Norman J. Rabkin, Managing Director, Homeland Security and Justice, at 202-512-8777 or [email protected]. Other key contributors to this statement were Jason Barnosky, Rebecca Gambler, Kathryn Godfrey, Christopher Keisling, Thomas Lombardi, Octavia Parks, and Sue Ramanathan. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Department of Homeland Security's (DHS) recent 4-year anniversary provides an opportunity to reflect on the progress DHS has made. The creation of DHS was one of the largest federal reorganizations in the last several decades, and GAO has reported that it was an enormous management challenge and that the size, complexity, and importance of the effort made the challenge especially daunting and critical to the nation's security. Our prior work on mergers and acquisitions has found that successful transformations of large organizations, even those faced with less strenuous reorganizations than DHS, can take at least 5 to 7 years to achieve. This testimony is based on our August 2007 report evaluating DHS's progress since March 2003. Specifically, it addresses DHS's progress across 14 mission and management areas and key themes that have affected DHS's implementation efforts. Since its establishment in March 2003, DHS has made varying levels of progress in implementing its mission and management areas, as shown in the following table. In general, DHS has made more progress in its mission areas than in its management areas. Within its mission areas, DHS has made progress in developing plans and programs, but has faced challenges in its implementation efforts. Key underlying themes have affected DHS's implementation efforts. These include strategies to achieve agency transformation, strategic planning and results management, risk management, information sharing, and partnerships and coordination. For example, we have designated DHS's implementation and transformation as high-risk. While DHS has made progress in transforming its component agencies into a fully functioning department, it has not yet addressed elements of the transformation process, such as developing a comprehensive transformation strategy. DHS also has not yet fully adopted and applied a risk management approach in implementing its mission and management functions. Some DHS component agencies have taken steps to do so, but this approach is not yet used departmentwide. In addition, DHS has taken steps to share information and coordinate with homeland security partners but has faced difficulties in these partnership efforts. Given DHS's leading role in securing the homeland, it is critical that the department's mission and management programs operate as efficiently and effectively as possible. DHS has taken important actions to secure the border and transportation sectors and to prepare for and respond to disasters. DHS has had to undertake these missions while also working to transform itself into a fully functioning cabinet department--a difficult task for any organization. As DHS moves forward, it will be important for the department to continue to develop more measurable goals to guide implementation efforts and to enable better accountability. It will also be important for DHS to continually reassess its mission and management goals, measures, and milestones to evaluate progress made, identify past and emerging obstacles, and examine alternatives to effectively address those obstacles.
| 5,707 | 591 |
In August 2003, the Coalition Provisional Authority (CPA) dissolved the military organizations of the former regime, including the Ministry of Defense. In March 2004, the CPA established a new Ministry of Defense. The MOD was ultimately to be responsible for the overall management, direction, and control of the Iraqi armed forces, which now include the Iraqi Army, Air Force, and Navy. Responsible for an estimated 200,000 civil servants and military personnel, the MOD is expected to conduct all functions needed to sustain the armed forces, including developing plans, programs, and budgets; and procuring needed goods. The CPA did not dissolve the Ministry of Interior. MOI's role is to manage more than 300,000 staff in the Iraqi police services, the National Police, the Border Enforcement, and other services. Managerial functions include setting qualifications and training for the forces, vetting all police and other employees, and conducting the budgeting and financing for MOI forces. The MOI directly controls the national police forces. However, the MOI exercises only limited administrative control over regular Iraqi police forces in the provinces, controlling issues such as recruiting standards and yearly budget allocations. Operational control of provincial police rests with the governor and his Council. MNF-I leads U.S. and coalition military efforts in Iraq. Under the command of MNF-I, MNSTC-I is responsible for leading coalition efforts to train and equip Iraqi security forces and to build MOI and MOD capabilities. MNSTC-I helps develop MOI and MOD capabilities through Ministry Transition Teams and the Joint Staff Transition Team, which have a total of about 215 coalition advisors assigned to work with Iraqi officials at the ministries. The Iraqi government and the coalition transition teams confront a challenging national environment to develop Iraq's security ministries. Corruption is reportedly widespread and poses a major challenge to building an effective government. A March 2007 DOD report states that the Prime Minister has committed to reforming the government beginning with his cabinet and the ministries. This commitment recognizes the government's failure to counter corruption and reduce sectarianism, which hampers the government's ability to perform. In addition, capacity building efforts are taking place amid ongoing violence and sectarian tension, posing a threat to Iraqi government employees. The 2007 increase in Iraq's security budget is attributable to increases in planned expenditures and an appreciation of the Iraqi currency against the U.S. dollar. MOD and MOI spent the largest percentage of budgeted amounts on salaries but were less successful in spending funds on goods and services (e.g., food, uniforms, and fuel) and capital goods (e.g., weapons, ammunition, and vehicles). Given Iraq's continued difficulties in spending funds for these items, DOD has requested $5.8 billion in additional funds to help purchase these critical items and provide other assistance to Iraq's security ministries. DOD's March 2007 report to Congress stated that the 37-percent increase in Iraq's 2007 security budget is evidence of Iraq's growing self-sufficiency and commitment to security. However, our analysis of Iraq's 2007 budget shows that this reported increase is attributable to both increases in planned expenditures and an appreciation of the Iraqi currency against the U.S. dollar (Iraq's fiscal year begins on January 1 of each year). Iraq implemented a 14-percent exchange rate appreciation between November 1, 2006, and February 1, 2007, to reduce the rate of core (non-fuel) inflation. In 2006, inflation in Iraq averaged over 50 percent. Iraq's official budget is presented and executed in Iraqi dinars, not U.S. dollars. The percentage changes we calculated using a constant 2006 exchange rate are the same as those in the official budget based on Iraqi dinars. For example, MOD's 2007 budget shows a decline in the number of Iraqi dinars budgeted for goods and services compared with 2006. However, when converted to U.S. dollars at the new appreciated exchange rate, the budget shows an increase in planned expenditures. It is therefore important to know the source of changes in the budget. For imported products, the appreciated exchange rate (which means the Iraqi dinar exchanges for relatively more U.S. dollars than before) allows Iraq to buy relatively more imported products for the same number of dinars. However, for expenditures made in Iraq, especially salaries, the appreciated exchange rate may not best reflect changes in Iraq's budget expenditures. Thus, we present both calculations. Table 1 shows how the projected growth rate of Iraq's security budget varies with the foreign exchange rate used to convert Iraqi dinars into U.S. dollars. When using an appreciated exchange rate, Iraq's security budget grows by 37 percent in 2007. The budget of MOD, which plays a key role in conducting counterinsurgency operations, grows by 20 percent. However, when using a constant exchange rate to facilitate a more direct comparison of the planned increases in budgeted dinars, Iraq's security budget grows by 15 percent in 2007 to $6.2 billion (constant exchange rate), which represents 18 percent of Iraqis total 2007 budget of $34.5 billion. Thus, the increase in Iraq's budget in U.S. dollars is due to the actual increases in planned expenditures and an appreciation of the currency. Although MOD's overall budget will grow in 2007, its budget for several critical items needed to wage counterinsurgency operations will decline in 2007. For example, the Ministry of Defense's 2007 budget for capital goods--including weapons, ammunition, and vehicles--will decrease whether using a constant exchange rate (17 percent) or appreciated exchange rate (2 percent). In contrast to MOD, MOI's 2007 budget shows positive growth rates in all major categories. For example, the Ministry of Interior's 2007 budget for capital goods--including weapons, ammunition, and vehicles--will increase regardless of which exchange rate is used, by 16 percent using a constant exchange rate or by 38 percent using the appreciated exchange rate. The MOI is receiving increased budget support for its law enforcement responsibilities. However, the additional budget support will be provided to a ministry prone to militia infiltration. For example, in November 2006, the Director of the Defense Intelligence Agency stated that the Ministry of Interior and the police were heavily infiltrated by militia members of the Badr Organization and the Mahdi Army. In addition, the MOI's national police--a paramilitary force of about 24,000 personnel--had conducted counterinsurgency operations in the past, but the Iraqi government decided in late 2006 to transform it into a civil society force due to frequent allegations of abuse and other illegal activities. The total number of staff reportedly employed by the Ministries of Defense and Interior will grow from about 538,000 in 2006 to 608,000 employees in 2007 (see table 2). However, these numbers should be interpreted with some caution. As we reported in January 2007, ghost employees comprise about 20 to 30 percent of Ministry of Interior staff, according to U.S. officials. Also, as of February 2007, the Iraqi government has yet to complete a census of all government employees, as required by the International Monetary Fund. To help assess whether Iraq's security ministries will be able to spend the 2007 budgets, we analyzed the security ministries' 2006 budgets and spending. Figure 1 shows the total amounts budgeted and expended by funding category. In terms of their budgets, the MOD had both a larger budget ($3.4 billion compared with $1.9 billion) and a larger portion of its budget targeted at goods and services and capital goods, compared with the MOI. For the MOI, salaries dominated the budget in 2006. Figure 1 also shows that the ministries have had difficulty expending some categories of their budgets. For example, MOD and MOI spent about 76 and 82 percent, respectively, of the $912 million and $1,471 million budgeted for salaries as of November 2006. In contrast, MOD and MOI spent 1 and 15 percent, respectively, of the $864 million and $233 million budgeted for capital goods (e.g., weapons, ammunition, and vehicles). The inability or unwillingness of Iraq's security ministries to spend budgeted funds on critical items raises questions about the priorities and capabilities of Iraq's government to fund its security requirements. As the U.S. government transfers more of its security responsibilities to the Iraqi government, it is important that the Iraqi government demonstrate that it can execute its approved budgets more effectively. While Iraq's security ministries have encountered difficulties in spending budgets for weapons, equipment, vehicles, food, fuel, and other items needed to mount counterinsurgency campaigns, the U.S. government anticipates providing additional support to these two ministries at least through the end of fiscal year 2008. DOD has asked for an additional $5.8 billion to develop the Iraqi security forces in its fiscal year 2007 supplemental request and the fiscal year 2008 Global War on Terror budget request (see table 3). Of this amount, about $3.25 billion (about 56 percent) would purchase equipment and transportation for the Iraqi security forces. DOD is also requesting about $682 million for training and operations, including efforts to develop senior management capabilities within the Ministries of Defense and Interior, and to provide increased training for MOD intelligence operations, communications operations, and resource management. Iraq's security ministries face numerous challenges if they are to more effectively direct and sustain Iraq's security forces. DOD reports and our February 2007 fieldwork in Iraq found that the security ministries face two key challenges: (1) managing a growing workforce while developing effective personnel systems, and (2) improving the limited ability of MOD and MOI to manage their logistics operations. Coalition advisors are working with the security ministries to improve their planning, budgeting, personnel, and logistical systems. In addition, a 2006 Foreign Military Sales (FMS) agreement with Iraq will enable the security ministries to bypass their ineffective procurement systems and purchase needed equipment and supplies directly from the United States, according to U.S. officials. Planned changes in the size and composition of the security forces will complicate MOD and MOI efforts to effectively manage their personnel. The security ministries plan to add 60,000 to 70,000 staff to their rolls in 2007. In addition, in December 2006, the Iraqi Prime Minister directed the MOI to assume responsibility for paying most of the Facilities Protection Service (FPS), a 150,000-strong ministry guard force currently working for 27 ministries and 8 independent directorates. According to DOD reporting, the FPS lacks a coherent force structure and standardized equipment, and its personnel are often untrained, unreliable, and sometimes responsible for violent crimes. According to a senior coalition advisor, FPS personnel will be paid by the MOI but remain under the day- to-day supervision of the ministries, agencies, or provincial governments to which they are assigned. Although the ministries are significantly expanding their workforces, DOD reports that MOD and MOI cannot accurately account for the personnel they currently have on their payrolls. DOD notes that about 65 percent of authorized personnel in fielded units are present for duty at any time, but this figure is based on unreliable data. Similarly, MOI also has no reliable data to indicate how many personnel are still serving with the ministry, so it is unknown how many of the more than 300,000 employees on the MOI payroll are present for duty. MNSTC-I estimates that the number of employees present for duty is less than 70 percent. DOD reports that payments for pensions, medical care, and death benefits are currently included in security ministry payrolls. Thus, the security ministries' personnel figures may include retired, wounded, or deceased personnel. DOD also found that corruption inflates both security ministries' personnel figures, as corrupt leaders often collect pay and other compensation designated for non-existent soldiers and policemen on the unit rolls. In addition, a February 2007 MNF-I assessment stated that development of MOD's personnel management system was hindered in 2006 by poor leadership, low morale, and reliance on coalition counterparts. MNSTC-I commented that higher level leadership within MOD did not allow knowledgeable managers to implement personnel reforms and overruled their decisions. U.S. government documents and coalition officials also cited problems at MOI with militia infiltration that complicated reform efforts. Our recent work in Iraq also found that the ministries' lack of skilled or experienced staff presents a challenge. Some coalition officials noted that the lack of trained staff hindered efforts to improve MOD budget formulation, noting that only two or three members of the 30- person budget office were capable of producing budget spreadsheets on a computer. Furthermore, these advisors stated that most ministry staff lack basic computer and information technology skills, are unwilling to make decisions, and often refer problems to higher levels. DOD's March report stated that the most significant shortcoming in MOD and MOI forces capabilities is in planning and executing logistics and sustainment requirements. The report noted that the factors underlying this deficiency include inadequate levels of sustainment stocks, such as vehicle fuel pumps and filters. Also identified as a challenge was the limited capacity of MOD and MOI to plan for, acquire, distribute, and maintain needed items. In addition, the security ministries have difficulties in accounting for their equipment. For example, MOI's immature equipment accountability system cannot track what police weapons and vehicles remain in service or how much equipment authorized by the provincial governors MOI has purchased for their staff, which had been. Our fieldwork found that MOD and MOI units maintain equipment accountability through the use of hand receipts and manual ledgers. As GAO previously testified, both MOD and MOI have significant logistics management issues to overcome before they are capable of independently sustaining their security forces. Our recent fieldwork also found that developing the security ministries' logistics capacity remains a major challenge, particularly at MOI. U.S. officials noted that MOI cannot sustain the wide variety of equipment donated by the coalition. For example, GAO previously testified that the MOD had difficulty maintaining 21 different types of light trucks. Similarly, MOI has been unable to maintain the 17 makes of vehicles it has received for use by its personnel. According to coalition officials, the cost and difficulty of obtaining spare parts for these diverse vehicle fleets results in using some vehicles for spare parts and not repairing others. Moreover, the MOI has not approved the draft logistics concept proposed by the coalition, in part because it has yet to gain the agreement of the provinces and is still negotiating with them on the national warehouse system. The coalition devotes significant resources to develop capacity at Iraq's security ministries. As of March 2007, the U.S.-led coalition had assigned 215 military, civilian, and contracting personnel to advise Iraqi staff at the MOD and MOI on establishing plans and policies, budgeting, and managing personnel and logistics. In comparison, the Ministries of Oil and Electricity had 10 and 18 advisors, respectively. The 111 coalition advisors at the MOD are embedded with staff from a number of offices, including Plans and Policies and the Iraqi Joint Staff. According to the advisors, they work with their Iraqi counterparts to improve their planning processes and capabilities. For example, a senior advisor to the joint staff helped MOD develop its counter insurgency strategy. He provided them with a planning template, reviewed their work, and suggested they add details such as the source of the threat, the risk level, and the forces required to counter the threats. He was uncertain as to whether his Iraqi counterparts had taken ownership of the process. Our recent field work at the MOI found that 104 coalition advisors are working with Iraqi officials. Among other efforts, they are helping MOI develop processes for vetting Iraqi security forces, including collecting and storing biometric data; establishing an identification card system; and establishing a personnel management database that will house inventory, payroll, human resource, financial, and budget data. However, U.S. advisors stated that MOI staff has resisted efforts to computerize their manual processes because of the increased transparency it would provide. Finally, MNSTC-I personnel are also assisting the MOD and the MOI in purchasing needed equipment from the United States through the Foreign Military Sales (FMS) program. Under FMS, the U.S. government agrees to sell defense articles or services (including training) to eligible foreign countries or international organizations. The articles or services usually come from DOD stocks or through purchase under DOD-managed contracts. In December 2006, the government of Iraq transferred $1.9 billion into an Iraqi account for FMS purchases. According to a November 2006 DOD report, Iraq's use of the FMS program is intended to provide a way for both MOD and MOI to spend their money on complete procurement packages without risking the loss of funds to the corruption and mismanagement that hampers Iraqi government contracting. In the latter part of 2006, DOD notified Congress of a number of possible foreign military sales to Iraq, including: Up to $900 million on intelligence, surveillance, and reconnaissance aircraft, as well as related support equipment, training, spare and repair parts, publications and technical data, and other elements of logistics support; Up to $750 million for troop transport helicopters, small arms, ammunition, vehicles, and associated logistics support; and Up to about $460 million for trucks, vehicles, including light armored vehicles, and trailers, as well as associated equipment and services. According to a March 2007 DOD report, MOD also plans to fund a $160 million maintenance contract through the FMS program from April 2007 through March 2008. U.S. and coalition officials stated that the FMS agreement would allow both MOD and MOI to bypass their ineffective procurement systems and procure equipment and supplies more quickly and efficiently. However, in the long term, it is unclear whether Iraq's use of the FMS program will contribute to the ministries' capacity to improve their inefficient procurement and contracting systems. DOD expects that the Iraqi government will be capable of sustaining its security forces by 2008. This expectation may not be met given the security ministries' past problems in spending their capital budgets and current personnel and logistical weaknesses. In addition, as we previously reported, the United States and the Iraqi security ministries are supporting Iraqi forces that have divided loyalties, varying capabilities, high absenteeism, and questionable dependability. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members may have at this time. The Multinational Security Transition Command-Iraq provided comments on a draft of this statement. The head of the Command stated, "The GAO testimony fails to give the government of Iraq and the two security ministries any credit for recognizing their financial vulnerabilities and for progressing far beyond the opaque and irresponsible business practices of previous interim governments. The 2007 GOI budget was negotiated responsibly and openly. Though the security budget may represent 'only' a 15-percent increase from the previous year in purchasing power, it is nearly a 20-percent share of the national budget. The government of Iraq has clearly recognized its inability to responsibly make procurements on behalf of its military and police forces and so has entered into a $1.7 billion Foreign Military Sales Agreement with 2006 funding. We anticipate that another $1.55 billion investment into United States FMS this calendar year." We added information in this statement to reflect MNSTC-I's comments. However, both DOD and GAO agree that it will take considerable time and resources to address the challenges the U.S. and Iraqi governments face in developing fully functioning security ministries and capable Iraqi forces. For questions regarding this testimony, please call Joseph A. Christoff at (202) 512-8979 or [email protected]. Other key contributors to this statement were Nanette Barton, Daniel C. Cain, Lynn Cothern, Mattias Fenton, Elisabeth Helmer, B. Patrick Hickey, Bruce Kutnick, Stephen M. Lord, Judy McCloskey, Tetsuo Miyabara, Mary Moutsos, and Timothy Wedding. 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 November 2005, the President issued the National Strategy for Victory in Iraq. According to the strategy, victory will be achieved when Iraq is peaceful, united, stable, secure, well integrated into the international community, and a full partner in the global war on terror. To help Iraq achieve this, the U.S. is, among other efforts, helping strengthen the capabilities of the Iraq Ministries of Defense and Interior (police forces) so they can assume greater responsibility for the country's security. The United States has provided about $15.4 billion to develop Iraqi security forces and institutions. In this testimony, GAO discusses preliminary observations on (1) U.S. and Iraqi funding to develop and sustain the Iraqi security forces, and (2) key challenges the United States and Iraq face in improving the security ministries' operations and management. This statement is based on prior GAO reports, recent fieldwork in Iraq and Department of Defense, U.S. Treasury and Embassy budget documents. GAO added information to this statement in response to comments from Multinational Security Transition Command-Iraq. We completed the work in accordance with generally accepted government auditing standards. In March 2007, DOD reported that Iraq will increase its 2007 security budget from $5.4 billion to $7.3 billion (a 37-percent increase). DOD states this increase provides evidence of the country's growing self-sufficiency and commitment to security. However, our analysis shows that some of this increase is due to the appreciation of the Iraqi dinar against the dollar. Using a constant exchange rate, Iraq's 2007 security budget grows by 15 percent. Also, Iraq faced problems spending its 2006 security budget. As of November 2006, the Iraq Ministry of Defense had spent only about 1 percent of its capital goods budget for weapons, ammunition, and vehicles. DOD has requested $5.8 billion in additional U.S. funds to help purchase these items for Iraq and provide assistance to its security ministries. The United States and Iraq face personnel and logistical challenges in developing ministries that can sustain Iraq's growing security forces. For example, the ministries have inadequate systems to account for personnel and inexperienced staff with limited budgeting and technology skills. Also, both security ministries have difficulties acquiring, distributing, and maintaining weapons, vehicles, and equipment. The U.S.-led coalition has provided significant resources to develop Iraq's security forces and has 215 military and civilian advisors at the ministries. The United States signed a foreign military sales agreement with Iraq that, according to U.S. officials, allows Iraq to bypass its ineffective procurement systems to purchase equipment directly from the United States. Iraq has deposited $1.9 billion into its account for foreign military sales. However, it is unclear whether this program will help improve the ministries' procurement and contracting capacity.
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Medicare Part B generally covers both synthetic drugs and biologicals administered under a physician's direct supervision, including those administered in physician offices and in hospital outpatient departments that are not usually self-administered. These include injectable drugs (such influenza, pneumococcal, and hepatitis B vaccines); drugs inhaled through durable medical equipment (such as certain asthma medications); and oral cancer drugs if the same drug is available in injectable form. As with all drugs, Part B drugs can be either single-source or multi- source. Single-source drugs have only one manufacturer. Multi-source drugs have at least two, and often several, versions produced by different manufacturers. While each of these versions will have its own NDC, Medicare pays a single rate for any NDC associated with a given HCPCS code. Part B drugs administered to Medicare beneficiaries are generally purchased by physicians or hospitals. In 2014, Medicare spent approximately $24 billion on these drugs. The majority of these expenditures--approximately $21 billion, or 87 percent--were for drugs paid based on ASP. The remaining 13 percent of expenditures were for drugs paid based on different methodologies. For example, several Part B drugs, including certain vaccines and drugs provided through DME, are paid for on the basis of average wholesale prices (AWP) or reasonable cost and not on the basis of ASPs. Part B ASP drugs accounted for a somewhat smaller percentage of administrations than expenditures of all Part B drugs in 2014--63 percent--as drugs paid based on AWP or reasonable cost, primarily flu, pneumonia, and hepatitis B vaccines, accounted for 26 percent of all administrations of Part B drugs. (See fig. 1.) Over 9 million Medicare beneficiaries received at least one Part B ASP drug during 2014, which accounted for approximately 43 percent of all beneficiaries who received a Part B drug that year. These 9 million beneficiaries were responsible for 20 percent of Medicare's payment for these drugs via cost-sharing requirements, or about $4 billion in 2014. According to statute, drug manufacturers that participate in the Medicaid Drug Rebate Program are required to submit data to CMS on sales of Part B drugs to most U.S. purchasers, including physicians, hospitals, and wholesale distributors within 30 days of the end of every calendar quarter. Sales must be reported net of rebates, discounts, and other price concessions. CMS officials have stated that most manufacturers participate in the Medicaid Drug Rebate Program. Other manufacturers may voluntarily submit sales price data to CMS. CMS reviews these data, which are typically reported at the NDC level, and calculates payment rates at the HCPCS level. According to CMS officials, the agency then publicly releases the revised quarterly payment rates so that stakeholders can comment on the new rates before they take effect. These officials noted that due to the time it takes for manufacturers to submit the data to CMS, CMS to review the data and then update the payment rates, and the public to review and comment on the revised rates, there is a two- quarter (6-month) lag between the sale and when the payment rate takes effect. CMS produces a web page titled "Medicare Part B Drug Average Sales Price" that provides guidance for drug manufacturers on submitting ASP data. Manufacturers submit two forms to CMS: the ASP Data Collection Form--an Excel document in which manufacturers insert all relevant sales data--and the ASP Certification Form signed by the manufacturer's CEO or CFO to affirm the accuracy of the submitted data. Where there is no specific guidance in federal statute or regulations regarding how to calculate ASP, CMS has indicated that it allows manufacturers to make reasonable assumptions in their calculations of ASP and to submit these assumptions with the required data. CMS's web page also includes a common e-mail address for manufacturers to send ASP-related questions to the agency. The OIG has conducted two studies related to manufacturer reporting and CMS oversight of ASP data. The first report, published in 2010, found that CMS lacks complete ASP data for certain drugs because not all manufacturers of Part B drugs are required to report ASPs. OIG recommended that CMS consider seeking a legislative change to require all manufacturers of Part B drugs to submit ASPs. CMS did not concur with this recommendation, stating that the President's budget for the upcoming fiscal year did not include any proposals to require manufacturers of Part B drugs to submit ASPs. The second report, published in 2014, further explored this policy and found that at least one- third of the more than 200 manufacturers of Part B drugs included in the study did not submit ASPs for some of their products in the third quarter of 2012, despite being required to do so. An additional 45 manufacturers of Part B drugs were not required to report ASPs that quarter. OIG again recommended that CMS seek a legislative change to directly require all manufacturers of Part B drugs to submit ASPs. CMS again did not concur with this recommendation, stating that the President's budget for the upcoming fiscal year did not include any proposals to require manufacturers of Part B drugs to submit ASPs. However, the agency said it would take the recommendation into consideration in the future. These reports also recommended that CMS develop or implement an automated system for the submission of ASP data to potentially limit the possibility of data entry errors, reduce the amount of time it takes to calculate ASP- based payment amounts and adjust ASP payment limits, and enable CMS to track ASPs with greater ease. CMS concurred with these recommendations. Medicare expenditures were concentrated in a small number of the 551 Part B drugs that were paid based on ASP in 2014. (See fig. 2.) In particular, 6 drugs each had expenditures of over $1 billion and collectively accounted for 36 percent of all expenditures on Part B ASP drugs that year. (See table 1 and, for a list of characteristics associated with the highest expenditure drugs in 2014, see table 6 in app. I.) Beyond the 6 highest expenditure drugs, an additional 43 drugs each had between $100 million and $1 billion in expenditures and collectively accounted for an additional 48 percent of expenditures on Part B ASP drugs. In contrast, 306 drugs (56 percent of all Part B ASP drugs) each had less than $1 million in expenditures and collectively accounted for less than 1 percent of all expenditures on Part B ASP drugs. (For a list of the 50 Part B ASP drugs with the highest expenditures in 2014, see table 7 in app. I.) Administrations of Part B ASP drugs were also concentrated in a small number of drugs in 2014. (See fig. 3.) In particular, 10 drugs were each administered over 1 million times and collectively accounted for 37 percent of all administrations of Part B ASP drugs that year. (See table 2 and, for a list of characteristics associated with the highest administration drugs in 2014, see table 8 in app. I.) Beyond the 10 drugs with the highest number of administrations, an additional 75 drugs were each administered between 100,000 and 1 million times, and collectively accounted for an additional 51 percent of all administrations of Part B drugs paid based on ASP. In contrast, 187 drugs (34 percent of all Part B ASP drugs) were each administered fewer than 1,000 times and collectively accounted for less than 1 percent of all administrations of Part B ASP drugs. (For a list of the 50 Part B ASP drugs with the highest number of administrations in 2014, see table 9 in app. I.) Few Part B ASP drugs were among both the highest expenditure and the highest administration drugs in 2014. For example, no Part B ASP drug had over $1 billion in expenditures and over 1 million administrations that year. Additionally, of the 102 Part B ASP drugs with either $100 million or more in expenditures or 100,000 or more administrations, only 32 were in both categories. These 32 drugs included all 6 drugs with expenditures over $1 billion, but none of the 10 drugs with over 1 million administrations. The characteristics of drugs associated with the majority of expenditures on Part B ASP drugs tended to differ from the characteristics of drugs associated with the majority of administrations. For example, the majority of Medicare expenditures for Part B ASP drugs in 2014 were for biologics, brand name drugs, drugs made by a single manufacturer, and drugs that came onto the market since 2000. In contrast, the majority of administrations of Part B ASP drugs were for synthetics, generics, drugs made by multiple manufacturers, and drugs that came onto the market prior to 2000. Additionally, the therapeutic categories associated with the largest percentage of expenditures tended to differ from the categories associated with the largest percentage of administrations. However, injections accounted for the majority of both expenditures and administrations (See table 3.) The majority of expenditures were for drugs with average expenditures per beneficiary over $10,000 and for drugs received by fewer than 100,000 beneficiaries. The majority of administrations were for drugs with average expenditures per beneficiary under $100 and for drugs received by over 100,000 beneficiaries. (See table 4.) Expenditures on and administrations of Part B ASP drugs were generally associated with the same provider characteristics in 2014. In particular, the majority of expenditures and administrations occurred in physicians' offices (rather than hospital outpatient departments or other settings) and in urban areas (rather than suburban or rural areas). Additionally, the highest percentage of both expenditures and administrations generally were for Part B ASP drugs that were prescribed by the same provider specialty: hematology oncology. (See table 5.) CMS takes three main steps to validate that the sales price data reported by drug manufacturers are complete and accurate. First, CMS requires that, before a manufacturer submits a report containing data to CMS, the CEO, CFO, or authorized official of each drug manufacturer attests to the accuracy of the information provided in that report by signing the ASP Certification Form. Second, according to CMS officials, once CMS receives the sales data from the manufacturer, it performs a series of electronic data checks to assess the completeness of the submitted data. CMS's data checks include checking for missing data or duplicate entries, checking for incorrect product information, and comparing submissions to those of previous quarters. In cases where CMS identifies discrepancies through its data checks, agency officials stated that they attempt to resolve the issue directly with the manufacturer. If CMS is unable to resolve the issue directly with the manufacturer, the agency refers the case to OIG and OIG determines appropriate enforcement, if needed. Third, officials from CMS stated the agency holds a 7 to 10 day public comment period where manufacturers and providers have an opportunity to comment on the payment amounts before they are published. CMS officials believe that the steps the agency takes to validate manufacturer-reported sales price data are sufficient, but CMS does not verify that the reported data reflect actual sales prices. Federal standards for internal control call for management to use quality information to achieve its objectives. According to GAO's guidance for assessing the reliability of computer-processed data, completeness and accuracy are the two key components of quality data. CMS officials noted that, since 2009, only one drug manufacturer has incurred civil monetary penalties as a result of OIG's review of manufacturer reporting discrepancies. CMS officials told us that there have been few other issues with drug manufacturers' ASP submissions over the past couple of years and that any issues that did arise were minor. These officials also noted that during the public comment period, they receive few comments from stakeholders. Additionally, CMS's electronic data checks described earlier are consistent with recommendations in GAO's guidance related to verifying the completeness of data. Specifically, examples of GAO's guidance include testing electronic data for missing or duplicate data, looking for values outside of a desired range, and testing relationships between data elements. However, CMS does not take sufficient steps to verify the accuracy of the data. Officials from CMS told us that they do not routinely verify the underlying data from manufacturers either by tracing the data to and from source documents, such as sales invoices, or through CMS's referrals to OIG. The Social Security Act authorizes CMS to survey manufacturers that have Medicaid drug rebate agreements when necessary to verify ASP. However, CMS officials told us that this authority does not allow them to conduct blanket surveys to routinely collect information regarding manufacturers' ASP data beyond what is on the ASP data collection form. CMS officials indicated they may also request that OIG use its authority to audit ASP data submitted by manufacturers. However, CMS has limited such referrals to situations where the agency has identified potential consistent or repeated problems with calculating and reporting ASP data. In situations where CMS requires additional information about the data submission, the agency officials stated that the requests are typically for information that could be considered public. Officials from CMS indicated the agency is developing an automated ASP submission system to use with drug manufacturers; however, the new system will not help to ensure the accuracy of the underlying sales price data. According to OIG, this automated system could limit the possibility of data entry errors, reduce the amount of time it takes to calculate and adjust ASP payments, and enable CMS to track ASPs with greater ease and efficiency. CMS began working on an automated system following a 2010 OIG recommendation. CMS officials told us that the agency is still testing the system and hopes to begin implementation at the end of 2016. Four of the six drug manufacturers we spoke with stated that implementation of an automated submission system would improve the ASP submission process. The two manufacturers that did not believe an automated submission system would improve the ASP submission process already submit their data exclusively via e-mail instead of by mail. CMS officials stated that due to the time it takes for manufacturers to calculate and submit ASP data and for CMS to review the data and update the payment rates, the automated system may not reduce the two-quarter lag between when drugs are sold and CMS receives all data and updates the payment rates. CMS is unable to assess the accuracy of all drug manufacturers' sales price data because not all drug manufacturers submit these data to CMS. As stated previously, only drug manufacturers with Medicaid drug rebate agreements are required to submit ASP data on a quarterly basis. However, not all manufacturers of Medicare Part B drugs have these agreements; therefore, not all manufacturers are required to submit ASP data to CMS. Further, CMS officials said that the agency lacks the authority to require manufacturers not participating in the Medicaid Drug Rebate Program to submit ASP data. CMS officials also said that most manufacturers of Part B drugs do submit sales price data because they have Medicaid drug rebate agreements or submit the data voluntarily, but not all do. Without complete data from manufacturers that have been assessed for accuracy by CMS, the agency risks setting payment rates based on inaccurate information. This is inconsistent with federal standards for internal control, which call for management to use quality information to achieve objectives. Drugs manufactured by multiple sources are more likely to have inaccurate payment rates than are drugs manufactured by a single source because, according to CMS officials, the payment system provides an incentive for single-source manufacturers to report their data. CMS officials told us that single-source drug manufacturers have an incentive to report ASP data so that health care providers will know Medicare's payment rate for their drug. These officials stated that providers prefer to use drugs with published Medicare payment rates because they know what they will be paid. If the manufacturer of a single-source drug did not submit sales price data, ASP data for that billing code would be unavailable, and CMS would substitute ASP with another metric that might be less accurate. Other metrics include rates published in national pricing compendia such as Truven Health Analytics' RED BOOK or First Databank's National Drug Data File, which publish product information for drugs such as strength, package size, and package quantity. OIG has found that prices published in national pricing compendia do not accurately reflect actual market prices. In contrast, CMS officials told us if a manufacturer did not submit ASP data for a drug that is manufactured by multiple sources, the sales price would still be based on ASP data submitted by the other manufacturers of the drug. This gives multi-source drug manufacturers less incentive to report ASP data, particularly if the inclusion of their data would result in a lower Medicare payment rate for the drug. To assess the potential impact of manufacturers without rebate agreements that do not voluntarily report ASP data, in its 2014 report, OIG looked at 50 high-expenditure multi-source Part B drugs in the third quarter of 2012. These drugs included those with payment rates that used sales price data from both manufacturers that were required to report their data and manufacturers that voluntarily reported their data. If manufacturers had not voluntarily reported their data, 12 of the 50 drug payment rates would have changed. Payment rates would have increased for 5 drugs (between 3 and 40 percent) and decreased for 7 drugs (between 1 and 49 percent). Payment rates for the remaining 38 drugs would have stayed the same. In 2014, Medicare spent approximately $21 billion on Part B drugs paid based on ASP. The substantial expenditures for Part B ASP drugs underscore how important it is that CMS ensure that the data on which the agency bases Medicare's payment rates for these drugs are accurate. Federal standards for internal control call for management to use quality information to achieve its objectives. According to GAO's guidance for assessing the reliability of computer-processed data, completeness and accuracy are the two key components of quality data. CMS conducts certain data checks to assess the completeness of the ASP data submitted by drug manufacturers. However, CMS does not verify the accuracy of the underlying data by tracing the data to and from source documents, such as sales invoices. Because CMS does not verify the accuracy of the underlying data used to determine Medicare payment rates, the resulting payment rates may be inaccurate if drug manufacturers do not report accurate data. CMS is unable to assess the accuracy of all sales price data because the agency does not receive data from all drug manufacturers. Currently, only drug manufacturers with Medicaid drug rebate agreements are required to submit ASP data to CMS. Although agency officials told us that most drug manufacturers have rebate agreements or choose to voluntarily submit ASP data, some manufacturers do not. Federal standards for internal control call for management to use quality information to achieve its objectives. Without complete data from all manufacturers that have been assessed for accuracy by CMS, the agency risks setting payment rates based on inaccurate information. To help the Department of Health and Human Services ensure accuracy in Part B drug payment rates, Congress should consider requiring all manufacturers of Part B drugs paid at ASP, not only those with Medicaid drug rebate agreements, to submit sales price data to CMS, and ensure that CMS has authority to request source documentation to periodically validate all such data. CMS should periodically verify the sales price data submitted by a sample of drug manufacturers by requesting source documentation from manufacturers to corroborate the reported data, either directly or by working with OIG as necessary. We provided a draft of this report for review to HHS and received written comments that are summarized below and reprinted in appendix II. In its comments, HHS agreed with our recommendation. HHS stated that CMS will work with OIG as appropriate regarding collecting source documentation from drug manufacturers and that CMS will take action as it is warranted. To fulfill this recommendation, CMS will have to take additional actions relative to what it has done in the past. As we noted in the report, CMS has previously requested that OIG use its authority to audit ASP data submitted by manufacturers when it has identified potential consistent or repeated problems with calculating and reporting ASP data. HHS also noted in its comments that the OIG reviews average manufacturer price (AMP) data for Part B drugs and that CMS has the authority to adjust the ASP-based payment amount in situations where the OIG finds that ASP exceeds AMP by a certain threshold percentage. However, AMP data are also reported by manufacturers and would be inaccurate if the data do not represent actual manufacturer prices. 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 Secretary of Health and Human Services and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. Appendix I: Characteristics Associated with the Part B Drugs Paid Based on ASP with the Highest Expenditures and Highest Number of Administrations (2014) Methylprednisolone acetate (40mg) Number of beneficiaries (thousands) Methylprednisolone acetate injection (40mg) Albuterol and ipratropium bromide inhalation solution Methylprednisolone acetate injection (80mg) In addition to the contact named above, individuals who made key contributions to this report included Gregory Giusto, Assistant Director; Alison Binkowski; George Bogart; Alexander Cattran; Daniel Lee; Lauren Metayer; Elizabeth T. Morrison; and Aubrey Naffis. Medicare Part B: Expenditures for New Drugs Concentrated among a Few Drugs and Most Were Costly for Beneficiaries. GAO-16-12. Washington, D.C.: October 23, 2015. Medicare: Information on Highest-Expenditure Part B Drugs. GAO-13-739T. Washington, D.C.: June 28, 2013. Medicare: High-Expenditure Part B Drugs. GAO-13-46R. Washington, D.C.: October 12, 2012. Medicare Part B Drugs: CMS Data Source for Setting Payments Is Practical but Concerns Remain. GAO-06-971T. Washington, D.C.: July 13, 2006. Medicare Hospital Pharmaceuticals: Survey Shows Price Variation and Highlights Data Collection Lessons and Outpatient Rate-Setting Challenges for CMS. GAO-06-372. Washington, D.C.: April 28, 2006. Medicare: Comments on CMS Proposed 2006 Rates for Specified Covered Outpatient Drugs and Radiopharmaceuticals Used in Hospitals. GAO-06-17R. Washington, D.C.: October 31, 2005. Medicare: Radiopharmaceutical Purchase Prices for CMS Consideration in Hospital Outpatient Rate-Setting. GAO-05-733R. Washington, D.C.: July 14, 2005. Medicare: Drug Purchase Prices for CMS Consideration in Hospital Outpatient Rate-Setting. GAO-05-581R. Washington, D.C.: June 30, 2005.
