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Labor, established as a Department in 1913, administers and enforces a variety of federal labor laws guaranteeing workers' rights to a workplace free from safety and health hazards, a minimum hourly wage and overtime pay, family and medical leave, freedom from employment discrimination, and unemployment insurance. Labor also protects workers' pension rights; provides for job training programs; helps workers find jobs; works to strengthen free collective bargaining; and keeps track of changes in employment, prices, and other national economic measures. Although Labor seeks to assist all Americans who need and want to work, special efforts are made to meet the unique job market problems of youths, older workers, economically disadvantaged and dislocated workers, and other groups. In fiscal year 1997, Labor has an estimated budget of $34.4 billion and is authorized 16,614 full-time-equivalent (FTE) staff-years. About three-fourths of Labor's budget is composed of mandatory spending on income maintenance programs, such as the unemployment insurance program. The administration's fiscal year 1998 budget request is $37.9 billion in budget authority and 17,143 FTE staff. The budget request includes $12 billion for Labor's major budget themes--an increase of $1.7 billion over fiscal year 1997. Included in the request for fiscal year 1998 is $750 million in mandatory funding for a new welfare-to-work jobs program. Labor's many program activities fall into two major categories: enhancing workers' skills through job training and ensuring worker protection.Figure 1 shows the organizational structure of the Department. Labor's workforce development responsibilities are housed in the Employment and Training Administration (ETA) and the Veterans' Employment and Training Service. Together, they have a fiscal year 1997 budget of about $6.5 billion and 1,595 FTEs. Labor's employment training programs include multiple programs authorized by the Job Training Partnership Act (JTPA), such as those for economically disadvantaged adults and youth and workers who lose their jobs because of plant closings or downsizing and Job Corps, an intensive residential program for severely disadvantaged youth. Table 1 shows Labor's appropriations and staff-year spending for fiscal year 1997. Administration. Together, these units have 9,020 FTEs and a budget of $915 million for fiscal year 1997. uncertain how this fragmented system will be able to meet the employment demands of those affected by the recent welfare reform legislation. A major challenge for Labor is to facilitate workforce development within the context of a conglomeration of programs operated by Labor and 14 other federal departments and agencies. Table 2 shows the number of different employment training programs that existed in fiscal year 1995, their target groups, and fiscal year 1995 appropriations. For example, we found that 9 programs targeting economically disadvantaged individuals had similar goals; often served the same categories of people; and provided many of the same services using separate, often parallel, delivery structures. Congress could consider to reduce the deficit. Alternatively, the Congress could spend the same amount of money and serve more people. Further, consolidating similar employment training programs could result in improved opportunities to increase effectiveness in service delivery. For example, consolidating programs could improve the assistance provided to the target populations because individuals would be more likely to receive the mix of services needed to achieve training or placement goals. And, getting needed services might be less confusing and frustrating to clients, employers, and administrators. In anticipation of federal consolidation legislation, and to improve their local service delivery, many states are moving ahead with their own consolidation plans. Labor has engaged in several efforts to assist states in these consolidation efforts. For example, Labor has promoted the development of "one-stop career centers." These centers are designed to transform an array of employment training programs into an integrated service delivery system for job-seekers and employers. Labor expects them to identify the jobs that are available, the skills they require, and the institutions that have proven track records of preparing people for new work. This information will probably be available largely through computer links. As of February 1996, 54 states and jurisdictions had received planning or implementation grants to establish one-stop centers. In addition, Labor and the Department of Education jointly administer the school-to-work program--a program designed to build integrated learning and employment opportunities for youth. The proposed fiscal year 1998 budget includes $200 million for each agency to ensure that "seed capital" grants to states and communities continue. data. In our review of 62 programs for which the economically disadvantaged individuals were eligible, we found that less than half of the programs obtained data on whether or not participants obtained jobs after they received services. To its credit, Labor has collected much basic information, including outcome data, on its major employment training programs, such as Job Corps and other programs funded under JTPA. It has also conducted some evaluations to assess the impact of its programs. However, our reviews have shown that existing performance measures and studies still do not provide the kind of information that would provide confidence that funds are being spent to the greatest advantage of participants. Our reviews of the Job Corps program illustrate some of the weaknesses in current data collection and evaluation efforts. Job Corps is a national employment training program that provides severely disadvantaged youth with comprehensive services, generally in a residential setting, at a cost of about $1 billion a year to serve about 66,000 participants. Job Corps has a list of performance measures on which the over 100 individual centers are ranked each year. Moreover, to demonstrate the effectiveness of Job Corps, Labor cites the positive results of a national impact study. We have raised questions, however, about how valuable the information from these sources is in determining whether the high costs are justified by program outcomes. Jobs Corps reported that, nationally, 59 percent of its students obtained jobs in fiscal year 1993. However, when we surveyed a sample of employers identified in Job Corps records, we were left with serious concerns about the validity of reported job placement information. Despite Job Corps placement verification procedures, we found that about 15 percent of the reported placements in our sample were potentially invalid. In addition, we found that about half of the jobs obtained by students from the sites we visited were low-skill jobs--such as fast food worker--unrelated to the training provided by Job Corps. Labor initiated a major impact evaluation of the Jobs Corps program. This study, the initial results of which are expected to be available in 1998, should be extremely useful to inform decisions about the future of the program. The passage of the recent welfare reform legislation is likely to have an impact on the structure and delivery of employment training programs at the state and local levels. Because of the work requirements imposed by that legislation, many individuals formerly on welfare will be needing job assistance and training services. The responsibility for service delivery lies with state and local offices, yet Labor has an important role because of its expertise and experience. Labor can encourage and facilitate, as appropriate, the integration of employment training services that may be required to meet the needs of the welfare population. How to serve those individuals transitioning from welfare to work, while at the same time meeting the service needs of dislocated workers and other client populations, is a challenge for Labor. Concerns have been raised about the availability of appropriate jobs, the level of training and skills required for jobs, the impact of competition for low-skilled jobs on the wages of low-skilled workers, and the extent to which the current employment training system can absorb and provide needed services to the expanded welfare population. In addition, it is critical that Labor and other agencies providing services consider the employment training needs of welfare clients in the process of providing job placement assistance. Our work on promising employment training practices shows that providing occupational skills alone is not the answer. Equally, or perhaps even more, important are employability skills--the ability not only to get a job but to keep a job.Concerns have been raised that in the rush to place welfare clients in jobs, if the appropriate mix of skills is not provided, many clients potentially will lose their jobs and go back on welfare. to monitor the situation and be responsive to the needs of states and localities as they transition individuals from welfare to work. For example, our work on identifying strategies used by successful employment training projects is the type of information that can be shared with states to assist their efforts. When we testified before this Subcommittee almost 2 years ago about the overall federal role in worker protection, we stressed the need for Labor to change its approach to one that was more service oriented and made more efficient use of agency resources. Some evidence exists that Labor has moved in that direction, especially in OSHA. But this change has not been without controversy, and further opportunities exist to develop alternative regulatory approaches. In addition to the overall need to consider alternatives to current regulatory approaches, Labor faces regulatory challenges in two specific areas: (1) redesigning the wage determination process under the Davis-Bacon Act and (2) as a result of recent legislative action, developing and enforcing regulations regarding portability of employer-provided health insurance. well as make enforcement less of a "gotcha" exercise and more one that recognizes good faith compliance efforts. These changes would also have the potential for improving the way limited agency resources are used for regulatory purposes. Changes in OSHA's regulatory approach illustrate Labor's action in this direction. In May 1995, the administration announced three regulatory reform initiatives to "enhance safety, trim paperwork, and transform OSHA." This action was considered necessary because, despite OSHA's efforts, the number of workplace injuries and illnesses was still too high, with over 6,000 workers dying each year from workplace injuries and 6 million suffering nonfatal workplace injuries. In addition, the administration acknowledged that the public saw OSHA as driven too often by numbers and rules, not by smart enforcement and results. The first initiative, the "New OSHA," called for OSHA to change its fundamental operating paradigm from one of command and control to one that provides employers a real choice between partnership and a traditional enforcement relationship. The second initiative, "Common Sense Regulation," called for a change in approach by identifying clear and sensible priorities, focusing on key building block rules, eliminating or updating and clarifying out-of-date and confusing standards, and emphasizing interaction with business and labor in the development of rules. The third initiative, "Results, Not Red Tape," called for OSHA to change the way it works on a day-to-day basis by focusing on the most serious hazards and the most dangerous workplaces and by insisting on results instead of red tape. What data should be used to identify companies with high numbers of injuries (workers' compensation claims, claims rates, or other data)? Has the effectiveness of the pilot effort been demonstrated well enough to extend it nationwide? Has the emphasis on partnerships been at the expense of effective enforcement actions against companies continuing to violate the standards? Further opportunities exist for OSHA to leverage its resources and demonstrate "smarter" enforcement. For example, in a recent study, we found that the federal government awarded $38 billion in federal contracts during fiscal year 1994 to at least 261 corporate parent companies with worksites where OSHA had proposed significant penalties for violations of safety and health regulations. We pointed out that agencies could use awarding federal contracts as a vehicle to encourage companies to improve workplace safety and health or--if companies refuse to improve working conditions--debar or suspend federal contractors for violation of safety and health regulations. One of our recommendations was that OSHA work with the General Services Administration and the Interagency Committee on Debarment and Suspension on policies and procedures regarding how safety and health records of federal contractors could be shared to help agency awarding and debarring officials in their decisionmaking. Labor recently told us that some discussions have occurred between OSHA and the Interagency Committee, but final decisions have not been reached on any new policies and procedures. prevailing wage rates that are, in fact, higher than those prevailing in the area--thus artificially inflating federal construction costs. Labor has acknowledged weaknesses in its wage determination process that call into question the integrity and accuracy of some of its wage determinations. For this reason, it requested funds to develop, evaluate, and implement alternative reliable methodologies or procedures that would yield accurate and timely wage determinations at a reasonable cost. Labor's fiscal year 1997 budget request included $3.7 million for that purpose. The conference report accompanying the Department's appropriation requested that we review these implementation activities to determine whether they will achieve their goals. We will do so and report our findings to the Appropriation Committees, as requested, when Labor has completed its work. Labor took some actions that we recommended in our May 1996 report as a short-term solution to reduce its vulnerability to the use of fraudulent or inaccurate data in the wage determination process. These actions, including increased verification of information provided by employers, will at least reduce some of the vulnerabilities of the existing process. The larger challenge facing Labor, however, is to examine and substantially improve the overall process. provisions will make it much easier for workers to change jobs and maintain health care coverage. And, according to Labor, millions more who have been unwilling to leave their job for a better one out of concern that they would lose their health care coverage would also benefit. The Congress set a very short timeframe for implementing these protections: Although the act was only signed into law on August 21, 1996, the regulations to carry out the portability provisions must be issued by April 1, 1997. Labor is working with the Department of Health and Human Services and the Treasury Department to meet that date because these provisions--called "shared provisions"--involve overlapping responsibilities of the three departments. In a statement before the Senate Committee on Labor and Human Resources in February of this year, the Assistant Secretary of Labor for PWBA said the three departments are "on track" to meet that goal. The regulations issued by April 1 will target the preexisting condition limitation and certification of previous health coverage portions of the portability provisions. The regulations will reflect comments received in response to a December notice in the Federal Register and will be fully effective when issued. Nevertheless, Labor intends to ask for public comments after they are issued and consider the need for any changes on the basis of the comments. Work will continue on other portions of the portability provisions after publication of the first set of regulations. performance goals, and (4) accurate and audited financial information about the costs of achieving mission outcomes. GPRA is aimed at improving program performance. It requires that agencies consult with the Congress and other stakeholders to clearly define their missions. It also requires that they establish long-term strategic goals, as well as annual goals linked to them. They must then measure their performance against the goals they have set and report publicly on how well they are doing. In addition to ongoing performance monitoring, agencies are expected to perform discrete evaluation studies of their programs, and to use information obtained from these evaluations to improve the programs. In moving toward an increased emphasis on program performance and results, Labor has begun developing an agencywide plan that describes its mission, goals, and objectives. According to the Office of Management and Budget (OMB), developing an overall mission and goals is a formidable challenge for Labor because of the diversity of the functions performed by its different offices. OMB officials have told us that the different offices in Labor have developed draft strategic plans that describe their respective goals and performance indicators. For example, ETA's plan describes its mission, its strategies for achieving its employment training objectives, and the measures it will use to assess program outcomes. These plans were submitted to OMB with the Department's most recent budget submission. Although Labor is not required to submit the strategic plans to the Congress and OMB until September 1997, this year's early submission was used to obtain informal review and feedback on the draft plans. According to OMB, Labor is committed to developing a strategic approach that includes measurable outcomes. OMB's review of Labor's plans indicated that some parts of the Department are doing better than others, especially in identifying measures to assess results. At the same time, OMB recognizes that developing such measures may be more difficult for some offices than for others because of the differences in the specificity of goals and difficulty of quantifying some outcomes. According to Labor, it is continuing to make progress in meeting GPRA legislative mandates. Over the next few months, Labor officials will continue discussions with OMB as well as consultations with the Congress and the stakeholders. OSHA, as one of the GPRA pilot agencies, has been involved in a number of activities geared toward making the management improvements envisioned by the act. It has developed a draft strategic plan that identifies its performance goals and measures, and it has been working to develop a comprehensive performance measurement system that will focus on outcomes to measure its own effectiveness. OSHA and state representatives have discussed the application of this comprehensive system to OSHA's monitoring of state safety and health programs. Although we have not reviewed the quality of OSHA's performance measures, these types of planning and assessment efforts are consistent with those set out in GPRA to promote a results orientation in reviewing programs. This system, when fully implemented, will also be responsive to recommendations we made in a February 1994 report. Labor's decentralized organizational structure makes adopting the better management practices described in GPRA quite challenging. Labor has 24 component offices or units, with over 1,000 field offices, to support its various functional responsibilities. Establishing departmental goals and monitoring outcome measures is a means by which the Department can ensure that its operations are working together toward achieving its mission. The CFO Act was designed to remedy decades of serious neglect in federal financial management operations and reporting. It created a foundation for improving federal financial management and accountability by establishing a financial management leadership structure and requirements for long-range planning, audited financial statements, and strengthened accountability reporting. The act created chief financial officer positions at each of the major agencies, most of which were to be filled by presidential appointment. Under the CFO Act, as expanded in 1994, Labor, as well as all other 23 major agencies, must prepare an annual financial statement, beginning in fiscal year 1996. Since 1986, Labor has produced audited departmentwide financial statements, thus complying with this requirement of the CFO Act. Producing audited financial statements that comply with the act involves obtaining an independent auditor's opinion on the Department's financial statements, report on the internal control structure, and report on compliance with laws and regulations. By meeting these requirements, Labor has been instilling accountability and oversight into its financial activities. Labor also has a chief financial officer, in compliance with the act. The Paperwork Reduction Act of 1995 is the overarching statute dealing with the acquisition and management of information resources by federal agencies. The Clinger-Cohen Act of 1996 reinforces this theme by elaborating on requirements that promote the use of information technology to better support agencies' missions and to improve program performance. Among their many provisions are requirements that agencies set goals, measure performance, and report on progress in improving the efficiency and effectiveness of information management generally--and specifically, the acquisition and use of information technology. The Paperwork Reduction Act is based on the concept that information resources should support agency mission and performance. An information resources management plan should delineate what resources are needed, as well as how the agency plans to minimize the paperwork burden on the public and the cost to the government to collect the information. The Clinger-Cohen Act sets forth requirements for information technology investment to ensure that agencies have a system to prioritize investments. Clinger-Cohen also requires that a qualified senior-level chief information officer be appointed to guide all major information resource management activities. Labor has made some efforts to improve its information management systems; for example, it has appointed a chief information officer. OMB, in 1996, raised a question regarding this individual's also serving as the Assistant Secretary for Administration and Management. The Clinger-Cohen Act requires that information resources management be the primary function of the chief information officer. Because it is unclear whether one individual can fulfill the responsibilities required by both positions, OMB has asked Labor to evaluate its approach and report back to OMB in a year. In past work, we have identified weaknesses in Labor's information management practices. For example, our review of Labor's field offices demonstrated the lack of centrally located information on key departmental functions, such as field office locations, staffing, and costs. We eventually identified 1,074 field offices, having constructed a profile of information about these field offices from information Labor provided. But constructing this profile was difficult. In response to our request for this information, Labor's Office of the Assistant Secretary for Administration and Management queried the individual components and assembled a list of 1,037 field offices. We identified other offices using documents Labor provided, which brought the total to 1,056. When Labor reviewed a draft of the report, it amended the list again to add 18 more offices and bring the total to 1,074. Consequently, we had to report as a limitation of our findings that there was no assurance that all the information provided used consistent definitions and collection methods. In our report on Labor's Davis-Bacon wage determination process, we also identified limited computer capabilities as a reason for the process' vulnerability to use of fraudulent or inaccurate data. We found a lack of both computer software and hardware that could assist wage analysts in their reviews. For example, Labor offices did not have computer software that could detect grossly inaccurate data reported in Labor's surveys to obtain wage data. And the hardware was so outdated that the computers had too little memory to store historical data on prior wage determinations, which would have allowed wage analysts to compare current data with prior recommendations for wage determinations in a given locality. not reconcilable to Job Corps contractor reports. As a result, there was insufficient accountability for Job Corps real property expenditures. This year, we added two new areas to our "high-risk" issues, both of which apply to Labor as well as to all other government agencies. The first area, information security, generally involves an agency's ability to adequately protect information from unauthorized access. Ensuring information security is an ongoing challenge for Labor, especially given the sensitivity of some of the employee information being collected. The second area involves the need for computer systems to be changed to accommodate dates beyond the year 1999. This "year 2000" problem stems from the common practice of abbreviating years by their last two digits. Thus, miscalculations in all kinds of activities--such as benefit payments, for example--could occur because the computer system would interpret 00 as 1900 instead of 2000. Labor, along with other agencies that maintain temporal-based systems, is faced with the challenge of developing strategies to deal with this potential problem area in the near future. Labor's programs touch the lives of nearly every American because of the Department's responsibilities for employment training, job placement, and income security for workers when they are unemployed, as well as workplace conditions. Labor's mission is an urgent one. Each day or week or year of unemployment or underemployment is one too many for individuals and their families. Every instance of a worker injured on the job or not paid legal wages is one that should not occur. Every employer frustrated in attempts to find competent workers or to understand and comply with complex or unclear regulations contributes to productivity losses our country can ill afford. And every dollar wasted in carrying out the Department's mission is one we cannot afford to waste. Labor currently has a budget of about $34 billion and about 16,000 staff to carry out its program activities. Over the years, however, our work has questioned the effectiveness of these programs and called for more efficient use of these substantial resources. Like other agencies, Labor must focus more on the results of its activities and on obtaining the information it needs for a more focused, results-oriented management decision-making process. GPRA and the CFO, Paperwork Reduction, and Clinger-Cohen Acts give Labor the statutory framework it needs to manage for results. Labor has begun to improve its management practices in ways that are consistent with that legislation, but implementation is not yet far enough along for it to fully yield the benefits envisioned. We are hopeful that the changes Labor is making in its approach to management will help it better address the two challenges we have identified: developing employment skills through programs that meet the needs of a diverse workforce in the most cost-effective way and effectively ensuring the well-being of the nations' workers while reducing the burden of providing that protection. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions that you or Members of the Subcommittee might have. For more information on this testimony, call Harriet C. Ganson, Assistant Director, at (202) 512-9045. Joan Denomme and Jacqueline Harpp also contributed to this statement. Employment Training: Successful Projects Share Common Strategy (GAO/HEHS-96-108, May 7, 1996). Job Corps: High Costs and Mixed Results Raise Questions About Program's Effectiveness (GAO/HEHS-95-180, June 30, 1995). Multiple Employment Training Programs: Information Crosswalk on 163 Employment Training Programs (GAO/HEHS-95-85FS, Feb. 14, 1995). Multiple Employment Training Programs: Major Overhaul Needed to Reduce Costs, Streamline the Bureaucracy, and Improve Results (GAO/T-HEHS-95-53, Jan. 10, 1995). OSHA: Potential to Reform Regulatory Enforcement (GAO/T-HEHS-96-42, Oct. 17, 1995). Davis-Bacon Act: Process Changes Could Raise Confidence That Wage Rates Are Based on Accurate Data (GAO/HEHS-96-130, May 31, 1996). Managing for Results: Using GPRA to Assist Congressional and Executive Branch Decisionmaking (GAO/T-GGD-97-43, Feb. 12, 1997). Information Technology Investment: Agencies Can Improve Performance, Reduce Costs, and Minimize Risks (GAO/AIMD-96-64, Sept. 30, 1996). Information Management Reform: Effective Implementation Is Essential for Improving Federal Performance (GAO/T-AIMD-96-132, July 17, 1996). Executive Guide: Effectively Implementing the Government Performance and Results Act (GAO/GGD-96-118, June 1996). Executive Guide: Improving Mission Performance Through Strategic Information Management and Technology (GAO/AIMD-94-115, May 1994). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed the major challenges Department of Labor faces in achieving its mission, focusing on: (1) Labor's efforts to provide effective employment and training programs that meet the diverse needs of its target populations in a cost-efficient manner; (2) Labor's efforts to ensure worker protection within a flexible regulatory structure; and (3) how Labor's ability to meet these challenges would be enhanced by the improved management envisioned by recent legislation. GAO noted that: (1) although Labor has historically been the focal point for workforce development activities, it faces the challenge of meeting those goals within the context of an uncoordinated system of multiple employment and training programs operated by numerous departments and agencies; (2) in fiscal year 1995, 163 federal employment training programs were spread across 15 departments and agencies (37 programs were in Labor), with a total budget of over $20.4 billion; (3) although GAO has not recounted the programs and appropriations, GAO is confident that the same problem exists; (4) rather than a coherent workforce development system, there is a patchwork of federal programs with similar goals, conflicting requirements, overlapping target populations, and questionable outcomes; (5) comprehensive legislation that would have addressed this fragmentation was considered but not passed by the 104th Congress; (6) in the absence of consolidation legislation, Labor has gone ahead with some reforms, such as planning grants for one-stop career centers, but the actions it has taken have not been enough to fix the problems; (7) passage of the recent welfare reform puts even greater demands on an employment training system that appears unprepared to respond; (8) a second major challenge for Labor is to develop regulatory strategies that ensure the well-being of the nations' workers in a less burdensome, more effective manner; (9) Labor has made some changes since GAO last testified, which are perhaps best illustrated by actions at the Occupational Safety and Health Administration (OSHA), such as its partnership initiatives with companies, but OSHA's actions have not been without controversy, and substantial challenges remain there and at other Labor components with worker protection responsibilities; (10) congressional action poses new challenges in the worker protection area as well; (11) Labor has committed to redesigning its Davis-Bacon wage determination process with additional funds appropriated by the Congress; (12) Labor also must issue and enforce regulations to implement the new health care portability law; and (13) in meeting these mission challenges, Labor will need to become more effective at managing its organization.
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The Apache Longbow helicopter is designed to conduct precision attacks in adverse weather and on battlefields obscured by smoke, automatically engage multiple targets, and provide fire-and-forget missile capability. The Apache Longbow configuration consists of a modified airframe, a fire control radar, and a new Longbow (radio frequency) Hellfire missile. The Army plans to upgrade the entire fleet of 758 Apache helicopters to the Apache Longbow configuration but outfit only 227 with the radar and a more powerful 701C engine. The remaining 531 non-radar-equipped Apache Longbows will be equipped with the less powerful 701 engine, even though they will be reconfigured to accept the radar and upgraded 701C engine. In its fiscal year 2000-2005 program plan, the Army has proposed a reduction in the number of Apaches that will be converted to the Apache Longbow configuration. The April 1994 Apache Longbow's operational requirements document (ORD) prescribes performance capabilities required for the system's survivability and lethality. These capabilities include meeting the vertical flight requirement, carrying the Longbow Hellfire missile, and passing target data when in line of sight and not in the line of sight. For the Apache Longbow, the Army has identified performance objectives (desired capabilities) and performance thresholds (minimum capabilities). The Army designated selected thresholds as key performance parameters. According to the Department of Defense's (DOD) acquisition guidelines, key performance parameters are those capabilities that are so significant that failure to meet the threshold can be a cause for the program to be reassessed or terminated. The Apache Longbow ORD prescribes that, for survivability in the combat mission configuration, the system is required to achieve a VROC of at least 450 feet per minute at 4,000 feet and 95 degrees Fahrenheit while carrying 4 air-to-air missiles, 8 Hellfire missiles (4 semiactive laser Hellfire missiles and 4 Longbow Hellfire missiles), 320 rounds of 30-millimeter ammunition, and a full fuel load. VROC indicates the helicopter's ability to climb vertically from a hover position and its ability to conduct lateral maneuvers. Both lateral and vertical acceleration provide the agility a helicopter needs to extricate itself from threatening situations. In October 1994, the Joint Requirements Oversight Council validated the ORD's VROC requirement of 450 feet per minute as a key performance parameter. The Council also made 12 Longbow Hellfire missiles a key performance parameter, replacing the ORD's combat mission requirement for 8 Hellfire missiles. In November 1994, the Army directed the Training and Doctrine Command's Apache Longbow system manager and the Program Executive Officer for Aviation to update the ORD to reflect the changed requirement. The Apache Longbow ORD and contract reflect the VROC requirement but not the revised Hellfire requirement. The ORD describes non-line-of-sight communications capability as a critical system performance objective, but not a key performance parameter, of the Apache Longbow helicopter. The non-line-of-sight radio gives the radar- and non-radar-equipped Apache Longbow helicopters the ability to transfer targeting data when not in direct line of sight. Both the design and use of the fire control radar depend on the ability of the radar-equipped Apache Longbow to utilize terrain and vegetation for concealment, rise above a tree line or hill to acquire target data, return to a concealed position to transfer the target data to another Apache Longbow, and fire the Longbow Hellfire missile. The Army plans to use the ARC-220 radio to meet this requirement. The 227 radar-equipped Apache Longbows will not be able to achieve the combat mission VROC requirement of 450 feet per minute when carrying 12 missiles with a full fuel load. Thus, the system's survivability will be adversely impacted. The contractor reports that, in the combat mission configuration, the Apache Longbow weighs 16,535 pounds after burning off 1,084 pounds of fuel. At this weight, the contractor reports that the Apache Longbow can achieve a VROC of 895 feet per minute, exceeding the required 450 feet per minute. From Army and contractor records, we identified those items that would have to be added to the helicopter to meet the ORD's combat mission requirement. When the reported Apache Longbow weight of 16,535 pounds is increased by the fuel burn off weight of 1,084 pounds to meet the ORD's full fuel load requirement, the helicopter's weight is 17,619 pounds. When the contractor's reported weight is increased by the weight associated with meeting the Hellfire missile requirement of 12 instead of 8 (430 pounds), the necessary launcher and pylon to carry them (207 pounds), and a full fuel load (1,084 pounds), we determined that the weight of the Apache Longbow would be about 18,256 pounds. According to Army engineers, an increase in weight of one pound causes a corresponding decrease in VROC of 0.839 feet per minute. With an increase in weight of either 1,084 or 1,721 pounds, the Apache Longbow would be incapable of meeting the validated VROC requirement of 450 feet per minute at 4,000 feet and 95 degrees Fahrenheit. To achieve the validated VROC requirement of 450 feet per minute and carry the required 12 Hellfire missiles, aircraft weight must be reduced. Since the Apache Longbow's 701C engine is operating at 100-percent maximum-rated power in the combat mission configuration when VROC is measured, no reserve engine power is available. In describing the Apache Longbow's ability to meet the VROC while carrying the 12 Hellfire missiles, the Army stated, in its November 1995 acquisition program baseline, that the helicopter can only achieve the VROC requirement by reducing weight, such as ordnance and/or fuel load. According to Army officials, reduced VROC performance will decrease the helicopter's ability to evade enemy fire, thereby decreasing survivability. Also, if the mission ordnance load is reduced to lower weight and, therefore, achieve desired VROC, lethality will be decreased because less ammunition and/or fewer missiles will be available for use against enemy targets. If the mission fuel load is reduced for the same purpose, mission range and/or loiter time will be decreased. On the basis of the Army's planned system enhancements, the contractor expects the Apache Longbow's weight to increase by another approximately 1,000 pounds when existing requirements, such as improved avionics equipment, the non-line-of-sight radio, and fixes for systemic problems (including a new transmission and main gear box) are added to the helicopter. Also, based on new requirements, the contractor projects that weight will increase by an additional 500 pounds for items, such as, sensor improvements, a redesigned rotor system, an advanced weapon suite, and improved crew seats. With the additional 1,500 pounds, the Army will be further challenged to find ways to meet the Apache Longbow's VROC requirements. The Apache Longbow ORD also requires that the 531 non-radar-equipped helicopters have a VROC equal to or greater than the radar-equipped aircraft to ensure that combat effectiveness is maintained. The non-radar-equipped helicopter has a less powerful engine, and the contractor reports that this helicopter has significantly less VROC capability than the radar-equipped helicopter. To improve VROC and corresponding maneuverability on non-radar-equipped aircraft, the Army plans to upgrade the 701 engines on these aircraft to the more powerful 701C engines. According to the Army, this upgrade will cost about $1.1 million per aircraft, or about $600 million for 531 helicopters. This requirement is included in the Army's future funding plans. The additional power provided by the 701C engines may not provide the lift capability the non-radar-equipped Apache Longbow will need for the combat mission. Removing the radar will decrease weight by about 450 pounds. However, fuel and missile load requirements for the combat mission will increase weight by about 1,721 pounds. The incremental increase of 1,271 pounds would have an adverse impact on the non-radar-equipped Apache Longbow's already limited VROC performance. At initial operational capability in October 1998, the Apache Longbow will not be able to meet the requirement to transfer target data to other helicopters when out of line of sight, as required. The Army plans to provide this capability through the ARC-220 radio but because of funding and developmental problems, it does not know when this required capability will be available. The ORD requires that all Apache Longbow helicopters be able to transmit, receive, and coordinate battlefield information. The Apache Longbow must interface with existing and planned Army command, control, communications, and intelligence systems. The communications system must support the transfer of mission data from ground units to aircraft, aircraft to aircraft, and aircraft to ground units. This communications capability requires airborne and ground non-line-of-sight communications. As of May 1998, unresolved technical issues, including the amount and severity of electrical interference generated, have affected the radio's development. The ARC-220 Army project manager did not know when radio delivery would begin. The Army plans to address this and other concerns with additional testing; however, the Army does not currently plan to start testing the ARC-220 radio in the Apache Longbow until fiscal year 2000. According to the ARC-220 project manager, no other radio can provide the non-line-of-sight communications capability for the Apache Longbow. Also, the Army has decided to equip only one-half, or 379, rather than all 758 helicopters with the ARC-220 radio due to changing Army funding priorities. Therefore, 50 percent of the Apache Longbow fleet will be unable to transfer or receive targeting data when out of the line of sight. The 50-percent reduction in planned radio procurement quantities will result in decreased lethality of the Apache Longbow fleet due to the inability to transfer target data between Apache Longbow helicopters. Also, the fleet's survivability will be decreased because of the helicopter's greater exposure to hostile forces. The Army's 227 radar-equipped Apache Longbow helicopters will be too heavy to achieve the validated VROC requirement of 450 feet per minute in the combat mission configuration when carrying a full fuel load and 12 missiles. According to the ORD, if the VROC requirement is not met, the helicopters will not have acceptable levels of maneuverability and agility to successfully operate in combat. Army plans to modify the system will add weight and therefore exacerbate this problem. The impact of increased weight on the ability of non-radar-equipped Apache Longbow helicopters to achieve VROC performance requirements is even greater because of their less-powerful engines. At initial operational capability, the Apache Longbow will not have a radio that will allow it to transfer target data between helicopters when concealed or not in the line of sight. Unresolved technical issues have delayed the radio's development. More importantly, the Army plans to install the non-line-of-sight radio on only one-half of the total Apache Longbow helicopter fleet. The 50-percent reduction in planned procurement quantities will result in decreased lethality of the Apache Longbow fleet due to the inability to transfer target data between Apache Longbow helicopters. Also, the fleet's survivability will be decreased because of the helicopter's greater exposure to hostile forces. We recommend that the Secretary of Defense reassess the Apache Longbow program to determine whether its performance capabilities will be sufficient to meet its critical warfighting missions. In written comments on a draft of this report, DOD partially concurred with the findings but nonconcurred with the recommendation. DOD's comments are reprinted in their entirety in appendix I, along with our evaluation of them. In disagreeing with our recommendation, DOD contends that past analyses have shown that the Apache Longbow, can meet its performance requirements and, therefore, it can meet its critical warfighting missions. DOD believes there is no need to repeat these analyses. However, it noted that it plans to reassess the program as specified in the full-rate production Acquisition Decision Memorandum. The Army has identified VROC and Hellfire missile load among the most critical Apache Longbow performance characteristics--key performance parameters. While the Apache Longbow may have met performance requirements in earlier analyses, it does not currently meet the VROC and missile load key performance parameters required to execute its combat and primary missions. DOD Regulation 5000.2 clearly defines the importance of key performance parameters as those capabilities or characteristics so significant that failure to meet them can be cause for the program to be reassessed or terminated. The Acquisition Decision Memorandum requires that the program manager evaluate cost, schedule, and performance tradeoffs to minimize the cost of ownership; it does not require a fundamental reassessment of the program, as we are recommending. Therefore, based on the issues raised in this report and DOD's guidance, we disagree with DOD's position on our recommendation and continue to maintain that the Apache Longbow program should be reassessed. To determine whether Apache Longbow performance requirements and operational capabilities, including the ability to transfer data when not in the line of sight, will be met, we interviewed cognizant officials and reviewed relevant Army and DOD documents related to the development and acquisition of the Apache Longbow. These documents include Defense Acquisition Executive Summaries, the Apache Longbow's ORD and Acquisition Program Baseline, key performance parameters, system specifications, Selected Acquisition Reports, and the Acquisition Decision Memorandum. In addition, we reviewed contractor data, such as project progress reviews, and selected documents related to the original Apache helicopter. To calculate aircraft weights, we used the weights shown in the Weight and Balance Reports prepared by the contractor after the actual weighing of each remanufactured aircraft. The Army uses these weights in accepting aircraft, and they are the basis for all subsequent modifications to each helicopter. We did not independently verify these weights. We calculated VROC utilizing accepted factors and methodologies provided by engineers from the Army's Aviation Research, Development, and Engineering Center. We also used data from these officials illustrating how various factors, such as weight, altitude, temperature, and flight duration, affect helicopter performance under different mission scenarios. In addition, we received information from these officials on power requirements, velocities, and fuel consumption rates that supported our calculations of VROC. We discussed our methodology with Army engineering officials, and they agreed that it would provide a basis for evaluating the impact of weight increases on VROC. We conducted our work at the Program Office for Aviation, the Apache Attack Helicopter Project Management Office, and the Office of the Executive Director for Aviation Research, Development, and Engineering Center at the Army's Aviation and Missile Command, Huntsville, Alabama; the Joint Chiefs of Staff, Washington, D.C.; the Office of the Assistant Secretary of the Army for Research, Development, and Acquisition, Washington, D.C.; the U.S. Army Office of the Deputy Chief of Staff for Operations and Plans, Washington, D.C.; and the Army's Training and Doctrine Command, Fort Rucker, Alabama. In addition, we interviewed officials at the Boeing Company and Defense Contract Management Command in Mesa, Arizona. We conducted our review from January to June 1998 in accordance with generally accepted government auditing standards. As you know, the head of a federal agency is required by 31 U.S.C. 720 to submit a written statement of actions taken on our recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight not later than 60 days after the date of this report. A written statement must also be submitted 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. We are sending copies of this report to the Chairmen and Ranking Minority Members, Senate and House Committees on Appropriations, Senate Committee on Armed Services, House Committee on National Security, Senate Committee on Governmental Affairs, and the House Committee on Government Reform and Oversight; the Director, Office of Management and Budget; and the Secretary of the Army. We will also provide copies to others upon request. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report were Robert J. Stolba, Charles Burgess, Nora Landgraf, William T. Woods, and Margaret L. Armen. The following are GAO's comments on the Department of Defense's (DOD) letter dated July 28, 1998. 1. We are not persuaded by DOD's assertion that the key performance parameters for VROC and missile load should be evaluated independently. While DOD's documentation for the Apache Longbow program has been inconsistent in discussing Apache Longbow requirements, the ORD, Acquisition Program Baseline, Defense Acquisition Executive Summaries, Selected Acquisition Reports, and the aircraft production contract itself are uniform in that they simultaneously address VROC and missile load in discussing the Apache Longbow's operational missions and, therefore, clearly demonstrate the interrelationship of VROC and missile load. DOD's response attests to this interrelationship when it refers to VROC and missile load in the Acquisition Program Baseline as the basis for its VROC calculation. 2. Our analysis clearly shows that the Apache Longbow cannot meet the VROC requirement in the combat mission configuration when carrying a full fuel load and 12 missiles--either as specified in the ORD or validated by the Joint Requirements Oversight Council. The issue addressed in our report is whether or not the Apache Longbow can meet its required VROC while carrying the necessary missile load to accomplish its required mission. Our report documents that the Apache Longbow with the required full fuel load is too heavy to meet the VROC requirement for the combat mission specified in the ORD. The VROC requirement in the ORD is 450 feet per minute--the key performance parameter. This ORD key performance parameter remains the same whether VROC is measured with 4 air-to-air missiles and 8 Hellfire missiles or the validated requirement for 12 Longbow Hellfire missiles. The VROC cannot be met under either condition. DOD did not present support for its contention that the Acquisition Program Baseline shows that the Apache Longbow can achieve the required VROC. In fact, DOD is incorrect in its assumption that the November 1995 full-rate production Baseline calls for the calculation of VROC based only on eight Hellfire missiles. The Baseline that DOD cites refers to only one mission--the primary mission. According to the October 1995 Acquisition Decision Memorandum, the full-rate production Baseline should have defined this mission based on the VROC and missile load key performance parameters validated by the Joint Requirements Oversight Council in October 1994. Significantly, the Army recognized in the Baseline that the required VROC in the primary mission with 12 Longbow Hellfire missiles could not be achieved unless fuel or ordnance are reduced. Without these reductions, the helicopter's VROC, in the primary mission, would be significantly lower than 450 feet per minute. While the Army did not update the ORD to reflect the key performance parameters, it did modify the Apache Longbow Selected Acquisition Report, as early as December 1994, to reflect the VROC and missile load key performance parameters that the Council validated. Finally, the September 1995 Army Material System's Analysis Activity's independent evaluation of the Apache Longbow weapon system reported that neither version of the airframe could meet VROC requirements without reducing weight by about 590 pounds. 3. We disagree with DOD's assertions regarding the VROC performance of the non-radar-equipped Apache Longbow. The ORD states that an adequate VROC to ensure combat effectiveness must be maintained with or without the radar. Further, when discussing the Apache Longbow's maneuverability and agility, the ORD states that the performance of the non-radar-equipped aircraft should equal or exceed that of the radar-equipped aircraft. 4. The ORD and the Director, Operational Test and Evaluation's report on the Apache Longbow show that the Army expects to use the non-line-of-sight radio for transferring targeting data between aircraft. The ORD states that the primary use of digital data will be for targeting purposes. This data can then be shared with other non-radar-equipped helicopters for warfighting, situational awareness, and to coordinate battlefield information. The ORD specifies that this communication capability requires non-line-of-sight communications, and the Army plans to provide this capability with the ARC-220 radio. The Director's 1995 report states that varied or obstructed terrain caused significant communication problems, which indicates that the lack of non-line-of sight communications capability resulted in the inability to pass target data from radar-equipped Apache Longbows to non-radar-equipped helicopters. In another phase of operational testing, the flat, open terrain, which afforded clear line-of-sight communications, was cited as the main reason for a lack of communication problems. Furthermore, DOD's assertion that the helicopter can transfer high-volume targeting data over the existing communications suite is only applicable when aircraft are in line of sight. Without the non-line-of-sight communications capability that the ARC-220 radio provides, the Apache Longbow will continue to experience target handover problems when operating in environments other than a flat, open terrain. Because of the Army's plan to reduce ARC-220-equipped helicopters by 50 percent and evidence that indicates the fielding delay will be longer than DOD reports, we continue to believe that there will be an overall reduction in the Apache Longbow's planned lethality and survivability. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. 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GAO reviewed the Army's Apache Longbow helicopter program to determine if its operational requirements will be met, focusing on whether the Apache Longbow will meet: (1) the validated key performance requirement for vertical rate of climb (VROC); and (2) the requirement to transfer target data between Apache Longbow helicopters. GAO noted that: (1) the Apache Longbow program needs to be reassessed because the helicopter does not meet two key user requirements; (2) the Army's 227 radar-equipped Apache Longbow helicopters will be too heavy to achieve the validated VROC requirement of 450 feet per minute in the combat mission configuration when carrying the required 12 Longbow Hellfire missiles and a full fuel load; (3) as a result, the helicopters will not have acceptable levels of maneuverability and agility to successfully operate in combat; (4) even though the Apache Longbow is reported to have significantly greater overall capability than the original Apache, its VROC and corresponding maneuverability will be less than that of the original Apache; (5) Army plans to modify the system will add weight and therefore exacerbate this problem; (6) the impact of weight on the ability of non-radar-equipped Apache Longbow helicopters to achieve VROC performance requirements is even greater because of the less-powerful engines used in these helicopters; (7) at initial operational capability, the Apache Longbow will not have a radio that will allow it to transfer target data between helicopters when concealed or not in the line of sight; (8) unresolved technical issues have delayed the radio's development; (9) the Army plans to install the non-line-of-sight radio on only one-half of the total Apache Longbow helicopter fleet; and (10) the lack of this capability throughout the fleet results in an overall reduction in lethality due to the inability to transfer target data between Apache Longbow helicopters and decreased survivability caused by the greater exposure to hostile forces.
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The V-22 Osprey program was approved in 1982. The V-22 was being developed to meet joint service operational requirements that would satisfy various combat missions, including medium-lift assault for the Marine Corps, search and rescue for the Navy, and special operations for the Air Force. The program advanced into full-scale development in 1986. In December 1989, the Department of Defense (DOD) directed the Navy to terminate all V-22 contracts because, according to DOD, the V-22 was not affordable when compared to helicopter alternatives. DOD notified Congress that in order to satisfy the joint service requirements, the aircraft would require substantial redesign and testing. Congress continued to fund the program and in August 1992, the Acting Secretary of the Navy testified that a V-22 that met the joint service operational requirements could not be built with the funds provided. In October 1992, the Navy terminated the V-22 full-scale development contract and awarded a contract to begin engineering, manufacturing, and development (EMD) of a V-22 variant. During the FSD phase, five prototype aircraft were built. We have been monitoring the V-22 program for the past several years. Our reportsconsistently discussed testing and development issues such as weight, vibration, avionics, flight controls, landing gear, and engine diagnostic deficiencies. The current V-22 program, which entered EMD in 1992, is scheduled to proceed with developmental testing through 1999. During the EMD phase, the contractor is required to build four production representative aircraft to Marine Corps specifications and deliver them to Patuxent River Naval Air Station, Maryland, in 1997 for developmental and operational testing. Operational testing for the Marine Corps' V-22 is scheduled to extend into fiscal year 2000. After completion of operational testing to determine whether the EMD aircraft will meet Marine Corps requirements, one of the aircraft will be remanufactured and tested to determine whether it will meet SOCOM requirements. Operational testing for the SOCOM variant is scheduled to extend through fiscal year 2002. In March 1997, one EMD aircraft was delivered to Patuxent Naval Air Station to begin developmental and operational testing. Three more aircraft are under construction and are expected to be delivered by October 1997. DOD approved the program to begin low-rate initial production (LRIP) in April 1997 and will purchase 25 V-22 aircraft in 4 LRIP lots of 5, 5, 7, and 8 through fiscal year 2000. Full-rate production is scheduled to begin in fiscal year 2001 and continue through fiscal year 2018. Initial operational capability (IOC) for the V-22 Marine Corps variant is scheduled for 2001 and in 2005 for the SOCOM version. IOC for the Navy V-22 aircraft has not yet been specified. Through fiscal year 1997, more than $6.5 billion has been provided for the program. The cost data reported in the December 31, 1996, V-22 Selected Acquisition Report (SAR) is different from the data in the program office submission to support the fiscal year 1998-99 President's Budget. For example, the SAR indicates that average unit flyaway costs at program completion would be about $55.4 million, while the program office estimate for the President's Budget shows that average unit flyaway cost will be about $57.5 million at program completion. Table 1 provides a comparison of the various cost estimates at different program milestones. (See app. I for a more detailed comparison.) Furthermore, the contractor is estimating that the average unit flyaway cost, in then-year dollars, for the V-22 will eventually get down to about $40.9 million. The contractor estimate is based on the assumption that the production quantities and cost will stabilize (commonly referred to as the production learning curve) at about the time that aircraft number 153 is produced. Thus, the contractor estimate of $40.9 million would occur at a point in time in the program when the program office estimate and the SAR indicate that the average unit flyaway cost would be about $53.9 million and about $51.8 million, respectively. These widely differing estimates indicate that the V-22 has not matured to the point that there can be reasonable confidence that the costs are stable. This is particularly true because, as discussed later, the aircraft design is not yet stable and further changes are expected as the test program continues. Resolution of performance and operational issues will likely increase V-22 program costs. In that regard, we and other organizations, such as the Congressional Budget Office and the Institute for Defense Analyses, have performed reviews of weapon systems over the years that have shown that, historically, the cost of major weapons programs increases by over 20 percent. At this point in the V-22 program, it is questionable whether the aircraft being produced will be able to meet the multi-mission requirements outlined in the current Operational Requirements Document (ORD). The following are some issues that must be resolved before a determination can be made as to whether the V-22 will satisfy the services' stated requirements. The current Marine Corps medium-lift helicopter fleet, consisting of CH-46E and CH-53D helicopters, is aging and now has an average age of 24 to 27 or more years. Navy and Marine Corps documents indicate that this fleet is deficient in payload, range, and speed. In addition, the fleet is incapable of providing the operational performance needed by the Marine Corps. And, according to Marine Corps officials, the medium-lift aircraft inventory is well below what is required. While the V-22 is to replace the Marine Corps' CH-46E and CH-53D helicopters, its payload capabilities have yet to be demonstrated. The ORD stipulates that the V-22 must be able to lift external loads up to 10,000 pounds. By comparison, the CH-46E and CH-53D are able to lift 8,000 to 12,000 pounds. Testing to evaluate the V-22's lift capability, and to measure structural load/stresses/strains in flight and the operational capabilities to carry external cargo is planned to take place in fiscal year 1998. Moreover, it has yet to be determined if the high-speed capability of the V-22 will enhance the Marine Corps' external lift capabilities, since the airborne behavior of operational equipment such as multi-purpose vehicles, heavy weapons, and cargo vehicles carried at speeds at or in excess of 200 knots has yet to be tested. If the V-22 cannot rapidly move operational equipment, then its utility as an external cargo carrier to replace current Marine Corps medium-lift assets will have to be reevaluated. The V-22 ORD requires that, at a minimum, the CV-22 have the capability to fly at 300 feet using terrain following/terrain avoidance, in all weather conditions during both daylight and night-time environments. Testing done with the FSD prototype V-22 aircraft has shown that the AN/APQ 174 multi-functional radar, which would provide this capability, interferes with the V-22's radar jamming system. Further EMD aircraft testing with the AN/APQ 174 radar system is necessary to resolve this issue. That testing is not scheduled to be completed until the middle of fiscal year 2001. According to the ORD, the V-22 must have an aerial refueling receiver capability compatible with current Marine Corps and SOCOM tanker assets. SOCOM personnel told us that it was vital for both the pilot and the co-pilot to be able to see the probe during aerial refueling. However, the current V-22 design prevents the pilot in the left seat of the aircraft from being able to see the refueling probe. Testing to date with the full-scale development version of the aircraft shows that the pilot in the left seat must either raise the seat or lean forward in the seat to clearly see the refueling probe. According to SOCOM officials, being able to readily see the refueling probe from both pilot seats without the pilot having to make these physical adjustments is essential to safe flight operations. From a mission and training point of view, these officials claim that it is critical that both pilots be able to see the entire refueling operation in the event that the pilot in the left seat has to take over the operation. While SOCOM pilots perform significantly more missions requiring refueling, Marine Corps officials told us that they believe that as long as the pilot in the right seat can clearly see the probe, the pilot in the left seat could make necessary adjustments to safely conduct the refueling mission should the need arise. V-22 program officials have agreed that if future testing shows that the current design of the refueling probe is a problem, necessary steps will be taken to correct the baseline aircraft. However, if a redesign is necessary, it could have an impact on aircraft performance (weight, range, and speed) or other aircraft systems, such as the radar. The downward force from the V-22 proprotor blades while in the hover mode (referred to as downwash) continues to be an area of concern. Downwash is a concern for both the Marine Corps and SOCOM in areas such as personnel insertions/extractions, external load hookups, fast rope exercises, and rope ladder operations. According to DOD documentation, the extremely intense rotor downwash under the aircraft makes it a challenge to stand under the aircraft, let alone perform useful tasks. According to the DOD Director, Operational Test and Evaluation report issued in March 1997, resolution of this issue will require further testing. Program officials told us that downwash is a common concern with rotary aircraft and V-22 users will have to adjust mission tactics while under the aircraft to compensate for downwash. Survivability is a critical concern as the services seek to perform their missions, particularly in hostile environments. The V-22 ORD defines the necessary capabilities that must be available on each configuration of the aircraft. However, our review showed that in order for the aircraft to meet key performance parameters, such as range, trade-offs are being considered. Critical subsystems may be delayed or deleted, while others may require future upgrades or modifications that may affect the program's cost and schedule. One such subsystem is the AN/AVR-2A laser-warning receiver. By giving the pilot advance warning, this subsystem would reduce the susceptibility of the aircraft to laser illumination and attacks. The ORD requires that consideration be given to protecting crew and electro-optical sensors from low- to medium-powered lasers. While the Marine Corps V-22 aircraft will have this capability, the SOCOM V-22 aircraft will only have space and wiring provisions. Currently, the SOCOM variant will not have the laser-warning receiver because, according to SOCOM officials, it would prevent the aircraft from meeting its range requirements. In that regard, the V-22 ORD states that a key performance parameter for the SOCOM variant is the requirement for a mission radius of 500 nautical miles; that is, the aircraft must have the ability to fly from a base station out to 500 nautical miles, hover for 5 minutes, and return. According to SOCOM officials, the V-22 will not meet this range requirement with the laser-warning subsystem installed. SOCOM officials contend that the lack of the laser warning receiver is a concern relative to successful mission accomplishment and survivability of aircraft and crew. Another survivability concern is the lack of a defensive weapon on the V-22. The requirement document states that the V-22 must have an air-to-ground and air-to-air weapon system compatible with night vision devices. This is a required capability for the Marine Corps variant and a desired capability for the SOCOM variant. Originally, the V-22 was to be equipped with a 50-caliber machine gun; however, for affordability reasons, it will now be produced without a defensive weapon system. Finally, the ORD requires that the V-22 include a ground collision avoidance and warning system with voice warning. Currently, the Navy claims that this requirement was added to the ORD after the V-22 had validated its design and, therefore, was not included in the planned production. Instead, the system is a potential limitation to the Marine Corps' V-22 configuration and will be included as a preplanned product improvement to be evaluated through the course of the test program. The Navy intends to correct this deficiency, most likely through a retrofit process, and pay for it within program baseline funding. The V-22 program was approved to proceed with LRIP in April 1997. One of the primary criterion that the program was required to meet was the completion of an operational assessment endorsing potential operational effectiveness and suitability of the V-22's EMD design. Three series of early operational assessments were used to support DOD's LRIP decision. Due to the significant limitations of these early operational assessments, their reliability as the basis for deciding to proceed into LRIP is questionable and future production decisions should be based on more realistic tests. The three operational assessments that have been conducted used aircraft produced under the earlier full-scale development program. Previously, DOD had determined these aircraft to be incapable of meeting V-22 mission requirements and, at one point, the Secretary of Defense sought to cancel the full-scale development program. V-22 program officials believe that even though the full-scale development aircraft did not meet mission requirements, the lessons learned from having produced them reduced the risk associated with developing the current EMD aircraft. The first of the three early operational assessments was conducted between May and July 1994; the second assessment between June and October 1995. These assessments were conducted jointly by the Navy's Operational Test and Evaluation and the Air Force's Operational Test and Evaluation Center. In both assessments, the joint test teams concluded that the development aircraft demonstrated the potential to be operationally effective and suitable. Although the third assessment was not completed at the time of the decision to proceed with LRIP, an interim report was prepared for this milestone. This report highlighted limitations and risks remaining from previous assessments and cited additional areas of concern, but still projected that the V-22 will be potentially operationally effective and suitable. In March 1997, DOD's Director for Operational Test and Evaluation issued the Fiscal Year 1996 Annual Report. In that report, the Director, Operational Test and Evaluation, concluded that V-22 testing had concentrated on system integration and flight envelop expansion, but had "not extensively investigated mission applications of tiltrotor technology and potential operational effectiveness and suitability of the EMD V-22." The report also highlighted the following operational test and evaluation limitations relative to the operational assessments of the V-22. The aircraft was not cleared to hover over unprepared landing zones, could not hook up to or carry any external loads, could not carry any passengers, and was not cleared to hover over water. The Director, Operational Test and Evaluation report also stated that the aircraft configuration was not representative of any mission configuration. The Director, Operational Test and Evaluation said this combination of limitations to clearance and configuration results in an "extremely artificial" test environment for early operational test and evaluation. The Director, Operational Test and Evaluation also reported serious concerns regarding the effects of downwash previously mentioned in this report and recommended further evaluation in this area. The initial flight of the first of four EMD aircraft, originally scheduled for December 1996, was delayed until February 1997. As a result, the required ferry to Patuxent River was delayed until March 1997. The aircraft arrived at the test facility needing several changes before the test program could continue as planned. In order to meet the ferry date and thus obtain approval to proceed with LRIP, component changes and modifications were not completed at the contractor's facility. Instead, they were to be completed at Patuxent River after the required ferry flight. During a visit to the Naval Air Station test facilities in April 1997, we observed the aircraft undergoing modifications by contractor personnel. According to test officials with whom we spoke, the modifications were originally only expected to take about 2 weeks. However, as of June 16, 1997, the modifications were still ongoing, nearly 2 months after they began. The next major milestone decision for the V-22 is the LRIP lot 2 production decision. That decision is scheduled for early 1998 and will represent DOD's approval to procure the next five V-22 aircraft. The criteria that must be met for LRIP lot 2 approval are: delivery of two additional EMD aircraft and completion of certain static tests to determine the structural strength of the aircraft. Congressional committees have expressed concern that the planned V-22 production schedule (4 LRIP lots of 5, 5, 7, and 8 aircraft with eventual full-rate production of as many as 31 aircraft per year through 2018) is inefficient. (See app. I for complete V-22 program schedule and cost estimates.) In August 1996, the contractors submitted an unsolicited cost estimate to the Under Secretary of Defense for Acquisition and Technology that suggested that accelerated production rates, combined with a multi-year procurement strategy, could result in savings of nearly 25 percent over the life of the V-22 program. The contractor proposed accelerating the production schedule to a rate of 24 aircraft by fiscal year 1999, instead of the 7 aircraft currently planned in fiscal year 1999. DOD responded that while this strategy had the potential for significant savings, it was inappropriate to consider such an alternative until the aircraft design was more stable. DOD indicated that to do otherwise would unnecessarily increase technical risk to the program. In addition, DOD stated that such an increase in annual procurement quantities would not be affordable within the overall defense budget. Further, the May 1997 Quadrennial Defense Review recommended lowering the number of V-22 aircraft to be procured from 523 to 458 and increasing the planned production rate after the program enters full-rate production. The recommendation retains the limited LRIP rates currently planned by DOD. According to V-22 program test personnel, accelerating the production schedule and increasing the rate would add risk to the program in the event the test program finds problems that require a significant amount of time and resources to fix, and result in a larger number of aircraft to retrofit or modify. These views are consistent with the conclusions in our February 13, 1997, report that described the effects of increased production during LRIP of 28 weapon systems and the cost and schedule impact to these programs. This report showed that when DOD inappropriately placed priority on funding production of unnecessary quantities during LRIP, the result was a large number of untested weapons that subsequently had to be modified. Moreover, it points out that because of overall budgetary constraints, decisions to buy unnecessary quantities of unproven systems under LRIP forced DOD to lower the annual full production rates of proven weapons thereby stretching out full-rate production for years and increasing unit production costs by billions of dollars. There is no consensus on the acquisition strategy for acquiring the V-22 Osprey. Congress has been attempting to increase the annual production rates to achieve more efficient production and DOD has been attempting to keep the annual production rates at a more limited quantity. The key to efficient production and the efficient use of the funds Congress has provided for the V-22 is program stability. However, after 15 years of development effort, the V-22 design has not been stabilized. To begin the process of achieving consensus on the acquisition strategy for the V-22, we believe that DOD needs to present Congress with a strategy for overcoming the production inefficiencies that Congress views as present in the current acquisition strategy. As part of that strategy, we believe that DOD needs to introduce more realistic testing into the program to achieve aircraft design stability. Ideally, this testing should be done as early as possible in the program schedule and should be directed at ensuring that the required capabilities of the V-22 are adequately demonstrated before a significant number of aircraft are procured. In that regard, the next scheduled major program milestone is the LRIP lot 2 production decision scheduled for early 1998. Accordingly, we recommend that the Secretary of Defense provide in the Department's next request for V-22 funds an explanation of how it plans to (1) introduce more realistic testing earlier into the V-22 program schedule and (2) achieve the production efficiencies desired by Congress. An agreement between Congress and DOD in this regard would be a significant step toward reaching consensus on the acquisition strategy for the V-22 program. DOD reviewed and partially concurred with a draft of this report. In its comments, DOD agreed to continually assess and correct operational deficiencies found during V-22 testing. However, DOD did not concur with our recommendation to provide Congress an explanation of how it plans to introduce more realistic testing earlier into the V-22 program schedule and achieve production efficiencies. DOD stated that it considers test results, production efficiencies, and other factors in developing its budget and does not consider additional explanatory materials necessary. DOD also stated that the Defense Acquisition Board, in April 1997, determined that the V-22 test program was adequate and properly sequenced. We continue to believe that the V-22 test program and the criteria for proceeding with the low-rate production program should be made more realistic. Given the artificial nature of the prior operational testing that was used to justify LRIP lot 1 production and the fact that earlier tests were conducted using nonproduction representative aircraft developed under the earlier V-22 full-scale development program, we believe that DOD should expand the LRIP lot 2 criteria to introduce more realistic testing into the program, using aircraft produced under the EMD phase of the program. We believe that at a minimum, the limitations of the prior tests, which were disclosed by the Director, Operational Test and Evaluation in its March 1997 report, should be addressed before a decision is made to proceed into the next LRIP lot. This would allow the test program to validate the projected capabilities of the EMD-configured aircraft without injecting unnecessary risk into the program. DOD also emphasized in its comments on our draft report that the Quadrennial Defense Review (QDR) resulted in an accelerated production profile that addresses many of the production efficiencies desired by Congress. The QDR recommends an overall reduction in aircraft for the Marine Corps, from 425 aircraft to 360 with an increase in the rate of production during the full production phase of the program. The four low-rate production lots of 4, 5, 7, and 8 aircraft planned during the period 1997-2000 are retained. It is during this LRIP phase of the program that we believe more realistic testing is needed and should be included as criteria for procuring the next EMD LRIP lots. Therefore, we believe our position is consistent with the intent of the QDR recommendation, which would not take effect until the full-rate production phase of the V-22 program. DOD's comments and our evaluation of them are presented in their entirety in appendix II. We reviewed the status of the V-22 aircraft development and readiness of the program to proceed into production. We reviewed and analyzed test plans and reports, including the Test and Evaluation Master Plan and results of three V-22 Operational Assessments; cost and budget estimates, including the SAR and President's Budget Estimates for fiscal years 1997-99; and other program documentation, including the ORD and the EMD and LRIP contracts. We also obtained information on Marine Corps medium-lift requirements and capabilities of existing assets. In addition, we met with officials in the office of the Secretary of Defense and conducted interviews with program officials from the following locations: U.S. Navy Headquarters, Washington, D.C.; U.S. Marine Headquarters, Arlington, Virginia; Office of the Chief of Naval Operations, Washington, D.C.; U.S. Special Operations Command, Tampa, Florida; V-22 Program Office, Crystal City, Virginia; and Naval Air Warfare Station, Patuxent River, Maryland. Finally, we visited contractor facilities at Boeing Defense and Space Group-Helicopters Division, Philadelphia, Pennsylvania, and Bell Helicopter Textron, Fort Worth, Texas. We performed our review from March 1996 through June 1997 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of the Navy; the Secretary of the Air Force; the Commandant of the Marine Corps; and the Director, Office of Management and Budget. We will also make copies available to others on request. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report were Steven F. Kuhta, Assistant Director; Samuel N. Cox, Evaluator-in-Charge; and Brian Mullins, Senior Evaluator. (Then-year dollars in millions) The following are GAO's comments on the Department of Defense's (DOD) letter dated August 27, 1997. 1. We recalculated the cost data obtained from the V-22 Selected Acquisition Report, using DOD inflation indices, to reflect then-year dollars for comparison to program office budget estimates. The recalculated cost data are reflected in the final report. 2. We agree that the Operational Requirements Document (ORD) validated by the Joint Requirements Oversight Council in June 1995 does not specify an airspeed requirement for carrying external loads. However, the V-22 program was justified on the basis that it would overcome the shortcomings of the Marine Corps' current medium-lift helicopters. In that regard, the ORD is specific in identifying inadequate payload, range, speed and survivability in the current medium-lift force that severely limit the Marine Corps' ability to accomplish the assault support missions in current and future threat environments. We also agree that the ORD does not identify the specific equipment that the V-22 must have to protect the aircraft and crew from laser threats. However, the ORD does require that the aircraft be designed for operations in a hostile environment with features that increase aircraft, crew, and passenger survivability. Specifically, it requires that consideration be given to protecting crew and electro-optical sensors from low- to medium-powered lasers. While the MV-22 will be equipped with an AN/AVR-2A laser-warning receiver, the CV-22 will not be so equipped. Instead, the aircraft will be produced with available space and wiring for installation of laser protection capabilities. 3. We note that the approved CV-22 exit criteria is as follows: For lot 1 advanced procurement funding, flight testing of the first of two CV-22 flight test aircraft must have started. For lot 1 full funding and advanced procurement for lot 2, flight testing with the second CV-22 aircraft must have started and the terrain following/terrain avoidance testing must have started using the first CV-22 aircraft. We question the value of "flight test started" as sufficient criteria for making an informed decision to proceed with production of the CV-22 model aircraft. 4. This comment is consistent with the discussion in the report. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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 reported on the V-22 Osprey Program, which is intended to provide the armed services with 523 new tilt-rotor aircraft, focusing on: (1) the status of the program and areas of potential cost increases or performance challenges; and (2) whether the aircraft being developed will meet the stated requirements of each of the services. GAO noted that: (1) the V-22 has been in development for almost 15 years; (2) although Congress has provided significant funding and support to the Department of Defense (DOD), the system has not yet achieved program stability in terms of cost or aircraft design; (3) there are large disparities among the cost estimates from the program office, the contractors, and the Office of the Secretary of Defense; (4) these estimates range from about $40 million to $58 million for each aircraft; (5) the design of the aircraft will not be stabilized until further testing is completed and several important performance and operational issues, such as payload capability, aerial refueling, and downwash are resolved; (6) resolution of these issues, which could also require mission trade-offs or changes to planned operational concepts, will likely escalate program costs and extend the program schedule; (7) the April 1997 low-rate initial production (LRIP) decision was based, in large part, on the results of early operational testing using aircraft produced under an earlier full-scale development program; (8) however, those aircraft are not representative of the aircraft currently being developed during the engineering and manufacturing development phase of the V-22 program; (9) furthermore, the DOD Director, Operational Test and Evaluation (DOT&E), has characterized the tests on which the LRIP decision was based as extremely artificial because of significant test limitations; and (10) future production decisions for the V-22 should be based on more realistic testing.