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Medicare Part B covers drugs typically administered by a physician. Medicare pays physicians and other providers for these drugs at an amount generally equal to the ASP of the drug plus a fixed percentage. These payment rates are calculated quarterly by CMS based on price and volume data reported by drug manufacturers. Members of Congress and others have questioned the amount that both Medicare and its beneficiaries spend on Part B drugs. GAO was asked to examine Medicare spending for and utilization of Part B drugs and the accuracy of the sales price data reported by drug manufacturers. This report (1) describes Medicare spending and utilization for Part B drugs that are paid based on ASP, including variations in spending and utilization by provider and drug characteristics, and (2) examines the steps CMS takes to ensure the accuracy of the sales price data reported by drug manufacturers. To describe Medicare spending and utilization for Part B ASP drugs, GAO analyzed 2014 Medicare claims data. To examine the accuracy of ASP data, GAO interviewed CMS, the HHS Office of Inspector General, and drug manufacturers and reviewed related documentation. In 2014, the most recent year for which data were available, the Medicare program and its beneficiaries spent about $21 billion on approximately 46 million administrations of 551 Part B drugs paid based on average sales price (ASP). Six drugs--each exceeding $1 billion in expenditures--accounted for 36 percent of all expenditures on Part B ASP drugs, while a different 10 drugs--each administered over 1 million times--accounted for 37 percent of all administrations. Biologics (drugs made from living entities), drugs without generic versions available, and drugs made by a single manufacturer were associated with the vast majority of expenditures on Part B ASP drugs. In contrast, synthetics (drugs produced from chemical ingredients), drugs with generic versions available, and drugs with multiple manufacturers were associated with the vast majority of administrations. Compared with other types of providers, hematology oncologists were associated with the highest percentage of drug expenditures and administrations. Source: GAO analysis of Centers for Medicare & Medicaid Services, Food and Drug Administration, and RED BOOK data. | GAO-16-594 The Centers for Medicare & Medicaid Services (CMS), an agency within the Department of Health and Human Services (HHS), performs several electronic data checks on the sales price data reported by drug manufacturers each quarter, including checking for missing data or incorrect product information. However, CMS does not routinely verify the underlying data, which is inconsistent with federal internal control standards that call for management to use quality information to achieve its objectives. Without additional verification of the ASP data received from manufacturers, it is possible for the data to be inaccurate, which could result in inaccurate Medicare payment rates. In addition, CMS is unable to use or assess the accuracy of all sales price data because, as directed by statute, only manufacturers with Medicaid drug rebate agreements are required to submit sales price data to CMS. Unless all manufacturers without rebate agreements choose to voluntarily submit sales price data, the payment rates for some drugs will be based on incomplete ASP data or will not be set based on ASP. Congress should consider requiring all manufacturers of drugs paid at ASP to submit sales price data to CMS. Further, CMS should periodically verify the data submitted by a sample of drug manufacturers by requesting source documentation. HHS agreed with GAO's recommendation and stated that CMS would take action as warranted.
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Because of FEMA's failure to establish basic upfront validation controls over registrants' identity and address information, we estimate that FEMA made approximately $1 billion of improper and potentially fraudulent payments based on invalid registrations. This represents 16 percent of all individual assistance payments for hurricanes Katrina and Rita. The improper and potentially fraudulent payments included cases where individuals and households used invalid SSNs, used addresses that were fictitious or not their primary residence, and for submitted earlier registrations. These improper payments based on phony or duplicate registration data were not only restricted to the initial expedited assistance payments that we previously reported on, but also included payments for rental assistance, housing repair, and housing replacement. For example, rental assistance payments were made to registrants that used a post office box and a cemetery as damaged properties. In fact, as part of our ongoing forensic audit, FEMA continues to provide rental assistance to GAO based on registrations that contained fictitious identities and bogus damaged addresses. In one case, FEMA even sent GAO a check for expedited assistance after an inspector could not confirm that the property existed, and FEMA had decided not to provide housing assistance to this registration. Our projection likely understates the total amount of improper and potentially fraudulent payments since our examination of sample payments focused only on invalid registrations and did not include other criteria, such as insurance policies, which may make registrants ineligible for IHP payments. Based on our statistical sample we estimate that 16 percent of all payments were based on invalid registrations. We considered a registration invalid if it contained an invalid identity, invalid address information, or was paid from duplicate registration information. Some registrations failed more than one attribute. We drew our statistical sample from a population of 2.6 million payments made in the wake of hurricanes Katrina and Rita, totaling over $6 billion through mid-February 2006. Based on these results, we project that FEMA made about $1 billion in assistance payments based on improper or potentially fraudulent registrations. The 95 percent confidence interval associated with our estimate of improper and potentially fraudulent registrations ranges from a low of $600 million to a high of $1.4 billion in improper and potentially fraudulent payments. Table 1 shows the attributes we tested, the estimated failure rate in each attribute, and the overall projected failure amount. As shown in table 1, some registrations failed more than one attribute; therefore the total number of registrations which failed our attribute tests is less than the sum of the failures of each attribute. For example, all payments made to registrations containing bogus damaged property addresses also failed the primary residence test because the registrants could not have lived there at the time of the disaster. Additional details on the 39 registrants in our sample where we found a problem are as follows: Payments to Registrants Whose Damaged Property Address Was Not Their Primary Residence - Twenty six payments failed the primary residence test. These include individuals who had never lived at the damaged property, did not live at the damaged property at the time of the disasters, or used bogus property addresses on their registrations. We made these determinations after reviewing publicly available records, conducting site visits, and interviewing current residents and/or neighboring residents. We provide additional details related to failures in this attribute in table 2. Registrant received $2,000 in expedited assistance, $2,358 in rental assistance, and more than $15,000 in personal property replacement. Registrant originally claimed damage at a street address several houses away from the damaged property address currently in FEMA's database. At some point in the disaster assistance process, the registrant made changes to the damaged property address. No physical inspection occurred at the damaged property. Personal property payment was based on geospatial data due to the level of devastation in the area. GAO reviews of publicly available information and credit report data showed that the registrant had never lived at the damaged property address for which she was paid. Registrant used valid physical property as damaged address to receive three payments for expedited assistance, rental assistance, and personal property replacement. GAO audit and investigative work found no evidence that the individual ever lived at the property. After receiving the payments, the registrant withdrew the application without ever having a physical inspection performed or returning the disaster payments to FEMA. Registrant used damaged property in Kenner, Louisiana, as primary residence to qualify for one expedited assistance payment and two rental assistance payments. Registrant did not live at property at the time of disaster. Owner of the property told us that the registrant had moved out of the damaged property a month prior to hurricane Katrina. Registrant used damaged property as primary residence to receive one expedited assistance and two rental assistance payments. Residents at the property had never heard of the registrant. Registrant used post office box in McIntosh, Alabama, as the damaged property address to receive expedited assistance and rental assistance. The local postal inspector stated that the post office box was linked to other individuals associated with known fraudulent activity. Payments to Duplicate Registrations--12 other payments in our sample failed because they were made to registrants whose damaged property addresses and current addresses had previously been submitted under other registrations and had received payments on those previous registrations. For example, one sample registrant submitted a registration containing the same damaged and current property addresses as those used previously by another registrant. Both registrations received payments for rental assistance for $2,358 in September 2005. Payments to Registrations with Bogus Property Addresses - Three payments in our sample were made to registrations containing bogus property addresses. For example, we found that one individual used several pieces of bogus information to receive expedited assistance. Specifically, the registrant used a SSN that was valid but the name did not match the name in records maintained by the Social Security Administration. The registrant also used a damaged property address in the 3000 block that was determined to be invalid through our on-site inspection, as street numbers on that street only went up to the 1000s. After the initial payment, the registration was withdrawn voluntarily by the registrant. In effect, this registrant was able to use completely bogus information to receive $2,000 from FEMA and then withdraw the registration to avoid further scrutiny. Payments to Registrations Containing Invalid Social Security Numbers -- Two of the payments in the sample were made to individuals that used invalid SSNs (e.g., SSNs that have never been issued or SSNs that did not match the name provided on the registration). For example, one individual used a SSN that had never been issued to receive FEMA payments for expedited and rental assistance. Overall, we observed that 17 of our sample failures (44 percent) were related specifically to expedited assistance payments. The high level of expedited assistance-related failure was expected because these payments needed to be made quickly and, typically, prior to a physical inspection of the damaged property. However, we found that the other 22 failures (56 percent) were related to rental assistance and personal and real property repair and replacement payments. In its response to a draft GAO report, FEMA represented to us that all nonexpedited assistance payments, including the $2,358 in housing assistance payments, were subject to much more stringent requirements. Specifically, FEMA represented that the registrants had to demonstrate that they occupied the damaged property at the time of the disaster. However, the 22 failures we found indicate that these requirements were not effective in preventing improper and potentially fraudulent registrations from receiving nonexpedited assistance payments. Our estimate likely understates the total amount of improper and potentially fraudulent payments because we did not test our samples for all potential reasons why a disaster assistance payment could be fraudulent or improper. For example, our testing criteria did not include reviewing whether registrants had insurance policies that covered hurricane damages, which may have made them ineligible for IHP payments. We also did not test whether FEMA inspectors accurately assessed the damage to each sampled damaged property, or whether the registrants were displaced from their homes, an eligibility factor for rental assistance. During the course of our work, we found that these problems affected some of our sampled payments and, therefore, these payments may be improper or potentially fraudulent. However, because the problems did not relate to identity and address information, they passed our testing criteria. For example, an individual in our statistical sample provided a valid SSN and lived in a declared disaster area. However, the individual informed GAO that he did not incur any hurricane-related damage. Despite this fact, the individual received $2,000 in expedited assistance. We did not test whether registrants received duplicate benefits from other FEMA programs, such as free hotel lodging and trailers, which would have resulted in FEMA paying duplicate housing benefits to the same registrant. Later in this testimony, we provide examples where registrants received from FEMA free hotel rooms in addition to rental assistance. Finally, our estimate would include payments FEMA has identified for potential recoupment. Given the considerable amount of potentially fraudulent and improper payments identified in our statistical sample, it is not surprising that FEMA continued to provide rental assistance payments to GAO investigators based on bogus registrations. In one instance, rental assistance was made even after a FEMA inspector was unable to find the damaged property. Similarly, our sample testing and data mining work also identified additional examples of payments made on the basis of bogus information. In our previous testimony, we reported that we were able to obtain $2,000 expedited assistance checks from FEMA using falsified identities, bogus property addresses, and fabricated disaster stories. FEMA has continued to provide us with additional disaster-related assistance payments even after FEMA received indications from various sources that our registrations may be bogus. GAO has not cashed these checks and plans to return the checks to the Department of Treasury upon the conclusion of our work. The following provides details of two of our undercover operations: Case #1 relates to a registration submitted by GAO for hurricane Rita that cited a bogus address in Louisiana as the damaged property. In October 2005, GAO received notice that the inspector assigned to inspect the property was not able to find the house despite numerous attempts to verify the address with the phone book, post office, and with a physical inspection. The registration was subsequently returned to FEMA by the inspector and coded as withdrawn because no contact was made with the registrant. Even though GAO never met with the inspector to prove that the damaged property existed, FEMA sent GAO a check for $2,000 in early 2006. Case # 2 relates to a GAO disaster registration for an empty lot in Louisiana for hurricane Katrina. Although the damaged property address was bogus, FEMA notified GAO that an inspection was performed and confirmed that the property was damaged. However, FEMA stated that the registration could not be processed because FEMA was unable to corroborate that the GAO lived at the damaged property. GAO subsequently submitted a fictitious driver's license that included the bogus address, which FEMA readily accepted. Based on the fictitious driver's license, FEMA issued GAO a $2,358 rental assistance check, as shown in figure 1. Subsequent to FEMA issuing the $2,358 check, a Small Business Administration (SBA) inspector who was responsible for inspecting the damaged property in evaluation of a potential SBA loan reported that the property did not exist. Although SBA discovered that the property was bogus, FEMA issued another rental assistance check to GAO, bringing the total rental assistance on this bogus registration to about $6,000. We found that the discrepancy between FEMA's result (which confirmed that the property existed), and SBA's result (which showed that the property did not exist) occurred because FEMA did not conduct a physical inspection on the property but instead used geospatial mapping to determine losses. We have previously testified regarding potentially fraudulent case studies we uncovered through data mining and investigative techniques. The potential fraud in those cases was hundreds of thousands of dollars. We have continued our data mining work find additional examples where FEMA made payments, sometimes totaling over $100,000, to improper or potentially fraudulent registrations, including payments made to registrants where cemeteries and post office boxes were claimed as damaged property addresses. Table 3 provides several additional examples of improper and potentially fraudulent payments. The following provides illustrative information for three of the cases. Case number 1 involves 8 individuals who claimed several different damaged property addresses, but the same current address which is a single apartment. Public record searches also determined that only 2 of the 8 individuals actually lived at the current address. Four individuals were members of the same household who shared the same damaged property address. However, the 4 individuals each received one expedited and one rental assistance payment. FEMA criteria specified that members from the same household who were displaced to the same location should be entitled to only one IHP payment. According to public records, the other 4 individuals were not living at the address claimed as damaged at the time of the hurricane. Case number 2 involves an individual who used 13 different SSNs-- including one of the individual's own--to receive payments on 13 registrations. The individual claimed 13 different damaged property addresses and used one single current address to receive FEMA payments. According to publicly available records, this individual had no established history at any of the 13 properties in Louisiana, Mississippi, and Alabama, which the individual claimed as damaged. The individual received approximately $139,000 consisting of 8 expedited assistance payments, 4 rental assistance payments, and 14 other payments, including 3 payments of $10,500 each, and 3 payments ranging from over $12,000 to over $17,000 for personal property replacement. Further audit and investigative work indicates that 8 of the 13 addresses did not exist or do not have public ownership records. Case number 4 involves a registrant who used the address of a cemetery to make an IHP claim. Specifically, the registrant used a damaged property address located within the grounds of Greenwood Cemetery, in New Orleans, Louisiana, to request disaster assistance from FEMA. Public records show no record of the registrant ever living in New Orleans. Instead, public records indicate that for the past five years, the registrant has resided in West Virginia at the address provided to FEMA as the registrant's current address. As discussed previously, one statistical sample item we tested related to an improper and potentially fraudulent payment FEMA made to an individual who received expedited and rental assistance as a result of using a post office box as a damaged property address. According to the Postal Inspector, this post office box was also linked to individuals that are associated with fraudulent activity. In total, we found that FEMA made over 2,000 payments totaling about $5.3 million to registrants who provided a post office box as their damaged residence. While not all payments made to post office boxes are improper or potentially fraudulent, the number of potentially fraudulent payments could be substantially reduced if FEMA put in place procedures to instruct disaster recipients to provide actual street addresses of damaged property when claiming disaster assistance. FEMA paid millions of dollars to over 1,000 registrants who used names and SSNs belonging to state and federal prisoners for expedited and housing assistance. FEMA guidelines specify that eligibility for disaster assistance is predicated on the registrant being displaced from their primary residence due to the disaster, thus having need for shelter. These eligibility criteria should have generally excluded prisoners incarcerated throughout the disaster period. Given the weaknesses we identified earlier related to the number of individuals who claimed damages based on invalid property addresses, we can not ascertain whether FEMA properly verified that these registrations were valid, and therefore deserving of IHP payments. The following are three cases where prisoner identities were used to improperly receive IHP payments. Case 1 involves a convicted felon, housed in a Louisiana prison from April 2001 to the present, who registered for IHP assistance by telephone. The registrant made a FEMA claim using a post office box address in Louisiana as his damaged property address to qualify for IHP payments for expedited assistance, rental assistance, and personal property replacement. Two of these payments were made via checks sent to the address he falsely claimed as his current residence, and the final payment was sent via electronic funds transfer (EFT) to someone who also listed the same current address on the checking account. FEMA paid over $20,000 to the registrant even though the damaged property address on the registration was a post office box address and the registrant was incarcerated throughout the disaster period. Case 2 involves a registrant who has been incarcerated in a Louisiana state penitentiary since February 2005. Several weeks after the disaster, the registrant applied by telephone for individual disaster relief assistance claiming a Louisiana address. Based on his registration information, FEMA paid the inmate over $14,000 in checks mailed to an address in Texas that he listed as his current address, and an EFT was sent to his checking account. Payments included expedited assistance, rental assistance, and personal property replacement funds. Case 3 involves a registrant who has been incarcerated in a Mississippi correctional facility since 2004. The registrant used his name and SSN over the telephone to apply for and receive $2,000 in expedited assistance and $2,358 in rental assistance. The individual listed his correct current address, at the prison, to receive these payments. Following hurricane Katrina, FEMA undertook massive efforts to house individuals and households who were displaced by the hurricane. Among other efforts, FEMA provided hotel accommodations to individuals who were at that time displaced across the United States. We found that although FEMA was responsible for paying hotel costs, FEMA did not require hotels to collect registration information (such as FEMA registration identification numbers or SSN) on individuals to whom it provided hotel accommodations. Without this information, FEMA was not able to identify individuals who were housed in hotels, and, thus, FEMA was unable to determine whether rental assistance should be provided to individuals to whom the federal government was providing free lodging. As a result, FEMA made rental assistance payments which covered the same period of time that the registrant was staying at a FEMA-paid hotels. Table 4 provides examples of some of these cases. Because the hotels were not required to collect identification numbers, we were unable to determine the magnitude of individuals who received these duplicate benefits. However, as illustrated in table 4, our data mining identified a number of individuals housed in FEMA-paid for hotels who have received more than one rental assistance payment. Without an effective means of reconciling individuals in FEMA hotels with those individuals receiving rental assistance payments, FEMA may have wasted taxpayer dollars by paying twice for housing assistance to hurricane victims. FEMA did not establish proper accountability for debit cards. As a result, FEMA disbursed about $1.5 million of taxpayer money for over 750 debit cards that FEMA cannot establish went to disaster victims. In addition, as reported previously, we continued to find cases where recipients purchased goods and services that did not meet serious disaster related needs as defined by federal regulations. FEMA lacked controls for accounting for debit cards issued, resulting in the loss of accountability for over 750 debit cards valued at about $1.5 million. The lack of controls over debit cards is particularly troubling given that debit cards are, in essence, cash that can be used to purchase goods and services. In September 2005, JPMorgan Chase was initially paid approximately $22.7 million for about 11,374 cards that the bank believed were issued to FEMA registrants. However, prior to our inquiries beginning in November 2005, we found that neither FEMA nor the bank had reconciled the actual number of cards distributed with the number of cards for which payment was made. From our numerous inquiries, both JPMorgan Chase and FEMA began to reconcile their records to the debit cards issued. As a result, JPMorgan Chase performed a physical count of cards remaining to identify the number of cards distributed. This resulted in JPMorgan Chase determining that it distributed 10,989 cards, not 11,374 cards. Upon identification of the 385 undistributed debit cards, JPMorgan Chase refunded to FEMA $770,000 attributable to these undistributed debit cards. FEMA attempted to perform a reconciliation of the distributed cards to the cards recorded in its disaster recipient database. As of May 26, 2006, FEMA can only account for 10,608 cards of the 10,989 cards JPMorgan Chase claimed that it has distributed. As a result, FEMA cannot properly account for 381 debit cards, worth about $760,000. Since initially paying JPMorgan Chase $22.7 million, FEMA has expanded the use of debit cards as a payment mechanism for future IHP payment for some registrants. Through this process, FEMA made about $59 million in additional payments of rental assistance and other benefits. As of March 2006, over 90 percent of money funded to the debit cards has been used by recipients to obtain cash and purchase a variety of goods and services. Our analysis of data provided by JPMorgan Chase found that the debit cards were used predominantly to obtain cash which did not allow us to determine how the money was actually used. The majority of the remaining transactions was associated with purchases of food, clothing, and personal necessities. Similar to findings in our February 13, 2006, testimony, we continue to find some cases where cardholders purchased goods and services that did not appear to meet legitimate disaster needs. In this regard, FEMA regulations provide that IHP assistance be used for items or services that are essential to a registrant's ability to overcome disaster-related hardship. Table 5 details some of the debit cards activities we found that are not necessary to satisfy legitimate disaster needs. FEMA faces a significant challenge in ensuring that IHP relief payments are only sent to valid registrants while also distributing those relief payments as fast as possible. To ensure the success of the program, FEMA must build the American taxpayers confidence that federal disaster assistance only goes to those in need, and that adequate safeguards exist to prevent assistance from going to those who submit improper and potentially fraudulent registrations. To that effect, FEMA must develop and strengthen controls to validate information provided at the registration stage. As we have stated in prior audit work, and as FEMA had learned from prior experience, pursuing collection activities after disaster relief payments have been made is costly, time-consuming, and ineffective. Upfront controls are all the more crucial given the estimated $1 billion dollars that had gone to improper and potentially fraudulent registrations related to hurricanes Katrina and Rita. It is key that FEMA address weaknesses in its registration process so that it can substantially reduce the risk for fraudulent and improper payments before the next hurricane season arrives. In addition, to help deter future fraudulent registrations, FEMA must ensure there are consequences for those who commit fraud. We plan to refer potentially improper payments to FEMA for further review, and hope that FEMA will take the necessary recoupment actions. Further, we have referred, and plan to refer additional cases of potential fraud to the Katrina Fraud Task Force for further investigations and, if warranted, indictments. Finally, we plan to issue a report in the future with recommendations for addressing problems identified in this testimony. Mr. Chairman and Members of the Committee, this concludes our statement. We would be pleased to answer any questions that you or other members of the committee may have at this time. For further information about this testimony, please contact Gregory Kutz at (202) 512-7455 or [email protected], John Kelly at (202) 512-6926 or [email protected]. Major contributors to this testimony include Kord Basnight, James Berry Jr., Gary Bianchi, Valerie Blyther, Matthew Brown, Norman Burrell, Jennifer Costello, Paul Desaulniers, Steve Donahue, Dennis Fauber, Christopher Forys, Adam Hatton, Aaron Holling, Jason Kelly, Sun Kim, Crystal Lazcano, Tram Le, John Ledford, Jennifer Leone, Barbara Lewis, Jonathan Meyer, Gertrude Moreland, Richard Newbold, Kristen Plungas, John Ryan, Sidney Schwartz, Robert Sharpe, Gail Spear, Tuyet-Quan Thai, Patrick Tobo, Matthew Valenta, Tamika Weerasingha, and Scott Wrightson. Our objectives were to (1) provide an estimate of improper and potentially fraudulent payments related to certain aspects of the disaster registrations, (2) identify whether FEMA made improper or potentially fraudulent IHP payments to registrants who were incarcerated at the time of the disaster, (3) identify whether FEMA provided registrants with rental assistance payments at the same time it was paying for their hotel rooms, and (4) review FEMA's accountability over debit cards and controls over proper debit card usage. To provide an estimate of improper and potentially fraudulent payments related to certain aspects of the disaster registrations, we drew a statistical sample of 250 payments from the Federal Emergency Management Agency (FEMA)'s Individuals and Households Program (IHP) payments. Three of the 250 were considered out of scope for our study because the payment has been returned to the U.S. government by the time of our review. Therefore, our review examined 247 payments for which the government was subject to financial loss. Potentially fraudulent and invalid payments are claims that contained (1) bogus identities, (2) addresses that did not exist, (3) addresses where there was no evidence that the address was the primary residence of the registrant at the time of the disaster, and (4) addresses that had been previously registered using duplicate information (such information would include same SSNs, same damaged address, and/or same current address). We conducted searches of public records, available FEMA data, and/or made physical inspections of addresses to determine if registrations were improper and/or potentially fraudulent. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample's results as a 95 percent confidence interval (e.g., plus or minus 5 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. As a result, we are 95 percent confident that each of the confidence intervals in this report will include the true values in the study population. To identify whether FEMA made improper or potentially fraudulent IHP payments to registrants who were incarcerated at the time of the disaster, we obtained the FEMA IHP database as of February 2006. We obtained databases containing state prisoner data since August 2005, including releases and new incarcerations, from the states of Louisiana, Texas, Mississippi, Alabama, Georgia, and Florida. We also obtained federal prisoner data since August 2005, including releases and new incarcerations, from the Department of Justice. We validated the databases were complete by comparing totals against available public information on prisoner populations. We compared these databases against the population of IHP payments to identify prisoner SSN/name combinations that received payments from FEMA. We restricted this comparison to prisoners who were in state or federal prisons at the time of the disasters. We also interviewed prisoners who registered for disaster relief and prison officials to determine if prisoners were incarcerated at the time of the disaster. To identify whether FEMA improperly provided registrants with rental assistance payments at the same time it was paying for their hotel rooms, we reviewed FEMA policies and procedures to determine how FEMA administered its hotel program, and obtained FEMA data on its hotel registrants. We also used data mining and forensic audit techniques to identify registrants who stayed in hotels paid for by FEMA who also received rental assistance payments through the IHP program. To determine whether registrations from our data mining resulted in duplication of housing benefits, we used a selection of 10 case studies for further investigation. We obtained documentation from hotel officials to substantiate that case study registrants stayed at hotels paid for by FEMA. We also gathered available FEMA data on case study registrations that received multiple rental assistance payments to determine what information they had provided FEMA in order to receive additional rental assistance. To review FEMA's accountability over debit cards and controls over proper debit card usage, we reviewed databases of transactions and accounts provided by JPMorgan Chase, the administering bank for the debit cards, as well as FEMA's database of debit card accounts. We interviewed bank, FEMA, and Treasury officials regarding the reconciliation of debit card accounts against IHP registrants and reviewed documentation related to the payment flow of debit cards. We also performed data mining on debit card transactions to identify purchases that did not appear to be indicative of necessary expenses as defined by the Stafford Act's implementing regulations. During the course of our audit work, we identified multiple cases of potential fraud. For cases that we investigated and found significant evidence of fraudulent activity, we plan to refer our cases directly to the Hurricane Katrina Fraud Task Force. We performed our work from February 2006 through June 8, 2006 in accordance with generally accepted government auditing standards and quality standards for investigations as set forth by the President's Council on Integrity and Efficiency. To validate that the National Emergency Management Information System database was complete and reliable, we compared the total disbursements against reports FEMA provided to the Senate Appropriations Committee on Katrina/Rita disbursements. We also interviewed FEMA officials and performed electronic testing of the database on key data elements. 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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Hurricanes Katrina and Rita destroyed homes and displaced millions of individuals. In the wake of these natural disasters, Federal Emergency Management Agency (FEMA) responded to the need to provide aid quickly through the Individuals and Households Program (IHP) program, which provides housing assistance, real and personal property assistance, and for other immediate, emergency needs. As of February 2006, FEMA made 2.6 million payments totaling over $6 billion. Our testimony today will (1) provide an estimate of improper and potentially fraudulent payments through February 2006 related to certain aspects of the disaster registrations, (2) identify whether improper and potentially fraudulent payments were made to registrants who were incarcerated at the time of the disaster, (3) identify whether FEMA improperly provided registrants with rental assistance payments at the same time it was paying for their lodging at hotels, and (4) review FEMA's accountability over debit cards and controls over proper debit card usage. To estimate the magnitude of IHP payments made on the basis of invalid registrations, we selected a random statistical sample of 250 payments made to hurricanes Katrina and Rita registrants as of February 2006. We also conducted data mining and investigations to further illustrate the effects of control breakdowns. We estimate that through February 2006, FEMA made about 16 percent or $1 billion in improper and potentially fraudulent payments to registrants who used invalid information to apply for disaster assistance. Based on our statistical sample, we are 95 percent confident that the range of improper and potentially fraudulent payments is from $600 million to $1.4 billion. In our assessment of whether a payment was improper and potentially fraudulent, we did not test for other evidence of impropriety or potential fraud, such as insurance fraud and bogus damage claims. This means our review potentially understates the magnitude of improper payments made. Examples of fraud and abuse include payments to registrants who used post office boxes, United Parcel Service stores, and cemeteries as their damaged property addresses. Absent proper verification, it is not surprising that FEMA continued to pay fictitious disaster registrations set up by GAO as part of our ongoing forensic audit. In one case, FEMA paid nearly $6,000 to our registrant who submitted a vacant lot as a damaged address. Below is a copy of a rental assistance check sent to GAO after FEMA received feedback from its inspector that the GAO undercover registrant did not live at the damaged address, and after a Small Business Administration inspector reported that the damaged property could not be found. We also found that FEMA provided expedited and housing assistance to individuals who were not displaced. For example, millions of dollars in expedited and housing assistance payments went to registrations containing the names and social security numbers of individuals incarcerated in federal and state prisons during the hurricanes. In addition, FEMA improperly paid individuals twice for their lodging--paying their hotels and rental assistance at the same time. For example, at the same time that FEMA paid $8,000 for an individual to stay in California hotels, this individual also received three rental assistance payments for both hurricane disasters. Finally, we found that FEMA could not establish that 750 debit cards worth $1.5 million went to hurricane Katrina victims. We also found debit cards that were used for a Caribbean vacation, professional football tickets, and adult entertainment.