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Social Security provides retirement, disability, and survivor benefits to insured workers and their dependents. Insured workers are eligible for reduced benefits at age 62 and full retirement benefits between age 65 and 67, depending on their year of birth. Social Security retirement benefits are based on the worker's age and career earnings, are fully indexed for inflation after retirement, and replace a relatively higher proportion of wages for career low-wage earners. Social Security's primary source of revenue is the Old Age, Survivors, and Disability Insurance (OASDI) portion of the payroll tax paid by employers and employees. The OASDI payroll tax is 6.2 percent of earnings each for employers and employees, up to an established maximum. One of Social Security's most fundamental principles is that benefits reflect the earnings on which workers have paid taxes. Social Security provides benefits that workers have earned to some degree because of their contributions and those of their employers. At the same time, Social Security helps ensure that its beneficiaries have adequate incomes and do not have to depend on welfare. Toward this end, Social Security's benefit provisions redistribute income in a variety of ways--from those with higher lifetime earnings to those with lower ones, from those without dependents to those with dependents, from single earners and two-earner couples to one-earner couples, and from those who don't live very long to those who do. These effects result from the program's focus on helping ensure adequate incomes. Such effects depend to a great degree on the universal and compulsory nature of the program. According to the Social Security Trustees' 2005 intermediate, or best- estimate, assumptions, Social Security's cash flow is expected to turn negative in 2017. In addition, all of the accumulated Treasury obligations held by the trust funds are expected to be exhausted by 2041. Social Security's long-term financing shortfall stems primarily from the fact that people are living longer and having fewer children. As a result, the number of workers paying into the system for each beneficiary has been falling and is projected to decline from 3.3 today to about 2 by 2030. Reductions in promised benefits and/or increases in program revenues will be needed to restore the long-term solvency and sustainability of the program. About one-fourth of public employees do not pay Social Security taxes on the earnings from their government jobs. Historically, Social Security did not require coverage of government employment because there was concern over the question of the federal government's right to impose a tax on state governments, and some had their own retirement systems. However, virtually all other workers are now covered, including the remaining three-fourths of public employees. The 1935 Social Security Act mandated coverage for most workers in commerce and industry, which at that time comprised about 60 percent of the workforce. Subsequently, the Congress extended mandatory Social Security coverage to most of the excluded groups, including state and local employees not covered by a public pension plan. The Congress also extended voluntary coverage to state and local employees covered by public pension plans. Since 1983, however, public employers have not been permitted to withdraw from the program once they are covered. Also in 1983, amendments to the Social Security Act extended mandatory coverage to newly hired federal workers and to all members of the Congress. SSA estimates that in 2004 nearly 5 million state and local government employees, excluding students and election workers, are not covered by Social Security. In addition, about three-quarters of a million federal employees hired before 1984 are also not covered. Seven states--California, Colorado, Illinois, Louisiana, Massachusetts, Ohio, and Texas--account for 71 percent of the noncovered payroll. Most full-time public employees participate in defined benefit pension plans. Minimum retirement ages for full benefits vary. However, many state and local employees can retire with full benefits at age 55 with 30 years of service. Retirement benefits also vary, but they are usually based on a specified benefit rate for each year of service and the member's final average salary over a specified time period, usually 3 years. For example, plans with a 2 percent rate replace 60 percent of a member's final average salary after 30 years of service. In addition to retirement benefits, members generally have a survivor annuity option and disability benefits, and many receive some cost-of-living increases after retirement. In addition, in recent years, the number of defined contribution plans, such as 401(k) plans and the Thrift Savings Plan for federal employees, has been growing, and such plans are becoming a relatively more common way for employers to offer pension plans; public employers are no exception to this trend. Even though noncovered employees may have many years of earnings on which they do not pay Social Security taxes, they can still be eligible for Social Security benefits based on their spouses' or their own earnings in covered employment. SSA estimates that nearly all noncovered state and local employees become entitled to Social Security as workers, spouses, or dependents. However, their noncovered status complicates the program's ability to target benefits in the ways it is intended to do. To address the fairness issues that arise with noncovered public employees, Social Security has two provisions--the Government Pension Offset, to address spouse and survivor benefits, and the Windfall Elimination Provision, to address retired worker benefits. Both provisions depend on having complete and accurate information that has proven difficult to get. Also, both provisions are a source of confusion and frustration for public employees and retirees. Under the GPO provision, enacted in 1977, SSA must reduce Social Security benefits for those receiving noncovered government pensions when their entitlement to Social Security is based on another person's (usually a spouse's) Social Security coverage. Their Social Security benefits are to be reduced by two-thirds of the amount of their government pension. Under the WEP, enacted in 1983, SSA must use a modified formula to calculate the Social Security benefits people earn when they have had a limited career in covered employment. This formula reduces the amount of payable benefits. Regarding the GPO, spouse and survivor benefits were intended to provide some Social Security protection to spouses with limited working careers. The GPO provision reduces spouse and survivor benefits to persons who do not meet this limited working career criterion because they worked long enough in noncovered employment to earn their own pension. Regarding the WEP, the Congress was concerned that the design of the Social Security benefit formula provided unintended windfall benefits to workers who had spent most of their careers in noncovered employment. The formula replaces a higher portion of preretirement Social Security covered earnings when people have low average lifetime earnings than it does when people have higher average lifetime earnings. People who work exclusively, or have lengthy careers, in noncovered employment appear on SSA's earnings records as having no covered earnings or a low average of covered lifetime earnings. As a result, people with this type of earnings history benefit from the advantage given to people with low average lifetime earnings when in fact their total (covered plus noncovered) lifetime earnings were higher than they appear to be for purposes of calculating Social Security benefits. Both the GPO and the WEP apply only to those beneficiaries who receive pensions from noncovered employment. To administer these provisions, SSA needs to know whether beneficiaries receive such noncovered pensions. However, SSA cannot apply these provisions effectively and fairly because it lacks this information, according to our past work. In response to our recommendation, SSA performed additional computer matches with the Office of Personnel Management to get noncovered pension data for federal retirees. These computer matches detected payment errors; we estimate that correcting these errors will generate hundreds of millions of dollars in savings. However, SSA still lacks the information it needs for state and local governments and therefore it cannot apply the GPO and the WEP for state and local government employees to the same degree that it does for federal employees. The resulting disparity in the application of these two provisions is yet another source of unfairness in the final outcome. In our testimony before this committee in May 2003, we recommended that the Congress consider giving the Internal Revenue Service (IRS) the authority to collect the information that SSA needs on government pension income, which could perhaps be accomplished through a simple modification to a single form. Earlier versions of the Social Security Protection Act of 2004 contained such a provision, but this provision was not included when the final version of the bill, was approved and signed into law. In recent years, various Social Security reform proposals that would affect public employees have been offered. Some proposals specifically address the GPO and the WEP and would either revise or eliminate them. Still other proposals would make coverage mandatory for all state and local government employees. The GPO and the WEP have been a source of confusion and frustration for the more than 6 million workers and 1.1 million beneficiaries they affect. Critics of the measures contend that they are basically inaccurate and often unfair. For example, some opponents of the WEP argue that the formula adjustment is an arbitrary and inaccurate way to estimate the value of the windfall and causes a relatively larger benefit reduction for lower-paid workers. In the case of the GPO, critics contend that the two- thirds reduction is imprecise and could be based on a more rigorous formula. A variety of proposals have been offered to either revise or eliminate the GPO or the WEP. While we have not studied these proposals in detail, I would like to offer a few observations to keep in mind as you consider them. First, repealing these provisions would be costly in an environment where the Social Security trust funds already face long-term solvency issues. According to the most recent estimates from SSA eliminating the GPO entirely would cost $32 billion over 10 years and cost 0.06 percent of taxable payroll, which would increase the long-range deficit by about 3 percent. Similarly, eliminating the WEP would cost nearly $30 billion and increase Social Security's long-range deficit by 3 percent. Second, in thinking about the fairness of the provisions and whether or not to repeal them, it is important to consider both the affected public employees and all other workers and beneficiaries who pay Social Security taxes. For example, SSA has described the GPO as a way to treat spouses with noncovered pensions in a fashion similar to how it treats dually entitled spouses, who qualify for Social Security benefits on both their own work records and their spouses'. In such cases, spouses may not receive both the benefits earned as a worker and the full spousal benefit; rather they receive the higher amount of the two. If the GPO were eliminated or reduced for spouses who had paid little or no Social Security taxes on their lifetime earnings, it might be reasonable to ask whether the same should be done for dually entitled spouses who have paid Social Security on all their earnings. Otherwise, such couples would be worse off than couples that were no longer subject to the GPO. And far more spouses are subject to the dual entitlement offset than to the GPO; as a result, the costs of eliminating the dual entitlement offset would be commensurately greater. Making coverage mandatory for all state and local government employees has been proposed to help address the program's financing problems. According to Social Security actuaries, doing so for all newly hired state and local government employees would reduce the 75-year actuarial deficit by about 11 percent. Covering all the remaining workers increases revenues relatively quickly and improves solvency for some time, since most of the newly covered workers would not receive benefits for many years. In the long run, however, benefit payments would increase as the newly covered workers started to collect benefits. Overall, this change would still represent a net gain for solvency, although it would be small. In addition to considering solvency effects, the inclusion of mandatory coverage in a comprehensive reform package would need to be grounded in other considerations. In recommending that mandatory coverage be included in the reform proposals, the 1994-1996 Social Security Advisory Council stated that mandatory coverage is basically "an issue of fairness." Its report noted that "an effective Social Security program helps to reduce public costs for relief and assistance, which, in turn, means lower general taxes. There is an element of unfairness in a situation where practically all contribute to Social Security, while a few benefit both directly and indirectly but are excused from contributing to the program." Moreover, mandatory coverage could improve benefits for the affected beneficiaries, but it could also increase pension costs for the state and local governments that would sponsor the plans. The effects on public employees and employers would depend on how states and localities changed their noncovered pension plans to conform with mandatory coverage. For example, Social Security offers automatic inflation protection, full benefit portability, and dependent benefits, which are not available in many public pension plans. Creating new pension plans that kept all the existing benefit provisions but added these new ones would increase the cost of the total package. Under this scenario, costs could increase by as much as 11 percent of payroll, depending on the benefit packages of the new plans. Alternatively, states and localities that wanted to maintain level spending for retirement would likely need to reduce some pension benefits. Additionally, states and localities could require several years to design, legislate, and implement changes to current pension plans. Mandating Social Security coverage for state and local employees could also elicit a constitutional challenge. Finally, mandatory coverage would not immediately address the issues and concerns regarding the GPO and the WEP. If left unchanged, these provisions would continue to apply for many years to come for existing employees and beneficiaries. Still, in the long run, mandatory coverage would make these provisions obsolete. In conclusion, there are no easy answers to the difficulties of equalizing Social Security's treatment of covered and noncovered workers. Any reductions in the GPO or the WEP would ultimately come at the expense of other Social Security beneficiaries and taxpayers. Mandating universal coverage would promise eventual elimination of the GPO and the WEP but at potentially significant cost to affected state and local governments, and even so the GPO and the WEP would continue to apply for some years to come, unless they were repealed. Whatever the decision, it will be important to administer the program effectively and equitably. The GPO and the WEP have proven difficult to administer because they depend on complete and accurate reporting of government pension income, which is not currently achieved. The resulting disparity in the application of these two provisions is yet another source of unfairness in the final outcome. We therefore take this opportunity to bring the matter back to your attention for further consideration. To facilitate complete and accurate reporting of government pension income, the Congress should consider giving IRS the authority to collect this information, which could perhaps be accomplished through a simple modification to a single form. Mr. Chairman, this concludes my statement, I would be happy to respond to any questions you or other members of the subcommittee may have. For information regarding this testimony, please contact Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security Issues, on (202) 512-7215. Individuals who made key contributions to this testimony include Daniel Bertoni, Ken Stockbridge, and Michael Collins. Social Security Reform: Answers to Key Questions. GAO-05-193SP. Washington, D.C.: May 2005. Social Security: Issues Relating to Noncoverage of Public Employees. GAO-03-710T. Washington, D.C.: May 1, 2003. Social Security: Congress Should Consider Revising the Government Pension Offset "Loophole." GAO-03-498T. Washington, D.C.: Feb. 27, 2003. Social Security Administration: Revision to the Government Pension Offset Exemption Should Be Considered. GAO-02-950. Washington, D.C.: Aug. 15, 2002. Social Security Reform: Experience of the Alternate Plans in Texas. GAO/HEHS-99-31, Washington, D.C.: Feb. 26, 1999. Social Security: Implications of Extending Mandatory Coverage to State and Local Employees. GAO/HEHS-98-196. Washington, D.C.: Aug. 18, 1998. Social Security: Better Payment Controls for Benefit Reduction Provisions Could Save Millions. GAO/HEHS-98-76. Washington, D.C.: April 30, 1998. Federal Workforce: Effects of Public Pension Offset on Social Security Benefits of Federal Retirees. GAO/GGD-88-73. Washington, D.C.: April 27, 1988. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Social Security covers about 96 percent of all U.S. workers; the vast majority of the rest are state, local, and federal government employees. While these noncovered workers do not pay Social Security taxes on their government earnings, they may still be eligible for Social Security benefits. This poses difficult issues of fairness, and Social Security has provisions that attempt to address those issues, but critics contend these provisions are themselves often unfair. The Subcommittee asked GAO to discuss Social Security's effects on public employees as well as the implications of reform proposals. Social Security's provisions regarding public employees are rooted in the fact that about one-fourth of them do not pay Social Security taxes on the earnings from their government jobs, for various historical reasons. Even though noncovered employees may have many years of earnings on which they do not pay Social Security taxes, they can still be eligible for Social Security benefits based on their spouses' or their own earnings in covered employment. To address the issues that arise with noncovered public employees, Social Security has two provisions--the Government Pension Offset (GPO), which affects spouse and survivor benefits, and the Windfall Elimination Provision (WEP), which affects retired worker benefits. Both provisions reduce Social Security benefits for those who receive noncovered pension benefits. Both provisions also depend on having complete and accurate information on receipt of such noncovered pension benefits. However, such information is not available for many state and local pension plans, even though it is for federal pension benefits. As a result, the GPO and the WEP are not applied consistently for all noncovered pension recipients. In addition to the administrative challenges, these provisions are viewed by some as confusing and unfair. In recent years, various Social Security reform proposals that would affect public employees have been offered. Some proposals specifically address the GPO and the WEP and would either revise or eliminate them. Such actions, while they may reduce confusion among affected workers, would increase the long-range Social Security trust fund deficit and could create fairness issues for workers who have contributed to Social Security throughout their working lifetimes. Other proposals would make coverage mandatory for all state and local government employees. According to Social Security actuaries, mandatory coverage would reduce the 75-year actuarial deficit by 11 percent. It could also enhance inflation protection, pension portability, and dependent benefits for the affected beneficiaries, in many cases. However, to maintain the same level of spending for retirement, mandating coverage would increase costs for the state and local governments that sponsor the plans, and would likely reduce some pension benefits. Moreover, the GPO and the WEP would still be needed for many years to come even though they would become obsolete in the long run.
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There are no legal definitions for a virtual economy or currency, but generally, a virtual economy is comprised by the economic activities among a community of entities that interact within a virtual setting, such as an online, multi-user game. Virtual economies can be closed, meaning the economic activities and units of exchange used within the community do not interact with the real economy outside of the virtual environment setting, or they can be open, with some economic activity occurring in both the virtual setting and the real economy. A virtual currency is, generally, a digital unit of exchange that is not backed by a government- issued legal tender. Virtual currencies can be used entirely within a virtual economy, or can be used in lieu of a government-issued currency to purchase goods and services in the real economy. Some virtual economies may function similarly to barter exchanges, where bartering is the exchange of goods or services in lieu of monetary payments. For example, a carpenter may build a desk for a dentist in exchange for dental work. Barter transactions are taxable transactions, and taxpayers must report the fair market value of the good or service received on their tax returns. Some of the variations in virtual currencies and their interaction with the real economy are shown in figure 1. 2The 2007 Taxpayer Assistance Blueprint--a 5-year strategic plan for improving service to taxpayers--is a collaborative effort of IRS, the National Taxpayer Advocate, and the IRS Oversight Board. Congress has received annual update reports on the implementation of the blueprint. 3The term "barter exchange" means any organization of members providing property or services who jointly contract to trade or barter such property or services. 26 U.S.C. SS 6045. halve every time the network reaches 210,000 blocks, or approximately every four years. From inception through November 2012, rewards were 50 bitcoins. In 2016, rewards are expected to halve again to 12.5 bitcoins. from the bitcoin network, but are providing some figures to provide context for the possible size of these markets. 5Given these limitations, we did not test the reliability of data, such as the data generated 6http://blockchain.info. (Date accessed May 1, 2013.) 7Due to data limitations, it is difficult to calculate the velocity, or the rate at which bitcoins 8https://mtgox.com. (Date accessed May 1, 2013.) https://mtgox.com operates the largest are spent, and the number of transactions between unique users in a given time period. bitcoin exchange. The site has daily and monthly limits on how many bitcoins may be exchanged back to U.S. dollars or other virtual or government-issued currencies. These limits may be raised if users provide additional documentation confirming their identity. According to Linden Lab, creators of Second Life, residents exchanged more than US$150 million worth of Linden dollars within Second Life's economy in the third quarter of 2010. IRS is responsible for ensuring taxpayer compliance for all economic areas, including virtual economies and currencies. One mechanism that assists IRS in enforcing tax laws is information reporting, through which third parties report to IRS and taxpayers on certain taxpayer transactions. For example, subject to certain thresholds, third-party settlement organizations are required to report on Form 1099-K payments in settlement of third-party network transactions. A common example of a third-party settlement organization is an online auction-payment facilitator, which operates as an intermediary between buyers and sellers by transferring funds between their accounts in settlement of purchases. Another type of third-party information reporting is performed by barter exchanges, which, generally, are organizations that facilitate barter transactions among exchange members. Such barter exchanges are required to report on Form 1099-B each member's barter transactions proceeds. Third-party information reporting is widely acknowledged to increase voluntary tax compliance, in part because taxpayers know that IRS is aware of their income. Likewise, in its role in administering the tax code, IRS must implement the laws Congress enacts through detailed guidance. To accomplish this responsibility, IRS publishes several forms of guidance, such as regulations, revenue rulings and procedures, and notices. IRS also provides more informal guidance on its website based on factors such as perceived need, media coverage, or IRS staff identifying an emerging tax compliance issue. As outlined in IRS's Taxpayer Assistance Blueprint and related reports, a key part of IRS's strategy for preventing and minimizing noncompliance is to outreach to taxpayers to help them understand and meet their tax responsibilities. One of the guiding principles of this approach is to enhance IRS's website so that it becomes the first choice of taxpayers for obtaining the information they need to comply. 9Third-party settlement organizations must file Form 1099-K if gross payments to a payee exceed $20,000 and there are more than 200 transactions with the payee in a given tax year. 10For federal tax purposes, all income is taxable, although the tax code excludes some items from income, such as gifts or inheritances, subject to exceptions, while it allows other items to be deducted to reduce taxable income, subject to limitations and restrictions, such as trade or business expenses. have no value outside the game and David cannot exchange his online money for U.S. dollars. David has not engaged in a taxable transaction. Ann plays an online game and amasses virtual tools that are valuable to her avatar. The online game does not allow users to directly exchange their virtual tools for U.S. dollars, but rather they can do so using a third-party, making this a hybrid system. Ann uses a third- party exchange not affiliated with the online game to coordinate the transfer of her virtual tools to another player in exchange for U.S. dollars. The transfer is conducted by the third-party exchange and payment is mediated by a third-party payment network. Ann may have earned taxable income from the sale of these virtual tools. John is a resident of Second Life. He rents virtual property to other residents who pay him in Linden dollars. At the end of the year, John exchanges his Linden dollars for U.S. dollars and realizes a profit. John may have earned taxable income from his activities in Second Life. Bill is a bitcoin miner. He successfully mines 25 bitcoins. Bill may have earned taxable income from his mining activities. Carol makes t-shirts and sells them over the Internet. She sells a t- shirt to Bill, who pays her with bitcoins. Carol may have earned taxable income from the sale of the t-shirt. IRS, tax experts, academics, and others have identified various tax compliance risks associated with virtual economies and currencies, including underreporting, mischaracterization, and evasion. These risks are not unique to virtual economies and currencies, as they also exist for other types of transactions, such as cash transactions, where there are not always clear records or third-party tracking and reporting of transactions. The tax compliance risks we identified for virtual economies and currencies are described below. Taxpayer lack of knowledge of tax requirements. Income is generally defined as any undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. The unsophisticated taxpayer may not properly identify income earned through virtual economies or currencies, such as virtual online game assets exchanged for real word currency, as taxable income. If taxpayers using virtual currencies turn to the Internet for tax help, they may find misinformation in the absence of clear guidance from IRS. For example, when we performed a simple Internet search for information on taxation of bitcoin transactions, we found a number of websites, wikis, and blogs that provided differing opinions on the tax treatment of bitcoins, including some that could lead taxpayers to believe that transacting in virtual currencies relieves them of their responsibilities to report and pay taxes. Uncertainty over how to characterize income. Even if taxpayers are aware that they may have a tax liability, they may be uncertain about the proper tax treatment of virtual transactions, according to tax experts, including academics and tax practitioners with whom we spoke. For example, characterization depends on whether the virtual economy activity or virtual currency unit is to be treated as property, barter, foreign currency, or a financial instrument. According to some experts with whom we spoke, some virtual currency transactions could be considered barter transactions, which may not be an obvious characterization to unsophisticated taxpayers. This characterization could result in noncompliance with requirements for reporting and paying tax on barter income. Uncertainty over how to calculate basis for gains. Income earned from virtual economy or currency transactions may not be taxable if it is equivalent to that from an occasional online garage sale, meaning occasional income from selling goods for less than their original purchase price. It may be difficult for individuals receiving income from virtual economies to determine their basis for calculating gains. For example, some online games require players to pay a monthly fee in exchange for use of the game and a monthly allowance of virtual currency. If a player then sells a virtual tool gained in the game for real money, calculating the basis for any taxable gain may be difficult for the unsophisticated taxpayer. Challenges with third-party reporting. Third-party information reporting requirements do not apply specifically to transactions using virtual economies or currencies. Virtual economy or currency transactions may be subject to third-party information reporting to the extent that these transactions involve the use of a third-party payment network to mediate the transaction and the taxpayer meets reporting threshold requirements. Because virtual economy and currency transactions are inherently difficult to track, including identifying the true identities of the parties to the transaction, third-party information reporting may be difficult or prohibitively burdensome for some virtual economy and currency issuers to administer. Evasion. Some taxpayers may use virtual economies and currencies as a way to evade taxes. Because transactions can be difficult to trace and many virtual economies and currencies offer some level of anonymity, taxpayers may use them to hide taxable income. Because of the limited reliable data available on their size, it is difficult to determine how significant virtual economy and currency markets may be or how much tax revenue is at risk through their usage. Some experts with whom we spoke indicated that there is potential for growth in the use of virtual currencies. Additionally, the European Central Bank recently issued a report on virtual currencies, acknowledging their potential for future growth and interaction with the real economy. If the use of virtual economies and currencies expands, it can be expected that associated revenue at risk of tax noncompliance will grow. 1326 U.S.C. SS 6050W and applicable regulations define third-party payment networks. 14European Central Bank, Virtual Currency Schemes (Frankfurt am Main, Germany: October 2012). IRS has assessed the tax compliance risks from virtual economies and virtual currencies used within those economies, and developed a plan to address them in a manner consistent with internal control standards. Beginning in 2007, IRS's Electronic Business and Emerging Issues (EBEI) policy group identified and surveyed internal and external information sources, gathered data on the industry, and collect trend information, among other efforts. EBEI determined that virtual economies presented opportunities for income underreporting and developed (1) a potential compliance strategy, including initiating a compliance improvement project to gather research data and analyze compliance trends, and (2) a potential action plan for specific compliance activities. According to IRS compliance officials, IRS ultimately decided not to pursue these actions in light of available IRS resources and other higher priority needs. Also, IRS did not find strong evidence of the potential for tax noncompliance related to virtual economies, such as the number of U.S. taxpayers involved in such activity or the amount of federal tax revenue at risk. However, in November 2009, based on EBEI having determined the need, IRS posted information on its website on the tax consequences of virtual economy transactions. The web page points out that, in general, taxpayers can receive income in the form of money, property, or services from a virtual economy, and that if taxpayers receive more income than they spend, they may be required to report their gains as taxable income. The page further states that IRS has provided guidance on the tax treatment of issues similar to online gaming activities, including bartering, gambling, business, and hobby income, and provides links to IRS publications on those topics. IRS officials who were involved in issuing this guidance reported it cost less to make an online statement pointing taxpayers to existing guidance than it would have cost to develop and publish new guidance specific to virtual economies. IRS has not assessed the tax compliance risks of open-flow virtual currencies developed and used outside of virtual economies. These types of currencies, generally, were introduced after IRS's last review of compliance related to virtual economy transactions. According to IRS compliance officials, IRS would learn about tax compliance issues related to virtual currencies as it would any other tax compliance issue, such as IRS examiners identifying compliance problems during examinations or taxpayers requesting guidance on how to comply with certain tax requirements. To date, these processes have not resulted in IRS identifying virtual currencies used outside of virtual economies as a compliance risk that warrants specific attention. Likewise, IRS has not issued guidance specific to virtual currencies used outside of virtual economies due to competing priorities and resource constraints, and because the use of virtual currencies is a relatively recent development that requires further consideration before guidance can be issued, according to IRS's Office of Chief Counsel and compliance officials. As previously discussed, taxpayers may be unaware that income from transactions using this type of virtual currency may be taxable, or if they are aware, uncertain on how to characterize it. By not issuing guidance, IRS may be missing an opportunity to address these compliance risks and minimize their impact and the potential for noncompliance. Given the uncertain extent of noncompliance related to virtual currency transactions, formal guidance, such as regulations, revenue rulings, or revenue notices, may not be warranted at this time. According to officials from IRS's Office of Chief Counsel, these types of guidance require extensive review within IRS and the Department of the Treasury and, in some cases, public comment, which add to the time and cost of development. However, IRS may be able to develop informal guidance, which, according to Chief Counsel officials, requires less extensive agency review and can be based on other existing guidance. As such, IRS can develop informal guidance in a more timely and less costly manner than formal guidance, according to the officials. An example of such informal guidance is the information IRS provides to taxpayers on its website on the tax consequences of virtual economy transactions. Posting such information to its website would be consistent with IRS's strategy for preventing and minimizing taxpayers' noncompliance by helping them understand and meet their tax responsibilities, as outlined in IRS's Taxpayer Assistance Blueprint. in providing taxpayers with information on the tax consequences of virtual economy transactions, a low-cost step to potentially mitigate some of the noncompliance risk associated with such transactions. The uncertainty about the extent virtual currencies are used in taxable transactions and any associated tax noncompliance means that costly compliance activities are not merited at this time. However, the fact that misinformation is circulating and the possibility of growth in the use of virtual currencies outside virtual economies suggest that it would be prudent to take low-cost steps, if available, to mitigate potential compliance risks. The type of information IRS provided about virtual economy transactions is one model. To mitigate the risk of noncompliance from virtual currencies, the Commissioner of Internal Revenue should find relatively low-cost ways to provide information to taxpayers, such as the web statement IRS developed on virtual economies, on the basic tax reporting requirements for transactions using virtual currencies developed and used outside virtual economies. We sent a draft of this report to the Acting Commissioner of Internal Revenue for comment. In written comments, reproduced in appendix I, IRS agreed with our recommendation and stated it would provide information to taxpayers on the basic tax reporting requirements for transactions involving virtual currencies by linking to existing relevant guidance. IRS noted that it was aware of the tax compliance risks associated with virtual currencies and was taking other steps, such as developing training resources for agents, to address them. IRS also provided technical comments on our draft report, which we incorporated, as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to interested congressional committees, the Secretary of the Treasury, the Acting Commissioner of Internal Revenue, and other interested parties. In addition, the report also will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff 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. GAO staff who made key contributions to this report are listed in appendix II. In addition to the contact named above, Jeff Arkin (Assistant Director), David Dornisch, Lois Hanshaw, Richard Hung, Ronald W. Jones, Donna Miller, Ed Nannenhorn, Danielle N. Novak, and Sabrina Streagle made key contributions to this report.