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Bridge safety first emerged as a high-priority issue in the United States in the 1960s, following the collapse of the Silver Bridge between Ohio and West Virginia, which killed 46 people. That collapse prompted national concerns about bridge conditions and safety and highlighted the need to repair and replace bridges before they collapse. Congress responded by establishing two major federal bridge programs: (1) the National Bridge Inspection Program (NBIP) to ensure periodic safety inspection of bridges and (2) what is now known as the HBP to provide a funding mechanism to assist states in replacing and rehabilitating bridges. Both of these programs generally define applicable bridges as publicly owned, over 20 feet in length, and located on public roads. Although the NBIP and HBP are separate programs, they are linked by the data collected through bridge inspections. For example, bridge information gathered through NBIP inspections is one factor used to determine the amount of HBP funding apportioned to states. The NBIP establishes federal standards, known as the National Bridge Inspection Standards, and program requirements for the proper safety inspection and evaluation of bridges. These standards establish by whom, with what frequency, and how bridge inspections are to be completed. For example, state departments of transportation (DOTs) carry out the federal- level policies, procedures, and requirements for inventory, inspection, bridge load ratings, quality assurance, and reports. Routine bridge inspections are generally conducted every 2 years, but with FHWA approval, the inspection interval may be extended to 4 years on certain bridges. Bridges may be inspected more often than every 2 years, when past inspection findings justify an increased inspection frequency. Bridge inspectors must record bridge data, including bridge conditions, during the inspection and report that information to the NBI, maintained by FHWA headquarters. Based on information gathered during bridge inspections and reported to the NBI, the HBP classifies bridge conditions as deficient or not; assigns each bridge a sufficiency rating reflecting its structural adequacy, safety, serviceability, and relative importance; and uses that information to provide funding for states to improve bridges. Deficient bridges include those that are structurally deficient, with one or more components in poor condition, and those that are functionally obsolete, with a poor configuration or design that may no longer be adequate for the traffic they serve. FHWA uses information in the NBI to annually apportion HBP funds to the states. While each state's HBP apportionment amount is largely determined by bridge conditions and bridges generally must be below a certain condition threshold to qualify for HBP funding, other bridges are also eligible for HBP funds because states may use the funds for a broad array of other purposes, such as bridge preventive maintenance projects. All bridges are grouped into one of two general categories: Federal-aid highway bridges and bridges not on Federal-aid highways. The NBIP and the HBP generally apply to both categories of bridges located on public roads. Federal-aid highway bridges are generally located on the National Highway System, a 160,000-mile network that carries over 40 percent of the nation's highway traffic. Non-Federal-aid highway bridges are generally located on local or rural roads that carry lower volumes of traffic than state-owned bridges. The HBP affords state DOTs discretion in determining how to use their HBP funds, and as a result, states use HBP funds and select bridge projects in a variety of ways. The HBP gives states three key flexibilities in determining how to use their HBP resources. First, the HBP has evolved to allow states to use program funds not only for bridge replacement and rehabilitation, but also for a broad array of purposes--including painting, seismic retrofitting, systematic preventive maintenance, installation of scour countermeasures (to address the effects of sediment erosion around bridge piers and abutments), and anti-icing or deicing applications-- regardless of the bridge's condition. In addition, FHWA has determined that the costs for personnel and equipment used in bridge inspections and for bridge management systems are consistent with the purpose of the HBP and therefore are also eligible uses for HBP funds. Thus, states have the flexibility to use HBP funds on bridge projects that may not immediately reduce their inventory of deficient bridges. Secondly, states have flexibility in determining how to split HBP resources between state and locally owned bridges. Aside from a requirement to distribute funds equitably, the only HBP requirement applicable to states' allocation of program funds is that states must spend a minimum (15 percent) on non- Federal-aid highway bridges. Third, states may also spend program funds on other, nonbridge, transportation priorities by transferring up to 50 percent of their annual HBP funding to other core Federal-aid highway programs, though a penalty is invoked by reducing the state's HBP funds in the succeeding year by the amount transferred. Many states have taken advantage of this provision over the years and transferred some of their HBP funding to other programs, although FHWA officials pointed out that some of the transferred HBP funds may still be spent on bridges and funds from other Federal-aid highway programs may also be spent on bridges. FHWA data show that significant funds have flowed toward bridges from other programs which, from a national perspective, exceed outflows from the HBP. Finally, planning for how HBP funds are spent is generally under the control of state DOTs; once states select bridge projects, they may apply to FHWA for the federal share of the costs, which is generally 80 percent of the project cost. In part due to these flexibilities, state DOTs we visited have established a range of priorities for their HBP funds--from reducing the number of their deficient bridges to seismically retrofitting their bridges--and some opted to transfer their HBP funds to fund other transportation priorities. Although the key purpose of the HBP is to enable states to improve the condition of their deficient bridges, some state transportation officials we interviewed explained that they do not focus on reducing their inventories of deficient bridges for several reasons: Deficient bridges are not necessarily unsafe. Many state transportation officials we interviewed told us that some of the deficient bridges in their states are in at least reasonably good condition and are safe. In addition, FHWA reported in 2007 that classifying a bridge as deficient does not immediately imply that it is likely to collapse or that it is unsafe. According to the FHWA report, if proper vehicle weight restrictions are posted and enforced, deficient bridges can continue to serve most traffic conditions. FHWA requires that bridge owners close to traffic any bridges that they determine to be unsafe. The HBP apportionment formula may create a disincentive to improve deficient bridges. Many federal and state officials we met with noted this potential disincentive that occurs because reducing the number and deck area of deficient bridges reduces a state's HBP funding eligibility. Some deficient bridge projects can be cost-prohibitive. Some state officials explained that certain large-scale bridge projects--often the most traveled, urban bridges on interstate corridors--are too expensive to be implemented with HBP funds alone, especially costly "mega" projects that have an estimated total cost greater than $500 million. State DOTs use a variety of criteria, tools, and methods to select among potential bridge projects. Officials in the six states we visited use criteria such as bridge condition ratings, average daily traffic over bridges, local transportation priorities, or funding availability when prioritizing and selecting among potential bridge projects. Some states have also developed tools and approaches beyond those required by the HBP--such as bridge management systems, element-level inspections, state-specific condition ratings, and various prioritization approaches--to help them gauge bridge conditions and further inform their selection of bridge projects for funding. For example, all of the states we visited have adopted, or are considering, some form of bridge management system for gathering and analyzing bridge data to help manage their bridge assets and more efficiently allocate limited HBP resources among competing bridge priorities. States use these systems to predict future bridge conditions, estimate bridge maintenance and improvement needs, determine optimal policies for rehabilitation and replacement, and recommend projects and schedules within budget and policy constraints. FHWA has actively encouraged, but has not required, states to use bridge management systems, in part, by providing state transportation officials with relevant training and technical support. In addition, all of the states we visited required bridge inspectors to gather more detailed "element-level" bridge condition data, thereby exceeding the federal inspection requirements that require inspection of only the three major bridge components (superstructure, substructure, and deck). Furthermore, some state DOTs use their own bridge rating systems to better gauge bridge conditions and to inform their selection of bridge projects for funding. For example, the New York State DOT uses its own condition rating scale, which is based on an assessment of 47 individual bridge elements, to prioritize bridge projects. Finally, state DOTs use different methods to prioritize and select bridge projects for funding. Whereas some states we visited had highly centralized prioritization processes, others allowed the process to vary across the state. Bridge conditions, as measured by the number of deficient bridges and average sufficiency rating, improved from 1998 through 2007. According to NBI data, the total number of deficient bridges--including both structurally deficient and functionally obsolete bridges--has decreased over the last 10 years, even as the total number of bridges has increased. From 1998 through 2007, the number of deficient bridges declined by nearly 12 percent, from 172,683 to 152,317, even with the addition of more than 16,000 new bridges to the NBI (see fig. 1). The decline in the overall number of deficient bridges over the past decade reflects a reduction in the number of structurally deficient bridges. From 1998 through 2007, the number of structurally deficient bridges decreased by 22 percent, from 93,118 to 72,519 (see fig. 2). During that same period, the number of functionally obsolete bridges increased slightly from 79,565 to 79,798, an increase of 233 bridges. The reduction in the number of structurally deficient bridges, rather than functionally obsolete bridges, over this time period may reflect bridge owners' efforts to address the deterioration or damage that are characteristic of structurally deficient bridges. Although reducing or eliminating structurally deficient bridges may not always be a state's highest priority, structurally deficient bridges often require maintenance and repair to remain in service. By contrast, functionally obsolete bridges do not necessarily require repair to remain in service and, therefore, are unlikely to be transportation officials' top priority for rehabilitation or replacement. The average sufficiency rating of all bridges--including both deficient and not deficient bridges--also improved slightly between 1998 and 2007, from 75 to 79 on the sufficiency rating's 100-point scale. Additionally, while structurally deficient bridges generally have lower sufficiency ratings (average rating of 42 in 2007) than functionally obsolete bridges (average rating of 69 in 2007), the average sufficiency ratings of both types of deficient bridges improved slightly over the last decade. Improvements were most notable in bridges owned by local agencies and on rural routes, which may be attributable, in part, to the federal bridge program requirement--under HBP and some of its predecessor programs--that states spend a minimum amount of their apportionment on non-Federal-aid highway bridges. For example, from 1998 through 2007, the average sufficiency rating for bridges owned by local agencies improved from 71 to 77, and the number of deficient bridges decreased by over 17 percent, from 99,492 to 82,101. During that same period, for bridges owned by state agencies, the average sufficiency rating improved from 79 to 82, and the number of deficient bridges decreased by 4 percent, from 70,066 to 67,232 (see fig. 3). With respect to urban and rural bridges, the number of deficient rural bridges declined from 1998 through 2007 and the number of deficient urban bridges increased. From 1998 through 2007, the number of deficient rural bridges decreased by about 19 percent, from 130,910 to 106,209. During that same period, the number of deficient urban bridges increased by about 11 percent, from 41,659 to 46,086 (see fig. 4). The average sufficiency rating for both rural and urban bridges improved slightly from 1998 through 2007; for rural bridges, the average rating increased from 74 to 78, and for urban bridges, the average rating increased from 79 to 82. A bridge is classified as rural in the NBI database if it is not located inside a designated urban area. state and local bridge spending, the expansion of bridge project eligibility, and limitations in the NBI data. First, the impact of the federal investment in the HBP is difficult to measure in part because there are no comprehensive data for state and local spending on bridges. FHWA does track a portion of each state's capital spending on bridges, and the agency has generated a single, national level estimate for total bridge expenditures by all government levels; however, there are significant gaps in this information, and neither source is comprehensive or detailed enough to be used to determine the impact of the HBP. The state transportation officials we spoke with during our site visits estimated that state and local spending on bridges ranged from the minimum match amount (generally 20 percent of the HBP apportionment amount) to more than four times the state's apportioned HBP funds. Our previous work has shown that although federal investment in HBP and other Federal-aid highway programs has increased over time, this investment has not resulted in commensurate increases in the nation's total government spending (federal, state, and local) on its highway system. In particular, as the level of federal funding has increased since the mid-1990s, states have not maintained their level of effort in highway spending, and federal funds have increasingly been substituted for state funds. This suggests that increased federal highway funding influences states and localities to substitute federal funds for state and local funds they otherwise would have spent on highways and bridges. Second, the impact of the HBP is also difficult to measure because HBP funds can, in some cases, be used for a variety of bridge projects without regard to a bridge's deficiency status or sufficiency rating. Therefore, simply measuring changes in the number of structurally deficient or functionally obsolete bridges does not reflect the full impact of the program since these measures do not capture the impact of the HBP investment in the other eligible activities that do not necessarily result in an immediate reduction in the number of deficient bridges. Without quantifiable performance measures to track the full range of desired outcomes for the HBP, it is difficult to measure the program's impact and determine the extent to which the program is serving its stated purpose. Finally, another difficulty in determining the impact of HBP funding occurs because the NBI does not readily permit changes in the condition of a group of bridges to be tracked across time. Each bridge in the NBI is assigned an identifying number by the relevant state DOT. However, the identifying number for a bridge at a specific location may change over the life of that bridge. Such a change may occur when a state renumbers, replaces, or closes and subsequently reopens a bridge. As a result, it is difficult to track changes in the condition of any specific bridge or group of bridges to determine if, for example, the same bridges that were deficient in 1998 are still deficient today, to see how many bridges have been replaced, or to determine the impact of new bridges added to the inventory (which may not be funded by the HBP) on the overall condition of the nation's bridges. Evaluating the impact of the HBP is important not only to understand the outcomes of past spending but also to determine how to sensibly invest future federal resources. The number of HBP-eligible bridges is expected to increase as a large share of the nation's bridges built in the 1960s and early 1970s age and become eligible for rehabilitation and replacement as a group; as a result, states and local agencies may see a spike in their need for bridge rehabilitation and replacement funding. In this environment of increasing demand for limited resources, it is especially important for FHWA and Congress to be able to evaluate the impact of the HBP in order to ensure that the program is providing an acceptable return on investment and addressing national transportation priorities. The HBP, while generally helping to improve bridge conditions, does not fully align with our principles for re-examining surface transportation programs in that the bridge program lacks focus, performance measures, and sustainability. Our principles, which are based on our prior work and federal laws and regulations, include: (1) ensuring program goals are well defined and focused on the federal or national interest, (2) incorporating performance and accountability into funding decisions, (3) employing the best tools and approaches to emphasize return on targeted federal investment, and (4) ensuring fiscal sustainability. First, HBP's goals are not focused on a clearly identified federal interest. Over the years, the program's statutory goals have expanded from improving deficient bridges to supporting seismic retrofitting, preventive maintenance, and many other activities, thus expanding the federal interest to potentially include almost any bridge in the country. Our previous work has emphasized the importance of identifying clear areas of federal interest as a first step in determining program goals. For example, if mobility is determined to be a key federal interest and a primary goal, the HBP could be targeted toward bridges whose conditions have the most impact on congestion and economic competitiveness and that carry higher levels of traffic or freight than those bridges in remote areas that may serve only a few people each day. If rehabilitating and reducing deficient bridges is determined to be a key federal interest, then the program could be further targeted toward that goal. The federal interest may also be greater in bridge projects that are too expensive for states to undertake without additional federal assistance or in projects that extend beyond the borders of a single state. Once the federal interest has been determined, our principles call for basing the federal share of the cost of bridge projects on the level of federal interest. Second, there is no clear tie between HBP funding and performance. HBP funds are apportioned to states without regard to program performance because the HBP formula is based on a calculation of needed repairs to deficient bridges but does not consider a state's efforts or effectiveness in reducing its inventory of deficient bridges or controlling costs. Because the formula does not factor in other eligible program activities, such as systematic preventive maintenance, there is no link between the apportionment formula and the states' performance of these activities. Without performance measures to link funding to performance, states lack an incentive to improve the return on the federal investment and are not held accountable for the results of their investments. Our work has shown that an increased focus on performance and accountability for results can help the federal government better target limited federal resources. Third, the HBP generally lacks sufficient tools to determine the effects of the federal investment in bridges. In this regard, bridge management systems, which are currently used by many states but not required by the program's authorizing legislation, may be useful for prioritizing projects and making funding decisions to improve results and emphasize return on investment. Finally, the HBP's fiscal sustainability remains a challenge in light of aging bridge infrastructure, coupled with the declining purchasing power of funding currently available for bridge maintenance, rehabilitation, replacement and the recent growth in construction costs. Based on our prior work, two tools that could possibly improve the sustainability of the HBP are a maintenance-of-effort requirement and tolling. A maintenance- of-effort requirement, whereby state or local grantees would be required to maintain their own level of funding in order to receive HBP funds, could reduce the potential substitution of federal funds for state and local funds under the program. In addition, our prior work has shown that removing barriers to, or even promoting, tolling can lead to more efficient management of existing infrastructure and capacity. Addressing the HBP's future fiscal sustainability is critical, given the overall fiscal imbalance facing the nation and the lack of assurance that HBP funding is allocated to projects that are in the federal interest and provide the best return on investment. Our work on the HBP can provide some perspective on several provisions in the proposed legislation under review by this committee, the National Highway Bridge Reconstruction and Inspection Act of 2008 (S. 3338). The legislation proposes, among other things, to authorize an additional $1 billion for fiscal year 2009 from the U.S. Treasury's general fund to address bridge infrastructure. The legislation would also require DOT to strengthen bridge inspection standards, adopt a risk-based process for prioritizing certain bridge rehabilitation and replacement projects, and require that states develop 5-year performance plans for bridge inspections and for the rehabilitation or replacement of deficient bridges. As summarized below, our work on the HBP is related to several provisions in the proposal: For example, the legislation calls for DOT to apply a risk-based prioritization process to every structurally deficient or functionally obsolete bridge in the nation. While such a process could potentially help target scarce federal resources to bridges that are most critical to safety and mobility, many state transportation officials we interviewed during our work raised questions about the appropriateness of focusing on all deficient bridges, noting that all deficient bridges are not necessarily unsafe and some large-scale deficient bridge projects can be too cost- prohibitive to be implemented with HBP funds alone. Also, the legislation is unclear about how, if at all, the new risk-based prioritization process will differ from or relate to DOT's established sufficiency rating process. FHWA uses sufficiency ratings primarily to determine HBP eligibility and apportion funds. We found that states may consider sufficiency ratings in their prioritization processes but generally do not rely on these to prioritize bridge projects. In addition, the legislation calls for DOT to require states to develop 5-year performance plans covering the inspection and rehabilitation or replacement of all structurally deficient or functionally obsolete bridges. We support the use of performance plans to articulate program goals that are in the federal interest, encourage accountability for results, and help ensure that the federal government targets resources to programs that best achieve intended outcomes and national priorities. Our work has shown that the current HBP funding formula is not linked to a state's performance in reducing its inventories of deficient bridges and we are recommending in our report being issued today that DOT work with Congress to define specific national goals and performance measures for the HBP. This legislative provision might be strengthened by requiring states to report on their progress in achieving their goals as part of each annual update to their performance plan. Also, the legislation requires that the performance plans be focused on all deficient bridges, and the same issue that I raised earlier about the appropriateness of this focus applies here as well. The legislation also calls for DOT to require the states to develop and implement a bridge management system. In our work on the HBP, all six states we visited had adopted, or were considering, some form of bridge management system to help manage their bridge assets and more efficiently allocate limited HBP resources among competing bridge priorities. In the report we are releasing today, we are recommending that DOT evaluate and incorporate into the HBP best tools and practices, such as bridge management systems. Although many aspects of the HBP are carried out at the state level--with ultimate responsibility for bridge inspection and project selection residing with the states--the federal government bears responsibility for ensuring that the program achieves results that are in the federal interest and that the program's resources are allocated efficiently. The purpose of the HBP has greatly expanded over the years, making nearly any bridge potentially eligible for federal funding, and as a result, the federal interest in bridges lacks focus. Additionally, many state officials told us that measures used by the HBP to apportion federal funds--bridge deficiency status and sufficiency ratings--are not necessarily good proxies for the safety or risk associated with specific bridges. Even though data indicate that the number of structurally deficient bridges has declined over the last 10 years, most of this improvement has been in locally owned and rural bridges. Oftentimes, the largest and most critical bridges carrying more interstate commerce are too expensive to be funded by the HBP and so require other funding sources to be replaced or rehabilitated. Moreover, without comprehensive data on state and local spending on bridges, it is impossible either to distinguish the impact of HBP funding from the impact of state and local bridge funding or to determine the extent to which states are substituting HBP funding for state and local funds that would otherwise have been spent on bridges. Absent clear goals and related performance measures for the HBP, it is difficult to determine the overall effectiveness of the program's investment in bridges. Our principles have suggested several ways to improve the HBP to ensure that it is more focused and performance-based in the future. For example, tools such as bridge management systems provide bridge managers with a more systematic approach to prioritizing projects and making funding decisions. Our work has shown that some states are using bridge management systems and other tools that generally exceed federal standards. Additionally, linking program goals to performance measures to determine whether goals are met and using that information to select projects and make funding decisions, can create incentives for state and local governments to improve the performance of their bridge programs, as well as the overall transportation system. As the projected revenue shortfall in the Highway Trust fund rapidly approaches and as bridge costs rise and infrastructure continues to age, incorporating strategies to better ensure the fiscal sustainability of the HBP is also critical. To improve the focus, performance, and sustainability of the HBP, the report we are releasing at this hearing recommends that the Secretary of Transportation work with Congress to take the following actions: identify and define specific national goals for the HBP; determine the performance of the program by developing and implementing performance measures related to the goals for the HBP; identify and evaluate best tools and practices that can potentially be incorporated into the HBP, such as bridge management systems; and review and evaluate HBP funding mechanisms to align funding with performance and support a targeted and sustainable federal bridge program. In reviewing a draft of the report, DOT officials said that they generally agreed with our findings and recommendations, and they provided technical comments which we incorporated in the report and this testimony, as appropriate. DOT officials also commented that they thought our re-examination principles had broader applicability than just the HBP--noting that DOT had incorporated our principles into the Department's recent proposal for reforming surface transportation programs. DOT's reform proposal, released in July 2008, recommends consolidating the existing network of over 100 surface transportation programs into eight broad, intermodal programs. The officials noted that DOT's reform proposal articulates a narrower federal interest and a framework for performance management tied to clearer goals for surface transportation programs. We have not commented on DOT's reform proposal, and the outcome of that proposal in the surface transportation reauthorization debate that will occur during 2009 is uncertain. However, we agree with DOT that our re-examination principles are applicable at a broader level than a specific program like HBP; in fact, we developed our principles because of (1) our concerns, raised in prior work, that many federal surface transportation programs are not effective at addressing key transportation challenges such as growing congestion and freight demand and (2) our conclusion that our principles could help drive the re- examination of those programs and help assess options for restructuring the entire federal surface transportation program. Chairman Boxer, this concludes my prepared statement. I would be happy to respond to any questions that you or members of the committee may have. For further information on this statement, please contact Katherine Siggerud at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony were Rita Grieco, Assistant Director; Claudia Becker; Stephanie Fain; Carol Henn; Bert Japikse; Delwen Jones; Leslie Locke; 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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The August 1, 2007, collapse of a Minnesota bridge raised nationwide questions about bridge safety and the Department of Transportation's (DOT) prioritization of bridge resources. The Highway Bridge Program (HBP), the primary source of federal funding for bridges, provided over $4 billion to states in fiscal year 2007. This testimony, based on a report GAO is releasing today, addresses (1) how states use HBP funds and select bridge projects for funding, (2) what data indicate about bridge conditions and the HBP's impact, and (3) the extent to which the HBP aligns with principles we developed, based on our prior work and federal laws and regulations, for reexamining surface transportation programs. The testimony also discusses the implications of our work for related sections of proposed legislation under review by this committee, the National Highway Bridge Reconstruction and Inspection Act of 2008 (S.3338). As context for understanding GAO's findings on the HBP, based on information gathered during bridge inspections that are generally conducted every 2 years, the HBP classifies bridge conditions as deficient or not; assigns each bridge a sufficiency rating reflecting its structural adequacy, safety, serviceability, and relative importance for public use; and uses that information to distribute funding to states to improve bridges. Deficient bridges include those that are structurally deficient, with one or more components in poor condition, and those that are functionally obsolete, with a poor configuration or design that may no longer be adequate for the traffic they serve. Use of HBP funds and project selection: The HBP affords states discretion to use HBP funds and select bridge projects in a variety of ways. Some states are focused on reducing their number of deficient bridges, while other states are pursuing different bridge priorities. For example, California has focused on seismically retrofitting bridges, a safety concern for that state. Furthermore, some states have developed tools and approaches for selecting bridge projects that go beyond those required by the HBP--such as bridge management systems and state-specific bridge condition rating systems. Bridge conditions and impact of HBP: Bridge conditions, as measured by the number of deficient bridges and average sufficiency rating of all bridges, improved from 1998 through 2007. However, the impact of the HBP on that improvement is difficult to determine because (1) the program provides only a share of what states spend on bridges and there are no comprehensive data for state and local spending on bridges and (2) HBP funds can, in some cases, be used for a variety of bridge projects without regard to a bridge's deficiency status or sufficiency rating. Alignment of HBP with GAO principles: The HBP does not fully align with GAO's principles in that the program lacks focus, performance measures, and sustainability. For example, the program's statutory goals are not focused on a clearly identified federal interest, but rather have expanded from improving deficient bridges to supporting seismic retrofitting, preventive maintenance, and many other projects, thus expanding the federal interest to potentially include almost any bridge in the country. In addition, the program lacks measures linking funding to performance and is not sustainable, given the anticipated deterioration of the nation's bridges and the declining purchasing power of funding currently available for bridge maintenance, rehabilitation, and replacement. The results of our work are generally consistent with provisions of S.3338 that call for a risk-based prioritization process for selecting bridge projects, 5-year performance plans, and bridge management systems. Our work does raise some questions about the legislation's focus on all deficient bridges because some deficient bridges do not need immediate repairs to carry traffic safely.
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Prior to 1940, U.S. presidents or their descendents typically retained ownership of papers documenting their terms of office. The fate of these papers was up to the former president or his descendents, and some were lost forever. In 1940, Franklin D. Roosevelt was the first president to arrange to have a library built using privately raised funds and to then transfer both the facility and his papers to the federal government. Through its Office of Presidential Libraries, NARA operates presidential libraries housing the papers of all subsequent presidents through George W. Bush, as well as President Roosevelt's predecessor in the White House, Herbert Hoover. At the end of a president's term, NARA staff begin working with the president's official records and other materials. This work goes on during library construction and during the period between the dedication of the library facility and its transfer to the federal government. Table 1 provides facts about the 13 presidential libraries and museums operated by NARA. For most of the libraries, as the president's term was coming to a close or after it ended, friends and supporters of the president created a private charitable foundation to collect donations to construct a library. Under current law, NARA collaborates with each presidential library foundation on the construction of the library facility, and when the facility construction is complete, the foundation deeds or gives the right to use the library facility or a portion of the facility to NARA. The Presidential Libraries Act of 1986 also requires that the National Archives Trust Fund receive an operating endowment for each library before NARA can accept the transfer of the library. These endowments fund some of the federal government's costs for the operation and maintenance of the presidential libraries. Figure 1 captures key steps of the current process of establishing a presidential library. Some variations from this process may exist. Each library is operated by a director who is a NARA employee, and other library staff who are also NARA employees. The staffs typically include an administrative officer, facility manager, education and exhibits specialists, archivists, archives technicians, and clerks, among other staff. The director of a presidential library is appointed by the Archivist of the United States, the head of NARA, who consults with the former president in selecting a candidate. The Office of Presidential Libraries is headed by the Assistant Archivist for Presidential Libraries. The Office of Presidential Libraries is responsible for overseeing the management of records at the libraries, the development of policies and procedures for the management and operation of presidential libraries, and the development and coordination of plans, programs, and resource allocations at presidential libraries. The Office of Presidential Libraries is also involved in the creation of new presidential libraries. Funds appropriated by Congress support NARA's staffing, administration, security, maintenance, and renovation projects at the library. In fiscal year 2009, NARA spent more than $68 million in appropriations to operate the presidential libraries. In addition, for fiscal year 2009 NARA received $41.5 million in special appropriations for repairs and restoration to the John F. Kennedy Presidential Library and Museum ($22 million), the Franklin D. Roosevelt Presidential Library and Museum ($17.5 million), and the Lyndon Baines Johnson Library & Museum ($2 million). Each private foundation is operated by a director, president, or CEO and other staff that may include a chief financial officer and director of communications, among other positions. Foundation support enables the libraries to expand their research and archival functions, as well as undertake additional projects such as public outreach efforts. The foundations' level of involvement in the activities at their associated library, such as collaboration on public and educational programs, varies from library to library. Foundations may also sponsor their own programs and activities, such as hosting a lecture series or academic discussion or producing a newsletter. NARA officials told us that, in most cases, these kinds of programs and activities are offered in conjunction with and supported by library staff. For example, a foundation may pay for a lecture series that is held in NARA-controlled space. The foundations may also generally support their associated libraries with additional funding for new facilities and equipment and for updating permanent exhibits, adding program space, and giving the library the use of foundation staff time for library activities. Foundations provide these resources directly to their associated library. This process generally is handled at the library level based on the relationship between the library and the foundation. Each presidential library also has a trust fund that receives revenue from the sale of publications, museum shop sales, document reproductions, audio-visual reproductions, library admissions, public space rentals, educational conferences, and interest income. Trust- fund money helps the library cover the cost of museum shop inventory, personnel, operational and financial systems, equipment, and supplies. These funds may also support exhibit-related and public-programming expenses. In fiscal year 2009, the trust funds for presidential libraries had a total end-of-year balance of approximately $15 million. In addition to trust funds, presidential libraries also maintain funds from gifts donated to a library for general library support or for specific projects or programs. The federal laws specific to presidential libraries focus primarily on the design and construction of library facilities and, once constructed, the deeding of the library facilities, or the rights to use the facilities, to the federal government. Congress has enacted three primary statutes that provide the legal rules for the design, construction, and transfer of library facilities. NARA's building-use regulations outline the permissible and prohibited uses of the presidential library facilities by other groups. According to the regulations, other groups may request the use of presidential library facilities when the activity is sponsored, cosponsored, or authorized by the library; conducted to further the library's interests; and does not interfere with the normal operation of the library. The regulations prohibit the use of the facilities for profit-making, commercial advertisement or sales, partisan political activities, or sectarian activities. When NARA considers it to be in the public interest, NARA may allow for the occasional, nonofficial use of rooms and spaces in a presidential library and charge a reasonable fee for such use. Additionally, the regulations require outside organizations to apply for the use of library space by writing to the library director and submitting an Application for Use of Space in Presidential Libraries. Applying organizations must agree to review their event plans with library staff and that the plans will conform to library rules and procedures. The application also confirms that the organization will not charge admission fees, make indirect assessment fees for admission, or take collections for their events. Further, the application prohibits the organization from suggesting that the library endorses or sponsors the organization. Federal laws and regulations specify for all federal employees--including federal employees working at presidential libraries--what they may and may not do in their official capacity. For example, federal employees may not engage in commercial or political activity associated with their federal positions. According to NARA's General Counsel, there are no special laws or regulations that apply only to how library employees interact with the foundation or, if applicable, university associated with their library, but the laws and regulations that apply throughout the federal government also apply to library employees. The Hatch Act provides the rules for the activities of library employees at events such as candidate debates or speeches by candidates that sometimes take place at the libraries. The Hatch Act, which is enforced by the U.S. Office of Special Counsel (OSC), prohibits certain political activities for federal employees. At an event such as these (or at any other time) a library employee may not use official authority to interfere with an election; solicit, accept, or receive political contributions from any person; run for nomination or as a candidate for election to a partisan political office; or solicit or discourage the political activity of any person connected to the business of the employee's office. NARA employees must also follow the Standards of Ethical Conduct for Employees of the Executive Branch issued by the Office of Government Ethics. The standards emphasize that employees have a responsibility to the U.S. government and its citizens to place loyalty to the Constitution, laws, and ethical principles above private gain, and set forth 14 general principles. Among other things, the standards describe limitations on actions an employee may take while seeking other employment, and require that employees use the time they are serving in an official capacity in an honest effort to perform official duties. NARA's Office of Presidential Libraries oversees the 13 presidential libraries. That office has developed systemwide policies, including the Presidential Libraries Manual, which discusses museum activities and records topics, and the NARA / Office of Presidential Libraries Architecture and Design Standards for Presidential Libraries. The Office of Presidential Libraries also works with the NARA General Counsel on the development of policies governing the library-foundation relationship. The NARA General Counsel has issued legal opinions on foundations' use of library facilities, when and how library staff can support foundation activities, and if library staff can fundraise for the foundations. Additionally, NARA officials explained that the NARA General Counsel and the Office of Presidential Libraries negotiate with the foundations on the agreements establishing the relationship between a new library and its associated foundation. According to NARA officials, library directors at the individual libraries consult with the NARA General Counsel about activities that could have political undertones before allowing a program or event. For example, library directors have contacted NARA General Counsel to inquire about using libraries as polling places. NARA approved the use of libraries as polling places as long as certain requirements were met such as that no political solicitation occurs on library-controlled property. In another example, a local political party requested but was not allowed to hold a political forum at the library. NARA officials told us that NARA does not have internal directives specifically regarding the supervision of library and foundation staff. They said that when library staff are concerned about supervision or other issues while working on a collaborative project with the foundations, they are expected to seek advice from the NARA General Counsel's ethics program staff. Table 3 provides a summary of NARA policies and NARA General Counsel opinions concerning library-foundation activities and other outside uses of the libraries. Each presidential library has a written agreement with its associated foundation and, if applicable, the associated university that governs aspects of the relationship between the entities. These agreements differ in format; content; and the extent to which they address use of facilities, library and foundation staff relationships, and political activities. These agreements must be consistent with the applicable statutes and NARA regulations. At some libraries, the library-foundation relationship is addressed by more than one agreement due to the updating or supplementing of original documents, or to the changing format of the agreements over time. Some of the oldest agreements are primarily a series of Letters of Offer and Acceptance between the foundation and the General Services Administration (GSA), with later agreements taking the form of a mutually signed agreement between the foundation and NARA. For example, the Ford museum and the Hoover, Truman, Eisenhower, and Kennedy library agreements (from 1957 to 1980) include one or more Letters of Offer and Acceptance between the foundation and the GSA. Later agreements from more-recently established libraries, as well as earlier libraries that updated their agreements, include mutually signed agreements between the foundation and NARA. Of these later agreements, some focus on a specific project or aspect of the library-foundation relationship, while some focus broadly on the library-foundation relationship. We reviewed the library-foundation agreements and found that, over time, the agreements have become increasingly more detailed, especially regarding staff, each entity's use and control of the different parts of the facilities, and political activities. Earlier agreements are largely focused on the transfer of property from the foundation to the United States, while later agreements address additional aspects of the library-foundation relationship. For example, later agreements address which entity controls specific parts of the facilities, including details related to one entity's use of the other's space (such as the permitted purposes for using the other's space, and reimbursing the other entity for costs associated with using its space). Later agreements are also more likely to clarify the different roles and responsibilities of library and foundation staff, and address activities or tasks that library staff are not allowed to perform. Some of the later agreements also address potential conflicts of interest between the library and the foundation. For example, two of the later agreements state that foundation staff are to act in the best interests of the foundation, and NARA staff are to act in the best interests of NARA and the United States. Regarding political activities, two of the later agreements state that library space is not allowed to be used for partisan political activities. Also, NARA regulations give library directors the authority to establish supplemental policies. According to NARA officials, these supplemental policies may provide further detail on the library-foundation relationship regarding facilities, staff, and political activities. Our review was limited to NARA- wide policies and library-foundation agreements and we did not review any local library supplemental policies. NARA officials explained that the written agreements between individual libraries and the foundations are important, but that they also do not fully prescribe the relationships between the entities. They said that the relationships are shaped over time and by factors such as the particular foundation's interest in collaborating with the library or doing charitable work elsewhere. For example, the Harry S. Truman Library and Museum and its associated foundation, the Truman Library Institute, are colocated and often collaborate on educational programs. The foundation describes itself as working with the library to "fulfill the Truman Library's commitment to research and education." In contrast, the mission of the foundation associated with the Jimmy Carter Library and Museum, The Carter Center, does not directly focus on the library, but rather "to advance peace and health worldwide." NARA officials said that interaction between individual libraries and their foundations vary, but they also stressed that no one foundation's emphasis is more correct than another. These are examples of differences among foundations and how those differences shape the level of involvement by a foundation with a library. We provided a draft of this report to NARA. NARA had no substantive comments and provided technical comments by e-mail, which we incorporated as appropriate. NARA's letter is reprinted in appendix I. We will send a copy of this report to the Archivist of the United States. This report will also be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. In addition to the contact named above, David Lewis, Assistant Director; Sonya Phillips; Juliann Gorse; Brianna Benner; Sabrina Streagle; Lois Hanshaw; Susan Christiansen; Lindsay Read; and Jessica Thomsen made key contributions to this report.
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The National Archives and Records Administration (NARA) operates presidential libraries for all of the former U.S. presidents since Herbert Hoover. These libraries received over 2.4 million visits in 2009, including researchers, public program attendees, and museum visitors. Each library is associated with a private foundation, which raised the funds to build the library and then turned the library facility over to the federal government. These foundations typically have ongoing relationships with the libraries they built, and some of these library-foundation relationships involve sharing of staff and facilities. Per congressional request, this report describes the principal laws, regulations, and NARA policies that govern library-foundation relationships and the appropriate use of library facilities and staff. GAO reviewed specific laws governing presidential libraries, and NARA regulations and policies. We also reviewed applicable laws and regulations governing activities held on government property and acceptable activities of federal employees. Further, we interviewed relevant NARA officials. NARA reviewed a draft of this report and had no substantive comments. NARA made technical suggestions which we incorporated as appropriate. GAO is not making any recommendations in this report. The federal laws specific to presidential libraries focus primarily on the design and construction of library facilities and, once constructed, the deeding of the library facilities, or the rights to use the facilities, to the federal government. NARA building-use regulations outline the permissible and prohibited uses of presidential library facilities by outside organizations. Prohibited uses include profit-making, commercial advertisement or sales, partisan political activities, or sectarian activities. Other laws and regulations govern what federal employees may and may not do in their official capacity. As federal employees, NARA library employees must follow these rules in their interactions with the foundation associated with the library. NARA's Office of Presidential Libraries has developed a policy manual and standards that address topics such as museum activities and records. This office also works with the NARA General Counsel to develop guidance governing the library-foundation relationship, such as those related to the foundations' use of library facilities and when and how library staff can support foundation activities. The libraries also have one or more written agreements with their associated foundation that govern different aspects of the relationship. These agreements differ in format; content; and the extent to which they address use of facilities, library and foundation staff relationships, and political activities.
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FDA conducts quality system inspections of medical device manufacturers' establishments to assess compliance with applicable FDA regulations, including the quality system regulation to ensure good manufacturing practices and the regulation requiring reporting of adverse events. FDA's routine postmarket quality system inspections include both comprehensive and abbreviated inspections, which differ in the scope of inspectional activity. A comprehensive postmarket inspection of an establishment assesses multiple aspects of the manufacturer's quality system, including management activities to establish, implement, and review the quality system; procedures to control the design and the production or processing of the device to ensure that it conforms to specifications and user requirements; and procedures for preventing, identifying, and correcting quality problems. Based upon its findings during inspection, FDA classifies completed inspections into one of three categories based on the extent to which the establishment deviates from applicable requirements of the quality system regulation: No action indicated (which indicates no deviations or only minor deviations), voluntary action indicated (which indicates minor to significant deviations), or official action indicated (which indicates significant deviations and warnings). MDUFMA required FDA to accredit third persons--which are organizations--to conduct inspections of certain establishments. Manufacturers that meet eligibility requirements may request a postmarket inspection by an FDA-accredited organization. To be eligible to request an inspection of an establishment by an accredited organization, a manufacturer must manufacture a class II or class III medical device; market at least one of those devices in the United States; market or intend to market at least one of those devices in a foreign country and either (a) one of those countries certifies, accredits, or otherwise recognizes the FDA-accredited organization as authorized to conduct inspections of establishments or (b) the manufacturer submits a statement to FDA that the law of one of the countries recognizes an inspection by FDA or the FDA-accredited organization; have received, after its most recent inspection, a classification by FDA as "no action indicated" or "voluntary action indicated" for the establishment that it seeks to have inspected by an accredited organization; and request and receive FDA's approval to use a specific accredited organization. In addition, to be eligible to request an inspection by an accredited organization, domestic establishments may not have been inspected by the accredited organization during the previous four years, unless the manufacturer requests and receives a waiver from FDA, and foreign establishments must be periodically inspected by FDA. Organizations seeking accreditation to conduct inspections through the accredited persons inspection program submit applications to FDA for review. FDA established criteria for accreditation that incorporate the minimum requirements set out in MDUFMA, including the independence and competence of the accredited organizations. For example, to ensure the independence of organizations accredited to conduct inspections of medical device establishments, MDUFMA prohibits accredited organizations from engaging in the design, manufacture, promotion, or sale of articles regulated by FDA, and FDA's criteria include whether the organization has procedures in place to prevent conflicts of interest. To ensure that accredited organizations are competent to conduct inspections, MDUFMA requires that accredited organizations agree to limit their work to that for which they have sufficient competence and capacity, and FDA's criteria include whether the organizations' personnel have knowledge of pertinent FDA laws, regulations, and inspection procedures. FDA developed a scoring procedure to evaluate applications from organizations in light of these and other criteria. FDA also developed a training program for inspectors from accredited organizations that involves both formal classroom training and training inspections of establishments. The formal classroom training includes instruction on FDA's regulations pertaining to medical devices and FDA's techniques for conducting quality system inspections. FDA also requires inspectors to successfully complete three joint inspections with FDA before being cleared to conduct independent inspections. FDA relies on manufacturers to volunteer to host these joint inspections. During the first training inspection, an FDA inspector leads the inspection and the accredited organization's inspector acts primarily as an observer. During the second training inspection, the accredited organization's inspector conducts an inspection while being observed and evaluated by an FDA inspector who may provide assistance to the trainee. During the third training inspection, the accredited organization's inspector conducts an inspection while being observed and evaluated by an FDA inspector who may not provide assistance to the trainee. Each individual inspector from an accredited organization must complete all training requirements successfully before being cleared to conduct independent inspections. Manufacturers that want to have an inspection through the accredited persons inspection program submit a request to FDA that identifies the accredited organization they intend to use and asks for FDA's approval. Manufacturers include with that request documentation showing that they meet the eligibility criteria. FDA can then provide clearance and approve the request, ask for additional information, or deny the request. If the request is approved, the manufacturer enters an agreement with the approved accredited organization and schedules an inspection. Once the accredited organization completes its inspection, it prepares a report and submits it to FDA. FDA makes the final assessment of compliance with applicable requirements. FDA granted accreditation to 17 of 23 organizations. FDA denied accreditation to applicants that did not meet minimum criteria because their applications were not correctly completed or did not demonstrate technical competence. In addition, some applicants were denied accreditation because MDUFMA limited the number of organizations that could be accredited to 15 during the first year after FDA issued criteria for accreditation. FDA granted accreditation to 17 of 23 organizations that applied to conduct inspections of establishments through the accredited persons inspection program. One or more foreign governments had already authorized each of these accredited organizations to conduct inspections to assess compliance with quality system requirements. FDA announced accreditation of 15 of 22 applicant organizations on November 6, 2003. One of these accredited organizations withdrew from the program in December 2003, leaving 14 accredited organizations. After the initial accreditation year, FDA received two additional applications for accreditation, including one from an organization that had been denied accreditation during the first year; FDA accredited both of these organizations. The total number of accredited organizations as of October 31, 2006, was thus 16. FDA denied accreditation to applicants that did not meet minimum criteria because their applications were not correctly completed or did not demonstrate the applicants' technical competence and because more organizations met the minimum criteria for accreditation than FDA could legally accredit. During the first accreditation year, FDA received a total of 23 applications from 22 organizations. Of these 23 applications, 2 were not correctly completed and the applicants were denied accreditation. For example, these applications did not include required documentation showing the authority, responsibility, and reporting structure of the individuals who would perform work through the accredited persons inspection program. One of the organizations that had initially submitted an application that was not correctly completed submitted a second, correctly completed application within the first accreditation year. (This second application is included among the total of 23 applications FDA received during the first accreditation year.) Thus, FDA received 21 correctly completed applications from 21 organizations during the first accreditation year. FDA also denied accreditation to applicants that did not meet minimum criteria because their applications did not demonstrate that the applicants had adequate technical competence. To evaluate organizations' qualifications, FDA developed a checklist for scoring applications against the criteria for accreditation. A group of FDA staff assessed the applications and assigned scores to specific elements, such as technical competence and prevention of conflict of interest. FDA determined that 2 of the 21 correctly completed applications did not demonstrate that the organization had adequate technical competence, and it denied accreditation to these 2 organizations. FDA found that the remaining 19 organizations that applied for accreditation during the first accreditation year met the minimum criteria for accreditation, but it was limited to accrediting 15 organizations during that year. FDA rank-ordered the applications by the total score it assigned through use of the checklist. FDA granted accreditation to the 15 organizations with the highest ranking applications, and denied accreditation to the remaining 4 organizations with lower-ranking applications. Between March 11, 2004--the date when FDA first cleared an accredited organization to conduct independent inspections of establishments--and October 31, 2006, two accredited organizations conducted independent inspections--one inspection of a domestic establishment and one inspection of a foreign establishment. During the same time period, 36 inspections of domestic establishments and 1 inspection of a foreign establishment were conducted by accredited organizations jointly with FDA officials as part of the training FDA required of accredited organizations. As shown in table 1, individuals from 7 of 16 accredited organizations completed all training requirements and were cleared to conduct independent inspections by October 17, 2006. The remaining 9 accredited organizations had not completed all training requirements as of October 31, 2006. To gain perspective on the number of inspections conducted by accredited organizations, we asked FDA how many inspections it had conducted from March 11, 2004, through October 31, 2006, that could potentially have been conducted by accredited organizations. FDA could not provide exact counts of these inspections for two reasons. First, only those manufacturers that market, or intend to market, a device in a foreign country are eligible to be inspected by an accredited organization, but FDA does not routinely obtain information about foreign marketing activities or plans. Second, eligibility for an inspection by an accredited organization is limited to manufacturers of class II or III medical devices, but FDA does not have readily available information about the classification of devices that were manufactured at establishments at the time of inspection. Instead of providing exact counts of the number of inspections FDA had conducted that could potentially have been conducted by accredited organizations, FDA told us how many comprehensive postmarket quality system inspections it had conducted of establishments where class II or III medical devices were manufactured as of October 31, 2006, and that met the criteria for an inspection by an accredited organization other than the criterion that the manufacturer markets, or intends to market, a medical device in a foreign country. These counts provide an upper bound estimate of the number of inspections FDA had conducted that could potentially have been conducted by accredited organizations. From March 11, 2004, through October 31, 2006, FDA conducted 229 inspections of domestic establishments and 48 inspections of foreign establishments. According to FDA and representatives of affected entities, several factors could influence manufacturers' interest in voluntarily participating in the accredited persons inspection program, whether by requesting an inspection or by hosting a training inspection. FDA and representatives of affected entities described factors that could serve as potential incentives, disincentives, or reasons to defer making a request for an inspection by an accredited organization. Additional factors may influence manufacturers' interest in participating in the program by hosting required training inspections. Potential incentives to having an inspection by an accredited organization include the opportunity to reduce the number of inspections conducted to meet FDA and other countries' requirements and to control the scheduling of the inspection by an accredited organization. FDA and representatives of affected entities told us that manufacturers would prefer to reduce the number of inspections they need to undergo by having a single inspection cover requirements of FDA and other governments, rather than having separate inspections. One reason for this preference is that inspections are disruptive to manufacturers. FDA and representatives of affected entities told us that FDA's requirements are similar, but not identical, to the requirements of other countries. As a result, a single inspection designed to cover multiple requirements would likely take more time than a single inspection designed to meet any one set of requirements, but less time than separate inspections. Representatives of the accredited organizations with whom we spoke stated that they expect to be able to address multiple inspection requirements in a single inspection, and the one inspection of a domestic establishment that an accredited organization completed independently before October 31, 2006, was a single inspection designed to meet the requirements of FDA, the European Union, and Canada. According to FDA and many representatives of affected entities, another potential incentive to requesting an inspection by an accredited organization is that manufacturers can work with accredited organizations to schedule inspections and can schedule them months in advance. In contrast, FDA generally notifies manufacturers of inspections about a week in advance. The reasons representatives of affected entities gave for the preference for scheduling inspections well in advance include that it enables them to ensure the availability of their quality managers and minimize disruption to their normal work activities. FDA and representatives of affected entities told us that the potential disincentives to having an inspection by an accredited organization include bearing the cost for the inspection, doubts about whether accredited organizations can cover multiple requirements in a single inspection, and uncertainty about the potential consequences of making a commitment to having an inspection to assess compliance with FDA requirements in the near future. Manufacturers pay for inspections that are conducted by accredited organizations; in contrast, manufacturers are not charged for inspections conducted by FDA. Manufacturers that already pay for inspections to meet requirements of foreign countries will likely face a higher cost for an inspection that also covers FDA requirements because the requirements are not identical and the inspection will therefore likely take longer. FDA and representatives of affected entities stated that bearing the cost for the inspection might be a disincentive to participation in the program, and some of these representatives suggested that cost could be particularly important to small manufacturers. Although a goal of the accredited persons inspection program is to reduce the total number of inspections for manufacturers that market devices in the United States and other countries, some representatives of FDA and manufacturers raised doubts about whether the accredited organizations could cover multiple requirements in a single inspection. One of them told us that the accredited organization that inspects its establishments stated that it would not combine the inspection to assess compliance with FDA requirements with an inspection to address other requirements, and would instead conduct two separate inspections. Similarly, some FDA officials expressed uncertainty about whether all of the accredited organizations would develop inspection strategies that effectively address multiple requirements. FDA and Canada are in the process of establishing a pilot program to assess whether accredited organizations can meet the requirements of both countries in a single inspection. In addition, uncertainty about the potential consequences of making a commitment to having an inspection to assess compliance with FDA requirements in the near future is a potential disincentive. Manufacturers who request an inspection by an accredited organization are committing to an inspection to assess compliance with FDA requirements in the near future, even though it is possible that FDA would not inspect them in the next 5 or 6 years--and inspections carry the risk of regulatory action. FDA and most of the representatives of affected entities with whom we spoke told us that this commitment to an inspection is a potential disincentive to participation in the program. For example, one industry representative questioned why manufacturers would ask for--and pay for--inspections when the result could be that FDA closes them down. In addition, because FDA will make the final determination of compliance with its requirements, some representatives of affected entities suggested that manufacturers might be uncertain about whether the accredited organization's inspection will satisfy FDA, or whether FDA will conduct an additional inspection after reading the report prepared by the accredited organization. Some representatives of affected entities suggested that manufacturers might defer a decision about whether to request an inspection by an accredited organization until uncertainties about the potential incentives and disincentives have been reduced. For example, manufacturers might defer a decision until there is greater certainty about whether accredited organizations are able to conduct single inspections to cover multiple sets of requirements and about how FDA will respond to the inspection reports prepared by accredited organizations. According to representatives of affected entities, some manufacturers-- those that are already paying to have routine quality system inspections of their establishments to meet the requirements of other countries--might have other reasons for deferring a request for an inspection by an accredited organization. Manufacturers that already contract with a specific accredited organization to conduct inspections to meet the requirements of other countries might defer participation until that organization has completed all required training and been cleared by FDA to conduct independent inspections. In addition, because manufacturers want to minimize the disruptiveness of inspections, they might defer requesting an inspection through FDA's accredited persons inspection program until accredited organizations have honed their procedures for conducting inspections to cover FDA's requirements. Manufacturers' participation in the accredited persons inspection program also includes their willingness to host training inspections. In addition to some of the potential incentives and disincentives to requesting an inspection by an accredited organization, other factors may have influenced manufacturers' interest in hosting required training inspections. Fewer manufacturers have volunteered to host training inspections than needed for all of the accredited organizations to complete their training. Some representatives of affected entities speculated that manufacturers might have believed that training inspections would require more time and effort for their staff (and would thus be more disruptive) than inspections conducted by fully trained personnel, or that manufacturers might have believed that training inspections would be more rigorous than nontraining inspections if the trainees and FDA personnel were to take particular care to demonstrate their thoroughness to each other. Moreover, FDA and representatives of affected entities indicated that scheduling training inspections was difficult. For example, FDA schedules inspections a relatively short period of time prior to the actual inspection, and some accredited organizations were not available to participate because they had already made prior commitments. We provided a draft of this report to the Department of Health and Human Services for comment. The department stated that our report provides an accurate and balanced explanation of the accredited persons inspection program and provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Health and Human Services and the Commissioner of FDA, appropriate congressional committees, and other interested parties. We will also make copies available to others on request. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have questions about this report, please contact me at (202) 512-7119 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. The Medical Device User Fee and Modernization Act of 2002 (MDUFMA) requires us to report on the number of inspections of medical device establishments conducted by the Food and Drug Administration (FDA). We are reporting the number of postmarket quality system inspections of domestic establishments where medium or high risk medical devices (referred to as class II or class III medical devices) are manufactured and the number of inspections of foreign medical device establishments conducted by FDA. To provide this information, we asked FDA how many inspections it conducted from March 11, 2004--the date when FDA first cleared an accredited organization to conduct independent inspections--through October 31, 2006. With regard to domestic establishments, we asked for the number of quality system inspections of establishments where class II or class III medical devices are manufactured. FDA provided us with the number of such inspections based on the classification of medical devices as of October 31, 2006, because FDA does not have readily available information about the classification of devices manufactured at the establishments at the time of inspection. FDA updates the information about device classification in its inspection database when the types of medical devices an establishment handles changes, for example, when a manufacturer changes its device inventory or when FDA reclassifies a device. Based on our review of FDA documents and discussions with FDA officials, we determined that the data FDA provided were sufficiently reliable for the purposes of this report. FDA reported that from March 11, 2004, through October 31, 2006, it conducted 2,814 postmarket quality system inspections of domestic establishments where a class II or III medical device was manufactured as of October 31, 2006. These establishments included medical device manufacturers and remanufacturers, packers and repackers, labelers and relabelers, contract sterilizers, software manufacturers, and reprocessors. During this time period, another 86 domestic inspections were conducted by state investigators under contract to FDA. FDA also reported that it conducted 656 inspections of foreign medical device establishments from March 11, 2004, through October 31, 2006. To determine the number of organizations that sought accreditation, the number that were accredited, and reasons for denial of accreditation, we reviewed FDA documentation of the number of applications for accreditation it received and its evaluation of those applications, and we interviewed FDA officials. To determine the number of inspections of foreign and domestic establishments conducted by accredited persons, we asked FDA to provide counts of the number of inspections conducted from March 11, 2004--the date when FDA first cleared an accredited organization to conduct independent inspections--through October 31, 2006. Based on our review of FDA documents and discussions with FDA officials, we determined that the data were sufficiently reliable for our purposes. To determine whether there are factors that could influence manufacturers' interest in voluntarily participating in FDA's accredited persons inspection program, we interviewed FDA officials and representatives of affected entities. As indicated in table 2, the affected entities with which we conducted interviews were four accredited organizations, three organizations that represent medical device manufacturers, and six global medical device manufacturers. For our sample of accredited organizations, we selected two that had been cleared by FDA to conduct independent inspections as of April 2006 and two that had not. To select our sample of manufacturers, we asked the representatives of each of the three organizations that represent manufacturers to provide us with a list of five manufacturers. Two of the organizations provided lists of five manufactures and one organization provided a list of four manufacturers. We randomly selected two global manufacturers from each list. The information we obtained from these representatives of affected entities can not be generalized to other manufacturers or accredited organizations. We also reviewed applicable law, regulations, legislative history, FDA guidance, and other relevant documents. We conducted our work from February 2006 through November 2006 in accordance with generally accepted government auditing standards. In addition to the contact named above, James McClyde, Assistant Director; Kristen Joan Anderson; Cathleen J. Hamann; and Julian Klazkin made key contributions to this report.
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The Food and Drug Administration (FDA) inspects domestic and foreign establishments where U.S.-marketed medical devices are manufactured to assess compliance with FDA's quality system requirements for ensuring good manufacturing practices and other applicable requirements. The Medical Device User Fee and Modernization Act of 2002 (MDUFMA) required FDA to accredit organizations to inspect certain establishments where devices that are marketed in both the United States and other countries are manufactured. This report includes information that MDUFMA requires GAO to provide on (1) the number of organizations that sought accreditation, the number that were accredited, and reasons for denial of accreditation and (2) the number of inspections conducted by accredited organizations. It also includes information about factors that could influence manufacturers' interest in voluntarily requesting and paying for an inspection by an accredited organization. GAO examined FDA documents, interviewed FDA officials, and obtained information from FDA on the number of inspections conducted from March 11, 2004--when FDA first cleared an accredited organization to conduct independent inspections--through October 31, 2006. GAO also interviewed affected entities, including accredited organizations and medical device manufacturers. FDA granted accreditation to 17 of 23 organizations that applied to conduct inspections of establishments where medical devices are manufactured. FDA denied accreditation to applicants that did not meet minimum criteria because their applications were not correctly completed or did not demonstrate the applicants' technical competence. During the first accreditation year, which started in April 2003, FDA received 23 applications. Of the 23 applications, 2 were not correctly completed and 2 did not demonstrate that the applicants had adequate technical competence. Although the remaining 19 applicants met the minimum criteria, MDUFMA limited the number of organizations that could be accredited to 15 during the first year after FDA issued criteria for accreditation. FDA scored the 19 applications against these criteria and rank-ordered them. It accredited the 15 organizations with the highest ranking applications, but 1 organization later withdrew. After the initial accreditation year, FDA received 2 more applications for accreditation and it accredited both organizations. These 16 organizations remained accredited as of October 31, 2006. Between March 11, 2004, and October 31, 2006, two accredited organizations conducted independent inspections--one inspection of a domestic establishment and one inspection of a foreign establishment. During that same period, 36 inspections of domestic establishments and 1 inspection of a foreign establishment were conducted by accredited organizations jointly with FDA officials as part of training that FDA requires of accredited organizations. As of October 31, 2006, individuals from 7 of the 16 accredited organizations had completed all training requirements and were cleared to conduct independent inspections. Several factors may influence manufacturers' interest in voluntarily requesting an inspection by an accredited organization. According to FDA and representatives of affected entities, there are potential incentives and disincentives to requesting an inspection, as well as reasons for deferring participation in the program. Potential incentives include the opportunity to reduce the number of inspections conducted to meet FDA and other countries' requirements and to control the scheduling of the inspection. Potential disincentives include bearing the cost for the inspection and uncertainty about the potential consequences of making a commitment to having an inspection to assess compliance with FDA requirements in the near future. Some manufacturers might be deferring participation. For example, manufacturers that already contract with a specific accredited organization to conduct inspections to meet the requirements of other countries might defer participation until FDA has cleared that organization to conduct independent inspections. The Department of Health and Human Services provided technical comments on a draft of this report, which GAO incorporated as appropriate.