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Recent years have seen the development of virtual economies, such as those within online role-playing games, through which individual participants can own and exchange virtual goods and services. Within some virtual economies, virtual currencies have been created as a medium of exchange for goods and services. Virtual property and currency can be exchanged for real goods, services, and currency, and virtual currencies have been developed outside of virtual economies as alternatives to government-issued currencies, such as dollars. These innovations raise questions about related tax requirements and potential challenges for IRS compliance efforts. This report (1) describes the tax reporting requirements for virtual economies and currencies, (2) identifies the potential tax compliance risks of virtual economies and currencies, and (3) assesses how IRS has addressed the tax compliance risks of virtual economies and currencies. To accomplish these objectives, GAO reviewed tax laws, IRS guidance and program documents, federal program internal control guidance, and interviewed IRS officials and knowledgeable experts on the topics. Transactions within virtual economies or using virtual currencies could produce taxable income in various ways, depending on the facts and circumstances of each transaction. For example, transactions within a "closed-flow" virtual currency system do not produce taxable income because a virtual currency can be used only to purchase virtual goods or services. An example of a closed-flow transaction is the purchase of items to use within an online game. In an "openflow" system, a taxpayer who receives virtual currency as payment for real goods or services may have earned taxable income since the virtual currency can be exchanged for real goods or services or readily exchanged for governmentissued currency, such as U.S. dollars. Virtual economies and currencies pose various tax compliance risks, but the extent of actual tax noncompliance is unknown. Some identified risks include taxpayers not being aware that income earned through virtual economies or currencies is taxable or not knowing how to calculate such income. Because of the limited reliable data available on their size, it is difficult to determine how significant virtual economy and currency markets may be or how much tax revenue is at risk through their usage. Some experts with whom we spoke indicated a potential for growth in the use of virtual currencies. Beginning in 2007, IRS assessed the tax compliance risks from virtual economies, and in 2009 posted information on its website on the tax consequences of virtual economy transactions. However, IRS has not provided taxpayers with information specific to virtual currencies because of other priorities, resource constraints, and the need to consider the use of these recently-developed currencies, according to IRS officials. By not issuing guidance, IRS may be missing an opportunity to address virtual currency tax compliance risks. Given the uncertain extent of noncompliance with virtual currency transactions, formal guidance, such as regulations, may not be warranted. According to IRS officials, formal guidance requires extensive review, which adds to development time and cost. However, IRS may be able to develop more timely and less costly informal guidance, which, according to IRS officials, requires less extensive review and can be based on other existing guidance. An example is the information IRS provides to taxpayers on its website on the tax consequences of virtual economy transactions. Posting such information would be consistent with IRS's strategy for preventing and minimizing taxpayers' noncompliance by helping them understand and meet their tax responsibilities. GAO recommends that IRS find relatively low-cost ways to provide information to taxpayers, such as on its website, on the basic tax reporting requirements for virtual currencies. In commenting on a draft of this report, IRS agreed with our recommendation.
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VA operates its nursing homes in 132 locations, which are located throughout VA's 21 health care networks. Almost all of these nursing homes are attached or in close proximity to a VA medical center. According to VA policy, VA staff at these facilities determine whether the veteran has a clinical need for nursing home care based on a comprehensive interdisciplinary clinical assessment. The interdisciplinary teams determining clinical need for nursing home care could include personnel such as the nursing home director, a social worker, nurse, physical therapist, and gerontologist. The care provided to veterans at a VA nursing home could include a range of services, including short-term postacute care needed to recover from a condition such as a stroke to longer-term care required by veterans who cannot be cared for at home because of severe, chronic physical or mental limitations. VA may also refer patients to receive nursing home care under contract from non-VA nursing homes located in the community--referred to as community nursing homes. In fiscal year 2003, VA purchased care from community nursing homes in one of two ways. VA contracted with most nursing homes through the local VA medical center. In addition, VA also contracted with some community nursing homes under its Regional Community Nursing Home initiative, in which nursing home chains in single or multiple states contract directly with VA headquarters for services at their nursing homes. In fiscal year 2003, VA contracted with 1,723 nursing homes through its medical centers and with 508 more nursing homes under its Regional Community Nursing Home initiative. Veterans may also choose to seek care in state veterans' nursing homes. In fiscal year 2003, 109 state veterans' nursing homes located in 44 states and Puerto Rico received VA payment to provide care. VA may refer patients to these nursing homes for care, but does not control the admission process. Veterans are admitted based on eligibility criteria established by the states. For state veterans' nursing homes to participate in VA's program, however, VA requires that at least 75 percent of the residents be veterans in most cases. State veterans' nursing homes may also provide nursing home care to certain nonveterans, such as spouses of residents who are veterans. VA is authorized to pay for about two-thirds of the costs of construction of state veterans' nursing homes and pays about a third of the costs per day to provide care to veterans in these homes. In fiscal year 2003, VA paid $56.24 per day for veterans in these state veterans' nursing homes and awarded $174 million in grants to 16 states for renovations of existing facilities or construction of new state veterans' homes. Veterans can also receive nursing home care financed by sources other than VA, including Medicaid and Medicare, private health or long-term care insurance, or self-financed. States design and administer Medicaid programs that include coverage for long-term nursing home care to assist with daily activities such as eating and bathing. Medicare primarily covers acute care health costs and therefore limits its nursing home coverage to short stays requiring skilled nursing home care following hospitalization. State Medicaid programs are the principal funders of nursing homes, besides patients self-financing their care. Private health insurance pays for about 11 percent of nursing home and home health care expenditures. VA nursing homes accounted for almost three-quarters of VA's overall nursing home expenditures, or about $1.7 billion, in fiscal year 2003. Care in state veterans' nursing homes accounted for 15 percent of nursing home expenditures, or about $352 million. Care in community nursing homes accounted for the lowest percentage of overall nursing home expenditures at 12 percent, or about $272 million. Overall, VA spent approximately $2.3 billion to provide or pay for nursing home care in VA nursing homes, community nursing homes, and state veterans' nursing homes in fiscal year 2003. In contrast to fiscal year 1998, in fiscal year 2003 the percentage of expenditures from community nursing homes declined, whereas the percentage of expenditures for care in VA nursing homes and state veterans' nursing homes increased. (See fig. 1.) For example, 70 percent of nursing home expenditures were accounted for by VA nursing homes in fiscal year 1998 as compared to 73 percent in 2003. Moreover, the percentage of community nursing home expenditures was 17 percent in 1998 as compared to 12 percent in 2003. During the same years, VA's overall nursing home expenditures increased by about a third, growing from about $1.7 billion to approximately $2.3 billion. The percentage of nursing home expenditures for care in each nursing home setting varied widely by network in fiscal year 2003. (See fig. 2.) All networks spent the largest percentage of their resources on VA nursing homes. The percentage of expenditures for VA nursing homes ranged from a low of 47 percent in Network 19 (Denver) to a high of 88 percent in Network 6 (Durham). Further, the percentage of overall nursing home expenditures accounted for by community and state veterans' nursing homes also varied widely across the networks. For example, the percentage of expenditures for community nursing homes ranged from a low of 2 percent in Network 3 (Bronx) to a high of 28 percent in Network 20 (Portland). A comparison of how networks' percentage of expenditures on each nursing home setting changed in fiscal year 2003 as compared to fiscal year 1998 showed that networks' changes were consistent with the VA- wide changes. In fiscal year 2003, the percentage of expenditures for VA nursing homes increased in 15 of the 21 health care networks as compared to fiscal year 1998. Similar to the overall trend, the percentage of expenditures for state veterans' nursing homes increased in 17 of 21 networks, whereas the percentage of expenditures for community nursing homes decreased in 17 of 21 networks. The largest shift in the percentage of expenditures for the three settings occurred in Network 19 (Denver). In this network, the percentage of expenditures for VA nursing homes declined from 75 to 47 percent because of a nursing home closure during this period. For more detailed information on the percent change in nursing home expenditures for each setting and network in fiscal years 1998 and 2003, see appendix II. State veterans' nursing homes accounted for half of VA's overall nursing home workload--measured by average daily census--in fiscal year 2003, even though they accounted for only 15 percent of expenditures. In large part this is because VA pays a per-diem rate for care in state veterans' nursing homes that, on average, accounts for about one-third of the cost to provide veterans nursing home care in this setting. The remaining payments made to state veterans' nursing homes come from a number of other sources including Medicaid, Medicare, private health insurance, and patients self-financing their care. VA nursing homes provided the next largest percentage of nursing home workload, 37 percent in fiscal year 2003. Community nursing homes provided 13 percent of overall nursing home workload. Overall, VA provided or paid for 33,214 patients to receive nursing home care daily in VA nursing homes, community nursing homes, and state veterans' nursing homes in fiscal year 2003. Since fiscal year 1998, VA has increased its use of state veterans' nursing homes and decreased the use of VA nursing homes and community nursing homes. Overall, workload in VA's nursing home program was 33,214 in fiscal year 2003, about 1 percent below its fiscal year 1998 workload. The percentage of nursing home workload provided in state veterans' nursing homes increased from 43 to 50 percent. In contrast, the percentage of workload provided in VA nursing homes and community nursing homes declined. (See fig. 3.) The increase in the percentage of nursing home workload provided in state veterans' nursing homes resulted from a number of factors. States, with the assistance of construction grants from VA, built 17 new state veterans' nursing homes, increasing the number of beds available during this period. The increasing percentage of state veterans' nursing home workload also occurred as a result of declines in workload in VA nursing homes and community nursing homes due to changes in VA's use of these settings. In VA nursing homes, VA officials attributed some of the decreases in nursing home workload to an increased emphasis on postacute patients with short lengths of stay. Moreover, VA officials told us that they are providing contract community nursing home care to fewer veterans and paying for shorter contracts than in the past. The number of patients VA served in this setting declined from 28,893 to 14,032 during this period. Network officials also told us that contracts for community nursing home care are often now 30 days or less and are used primarily to transition veterans to nursing home care, which is paid for by other payers such as Medicaid. Although state veterans' nursing homes predominate overall, networks vary widely in the percentage of workload met in different nursing home settings. For example, networks varied in their use of state veterans' nursing homes ranging from a low of 22 percent in Network 8 (Bay Pines) to a high of 71 percent in Network 15 (Kansas City). (See fig. 4.) This variation is due, in part, to the available bed capacity of state veterans' nursing homes in these networks. In 2003, Network 15 (Kansas City) had 1,509 state veterans' nursing home beds compared to 420 beds in Network 8 (Bay Pines). However, wide network variation also existed in the percentage of networks' workloads accounted for by VA nursing homes and community nursing homes. Changes in networks' delivery of nursing home care among the three nursing home settings were consistent with VA-wide changes between fiscal year 1998 and 2003. The percentage of workload provided in state veterans' nursing homes increased in 19 of VA's 21 health care networks. Similar to the overall trend, the percentage of workload met in community nursing homes declined in 17 networks and declined in 13 networks for VA nursing homes. The largest shift in the percentage of workload for the three settings occurred in Network 17 (Dallas). In this network, the percentage of workload for state veterans' nursing homes increased from 0 to 30 percent because Texas opened up four state veterans' nursing homes during this period. For more detailed information on the percent change in nursing home workload for each setting and network in fiscal years 1998 and 2003, see appendix III. About one-third of the care VA provided in VA nursing homes was long stay in fiscal year 2003. The use of long-stay nursing home care (90 days or more) includes services needed when a person has a physical or mental disability that cannot be cared for at home. For example, veterans needing long-stay care may have difficulty performing some activities of daily living without assistance, such as bathing, dressing, toileting, eating, and moving from one location to another. They may have mental impairments, such as Alzheimer's disease or dementia, that necessitate supervision to avoid harm to themselves or others or require assistance with tasks such as taking medications. The remainder, or two-thirds of VA nursing home care, was short-stay care (less than 90 days) in this setting. VA's use of short- stay care includes nursing home services such as postacute care required for recuperation from a stroke or hip replacement. VA officials also told us that this care could include a number of other services such as the delivery of complex medical services such as chemotherapy, the treatment of wounds such as pressure ulcers, and end-of-life care. VA's use of short- stay care is similar to services provided by Medicare, which provides short-term coverage, whereas VA's use of long-stay care is similar to services provided by Medicaid, which provides long-term coverage for nursing home care. Since fiscal year 1998, VA has decreased its use of long-stay care and increased its use of short-stay nursing home care. Specifically, the percentage of nursing home care that was long stay has declined from 43 to 34 percent between fiscal years 1998 and 2003. (See fig. 5.) In contrast, the percentage of short stays provided in this setting increased from 57 to 66 percent during the same period. This shift in the amount of short-stay care is consistent with VA's policy on nursing home eligibility that sets a higher priority on serving veterans who require short-stay postacute care. Short stay (less than 90 days) Long stay (90 days or more) Networks vary widely, however, in the percentage of VA nursing home care that is long stay. The percentage of long stays in VA nursing homes ranged from a low of 17 percent in Network 20 (Portland) to a high of 55 percent in Network 7 (Atlanta). (See fig. 6.) Network 20 (Portland) officials told us that the focus of their VA nursing homes has changed from long-stay care to short-stay transitional and rehabilitative care and as a result they are serving more veterans with shorter lengths of stay. By contrast, Network 7 (Atlanta) officials told us that several of their nursing homes provide services that are consistent with long-stay nursing home care such as providing assistance to veterans who have difficulty performing some activities of daily living such as the inability to independently eat. VA lacks information on the amount of long- and short-stay nursing home care veterans receive in community and state veterans' nursing homes preventing it from strategically planning how best to use these nursing home settings at the national and network levels to enhance access to nursing home services. VA officials told us that while some of these data may be available at certain facilities because the facilities collect them for their own purposes, VA does not require state veterans' nursing homes and community nursing homes to provide billing or other information that identifies individual veterans on which length of stay could be calculated. VA collects information on the payments made to community nursing homes and state veterans' nursing homes, but does not collect the days of care a veteran receives or other individual information. VA officials told us that they receive and pay individual claims for some veterans in community nursing homes, but that in other cases VA pays for care provided by community nursing homes based on invoices, which aggregate information on the number of patients being treated by a nursing home. VA officials told us that they are in the initial planning stages of redesigning a payment system to collect information by individual veteran in community nursing homes, but that the implementation of such a system could take several years. Once completed, VA officials expect the new system to collect and report data on the total number of days individual veterans receive in community nursing homes. VA does not currently have plans to collect such data for state veterans' nursing homes, but is exploring doing so. In fiscal year 2003, about 26 percent of veterans who received care in VA nursing homes are required to be served by the Millennium Act or VA's policy on nursing home eligibility. Of these veterans, about 21 percent are being treated under the Millennium Act because they have a service- connected disability rating of 70 percent or greater. The act also required that VA continue to treat veterans who had been receiving nursing home care in VA facilities at the time the law was enacted about 4 percent of the veterans receiving care in fiscal year 2003 fell into this category. Further, 1 percent of veterans in VA nursing homes are required to be served based solely on VA's policy on nursing home eligibility that extended required coverage to veterans with a 60 percent service- connected disability rating who also met other criteria. However, the vast majority of veterans--about 74 percent in fiscal year 2003--received VA nursing home care as a discretionary benefit based on available budgetary resources. VA's policy on nursing home eligibility directs that for these veterans VA nursing homes admit, as a priority, patients who meet certain clinical and programmatic criteria: patients requiring nursing home care after a hospital episode, patients who VA determines cannot be adequately cared for in community nursing homes or home- and community-based care, and those patients who can be cared for more efficiently in VA nursing homes. The percentage of veterans receiving VA nursing home care as required by the Millennium Act or VA's policy on nursing home eligibility varied widely across networks in fiscal year 2003. The percentage of veterans receiving this care ranged from a low of 20 percent in Network 15 (Kansas City) and Network 11 (Ann Arbor) to a high of 39 percent in Network 1 (Boston). (See fig. 7.) However, most networks were grouped closer to the lower range. Fifteen of VA's 21 health care networks had percentages of 26 percent or less. According to VA officials, the percentage of veterans that are required to be treated may be lower in some networks because networks may choose to pay for these veterans to receive care in community nursing homes. In contrast, some networks may prefer to treat these patients in VA nursing homes. For example, officials from Network 3 (Bronx), a network with the second highest percentage at 37 percent, told us that they prefer to treat these types of veterans in VA nursing homes because they have sufficient bed capacity. VA lacks comparable information for community nursing homes or state veterans' nursing homes on the percentage of veterans that are required to be served based on the Millennium Act or VA's policy on nursing home eligibility even though these settings combined accounted for 63 percent of VA's overall nursing home workload. The lack of such data prevents VA from strategically planning how best to use these nursing home settings at the national and network levels to enhance access to nursing home services. VA officials told us that while some of these data on eligibility status may be available at certain facilities because the facilities collect them for their own purposes, VA does not require that this information be collected and reported to headquarters. VA does not collect information by individual on all payments made to community nursing homes and state veterans' nursing homes. As a result, VA cannot match individual veterans' data from their payment system with data it currently collects on eligibility to determine the eligibility status of all veterans receiving contract care in community nursing homes and state veterans' nursing homes. VA officials told us this type of analysis could be done if a new information system for collecting contract payments is designed and implemented to collect and report such information. Gaps in nursing home data impede VA's ability to monitor and strategically plan for the nursing home care VA pays for nationally and at the network level. The workload in state veterans' nursing homes and community nursing homes has grown to 63 percent of VA's overall nursing home workload. However, VA does not have data on length of stay and the eligibility status of veterans receiving care in these settings as it has for VA nursing homes. As a result, VA cannot strategically plan how best to serve veterans it is required to serve, including those who have a 70 percent or greater service-connected disability rating, or other veterans receiving care on a discretionary basis; nor can VA strategically plan how best to use the nursing home settings to provide long- and short-stay nursing home care nationally or in individual networks. Equally important, the lack of such data and assessments hampers congressional oversight of strategic options available to VA in its nursing home care planning and its progress in meeting veterans' needs. To help ensure that VA can provide adequate program monitoring and planning for nursing home care and to improve the completeness of data needed for congressional oversight, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to take two actions: For community nursing homes and state veterans' nursing homes, collect and report data on the number of veterans who have long and short stays, comparable to data VA currently collects on VA nursing homes. For community nursing homes and state veterans' nursing homes, collect and report data on the number of veterans in these homes that VA is required to serve based on the requirements of the Millennium Act or VA's policy on nursing home eligibility, comparable to data VA currently collects on VA nursing homes. We provided a draft of this report to VA for comment. In commenting on the draft, VA stated that it concurred in principle with our recommendations. VA stated that it will continue its efforts to reduce data gaps in the community nursing home and state veterans home programs, but VA did not indicate specific plans to collect data on length of stay and eligibility for its long-term care planning process. Moreover, VA stated that data other than eligibility and length of stay, such as age and disability, are most crucial for its long-term care strategic planning and program oversight. We disagree with VA's position that eligibility and length-of-stay data are not considered most crucial and are concerned about VA's lack of specificity regarding its intent to utilize these data. While factors such as age and disability are generally recognized as important in projecting need for nursing home care, VA needs data on veterans' eligibility status and length of stay to determine what portion of the overall veteran need for nursing home care VA will meet nationally and in individual communities. Because VA is required to serve veterans that meet the requirements of the Millennium Act or VA policy, VA needs to project the number of these veterans seeking nursing home care from VA and determine the number of other veterans it will also serve on a discretionary basis after meeting this need. To strategically plan and provide the type of service needed in the future, VA must also project what proportion of veterans with different eligibility statuses will need short-stay or long-stay nursing home care. VA needs to use this information to determine if the nursing home care it currently pays for in VA nursing homes, contract community nursing homes, and state veterans' nursing homes is appropriately located and provides the type of nursing home care needed by veterans. VA also noted that it is narrowing information gaps on both veterans' eligibility status and length of stay for veterans in its community and state veterans' nursing home programs by using data extracted from various sources to estimate these numbers. However, VA did not provide these data for our review. Given that the combined workload in these settings accounted for 63 percent of VA's overall nursing home workload in fiscal year 2003, we believe that complete information on veterans' eligibility status and length of stay for veterans in these settings is crucial for both strategic planning and program oversight. VA noted that one of our statements--that about one-fourth of veterans receiving nursing home care are entitled to such care under the requirements of the Millennium Act--could be misinterpreted to imply that some of these "mandatory" veterans are being displaced by veterans receiving discretionary care. We did not imply this relationship, nor did our work examine this particular issue. We are sending copies of this report to the Secretary of Veterans Affairs and appropriate congressional committees. The report is available at no charge on GAO's Web site at http://www.gao.gov. We will also make copies available to others on request. If you or your staff have any questions about this report, please call me at (202) 512-7101. Another contact and key contributors are listed in appendix V. We reviewed the Department of Veterans Affairs' (VA) nursing home program for fiscal year 2003 for VA nursing homes, community nursing homes, and state veterans' nursing homes to determine (1) VA spending to provide or pay for nursing home care, (2) VA workload provided or paid for, (3) the percentage of nursing home care that is long and short stay, and (4) the percentage of veterans receiving care that are required to be served by the Millennium Act or VA policy. To place this information in context, you asked us to supplement our findings with information for fiscal year 1998. To address the first two objectives, we obtained data on nursing home workload and expenditures at the network level for fiscal years 1998 and 2003 from several VA headquarters offices. VA's Geriatrics and Extended Care Strategic Healthcare Group provided us workload data for VA nursing homes and community nursing homes, as reported in VA's Automated Management Information System. This group also gave us workload data from monthly reports completed by state veterans' nursing homes that were maintained at the VA medical centers. These data are used by the Geriatrics and Extended Care office to provide per diem grants to state veterans' homes. The Office of the Chief Financial Officer for the Veterans Health Administration (VHA) provided us expenditure data from VA's Cost Distribution Report for the nursing home care provided or paid for by VA. To do our analysis, we used average daily census as a measure of workload. Average daily census is the total number of days of nursing home care provided in a year divided by the number of days in the year. For VA nursing home expenditures, we included the direct costs used to provide nursing home care plus other facility costs associated with operating the nursing home. VA nursing home expenditures excluded depreciation as well as VA headquarters and network administrative costs. To calculate community nursing home expenditures, we included all contract payments made to community nursing homes plus additional facility expenditures required to directly support the program at the local VA medical center. To calculate state veterans' home expenditures, we included per diem payments made to state veterans' nursing homes plus additional facility expenditures required to directly support the program at local VA medical centers. Expenditures for state veterans' homes did not include construction grants. To determine the percentage of long and short stays in VA nursing homes in fiscal years 1998 and 2003, we obtained data on length of stay from VHA's Extended Care Patient Treatment Files. The Patient Treatment Files include nursing home discharges for veterans who were discharged from a VA nursing home during a fiscal year, and current resident files for veterans who were not discharged by the end of a fiscal year. Using length of nursing home stay, we classified stays of 90 days or more as long stays and stays of less than 90 days as short stays. Length of stay is calculated as the number of days in a nursing home between the admission and discharge days and was given a minimum value of 1. The number of days absent from the nursing home, such as for a hospital stay, was subtracted from the length of stay. Because current residents were not discharged within the fiscal year, we calculated their lengths of stay by looking ahead into the next fiscal year. That is, we matched current residents with discharges in the next fiscal year to determine whether their stays were short or long. A current resident who was admitted on the last day of the fiscal year, for example, but was discharged after 90 days into the next fiscal year, was classified as having a long stay. If the same resident was discharged within 90 days of the next fiscal year, then the stay was classified as short. We classified nursing home stays as long for current residents who were not discharged in the next fiscal year. Our analysis for long- and short-stay care was based on nursing home stays rather than individual veterans because some veterans had multiple nursing home stays. To determine the percentage of veterans in VA nursing homes receiving care that are required to be served by the Millennium Act or VA policy, we obtained individual data on eligibility for veterans enrolled in VA's health care system. VHA's Office of Policy and Planning provided us these data in an enrollment file for fiscal year 2003. We merged these data with the discharge and current resident files from VHA's Extended Care Patient Treatment Files in order to calculate the percentage of veterans receiving nursing home care that are required to be served in fiscal year 2003. Our analyses on eligibility are based on individual veterans rather than nursing home stays; because some veterans had multiple nursing home stays in a given year, we retained veterans' first nursing home stay and eliminated other stays in that year. We used a variable from VA's enrollment file that measures service-connected disability rating. In addition, we used variables from the file that measure whether the veteran is unemployable and whether the veteran is considered permanent and total disabled, based on disabilities not related to military service. We included the following categories of veterans in our calculation to determine the percentage of veterans receiving nursing home care required to be served by the Millennium Act or VA's policy on nursing home eligibility: (1) veterans who had a service-connected disability rating of 70 percent or more; (2) veterans who were admitted to a VA nursing home on or before November 30, 1999; and (3) veterans who had a service- connected disability rating of 60 percent and who were also unemployable or permanent and total disabled. We did not include in our estimate veterans VA is required to serve who need nursing home care because of a service-connected disability, but who do not have a service-connected disability rating of 70 percent or more. VA did not have data on these veterans, but a VA official estimated that this group is very small based on conversations with facility staff. To supplement our knowledge of the type of nursing home care provided in VA networks, we visited two networks and five nursing homes. In Network 5 (Baltimore) we visited Washington, D.C.; Martinsburg, West Virginia; and Baltimore, Maryland. In Network 23 (Minneapolis) we visited St. Cloud, Minnesota; and Minneapolis, Minnesota. We selected these two networks because they were in different geographic regions and had variation in the types of care offered in their facilities. Within each network, we chose one nursing home that provided more long-stay nursing home care and another that provided more short-stay care. We assessed the reliability of workload and expenditure data in VA's nursing home program, VHA's enrollment data file, and VHA's Extended Care Patient Treatment Files in several ways. First, we performed tests of data elements. For example, we examined the range of values for length of stay to determine whether these data were complete and reasonable. Second, we reviewed existing information about the data elements. For example, we obtained and reviewed information from VHA on data elements we used from VHA's Extended Care Patient Treatment Files. Third, we interviewed agency officials knowledgeable about the data in our analyses and knowledgeable about VA's nursing home program. For example, we sent network-specific nursing home workload and expenditure data provided to us by VA headquarters to each of VA's 21 health care networks through electronic mail in December 2003. Network officials reported whether these data were accurate and indicated where they found discrepancies. Through discussions with VA headquarters and network officials we resolved the discrepancies. We determined that the data we used in our analyses were sufficiently reliable for the purposes of this report. We performed our review from January 2003 to November 2004 in accordance with generally accepted government auditing standards. Increase was less than 1 percent. Decrease was less than 1 percent. Decrease was less than 1 percent. Increase was less than 1 percent. In addition to the contact named above, Cheryl A. Brand, Pamela A. Dooley, and Thomas A. Walke made key contributions to this report. VA Long-Term Care: More Accurate Measure of Home-Based Primary Care Workload Is Needed. GAO-04-913. Washington, D.C.: September 8, 2004. VA Long-Term Care: Changes in Service Delivery Raise Important Questions. GAO-04-425T. Washington, D.C.: January 28, 2004. VA Long-Term Care: Veterans' Access to Noninstitutional Care Is Limited by Service Gaps and Facility Restrictions. GAO-03-815T. Washington, D.C.: May 22, 2003. VA Long-Term Care: Service Gaps and Facility Restrictions Limit Veterans' Access to Noninstitutional Care. GAO-03-487. Washington, D.C.: May 9, 2003. Department of Veterans Affairs: Key Management Challenges in Health and Disability Programs. GAO-03-756T. Washington, D.C.: May 8, 2003. VA Long-Term Care: The Availability of Noninstitutional Services Is Uneven. GAO-02-652T. Washington, D.C.: April 25, 2002. VA Long-Term Care: Implementation of Certain Millennium Act Provisions Is Incomplete, and Availability of Noninstitutional Services Is Uneven. GAO-02-510R. Washington, D.C.: March 29, 2002. VA Long-Term Care: Oversight of Community Nursing Homes Needs Strengthening. GAO-01-768. Washington, D.C.: July 27, 2001.