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Information systems can be complex undertakings consisting of a multitude of pieces of equipment and software products, and service providers. Each of these components may rely on one or more supply chains. Obtaining a full understanding of the sources of a given information system can also be extremely complex. According to the Software Engineering Institute, the identity of each product or service provider may not be visible to others in the supply chain. Typically, an acquirer, such as a federal agency, will only know about the participants directly connected to it in the supply chain. In addition, the complexity of corporate structures, in which a parent company (or its subsidiaries) may own or control companies that conduct business under different names in multiple countries, presents additional challenges to fully understanding the sources of an information system. As a result, the acquirer will have little visibility into the supply chains of its suppliers. Federal procurement law and policies promote the acquisition of commercial products when they meet the government's needs. Commercial providers of IT use a global supply chain to design, develop, manufacture, and distribute hardware and software products throughout the world. Many of the manufacturing inputs required for those products-- whether physical materials or knowledge--are acquired from various sources around the globe. Figure 1 depicts the potential countries of origin of common suppliers of various components within a commercially available laptop computer. The Federal Information Security Management Act of 2002 (FISMA) establishes federal agency information security program requirements that support the effectiveness of information security controls over information resources that support federal operations and assets. Its framework creates a cycle of risk management activities necessary for an effective security program, and it assigns responsibilities to the National Institute of Standards and Technology (NIST) for providing standards and guidelines on information security. In its August 2009 revision of Special Publication (SP) 800-53 (Revision 3), which provides recommended security controls for federal agencies and organizations, NIST included for the first time a security control for supply chain protection (SA-12). SA-12 identified several specific measures organizations could use to provide additional supply chain protections, such as conducting due diligence reviews of suppliers; using trusted shipping and warehousing; and employing independent analysis and penetration testing of IT systems, components, and products. In addition, SP 800-53, Revision 3, includes a security control for system and service acquisition policies and procedures (SA-1). Thus, for systems where both controls are selected, agencies should develop, disseminate, and review acquisition policy and implementing procedures that help protect against supply chain threats throughout the system development life cycle. Further, in March 2011, NIST published SP 800- 39, an approach to organizationwide management of information security risk, which states that organizations should monitor risk on an ongoing basis as part of a comprehensive risk management program. Reliance on a global supply chain introduces multiple risks to federal information systems and underscores the importance of threat assessments and risk mitigation. Supply chain threats are present at various phases of a system's development life cycle. Key threats that could create an unacceptable risk to federal agencies include the following: installation of hardware or software containing malicious logic, which is hardware, firmware, or software that is intentionally included or inserted in a system for a harmful purpose; installation of counterfeit hardware or software, which is hardware or software containing non-genuine component parts or code; failure or disruption in the production or distribution of critical products resulting from manmade or natural causes; reliance on a malicious or unqualified service provider for the performance of technical services; and installation of hardware or software that contains unintentional vulnerabilities, such as defects in code that can be exploited. Such threats can have a range of impacts, including allowing attackers to take control of systems and read, modify, or delete sensitive information; decreasing the reliability of IT equipment; decreasing the availability of material needed to develop systems; or allowing remote attackers to cause a denial of service, among other things. Threat actors can introduce these threats into federal information systems by exploiting vulnerabilities that could exist at multiple points in the global supply chain. In addition, supply chain vulnerabilities can include weaknesses in agency acquisition or security procedures, controls, or implementation related to an information system. Examples of types of vulnerabilities that could be exploited include acquisition of IT products or parts from sources other than the original manufacturer or authorized reseller, such as independent distributors, brokers, or on the gray market; applying untested updates and software patches to information acquiring equipment, software, or services from suppliers without understanding their past performance or corporate structure; and using delivery or storage mechanisms that are not secure. If a threat actor exploits an existing vulnerability, it could lead to the loss of the confidentiality, integrity, or availability of the system and associated information. Although the four agencies in our review--the Departments of Energy, Homeland Security (DHS), Justice, and Defense--have acknowledged the risks presented by supply chain vulnerabilities, they varied in the extent to which they have addressed these risks by (1) defining supply chain protection measures for department information systems, (2) developing implementing procedures for these measures, and (3) establishing capabilities for monitoring compliance with and the effectiveness of such measures. Three of the four departments have made limited progress in addressing supply chain risk: In May 2011, the Department of Energy revised its information security program, which requires Energy components to implement provisions based on NIST and Committee on National Security Systems guidance. However, the department was unable to provide details on implementation progress, milestones for completion, or how supply chain protection measures would be defined. Because it had not defined these measures or associated implementing procedures, the department was also not in a position to monitor compliance or effectiveness. Although its information security guidance mentions the NIST control related to supply chain protection, DHS has not defined the supply chain protection measures that system owners should employ. The department's information security policy manager stated that it was in the process of developing policy that would address supply chain protection, but did not provide details on when it would be completed. In addition, in the absence of such a policy, DHS was not in a position to develop implementation procedures or to monitor compliance or effectiveness. The Department of Justice has defined specific security measures for protecting against supply chain threats through the use of provisions in vendor contracts and agreements. Officials identified (1) a citizenship and residency requirement and (2) a national security risk questionnaire as two provisions that address supply chain risk. However, Justice has not developed procedures for ensuring the effective implementation of these protection measures or a mechanism for verifying compliance with and the effectiveness of these measures. By contrast, the Department of Defense has made more progress. Specifically, the department's supply chain risk management efforts began in 2003 and include a policy requiring supply chain risk to be addressed early and across a system's entire life cycle and calling for an incremental implementation of supply chain risk management through a series of pilot projects; a requirement that every acquisition program submit and update a "program protection plan" that is to, among other things, help manage risks from supply chain exploits or design vulnerabilities; procedures for implementing supply chain protection measures, such as an implementation guide describing 32 specific measures for enhancing supply chain protection and procedures for program protection plans identifying ways in which programs should manage supply chain risk; and a monitoring mechanism to determine the status and effectiveness of supply chain protection pilot projects, as well as monitoring compliance with and effectiveness of program protection policies and procedures for several acquisition programs. In addition, the four national security-related agencies participate in interagency efforts to address supply chain security, including participation in the Comprehensive National Cybersecurity Initiative,development of technical and policy tools, and collaboration with the intelligence community. In support of the cybersecurity initiative, Defense and DHS jointly lead an interagency initiative on supply chain risk management to address issues of globalization affecting the federal government's IT. Also, DHS has developed a comprehensive portfolio of technical and policy-based product offerings for federal civilian departments and agencies, including technical assessment capabilities, acquisition support, and incident response capabilities. Further, the four national security-related departments participate in an Office of the National Counterintelligence Executive-led initiative to (1) develop a common methodology for conducting threat assessments on entities that do business with the national security community and (2) request from agencies and centrally store copies of threat assessments for future use by components of the national security community. To assist the three national security-related agencies in better addressing IT supply chain-related security risks for their departmental information systems, we made several recommendations to the Secretaries of Energy and Homeland Security and the Attorney General. Specifically, we recommended that Energy develop and document departmental policy that defines which security measures should be employed to protect against supply chain threats; develop, document, and disseminate procedures to implement the supply chain protection security measures defined in departmental policy; and develop and implement a monitoring capability to verify compliance with, and assess the effectiveness of, supply chain protection measures. In commenting on our report, Energy stated that it concurred with the spirit of our recommendations. Energy also expressed concern that the recommendations are not fully aligned with the administration's initiatives and stated that it believes policies and standards to address IT supply chain risk management must be coordinated at the national level, not independently through individual agencies. We agree that national or federal policies and standards should be coordinated and promulgated at the national or federal level. However, we also believe-as intended by our recommendations--that federal departments are responsible for developing departmental policies and procedures that are consistent and aligned with federal guidance. Our recommendations to Energy are based on and consistent with federal guidance on supply chain risk management. In addition, we recommended that DHS develop and document departmental policy that defines which security measures should be employed to protect against supply chain threats; develop, document, and disseminate procedures to implement the supply chain protection security measures defined in departmental policy; and develop and implement a monitoring capability to verify compliance with, and assess the effectiveness of, supply chain protection measures. In commenting on a draft of our report, DHS concurred with our recommendations and described steps the department is taking to address them, including developing departmental policy to define supply chain protection measures, examining risk management procedures, and exploring options for verifying compliance with and effectiveness of its supply chain protection measures. We also recommended that Justice develop, document, and disseminate procedures to implement the supply chain protection security measures defined in departmental policy; and develop and implement a monitoring capability to verify compliance with, and assess the effectiveness of, supply chain protection measures. Justice concurred with the recommendations. In summary, the global IT supply chain introduces a myriad of security vulnerabilities to federal information systems that, if exploited, could introduce threats to the confidentiality, integrity, and availability of federal information systems. Thus the potential exists for serious adverse impact on an agency's operations, assets, and employees. These risks highlight the importance of national security-related agencies fully addressing supply chain security by defining measures and implementation procedures for supply chain protection and monitoring compliance with and the effectiveness of these measures. Until these agencies develop comprehensive policies, procedures, and monitoring capabilities, increased risk exists that they will be vulnerable to IT supply chain threats. Chairman Stearns, Ranking Member DeGette, and Members of the Subcommittee, this completes my statement. I would be happy to answer any questions you have at this time. If you have any questions regarding this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Other key contributors to this statement include Michael W. Gilmore (Assistant Director), Bradley W. Becker, Kush K. Malhotra, and Lee McCracken. 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Information technology (IT) systems and the products and services that support them are essential to the operations of the federal government. These products and services are delivered through a complex global supply chain, and the exploitation of vulnerabilities in the IT supply chain is an emerging threat. Federal law requires establishment of information security programs, and implementing standards and guidelines provide for managing supply chain risk. GAO was asked to testify on its recently issued report that, among other things, identified key risks associated with the supply chains used by federal agencies to procure IT equipment, software, and services, and assessed the extent to which four national security-related agencies have addressed such risks. In producing that report, GAO analyzed federal acquisition and information security laws, regulations, standards, and guidelines; examined departmental policies and procedures; and interviewed officials from four national security-related departments, the intelligence community, and nonfederal entities. Reliance on a global supply chain introduces multiple risks to federal information systems and underscores the importance of threat assessments and mitigation. Supply chain threats are present at various phases of a system's development life cycle and could create an unacceptable risk to federal agencies. Key supply chain-related threats include installation of intentionally harmful hardware or software (i.e., containing "malicious logic"); installation of counterfeit hardware or software; failure or disruption in the production or distribution of critical products; reliance on malicious or unqualified service providers for the performance of technical services; and installation of hardware or software containing unintentional vulnerabilities, such as defective code. These threats can have a range of impacts, including allowing attackers to take control of systems or decreasing the availability of critical materials needed to develop systems. These threats can be introduced by exploiting vulnerabilities that could exist at multiple points in the supply chain. Examples of such vulnerabilities include acquisition of products or parts from unauthorized distributors; application of untested updates and software patches; acquisition of equipment, software, or services from suppliers without knowledge of their past performance or corporate structure; and use of insecure delivery or storage mechanisms. These vulnerabilities could by exploited by malicious actors, leading to the loss of the confidentiality, integrity, or availability of federal systems and the information they contain. The four national security-related agencies in GAO's review--the Departments of Energy, Homeland Security, Justice, and Defense--varied in the extent to which they have addressed supply chain risks. Specifically, Energy and Homeland Security had not yet defined supply chain protection measures for department information systems and are not in a position to develop implementing procedures and monitoring capabilities. Justice has defined supply chain protection measures but has not developed implementation procedures or monitoring capabilities. Until these agencies develop comprehensive policies, procedures, and monitoring capabilities, increased risk exists that they will be vulnerable to IT supply chain threats. By contrast, the Department of Defense has made greater progress: it has defined supply chain protection measures and implementing procedures and initiated efforts to monitor compliance and effectiveness. In addition, various interagency efforts are under way to address supply chain risks affecting federal IT. In its report, GAO recommended that the Departments of Energy, Homeland Security, and Justice take steps, as needed, to develop and document policies, procedures, and monitoring capabilities that address IT supply chain risk. In commenting on a draft of the report, the departments generally concurred with the recommendations.
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Homeland Security Presidential Directive 7, issued in December 2003, designates the Secretary of Homeland Security as the principal federal official responsible for leading, integrating, and coordinating the overall national effort to protect the nation's critical infrastructure and key resources. Homeland Security Presidential Directive 7 also requires all federal departments and agencies to identify, prioritize, and coordinate the protection of critical infrastructure and key resources from terrorist attacks. ASD(HD&ASA), within the Office of the Under Secretary of Defense for Policy, serves as the principal civilian advisor and the Chairman of the Joint Chiefs of Staff serves as the principal military advisor to the Secretary of Defense on critical infrastructure protection. The Transportation Defense Sector is made up of a worldwide network of DOD and non-DOD surface, sea, and air assets that the U.S. military relies on to move personnel and equipment. Currently, the Transportation Defense Sector consists of 300 critical air bases, seaports, and commercial airports worldwide and owned by DOD, other U.S. governmental organizations, private companies, and foreign governments. According to TRANSCOM officials, the Transportation Defense Sector is highly resilient because of significant redundancy among the various modes of transportation, particularly as it relates to surface transportation. For example, the size and capabilities of the U.S. rail and highway networks afford ability to reroute shipments via alternate roads and rail lines in the event of disruptions, a key reason why surface transportation assets were not identified as critical. In addition to DCIP, DOD has established other complementary programs that help assure critical assets, including the Antiterrorism Program and the Defense Continuity Program. The Antiterrorism Program is intended to establish protection standards for DOD assets against terrorist attacks. The Defense Continuity Program is intended to ensure that DOD mission- essential functions continue under all circumstances, such as a man-made or natural disaster. DCIP supports a risk-management process that seeks to ensure defense critical infrastructure availability. The risk-management process is comprised of a risk assessment component that identifies critical assets and infrastructure interdependencies that support DOD missions. Applicable follow-on threat and vulnerability assessments are then conducted on those assets to complete the risk assessment. The risk response component ensures that limited resources are optimally allocated towards those assets deemed most important to overall mission success for DOD, and for which it has been determined that the identified level of risk is unacceptable. Several DOD organizations have key roles in helping assure the availability of DOD's transportation critical assets. The military services, defense agencies, and the combatant commands are responsible, in coordination with the sector lead agents, for identifying and assessing critical assets. The military departments, in their role as executive agent for the combatant commands, provide funding and resources for combatant command critical infrastructure programs. DOD Directive 3020.40 also states that sector lead agents are responsible for collaborating with other defense sector lead agents and DOD DCIP stakeholders to identify cross- sector interdependencies. According to ASD(HD&ASA) officials, TRANSCOM's methodology for identifying, prioritizing, and assessing its critical transportation assets is inconsistent with the intent of DOD's DCIP guidance and with the approach adopted by some of the other combatant commands and military services. TRANSCOM officials stated in May 2008 that they now plan to leverage the draft DOD Critical Asset Identification Process manual to reevaluate its currently identified critical transportation assets; however, a timeline to complete this reevaluation has not yet been established. Further, until recently, TRANSCOM relied on its vulnerability assessments to identify critical transportation assets, an action that also conflicted with established DOD guidance and practice. While TRANSCOM officials stated that they will discontinue the use of vulnerability assessment for identification purposes, they were unable to provide any documentation to ASD(HD&ASA) or us to confirm this decision officially. Moreover, its memorandum of understanding with the Joint Staff to participate as transportation subject matter experts on Joint Staff DCIP vulnerability assessments is still in draft. At the time of our review, TRANSCOM had identified 300 Tier 1 and Tier 2 critical transportation assets linked to its global mobility mission. TRANSCOM officials told us that they identified larger systems of assets-- categorized as air bases, seaports, and commercial airports--based on their interpretation of the definition of an asset as outlined in DOD Directive 3020.40. TRANSCOM officials explained that these types of installations are part of its worldwide Defense Transportation System that is necessary to carry out TRANSCOM's missions. This broad list of assets has been submitted to the Joint Staff for inclusion in DOD's overall draft critical asset list. Because of TRANSCOM's interpretation of the guidance, its critical asset list lacks the specificity of the critical asset lists prepared by some of the other combatant commands and military services. Moreover, according to ASD(HD&ASA) officials, TRANSCOM's decision to identify entire installations was inconsistent with the intent of DCIP guidance. While TRANSCOM is not the only combatant command or military service to identify an entire installation as critical, it is the only organization that has done so for its entire list. DOD guidance requires combatant commands to first identify their missions, the critical assets that support those missions, and the threats and hazards to those critical assets, and then assess the vulnerability of the critical assets to the threats and hazards identified (see fig. 2). TRANSCOM skips steps two and three listed in figure 2 and instead has been using Transportation Infrastructure Vulnerability Assessments to identify specific critical assets. According to TRANSCOM officials, the identification of threats and hazards to critical assets (step 3) is incorporated in the conduct of vulnerability assessments (step 4), since Transportation Infrastructure Vulnerability Assessments specifically address vulnerability to all threats and hazards. ASD(HD&ASA) officials stated that when they began developing an overall DOD critical asset list, they told the combatant commands and military services that stopping the identification process for critical assets at the installation level is insufficient for the purposes of DCIP. As a result of continued submission of entire installations as critical assets, ASD(HD&ASA) published in March 2008 the Strategy for Defense Critical Infrastructure to reiterate the need for greater specificity in critical asset identification. Further, ASD(HD&ASA) is developing the DOD Critical Asset Identification Process manual, which is still in draft, but also notes that stopping the asset identification process at the system level (e.g., an air base, seaport, or commercial airport) does not meet the needs of DCIP, and that rarely is an entire system essential to mission success. For example, it is insufficient to identify an air base as a critical asset; rather, more specific assets, such as a runway, should be identified as appropriate. Figure 3 illustrates the DCIP critical asset identification process and where TRANSCOM's previous efforts have stopped. TRANSCOM officials stated that because the DOD Critical Asset Identification Process manual was still in draft, they had initially chosen not to implement its contents until its formal publication. According to TRANSCOM officials, beginning in May 2008, TRANSCOM began the process to develop coordination methods to facilitate the use of the criteria in the draft DOD Critical Asset Identification Process manual for the identification and validation of assets prior to submitting them to the Joint Staff. TRANSCOM has recognized that this process will require time to complete a meaningful critical transportation asset list; however, a timeline to complete this process has not yet been established. Complicating the process of identifying and prioritizing critical assets has been TRANSCOM's use of Transportation Infrastructure Vulnerability Assessments. Though contrary to DCIP guidance, TRANSCOM has been using its vulnerability assessments to identify specific critical assets rather than using the process outlined in DCIP guidance to identify specific critical assets. As a result, TRANSCOM officials could not tell us what specific transportation assets at a given site were critical, stating that in the absence of a Transportation Infrastructure Vulnerability Assessment it could be, though not necessarily, assumed that what was identified as critical at one location might be critical at another. For example, if a Transportation Infrastructure Vulnerability Assessment identified specific critical assets (such as a runway, navigation aids, or a fuel depot) at an air base as critical, it could be reasonably assumed that the same assets would probably be critical at other air bases. However, while TRANSCOM officials have stated that they will discontinue the use of vulnerability assessment for identification purposes, they were unable to provide any documentation to ASD(HD&ASA) or us to confirm this decision officially. Additionally, TRANSCOM's memorandum of understanding with the Joint Staff to serve as transportation subject matter experts for the enhanced DCIP module to the Joint Staff's Integrated Vulnerability Assessment when transportation assets are assessed remains in draft. At the behest of ASD(HD&ASA) in 2006, the Joint Staff began the process of creating a list of Tier 1 critical assets based on assets nominated and submitted by DOD organizations, including the combatant commands and the military services using DCIP-approved criteria. The Joint Staff's list has gone through several iterations and a subset of Tier 1 critical assets, known as Defense Critical Assets, will be selected by ASD(HD&ASA). These Defense Critical Assets are of such extraordinary importance to DOD operations in peace, crisis, and war that their incapacitation or destruction would have a very serious, debilitating effect on the ability of DOD to fulfill its missions. TRANSCOM has not yet established a timeline to reevaluate critical transportation assets using the approved DCIP methodology. Until this reevaluation is completed, ASD(HD&ASA)'s ability to formulate a comprehensive Defense Critical Asset list that includes transportation assets and effectively targets spending for risk reduction efforts will be impeded. Figure 4 illustrates the types of specific critical transportation assets that TRANSCOM could identify below the installation (air base, seaport, and commercial airport) level. TRANSCOM plans to reevaluate its critical asset list using the DCIP- approved criteria, which is expected to result in a "significant reduction" of critical transportation assets. Although DOD established DCIP to help assure the availability of mission- critical infrastructure--including transportation assets--installation personnel were often unfamiliar with DCIP and unaware of the critical role specific transportation assets play in TRANSCOM's missions. This lack of awareness contributed to a singular focus on protecting personnel and did not consider mission-critical assets. Installation officials responsible for critical transportation assets at the 22 sites we visited were often unaware of asset criticality because they were unfamiliar with DCIP and thus DCIP's impact at these installations was negligible. While some efforts have been made to coordinate with both DOD and non-DOD entities, including the private sector, state and local governments, and foreign governments to assure the availability of critical transportation assets at home and abroad, these coordination efforts have been conducted despite a lack of service-specific DCIP implementation guidance. According to officials at 17 of the 22 installations we visited, efforts at installations have mostly focused on protecting people through such actions as antiterrorism protection rather than focusing on specific mission-critical transportation assets. At 18 of the 22 installations we visited, we found numerous complementary programs, such as the Antiterrorism and Chemical, Biological, Radiological, Nuclear, and high-yield Explosive Programs; and continuity of operations and emergency management planning. Officials responsible for assuring the availability of critical transportation assets at 20 of the 22 installations we visited, told us that they had not heard of DCIP prior to our visit because (1) there is an absence of service-specific guidance that explains how to implement DCIP and (2) the frequent rotation of installation commanders (typically every 2 years), which can limit leadership continuity over DCIP at the installation level. Officials at 16 of the 22 installations we visited told us that they would have more vigorously advocated for resources to fund protection of critical assets had they been aware of an asset's criticality to TRANSCOM's mission. Without service-specific guidance to ensure that mission-critical assets are being protected, installations rely on other complementary programs in lieu of the all-hazards approach that DCIP requires. Nearly all of the installations (18 of 22) we visited had coordinated with both DOD and non-DOD entities, including the private sector, state and local governments, and foreign governments to help assure the availability of critical transportation assets at home and abroad. However, these coordination efforts have been performed independent of DCIP and, therefore, focus on protecting people and not on assuring the availability of mission-critical transportation assets. DOD DCIP guidance requires the combatant commands to coordinate with one another and with the military services and sector lead agents to identify and assess critical assets. At 21 of the 22 sites we visited, installation officials had taken steps to coordinate such efforts with DOD organizations on the installation and/or with the private sector, state and local communities, or with host nation officials. For example, at one air base we visited in Europe, installation officials conducted joint security patrols with host nation military officials and trained jointly with military and civilian firefighting personnel. Further, at 10 DOD installations we visited in the Pacific region, installation officials routinely coordinated with state, local, and foreign governments on emergency management planning or scenarios, such as typhoons and earthquakes. Such coordination efforts, however, do not directly assure the availability of specific critical assets in the wake of a natural or man-made disaster. To mitigate public works disruptions, personnel at 18 of the 22 installations we visited were coordinating with DOD organizations on the installation, as well as local, state, or host nation officials. Specifically, these installations had developed resiliency in supporting public works infrastructure, such as fuel and electric power sources, so that critical transportation assets remained operational in the event of an installation- wide disruption. For example, 18 of these installations have developed backup or alternative capabilities to mitigate the loss of electricity and fuel. For 17 of the 22 critical transportation assets we visited, installation personnel were coordinating with DOD tenant organizations on the installation and with host governments to maintain and sustain public works support for its assets located on the facility. Most of the installations we visited (17 of 22) had emergency management plans and continuity of operations plans that accounted for the loss or degradation of supporting public works infrastructure located on or within the installation, although none of the plans specifically identified the critical transportation assets as high-priority assets vis-a-vis the installation's other assets. We also found that installation personnel at 18 of the 22 locations we visited frequently tested and maintained backup fuel and electric power sources and often included them in their emergency management planning exercises. Seventeen of these installations had developed prioritized facilities lists to determine which facilities or assets would receive priority for power restoration when power to the installation was interrupted. DOD has allocated approximately $283.3 million for critical asset assurance through DCIP from fiscal years 2004 to 2008. DCIP guidance requires combatant commands and sector lead agents to provide adequate resources to implement their DCIP responsibilities. TRANSCOM has received approximately $8.6 million over this period to carry out its DCIP responsibilities, both as a combatant command and as a sector lead agent for the Transportation Defense Sector. In addition to these funds, critical transportation assets also have benefited indirectly from other DOD programs, such as the Antiterrorism Program, and from funding from foreign governments in countries where the United States maintains a military presence. Of the $8.6 million TRANSCOM has received in total DCIP funding from fiscal years 2004 to 2008, approximately $5.7 million has been used for carrying out its combatant command responsibilities and approximately $2.9 million has been used for implementing its transportation defense sector responsibilities. TRANSCOM, which is funded by the Air Force, as TRANSCOM's executive agent, has requested DCIP funding for fiscal years 2009 to 2013 totaling $9.4 million for its combatant command responsibilities and $4.1 million for its defense sector responsibilities. Although the Air Force has not established a dedicated funding account for DCIP for itself, according to TRANSCOM officials, the Air Force has budgeted DCIP funding for TRANSCOM to perform its combatant command and defense sector responsibilities. Figure 5 depicts TRANSCOM's DCIP allocated and planned funding for its combatant command and defense sector responsibilities from fiscal years 2004 to 2013. The assurance of critical transportation assets also benefits, indirectly, from other DOD sources, such as the Antiterrorism Program and the Combating Terrorism Readiness Initiative Fund. Among other things, the Antiterrorism Program provides a source of funding for installations to remediate vulnerabilities to transportation assets. Typically, remediation actions, such as improved security at entry control points or the hardening of a building to withstand an explosive blast, are done to counter a perceived terrorist threat--and do not explicitly consider other threats and hazards. Nonetheless, critical assets located within the installation or within a hardened building will benefit as a result of these other efforts. Further, the Combating Terrorism Readiness Initiative Fund provides another mechanism to fund antiterrorism measures, which tangentially affects the assurance of critical transportation assets. In addition to other DOD programs, foreign countries that host the U.S. military fund initiatives that indirectly help assure critical transportation assets. For example, U.S. embassy officials estimate that one country we visited in U.S. Central Command's area of responsibility provides over $1 billion annually and one country we visited in U.S. Pacific Command's area of responsibility contributes about $4.1 billion annually in support of the U.S. military presence in its country. In both instances, a portion of the funding contributed by these countries is used to safeguard installations containing critical transportation assets. Until now, TRANSCOM's practice of designating entire air bases, seaports, and commercial airports as critical transportation assets has been inconsistent with DCIP guidance and the approach adopted by some of the other combatant commands and military services to identify specific mission-critical assets. Recently, however, TRANSCOM decided to discontinue its current critical asset identification process in favor of the draft critical asset identification methodology. TRANSCOM's decision will necessitate reevaluating the approximately 300 installations on its existing critical asset list--an undertaking that could potentially delay ASD(HD&ASA)'s issuance of the department's approved Defense Critical Asset List. Consequently, it is important for TRANSCOM to establish a timeline and key dates associated with the reevaluation process so that ASD(HD&ASA) can account for transportation assets in future iterations of the Defense Critical Asset List. Once this process is completed, ASD(HD&ASA) should have greater visibility over the full complement of mission-critical infrastructure and be better positioned to effectively remediate vulnerabilities to its most critical assets. While TRANSCOM officials have stated that they will discontinue the practice of using Transportation Infrastructure Vulnerability Assessments to identify specific critical transportation assets on the installations, they were not able to provide ASD(HD&ASA) or us with any documentation to confirm this decision officially. Lastly, until TRANSCOM finalizes its memorandum of understanding with the Joint Staff, it will not be able to define the roles and responsibilities of transportation subject matter experts to participate in the Joint Staff vulnerability assessments with a DCIP module. Although OSD issued department-wide guidance on critical infrastructure in 2005, knowledge of the program at the installation level--where critical transportation assets are located--is minimal because the military services have not yet developed their own implementation guidance. This lack of awareness has led installation officials to rely on other, more established programs to protect critical assets. While programs, such as DCIP and the Antiterrorism Program, do share some precepts, there are significant differences in the types of threats and hazards each program focuses on and in their emphasis on protection, resilience, and restoration of operations and assets. Until the military services issue guidance that installation personnel can use to implement local critical infrastructure programs, mission-critical assets may incur unintended risk. We are making the following four recommendations to help assure the availability of critical assets in the Transportation Defense Sector. To enable decision makers within DOD to more effectively prioritize and target limited resources to reduce critical asset vulnerabilities and allow ASD(HD&ASA) to formulate a complete and accurate list of Defense Critical Assets, we recommend that the Secretary of Defense, through ASD(HD&ASA) and the Chairman of the Joint Chiefs of Staff, direct the Commander of TRANSCOM to take the following three actions: Fully implement the criteria, methodology, and process in the draft DOD Critical Asset Identification Process manual to reevaluate and update the identification of all critical transportation assets, and develop a timeline for doing so. Discontinue the use of Transportation Infrastructure Vulnerability Assessments as its primary tool for identifying its critical assets. Finalize its memorandum of understanding with the Joint Staff to enable TRANSCOM transportation subject matter experts to participate in the DCIP module of a Joint Staff vulnerability assessment. To facilitate DCIP implementation at the installation level, we recommend that the Secretary of Defense direct the secretaries of the military departments to develop and implement service-specific guidance based on published DOD DCIP guidance. In written comments on a draft of this report, which included three draft recommendations, DOD partially concurred with our recommendations. Also, TRANSCOM and U.S. Central Command provided us with technical comments, which we incorporated in the report where appropriate. DOD's comments are reprinted in appendix II. In its written comments, DOD stated that it partially concurred with our recommendation that TRANSCOM fully implement the criteria, methodology, and processes outlined in the draft DOD Critical Asset Identification Process manual to reevaluate and update the identification of all critical transportation assets, and develop a timeline for doing so. DOD agreed with the recommendation and noted that TRANSCOM already has initiated implementation of the current draft manual as a means to reevaluate identification of critical transportation assets. DOD stated that, consequently, TRANSCOM does not require additional ASD(HD&ASA) direction to do so. However, while TRANSCOM officials agreed during our review to begin reevaluating their critical assets using established criteria in the draft manual, our recommendation also calls for TRANSCOM to develop a timeline for completing this action. DOD acknowledged in its written comments that while the draft manual provides a process for critical asset identification, it has not yet provided timelines for the various milestones. DOD's comments stated that ASD(HD&ASA) will work with the various components to establish timelines, but estimated that the manual will require approximately 1 year to complete, and will require timely cooperation and participation by numerous stakeholders. We believe that establishing these timelines is essential so that TRANSCOM can reevaluate and update the identification of all critical transportation assets in a timely manner. DOD partially concurred with our draft recommendation that TRANSCOM finalize the memorandum of understanding with the Joint Staff to discontinue the use of Transportation Infrastructure Vulnerability Assessments as its primary tool for identifying its critical assets. In its written comments, DOD noted that this recommendation contained two separate issues: (1) the discontinuation of the Transportation Infrastructure Vulnerability Assessments as means to identify critical assets and (2) the finalization of a memorandum of understanding between TRANSCOM and the Joint Staff. DOD noted in its written comments that the purpose of the memorandum of understanding is to define the roles and responsibilities of transportation subject matter experts to augment the enhanced DCIP module rather than to discontinue the use of the Transportation Infrastructure Vulnerability Assessments. In response to DOD's comments and to reflect this distinction, we made this two recommendations rather than one. DOD also stated that no additional direction on ASD(HD&ASA)'s part is required because TRANSCOM has already taken steps to address both of these issues. As noted in our report, however, TRANSCOM officials were unable to provide ASD(HD&ASA) or us with any documentation to confirm that they have discontinued the use of the Transportation Infrastructure Vulnerability Assessments. TRANSCOM's discontinuation of the Transportation Infrastructure Vulnerability Assessments as a means of identifying critical transportation assets and its adoption of the manual's methodology are both key to TRANSCOM's ability to provide DOD with an accurate list of critical transportation assets. Further, while we recognize that TRANSCOM has taken steps to coordinate with the Joint Staff to define its roles and responsibilities for the DCIP module to the Joint Staff Integrated Vulnerability Assessment, the memorandum of understanding remains in draft. Timely completion of the draft memorandum of understanding is important so that TRANSCOM's expertise can be adequately leveraged on future vulnerability assessments of critical transportation infrastructure. Therefore, we believe this recommendation remains valid. Finally, DOD partially concurred with our recommendation to develop and implement service-specific guidance based on published DOD DCIP guidance. In its written response, DOD stated that the Army has already developed and is implementing service-specific guidance, and it noted that the military departments prefer to wait for the official publication of the draft DOD Critical Asset Identification Process manual before implementing service-specific guidance. We acknowledge the Army's efforts and recognize that other military services may prefer to wait until the manual is published before they implement service-specific guidance. However, our recommendation is based on the entire body of DOD's DCIP guidance--not just the draft DOD Critical Asset Identification Process manual, which is focused primarily on identification of critical assets and will take at least another year to complete. In our view, service-specific DCIP guidance should be issued promptly based on DOD Directive 3020.40 and DOD Instruction 3020.45, which have been finalized at the OSD level. In the absence of timely service-specific DCIP guidance, installation personnel will continue to rely primarily on antiterrorism plans instead of on an all-hazards approach to remediate, mitigate, or otherwise reduce the vulnerabilities to critical transportation infrastructure. As agreed with your offices, we are sending copies of this report to the Chairmen and Ranking Members of the Senate and House Committees on Appropriations, Senate and House Committees on Armed Services, and other interested congressional parties. We also are sending copies of this report to the Secretary of Defense; the Secretary of Homeland Security; the Secretary of State; the Chairman of the Joint Chiefs of Staff; the Secretaries of the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; the Combatant Commanders of the functional and geographic combatant commands; the Commander, U.S. Army Corps of Engineers; and the Director, Office of Management and Budget. We will also make copies available to others upon request. If you or your staff have questions concerning this report, please contact me at (202) 512-5431 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To conduct our review of the Department of Defense's (DOD) efforts to assure the availability of critical assets in the Transportation Defense Sector, we obtained relevant documentation and interviewed officials from the following DOD organizations: Office of the Secretary of Defense Under Secretary of Defense (Comptroller)/Chief Financial Officer Assistant Secretary of Defense for Homeland Defense and Americas' Security Affairs (ASD) Joint Staff, Directorate for Operations, Antiterrorism and Homeland Defense Threat Reduction Agency, Combat Support Assessments Department of the Army, Asymmetric Warfare Office, Critical Office of the Chief Information Officer Mission Assurance Division, Naval Surface Warfare Center, Dahlgren Division, Dahlgren, Virginia Department of the Air Force, Air, Space and Information Operations, Plans, and Requirements, Homeland Defense Division Headquarters, U.S. Marine Corps, Security Division, Critical Headquarters, U.S. Central Command, Critical Infrastructure Program Office, MacDill Air Force Base, Florida Headquarters, U.S. European Command, Critical Infrastructure Protection Program Office, Patch Barracks, Germany Headquarters, U.S. Pacific Command, Antiterrorism and Critical Infrastructure Division, Camp H.M. Smith, Hawaii U.S. Forces Japan Headquarters, U.S. Transportation Command (TRANSCOM), Critical Infrastructure Program, Scott Air Force Base, Illinois Headquarters, Air Mobility Command, Homeland Defense Branch, Scott Air Force Base, Illinois Headquarters, Military Sealift Command, Force Protection Office Headquarters, Surface Deployment and Distribution Command, Scott Air Force Base, Illinois Headquarters, Transportation Engineering Agency, Scott Air Force Defense Infrastructure Sector Lead Agents Headquarters, U.S. Transportation Command, Critical Infrastructure Program, Scott Air Force Base, Illinois Headquarters, U.S. Army Corps of Engineers, Directorate of Military Selected critical assets in the continental United States, Hawaii, the U.S. Territory of Guam, Germany, Greece, Kuwait and another country in U.S. Central Command's area of responsibility, and Japan We also met with officials from the Department of Homeland Security, Infrastructure Information Collection Division, to discuss the extent to which DOD was coordinating with the Department of Homeland Security on the protection of non-DOD-owned defense critical assets in the Transportation and Public Works Defense Sectors. Further, to become more familiar with additional work being conducted on defense critical infrastructure, we met in Arlington, Virginia, with officials from the George Mason University School of Law's Critical Infrastructure Protection Program and in Washington, D.C., with the Congressional Research Service (Resources, Science, and Industry Division). We drew a nonprobability sample of critical transportation assets located in the United States and abroad, using several critical asset lists developed by the Joint Staff, each of the four military services, and TRANSCOM. The assets we selected for review were initially drawn from the Joint Staff's list of Tier 1 critical transportation assets; however, the list includes only 4 Tier 1 critical transportation assets worldwide. To increase the size of our sample, we used TRANSCOM's Tier 1 and Tier 2 critical asset lists, which together total 300 critical assets. Further, we analyzed critical asset lists from each of the four military services for overlap with TRANSCOM's critical asset list. From this, we selected 22 assets for review that included geographic dispersion among two countries in each geographic region (Europe, the Middle East, and the Pacific). We also selected assets from each military service and that were representative of the three principal types of assets identified by TRANSCOM--air base, seaport, commercial airport. Our cases for review included two of the four Tier 1 critical transportation assets. The specific assets we reviewed, their locations, and the missions that they support are omitted from this appendix, since that information is classified. Figure 6 shows the methodology we used to select the critical transportation assets for review. Table 1 shows a breakout of critical transportation assets selected by geographic combatant command. Because the Joint Staff list of Tier 1 critical assets does not include critical assets from the Public Works Defense Sector, for the purposes of this report, we are treating public works assets as supporting infrastructure. For the critical transportation assets that we selected, we also spoke with the asset owners and operators about their reliance on public works assets that support the critical assets. To evaluate TRANSCOM's identification and assessment efforts of its critical transportation assets, we reviewed documentation and guidance and met with officials from ASD(HD&ASA), the Joint Staff, the military services, and TRANSCOM. We analyzed critical asset identification criteria and guidance and compared the guidance with current asset identification efforts. In addition, we spoke with DOD installation and U.S. embassy personnel to discuss their involvement with various DOD critical asset data calls and other efforts they participated in to identify critical assets. We reviewed TRANSCOM's Transportation Infrastructure Vulnerability Assessments for assets we selected for review to determine if specific critical transportation assets below the installation level were identified. We also attempted to match these critical assets identified through the TRANSCOM's vulnerability assessments with assets listed on TRANSCOM's critical asset list. To determine the extent to which DOD installation personnel have taken actions to help assure the availability of critical transportation assets, both within and independent of DCIP, we reviewed DOD guidance on risk management and other complementary programs. In addition, we reviewed and analyzed installation emergency management plans and continuity of operations plans to determine how, if at all, critical assets were incorporated. We also interviewed combatant command, subcomponent, and installation personnel responsible for assuring the availability of critical transportation assets to ascertain the adequacy of guidance, assessments, inspections, funding, and other processes to enhance asset availability. Finally, we assessed the supporting public works infrastructure for the 22 assets we selected for review to determine their impact on the availability of the critical asset. To determine how DOD is funding critical transportation asset assurance, we reviewed and analyzed DCIP funding data and we interviewed officials from the Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer. Additionally, we interviewed officials from ASD(HD&ASA) and TRANSCOM to verify that the funding data were comprehensive and reflected DCIP funding from all sources. Further, we interviewed installation officials; personnel from U.S. Forces Japan, U.S. European Command, U.S. Central Command, and U.S. Pacific Command; and U.S. embassy officials in Kuwait and another country in U.S. Central Command's area of responsibility, and Japan regarding other sources of funding. These sources include funding from other complementary programs or host nation contributions that provide an indirect contribution to the assurance of critical transportation assets. We found the data provided by DOD to be sufficiently reliable for representing the nature and extent of the DCIP funding. We conducted this performance audit from May 2007 through July 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Mark A. Pross, Assistant Director; Jon K. Bateman; Gina M. Flacco; James P. Krustapentus; Kate S. Lenane; Danielle Pakdaman; Terry L. Richardson; Marc J. Schwartz; John S. Townes; Cheryl A. Weissman; and Alex M. Winograd made key contributions to this report. Defense Critical Infrastructure: Additional Air Force Actions Needed at Creech Air Force Base to Ensure Protection and Continuity of UAS Operations. GAO-08-469RNI. Washington, D.C.: April 23, 2008 (For Official Use Only). Defense Critical Infrastructure: DOD's Risk Analysis of Its Critical Infrastructure Omits Highly Sensitive Assets. GAO-08-373R. Washington, D.C.: April 2, 2008. Defense Infrastructure: Management Actions Needed to Ensure Effectiveness of DOD's Risk Management Approach for the Defense Industrial Base. GAO-07-1077. Washington, D.C.: August 31, 2007. Defense Infrastructure: Actions Needed to Guide DOD's Efforts to Identify, Prioritize, and Assess Its Critical Infrastructure. GAO-07-461. Washington, D.C.: May 24, 2007.