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The Department of Veterans Affairs (VA) operates a $2.3 billion nursing home program that provides or pays for veterans' care in three settings: VA nursing homes, community nursing homes, and state veterans' nursing homes. The Veterans Millennium Health Care and Benefits Act (Millennium Act) of 1999 and VA policy require that VA provide nursing home care to veterans with a certain eligibility. Congress has expressed a need for additional data to conduct oversight of VA's nursing home program. Specifically, for all VA nursing home settings in fiscal year 2003, GAO was asked to report on (1) VA spending to provide or pay for nursing home care, (2) VA workload provided or paid for, (3) the percentage of nursing home care that is long and short stay, and (4) the percentage of veterans receiving care required by the Millennium Act or VA policy. In fiscal year 2003, VA spent 73 percent of its nursing home resources on VA nursing homes--almost $1.7 billion of about $2.3 billion--and the remaining 27 percent on community and state veterans' nursing homes. Half of VA's average daily nursing home workload of 33,214 in fiscal year 2003 was for state veterans' nursing homes, even though this setting accounted for 15 percent of VA's overall nursing home expenditures. In large part, this is because VA pays about one-third of the cost of care in state veterans' nursing homes. Community nursing homes and VA nursing homes accounted for 13 and 37 percent of the workload, respectively. About one-third of nursing home care in VA nursing homes in fiscal year 2003 was long-stay care (90 days or more). Long-stay services include those needed by veterans who cannot be cared for at home because of severe, chronic physical or mental impairments such as the inability to independently eat or the need for supervision because of dementia. The other two-thirds was short-stay care (less than 90 days), which includes services such as postacute care needed for recuperation from a stroke. VA lacks similar data for community and state veterans' nursing homes. About one-fourth of veterans who received care in VA nursing homes in fiscal year 2003 were served because the Millennium Act or VA policy requires that VA provide or pay for nursing home care of veterans with a certain eligibility. All other veterans received care at VA's discretion. VA lacks data on comparable eligibility status for community and state veterans' nursing homes even though these settings combined accounted for 63 percent of VA's overall workload. Gaps in data on length of stay and eligibility in these two settings impede program oversight.
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The public faces a risk that critical services could be severely disrupted by the Year 2000 computing crisis. Financial transactions could be delayed, airline flights grounded, and national defense affected. The many interdependencies that exist among governments and within key economic sectors could cause a single failure to have adverse repercussions. While managers in the government and the private sector are taking many actions to mitigate these risks, a significant amount of work remains, and time frames are unrelenting. The federal government is extremely vulnerable to the Year 2000 issue due to its widespread dependence on computer systems to process financial transactions, deliver vital public services, and carry out its operations. This challenge is made more difficult by the age and poor documentation of the government's existing systems and its lackluster track record in modernizing systems to deliver expected improvements and meet promised deadlines. Unless this issue is successfully addressed, serious consequences could ensue. For example: Unless the Federal Aviation Administration (FAA) takes much more decisive action, there could be grounded or delayed flights, degraded safety, customer inconvenience, and increased airline costs. Payments to veterans with service-connected disabilities could be severely delayed if the system that issues them either halts or produces checks so erroneous that it must be shut down and checks processed manually. The military services could find it extremely difficult to efficiently and effectively equip and sustain its forces around the world. Federal systems used to track student loans could produce erroneous information on loan status, such as indicating that a paid loan was in default. Internal Revenue Service tax systems could be unable to process returns, thereby jeopardizing revenue collection and delaying refunds. The Social Security Administration process that provides benefits to disabled persons could be disrupted if interfaces with state systems fail. In addition, the year 2000 also could cause problems for the many facilities used by the federal government that were built or renovated within the last 20 years that contain embedded computer systems to control, monitor, or assist in operations. For example, heating and air conditioning units could stop functioning properly and card-entry security systems could cease to operate. Year 2000-related problems have already been identified. For example, an automated Defense Logistics Agency system erroneously deactivated 90,000 inventoried items as the result of an incorrect date calculation. According to the agency, if the problem had not been corrected (which took 400 work hours), the impact would have seriously hampered its mission to deliver materiel in a timely manner. In another case, the Department of Defense's Global Command Control System, which is used to generate a common operating picture of the battlefield for planning, executing, and managing military operations, failed testing when the date was rolled over to the year 2000. Our reviews of federal agency Year 2000 programs have found uneven progress. Some agencies are significantly behind schedule and are at high risk that they will not fix their systems in time. Other agencies have made progress, although risks remain and a great deal more work is needed. Our reports contained numerous recommendations, which the agencies have almost universally agreed to implement. Among them were the need to complete inventories of systems, document data exchange agreements, and develop contingency plans. Audit offices of some states also have identified significant Year 2000 concerns. Risks include the potential that systems supporting benefits programs, motor vehicle records, and criminal records (i.e., prisoner release or parole eligibility determinations) may be adversely affected. These audit offices have made recommendations including the need for increased oversight, Year 2000 project plans, contingency plans, and personnel recruitment and retention strategies. Data exchanges between the federal government and the states are also critical to ensuring that billions of dollars in benefits payments are made to millions of recipients. Consequently, in October 1997 the Commonwealth of Pennsylvania hosted the first State/Federal Chief Information Officer (CIO) Summit. Participants agreed to (1) use a 4-digit contiguous computer standard for data exchanges, (2) establish a national policy group, and (3) create a joint state/federal technical group. America's infrastructures are a complex array of public and private enterprises with many interdependencies at all levels. Key economic sectors that could be seriously impacted if their systems are not Year 2000 compliant are information and telecommunications; banking and finance; health, safety, and emergency services; transportation; utilities; and manufacturing and small business. The information and telecommunications infrastructure is especially important because it (1) enables the electronic transfer of funds, (2) is essential to the service economy, manufacturing, and efficient delivery of raw materials and finished goods, and (3) is basic to responsive emergency services. Illustrations of Year 2000 risks follow. According to the Basle Committee on Banking Supervision--an international committee of banking supervisory authorities--failure to address the Year 2000 issue would cause banking institutions to experience operational problems or even bankruptcy. Moreover, the Chair of the Federal Financial Institutions Examination Council, a U.S. interagency council composed of federal bank, credit union, and thrift institution regulators, stated that banking is one of America's most information-intensive businesses and that any malfunctions caused by the century date change could affect a bank's ability to meet its obligations. He also stated that of equal concern are problems that customers may experience that could prevent them from meeting their obligations to banks and that these problems, if not addressed, could have repercussions throughout the nation's economy. According to the International Organization of Securities Commissions, the year 2000 presents a serious challenge to the world's financial markets. Because they are highly interconnected, a disruption in one segment can spread quickly to others. FAA recently met with representatives of airlines, aircraft manufacturers, airports, fuel suppliers, telecommunications providers, and industry associations to discuss the Year 2000 issue. Participants raised the concern that their own Year 2000 compliance would be irrelevant if FAA were not compliant because of the many system interdependencies. Representatives went on to say that unless FAA were substantially Year 2000 compliant on January 1, 2000, flights would not get off the ground and that extended delays would be an economic disaster. Another risk associated with the transportation sector was described by the Federal Highway Administration, which stated that highway safety could be severely compromised because of potential Year 2000 problems in operational transportation systems. For example, date-dependent signal timing patterns could be incorrectly implemented at highway intersections if traffic signal systems run by state and local governments do not process four-digit years correctly. One risk associated with the utility sector is the potential loss of electrical power. For example, Nuclear Regulatory Commission staff believe that safety-related safe shutdown systems will function but that a worst-case scenario could occur in which Year 2000 failures in several nonsafety-related systems could cause a plant to shut down, resulting in the loss of off-site power and complications in tracking post-shutdown plant status and recovery. With respect to the health, safety, and emergency services sector, according to the Department of Health and Human Services, the Year 2000 issue holds serious implications for the nation's health care providers and researchers. Medical devices and scientific laboratory equipment may experience problems beginning January 1, 2000, if the computer systems, software applications, or embedded chips used in these devices contain two-digit fields for year representation. In addition, according to the Gartner Group, health care is substantially behind other industries in Year 2000 compliance, and it predicts that at least 10 percent of mission-critical systems in this industry will fail because of noncompliance. One of the largest, and largely unknown, risks relates to the global nature of the problem. With the advent of electronic communication and international commerce, the United States and the rest of the world have become critically dependent on computers. However, there are indications of Year 2000 readiness problems in the international arena. In September 1997, the Gartner Group, a private research firm acknowledged for its expertise in Year 2000 issues, surveyed 2,400 companies in 17 countries and concluded that "hirty percent of all companies have not started dealing with the year 2000 problem." Based on its survey, the Gartner Group also ranked certain countries and areas of the world. According to the Gartner Group, countries/areas at level I on its scale of compliance--just getting started--include Eastern Europe, many African countries, many South American countries, and several Asian countries, including China. Those at level II--completed the inventory process and have begun the assessment process--include Japan, Brazil, South Africa, Taiwan, and Western Europe. Finally, some companies in the United States, the United Kingdom, Canada, and Australia are at levels II while others are at level III. Level III indicates that a program plan has been completed and dedicated resources are committed and in place. Although there are many national and international risks related to the year 2000, our limited review of these key sectors found a number of private-sector organizations that have raised awareness and provided advice. For example: The Securities Industry Association established a Year 2000 committee in 1995 to promote awareness and since then has established other committees to address key issues, such as testing. The Electric Power Research Institute sponsored a conference in 1997 with utility professionals to explore the Year 2000 issue in embedded systems. Representatives of several oil and gas companies formed a Year 2000 energy industry group, which meets regularly to discuss the problem. The International Air Transport Association organized seminars and briefings for many segments of the airline industry. In addition, information technology industry associations, such as the Information Technology Association of America, have published newsletters, issued guidance, and held seminars to focus information technology users on the Year 2000 problem. As 2000 approaches and the scope of the problems has become clearer, the federal government's actions have intensified, at the urging of the Congress and others. The amount of attention devoted to this issue has increased in the last year, culminating with the issuance of a February 4, 1998, executive order establishing the President's Council on Year 2000 Conversion. The Council Chair is to oversee federal agency Year 2000 efforts as well as act as spokesman in national and international forums, coordinate with state and local governments, promote appropriate federal roles with respect to private- sector activities, and report to the President on a quarterly basis. This increased attention could help minimize the disruption to the nation as the millennium approaches. In particular, the President's Council on Year 2000 Conversion can initiate additional actions needed to mitigate risks and uncertainties. These include ensuring that the government's highest priority systems are corrected and that contingency plans are developed across government. Agencies have taken longer to complete the awareness and assessment phases of their Year 2000 programs than is recommended. This leaves less time for critical renovation, validation, and implementation phases. For example, the Air Force has used over 45 percent of its available time completing the awareness and assessment phases, while the Gartner Group recommends that no more than about a quarter of an organization's Year 2000 effort should be spent on these phases. Consequently, priority-setting is essential. According to OMB's latest report, as of February 15, 1998, only about 35 percent of federal agencies' mission-critical systems were considered to be Year 2000 compliant. This leaves over 3,500 mission-critical systems, as well as thousands of nonmission-critical systems, still to be repaired, and over 1,100 systems to be replaced. It is unlikely that agencies can complete this vast amount of work in time. Accordingly, it is critical that the executive branch identify those systems that are of the highest priority. These include those that, if not corrected, could most seriously threaten health and safety, the financial well-being of American citizens, national security, or the economy. Agencies must also ensure that their mission-critical systems can properly exchange data with other systems and are protected from errors that can be introduced by external systems. For example, agencies that administer key federal benefits payment programs, such as the Department of Veterans Affairs, must exchange data with the Department of the Treasury, which, in turn, interfaces with financial institutions, to ensure that beneficiary checks are issued. As a result, completing end-to-end testing for mission-critical systems is essential. OMB's reports on agency progress do not fully and accurately reflect the federal government's progress toward achieving Year 2000 compliance because not all agencies are required to report and OMB's reporting requirements are incomplete. For example: OMB had not, until recently, required independent agencies to submit quarterly reports. Accordingly, the status of these agencies' Year 2000 programs has not been monitored centrally. On March 9, 1998, OMB asked 31 independent agencies, including the Securities and Exchange Commission and the Pension Benefit Guaranty Corporation, to report on their progress in fixing the Year 2000 problem by April 30, 1998. OMB plans to include a summary of those responses in its next quarterly report to the Congress. However, unlike its quarterly reporting requirement for the major departments and agencies, OMB does not plan to request that the independent agencies report again until next year. Since the independent agencies will not be reporting again until April 1999, it will be difficult for OMB to be in a position to address any major problems. Agencies are required to report their progress in repairing noncompliant systems but are not required to report on their progress in implementing systems to replace noncompliant systems, unless the replacement effort is behind schedule by 2 months or more. Because federal agencies have a poor history of delivering new system capabilities on time, it is essential to know agencies' progress in implementing replacement systems. OMB's guidance does not specify what steps must be taken to complete each phase of a Year 2000 program (i.e., assessment, renovation, validation, and implementation). Without such guidance, agencies may report that they have completed a phase when they have not. Our enterprise guide provides information on the key tasks that should be performed within each phase. In January 1998, OMB asked agencies to describe their contingency planning activities in their February 1998 quarterly reports. These instructions stated that contingency plans should be established for mission-critical systems that are not expected to be implemented by March 1999, or for mission-critical systems that have been reported as 2 months or more behind schedule. Accordingly, in their February 1998 quarterly reports, several agencies reported that they planned to develop contingency plans only if they fall behind schedule in completing their Year 2000 fixes. Agencies that develop contingency plans only for systems currently behind schedule, however, are not addressing the need to ensure the continuity of a minimal level of core business operations in the event of unforeseen failures. As a result, when unpredicted failures occur, agencies will not have well-defined responses and may not have enough time to develop and test effective contingency plans. Contingency plans should be formulated to respond to two types of failures: those that can be predicted (e.g., system renovations that are already far behind schedule) and those that are unforeseen (e.g., a system that fails despite having been certified as Year 2000 compliant or a system that cannot be corrected by January 1, 2000, despite appearing to be on schedule today). Moreover, contingency plans that focus only on agency systems are inadequate. Federal agencies depend on data provided by their business partners as well as on services provided by the public infrastructure. One weak link anywhere in the chain of critical dependencies can cause major disruptions. Given these interdependencies, it is imperative that contingency plans be developed for all critical core business processes and supporting systems, regardless of whether these systems are owned by the agency. In its latest governmentwide Year 2000 progress report, issued March 10, 1998, OMB clarified its contingency plan instructions. OMB stated that contingency plans should be developed for all core business functions. On March 18, 1998, we issued an exposure draft of a guide to help agencies ensure the continuity of operations through contingency planning. The CIO Council worked with us in developing this guide and intends to adopt it for federal agency use. OMB's assessment of the current status of federal Year 2000 progress has been predominantly based on agency reports that have not been consistently verified or independently reviewed. Without such independent reviews, OMB and others, such as the President's Council on Year 2000 Conversion, have no assurance that they are receiving accurate information. OMB has acknowledged the need for independent verification and asked agencies to report on such activities in their February 1998 quarterly reports. While this has helped provide assurance that some verification is taking place through internal checks, reviews by Inspectors General, or contractors, the full scope of verification activities required by OMB has not been articulated. It is important that the executive branch set standards for the types of reviews that are needed to provide assurance regarding the agencies' Year 2000 actions. Such standards could encompass independent assessments of (1) whether the agency has developed and is implementing a comprehensive and effective Year 2000 program, (2) the accuracy and completeness of the agency's quarterly report to OMB, including verification of the status of systems reported as compliant, (3) whether the agency has a reasonable and comprehensive testing approach, and (4) the completeness and reasonableness of the agency's business continuity and contingency planning. The CIO Council's Year 2000 Committee has been useful in addressing governmentwide issues. For example, the Year 2000 Committee worked with the Federal Acquisition Regulation Council and industry to develop a rule that (1) establishes a single definition of Year 2000 compliance in executive branch procurement and (2) generally requires agencies to acquire only Year-2000 compliant products and services or products and services that can be made Year 2000 compliant. The committee has also established subcommittees on (1) best practices, (2) state issues and data exchanges, (3) industry issues, (4) telecommunications, (5) buildings, (6) biomedical and laboratory equipment, (7) General Services Administration support and commercial off-the-shelf products, and (8) international issues. The committee's effectiveness could be further enhanced. For example, currently agencies are not required to participate in the Year 2000 Committee. Without such full participation, it is less likely that appropriate governmentwide solutions can be implemented. Further, while most of the committee's subcommittees are currently working on plans, they have not yet published these with associated milestones. It is important that this be done and publicized quickly so that agencies can use this information in their Year 2000 programs. It is equally important that implementation of agency activities resulting from these plans be monitored closely and that the subcommittees' decisions be enforced. Another governmentwide issue that needs to be addressed is the availability of information technology personnel. In their February 1998 quarterly reports, several agencies reported that they or their contractors had problems obtaining and/or retaining information technology personnel. Currently, no governmentwide strategy exists to address recruiting and retaining information technology personnel with the appropriate skills for Year 2000-related work. However, at the March 18, 1998, meeting of the CIO Council, the Office of Personnel Management (OPM) provided the council with information on the tools that are currently available to help agencies obtain and retain staff. In addition, OPM announced that its Director had agreed in principle that the Year 2000 problem was an "emergency or unusual circumstance" that would allow the Director to grant agencies waivers to allow them to rehire former federal personnel without financial penalty on a temporary basis to address the Year 2000 problem. Further, the council agreed that OPM and the Human Resources Technology Council would form a working group to look at any additional tools that could be made available to help agencies obtain and retain staff for the year 2000. This working group is tasked with providing recommendations by May 1998. Given the sweeping ramifications of the Year 2000 issue, other countries have set up mechanisms to solve the Year 2000 problem on a nationwide basis. Several countries, such as the United Kingdom, Canada, and Australia, have appointed central organizations to coordinate and oversee their governments' responses to the Year 2000 crisis. In the case of the United Kingdom, for example, a ministerial group is being established, under the leadership of the President of the Board of Trade, to tackle the Year 2000 problem across the public and private sectors. These countries have also established public/private forums to address the Year 2000 problem. For example, in September 1997, Canada's Minister of Industry established a government/industry Year 2000 task force of representatives from banking, insurance, transportation, manufacturing, telecommunications, information technology, small and medium-sized businesses, agriculture, and the retail and service sectors. The Canadian Chief Information Officer is an ex-officio member of the task force. It has been charged with providing (1) an assessment of the nature and scope of the Year 2000 problem, (2) the state of industry preparedness, and (3) leadership and advice on how risks could be reduced. This task force issued a report in February 1998 with 18 recommendations that are intended to promote public/private-sector cooperation and prompt remedial action. In the United States, the President's recent executive order could serve as the linchpin that bridges the nation's and the federal government's various Year 2000 initiatives. While the Year 2000 problem could have serious consequences, there is no comprehensive picture of the nation's readiness. As one of its first tasks, the President's Council on Year 2000 Conversion could formulate such a comprehensive picture in partnership with the private sector and state and local governments. Many organizational and managerial models exist that the Conversion Council could use to build effective partnerships to solve the nation's Year 2000 problem. Because of the need to move swiftly, one viable alternative would be to consider using the sector-based approach recommended recently by the President's Commission on Critical Infrastructure Protection as a starting point. This approach could involve federal agency focal points working with sector infrastructure coordinators. These coordinators would be created or selected from existing associations and would facilitate sharing information among providers and the government. Using this model, the President's Council on Year 2000 Conversion could establish public/private partnership forums composed of representatives of each major sector that, in turn, could rely on task forces organized along economic-sector lines. Such groups would help (1) gauge the nation's preparedness for the year 2000, (2) periodically report on the status and remaining actions of each sector's Year 2000 remediation efforts, and (3) ensure the development of contingency plans to ensure the continuing delivery of critical public and private services. As requested, we are providing preliminary information on the status of Year 2000 activities at HUD. As the principal federal agency responsible for housing, community development, and fair housing opportunity programs, HUD provides rental assistance to more than 4 million lower income households, insures mortgages for about 7 million homeowners, and helps revitalize communities and ensure equal housing access. The department had reported expenses of about $35.9 billion in fiscal year 1997, most of it for assisted and public housing. HUD also manages more than $400 billion in mortgage insurance and $460 billion in guarantees of mortgage-backed securities. HUD relies extensively on information and financial management systems to manage its programs. HUD officials recognize the importance of ensuring that its systems are Year 2000 compliant; system failures could interrupt the processing of applications for mortgage insurance, the payment of mortgage insurance claims, and the payment of rental assistance. This would place a serious strain on individuals and on the nation's financial and banking community. The department has more than 200 separate systems, with a total of over 65 million lines of software code. Its assessment revealed that over 31 million lines of code will need to be repaired, costing an estimated $48 million and 570,000 staff hours. It recognizes that making its systems Year 2000 compliant will take aggressive action. HUD established a Year 2000 project office in June 1996. In May 1997 this office issued a readiness guide for HUD staff and contractors, dealing with all phases of a Year 2000 program. The project office also developed a strategy, endorsed by senior HUD officials, with schedules for the completion of all tasks for each system and a tracking mechanism to monitor progress. Central to this strategy was inventorying its automated systems and performing risk assessments of them. On the basis of these risk assessments, HUD officials decided what actions to take on its automated information systems; the following table summarizes the reported status of this work. Although HUD is relying on its plans to replace twelve of its mission-critical systems, its tracking and management systems do not contain information on the status of these systems replacements. Consequently, it does not know about and cannot respond quickly to development delays that could affect Year 2000 readiness. According to the department's Year 2000 project officials, they will modify their tracking systems to provide this capability. According to HUD's schedule for the 30 mission-critical systems undergoing renovation, testing, and certification or where renovation has not yet begun, all of these actions will be completed--and the systems implemented--by December 31 of this year. It is already, however, behind schedule on 20 of these 30 mission-critical systems. While the delays on some of these systems are of only a few days, 13 of the 20 are experiencing delays of 2 months or more. This is significant because HUD is reporting that 5 of these 13 have "failure dates"--the first date that a system will fail to recognize and process dates correctly--between August 1, 1998, and January 1, 1999. One example illustrates this point: HUD's system for processing claims made by lenders on defaulted single family-home loans is 75 days behind schedule for renovation. The system is now scheduled to be implemented on November 4--only 58 days shy of January 1, 1999, the date that HUD has determined the current system will fail. In fiscal year 1997, this system processed, on average, a reported $354 million of lenders' claims each month for defaulted guaranteed loans. If this system fails, these lenders will not be paid on a timely basis; the economic repercussions could be widespread. To better ensure completion of work on mission-critical systems, HUD officials have recently decided to halt routine maintenance on five of its largest systems, beginning April 1 of this year. Further, according to Year 2000 project officials, if more delays threaten key implementation deadlines for mission-critical systems, they will stop work on nonmission-critical systems in order to focus all resources on the most important ones. We concur with HUD's plans to devote additional attention to its mission-critical systems. In conclusion, the change of century will initially present many difficult challenges in information technology and has the potential to cause serious disruption to the nation; however, these risks can be mitigated and disruptions minimized with proper attention and management. While HUD has attempted to mitigate its Year 2000 risks, several systems are behind schedule and actions must be taken to avoid widespread economic repercussions. Continued congressional oversight through hearings such as this and those that have been held by other committees in both the House and the Senate can help ensure that such attention continues and that appropriate actions are taken to address this crisis. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions that you or other members of the Committee may have at this time. Year 2000 Computing Crisis: Business Continuity and Contingency Planning (GAO/AIMD-10.1.19, Exposure Draft, March 1998). Year 2000 Computing Crisis: Office of Thrift Supervision's Efforts to Ensure Thrift Systems Are Year 2000 Compliant (GAO/T-AIMD-98-102, March 18, 1998). Year 2000 Computing Crisis: Strong Leadership and Effective Public/Private Cooperation Needed to Avoid Major Disruptions (GAO/T-AIMD-98-101, March 18, 1998). Post-Hearing Questions on the Federal Deposit Insurance Corporation's Year 2000 (Y2K) Preparedness (AIMD-98-108R, March 18, 1998). SEC Year 2000 Report: Future Reports Could Provide More Detailed Information (GAO/GGD/AIMD-98-51, March 6, 1998). Year 2000 Readiness: NRC's Proposed Approach Regarding Nuclear Powerplants (GAO/AIMD-98-90R, March 6, 1998). Year 2000 Computing Crisis: Federal Deposit Insurance Corporation's Efforts to Ensure Bank Systems Are Year 2000 Compliant (GAO/T-AIMD-98-73, February 10, 1998). Year 2000 Computing Crisis: FAA Must Act Quickly to Prevent Systems Failures (GAO/T-AIMD-98-63, February 4, 1998). FAA Computer Systems: Limited Progress on Year 2000 Issue Increases Risk Dramatically (GAO/AIMD-98-45, January 30, 1998). Defense Computers: Air Force Needs to Strengthen Year 2000 Oversight (GAO/AIMD-98-35, January 16, 1998). Year 2000 Computing Crisis: Actions Needed to Address Credit Union Systems' Year 2000 Problem (GAO/AIMD-98-48, January 7, 1998). Veterans Health Administration Facility Systems: Some Progress Made In Ensuring Year 2000 Compliance, But Challenges Remain (GAO/AIMD-98-31R, November 7, 1997). Year 2000 Computing Crisis: National Credit Union Administration's Efforts to Ensure Credit Union Systems Are Year 2000 Compliant (GAO/T-AIMD-98-20, October 22, 1997). Social Security Administration: Significant Progress Made in Year 2000 Effort, But Key Risks Remain (GAO/AIMD-98-6, October 22, 1997). Defense Computers: Technical Support Is Key to Naval Supply Year 2000 Success (GAO/AIMD-98-7R, October 21, 1997). Defense Computers: LSSC Needs to Confront Significant Year 2000 Issues (GAO/AIMD-97-149, September 26, 1997). Veterans Affairs Computer Systems: Action Underway Yet Much Work Remains To Resolve Year 2000 Crisis (GAO/T-AIMD-97-174, September 25, 1997). Year 2000 Computing Crisis: Success Depends Upon Strong Management and Structured Approach (GAO/T-AIMD-97-173, September 25, 1997). Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-10.1.14, September 1997). Defense Computers: SSG Needs to Sustain Year 2000 Progress (GAO/AIMD-97-120R, August 19, 1997). Defense Computers: Improvements to DOD Systems Inventory Needed for Year 2000 Effort (GAO/AIMD-97-112, August 13, 1997). Defense Computers: Issues Confronting DLA in Addressing Year 2000 Problems (GAO/AIMD-97-106, August 12, 1997). Defense Computers: DFAS Faces Challenges in Solving the Year 2000 Problem (GAO/AIMD-97-117, August 11, 1997). Year 2000 Computing Crisis: Time is Running Out for Federal Agencies to Prepare for the New Millennium (GAO/T-AIMD-97-129, July 10, 1997). Veterans Benefits Computer Systems: Uninterrupted Delivery of Benefits Depends on Timely Correction of Year-2000 Problems (GAO/T-AIMD-97-114, June 26, 1997). Veterans Benefits Computers Systems: Risks of VBA's Year-2000 Efforts (GAO/AIMD-97-79, May 30, 1997). Medicare Transaction System: Success Depends Upon Correcting Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 1997). Medicare Transaction System: Serious Managerial and Technical Weaknesses Threaten Modernization (GAO/T-AIMD-97-91, May 16, 1997). Year 2000 Computing Crisis: Risk of Serious Disruption to Essential Government Functions Calls for Agency Action Now (GAO/T-AIMD-97-52, February 27, 1997). Year 2000 Computing Crisis: Strong Leadership Today Needed To Prevent Future Disruption of Government Services (GAO/T-AIMD-97-51, February 24, 1997). High-Risk Series: Information Management and Technology (GAO/HR-97-9, February 1997). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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GAO discussed the nation's year 2000 computing crisis as well as the year 2000 program being implemented at the Department of Housing and Urban Development (HUD). GAO noted that: (1) the public faces a risk that critical services could be severely disrupted by the year 2000 computing crisis; (2) the federal government is extremely vulnerable to the year 2000 issue due to its widespread dependence on computer systems to process financial transactions, deliver vital public services, and carry out its operations; (3) in addition, the year 2000 also could cause problems for many of the facilities used by the federal government that were built or renovated within the last 20 years that contain embedded computer systems, to control, monitor, or assist in operations; (4) key economic sectors that could be seriously impacted if their systems are not year 2000 compliant are: information and telecommunications, banking and finance, health, safety, and emergency services, transportation, utilities, and manufacturing and small business; (5) agencies have taken longer to complete the awareness and assessment phases of their year 2000 programs than is recommended; (6) this leaves less time for critical renovation, validation, and implementation phases; (7) the Office of Management and Budget's (OMB) reports on agency progress do not fully and accurately reflect the federal government's progress toward achieving year 2000 compliance because not all agencies are required to report and OMB's reporting requirements are incomplete; (8) in January 1998, OMB asked agencies to describe their contingency planning activities in their February 1998 quarterly reports; (9) accordingly, in their 1998 quarterly reports, several agencies reported that they planned to develop contingency plans only if they fall behind schedule in completing their year 2000 fixes; (10) OMB's assessment of the current status of federal year 2000 progress has been predominantly based on agency reports that have not been consistently verified or independently reviewed; (11) given the sweeping ramifications of the year 2000 issues, other countries have set up mechanisms to solve the year 2000 problem on a nationwide basis; (12) HUD officials recognize the importance of ensuring that its systems are year 2000 compliant; systems failures could interrupt the processing of applicants for mortgage insurance, the payment of mortgage insurance claims, and the payment of rental assistance; (13) HUD established a year 2000 project office in June 1996; and (14) to better insure completion of work on mission-critical systems, HUD officials have recently decided to halt routine maintenance of five of its largest systems, beginning April 1 of this year.