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The Department of Defense (DOD) established the Defense Critical Infrastructure Program (DCIP) to assure the availability of mission-critical infrastructure, including surface, sea, and air transportation assets to carry out its missions. GAO was asked to evaluate (1) the extent to which the U.S. Transportation Command (TRANSCOM) has identified, prioritized, and assessed critical transportation assets; (2) the extent to which DOD installation personnel have taken actions to help assure the availability of critical transportation assets, both within and independent of DCIP; and (3) how DOD is funding critical transportation asset assurance. GAO examined a nonprojectable sample of 22 critical transportation assets, reviewed relevant DOD guidance and documents, and interviewed cognizant officials. TRANSCOM has taken some actions to identify, prioritize, and assess its critical transportation assets but, according to officials from the Office of the Assistant Secretary of Defense for Homeland Defense and Americas' Security Affairs (ASD[HD&ASA]), its methodology for doing so, until recently, has been inconsistent with the intent of DOD's various DCIP guidance and with the approach adopted by some of the other combatant commands and military services. TRANSCOM considers entire installations--military air bases, seaports, and commercial airports--as critical assets, rather than identifying assets with greater specificity, such as individual runways, navigation aids, and fuel storage facilities. This methodology diminishes the reliability of the critical transportation asset list, a condition that impedes DOD's ability to prioritize its critical assets departmentwide and effectively target spending on risk-reduction efforts. Further, TRANSCOM was using its vulnerability assessments to identify specific critical transportation assets on the installations. This practice conflicts with DOD's DCIP guidance not to use vulnerability assessments to identify critical assets. Though TRANSCOM officials stated that they now plan to discontinue this practice, they were unable to provide ASD(HD&ASA) or GAO with any documentation to confirm that this decision had occurred officially. Further, TRANSCOM's memorandum of understanding with the Joint Staff to participate as transportation subject matter experts on the Joint Staff's vulnerability assessments with a DCIP module is still in draft. In May 2008, TRANSCOM officials told GAO that they now plan to use the draft DCIP critical asset identification process to reevaluate its 300 identified critical transportation assets; however, a timeline to complete this has not yet been determined. DOD installation personnel at the 22 sites GAO visited have taken actions to help assure the availability of critical transportation assets; however, these actions have routinely occurred independent of DCIP. Consequently, they do not consider the full spectrum of threats and hazards and they tend to focus on preventing mass personnel casualties instead of critical asset assurance. DCIP's impact at the installations where the assets are located was negligible because of the lack of service-specific guidance. This gap in guidance hinders installation personnel's ability to make informed risk management decisions based on asset criticality. Coordination efforts between installation personnel and non-DOD owners of critical transportation assets and supporting public works infrastructure were substantial, but have been focused on the protection of people and not on asset assurance. DOD has allocated approximately $283 million for DCIP from fiscal years 2004 to 2008, including $8.6 million to TRANSCOM for its combatant command and defense sector responsibilities. Critical infrastructure assurance efforts also have been funded through other DOD complementary programs, such as the Antiterrorism Program, and through foreign government contributions. Although existing DCIP funding does not include funding for remediating asset vulnerabilities, remediation has been funded from these other sources.
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OPAP was established by the Secretary of State following the August 1998 bombings of U.S. embassies in Nairobi, Kenya, and Dar es Salaam, Tanzania. The panel was formed to consider the future of U.S. overseas representation, to appraise its condition, and to develop practical recommendations on how best to organize and manage embassies and consulates. Citing weaknesses in security, infrastructure, technology, human capital, and management, OPAP concluded that the U.S. overseas presence was "perilously close to the point of system failure." OPAP made recommendations in eight areas, including that of creating the right size and location for U.S. overseas presence. A key OPAP theme stressed that a rightsizing process should consider the relationship between embassy size and security. Specifically, OPAP recommended that rightsizing be used to reduce the number of people at risk overseas. OPAP made five additional recommendations regarding the size and location of overseas posts: Rightsize the U.S. overseas presence; reduce the size of some posts, close others, reallocate staff and resources, and establish new posts where needed to enhance the American presence where the bilateral relationship has become more important. Form a new Interagency Overseas Presence Committee--a permanent committee to regularly adjust U.S. presence to U.S. goals and interests. Adopt explicit criteria to guide size and location decisions. Support the concept of small posts. Encourage ambassadors to initiate rightsizing. OPAP also recommended that some administrative services be performed at regional centers or in the United States--actions that would lessen the need for administrative staff at some posts, thereby reducing security vulnerabilities. In February 2000, President Clinton directed the Secretary of State to lead an interagency effort to implement OPAP's recommendations. In a March 2000 report to the Congress, the Department of State said that the interagency committee planned to complete pilot studies by June 2000 to assess staffing levels, to recommend necessary changes at the study posts, and to develop decision criteria applicable to subsequent rightsizing reviews to be conducted at all overseas posts over a 5-year period. State anticipated that reviews at half the posts (about 130 posts) would be completed within 2 years. In early 2000, State organized an interagency rightsizing committee representing key agencies, including the Departments of Agriculture, Commerce, Defense, Transportation, Energy, Justice, the Treasury, and State; the intelligence community; and the U.S. Agency for International Development (USAID). Pilot studies were conducted at six embassies-- Amman, Jordan; Bangkok, Thailand; Mexico City, Mexico; New Delhi, India; Paris, France; and Tbilisi, Georgia, from March to May 2000. Teams with representatives from State, the intelligence community, Defense, Justice, USAID, and the Treasury visited all six posts; officials from other agencies made some of the trips. These embassies were selected because of the complexity of their missions and because they represented broad geographical and agency coverage. The Department of State told us that the interagency teams did not have written guidelines. Moreover, according to agency representatives who participated in the studies, the teams did not systematically assess staffing at the pilot posts. According to the former interagency committee leader, the teams attempted to use the criteria that OPAP suggested for making staffing decisions, but found that the criteria were too broad to guide determinations on specific post size. Prior to travel, the teams reviewed each embassy's Mission Performance Plan describing objectives and priorities. In addition, the Department of State directed the teams to draft a list of general questions that linked staffing to the goals and objectives laid out in each embassy's Mission Performance Plan, as a discussion guide. At each embassy, the teams received a briefing from the ambassador and then concentrated on interviewing key agency representatives, to obtain information and opinions on agencies' staffing levels and workload. The teams spent a few days at each post. For example, a team was in Tbilisi for 2 days, Paris for about 3 days, and Mexico City for 5 days. Some team members and representatives of the interagency rightsizing committee told us that 2 to 5 days at an embassy was too little time to permit detailed analysis of workload or to fully explore alternative ways of conducting business, such as regionalizing operations or outsourcing administrative functions. This is partly attributable to the size and complexity of embassy operations at the posts visited. Four of the embassies--Bangkok, Mexico City, New Delhi, and Paris--are among the largest and most complex in the world. Though smaller, the remaining two embassies both have substantial numbers of U.S. and foreign national employees, from multiple agencies. The ambassador who led three of the pilot studies told us that a comprehensive review of staff levels would take much longer than the 2 to 5 days the teams spent at the embassies, and that the pilot studies were not designed for that purpose. However, he believed that the length of visit was sufficient to identify potential functions that warranted additional study to determine if staffing levels should be adjusted. The interagency committee's June 2000 report to the Under Secretary of State summarizing results of the pilot studies concluded that it was impractical to develop a staffing methodology that would be applicable to all posts, as OPAP had recommended, because no two posts are sufficiently similar. In addition, the report questioned the need for additional rightsizing of overseas posts, stating that agencies had adjusted staff levels during the 1990s in response to budget constraints to ensure that only the most essential overseas functions were performed. As a result, the report concluded that agencies had already performed rightsizing. The report also concluded that planned rightsizing reviews of additional posts over 5 years should not be conducted, as the benefits of rightsizing may not outweigh the costs of conducting the reviews. Regarding OPAP's recommendation to establish an interagency board to review staff levels at overseas posts, the committee's report concluded that an interagency advisory board could be helpful as a forum to discuss programmatic issues with major overseas staffing implications and to provide informal and nonbinding advice to agencies and ambassadors. However, some agencies opposed the establishment of an interagency board, even on an advisory basis, because they believed it was unnecessary and would limit agency independence in making staffing decisions. Although the interagency committee did not recommend major changes in staff levels as a general theme in its June 2000 report, it did recommend that the regional financial service centers in Bangkok and Paris be relocated to the United States, and that several other potential opportunities for staff level reductions be explored. In addition, the report raised concerns about heavy embassy staff workloads, an issue not specifically addressed by OPAP. According to the committee's report, an expanded American role in promoting and protecting U.S. interests overseas has imposed a dramatic and often overwhelming burden of work and responsibility on embassy staff. The committee found a common perception at each post that "Washington's demands for reports, demarches, and other initiatives are numerous, un-prioritized, unrealistic, and insatiable." The report also noted concerns about the ambassador's ability to manage embassy staff and resources, noting that several ambassadors had indicated reluctance to challenge staffing levels of non- State agencies. The summary report also endorsed the initiation of separate interagency law enforcement pilot studies that the Attorney General had recommended in April 2000. These studies were intended to determine a methodology for deciding the appropriate type and number of law enforcement personnel to be assigned overseas, and to review the law enforcement policy role and staffing requirements at U.S. diplomatic missions. As part of this pilot, the law enforcement working group visited Mexico City, Bangkok, and Paris. State officials are unclear as to how the results of the working group will eventually affect staffing levels or rightsizing efforts. They noted, however, that law enforcement agencies have significantly increased their presence at a number of overseas posts in recent years. Table 1 summarizes the observations and conclusions for each post contained in the summary report on the pilot studies. Regarding staffing in Paris, the interagency committee's report noted that the ambassador had testified to the Congress that staff could be significantly reduced, but had not recommended which specific positions should be eliminated. The report recommended that the ambassador identify specific positions for elimination by September 2000. In addition, an informal "lessons learned" paper, prepared by the study team, suggested that staffing in Paris should be the subject of urgent, interagency review with a view toward reducing work demands, privatizing some administrative positions, and moving some functions to the United States. The ambassador who led the pilot study team said that reduction of work demands could be achieved if the White House, through the Office of Management and Budget, established relative policy priorities and questioned, and perhaps overrode, staffing decisions made by individual agencies. The study team also cited examples of work that may not need to be performed in Paris, or that could be privatized, including some translation services and reporting on information available in public sources. In addition, the team noted that there may be ways to reduce the amount of embassy staff time spent in supporting the large number of official visitors. After the pilot studies were completed, the ambassador at the U.S. Embassy in Paris asked headquarters agencies to review workload requirements, with a view toward reducing workload so that rightsizing could take place. In October 2000, State provided guidance to the ambassador on work requirements and priorities for the embassy. In November 2000, the ambassador said that this guidance would not permit him to reduce staff, as it would not be fair to cut staff and ask the remaining staff to take on an undiminished workload. Although the ambassador expressed disappointment in this effort to identify potential workload and staff reductions, he reiterated his position that staff reductions were needed in view of security concerns at the post, and in the interest of achieving operational efficiencies. The concern regarding embassy security in Paris was attributable to the absence of "setback" from public streets, making the embassy highly vulnerable to terrorist attack. According to Department of State officials, the departure of the ambassador in late 2000, the November 2000 U.S. elections, and the change in administrations detracted from follow-up on the potential rightsizing actions in Paris, as well as on the rightsizing committee's observations and conclusions concerning the other pilot posts. However, the current administration has made the embassy rightsizing process a priority by including it as one of the President's management initiatives, and it may revisit the observations of the pilot studies as a part of this process. State's August 2001 Final Report on Implementing the Recommendations of the Overseas Presence Advisory Panel agreed with the recommendations of OPAP to rightsize the overseas presence, rather than with the positions taken in the interagency committee's report on the pilot studies. State's final report also stated that the administration will analyze and review overall U.S. government presence and will develop a credible and comprehensive overseas staffing allocation process. However, it did not include a timetable for implementation or indicate whether more reviews of staffing issues at specific posts will be conducted. State's report mentioned only one specific action taken that would directly affect staff levels at the pilot posts--the relocation of the Paris Regional Financial Service Center to Charleston, South Carolina, proposed by Congress prior to the pilot studies. State did not indicate any additional rightsizing actions taken or planned for the embassy in Paris, nor did it comment on any of the other five pilot posts. On August 25, 2001, the President announced that the rightsizing of embassies and consulates would be one of 14 initiatives in the President's Management Agenda. The Office of Management and Budget is currently formulating a strategy for leading this initiative. In view of the September 11 terrorist attacks, the rightsizing of embassies and consulates has become more important than ever. Regrettably, the pilot studies conducted in 2000 do not provide a strong basis upon which the administration can pursue rightsizing, as they did not result in a methodology or blueprint for rightsizing around the world. Nevertheless, the studies did suggest that there may be opportunities to reduce embassy size, for example by moving some activities to the United States or to regional centers. If these suggestions prove feasible, their implementation could reduce security vulnerabilities at some overseas posts and could potentially free up resources to meet foreign policy needs elsewhere. We are currently planning work to further examine the suggestions raised by the pilot studies, as well as other issues to be considered as the administration implements the embassy rightsizing initiative. The Director of the Department of State's Office of Management Policy and Planning, which has overall responsibility for rightsizing initiatives in the department, provided oral comments on a draft of this report. He said that the department agrees with the report's conclusion and, on the whole, agrees with the report's observations regarding the pilot studies. He said that the department is working closely with the Office of Management and Budget on rightsizing activities. We contacted officials in the Departments of State, Defense, the Treasury, Justice, and Commerce, and in the USAID, who participated in the interagency rightsizing committee effort, to discuss how the pilot studies, were carried out and the studies' observations and results. We also obtained internal reports on the studies from some of these agencies. We interviewed Department of State personnel involved in the rightsizing studies, including the former Under Secretary of State for Management; the Director of the Office of Management Policy and Planning, which had responsibility for the pilot studies; and the former ambassador who led the pilot studies in Mexico City, Paris, and Tbilisi, and who was a co-chair for the overall pilot study exercise. We were unable to interview the other co- chair who prepared the June 2000 interagency report summarizing results of the pilot studies, as she is retired and unavailable. To explore the relationship between rightsizing and embassy security in OPAP's report, we interviewed the Chairman of OPAP. We conducted our review from April to September 2001, in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees and to the Secretary of State. We will make copies available to others upon request. Please contact me at (202) 512-4128 if you or your staff have any questions about this report. Major contributors to this report are John Brummet and Lynn Moore.
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The Department of State is leading an interagency assessment of staffing needs in U.S. embassies and consulates to improve mission effectiveness and reduce security vulnerabilities and costs. This process, called "rightsizing," was begun in response to the recommendations of the Overseas Presence Advisory Panel. In the aftermath of the August 1998 bombings of U.S. embassies in Africa, the Panel determined that overseas staffing levels had not been adjusted to reflect changing missions and requirements; thus, some embassies and consulates were overstaffed, and others were understaffed. The Panel recommended a rightsizing strategy to improve security by reducing the number of embassy staff at risk. The Panel also recommended the establishment of a permanent committee to regularly adjust the U.S. presence, and the adoption of explicit criteria to guide decisions on the size and location of posts. A State-led interagency committee conducted pilot studies at six embassies in 2000 to (1) develop a methodology for assessing staffing at embassies and consulates during the next five years and (2) recommend adjustments to staffing levels at the embassies studied. The interagency committee formed teams that visited U.S. embassies in Amman, Jordan; Bangkok, Thailand; Mexico City, Mexico; New Delhi, India; Paris, France; and Tbilisi, Georgia. The pilot studies did not result in a staffing methodology at all embassies and consulates, as had been anticipated. The interagency committee said that it was impractical to develop explicit criteria for staffing levels at all posts because each post has unique characteristics and requirements. Contrary to the Panel's recommendations, the committee's report also questioned the need for rightsizing and establishing a permanent committee to adjust U.S. presence. The report did recommend the relocation of the regional finance centers in France and Thailand, and it identified instances in which additional study was needed.
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Before discussing our preliminary findings in detail, it will be helpful to review the key features of Executive Order 12612 and some recent initiatives related to federalism. The executive order establishes a set of fundamental principles and criteria that executive departments and agencies should use when formulating and implementing policies that have federalism implications. For example, the executive order says that federal agencies should refrain to the maximum extent possible from establishing uniform, national standards for programs with federalism implications and that, when national standards are required, they should consult with appropriate officials and organizations representing the states in developing those standards. The order says that regulations and other policies have federalism implications if they "have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government." Executive Order 12612 also contains specific requirements for agency implementation and governmentwide coordination and review. For example, the head of each executive department and agency is required to designate an official to be responsible for ensuring the implementation of the order, and for determining which proposed policies have sufficient federalism implications to warrant preparation of a federalism assessment. If an assessment is prepared, it must accompany any proposed or final rule submitted to OMB for review under Executive Order 12866. OMB, in turn, is required to ensure that agencies' rulemaking actions are consistent with the policies, criteria, and requirements in the federalism executive order. and procedural steps during the rulemaking process for certain rules that involve a mandate. On May 14, 1998, President Clinton issued Executive Order 13083 on "Federalism," which was intended to replace both Executive Order 12612 and Executive Order 12875. The new executive order was to take effect in mid-August 1998, and would have made a number of changes to the specific requirements in Executive Order 12612. For example, agencies would no longer have been required to designate an official to ensure implementation of federalism requirements, and would not have been required to prepare federalism assessments for regulations and other policies with federalism implications. However, the President suspended Executive Order 13083 before it became effective in response to concerns raised by the National Governors' Association and other interested parties. Many of the commentators objected to the new order because they believed it expanded the federal government's authority to make national policies and standards. There was also criticism that the new order was issued without consulting affected state and local government representatives. With the suspension of Executive Order 13083, Executive Order 12612 remains the primary presidential directive to federal agencies on how they are to develop and implement regulations that have federalism implications. Executive Order 12612 does not require agencies to mention the order in the preamble to their final rules or to note in those preambles whether a federalism assessment was prepared. Therefore, our review of the rule preambles does not show whether agencies considered the executive order or whether the agencies prepared federalism assessments. However, mentioning the executive order in the preamble to a final rule is a clear indication that the agency was aware of and considered its requirements in some way. Also, if an agency prepared a federalism assessment for a final rule, the agency is likely to describe the assessment in the preamble to the rule. database of major rules issued since the passage of the SBREFA. SBREFA defines a rule as "major" if the Administrator of OMB's Office of Information and Regulatory Affairs concludes that the rule is likely to result in (1) an annual effect on the economy of $100 million or more; (2) an increase in costs or prices; or (3) significant adverse effects on (among other things) competition, employment, investment, or productivity. To summarize the 3 years of data depicted in figure 1, nonindependent regulatory agencies published 11,414 final rules in the Federal Register between April 1996 and December 1998. The agencies indicated in the preambles that they had conducted federalism assessments for 5 of these 11,414 rules--2 in 1996 and 3 in 1997. In 3,016 rules (26 percent of the total), the agencies stated that no federalism assessment was conducted because the rules did not have federalism implications. Nearly all of these statements were standard, "boilerplate" certifications with little or no discussion of why the rule did not trigger the executive order's requirements. In the remaining 8,393 rules (74 percent), the agencies did not mention Executive Order 12612. requirements. As table 1 shows, the five rules for which federalism assessments were prepared were issued by four agencies (DOC, DOT, HHS, and the Department of Labor) in either 1996 or 1997. Many of the final rules that federal agencies issue are administrative or routine in nature, and are therefore unlikely to have significant federalism implications. As a result, it is not particularly surprising that agencies would not prepare federalism assessments for many of those rules. However, rules that are "major" under SBREFA (e.g., those that have a $100 million impact on the economy) and that involve or affect state and local governments are more likely to have federalism implications that would warrant preparation of an assessment. Of the 11,414 final rules that nonindependent agencies issued between April 1996 and December 1998, 117 of them were identified as "major" rules by the agencies and OMB. The agencies issuing the rules indicated in the Unified Agenda of Federal Regulatory and Deregulatory Actions that 37 of them would affect state and local governments. The agencies indicated in the preambles to 21 of the rules that the rules would take precedence in the event they conflicted with state or local laws or regulations. rules they issued between April 1996 and December 1998 (about 25 percent of the total). However, only one of these preambles indicated that a federalism assessment had been prepared for the rule--an HHS rule issued in 1996 restricting the sale and distribution of cigarettes and smokeless tobacco to protect children and adolescents. The other 29 rule preambles that mentioned the executive order stated that the rules did not have sufficient federalism implications to warrant the preparation of a federalism assessment. Most of these statements were "boilerplate" certifications with little or no explanation of why the executive order's requirements were not applicable to the rules. representatives from seven major state and local government interest groups (known as the "Big Seven") to review descriptions of the 116 rules without federalism assessments and to indicate whether they believed any of the rules should have had an assessment. Four of these organizations provided us with comments on at least some of the rules. At least one of the four organizations indicated that 79 of the 116 rules should have had a federalism assessment. The agencies with the largest number of rules that the four organizations considered in need of assessments were HHS (26 rules), USDA (18 rules), and EPA (10 rules). Two or more of the organizations indicated that 30 of the rules should have had an assessment. We then contacted officials in each of these three agencies to determine whether federalism assessments had been prepared for these rules (but not mentioned in the preambles to the rules) or why they believed that no assessment was needed. The agencies did not indicate that any other assessments had been prepared, and generally said that their rules did not have sufficient federalism implications to trigger the executive order's requirements. In some cases, the agencies indicated that they had substantively complied with the executive order by taking other actions to address intergovernmental concerns during the rulemaking process. Federal departments and agencies are primarily responsible for implementing Executive Order 12612. Section 6 of the executive order delineates the agencies' responsibilities, requiring them to (1) designate an official to be responsible for ensuring implementation of the order, (2) have the designated official determine which proposed regulations have sufficient federalism implications to warrant the preparation of a federalism assessment, and (3) send each federalism assessment to OMB as a part of the regulatory review package sent pursuant to Executive Order 12866. However, Executive Order 12612 provides the agencies with broad discretion to determine how to meet these requirements. Each of the three agencies we visited--EPA, HHS, and USDA--has some kind of written guidance on how to implement Executive Order 12612. All three of the agencies' guidance documents identify a designated official or office responsible for ensuring compliance with the executive order. EPA issued its "Guidelines for Implementing Executive Order 12612: Federalism" in June 1988. The guidelines identified the Assistant Administrator of the Office of Policy, Planning, and Evaluation as the designated EPA official for federalism. However, in 1992, the EPA Administrator made the agency's General Counsel responsible for carrying out the functions of the designated official. The General Counsel was authorized to delegate the authority to the Deputy General Counsel, who could redelegate it to the Associate General Counsel level. EPA officials said that all agency regulations are to be reviewed by the General Counsel before being submitted to OMB and published in the Federal Register. USDA's guidance on "Regulatory Decisionmaking Requirements" was last updated in March 1997, and the requirements that are related to Executive Order 12612 are part of that overall guidance. The guidance indicates that the department's Office of the General Counsel (OGC) is responsible for carrying out the responsibilities of the designated official. For example, it says that OGC will "eview regulations and notices of proposed rulemaking for compliance with Executive Order 12612...and determine whether the preparation of a federalism assessment by an agency is required." All USDA regulations are to be reviewed centrally by the department's OGC before being submitted to OMB and published in the Federal Register. In March 1988, HHS's Assistant Secretary for Planning and Evaluation (ASPE) issued a memo on "Compliance with Executive Orders on The Family and Federalism." The memo indicated that the Secretary had assigned the ASPE lead responsibility for guidance, compliance, and technical assistance related to the executive order. HHS officials said that, with the exception of certain delegated regulations issued by the Food and Drug Administration (FDA), the ASPE is responsible for reviewing and clearing all departmental regulations. One facet of the ASPE's review is to determine whether the rules comply with Executive Order 12612. Many nonmajor FDA regulations (as determined by FDA) are issued directly by the Commissioner without formal departmental review and clearance. For these regulations, HHS officials said that the FDA Commissioner exercises the responsibilities of the designated official under the executive order. federalism implications. At least one of the agencies' criteria seems to establish a high threshold for preparing an assessment. USDA's written guidance on Executive Order 12612 does not establish any specific criteria that the department's OGC should use to determine whether a particular rule or other policy has sufficient federalism implications to warrant the preparation of a federalism assessment. Neither has USDA's OGC established any written criteria to guide these determinations. USDA officials said that OGC attorneys make their own determinations regarding federalism implications in the context of each rulemaking action. The HHS guidance on the executive order lists "threshold criteria" that can be used to determine whether a rule's federalism effects are significant and thus require a federalism assessment. The guidance indicates that a rule should be considered to have significant federalism implications if it (1) has a direct causal effect on the states; (2) primarily relates to the structure and role of states (e.g., not just a reduction in funding of grant programs); (3) has effects within a reasonably foreseeable time frame (e.g., within the next 5 years); and (4) has a significant incremental effect (e.g., requiring states to do something that they are not already doing). The guidance also says that an assessment must be prepared if an action will directly create significant effects on states even if the action is mandated by law or the department otherwise has no discretion. Finally, it says that rules and other policies with either a positive or negative significant effect on the states require a federalism assessment. traditional State responsibilities, or decrease the ability of States to make policy decisions with respect to their own functions" in order to have a "substantial" effect. The rule must affect all or most states, "not simply one state or a small cluster of States." The rule must have a "direct, causal effect" on the states. If a rule creates federalism effects as a side effect, the guidance says the rule would not trigger the requirement for a federalism assessment. These criteria seem to establish a high threshold for what constitutes "sufficient" federalism implications to require an assessment. For example, the executive order defines "state" to "refer to the States of the United States of America, individually or collectively." (Emphasis added.) EPA's guidance, on the other hand, indicates that federalism assessment should be prepared only if a regulation or other policy affects all or most states. However, EPA's actions appear to be allowable because the executive order does not define what is meant by "sufficient" federalism implications, leaving that determination up to the agencies. Section 7 of Executive Order 12612 indicates that, in implementing Executive Order 12866, OMB should, to the extent permitted by law, "take action to ensure that the policies of Executive departments and agencies are consistent with the principles, criteria, and requirements" of the federalism executive order. As noted previously, the order requires agencies to submit federalism assessments (if they were prepared) along with any rules being submitted to OMB for review. OMB officials told us that reviews of agencies' actions in the federalism area have been part of the standard regulatory reviews conducted by OMB staff pursuant to Executive Order 12866. They said that agencies have rarely submitted separate federalism assessments to OMB but have addressed federalism considerations, when appropriate, as a part of the cost-benefit analysis and other analytical requirements. These officials also noted that there were few federalism assessments filed with OMB during the Reagan and Bush administrations. House web site indicates that Executive Order 13083 (the suspended Clinton order), not 12612, is the applicable executive order on federalism. One OMB official told us that Executive Order 12612, Executive Order 12866, Executive Order 12875, and UMRA all substantively address the same idea regarding federalism. They all require that, if a proposed rule is likely to have a significant impact on other levels of government, the impact should be considered in analyzing the costs and benefits of the rule and the agency should consult with appropriate officials at the state and local level. Executive Order 12612 gives agencies substantial discretion to determine which regulations and other policies have "sufficient" federalism implications to warrant preparation of a federalism assessment. Using that discretion, the agencies have prepared federalism assessments for very few rules. One of the agencies we visited had no written criteria to make those determinations. Although the other two agencies had written criteria, they had prepared only one federalism assessment and had mentioned the executive order in only 10 out of nearly 3,000 rules. The two agencies' criteria were also inconsistent regarding whether statutorily mandated regulations required a federalism assessment. Also, other than including federalism as part of its regulatory reviews, OMB has taken no other specific actions to carry out its responsibility to ensure that agencies' regulations and other policies are consistent with the executive order. The fact that agencies have prepared federalism assessments for only 5 of the more than 11,000 final rules issued in recent years suggests that the agencies are not implementing the order as vigorously as they could. We will be exploring the implications of this situation as we complete the work on this issue that you have requested of us. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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Pursuant to a congressional request, GAO discussed the implementation of Executive Order 12612 on federalism, focusing on: (1) how often the preambles to covered agencies' final rules issued between April 1, 1996, and December 31, 1998, mentioned Executive Order 12612 and how often they indicated that the agencies had conducted federalism assessments under the order; (2) what selected agencies have done to implement the requirements of Executive Order 12612; and (3) what the Office of Management and Budget (OMB) has done to oversee federal agencies' implementation of Executive Order 12612 in the rulemaking process. GAO noted that: (1) federal agencies covered by Executive Order 12612 mentioned the order in about 27 percent of the more than 11,000 final rules they issued between April 1996 and December 1998; (2) the agencies indicated, however, that they had prepared federalism assessments for only five of these rules; (3) of the 117 major rules issued by these agencies during this period, the preambles indicated that only 1 had a federalism assessment; (4) state and local representatives that GAO consulted said that certain federal agencies should have done assessments for more of these major rules; however, the agencies said that their rules did not have sufficient federalism implications to trigger the executive order's requirements; (5) all three of the federal agencies GAO visited had some kind of written guidance on the executive order and had designated an official or office responsible for ensuring its implementation; (6) however, the methods the agencies use to determine whether federalism assessments are needed varied among the agencies; and (7) OMB officials told GAO that they have taken no specific actions to implement the executive order, but said the order is considered along with other requirements as part of their regulatory review process under Executive Order 12866.