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As previously noted, the capital surplus account is adjusted to a level equal to the paid-in capital account. This adjustment, however, is made at the end of the calendar year. During the year, another capital account, undistributed net income, reflects the amount of net earnings for the current year that have not been distributed. Each week, the sum of the balance in the capital surplus account and undistributed net income is compared with the paid-in capital account. If the amount of the capital surplus account and undistributed net income combined is greater than capital paid-in, the excess is paid to the Treasury a week later. This payment in turn reduces the undistributed net income account. At the end of the calendar year, the balance in the undistributed net income is transferred to the capital surplus account up to the amount of paid-in capital. Any remaining balance is distributed to the Treasury. Essentially, the capital surplus account represents earnings retained from prior years, and the undistributed net income represents earnings retained from the current year. Both the capital surplus account and the undistributed net income account provide a cushion against losses. Any Reserve Bank losses first reduce the undistributed net income account. The capital surplus account is then reduced if the undistributed net income account is not sufficient to absorb the loss. Transfers of the Reserve Banks' net earnings to the Treasury are classified as federal receipts. Federal receipts consist mostly of individual and corporate income taxes and social insurance taxes but also include excise taxes, compulsory user charges, customs duties, court fines, certain license fees, and the Federal Reserve System's deposit of earnings. The Treasury securities held by Reserve Banks are considered part of the federal debt held by the public. Federal debt consists of securities issued by the Treasury and a relatively small amount issued by a limited number of federal agencies. Federal debt is categorized into debt held by the public and debt held by government accounts. Debt held by the public is that part of the gross federal debt held outside of federal budget accounts, and this includes any federal debt held by individuals, corporations, state or local governments, the Federal Reserve System, and foreign governments and central banks. The Consolidated Appropriations Act of 2000 directed the Reserve Banks to transfer to the Treasury additional surplus funds of $3.752 billion during fiscal year 2000. The Federal Reserve System transferred the funds on May 10, 2000. Under the act, the Reserve Banks were not permitted to replenish their accounts during fiscal year 2000. Once the Reserve Banks were legally permitted to replenish the accounts, they did. By December 31, 2000, the capital surplus account was replenished for 11 of the 12 Reserve Banks. The Federal Reserve System maintains a capital surplus account to provide additional capital to cushion against potential losses. However, Federal Reserve Board officials have noted that it can be argued that a central bank, including the Federal Reserve System, may not need to hold capital to absorb losses, mainly because a central bank can create additional domestic currency to meet any obligation denominated in that currency. Federal Reserve Board officials acknowledged that determining the appropriate level of a central bank's capital account is difficult. The Federal Reserve Board's policy of maintaining the capital surplus account at the same level as that of the paid-in capital account has resulted in the capital surplus account growing from $4.5 billion in 1996 to $7.3 billion in 2001. The Federal Reserve System maintains the capital surplus account primarily as a cushion against losses. The Financial Accounting Manual for Federal Reserve Banks states that the primary purpose of the Federal Reserve capital surplus account is to provide capital to supplement paid-in capital for use in the event of loss. According to Board officials, the capital surplus reduces the probability that total Reserve Bank capital would be wiped out by a loss as a result of dollar appreciation, sales of Treasury securities below par value, losses associated with discount window lending, or any other losses. Individual Reserve Banks use the capital surplus account when they experience losses greater than the amount in their undistributed net income account. Federal Reserve Board officials also noted that it could be argued that maintaining capital, including the surplus account, provides an assurance of a central bank's strength and stability to investors and foreign holders of U.S. currency. Currently, a significant portion of U.S. currency is held abroad. According to one estimate published by the Federal Reserve Board, $279.5 billion in U.S. currency was held overseas as of the fourth quarter of 2001. The total amount of Federal Reserve notes outstanding was $611.8 billion as of December 31, 2001. Federal Reserve Board officials stated that the demand for U.S. currency conceivably could fall if a large loss wiped out the Federal Reserve's capital accounts, giving a misimpression that the Federal Reserve was insolvent. "In the abstract, a central bank with the nation's currency franchise does not need to hold capital. In the private sector, a firm's capital helps to protect creditors from credit losses. Creditors of central banks however are at no risk of a loss because the central bank can always create additional currency to meet any obligation denominated in that currency." Moreover, an official representing one of the four foreign central banks that we contacted agreed that the concept of solvency was essentially meaningless for a central bank in its role as a creator of currency, and that a massive loss could make a central bank technically insolvent, but that there would be no impairment of its ability to create and manage assets and issue currency. However, Federal Reserve Board officials told us that, because the maintenance of the capital surplus account is "costless" to the taxpayer and to the Treasury, the argument that a central bank does not need capital is not a rationale for reducing the surplus to any particular level, including zero. We will discuss the possible effects of a change in the surplus account on the federal budget and the economy later in this report. Federal Reserve Board officials told us that determining the appropriate level for a central bank's capital account is difficult. The growth in the Federal Reserve System's capital surplus account can be attributed to growth in the banking system together with the Federal Reserve Board policy of equating the amount in the capital surplus account with paid-in capital. The Federal Reserve System surplus has grown along with the paid- in capital account which itself grew as a result of expansion of the banking industry capital during the late 1990s. In 1996, the capital of all member banks (state member banks and national banks) totaled almost $157 billion; by December 2001, it was $267 billion. Because the Federal Reserve Act requires members to subscribe to a stock subscription equaling 6 percent of their capital and surplus, half of which is to be paid in, the Reserve Banks' capital paid-in accounts have increased along with member bank capital and surplus. As a result of the Federal Reserve Board's policy, the Federal Reserve capital surplus account grew correspondingly. The level of the Federal Reserve capital surplus account is not based on any quantitative assessment of the potential financial risk associated with the Federal Reserve's assets or liabilities. According to a Federal Reserve Board official, the current policy of setting the levels of surplus through a formula reduces the potential for any misperception that the surplus is manipulated to serve some ulterior purpose. In response to our 1996 recommendation that the Federal Reserve Board review its policies regarding the surplus account, the Federal Reserve Board conducted an internal study that did not lead to major changes in policy. Three of the four central banks that we contacted had capital accounts that included ownership shares as well as "surplus" accounts with functions similar to the Federal Reserve System capital surplus account (see table 1). We found the levels of these accounts varied in size and, with the exception of the Bank of England, officials from the four central banks explained that the levels were established by law. The Bundesbank and the ECB had also established additional "provision" accounts that were not part of the subscribed capital or surplus accounts, but that served as an additional cushion against losses. The provision accounts were set up primarily to offset the central banks' exposure to foreign exchange rate and interest rate risk and their levels are evaluated on an annual basis. In contrast to these central banks, the Bank of Canada does not require an additional account to buffer the impact of foreign exchange rate and interest rate movements on their assets because it does not hold a significant amount of assets denominated in currencies other than the Canadian dollar on its balance sheet. Similarly, its domestic assets holdings of Canadian government securities are diversified across maturities, approximately mirroring the issuance of Canadian government securities. It should be noted that accounts at the four central banks that we contacted are not fully comparable with the Federal Reserve System capital surplus account because of differences in accounting practices. The Bundesbank and the ECB use accounting methods that differ from the Federal Reserve's to cushion against foreign currency risk and have set up "revaluation accounts" representing valuation reserves arising from unrealized gains on assets and liabilities, including foreign currency. The levels of these accounts vary automatically in accordance with regular market valuations of the assets held compared to their original cost. The Bundesbank, bearing especially the foreign exchange risk in mind, has established a "provisions" account. When determining how much to put into this account, the Bundesbank evaluates its exposure to foreign exchange risk and interest rate risk, to the extent of which these risks are not already covered by the "revaluation account." In addition to the "provisions" account, the Bundesbank also has a "statutory reserves" account that serves as an additional financial buffer against risk. This reserve account may be used only to offset falls in value and to cover other losses. It is derived from the net profit each year and has a maximum level established by legislation. The levels of capital that the central banks maintain are not directly comparable with the Federal Reserve's capital (including the surplus account) for several reasons. First, as previously described, there are differences in the accounting systems among the central banks. The Bundesbank and the ECB, for instance, use accounts that are not part of capital to serve as a cushion against loss. Additionally, when determining the levels of the "provisions" account, the Bundesbank and the ECB evaluated their exposure to exchange rate and interest rate risk. The Bank of Canada and the Bank of England, in contrast, do not face significant foreign exchange rate exposure in their accounts. The Federal Reserve System has not had an annual operating loss since 1915. From 1989 to 2001, the Reserve Banks incurred some weekly losses in which their weekly earnings were not sufficient to absorb the losses. The individual Reserve Banks drew on their capital surplus accounts at least 158 times to absorb weekly losses during the years of 1989 to 2001. The frequency of transferring surplus funds to absorb losses declined during the years from 1998 and 2001. Although numerous factors can influence a Reserve Bank's net earnings, it appears that most of the weekly losses incurred by the Reserve Banks can be attributed to foreign currency revaluation. Federal Reserve Board officials noted that since the Reserve Banks began revaluing the Federal Reserve System's foreign currency holdings on a daily basis rather than a monthly basis in July 2001, they expect the size of these revaluations will be reduced. The individual Reserve Banks transferred funds occasionally from their capital surplus accounts to absorb losses from 1989 through 2001. On the basis of Federal Reserve Board data, 11 of the 12 Reserve Banks reported a total of 352 weeks in which earnings were less than expenses and losses. (The 352 weeks were out of 7,337 possible occurrences during the approximately 13 years of data at the 11 Reserve Banks.) The individual Reserve Banks transferred from the capital surplus accounts cumulatively 158 times, when the weekly loss was greater than the amount in the undistributed net income account. For the other 194 weekly losses, the undistributed net income was sufficient to absorb the losses. The amount and frequency of the weekly losses incurred and the use of the capital surplus accounts varied across Reserve Banks. The Reserve Banks did not incur losses at the same frequency or magnitude because their portfolios of Treasury securities and foreign currency were not proportional across Reserve Banks. The size of a Reserve Bank's Treasury securities portfolios is driven largely by the value of Federal Reserve notes issued by the Reserve Bank, but the size of its foreign currency portfolio is determined by the prior years' capital and surplus account levels. Four of 11 Reserve Banks (Atlanta, Dallas, Kansas City, and Philadelphia) had to transfer funds from their surplus accounts to cover more than 50 percent of their weekly losses (see table 2). The remaining 7 Reserve Banks transferred capital surplus funds that ranged from 26 percent to 46 percent of their weekly losses. The Federal Reserve Bank of Minneapolis (FRBM) is not included in the table because, as explained below, the structure of its assets and liabilities differed significantly from that of the other Reserve Banks over the period surrounding the century date change and its results would bias the overall results. If the FRBM's capital surplus transfers were included, the frequency would increase to 207 times. From May 2000 to December 2001, FRBM drew down its surplus account 24 times to absorb its weekly losses, compared with only 25 times for the entire previous 11-year period (from Apr. 5, 1989, through Mar. 1, 2000). FRBM's surplus has not been fully restored to a level at which its value equates with its paid-in capital, and it has not made a payment to the Treasury since the statutorily mandated surplus transfer by the Consolidated Appropriations Act of 2000 was completed in May 2000. The Federal Reserve Board staff provided us with two reasons for this condition. First, FRBM's share of earnings was lower than that for the average Reserve Bank compared with its share of the $3.752 billion transfer in May 2000. According to a Federal Reserve Board official, FRBM's lower earnings resulted from its relatively small share of the System Open Market Account compared with the other 11 Reserve Banks. For Year 2000 contingency purposes, FRBM stored a large amount of currency for the other Reserve Banks. FRBM was selected because its bank building had a large cash vault. To obtain currency to store for the other Reserve Banks, FRBM had to purchase higher level of currency from the other Reserve Banks. FRBM essentially purchased this currency by reducing its share of the System Open Market Account. Secondly, increases in FRBM's capital paid-in account due to mergers and acquisitions by its member banks increased the amount of capital surplus needed to match the value of its paid-in capital. Federal Reserve Board staff expect that FRBM will resume weekly payments to the Treasury in late 2002 or early 2003. During the period from 1989 to 2001, none of the Reserve Banks, including FRBM, entirely depleted their surplus accounts. Thus, the paid-in capital accounts were never needed to cushion any of the weekly losses the Reserve Banks incurred. After 1997, the frequency of capital surplus transfers by the Reserve Banks was considerably lower. From 1998 to 2001, the Federal Reserve System, excluding FRBM, averaged almost 5 surplus transfers annually compared with the period from 1989 to 1997, when the Federal Reserve System averaged over 15 surplus transfers annually. In 2001, the individual Reserve Banks, excluding FRBM, withdrew from their capital surplus account a total of eight times for a cumulative total of $292.4 million, almost 4.1 percent of the Federal Reserve System's capital surplus account. It appears that most of the weekly losses, which drew on the capital surplus account, resulted from revaluation of foreign currency assets. Federal Reserve Board officials told us that, in reviewing the data for the losses, they could not recall or identify reasons other than foreign currency revaluation as the primary reason for the weekly losses. Although the Federal Reserve System's asset portfolio is predominantly Treasury securities, it does include foreign currency holdings. As of December 31, 2001, the Federal Reserve's foreign currency holdings were equivalent to $7.3 billion of euros, $7.2 billion of yen, and $65.6 million of interest receivables. When the dollar appreciates against a foreign currency, the value of the foreign currency holdings declines in dollar terms, and the Reserve Banks may incur a loss. According to Federal Reserve officials, such losses are the primary reason that Reserve Banks have drawn on their capital surplus accounts. Federal Reserve Board data on the Reserve Banks' weekly losses that occurred since 1997 also suggested that the losses resulted from downward revaluation of foreign currency assets. Although none of the Reserve Banks' capital surplus accounts were ever entirely depleted, all of the capital surplus accounts were significantly reduced by one particular foreign currency loss. During the week of April 3, 1991, every Reserve Bank, including FRBM, recognized a loss that drew down their capital surplus accounts, reducing the Federal Reserve System's capital surplus by $1.67 billion. This loss represented almost a 67 percent reduction in the Federal Reserve System's capital surplus account. As of December 31, 1991, the capital surplus account totaled $2.65 billion. For 10 of 12 Reserve Banks, the reductions in capital surplus that week were the largest incurred for the 12-year period. The reductions that week ranged from 49 percent to 93 percent of the respective Reserve Banks' capital surpluses. The Reserve Banks of Dallas and Philadelphia needed to withdraw 91 percent and 93 percent of their capital surplus accounts, respectively, to absorb the size of the loss. According to a Federal Reserve Board official, the huge net weekly loss was caused by a sharp appreciation of the U.S. dollar near the conclusion of the Gulf War. Weekly losses resulting from revaluation of foreign currency holdings may occur less frequently in the future because of a recent change in Federal Reserve System's procedures that resulted from the Federal Reserve Board study that was conducted following our 1996 report. The Reserve Banks now revalue their foreign currency holdings on a daily basis rather than a monthly basis, and Federal Reserve Board staff told us that they expect daily basis revaluations, which began in July 2001, will lessen the volatility of these revaluations. Under the previous arrangement, the earnings of the week during which the revaluation occurred had to absorb any revaluation loss that had built up during the month since the previous revaluation, often leading to losses during that week. Daily revaluations generally lead to smaller revaluation losses than revaluing on a monthly basis, according to Federal Reserve Board officials, making it less likely that they will exceed weekly earnings. Reducing the Federal Reserve surplus account would create a one-time increase in federal government receipts, thereby reducing the budget deficit (or increasing the federal budget surplus) at the time of the transfer. Because the Federal Reserve System is not included in the federal budget, a Reserve Bank transfer to the Treasury is recorded as a receipt under current budget accounting. This move would reduce future Reserve Banks' earnings and in turn reduce their transfers to the Treasury in subsequent periods. Since the one-time transfer from the Federal Reserve System also increases Treasury's cash balance over time, the Treasury would sell fewer securities to the public and thus pay less interest to the public. Over time, the lower interest payments to the public approximately offset the lower receipts from Federal Reserve earnings. After the temporary capital surplus reduction in 2000, transfers of Reserve Bank net earnings to the Treasury were lower as the Reserve Banks replenished their capital surplus accounts. However, a permanent capital surplus reduction would also reduce future Reserve Bank earnings because the Reserve Banks would hold a smaller portfolio of securities. Since reducing the surplus does not produce new resources for the government, however, there would not be significant economic effects from its reduction. "...the transfer of surplus funds from the Federal Reserve to the Treasury has no import for the fiscal status of the Federal government... Where the funds reside has no economic significance. Hence, any transfer of the Federal Reserve surplus fund to the Treasury would have no effect on national savings, economic growth, or income." Permanently reducing the Federal Reserve System's capital surplus account would yield a one-time increase in federal receipts, under budget accounting; the transfer would have no net budgetary effect in subsequent years. Both OMB and Treasury officials told us that reducing the capital surplus account would cause the Reserve Banks to sell some of their Treasury securities portfolio. This move would reduce Reserve Bank earnings and, in turn, reduce payments to the Treasury in subsequent periods. This reduction in future transfers to the Treasury would occur even if the Reserve Banks were not allowed to replenish their capital surplus accounts. As a hypothetical example, suppose that the Federal Reserve System were to reduce permanently its surplus account by $1 billion, and, to simplify the example, that it did so by selling $1 billion in Treasury securities at the end of a fiscal year and transferring the proceeds to the Treasury. This one-time transfer would increase federal revenues by $1 billion and, assuming no changes in fiscal policy, reduce that year's deficit by $1 billion. With a smaller portfolio, the Reserve Banks' annual earnings on their Treasury securities would decline by about $43 million, on the basis of the August 2002 interest rate on newly issued 10-year notes. As a result, the Federal Reserve's annual payments to the Treasury would also decline by about $43 million for each of the next 10 years. This $43 million, however, is approximately offset by a decrease in interest that Treasury must pay. Receipt of the $1 billion permits Treasury to sell less debt to the public. Continuing the hypothetical example, if the Treasury were to use the $1 billion to reduce its issuance of 10-year notes, its borrowing costs would decrease by $43 million. Treasury's continued outlays for interest on the $1 billion of securities that the Federal Reserve System sold would thus be approximately offset by the interest expense that Treasury no longer would incur in selling the new securities. OMB staff explained that it would be impossible to quantify the exact budgetary effect of permanently reducing the capital surplus account, since the securities that the Federal Reserve System would sell to reduce the surplus account would not necessarily have the same interest rate as those that Treasury would no longer sell, nor the same interest rate as Treasury receives on its operating accounts held at the Federal Reserve System. In a provision of the Omnibus Budget Reconciliation Act of 1993, Congress directed for fiscal years 1997 and 1998 that the amount in the surplus account of any Reserve Bank in excess of the amount equal to 3 percent of the total paid-in capital and surplus of its member banks should be transferred to the Treasury. Moreover, the act required that the surplus accounts be reduced an additional $106 million in fiscal year 1997 and $107 million in fiscal year 1998 and that the amounts be transferred to Treasury. These transfers were made on October 1, 1997, and 1998, respectively. Also, under the act, the Reserve Banks were not permitted to replenish the surplus for these amounts during fiscal years 1997 and 1998. As of December 31, 1998, the capital surplus account and the paid-in capital account were equal. Although the act did not specifically state the purpose of those transfers, its effect was to reduce the federal government's deficit in those years. The capital surplus transfer mandated by the Consolidated Appropriations Act of 2000 resulted in a one-time increase in reported federal receipts but was clearly offset by lower Reserve Bank net earnings payments to the Treasury in the subsequent fiscal year. One reason for this is that the 2000 surplus reduction was temporary: the act prohibited the Reserve Banks from replenishing their surplus funds by the amounts they transferred in that fiscal year but did not prohibit subsequent replenishment. As previously stated, the Consolidated Appropriations Act directed the Reserve Banks to transfer to the Treasury surplus funds of $3.752 billion during fiscal year 2000. Under the act, the Reserve Banks were not permitted to replenish the capital surplus amounts transferred during fiscal year 2000. Because the Federal Reserve Board has discretion over how much it transfers to the Treasury, the Reserve Banks began replenishing the accounts as soon as they were legally allowed to in October 2000. To replenish the capital surplus accounts, the Reserve Banks ceased payments of their net earnings to the Treasury until the capital surplus accounts were replenished. In November 2000, CBO reported that receipts from the Federal Reserve System were $1 billion lower in October 2000 than they had been in October 1999 because the Federal Reserve System had temporarily stopped its weekly payments to the Treasury. Moreover, CBO noted that the Reserve Banks were replenishing their capital surplus accounts from earnings that would otherwise be paid to the Treasury and were not likely to resume their weekly payments until December 2000 or possibly later. Federal Reserve Board data on the replenishment of the Reserve Bank surplus accounts indicated that the Reserve Banks of Boston, Chicago, Dallas, Kansas City, and Philadelphia did not transfer any earnings to Treasury for as long as 5 to 6 weeks. Any reduction in the capital surplus account would not have a significant effect on Treasury's financial management, according to Treasury officials. First, the capital surplus account represents a small fraction of the total federal budget. The capital surplus account was $7.3 billion as of December 31, 2001, while total federal outlays during fiscal 2001 totaled $1,863.9 billion; thus the capital surplus account was less than 1/10 of 1 percent of outlays. These officials observed that the capital surplus account balance represented a small percentage of the total amount of Treasury securities outstanding in a year. As of June 30, 2002, the total amount of Treasury securities outstanding was $6,126.5 billion. Finally, these officials noted that while the surplus account would be significant relative to Treasury's cash balances, these balances vary considerably on a monthly basis. While Treasury monthly cash balances averaged about $24 billion in fiscal 2001, for instance, average monthly balances ranged from $12.1 billion to $43.2 billion. The Federal Reserve System maintains the surplus account to absorb losses. Since 1989, most of the weekly losses that resulted in using the capital surplus account were apparently due to monthly revaluation of the Federal Reserve System's holdings of foreign currencies. In most cases, the capital surplus account was replenished soon after absorbing the loss, and no Reserve Bank ever completely depleted its capital surplus account. Since 2001, however, the Federal Reserve System has begun recognizing gains or losses on its foreign currency holdings on a daily basis rather than a monthly basis. This change should lessen the use of the capital surplus account. The surplus account has grown substantially since 1996, reflecting the growth in the member banks' capital and therefore their paid-in capital, which the Federal Reserve System uses as the basis for determining the targeted value of the surplus account. Reducing the surplus account, however, would provide only a one-time increase in measured federal government receipts, reflecting a transfer from Reserve Banks to the Treasury. There would not be a significant economic effect from reducing the surplus account. We requested comments on a draft of this report from the Federal Reserve Board, OMB, and the Treasury. The Federal Reserve Board's comments are reprinted in appendix II. The Federal Reserve Board said that it generally agreed with the information in and conclusions of the report. The Federal Reserve Board also noted that it had separately provided technical corrections; we have incorporated these corrections where appropriate. OMB and the Treasury declined comment, although their staffs provided technical corrections that we have incorporated. We also obtained and incorporated technical corrections on a draft of this report from CBO. As agreed with your offices, unless you publicly release its contents earlier, we plan no further distribution of this report until 30 days from its issuance date. At that time, we will send 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 Financial Services. We will also send copies to the Chairman of the Board of Governors of the Federal Reserve System, the Secretary of the Treasury, the Director of the Congressional Budget Office, and the Director of the Office of Management and Budget. We will make copies available to others on request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me or James McDermott, Assistant Director, at (202) 512-8678. Other key contributors to this report were Nancy Eibeck and Josie Sigl. To describe the Federal Reserve System's rationale for maintaining a capital surplus account and to understand the capital accounts held at the Reserve Banks, we interviewed Federal Reserve Board officials primarily from the Division of Monetary Affairs and the Division of Reserve Bank Operations and Payment Systems. We reviewed and analyzed sections of the Federal Reserve Act pertaining to the paid-in capital and surplus transfers and the Consolidated Appropriations Act of 2000. We also reviewed the financial statements of the Reserve Banks from 1996 to 2001. To review the policies and practices of foreign central banks regarding accounts that serve similar functions as the capital surplus account, we judgmentally selected four central banks: the Bank of Canada, the Bank of England, the Bundesbank, and the European Central Bank. To verify our interpretation of their published reports, legal requirements, and financial statements, we contacted members of the staffs of the Bank of England and Her Majesty's Treasury (Treasury of the United Kingdom), the Bank of Canada, the Bundesbank, and the European Central Bank. We collected and reviewed annual financial statements from the four central banks for the years from 1996 to 2001 to compare/contrast capital and surplus accounts, and asset and liability structures. The comparability of these data with the Federal Reserve Board is limited, however, due to differences in accounting practices. To describe the Reserve Banks' use of the capital surplus account from 1989 to 2001, we analyzed historical data on weekly losses for all 12 Reserve Banks. These data included the net income or loss of the prior Wednesday, the amount of weekly loss, the amount of the Treasury payment, the amount of surplus withdrawn, the amount in the undistributed net income, and the amount in the surplus before and after the weekly loss. Federal Reserve Board staff collected the data from the 12 Reserve Banks' balance sheet information. We did not audit Reserve Bank accounting from which the data on the weekly losses were derived. Also, we did not review any weeks during the time period that the Reserve Bank revenues and gains for a week were greater than the expenses. The data we reviewed were for those weeks when the expenses and losses were greater than the revenues and gains for each of the 12 Reserve Banks. The data are limited on the identification of the cause of the weekly losses incurred by the Reserve Banks. Federal Reserve Board staff confirmed the cause for only those weekly losses that occurred during the time period of 1997 to 2001. We also analyzed the Board of Governors of the Federal Reserve System's Annual Reports from 1996 to 2001 to determine the trend in both the capital surplus and the paid-in capital accounts. To determine the reason for the growth in the paid-in capital accounts, we reviewed Federal Reserve Board data on the aggregate member bank capital and surplus from 1996 to 2001. According to Federal Reserve Board staff, the aggregate data provided us were drawn from bank call reports. To describe and determine the potential effects of reducing or eliminating the surplus account on the federal budget and the economy, we interviewed officials from the Federal Reserve Board, the Department of the Treasury, the Office of Management and Budget, and the Congressional Budget Office (CBO). We reviewed the Consolidated Appropriations Act of 2000 (P.L. 106-113, Section 302). We also reviewed reports from CBO on the Reserve Banks' transfers of net earnings to the Treasury. We conducted our work in Washington, D.C., between April 2002 and August 2002 in accordance with generally accepted government auditing standards. 