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According to State, the OAS is the primary inter-American political forum through which the United States engages with other countries in the Western Hemisphere to promote democracy, human rights, security, and development. While PAHO, IICA, and PAIGH are independent organizations, the Charter of the Organization of American States (OAS Charter) directs them to take into account the recommendations of the OAS General Assembly and Councils. PAHO, a specialized international health agency for the Americas, works with member countries throughout the region to improve and protect people's health and serves as the Regional Office for the Americas of the World Health Organization, the United Nations agency on health. IICA, among other things, supports its member states' efforts to achieve agricultural development and rural well- being through consultation and the administration of agricultural projects through agreements with the OAS and other entities. PAIGH specializes in regional cartography, geography, history, and geophysics and has facilitated the settlement of regional border disputes. Member states collectively finance these organizations by providing assessed contributions, in accordance with the organizations' regulations. The member states' assessed contributions are intended to finance the organizations' regular budgets, which generally cover the organizations' day-to-day operating expenses, such as facilities and salaries. Member states of each organization meet to review and approve the organizations' budgets. The exact dollar amount each member state is responsible for providing corresponds to its assessed percentage of the total approved assessment for any given year. The budgets are based on total approved quota assessment and other projected income. The OAS's system for determining member states' quotas is used to calculate member states' assessed contributions by the other three organizations. Thus, any change in the OAS's assessed quota structure should be reflected at PAHO, IICA, and PAIGH, according to their respective processes regarding the determination of assessed contributions. Member states also finance certain OAS, PAHO, and IICA activities through voluntary contributions. Member states generally target these contributions toward specific programs or issue areas. According to U.S. officials, the United States provides voluntary contributions to the OAS, IICA, and PAHO primarily through grants for specific projects from State, the U.S. Agency for International Development, the U.S. Department of Agriculture, and the Department of Health and Human Services. For example, according to OAS documentation, in 2015, State contributed slightly more than $200,000 to the OAS to fund judicial training to combat money laundering. According to U.S. agency officials, the organizations' regional knowledge and technical expertise make them effective implementing partners for projects serving U.S. national interests and priorities throughout the hemisphere. The Reform Act directs the Secretary of State to submit "a multiyear strategy that...identifies a path toward the adoption of necessary reforms that would lead to an assessed fee structure in which no member state would pay more than 50 percent of the OAS's assessed yearly fees." According to the Reform Act, it is the sense of Congress that it is in the interest of the United States, OAS member states, and a modernized OAS that the OAS move toward an assessed quota structure that (1) assures the financial sustainability of the organization and (2) establishes, by October 2018, that no member state pays more than 50 percent of the organization's assessed contributions. The United States' assessed contributions constituted over 57 percent of total assessed contributions by member states to the OAS, PAHO, IICA, and PAIGH from 2014 through 2016, as shown in table 1. During this time, the United States' assessed quota for these organizations did not change, and the total assessed contributions for all member states of these organizations remained about the same; thus, the actual amounts assessed to the United States generally remained the same. All four organizations apply a similar assessed quota structure that uses the relative size of member states' economies, among other things, to help determine each member state's assessed contributions. The OAS determines the assessed quota for each member state based on the United Nations' methodology, as adapted for the OAS, using criteria that include gross national income, debt burden, and per capita income. In addition, the OAS applies a minimum assessed quota of 0.022 percent and a maximum assessed quota of 59.470 percent. According to State officials, the OAS last made a major revision to its assessed quota structure in 1990 when Canada joined the organization, and the United States' and other members' assessed quotas were reduced as a result. OAS officials said that while member states seek, as far as possible, to adjust the assessed quota structure through consensus, the OAS General Assembly may force a vote and adopt changes with a two-thirds majority. The United States also provided voluntary contributions totaling about $105 million to the OAS, PAHO, and IICA from calendar years 2014 through 2016, as shown in table 2. In 2014, the United States contributed $37 million in voluntary contributions, or approximately 22 percent of the total of $168 million in such contributions from all member states. In 2015, the United States contributed $36 million, or approximately 29 percent of the total of $123 million from all member states. In 2016, the United States contributed $32 million, or approximately 22 percent of the total of $143 million from all member states. According to U.S. officials, levels of U.S. voluntary contributions vary year-to-year due to factors that include the schedule of multiyear grant disbursements, member states' priorities, and sudden crises. For example, the U.S. Agency for International Development made a $200,000 contribution to PAHO in 2016 for post- earthquake reconstruction and resilience-building in Ecuador. State is working with other member states toward reforming the OAS's quota structure for assessed contributions so that no member state provides more than 50 percent of the organization's annual assessed contributions, but State officials told us that reaching consensus among OAS member states will be difficult. In response to the Reform Act, State developed a strategy that identified a path toward the adoption of necessary reforms that would lead to an assessed quota structure in which no member state would pay more than 50 percent of the OAS's annual assessed contributions. State officials told us that they submitted the strategy to Congress in April 2014. The strategy included efforts to engage member state governments to explore options for reforming the quota structure and to examine the extent to which the OAS's quota- setting methodology reflects member states' capacity to finance the organization's activities. According to the OAS and State's 2015 report to Congress, achieving quota structure reform will require one or more of the other major contributors to accept an increase in their quotas--the percentages of total annual assessed contributions that they agree to provide. State officials told us that they have been working to implement this strategy. For example, State officials told us they engaged with other OAS member states, including Canada and Mexico, to explore options for quota structure reform. According to State officials, Canada led a modernization committee that produced a strategic plan that included quota structure reform. State officials added that they also reached out to member states from the Caribbean to discuss the importance of quota structure reform while highlighting OAS development programs that benefit Caribbean nations. In addition, officials at the U.S. Mission to the OAS worked with their counterparts from Mexico to review the OAS's assessed quota structure and to consult on alternatives that would adjust all member states' quotas so that no member pays more than 50 percent of the OAS's assessed contributions. According to State officials, the four largest contributing member states, including the United States, have agreed on the importance of quota structure reform. State officials added that quota structure reform efforts were bolstered by the selection of a reform-minded OAS Secretary General in 2015. However, State officials told us that while it will be difficult, it is not impossible for OAS member states to reach consensus on reforming the organization's assessed quota structure by October of 2018. Several issues among the member states have impeded the progress of State's strategy, according to State and OAS officials. These issues include the following: State and OAS officials told us that regional political tensions have complicated OAS member states' ability to reach consensus on quota structure reform. According to State officials, Venezuela's contentious political relationship with the OAS has hindered progress on various efforts promoted by the United States, including quota structure reform. State officials added that Venezuela has actively worked against the OAS to undermine the normal procedures of the organization. State officials told us that some member states have at times supported Venezuela during committee votes. For example, according to State officials, some member states voted against bringing proceedings against Venezuela for violating the Inter- American Democratic Charter in 2016. In this context, State officials emphasized that it was important for member states other than the United States to officially propose resolutions on quota structure reform. State officials told us that certain member states' nonpayment of their assessed contributions also has impeded the quota structure reform effort, as well as contributing to financial difficulties at the OAS. Venezuela has expressed publically its unwillingness to pay its assessed contributions, according to State officials. Additionally, as of November 2016, the OAS projected that five member states would be more than $17 million in arrears on their assessed contributions to the OAS by the end of 2016. Brazil--the OAS's second largest contributor--and Venezuela had not fully paid their assessed contributions for 2015 and 2016, which accounted for approximately 99 percent of the more than $17 million in arrears that member states owed the OAS. State officials told us that the large amounts owed by a few member states had contributed to smaller OAS member states' reluctance to increase their annual assessed quotas to ensure that no member state provides more than 50 percent by 2018. According to State officials, the United States repeatedly urged the Brazilian government to pay its arrears and 2016 contribution as soon as possible. Brazil recently paid its arrears in full for 2015 and 2016 and its assessed contribution for 2017. Thus, as of April 5, 2017, the remaining arrears for all member states at the OAS were lowered to just over $7 million. State officials told us that on April 28, 2017, Venezuela officially notified the OAS of its intent to withdraw from the organization. According to OAS officials, the OAS currently lacks a mechanism to penalize member states for not paying assessed contributions, unlike the other three organizations. OAS officials told us that OAS committees are discussing the potential for defining negative consequences for member states in arrears. According to State officials, the OAS's next opportunity to discuss quota structure reform at the ministerial level will be at its General Assembly meeting in Mexico City in June 2017. The Mexican government announced that the main theme of the meeting will be strengthening dialogue and cooperation in the OAS. State officials said that high-level engagement between member states' officials will be needed to promote quota structure reform. They informed us that efforts to reform the assessed quota structure continue at the working level and that they are seeing some progress toward reform. We provided a draft of this report for comment to State, the Departments of Agriculture and Health and Human Services, the U.S. Agency for International Development, the OAS, PAHO, IICA, and PAIGH. The Departments of Agriculture, Health and Human Services, and the U.S. Agency for International Development stated that they did not have any comments on our report. State provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of State, the Secretary of Agriculture, the Secretary of Health and Human Services, the Administrator of the U.S. Agency for International Development, the Secretary General of the Organization of American States, the Secretary General of the Pan American Health Organization, the Director General of the Inter-American Institute for Cooperation on Agriculture, the Secretary General of the Pan-American Institute of History and Geography, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have questions about this report, please contact me at (202) 512-9601, or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. This report responds to a request for GAO to review several issues related to the Organization of American States (OAS), the Pan American Health Organization (PAHO), the Inter-American Institute for Cooperation on Agriculture (IICA), and the Pan-American Institute of Geography and History (PAIGH). In this report, we (1) determine the amounts and percentages of U.S. contributions assessed by these organizations and voluntary contributions paid to them in calendar years 2014 to 2016, and (2) describe the Department of State's (State) efforts to comply with requirements in the Organization of American States Revitalization and Reform Act of 2013 (Reform Act) regarding a strategy for reform of the assessed quota structure of the OAS. To determine the amounts and percentages of contributions assessed by the OAS, PAHO, IICA, and PAIGH to the United States and other member states, as well as the amounts and percentages of additional voluntary contributions paid to these organizations, we reviewed externally audited budget reports for calendar years 2014 and 2015. For calendar year 2016, we reviewed budget documents from the four organizations and corroborated the accuracy of the data with the organizations and the U.S. agencies that provide funds to these organizations. For assessed contributions, we reviewed the organizations' assessed quota structures. We report the quota structure percentage assessed to the United States over these 3 years and the corresponding United States' assessed contribution amounts for this same time period, based on our analysis of data provided by the organizations. We determined the 2014 and 2015 data to be sufficiently reliable for the purpose of reporting the United States' assessed contributions and quota percentages because these data had been externally audited. To determine the reliability of the 2016 data, we reviewed budget documents that have not yet been audited, discussed these data with knowledgeable officials at the organizations and U.S. agencies, and corroborated them with these officials and U.S. agencies. We determined the data were sufficiently reliable for the purpose of reporting the United States' assessed contributions and quota percentages in 2016. These data reflect the quotas assessed to the United States and do not reflect total payments made by the U.S. government to the organizations' regular budget, which include other miscellaneous payments. For voluntary contributions, we reviewed the same externally audited reports and data from the organizations to obtain the amounts contributed by member states and calculated the proportion of the United States' voluntary contributions compared with those of the other member states. The four organizations under review have different categories of voluntary funds, depending on their source and intended use. For consistency purposes, we worked with State and officials from the OAS, PAHO, and IICA to establish our definition of voluntary contributions as funds given from governments to the organizations for implementing specific projects outside their respective countries. In accordance with this definition, we considered the following categories of voluntary contributions: "specific funds" at the OAS, "government financing of voluntary contributions" at PAHO, and "external resources by financing source" for each member state at IICA. We determined the 2014 and 2015 data to be sufficiently reliable for the purpose of reporting the United States' voluntary contributions as a percentage of all members' voluntary contributions because they had been externally audited. To determine the reliability of the 2016 data, we reviewed budget documents that have not yet been audited, discussed these data with knowledgeable officials at the organizations and U.S. agencies, and corroborated them with these officials and U.S. agencies. We determined that the data were sufficiently reliable for the purpose of reporting the United States' voluntary contributions as a percentage of all members' voluntary contributions in 2016. To describe State's efforts to comply with the Reform Act, we analyzed documents from State regarding its strategy for reform of the assessed quota structure in response to the Reform Act. We also interviewed officials from the U.S. Mission to the Organization of American States, State's Bureau of International Organization Affairs, and the OAS Secretariat for Administration and Finance. We conducted this performance audit from July 2016 to June 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 and conclusions based on our audit objectives. Appendix II: Member States of Four Inter- American Multilateral Organizations organization on April 28, 2017. In addition to the contact named above, Pierre Toureille (Assistant Director), Julia Jebo Grant (Analyst-in-Charge), Paul Sturm, Leslie Stubbs, Kira Self, and Rhonda Horried made key contributions to this report. In addition, David Dayton, Martin de Alteriis, Neil Doherty, and Alex Welsh provided technical assistance.
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The United States belongs to several inter-American organizations, including the OAS, PAHO, IICA, and PAIGH, which promote democracy, security, health care, agricultural development, and scientific exchange in the Western Hemisphere. The United States helps finance these organizations' operating expenses through assessed contributions (fees) that are based in part on the size of the U.S. economy relative to those of other members. The Reform Act required State to submit a strategy identifying, among other things, a path toward the adoption of reforms to the OAS's assessed quota structure to ensure that no member will pay more than 50 percent of OAS assessed contributions. In addition, the United States also provides the OAS, PAHO, and IICA with project-specific voluntary contributions. GAO was asked to review U.S. financial contributions to these four organizations. In this report, GAO (1) determines the amounts and percentages of U.S. contributions assessed by these organizations and voluntary contributions paid to them in calendar years 2014 to 2016, and (2) describes State's efforts to comply with the Reform Act's requirements regarding a strategy for reform of the assessed quota structure of the OAS. GAO analyzed documents and interviewed officials from State, the Department of Health and Human Services, the U.S. Agency for International Development, the U.S. Department of Agriculture, and the four organizations. GAO also analyzed the four organizations' annual audited financial reports. The United States' assessed contributions constituted over 57 percent of total assessed contributions by member states to four inter-American organizations from 2014 to 2016. These organizations are the Organization of American States (OAS), the Pan American Health Organization (PAHO), the Inter-American Institute for Cooperation on Agriculture (IICA), and the Pan-American Institute of Geography and History (PAIGH). During this time, the annual U.S. percentages (or quotas) of these organizations' assessed contributions have remained about the same. The United States also provided voluntary contributions to three of these organizations, as shown in the table. In response to a requirement in the Organization of American States Revitalization and Reform Act of 2013 (Reform Act), the Department of State (State) submitted to Congress a strategy that included working with OAS member states toward ensuring that the OAS would not assess any single member state a quota of more than 50 percent of all OAS assessed contributions. State officials told GAO that reaching member state agreement on assessed quota reform by 2018 will be difficult, although not impossible. State officials informed GAO that State continues to implement a strategy that includes engaging with other OAS member states, such as Canada and Mexico, to explore assessed quota reform options. For example, State officials have consulted with their counterparts from Mexico to review the OAS's assessed quota structure and to consult on alternatives that would adjust all member states' quotas so that no member state's quota exceeds 50 percent of the OAS's assessed contributions. According to State and OAS officials, obstacles to assessed quota reform include tensions among member states. For example, State officials noted that Venezuela's contentious political relationship with the OAS has hindered progress on various reforms, including assessed quota reform. State officials explained that some member states' failure to fully pay assessed contributions from previous years and smaller member states' reluctance to increase their annual assessed contributions have also impeded assessed quota reform efforts.
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The NASA Authorization Act of 2010 directed NASA to develop a Space Launch System, to continue development of a crew vehicle, and prepare infrastructure at Kennedy Space Center to enable processing and launch of the launch system. To fulfill this direction, NASA formally established the SLS program in 2011. Then, in 2012, the Orion project transitioned from its development under the Constellation program--a program that was intended to be the successor to the Space Shuttle but was canceled in 2010 due to factors that included cost and schedule growth--to a new development program aligned with SLS. To transition Orion from Constellation, NASA adapted the requirements from the former Orion plan with those of the newly created SLS and the associated ground systems programs. In addition, NASA and the European Space Agency (ESA) agreed that ESA would provide a portion of the service module for Orion. Figure 1 provides details about the heritage of each SLS hardware element and its source as well as identifies the major portions of the Orion crew vehicle. The EGS program was established to renovate portions of the Kennedy Space Center to prepare for integrating hardware from the three programs as well as launching SLS and Orion. EGS is made up of nine major components, including: the Vehicle Assembly Building, Mobile Launcher, software, Launch Pad 39B, Crawler-Transporter, Launch Equipment Test Facility, Spacecraft Offline Processing, Launch Vehicle Offline Processing, and Landing and Recovery. See figure 2 for pictures of the Mobile Launcher, Vehicle Assembly Building, Launch Pad 39B, and Crawler-Transporter. NASA established an agency baseline commitment--the cost and schedule baselines against which the program may be measured--for each program. NASA has committed to be ready to conduct one test flight, EM-1, no later than November 2018. During EM-1, the SLS vehicle is scheduled to launch an uncrewed Orion to a distant orbit some 70,000 kilometers beyond the moon. All three programs--SLS, Orion, and EGS--must be ready on or before this launch readiness date to support this integrated test flight. While the SLS and EGS program cost and schedule baselines are tied to the uncrewed EM-1 mission, the Orion program's cost and schedule baselines are tied to a second, crewed mission--EM-2. See table 1 for program baseline information. All three programs are entering the integration and test phase of the development life cycle--which our prior work has shown to be when problems are commonly found and schedules tend to slip. In general, programs have schedule and cost reserves in order to address challenges that arise during development. Funded schedule reserve is extra time, with the money to pay for it, in the program's overall schedule in the event that there are delays or unforeseen problems. Cost reserves are additional funds that can be used to mitigate problems during the development of a program. For example, cost reserves can be used to buy additional materials to replace a component or, if a program needs to preserve schedule, cost reserves can be used to accelerate work by adding extra shifts to expedite manufacturing and save time. With less than two years until the committed November 2018 launch readiness date for EM-1, the three human exploration programs--Orion, SLS, and EGS--are making progress, but schedule pressure is escalating as technical challenges continue to cause schedule delays. All three programs face development challenges in completing work, and each has little to no schedule reserve remaining to the EM-1 date-- meaning they will have to complete all remaining work with minimal delay during the most challenging stage of development. This includes completing design, production, and integration work at each program as well as integrating the hardware and software from the three programs in preparation for launch. Integration and testing is the phase where problems are most likely to be found, and the amount of potential problems is increased due to the two levels of integration--each inherently complex program must be integrated individually and then as an interdependent, combined enterprise. Because all three programs must be ready for launch to occur, a redesign of a single program's component, a test failure, or a significant hardware or software integration issue in any one area could delay the launch readiness date for all three programs. The schedule pressure is intensified by the low levels of cost reserves held by all three programs to mitigate problems during development. In some cases, however, even if the programs held higher levels of cost reserves, using them to gain back schedule would be difficult because-- at this late stage of development--work has become more sequential and there are fewer opportunities for workarounds, which the programs have relied on until now to preserve schedule. With little to no schedule or cost reserves remaining as the programs finalize production and enter integration and testing activities, the EM-1 launch readiness date is in a precarious position. While NASA officials told us they are assessing factors that could contribute to an EM-1 schedule slip, they have not committed to a timeline for completing that assessment or proposing an amended launch schedule, if needed. Therefore, it is unclear when Congress will be informed of NASA's findings and any impact those findings might have on NASA's fiscal year 2018 budget request. Since we last reported on the human exploration programs in July 2016, the programs have made progress toward completing development, including the following: Orion: After changing the heatshield design following a December 2014 test flight in which NASA determined that not all aspects of the original monolithic design would meet the more stringent requirements for EM-1 and EM-2 when the capsule will be exposed to greater temperature variance and longer durations, the Orion program and contractor reported that production of heatshield blocks is underway and production quality is very high. Orion officials also stated that the risks associated with the ESM main engine--a heritage in-space maneuvering engine from the Space Shuttle program--have been largely addressed. The program was concerned with the state of internal components given their age; however, the engines have completed rounds of acceptance and vibration testing following replacement of valves and other components. In addition, the program and contractor stated that they have addressed all probable causes of crew module airbag anomalies from the December 2014 test flight. These bags are designed to inflate upon touchdown in the ocean to properly orient the crew module; however, some did not properly inflate or leaked due in part to the bags inflating before they were outside of the vehicle, which placed the bags under stress. While the root cause for the failures remains unknown, given the mitigation steps being taken, program officials now have high confidence in the system's performance going forward. SLS: Program officials stated that the solid rocket boosters have completed the second of two planned qualification tests and that the program has also implemented a design change to address an issue where the solid rocket propellant might loosen from the insulation on the inside of the booster casing, which may increase the risk of booster failure. The program office is performing analysis to ensure the mitigation meets expected safety margins. The program is producing test and flight unit core stage hardware and, according to program officials, has made progress manufacturing panels which will be bolted together to create the intertank section of the core stage. They also stated that early attempts to bend some of the thick materials necessary for the core stage led to unrepairable cracks, but the contractor has updated its processes, which has allowed recently produced panels to pass inspections. The program has also begun integrated structural testing of its EM-1 in-space propulsion stage, Launch Vehicle Stage Adapter, and Orion Stage Adapter. EGS: Program officials stated that work for the Crawler Transporter and Launch Vehicle Offline Processing facility is complete. In addition, all 10 of the platforms that will allow access to the integrated SLS and Orion vehicles during final assembly in the Vehicle Assembly Building have been installed, according to EGS officials. Additionally, they have started verification and validation, the process by which the program assesses whether systems are capable of meeting their intended purpose and are being developed according to agency requirements, at the Multi-Payload Processing Facility--where spacecraft fueling will be performed. Program officials stated that 8 of the 20 pieces of launch equipment and accessories--for example, umbilical connections from the launch tower to the vehicle--have been built, finished testing, and are ready for installation onto the Mobile Launcher. The magnitude of the schedule delays that the programs have experienced amid this progress, however, foreshadows a likely schedule slip for the November 2018 EM-1 launch readiness date. In addition, each program is facing risks that will likely consume what little schedule reserve exists, and low cost reserves limit mitigation options to achieve the planned launch readiness date. These ongoing challenges include the following: Orion: The Orion program has no schedule reserve to EM-1 and the delivery of the European Service Module (ESM) and completion of flight software are the primary and secondary critical paths--or the path of longest duration through the sequence of activities that determines the earliest completion date--for both Orion and EM-1 as a whole. In December 2015, Orion officials stated that the program had zero schedule reserve to EM-1 and we reported in July 2016 that the program had already experienced several ESM development delays that impacted the ESM delivery, and that further delays could cause the EM-1 launch to slip. As of the ESM's critical design review in summer 2016, ESA has delayed ESM delivery to the Orion program from January 2017 to April 2017, and senior NASA officials stated the delivery will likely slip to August 2017 or later. Program officials stated that the delays are largely due to NASA, ESA, and the ESA contractor underestimating the time and effort necessary to address design issues for the first production ESM and the availability of parts from suppliers and subcontractors. For example, the contractor found welding failures in the ESM's propulsion tanks, and a number of parts deliveries have been late. Orion program officials told us that following delivery from ESA, they will need the service module for 12 months for integration with the crew module and testing prior to providing the completed Orion spacecraft to the ground systems at Kennedy Space Center. This means if ESA's delivery date of the service module slips to August 2017, the Orion program will not be ready to deliver Orion to Kennedy Space Center until August 2018. NASA officials stated that they would not be able to maintain a launch readiness date of November 2018 if Kennedy Space Center receives the Orion spacecraft after July 2018. As a result, the November 2018 launch readiness date is likely unachievable unless NASA identifies further mitigation steps to accommodate delays. In addition, the Orion program faces a number of other technical challenges including software delays and hardware design, but has limited cost reserves to address them until fiscal year 2018 when more cost reserves will be available. As we found in July 2016, the Orion program continues to employ most of its available budget to fund current work and holds most of its cost reserves in fiscal years 2019 and 2020. Program officials told us that the Orion program is schedule-constrained at this point, meaning that even if additional funding were available, it could not alleviate all schedule pressure to EM-1. SLS: The SLS program currently reports having the most program-level schedule reserve of the three programs--approximately 80 days-- however, schedule pressure is mounting as the program completes production and integration and test events grow near. Development of the core stage--which functions as the SLS's fuel tank and structural backbone--is the program's critical path, meaning any delay in its development reduces schedule reserves for the whole program. A number of important events must successfully take place before the core stage, or the vehicle at large, are ready for EM-1. First, the contractor is scheduled to complete production of the core stage flight unit and deliver it to Stennis Space Center for testing by September 2017. However, officials stated that they have exhausted schedule reserve for this delivery date to address "expected unknowns" with hardware processing due to this being the first time they have built the core stage. Further, according to officials, welding on the core stage was stopped for months due to low weld strength in the liquid oxygen and liquid hydrogen tanks caused by a program and contractor decision to change the weld tool configuration during fabrication. The altered configuration produced different welds that the program has had to confirm are within specification. While officials indicate that they now have a corrective action plan in place, and welding resumed in April 2017, they did not provide detail on the impact to program schedule reserve. Once production of the core stage flight unit is complete, the program plans to deliver it to Stennis Space Center for testing. At Stennis Space Center, the core stage will be filled with cryogenic hydrogen and oxygen for the first time--a considerable process on its own, as officials stated they were finding and mitigating hydrogen leaks for the entire life of the Shuttle program--and will undergo a "green run" test. During the green run, the core stage flight model--integrated with four RS-25 engines--will be fired for about 500 seconds to test a flight-like engine-use profile. Following this, the program has 20 days of reserves--less any delivery delays and delays from issues that arise during testing--from the completion of the green run test until it must be shipped to Kennedy Space Center to begin integration with the boosters, upper stage, and Orion as well as all EGS equipment. Should further challenges arise during final production and testing, the program's 80 days of reserve will likely be reduced. As we found in July 2016, NASA baselined the SLS program with cost reserves of less than 2 percent, even though guidance for Marshall Space Flight Center--the NASA center with responsibility for the SLS program-- establishes standard cost reserves for launch vehicle programs of 20 percent when the baseline is approved. NASA has not changed its cost reserve posture for this program since that time, meaning the program still has limited cost reserves to address risks and challenges. EGS: EGS program officials stated they used the majority of the 6 months of schedule reserve the program had when we reported in July 2016 to address, among other issues, complications at the Launch Equipment Test Facility and with the Mobile Launcher's ground support equipment installation. The program now has 28 days of schedule reserve, which program officials stated is being held for integrated operations before EM- 1, and zero days remaining for any further delays for EGS-specific projects. Without any schedule margin remaining for the EGS-specific projects, the program will be challenged to complete its remaining work that includes umbilical testing, ground support equipment and umbilical installation, and verification and validation testing. These efforts all carry schedule risks with expected delays that, if not mitigated, total 14 months. Program officials stated that they are actively trying to mitigate these schedule risks; however, they acknowledged that some mitigation tactics they are considering--such as performing some portion of these efforts concurrently--increase the complexity of these efforts. In addition, EGS officials indicated they are planning to consolidate some verification and validation testing to streamline the test flow, which they said would increase schedule risk but not technical risk. The program is also considering implementing additional work shifts to create additional schedule margin. The internal EGS delays and the cascading delays from Orion and SLS that EGS may have to absorb--as the program responsible for final integration of the three programs--contribute to NASA likely not achieving the November 2018 launch readiness date. Similar to Orion and SLS, we previously found in July 2016 that the EGS program is operating with limited cost reserves to address future construction and software risks. For example, we found that when NASA approved the program's baseline, the program had cost reserves of only 4 percent. While Kennedy Space Center--which is responsible for the EGS program--does not have cost reserve guidance in place, guidance from other NASA centers establishes higher levels of cost reserves at this stage of development. Further, according to EGS officials, the program used all of its fiscal year 2017 reserves in recent years, and has limited reserves in fiscal year 2018, hindering EGS's ability to address any remaining challenges. GAO's work on acquisition best practices has shown that success in development efforts such as these programs depends on establishing an executable business case based on matching requirements and resources before committing to a new product development effort. In our prior reviews of NASA's human exploration programs, we have found that all three programs have been using aggressive schedules and that SLS and EGS have low reserve levels compared to NASA standards. We have also previously found that both SLS and Orion cost and schedule estimates--which inform their cost and schedule baselines--were unreliable when compared to best practices. In July 2016, we recommended that the NASA administrator direct the Human Exploration and Operations Mission Directorate to re-evaluate SLS and EGS cost reserves as it finalized its schedule and plans for EM- 1 during a planned build-to-synchronization review--in summer 2016--in order to take advantage of all available time and resources and maximize the benefit of available cost reserves, and to verify that the November 2018 launch readiness date remained feasible. This review was intended to demonstrate that the integrated launch vehicle, crew vehicle, and ground systems will perform as expected to meet EM-1 objectives. NASA concurred with our recommendation and as of January 2017, senior NASA officials told us that they have reordered integration activities to try to meet the EM-1 launch schedule, but further analysis indicates that they will have to delay the launch readiness date. These officials stated that no decision has been made and NASA has not committed to a timeline in which to report its findings. Fiscal year 2018 is the last year before the November 2018 EM-1 launch readiness date. With fiscal year 2018 budget discussions ongoing, until it receives updated EM-1 schedule information, the Congress will be in the position of determining NASA's appropriations based on a launch readiness date that is likely not achievable. Should NASA determine it is likely to exceed its cost estimate baseline by 15 percent or miss a milestone by 6 months or more, NASA is required to report those increases and delays--along with their impacts--to the Congress. Given that these three human space exploration programs represent more than half of NASA's current portfolio development cost baseline, a cost increase or delay could have substantial repercussions for not only these programs but NASA's entire portfolio. A principle of federal internal controls is that managers should externally communicate the necessary quality information to achieve an entity's objective and address related risks. If NASA's ongoing assessment of the November 2018 EM-1 launch readiness date reveals that a new, more realistic, date is warranted, prolonging any decisions regarding the extent of delays and cost overruns--no matter the magnitude--until after deliberations on NASA's fiscal year 2018 budget request would increase the risk that both NASA and the Congress continue making decisions potentially involving hundreds of millions of taxpayer dollars based on schedules that may no longer be feasible. Human spaceflight and exploration programs are complex and require significant time and effort to design and develop hardware and software. While the Orion, SLS, and EGS programs are working toward a target EM-1 launch readiness date of November 2018, the threats to each program's schedule continue to mount, and the schedule reserve of each program is either very limited or nonexistent. In addition, as the target EM-1 launch readiness date nears--now less than two years away--the flexibility of the schedule to allow for replanning is likewise reduced. To this point, the programs have replanned program-level efforts and scheduled concurrent work despite the risks involved, and NASA is replanning integration efforts at the enterprise-level in an attempt to find additional schedule margin. However, beyond that, the programs have little to no cost reserves remaining to deal with challenges that may arise. By continuing to work toward this deadline, these programs are positioned to make potentially risky decisions in attempting to meet a schedule that is likely unachievable. Until NASA completes an analysis of factors that could contribute to an EM-1 schedule slip and reports on the feasibility of either its current or revised schedule, program managers will remain under pressure to achieve a goal that may be untenable, and the Congress will continue to base important budget decisions on an unclear picture of the time and money needed to support future human space exploration efforts. In order to ensure that the Congress is able to make informed resource decisions regarding a viable EM-1 launch readiness date, we recommend that the NASA Administrator or Acting Administrator direct the Human Exploration and Operations Mission Directorate to take the following two actions: Confirm whether the EM-1 launch readiness date of November 2018 is achievable, as soon as practicable but no later than as part of its fiscal year 2018 budget submission process; and Propose a new, more realistic EM-1 date if warranted and report to Congress on the results of its EM-1 schedule analysis. NASA provided written comments on a draft of this report. In the written comments, NASA concurred with both recommendations and stated that maintaining the November 2018 launch readiness date is no longer in the best interest of the programs. Further, NASA stated that it is reassessing the launch readiness schedule and anticipates proposing a new date by September 2017. These comments are reprinted in Appendix II. NASA also provided technical comments, which were incorporated as appropriate. In its response, NASA stated that "many of the specific concerns referenced in the report are no longer concerns, and new ones have appeared and caution should be used in referencing the report on the specific technical issues, but the overall conclusions are valid." We agree with NASA that the situation with these programs is dynamic and that risks and challenges change over time. However, in commenting on the report, NASA did not provide us with evidence that they have overcome specific technical issues that we highlight. Further, in at least the instance of the European Service Module, the situation has deteriorated for the program since we sent the draft copy of the report to NASA for comment. At the time we sent the report for comment, the delivery date for the service module was April 2017, and officials anticipated it could slip to August 2017 or later. The delivery date is now September 2017 with a risk of an additional 2-month delay. We continue to believe that NASA is facing several technical issues across all three programs that will contribute to a delay for Exploration Mission-1. We are sending copies of this report to NASA's Acting Administrator and to appropriate 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) 512-4841 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. To assess the extent to which the National Aeronautics and Space Administration's (NASA) Orion Multi-Purpose Crew Vehicle (Orion), Space Launch System (SLS), and Exploration Ground Systems (EGS) programs have risks that affect their progress towards meeting their Exploration Mission 1 (EM-1) cost and schedule commitments, we compared current program status information against program cost and schedule baselines. To assess the risks for the Orion, SLS, and EGS programs and the extent to which those risks may impact cost and schedule commitments, we obtained and reviewed quarterly reports and the programs' risk registers, which list the top program risks and their potential cost and schedule impacts, including mitigation efforts to-date. We interviewed program and contractor officials on technical risks, potential impacts, and risk mitigation efforts underway and planned. To evaluate the program's performance in preparing for EM-1, we reviewed program plans and schedules and compared them to actual program performance data found in quarterly program status reviews and program update briefings to assess whether program components and software were progressing as expected. We also compared current program data against program budget information to assess funding needs and cost growth. To determine the programs' cost and schedule posture and to assess the availability of the programs' cost and schedule reserves approaching EM-1, we analyzed its budget documentation, interviewed program officials from all three programs with insight into the programs' budget and schedule and discussed how reserves were being used to mitigate known risks. Our work was performed at Johnson Space Center in Houston, Texas; Marshall Space Flight Center in Huntsville, Alabama; Kennedy Space Center in Titusville, Florida; Lockheed Martin Space Systems Company in Houston, Texas; and NASA headquarters in Washington, DC. We conducted this performance audit from July 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 and conclusions based on our audit objectives. Cristina T. Chaplain (202) 512-4841 or [email protected]. In addition to the contact named above, LaTonya Miller (Assistant Director), Molly Traci (Assistant Director), Juli Digate, Susan Ditto, Laura Greifner, Carrie Rogers, Ryan Stott, Roxanna T. Sun, and Marie Ahearn made key contributions to this report.