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. 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The Board of Governors of the Federal Reserve System (Federal Reserve Board) reviewed its policies regarding the size of the Federal Reserve Banks' combined capital surplus account to determine if opportunities exist to decrease the amount held in the account. The consolidated capital surplus account is the aggregate of separate surplus accounts held at each of the 12 Reserve Banks, and the account represents cumulative retained net earnings for the Reserve Banks--that is, cumulative net earnings not paid to the Department of the Treasury. The Reserve Banks use their capital surplus accounts to act as a cushion to absorb losses. The Financial Accounting Manual for Federal Reserve Banks says that the primary purpose of the surplus account is to provide capital to supplement paid-in capital for use in the event of loss. Selected major foreign central banks maintain accounts with functions similar to the Federal Reserve System's capital surplus account. Although their accounts are not fully comparable with the Federal Reserve System capital surplus account, the Bank of England, the Bundesbank, and the European Central Bank have capital surplus or reserve accounts in addition to their paid-in capital accounts that are used as cushions against loss. The Federal Reserve System calculates earnings and transfers excess earnings to the Treasury on a weekly basis. Although the Federal Reserve System has not had an annual operating loss since 1915, the Reserve Banks recorded some weekly losses between 1989 through 2001, thus temporarily reducing their capital surplus accounts to cover these weekly losses. Reducing the Federal Reserve System capital surplus account would create a one-time increase in federal receipts, but the transfer by itself would have no significant long-term effect on the budget or the economy. Amounts transferred to the Treasury from reducing the capital surplus account would be treated as a receipt under federal budget accounting but do not produce new resources for the federal government as a whole
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Federal agencies' contracts with private businesses, whether made in the normal course of agency operations or specifically related to a natural disaster declaration, are used to meet certain goals to increase participation by various types of small businesses. The Small Business Act, as amended, defines a small business generally as one that is "independently owned and operated and that is not dominant in its field of operation." In addition, a business must meet the size standards published by SBA to be considered "small." The act sets a governmentwide goal for small business participation of not less than 23 percent of the total value of all prime contract awards--contracts that are awarded directly by an agency--for each fiscal year. The Small Business Act sets annual prime contract dollar goals for participation by specific types of small businesses: small disadvantaged businesses (5 percent); women-owned or service-disabled, veteran-owned, (5 and 3 percent, respectively); and businesses located in historically underutilized business zones (HUBZones, 3 percent). In August 2007, SBA issued its fiscal year 2006 Goaling Report. The Goaling Report includes data on the extent to which federal agencies met their goals for awarding contracts to various types of small businesses. According to this report, federal agencies awarded 22.8 percent of their prime contracting dollars to small businesses, just short of the 23 percent statutory goal. In addition, while federal agencies collectively exceeded the goals for awarding prime contracting dollars to small disadvantaged businesses, they did not meet the goals for awarding prime contracting dollars to women-owned, HUBZone, or service-disabled veteran-owned businesses. Of the agencies we reviewed in our March 2007 report, all exceeded their agency-specific goals for awarding prime contracting dollars to small disadvantaged businesses, a subset of which are Section 8(a) firms. Generally, in order to be certified under SBA's 8(a) program, a firm must satisfy SBA's applicable size standards, be owned and controlled by one or more socially and economically disadvantaged individuals who are citizens of the United States, and demonstrate potential for success. Black Americans, Hispanic Americans, Native Americans, and Asian Pacific Americans are presumptively socially disadvantaged for purposes of eligibility. The personal net worth of an individual claiming economic disadvantage must be less than $250,000 at the time of initial eligibility and less than $750,000 thereafter. The general rules governing procurement are set out in federal procurement statutes and in the Federal Acquisition Regulation (FAR). Among other things, these rules require that any business receiving a prime contract for more than the simplified acquisition threshold must agree to give small business the "maximum practicable opportunity" to participate in the contract. Additionally, for contracts (or modifications to contracts) that (1) are individually expected to exceed $550,000 ($1 million for construction contracts) and (2) have subcontracting possibilities, the prime contractor generally must have in place a subcontracting plan. This plan must identify the types of work the prime contractor believes it is likely to award as subcontracts as well as the percentage of subcontracting dollars it expects to direct to the specific categories of small businesses for which the Small Business Act sets specific goals. When they award contracts, federal agencies collect and store procurement data in their own internal systems--typically called contract writing systems. The FAR requires federal agencies to report the information about procurements directly to the Federal Procurement Data System-Next Generation (FPDS-NG), GSA's governmentwide contracting database, which collects, processes, and disseminates official statistical data on all federal contracting activities of more than $3,000. Congress has enacted several laws designed to foster small business participation in federal procurement. One of these laws, Public Law 95-507, enacted in 1978, amended section 15 of the Small Business Act (15 U.S.C. SS 644) to require that all federal agencies with procurement authority establish an Office of Small and Disadvantaged Business Utilization. This office is responsible for helping oversee the agency's functions and duties related to the awarding of contracts and subcontracts to small and disadvantaged businesses. Finally, the Stafford Act sets forth requirements for the federal response to presidentially declared disasters. It requires federal agencies to give contracting preferences, to the extent feasible and practicable, to organizations, firms, and individuals residing or doing business primarily in the area affected by a major disaster or emergency. Our March 2007 report identified the extent to which DHS, GSA, DOD, and the Corps awarded contracts directly to small businesses; the extent to which different types of small businesses received contracts; and the extent to which small businesses located in Alabama, Mississippi, and Louisiana received contracts for Katrina-related projects. Our report also noted that information on small business subcontracting plans was not consistently available for the four agencies. We found that small businesses received 28 percent of the $11 billion that DHS, GSA, DOD, and the Corps awarded directly for Katrina-related projects, but the percentages varied among the four agencies (see fig. 1). We assessed the agencies individually and found that DHS had awarded the highest dollar amount to small businesses--about $1.6 billion dollars-- and that GSA had awarded the highest percentage of its dollars to small businesses--72 percent of about $658 million. Among categories of small businesses, small disadvantaged businesses received 7 percent of the approximately $11 billion that the four agencies awarded to both large and small businesses. Other categories of small businesses, including women- and veteran-owned businesses and businesses located in HUBZones, received from 2 to 4 percent (see fig. 2). Contracting dollars awarded directly to businesses can be counted in more than one category, so the dollars awarded to various types of small businesses are not mutually exclusive. Small businesses in Alabama, Mississippi, and Louisiana received 66 percent of the $1.9 billion in Katrina-related contracting dollars awarded to local businesses by the four agencies we reviewed. Among the three states, the proportion of Katrina-related contracting dollars awarded to small businesses was largest in Mississippi (75 percent), followed by Alabama and Louisiana at 65 percent and 62 percent, respectively, of the dollars awarded (table 1). In general, these small local businesses received contracting dollars directly from the four agencies to provide trailers, administrative and service buildings, restoration activities, and other supportive services. In two respects, key information on small business subcontracting plans was not consistently available in official procurement data systems for the four agencies. First, primarily with respect to DHS and GSA contract actions, the official procurement data system had no information at all on whether the agencies required subcontracting plans for 70 percent or more of their contracting funds. This database should have contained information on whether the agencies required subcontracting plans in these instances. For DOD and the Corps, their system lacked information on whether they required subcontracting plans for one percent of their contracting funds. Table 2 shows the total amounts each agency awarded to large businesses for contracts valued over $500,000 (column 2) and the extent to which no information was available in the official procurement data system on whether the agencies required subcontracting plans for those contracts (column 6). Second, the procurement data systems showed that the agencies had determined that subcontracting plans were not required for contracts representing 12 to 77 percent of the dollars they awarded to large businesses for Katrina-related projects. Agencies are required to document their reasons for these determinations. However, information on the four agencies' reasons for not requiring these plans, which should have been readily available, was incomplete. Overall, procurement officials from the four agencies were able to explain some of the missing or incomplete information on subcontracting plans by, for example, identifying data entry errors or providing evidence of the agencies' reasons for not requiring the plans. For example, DHS officials determined that $545 million of the DHS contracting funds the procurement data system showed as not requiring a plan had been miscoded and should have been entered in the procurement system under a different category that listed the contracts as having "no subcontracting possibilities." In another instance, GSA officials did not require a subcontracting plan for a $26 million contract for ice because they believed that the urgency of the situation required buying and shipping the ice faster than normal procedures would allow. Nonetheless, at the time we issued our report contracting dollars remained for each agency with incomplete subcontracting plan information that agency officials had not been able to explain. These amounts ranged from $3.3 million for DOD (excluding the Corps) to $861 million for DHS. In our report, we concluded there was little doubt that Hurricane Katrina posed challenges to the agencies, which had to award contracts quickly while still following government procurement rules, especially those regarding subcontracting plans. Certain choices, such as documenting compliance with these requirements at a later date (something GSA and DOD officials indicated was the case), might have been understandable. Nonetheless, more than a year after the hurricane, we reported that a substantial amount of information about the four agencies' subcontracting requirements remained incomplete. Conclusively demonstrating compliance with the rules about subcontracting plans is important for reasons beyond just documentation. First, in requiring these plans agencies commit prime contractors to specific goals for providing opportunities to small businesses. Second, the agencies have tools-- incentives as well as sanctions--that they can use to ensure that the contractors engage in good faith efforts to meet their small business subcontracting goals. In doing so, the agencies ensure compliance with federal procurement regulations and help guarantee that small businesses have all of the practical opportunities to participate in federal contracts that they are supposed to have. Because so much key information about subcontracting plans was incomplete in federal procurement data systems and, at the conclusion of our review, remained unresolved, we cannot tell the extent to which the agencies are complying with the regulations. Furthermore, the lack of transparency surrounding much of the agencies' subcontracting data--missing information on plans when contracts appear to meet the criteria for having them--may lead to unwarranted perceptions about how the federal procurement system is working, particularly in terms of the government's stated preference for contracting with small businesses. To ensure compliance with federal contracting regulations and more transparently disclose the availability of subcontracting opportunities for small businesses, we recommended that the Secretaries of Homeland Security and Defense and the Administrator of General Services issue guidance reinforcing, among other things, the necessity for documenting in publicly available sources the agencies' contracting decisions, particularly in instances when the agencies decided not to require subcontracting plans. Moreover, we recommended that the agencies consider asking their respective Inspectors General to conduct a review to ensure that this guidance and related requirements were being followed. The agencies generally agreed with our recommendations, and GSA has already implemented them. Specifically, in March 2007, GSA issued guidance to its contracting officers reminding them of the importance both of the subcontracting plan requirements and of documenting key decisions affecting acquisitions, including any decisions impacting subcontracting plan requirements. In addition, GSA will include a review of compliance with subcontracting plan requirements in its annual internal procurement management reviews. DOD and DHS officials have stated that they are working on implementing these recommendations. For example, Corps officials indicated they are developing a new training module on the requirements regarding subcontracting plans and plan to deliver this to its contracting officers. SBA has governmentwide responsibilities for advocating that federal agencies use small businesses as prime contractors, and that prime contractors give small businesses opportunities to participate as subcontractors in federal contracts awarded to large businesses. To meet its responsibilities, SBA negotiates annual procurement goals with federal executive agencies to achieve the 23 percent governmentwide goal for contract dollars awarded directly by federal agencies. In addition, SBA is responsible for assigning Procurement Center Representatives (PCRs) to major contracting offices to implement small business policies and programs. Responsibilities of PCRs include reviewing proposed acquisitions and recommending various types of small business sources; recommending contracting methods to increase small business prime contracting opportunities; conducting reviews of the contracting office to ensure compliance with small business policies; and working to ensure that small business participation is maximized through subcontracting opportunities. Each federal agency that has procurement authority is required to have an OSDBU. The OSDBU is responsible for helping to oversee the agency's functions and duties related to the awarding of contracts and subcontracts to small and disadvantaged businesses. For example, the office must report annually on the extent to which small businesses are receiving their fair share of federal procurements, including contract opportunities under programs administered under the Small Business Act. The Small Business Act requires that OSDBU directors be responsible to and report only to agency heads or their deputy. By providing immediate access to top decision-makers, Congress intended to enhance the directors' ability to advocate effectively for small and disadvantaged businesses. However, in 2003 we reported that 11 of the 24 federal agencies we reviewed were not in compliance with this provision. As of our most recent follow-up work, nine of the agencies reviewed were out of compliance (the Departments of Agriculture, Commerce, Education, Health and Human Services, Justice, State, the Interior, and the Treasury; and the Social Security Administration). The Environmental Protection Agency has complied, and the Federal Emergency Management Agency has been subsumed into the Department of Homeland Security, which has an OSDBU with a director reporting to the highest agency levels. Most of the agencies that provided comments on this work disagreed with our conclusion that the reporting relationships did not comply with this provision of the Small Business Act. However, none of the legal arguments that the agencies raised caused us to revise our conclusions or recommendations. For example, the Departments of Agriculture and Treasury had delegated OSDBU responsibilities to lower level officials and argued in their comments to us that because the Small Business Act does not explicitly prohibit such a delegation, their reporting relationships complied with this provision. However, we noted that the lack of an express prohibition on such a delegation does not necessarily mean that it is thereby permitted and cited case history supporting our belief that the delegation of authority may be withheld by implication, which we believe this section of the Small Business Act does. Because the OSDBU directors at agencies that do not comply with this provision of the Act do not have a direct reporting relationship with their agencies' head or deputy, the reporting relationships potentially limit their role as effective advocates for small and disadvantaged businesses. At your request, we have ongoing work evaluating the efforts of SBA and, to some extent, OSDBUs within federal agencies, to advocate on behalf of small disadvantaged businesses and those in SBA's 8(a) business development program. As you are aware, both SBA and agencies' OSDBUs play important roles in advocating federal contracting opportunities for small disadvantaged businesses and 8(a) firms. SBA certifies the firms' eligibility for one or both designations and, as I noted earlier, has a governmentwide advocacy role for all types of small businesses, and OSDBUs advocate for contracting opportunities within each agency by, for example, reviewing proposed contracts and making recommendations to contracting officials about those they believe could be awarded to a small business, including disadvantaged businesses. The Small Business Act authorizes SBA's 8(a) Business Development Program as one of the federal government's vehicles to help small disadvantaged businesses compete in and access the federal procurement market. To be eligible for the program, a firm must, among other things, meet SBA's applicable size standards for small businesses and be owned and controlled by one or more socially and economically disadvantaged individuals who are U.S. citizens who demonstrate the potential for success. Firms receiving 8(a) certification are eligible for contracts that federal agencies set aside for them. To qualify for SDB certification, a firm must be owned or controlled by one or more socially and economically disadvantaged individuals or a designated community development organization. Section 8(a) firms automatically qualify as SDBs, but other firms may apply for SDB-only certification. Mr. Chairman, you recently wrote to us expressing concern about whether SBA was taking an appropriate, proactive approach to advocate that small disadvantaged businesses--those in SBA's 8(a) and SDB programs--have access to federal government contracts. As you know, procurement decisions--who gets each federal contract--ultimately rest with the agencies' contracting offices, not with their OSDBUs and not with SBA. Neither SBA nor the OSDBUs can force contracting officials to give a contract to a small business. However, as language in the Small Business Act suggests, they do have an important role to play in advocating that small businesses have the "maximum practicable opportunity" to participate. Consequently, our evaluation will focus on the advocacy role that SBA and OSDBUs play regarding these opportunities for small businesses. Specifically, it will include assessment of the actions SBA takes to encourage that prime contracting goals for small disadvantaged businesses are met; the extent to which such goals have been met; whether federal agencies are having difficulty awarding contracts to 8(a) firms; and SBA's efforts to advocate that small disadvantaged businesses have the maximum practicable opportunity to participate as subcontractors for prime federal contracts. In our evaluation, we also plan to assess actions by selected agency OSDBUs in serving as advocates for 8(a) firms. Our evaluations of contracting in the aftermath of Hurricane Katrina and agency OSDBUs provide useful perspectives as we move forward in our examination of the important advocacy roles undertaken by SBA and the OSDBUs. When we complete the design phase of this work, we will reach agreement with you on our reporting objectives and the anticipated issuance date. 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 William B. Shear at (202) 512-8678 or [email protected]. Individuals making key contributions to this testimony included Bill MacBlane, Assistant Director; Emily Chalmers; Nancy Eibeck; Julia Kennon; Tarek Mahmassani; Lisa Moore; Paul Thompson; Myra Watts-Butler; and Bill Woods. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The federal government's long-standing policy has been to use its buying power to maximize procurement opportunities for various types of small businesses. GAO initiated work and completed a report in March 2007 under the Comptroller General's authority describing the extent to which small businesses participated in contracting opportunities related to Hurricane Katrina. This testimony discusses (1) results from the March 2007 GAO report, including the amounts that small and local businesses received directly from federal agencies from contracts related to Hurricane Katrina and the lack of required information in official procurement data systems on subcontracting plans, (2) information from two previous GAO reports regarding the small business advocacy responsibilities of Small Business Administration (SBA) and federal agencies that award contracts, and (3) GAO work on SBA's efforts to advocate for small disadvantaged businesses, and similar efforts by entities within selected agencies. In conducting the studies discussed in this testimony, GAO analyzed agency contract data, reviewed federal acquisition regulations, and interviewed agency procurement officials; we also sent a questionnaire to agency officials regarding Office of Small and Disadvantaged Business Utilization (OSDBU) reporting relationships; reviewed organizational charts and other pertinent information; analyzed relevant laws, legislative history, and court cases; and, updated information on agency actions on our recommendations. Small businesses received 28 percent of the $11 billion in contracts that Department of Homeland Security (DHS), General Services Administration (GSA), Department of Defense (DOD), and the Army Corps of Engineers (Corps) awarded directly for Katrina-related projects. Information on whether DHS and GSA required subcontracting plans was generally not available in the federal government's official procurement database for 70 percent or more of the contracting dollars each agency awarded for activities related to Hurricane Katrina. This database should have contained information on whether or not the agencies required subcontracting plans in these instances. The lack of transparency surrounding much of the agencies' subcontracting data may lead to unwarranted perceptions about how the federal procurement system is working, particularly in terms of the government's stated preference for contracting with small businesses. GAO recommended in its March 2007 report that DHS, GSA, and DOD take steps designed to ensure compliance with federal contracting regulations and more transparently disclose the extent to which subcontracting opportunities are available to small businesses. These agencies generally agreed with GAO's recommendations. GSA has implemented them while DOD and DHS indicate they are in the process of doing so. SBA has governmentwide responsibilities for advocating that federal agencies use small businesses as prime contractors for federal contracts and set goals for and encourage the use of small businesses as subcontractors to large businesses receiving federal contracts. Similarly, within each federal agency there is an OSDBU that plays an advocacy role by overseeing the agency's duties related to contracts and subcontracts with small and disadvantaged businesses. The Small Business Act requires that the OSDBU director be responsible to and report only to agency heads or their deputies. In 2003, GAO reported that 11 of 24 agencies reviewed did not comply with this provision. While most of the agencies disagreed with our conclusion, none of the legal arguments that they raised changed GAO's recommendations. Because the OSDBU directors at these agencies do not have a direct reporting relationship with their agencies' heads or deputies, the reporting relationships potentially limit their role as effective advocates for small and disadvantaged businesses. GAO is presently evaluating SBA's and agency OSDBUs' advocacy efforts. This evaluation includes an assessment of the actions SBA takes to advocate that small disadvantaged businesses receive opportunities to participate as subcontractors under federal prime contracts and encourage that prime contracting goals for these businesses are met. Also, the evaluation addresses selected OSDBUs' actions to advocate for certain small business firms.