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NASA is undertaking a trio of closely related programs to continue human space exploration beyond low-Earth orbit: the SLS vehicle; the Orion capsule, which will launch atop the SLS and carry astronauts; and EGS, the supporting ground systems. NASA's current exploration efforts are estimated to cost almost $24 billion--to include two Orion flights and one each for SLS and EGS--and constitute more than half of NASA's current portfolio development cost baseline. All three programs are necessary for EM-1 and are working toward a launch readiness date of November 2018. In a large body of work on this issue, including two separate July 2016 reports, GAO has found that these programs have a history of working to aggressive schedules. The House Committee on Appropriations report accompanying H.R. 2578 included a provision for GAO to assess the acquisition progress of the Orion, SLS, and EGS, programs. This report assesses the extent to which these programs have risks that affect their progress toward meeting their commitments for EM-1. To do this work, GAO assessed documentation on schedule and program risks and interviewed program and NASA officials. With less than 2 years until the planned November 2018 launch date for its first exploration mission (EM-1), the National Aeronautics and Space Administration's (NASA) three human exploration programs--Orion Multi-Purpose Crew Vehicle (Orion), Space Launch System (SLS), and Exploration Ground Systems (EGS)--are making progress on their respective systems, but the EM-1 launch date is likely unachievable as technical challenges continue to cause schedule delays. All three programs face unique challenges in completing development, and each has little to no schedule reserve remaining between now and the EM-1 date, meaning they will have to complete all remaining work with little margin for error for unexpected challenges that may arise. The table below lists the remaining schedule reserve for each of the programs. The programs all face challenges that may impact their remaining schedule reserve. For instance the Orion program's European Service Module is late and is currently driving the program schedule; the SLS program had to stop welding on the core stage--which functions as the SLS's fuel tank and structural backbone--for months after identifying low weld strengths. Program officials stated that welding resumed in April 2017 following the establishment of a corrective action plan; the EGS program is considering performing concurrent hardware installation and testing, which officials acknowledge would increase complexity; and each program must integrate its own hardware and software individually, after which EGS is responsible for integrating all three programs' components into one effort at Kennedy Space Center. Low cost reserves further intensify the schedule pressure. Senior NASA officials said they are analyzing the launch schedule and expect that the EM-1 date will have to slip, but they have yet to make a decision on the feasibility of the current date or report on their findings. With budget discussions currently ongoing for fiscal year 2018, the last year prior to launch, Congress does not yet have insight into the feasibility of the EM-1 launch date, or the repercussions that any cost increase or delays could have in terms of cost and schedule impacts for NASA's entire portfolio. Unless NASA provides Congress with up-to-date information on whether the current EM-1 date is still achievable, as of the time the agency submits its 2018 budget request, both NASA and Congress will continue to be at risk of making decisions based on less than the entire picture and on likely unachievable schedules. NASA should confirm whether the current EM-1 date is still achievable no later than as part of its fiscal year 2018 budget submission, and propose a new, realistic EM-1 launch readiness date, if warranted, and report its findings to Congress. NASA concurred with both recommendations and agreed that EM-1 will be delayed.
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For more than a decade, we have reported that the lack of a modern integrated financial management system to produce accurate and reliable information has hampered NASA's ability to oversee contracts and develop good cost estimates for NASA's programs. In 1990 NASA's lack of effective systems and processes for overseeing contractor's activities prompted us to identify NASA's contract management as a high-risk area. In July 2002 we reported that the accuracy of NASA's $5 billion cost growth estimate for the International Space Station was questionable and that the agency might have difficulty preparing a reliable life-cycle cost estimate because a modern integrated financial management system was not available to track and maintain the data needed for estimating and controlling costs. NASA's lack of a fully integrated financial management system has also hurt the agency's ability to collect, maintain, and report the full cost of its projects and programs. For example, in March 2002 we testified that NASA was unable to provide us with detailed support for the amounts that it reported to the Congress as obligated against space station and related shuttle program cost limits as required by the National Aeronautics and Space Administration Authorization Act of 2000. IFMP is designed as an integrated system to replace the separate and incompatible financial management systems used by NASA's 10 centers. According to the IFMP Program Director, the new system will provide better decision data, consistent information across centers, and improved functionality. Unlike NASA's previous efforts to modernize its financial management system, IFMP does not rely on a single contractor. NASA selected System Applications and Products (SAP) to provide its "best of suite" software and contracted for implementation services under a separate contract. NASA has also broken the project into modules that will be implemented individually--instead of all at once--on the basis of the availability of proven commercial-off-the-shelf software products. IFMP initially segmented implementation into 14 modules but has since reorganized the program into 9. Some of these modules may be further broken out and others added, depending on the scope of OMB's e-Government initiatives and other considerations. Table 1 describes the modules that currently comprise the system and their status. When NASA announced in June 2003 that the Core Financial module had been implemented at all of its centers, only about two-thirds of the financial events needed for day-to-day financial operations and external reporting had been implemented. In addition, we found that NASA deferred implementation of other key core financial module capabilities and created new problems in recording certain financial transactions. Thus, full functionality of the system has been deferred, increasing the risk of additional costs and potentially affecting the implementation of future modules. As we reported in April 2003, NASA is not following key best practices for acquiring and implementing IFMP. For example, NASA has not analyzed the interdependencies between selected and proposed IFMP components, and it does not have a methodology for doing so. By acquiring IFMP components without first understanding system component relationships, NASA has increased its risk of implementing a system that will not optimize mission performance and will cost more and take longer to implement than necessary. In addition, in implementing the Core Financial module, NASA faces risks in the areas of user needs and requirements management because the agency did not consider the information needs of key system users and is relying on a requirements management process that does not require the documentation of detailed system requirements prior to system implementation and testing. The reliability of the current life-cycle cost estimate--which has fluctuated since the initial estimate and is 14 percent greater than the previous estimate established in February 2002--is uncertain because disciplined cost-estimating processes required by NASA and recognized as best practices were not used in preparing the estimate. Specifically, IFMP's life-cycle cost estimate did not include the full cost likely to be incurred during the life of the program. In addition, breakdowns of work to be performed--or Work Breakdown Structure (WBS)--were not consistently used in preparing the cost estimate. In cases where work breakdowns were used to prepare the estimate, the agency did not always provide a clear audit trail. NASA has made some improvements in the program's financial management, such as hiring personnel to provide oversight and consistency for the cost-estimating process. However, until NASA uses more disciplined processes such as breakdowns of work in preparing the program's cost estimate, the reliability of the life-cycle cost estimate will be uncertain and the program will have difficulty with controlling costs. Since the program began, cost estimates for IFMP's 10-year life cycle-- fiscal years 2001 through 2010--have fluctuated and increased overall, as shown in figure 1. NASA's current IFMP life-cycle cost estimate totals $982.7 million--an increase of $121.8 million, or 14 percent, over the previous IFMP life-cycle cost estimate. The estimate comprises IFMP direct program costs, NASA's enterprise support, and civil service salaries/benefits. (See table 2.) Although direct program costs decreased by $9.5 million, these costs were shifted to the enterprise support component of the estimate with the program's decision to fund only 1 year's worth of operations and maintenance, rather than 2 years' worth from the direct program budget. In addition, NASA anticipates that operations costs for fiscal years 2007 through 2010--estimated at $137.8 million--will be funded by the NASA Shared Services Center (NSSC), a planned initiative to consolidate various agency services such as purchasing and human resources. (See table 3.) As a result, the fiscal year 2004 budget for the IFMP direct program portion of implementing the system is $497.5 million. In March 2003 an independent cost estimate team concluded that there is an 85 percent confidence level that the direct program portion can be successfully completed with the available funding of $497.5 million. However, the direct program portion represents only about half of the total life-cycle cost estimate. In addition, the team's conclusion was contingent on two optimistic assumptions: that there would be no schedule disruptions and no increase in requirements. Reflecting OMB guidance and the best practices of government and industry leaders, NASA requires that life-cycle cost estimates be prepared on a full-cost basis, that estimates be summarized according to the current breakdown of work to be performed, and that major changes be tracked to the life-cycle cost. OMB guidance calls for a disciplined budget process to ensure that performance goals are met with the least risk and the lowest life-cycle cost, which includes direct and indirect costs, operations and maintenance, and disposal. The Software Engineering Institute (SEI) echoes the need for reliable cost-estimating processes in managing software implementations--identifying tasks to be estimated, mapping the estimates to the breakdown of work to be performed, and having a clear audit trail are among SEI's requisites for producing reliable cost estimates. Despite NASA requirements and OMB and SEI guidance, IFMP did not prepare a full life-cycle cost estimate--that is, all direct and indirect costs for planning, procurement, operations and maintenance, and disposal were not included. For example, the life-cycle cost estimate does not include the following: the cost to operate and maintain the system beyond 2010; the cost of retiring the system; enterprise travel costs, which are provided monthly by the NASA centers; and the cost of nonleased NASA facilities for housing IFMP. In addition, IFMP did not prepare WBS estimates for active modules--that is, those currently being implemented. According to NASA guidance, breaking down work into smaller units helps facilitate cost estimating and project and contract management, and helps ensure that relevant costs are not omitted. The guidance also states that the WBS should encompass both in-house and contractor efforts. According to the IFMP Deputy Program Director, WBS estimates are not prepared for active modules because information such as contract task orders can be used to prepare the cost estimates. However, there is not one overriding contract where each module is considered a deliverable at a fixed price. Rather, numerous contracts at both the project and center level for a module's implementation--many of which can be awarded for a level of effort at agreed-upon fixed rates at various phases in the implementation. Without a WBS estimate for the project as a whole, NASA cannot ensure that all relevant contractor costs are included in the cost estimate. In addition, using contract task orders to prepare the cost estimate would not ensure that government in-house costs are included in the life-cycle cost estimate. Finally, for modules in the planning phase, the program utilized NASA's subject matter experts and professional cost estimators to prepare business case analyses. However, although these analyses contained WBS cost estimates, the audit trail from the WBS estimate to the program's life- cycle cost estimate was not always clear. Without a clear audit trail, it is difficult to determine whether the differences between the detailed WBS estimates and the official program cost estimate are appropriate. The lack of a clear audit trail has been a weakness since the inception of the program. For example, IFMP was unable to provide us with traceable support for its baseline cost estimate for direct program costs. NASA has made some improvements that should help the program prepare better cost estimates. In May 2002 the NASA Administrator appointed an executive to provide leadership and accountability in the direction and operation of the system. The NASA headquarters program office also hired a business manager to oversee and provide consistency for the cost-estimating process and provide an analyst to review enterprise support costs. Although NASA guidance requires sufficient program schedule margins to manage risks, efforts to complete the integrated system as quickly as possible might have resulted in a schedule that is too compressed to accommodate program challenges, such as personnel shortages and uncertainties about software's availability. If the program schedule margin is too compressed, the program could incur additional risks, including added cost growth as well as failure to meet IFMP's schedule objectives. OMB's e-Government initiatives--which aim to streamline agency business processes and eliminate redundant systems governmentwide-- could also provide challenges for NASA's IFMP planning. As a result, the program schedule may be optimistic. While implementing the Core Financial module (see table 1), IFMP has faced human resource challenges, and the program continues to face these challenges with other modules. For example, personnel shortages at Marshall Space Flight Center for several months affected the Core Financial project and other projects. In this case, a schedule slip was avoided, but during fiscal year 2002, the shortages resulted in nearly $400,000 for extra hours worked by center employees. Human resource challenges are also affecting the Budget Formulation module. The simultaneous implementation of this module with the Core Financial module--an action advised against by a contractor conducting a lessons-learned study--placed heavy demand on already scarce resources and added complexity to the program. As a result the schedule for implementing the Budget Formulation module has already slipped. Sometimes, relying more on contractor personnel can alleviate shortfalls in civil service personnel, but a recent Budget Formulation project status report indicated that the implementation contractor might also have difficulties acquiring and/or retaining qualified personnel. The implementation schedules for the remaining modules overlap, putting the program at further risk of schedule slippages. Uncertainty regarding software availability also puts the program at risk for completing the integrated system on schedule. For example, complete software solutions and requirements for IFMP's Contract Administration module have not yet been determined. Although contract-document- generation software is available and tailored to meet the unique interface and reporting requirements of the federal government, the "best of suite" software solution--SAP--does not currently meet these requirements. NASA faces the same challenge with IFMP's Human Resources Management module. NASA's monthly status reports show that the program is working with SAP to develop a software solution for the Human Resources Management module that will meet federal government requirements, but the outcome is uncertain. In addition, the program could adopt an e-Government solution for its Human Resources Management module rather than the SAP solution. Inserting e-Government solutions into IFMP planning--which calls for using "best of suite" software--could create more difficult interface development and a less-integrated system, thus interrupting the program's cost and schedule. E-Government initiatives are already affecting NASA's planning for the payroll, procurement, and travel modules in the integrated system. For example, the payroll function, which was once part of the Human Resources Management module, will likely become a separate module under e-Government. Similarly, the Contract Administration module has been split into two components: one for procurement document generation, for which software is available although requirements are not finalized, and one for the remainder of NASA's Contract Administration requirements, for which requirements and software are currently unknown. Furthermore, e-Travel could replace the Travel Management module, which has already been implemented. According to the program's fiscal year 2002 Independent Annual Review, e-Government initiatives are forcing the program into a reactionary mode, thus increasing risk to the program's success. The review specifically noted that (1) the benefits of a fully integrated system could be lost under e-Government, (2) the scope of IFMP and timing of future projects' implementation have become uncertain, and (3) cost increases and schedule slippage to accommodate directives may occur. In addition to the uncertain reliability of IFMP's life-cycle cost estimates and optimistic schedules, NASA cannot ensure that the funding set aside for program contingencies is sufficient because the program did not consistently perform in-depth analyses of the potential cost impact of risks and unknowns specific to IFMP, as required by NASA guidance. Moreover, the program did not quantify the cost impact of identified risks, link its risks to funding reserves, or consistently set aside cost contingencies for these risks. NASA guidance stipulates that programs incorporate financial reserves, schedule margins, and technical performance margins to provide the flexibility needed to manage risks. According to the guidance, financial reserves are to be established and maintained commensurate with programmatic, technical, cost, and schedule risks. In other words, cost contingencies should be tailored to the specific risks associated with a particular program or project. In addition, NASA guidance suggests that tools such as Probabilistic Risk Assessment can help in analyzing risk. Although NASA's business case analyses include a risk assessment and recommended reserve levels, we found no evidence that these recommended levels were used in establishing the actual reserve levels for the IFMP module projects. Regardless, the actual levels established did not match the recommended levels in the business case analyses in most cases. We found that reserves for some IFMP modules--both in the planning and active phase--were based not on IFMP-specific risks but on reserve levels for other high-risk NASA programs. For example, for a number of IFMP modules, reserves were set at levels used for spacecraft implementations--typically about 30 percent--because industry experience showed that large cost overruns in system implementations such as IFMP are common. Yet it is unclear whether this reserve margin is adequate for IFMP because the effect of IFMP-specific risks and assumptions--such as uncertainties relating to software, schedule, and OMB's e-Government initiatives--were not analyzed. In addition, some of the enterprises supporting the module projects described their method of establishing funding reserves as a combination of rules of thumb and guesswork. The Budget Formulation module has already experienced shortfalls in its reserves, and project officials expressed concerns that the module's functionality may have to be reduced. As of April 2003, the module had expended its baseline reserves, which were established at about 20 percent on the basis of the level of risk for space flight missions--not on the risks specific to the module. Although the project was able to bring its budget back into balance by obtaining an agreement with SAP to limit overtime pay to time in excess of 50 hours per week, its remaining reserves total only $83,000 to cover all contingencies--including those that could require changes to the Budget Formulation module. NASA requires programs to quantify the cost impact of high-criticality risks and to determine to what extent reserves may be exhausted, should the risks become reality. According to SEI, estimating the potential cost and schedule impact for all identified risks is an element of good estimating practice. Quantifying the cost impact of identified risks and clearly and consistently linking the risk database to funding reserves helps programs develop realistic budget estimates. While IFMP identifies program risks, analyzes their severity, and plans mitigation actions, the program typically does not prepare a cost impact analysis for identified risks nor does it consistently link identified risks to funding reserves to ensure that funds are available, should the risk occur. For example, in February 2003, the Travel Management Project found that some components of the Travel Management module might not satisfy individual centers, be funded, or be technically feasible. However, the cost impact of this risk, as well as others, was not quantified. Similarly, in June 2003, the Budget Formulation module did not quantify the cost impact of a number of identified risks. Without estimating the potential cost impact of these risks, NASA cannot determine whether it has sufficient reserves to cover the risks--which is particularly problematic for Budget Formulation, since virtually no reserves remain for this module. Furthermore, in its July 2003 monthly status report, the IFMP headquarters office identified three high-criticality risks that could have a cost impact on the overall program; however, no liens were set aside against reserves for these risks: Reductions to out-year budgets could affect the implementation of future integrated modules or the ongoing evolution of existing modules. An e-Government solution may be adopted for human resources management rather than the IFMP solution, resulting in more difficult interface development and a less-than-integrated solution. E-Government initiatives and policy decisions could disrupt IFMP modules, resulting in delays or additional resource impacts. An independent cost estimate team identified and quantified the impact of two IFMP program risks, indicating that the cost and schedule impact of a risk on a program or project can be sizeable. First, the team identified a high-probability risk that NASA's "full cost requirement"--in which all direct and indirect agency costs, including civil service personnel costs, are tied to individual programs and projects--could affect the Budget Formulation module. The team estimated this risk at $2 million to $3 million, with a potential schedule slip of 3 to 6 months. The Budget Formulation Project is currently trying to determine what impact it may have. The second risk identified by the independent cost review team-- that the Core Financial module may be transitioned to operations before all integration points are addressed--could be more costly. The team estimated this risk at $10.5 million to $20 million, also with a potential 3- to 6-month schedule slip. However, the team considered this risk as having a low probability of occurrence. NASA is at a critical juncture and faces major challenges in improving contract management and controlling costs. These challenges seriously affect the agency's ability to effectively manage its largest and most costly programs. A modern integrated financial management system, as envisioned in IFMP, is critical to ensuring that NASA has accurate and reliable information to successfully meet these challenges. NASA has made some improvements during the past year, such as hiring personnel to provide the cost-estimating process with oversight and consistency. However, if IFMP continues to ignore disciplined processes in estimating program costs and impacts, it is unlikely that the program will meet its goals. To ensure that IFMP's life-cycle cost estimate conforms to NASA guidance and best practices, we recommend that the NASA Administrator direct IFMP to do the following: Prepare cost estimates by the current Work Breakdown Structure for the remaining modules. Provide a clear audit trail between detailed WBS estimates and the program's cost estimate for the remaining modules. Prepare a full life-cycle cost estimate for the entire IFMP that meets NASA's life-cycle cost and full cost guidance. To ensure that contingencies are funded in accordance with NASA guidance and best practices, we recommend that the NASA Administrator direct IFMP to do the following: Utilize a systematic, logical, and comprehensive tool, such as Probabilistic Risk Assessment, in establishing the level of financial reserves for the remaining module projects and tailor the analysis to risks specific to IFMP. Quantify the cost impact of at least all risks with a high likelihood of occurrence and a high magnitude of impact to facilitate the continuing analysis necessary to maintain adequate reserve levels. Establish a clear link between the program's risk database and financial reserves. Although NASA concurred with our recommendations for corrective action, NASA indicated that its current processes are adequate for (1) preparing WBS cost estimates, (2) estimating life-cycle costs, and (3) establishing reserves on the basis of IFMP-specific risks. The agency cited its business case analyses as the methodology through which it is accomplishing these tasks. We disagree that NASA's current processes are adequate, and our recommendations are aimed at improving these processes. As discussed in this report, while NASA prepares WBS cost estimates for IFMP modules in the planning phases by using business case analyses, it does not prepare WBS cost estimates for active modules. And although IFMP indicates that preparing cost estimates by using contract task orders is an appropriate methodology, this approach will not ensure that all relevant costs, including both contractor and government in-house costs, are included in the life-cycle cost estimate. Regarding contract costs, there is not one overriding contract where each module is considered a deliverable at a fixed price. Rather, there are numerous contracts at both the project and center level for implementing modules--many of which can be awarded for a level of effort at agreed-upon fixed rates at various phases in the implementation. Without a WBS estimate for the project as a whole, NASA cannot ensure that all relevant contractor costs are included in the cost estimate. In addition, using contract task orders to prepare the cost estimate would not ensure that government in-house costs are included in the life-cycle cost estimate. According to NASA, IFMP will improve its business case analyses by providing better estimates of operational costs through the expected life of the module, retirement costs, and other full life-cycle costs. However, as discussed in this report, an audit trail is needed between the detailed estimates contained in the business case analyses and the program's life- cycle cost estimate to ensure that these improvements are reflected in the program's official cost estimate. Finally, as discussed in this report, although NASA's business case analyses include recommended reserve levels, we found no evidence that these recommended levels were used in establishing the actual reserve levels for the IFMP module projects. Regardless, the actual levels established did not match the recommended levels in most cases. We found that the program established funding reserves on the basis of reserve levels set by other high-risk NASA programs, rather than on IFMP- specific risks as required by NASA guidance. To assess the reliability of NASA's methodology for preparing the current cost estimate for IFMP, we reviewed program and project-level documentation to obtain an understanding of NASA's current cost estimate and its major components and the methodology used to develop the estimate. We also interviewed program and project officials to clarify our understanding of the cost estimate and how NASA derived it. In addition, we compared the program's cost-estimating methodology with SEI best practices, OMB requirements, and NASA's own procedures and guidance. Finally, we reviewed internal and independent analyses of the cost estimate. We did not attempt to validate NASA's estimate; rather, we reviewed NASA's processes for preparing its estimate. To determine whether NASA's current schedule is reasonable in terms of progress to date and available resources, we reviewed the program's schedule objectives and NASA's policies for managing program and project schedules. We monitored the schedule and risks to the schedule through our review of the program's monthly status reports and internal NASA briefings. We interviewed program and project officials to ascertain NASA's progress against the schedule. To evaluate NASA's processes for ensuring the adequacy of cost contingencies to mitigate the potential impact of identified program risks and unknowns, we reviewed governmentwide and NASA policies and SEI best practices for managing risk and establishing cost contingencies. We also interviewed program officials at NASA headquarters and project managers to obtain an understanding of how reserve levels were established and maintained for the program. We then compared IFMP's processes for ensuring adequate cost contingencies with processes dictated by OMB and NASA guidance and by best practices. To accomplish our work, we visited NASA headquarters, Washington, D.C.; Marshall Space Flight Center, Alabama; and Goddard Space Flight Center, Maryland. We also contacted officials at Glenn Research Center, Ohio. We performed our review from April through September 2003 in accordance with generally accepted government auditing standards. As agreed with your offices, unless you announce its contents earlier, we will not distribute this report further until 30 days from its date. At that time, we will send copies to interested congressional committees; the NASA Administrator; and the Director, Office of Management and Budget. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Key contributors to this report are acknowledged in appendix I. Staff making key contributions to this report were Jerry Herley, Erin Schoening, LaTonya Miller, and Karen Sloan.
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The National Aeronautics and Space Administration (NASA) has struggled to implement a fully integrated financial management system. The lack of such a system has affected the agency's ability to control program costs, raising concerns about the management of its most costly programs, including the space shuttle program and the International Space Station. In April 2000 NASA initiated the Integrated Financial Management Program (IFMP)--its third effort to improve the agencywide management of its resources. Implementation is expected by fiscal year 2006 with an estimated life-cycle cost of nearly $1 billion. This report (1) assesses NASA's methodology for preparing the current life-cycle cost estimate for implementing IFMP, (2) determines whether NASA's current schedule is reasonable, and (3) evaluates NASA's processes for ensuring adequate cost contingencies. The uncertain reliability of cost estimates, optimistic schedules, and insufficient processes for ensuring adequate funding reserves have put NASA's latest financial management modernization effort at risk. Over the past several years, IFMP's life-cycle cost estimates have fluctuated, and NASA's current estimate is 14 percent greater than the previous estimate. The reliability of these estimates is uncertain because disciplined costestimating processes required by NASA and recognized as best practices were not used in preparing them. For example, IFMP's current life-cycle cost estimate did not include the full cost likely to be incurred during the life of the program, including certain operations costs and costs to retire the system. In addition, NASA did not consistently use breakdowns of work in preparing the cost estimate, as recommended by NASA guidance. In cases where work breakdowns were used, the agency did not always show the connection between the work breakdown estimates and the official program cost estimate. This has been a weakness since the inception. Although more than half of the IFMP modules have been implemented--including the Core Financial module, which is considered the backbone of IFMP--the system may not be fully implemented by the end of fiscal year 2006 as planned. Efforts to complete the integrated system as quickly as possible might have resulted in schedule margins that are insufficient to manage program challenges--such as personnel shortages, uncertainties about software availability, and Office of Management and Budget (OMB) initiatives to implement electronic systems for agency business processes governmentwide. These OMB initiatives have put IFMP in a reactive mode and are already affecting planning for the payroll, procurement, and travel components of the integrated system, which could result in additional schedule delays and cost growth. Finally, reserve funding for IFMP contingencies may be insufficient, which is particularly problematic, given the program's unreliable cost estimates and optimistic schedule. One module--Budget Formulation--is already experiencing potential shortfalls in its reserves, and project officials expressed concerns that the module's functionality may have to be reduced. Yet the program continues to establish funding reserves based on reserve levels set by other high-risk NASA programs, such as NASA's space flight program--not on analyses of the potential cost impact of risks and unknowns specific to IFMP, as required by NASA guidance. Moreover, the program did not quantify the cost impact of high-criticality risks--also required by NASA--or link its risks to funding reserves to help IFMP develop realistic budget estimates.
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