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The complexity of the environment in which CMS operates the Medicare program cannot be overstated. It is an agency within the Department of Health and Human Services (HHS) but has responsibilities over expenditures that are larger than those of most other federal departments. Medicare alone ranks second only to Social Security in federal expenditures for a single program. Medicare is expected to spend nearly $240 billion in fiscal year 2001; covers about 40 million beneficiaries; enrolls and pays claims from nearly 1 million providers and health plans; and has contractors that annually process about 900 million claims. Among numerous and wide-ranging activities associated with the Medicare program, CMS must monitor the roughly 50 claims administration contractors that pay claims and establish local medical coverage policies; set tens of thousands of payment rates for Medicare- covered services from different providers, including physicians, hospitals, outpatient and nursing facilities, home health agencies, and medical equipment suppliers; and administer consumer information and beneficiary protection activities for the traditional program component and the managed care program component (Medicare+Choice plans). The providers billing Medicare--hospitals, general and specialty physicians, and other practitioners--along with program beneficiaries and taxpayers, create a vast universe of stakeholders whose interests vary widely. Not surprisingly, then, the responsibility to be fiscally prudent has made the agency that runs Medicare a lightening rod for those discontented with program policies. For example, the agency's administrative pricing of services has often been contentious, even though a viable alternative is not easily identifiable. It is impractical for the agency to rely on competition to determine prices. The reason is that when Medicare is the dominant payer for services or products, the agency cannot use market prices to determine appropriate payment amounts, because Medicare's share of payments distorts the market. Moreover, Medicare is prevented from excluding some providers to do business with others that offer better prices. In addition, Medicare's public sector status means that changing program regulations requires obtaining public input. The solicitation of public comments is necessary to ensure transparency in decision-making. However, the trade-off to seeking and responding to public interests is that it is generally a time-consuming process and can thwart efficient program management. For example, in the late 1990s, HCFA averaged nearly 2 years between its publication of proposed and final rules. Consensus is widespread among health policy experts regarding the growing and unrelenting nature of the Medicare agency's work. The Balanced Budget Act of 1997 (BBA) alone had a substantial impact on HCFA's workload, requiring, among other things, that the agency develop within a short time frame new payment methods for different post-acute and ambulatory services. It also required HCFA to preside over an expanded managed care component that entailed coordinating a never- before-run information campaign for millions of beneficiaries across the nation and developing methods to adjust plan payments based partially on enrollees' health status. The future is likely to hold new statutory responsibilities for CMS. For example, some reform proposals call for expanding Medicare's benefit package to include a prescription drug benefit. As we have previously reported, the addition of a drug benefit would entail numerous implementation challenges, including the potential for the annual claims processing workload to double to about 1.8 billion a year. Tasked with administering this highly complex program, HCFA has earned mixed reviews in managing Medicare. On one hand, the agency presided over a program that is very popular with beneficiaries and the general public. It implemented payment methods that have helped constrain program cost growth and ensured that claims were paid quickly at little administrative cost. On the other hand, HCFA had difficulty making needed refinements to payment methods. It also fell short in its efforts to ensure accurate claims payments and oversee its Medicare claims administration contractors. In recent years, HCFA took steps to achieve greater success in these areas. However, the agency now faces criticism from the provider community for, in the providers' view, a program that is unduly complex and has burdensome requirements. HCFA was successful in developing payment methods that have helped contain Medicare cost growth. Generally, over the last 2 decades, the Congress required HCFA to move Medicare away from reimbursing providers based on their costs or charges for every service provided and to use payment methods that seek to control spending by rewarding provider efficiency and discouraging excessive service use. Payment development efforts have been largely successful, but making needed refinements to payment methods remains a challenge. For example, Medicare's hospital inpatient prospective payment system (PPS), developed in the 1980s, is a method that pays providers fixed, predetermined amounts that vary according to patient need. This PPS succeeded in slowing the growth of Medicare's inpatient hospital expenditures. Medicare's fee schedule for physicians, phased in during the 1990s, redistributed payments for services based on the relative resources used by physicians to provide different types of care and has been adopted by many private insurers. More recently, as required by the BBA, HCFA worked to develop separate prospective payment methods for post-acute care services--services provided by skilled nursing facilities, home health agencies, and inpatient rehabilitation facilities--and for hospital outpatient departments. Prospective payment methods can help constrain the overall growth of Medicare payments. But as new payment systems affected provider revenues, HCFA often received criticism about the appropriateness and fairness of its payment rates. HCFA had mixed success in marshaling the evidence to assess the validity of these criticisms and in making appropriate refinements to these payment methods to ensure that Medicare was paying appropriately and adequately. HCFA also had success in paying most claims within mandated time frames and at little administrative cost to the taxpayer. Medicare contractors process over 90 percent of the claims electronically and pay "clean" claims on average within 17 days after receipt. In contrast, commercial insurers generally take longer to pay provider claims. Under its tight administrative budget, HCFA kept processing costs to roughly $1 to $2 per claim--as compared to the $6 to $10 or more per claim for private insurers, or the $7.50 per claim paid by TRICARE--the Department of Defense's managed health care program. Costs for processing Medicare claims, however, while significantly lower than other payers, are not a straightforward indicator of success. We and others have reported that HCFA's administrative budget was too low to adequately safeguard the program. Estimates by the HHS Inspector General of payments made in error amounted to $11.9 billion in fiscal year 2000, which, in effect, raises the net cost per claim considerably. At the same time, HCFA estimated that, in fiscal year 2000, program safeguard expenditures saved the Medicare program more than $16 for each dollar spent. Taken together, these findings indicate that increasing the investment in CMS' administrative functions is a cost that can ultimately save program dollars. However, HCFA's payment safeguard activities have raised concerns among providers about the clarity of billing rules and the efforts providers must make to remain in compliance. To fulfill the program's stewardship responsibilities, claims administration contractors conduct medical reviews of claims and audits of providers whose previous billings have been questionable. These targeted reviews have been a cost-effective approach in identifying overpayments. Providers whose claims are in dispute, however, have complained about the burden of reviews and audits and about the fairness of some specific steps the contractors follow. Their concerns about fairness may also emanate from the actions of other agencies involved in overseeing health care--such as the HHS Office of Inspector General and the Department of Justice--which, in the last several years, have become more aggressive in pursuing health care fraud and abuse. CMS faces a difficult task in finding an appropriate balance between ensuring that Medicare pays only for services allowed by law and making it as simple as possible for providers to treat Medicare beneficiaries and bill the program. While an intensive claims review is undoubtedly vexing for the provider involved, very few providers actually undergo such reviews. In fiscal year 2000, Medicare contractors conducted complex medical claims reviews of only 3/10 of 1 percent of physicians--1,891 out of a total of more than 600,000 physicians who billed Medicare that year.We are currently reviewing several aspects of the contractors' auditing and review procedures for physician claims to assess how they might be improved to better serve the program and providers. Congressional concern has recently heightened regarding the regulatory requirements that practitioners serving Medicare beneficiaries must meet. Of the several studies we have under way to examine the regulatory environment in which Medicare providers operate, one study, conducted at the request of this Committee, examines ways in which explanations of Medicare rules and other provider communications could be improved. The preliminary results of our review of several information sources from selected carriers--the contractors that process physicians' claims-- indicate a disappointing performance record. In particular: Bulletins. Contractor bulletins, which are newsletters from carriers to physicians outlining changes in national and local Medicare policy, are viewed as the primary source of communication between the agency and providers. However, providers have complained that the information in these bulletins is often difficult to interpret, incomplete, and untimely. We reviewed the bulletins issued since February 2001 by nine carriers to determine, among other things, whether they included notices about four new billing procedures that were going into effect in early July 2001. The bulletins of five carriers either did not contain notices about the billing procedures until after the procedures had gone into effect or had not published this information as of mid-July. We also found that many of the bulletins contained lengthy discussions with significant technical and legalistic language. Telephone call centers. Call centers are intended to serve as another important information source for providers on a variety of matters, including clarification of Medicare's billing rules. Contractors maintain these call centers to respond to the roughly 80,000 provider inquiries made each day. We placed about 60 calls to 5 carrier call centers to obtain answers to common questions (those found on the "Frequently Asked Questions" Web pages at various carriers' web sites). For 85 percent of the calls placed, the answers that call center representatives provided were either incomplete (53 percent) or inaccurate (32 percent). Web sites. A third source of information for Medicare providers is the Internet. The agency imposes minimum requirements on carriers to maintain Web sites. Of 10 carrier Web sites we examined, 8 did not meet all of the Web site requirements, which include, among others, the inclusion of a frequently-asked-questions Web page and the capability for providers to send e-mail inquiries to customer service. These 8 also lacked the required links to both the CMS and Medicare Web sites. Many lacked user-friendly features: 7 did not have "site maps," which list the Web site's contents, and although 6 sites had search functions, only 4 worked as intended. Five sites contained outdated information. Although these results cannot be generalized to all carriers, the carriers we reviewed serve tens of thousands of physicians and the results are consistent with some of the concerns recently expressed by physicians in the Medical Group Management Practice Association. Our study, to be issued this fall, seeks to identify the actions CMS can take to ensure that carriers improve the consistency and accuracy of their communications with providers; it will also assess the adequacy of carriers' budgets to conduct these activities. CMS faces several limitations in its efforts to manage Medicare effectively. These include divided management focus, limited capacity, lack of a performance-based management approach, and constraints impeding the agency's ability to hold Medicare contractors accountable. CMS' management focus is divided across multiple programs and responsibilities. Despite Medicare's estimated $240-billion price tag and far-reaching public policy significance, there is no official whose sole responsibility it is to run the Medicare program. In addition to Medicare, the CMS Administrator and senior management are responsible for oversight of Medicaid and the State Children's Health Insurance Program. They also are responsible for individual and group insurance plans' compliance with standards in the Health Insurance Portability and Accountability Act of 1996 in states that have not adopted conforming legislation. Finally, they must oversee compliance with federal quality standards for hospitals, nursing homes, home health agencies, and managed care plans that participate in Medicare and Medicaid, as well as all of the nation's clinical laboratories. The Administrator is involved in the major decisions relating to all of these activities; therefore, time and attention that would otherwise be spent meeting the demands of the Medicare program are diverted. A restructuring of the agency in July 1997 inadvertently furthered the diffusion of responsibility across organizational units. The intent of the reorganization was to better reflect a beneficiary-centered orientation throughout the agency by dispersing program activities across newly established centers. However, after the reorganization, many stakeholders claimed that they could no longer obtain reliable or timely information. In addition, HCFA's responsiveness was slowed by the requirement that approval was needed from several people across the agency before a decision was final. The recent change from HCFA to CMS reflects more than a new name. It consolidates major program activities: the Center for Medicare Management will be responsible for the traditional fee-for-service program; the Center for Beneficiary Choices will administer Medicare's managed care program. We believe that this new structure is consistent with the desire to be more responsive to program stakeholders. As we and others have consistently noted, the agency's capacity is limited relative to its multiple, complex responsibilities. Human capital limitations and inadequate information systems hobble the agency's ability to carry out the volume of claims administration, payment, and pricing activities demanded of it. Staff shortages--in terms of skills and numbers--beset the agency that runs Medicare. These shortages were brought into sharp focus as HCFA struggled to handle the number and complexity of BBA requirements. When the BBA expanded the health plan options in which Medicare beneficiaries could enroll, HCFA's staff had little previous experience overseeing these diverse entities, such as preferred provider organizations, private fee-for-service plans, and medical savings accounts. Few staff had experience in dealing with the existing managed care option--health maintenance organizations. Half of HCFA's regional offices lacked managed care staff with clinical backgrounds--important in assessing quality of care issues--and few managed care staff had training or experience in data analysis--key to assessing plan performance against local and national norms and monitoring trends in plan performance over time. At the same time, CMS faces the potential loss of a significant number of staff with valuable institutional knowledge. In February 2000, the HCFA Administrator testified that more than a third of the agency's current workforce was eligible to retire within the next 5 years and that HCFA was seeking to increase "its ability to hire the right skill mix for its mission." As we and others have reported, too great a mismatch between the agency's administrative capacity and its designated mandate could have left HCFA, and now CMS, unprepared to handle Medicare's future population growth and medical technology advances. To assess its needs systematically, CMS is conducting a four-phase workforce planning process that includes identifying current and future expertise and skills needed to carry out the agency's mission. HCFA initiated this process using outside assistance to develop a comprehensive database documenting the agency's employee positions, skills, and functions. Once its future workforce needs are identified, CMS faces the challenge of attracting highly qualified employees with specialized skills. Due to the rapid rate of change in the health care system and CMS' expanding mission, the agency's existing staff may not possess the needed expertise. Another constraint on agency effectiveness has been inadequate information systems for running the Medicare program. Ideally, program managers should be able to rely on their information systems to monitor performance, develop policies for improvement, and track the effects of newly implemented policies. In reality, most of the information technology HCFA relied on was too outdated to routinely produce such management information. As a result, HCFA could not easily query its information systems to obtain prompt answers to basic management questions. Using its current systems, CMS is not in a position to report promptly to the Congress on the effects of new payment methods on beneficiaries' access to services and on the adequacy of payments to providers. It cannot expeditiously determine the status of debt owed the program due to uncollected overpayments. To encourage a greater focus on results and improve federal management, the Congress enacted the Government Performance and Results Act of 1993 (GPRA)--a results-oriented framework that encourages improved decision-making, maximum performance, and strengthened accountability. Managing for results is fundamental to an agency's ability to set meaningful goals for performance, to measure performance against those goals, and to hold managers accountable for their results. As late as January 1998, we reported that HCFA lacked an approach consistent with GPRA to develop a strategic plan for its full range of program objectives. Since then, the agency developed a plan, but it did not tie global objectives to management performance. Last month, we reported on the results of our survey of federal managers at 28 departments and agencies on strategic management issues. The proportion of HCFA managers who reported having output, efficiency, customer service, quality, and outcome measures was significantly below that of other government managers for each of the performance measures. HCFA was the lowest-ranking agency for each measure--except for customer service, in which it ranked second from the lowest. In addition, the percentage of HCFA managers who responded that they were held accountable for results to a great or very great extent--42 percent--was significantly lower than the 63 percent reported by the rest of the government. Constraints on the agency's flexibility to contract for claims administration services have also frustrated efforts to manage Medicare effectively. Under these constraints, the agency is at a disadvantage in selecting the best performers to carry out Medicare's claims administration and customer service functions. At Medicare's inception in the mid-1960s, the Congress provided for the government to use existing health insurers to process and pay physicians' claims and permitted professional associations of hospitals and certain other institutional providers to "nominate" their claims administration contractors on behalf of their members. At that time, the American Hospital Association nominated the national Blue Cross Association to serve as its fiscal intermediary. Currently, the Association is one of Medicare's five intermediaries and serves as a prime contractor for member plans that process over 85 percent of all benefits paid by fiscal intermediaries. Under the prime contract, when one of the local Blue plans declined to renew its Medicare contract, the Association--rather than HCFA--chose the replacement contractor. This process effectively limited HCFA's flexibility to choose the contractors it considered most effective. HCFA also considered itself constrained from contracting with non-health insurers for the various functions involved in claims administration because it did not have clear statutory authority to do so. As noted, the Congress gave HCFA specific authority to contract separately for payment safeguard activities, but for a number of years the agency has sought more general authority for "functional contracting," that is, using separate contractors to perform functions such as printing and mailing and answering beneficiary inquiries that might be handled more economically and efficiently under one or a few contracts. HCFA sought other Medicare contracting reforms, such as express authority for the agency to pay Medicare contractors on an other-than-cost basis, to provide incentives that would encourage better performance. Although the health care industry has grown and transformed significantly since Medicare's inception, neither the program nor the agency that runs it has kept pace. Nevertheless, CMS is expected to make Medicare a prudent purchaser of services using private sector techniques and improve its customer relations. Private insurance has evolved over the last 40 years and employs management techniques designed to improve the quality and efficiency of services purchased. In a recent study, an expert panel convened by the National Academy of Social Insurance (NASI) suggested that Medicare test private insurers' practices designed to improve the quality and efficiency of care and determine whether these practices could be adapted for Medicare. Private insurers have taken steps to influence utilization and patterns of service delivery through efforts such as beneficiary education, preferred provider networks, and coordination of services. They are able to undertake these efforts, in part, because they have wide latitude in how they run their businesses. In contrast, federal statutory requirements and the basic obligation to be publicly accountable have hampered agency efforts to incorporate private sector innovations. Medicare's efforts to encourage use of preferred providers is a case in point. The Medicare statute generally allows any qualified provider to participate in the program. This is significant in light of HCFA's experiment related to coronary artery bypass graft surgery in which certain hospitals--identified as those with the best outcomes for these surgeries--were designated to receive bundled payments for hospitals and physicians delivering certain expensive procedures. The experiment cut program costs by 10 percent for the 10,000 coronary artery bypass surgeries performed and saved money for beneficiaries through reduced coinsurance payments. HCFA began a similar experiment at selected acute-care hospitals, which involves bundling payments for hospital, physician, and other health care professionals' services provided during a beneficiary's hospital stay for selected cardiovascular and orthopedic procedures. However, more wide-scale Medicare implementation of such hospital and physician partnership arrangements may be difficult. Providers have raised concerns about government promotion of certain providers at the expense of others, thus creating a barrier to this and other types of preferred provider arrangements. Efforts to facilitate disease management provide another example of the potential limitations of adapting private sector management strategies to Medicare. HCFA was able to implement broad-based education efforts to encourage the use of Medicare-covered preventive services, but the agency could be deterred in approaches targeting individual beneficiaries most likely to need the help. For example, the agency has overseen the dissemination of more than 23,000 posters with tear-off sheets that beneficiaries can hand to physicians to facilitate discussions of colon cancer screening that otherwise might be avoided because of unfamiliar terms and sensitive issues. It has also been involved in a multifaceted effort to increase flu vaccinations and mammography use. However, the agency may be less able to undertake the more targeted approaches of some private insurers, such as mailing reminders to identified enrollees about the need to obtain a certain service. Because targeting information would require using personal medical information from claims data, CMS could encounter opposition from those who would perceive such identification to be government intrusion. Providers might also object to a government insurance program advocating certain medical services for their patients. In its study, NASI concluded that these and other innovations could have potential value for Medicare but would need to be tested to determine their effects as well as how they might be adapted to reflect the uniqueness of Medicare as both a public program and the largest single purchaser of health care. In addition, CMS would likely need new statutory authority to broadly implement many of the innovations identified in the NASI study. Congressional concern has heightened recently regarding the regulatory burden on the practitioners that serve Medicare beneficiaries. In his testimony before the Senate Committee on Finance, the Secretary of HHS emphasized the importance of communication between CMS and providers, stating, "When physicians call us...we need to respond quickly, thoroughly and accurately." Under the spotlight held by both the Congress and the Administration, CMS is expected to improve its customer service to the provider community. Concern about regulatory burden is not limited to providers in Medicare's traditional fee-for-service program. Policymakers are also concerned about the regulatory burden on health plans that participate in the Medicare+Choice program. During each of the last 3 years, substantial numbers of health plans reduced the geographic areas they served or terminated their Medicare participation altogether. Cumulatively, these withdrawals affected more than 1.6 million beneficiaries who either had to return to the fee-for-service program or switch to a different health plan. Industry representatives have attributed the withdrawals, in part, to Medicare+Choice requirements that they characterize as overly burdensome. HCFA took steps to address plans' regulatory concerns modifying some requirements or delaying their implementation. It also launched an initiative designed to help the agency better understand plans' concerns, assess them, and recommend appropriate regulatory changes. At the request of the House Ways and Means Subcommittee on Health, we are evaluating Medicare+Choice requirements. Our study will compare Medicare+Choice requirements with the requirements of private accrediting organizations and those of the Office of Personnel Management for plans that participate in the Federal Employees Health Benefits Program. The study's objective is to document differences in these sets of requirements and determine whether these differences are necessary because of the unique nature of the Medicare program and the individuals it serves. CMS is also expected to improve communications with beneficiaries, particularly as the information pertains to Medicare+Choice health plan options. The agency has made significant progress in this regard but continues to face challenges in meeting the sometimes divergent needs of plans and beneficiaries. As required by the BBA, HCFA began a new National Medicare Education Program (NMEP). For 3 years the agency has worked to educate beneficiaries and improve their access to Medicare information. It added summary health plan information to the Medicare handbook and increased the frequency of its distribution from every few years to each year. It also established a telephone help line and an Internet Web site with comparative information on health plans, Medigap policies, and nursing homes and sponsored local education programs. Beginning this fall, it will become more important for beneficiaries to be aware that Medicare+Choice health plan alternatives to the traditional fee- for-service program may be available in their area and to understand each option and its implications. As required by the BBA, Medicare will now have an annual open enrollment period each November when beneficiaries must select either the fee-for-service program or a specific Medicare+Choice plan for the following calendar year. Beneficiaries will have strictly limited opportunities for changing their selection outside of the open enrollment period, a provision known as "lock-in." CMS recently announced that it would fund a $35 million advertising campaign this fall to help beneficiaries learn about Medicare's new features--such as the proposed discount prescription drug card program, coverage for preventive services and medical screening examinations, and the annual enrollment and lock-in provisions--and provide general information about Medicare+Choice plans and the availability of Medicare's Web site and telephone help line. The agency will also extend the operating hours of the help line and add an interactive feature to the Web site designed to help beneficiaries select the Medicare option that best fits their preferences. CMS has made other decisions about the fall information campaign that illustrate the sometimes difficult trade-off between accommodating plans and serving beneficiaries. To encourage health plan participation in the Medicare+Choice program, CMS has allowed plans additional time to prepare their 2002 benefit proposals. This extension will hamper the ability of CMS and health plans to disseminate information before the BBA-established November open enrollment period. CMS will not, for example, include any information about specific health plans in the annual handbook mailed to Medicare households. To reduce the potentially adverse effects of an abbreviated fall information campaign, the agency will allow health plans to distribute marketing materials with proposed benefit package information marked "pending Federal approval." CMS will also extend the open enrollment period through the end of December. Medicare is a popular program that millions of Americans depend on to cover their essential health needs. However, the management of the program is not always responsive to beneficiary, provider, and taxpayer expectations. CMS, while making improvements in certain areas, may not be able to meet these expectations effectively without further congressional attention to the agency's multiple missions, limited capacity, and constraints on program flexibility. The agency will also need to do its part by implementing a performance-based management approach that holds managers accountable for accomplishing program goals. These efforts will be critical in preparing the agency to meet the management challenges of administering a growing program and implementing future Medicare reforms. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or other Committee Members may have. For more information regarding this testimony, please contact me at (202) 512-7114, Leslie G. Aronovitz at (312) 220-7600, or Laura Dummit at (202) 512-7119. Under the direction of James Cosgrove and Geraldine Redican- Bigott, contributors to this statement were Susan T. Anthony, Carolyn Manuel-Barkin, Hannah Fein, William Hadley, Don Kittler, Christie Turner, and Margaret Weber. Medicare Management: Current and Future Challenges (GAO-01-878T, June 19, 2001. Medicare Reform: Modernization Requires Comprehensive Program View (GAO-01-862T, June 14, 2001). Managing for Results: Federal Managers' Views on Key Management Issues Vary Widely Across Agencies (GAO-01-592, May 25, 2001). Medicare: Opportunities and Challenges in Contracting for Program Safeguards (GAO-01-616, May 18, 2001.) Medicare Fraud and Abuse: DOJ Has Improved Oversight of False Claims Act Guidance (GAO-01-506, Mar. 30, 2001). Medicare: Higher Expected Spending and Call for New Benefit Underscore Need for Meaningful Reform (GAO-01-539T, Mar. 22, 2001). Major Management Challenges and Program Risks: Department of Health and Human Services (GAO-01-247, Jan. 2001). High Risk: An Update (GAO-01-263, Jan. 2001). Nursing Homes: Sustained Efforts Are Essential to Realize Potential of the Quality Initiatives (GAO/HEHS-00-197, Sept. 28, 2000). Medicare: Refinements Should Continue to Improve Appropriateness of Provider Payments (GAO/T-HEHS-00-160, July 19, 2000). Medicare: 21st Century Challenges Prompt Fresh Thinking About Program's Administrative Structure (GAO/T-HEHS-00-108, May 4, 2000). Medicare Contractors: Further Improvement Needed in Headquarters and Regional Office Oversight (GAO/HEHS-00-46, Mar. 23, 2000). Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 1999).
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Management of Medicare has come under increasing scrutiny. The Health Care Financing Administration (HCFA) has had mixed success running the program. The agency has developed payment methods that have contained cost growth, and HCFA has paid fee-for-service claims quickly and at low administrative cost. However, HCFA has had difficulty ensuring that it paid claims appropriately. In addition, Medicare claims administration contractors have done a poor job of communicating with Medicare providers. HCFA has taken important steps to address some of these shortcomings, including strengthening payment safeguards, but several factors have hampered its efforts. Despite its growing responsibilities, HCFA suffers from staffing shortages. The agency also continues to rely on archaic computer systems. At the same time, HCFA has faltered in its attempts to adopt a results-based approach to agency management. Constraints on the agency's contracting authority have limited its use of full and open competition to select claims administration contractors and assign administrative tasks. Rising expectations among Medicare beneficiaries and providers are putting pressure on the Centers for Medicare and Medicaid Services to modernize and improve agency operations. Such improvements will require HCFA to begin a performance-based management approach that holds managers accountable for achieving program goals. Congressional attention also appears warranted if Medicare is to meet the challenges of the 21st century.
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In 2003, HSPD-7 established a national policy for critical infrastructure and key resources. HSPD-7 designated DHS as the agency responsible for coordinating the nation's efforts to protect critical infrastructure. The Office of Infrastructure Protection (IP) within DHS fulfills the functions associated with managing and coordinating the national protection efforts. In June 2006, DHS issued the first NIPP as required by HSPD-7. The NIPP provides a risk management framework and sector partnership model for developing, implementing, and maintaining a coordinated national effort to manage the risks to critical infrastructure. FPS is the lead agency for the government facilities sector (the sector), and assumes multiple roles and responsibilities for the sector, which is comprised of a wide variety of facilities and assets owned or leased by federal, state, local, tribal, or territorial governments, located both domestically and overseas. Under the NIPP risk management framework, FPS is responsible for leading and coordinating six major elements sector-wide to identify, prioritize, and measure progress towards protecting critical infrastructure. See figure 1. Additionally, the NIPP sector partnership model calls on FPS to form and chair a government coordinating council comprised of representatives from different levels of government to share activities, policy, and FPS also participates in or interacts with the following communications.cross-sector councils, which facilitate relationships within and among the 18 sectors: The State, Local, Tribal, and Territorial Government Coordinating Council (SLTTGCC), which coordinates with non-federal government organizations across all 18 sectors; the Regional Consortium Coordinating Council, which represents a variety of distinct collaborative efforts between state, local, and private sector partners focused on critical infrastructure found in multistate regions or within a given city; the NIPP Federal Senior Leadership Council, which is a DHS-chaired council that consists of federal department and agency representatives from lead agencies named in HSPD-7; and the Critical Infrastructure Partnership Advisory Council, which is a partnership between government and private sector owners and operators of critical infrastructure to effectively coordinate federal protective programs. The NIPP requires each lead agency to develop and revise a sector- specific plan that addresses critical infrastructure protection. FPS has responsibility for updating the plan to adequately represent the sector and involve Council members. Every 4 years, FPS must: identify gaps between the plan and guidance from IP, policy changes, and best practices; identify and develop a consolidated list of actions required to close gaps; obtain, and incorporate input from sector partners and the Council in obtain final approval from IP and release the plan to sector partners and the Council. FPS and DHS issued the first sector-specific plan in 2007 and an update to the plan in 2010, in which they identified goals and objectives for the sector, shown in table 1. As the lead agency, HSPD-7 also requires FPS to provide the Secretary of Homeland Security with annual reports to assess progress and effectively prioritize sector-specific activities and gaps, among other things. This process involves consulting the Council, similar to the 2010 update to the plan. FPS's role as the lead agency for the sector is an additional duty beyond its traditional role of protecting over 9,000 owned or leased facilities under the custody and control of GSA. As part of its mission, FPS conducts risk assessments, recommends countermeasures, and performs law enforcement activities, such as incident response. FPS's activities are funded by security fees collected from tenant federal agencies. As such, FPS charges each tenant agency a basic security fee per square foot of space occupied in a GSA facility, among other fees. The Interagency Security Committee (ISC), which was established in 1995, develops policies and standards and facilitates security-related information exchanges. While domestic non-military federal facilities-- whether federally owned, leased, or managed--are required to adhere to the ISC standards, these standards do not apply to state, local, tribal, and territorial government facilities. ISC membership consists of over 100 senior executives from 51 federal agencies and departments, including FPS. DHS is responsible for chairing the ISC and is authorized to monitor federal agencies' adherence to ISC standards. FPS's leadership has not resulted in implementation of a risk management approach for the sector, as called for under the NIPP framework. Specifically, a lack of facilities data, risk assessments, and effective metrics and performance data undermine the implementation of a risk management approach. Under FPS's leadership, effective partnerships have also not developed. FPS faces challenges in leading the sector linked to the sector's size, diversity, and FPS's fee-based revenue structure. These challenges are compounded by the lack of an action plan. Lack of facilities data: Asset identification is a crucial element for risk management as outlined by both the NIPP framework and the 2010 plan. According to the 2010 plan, the sector's assets and systems must be identified to determine which of these, if damaged, would result in significant consequences for national economic security, public health or safety, morale, or governance. The 2010 plan also states that identifying and obtaining appropriate data on government facilities located domestically and overseas is a sector objective. However, FPS officials said that they have not identified or obtained data on federal, state, local, tribal and territorial government facilities for the sector. According to FPS officials, developing sector-wide data may be untenable and unwarranted, because most federal, state, local, tribal, and territorial government facilities do not meet the threshold established by IP for the most critical infrastructure and government facilities generally remain the same year after year. Yet, the 2010 plan states that several circumstances may require frequent updates to data on government facilities, including changes in threat levels, large-scale facility renovations, or the identification of a facility as supporting a nationally critical function or critical asset. Moreover, the 2011 annual report states that functions carried out in one government facility often directly support the functions under way in many other government facilities. Thus, an incident at one facility could have cascading impact across a range of functions essential to governance. Without appropriate data on government facilities, FPS has limited awareness of the potentially evolving universe of government facilities as well as the interdependencies that may exist in the sector. As a result, FPS may be overlooking facilities whose failure or degradation could pose significant harm to the nation's security, health, economy, or morale. While FPS officials said that they have neither identified nor obtained data on the sector, FPS has contributed to the development of a database maintained by IP, the IP Gateway / Infrastructure Information Collection System. IP uses this database to identify critical infrastructure assets and systems. According to FPS officials, they periodically review and cross reference the information contained within the database against the dataset that FPS uses as part of its role of protecting federal facilities. However, FPS's data do not encompass the full spectrum of sector facilities, in particular non-federal facilities. In addition, we have previously identified problems with FPS's data, such as a lack of data on building jurisdictional authorities. Consequently, FPS's efforts to corroborate the data contained within the IP Gateway / Infrastructure Information Collection System are undermined by the limited scope and quality of its data. To the extent that the IP Gateway / Infrastructure Information Collection System is used to prioritize critical infrastructure, this effort may also be detrimentally affected by weaknesses in FPS's data. No sector-wide risk assessments: FPS is not currently positioned to assess risk across the sector. Assessing risks and coordinating risk assessment programs are another key element of the NIPP framework and a sector objective. The plan and annual reports provide information about the principles of threat, vulnerability, and consequence as well as discuss different types of risks and threats faced by government facilities, but no standardized tool for performing risk assessments exists at the federal level, much less the state, local, tribal, and territorial levels. FPS promoted its Risk Assessment and Management Program (RAMP) as a risk assessment tool in the 2010 plan and sector annual reports, as well as in past Council meetings. However, the scope of RAMP was not originally intended to address non-federal facilities and has never become fully operational. Therefore, its usefulness as a sector-wide risk assessment tool is not clear. In fact, RAMP has been terminated according to a senior FPS official, and FPS is working on developing a replacement. According to this official, a new risk assessment tool and methodology will be released for use by sector partners at a future, unspecified date. FPS officials acknowledged the absence of a sector- wide risk assessment. Without this, FPS cannot prioritize facilities or implement protective programs, both activities predicated on effective risk assessment. No effective metrics and performance data: FPS has not established effective metrics and performance data, which hampers its ability to monitor the sector's progress toward the sector goal of implementing a long-term government facility risk management program as described in the 2010 plan. An effective metric is one that can adequately indicate progress toward a goal and that is objective, measureable, and quantifiable. Data to track metrics need to be sufficiently timely, complete, accurate, and consistent. Further, DHS has established guidance on metrics to assess improvements in the protection and resiliency of critical infrastructure, which lead agencies can use to guide these efforts in their respective sectors. We have reported that without effective performance data, decision makers may not have sufficient information to evaluate whether investments have improved security and reduced a facility's vulnerability, or to determine funding priorities within and across agencies. In 2000, FPS transitioned all alarm-monitoring and dispatching capabilities from several regional control centers to four MegaCenters. Currently, each MegaCenter monitors multiple types of alarm systems, closed circuit television, and wireless dispatch communications within federal facilities throughout the nation. These centers--located in Michigan, Colorado, Pennsylvania, and Maryland--are equipped with state-of-the-art communication systems and operate continuously. terms of timeliness, completeness, accuracy, or consistency. Until it establishes quantifiable metrics and performance data, FPS will be unable to gauge progress toward implementing a risk management approach, specifically, and the protection or resiliency of critical government facilities, overall. To effectively implement the NIPP and achieve the goals of the sector, partnerships are essential. As previously discussed, the NIPP sector partnership model integrates partners into the planning and operational activities for a collaborative approach to the protection of critical infrastructure. Likewise, the 2010 plan places a significant emphasis on the role of partnerships. However, of the 16 Council members we contacted, 13 indicated that they had little or no involvement in developing the sector plan and annual reports, and for at least 8 agencies these documents were of negligible value. To offset low Council member response, FPS officials reported relying on open source information (e.g., annual federal budget) to develop the annual report. Relying primarily on open source information does not fully or effectively leverage the knowledge and experience of Council members, potentially undermining the value of the plan as a means to promote collaboration in critical infrastructure protection. Consequently, this key coordination goal of the 2010 plan has not been met, and as a result, FPS is limited in its ability, as lead agency for the sector, to productively contribute to the larger DHS effort to prioritize and safeguard the nation's most critical infrastructure. FPS's role as lead agency for the government facilities sector is particularly critical because according to the 2011 annual report, government facilities have been the most frequently attacked sector since 1968 and the sector involves a very dynamic threat environment. FPS's compilation of reports that hold little value for sector partners, leaves FPS and its sector partners less able to engage in a comprehensive risk management framework that addresses this threat environment. Furthermore, while FPS chairs the Council, the principle mechanism for engaging partners, FPS has not involved the full spectrum of sector partners. FPS officials said that they use an informal process to manage the Council membership and have repeatedly reported that they actively seek to add members to expand state and local representation. Of the Council members identified by FPS, 21 of the 26 are federal agencies, 3 are state or local agencies, and 2 are non-governmental organizations. Officials from all 5 state and local government and non-governmental organizations told us that they were either unaware or did not consider themselves to be members of the Council. Furthermore, the Council currently has no representation from tribal and territorial governments. Having active representation from state, local, tribal, and territorial governments on the Council would be particularly helpful, given that FPS's interaction with the cross-sector councils that represent these perspectives has been limited or non-existent. As previously discussed, the SLTTGCC provides all 18 sectors a mechanism to coordinate with non-federal government organizations. According to the 2010 plan, the SLTTGCC had liaisons who were fully integrated into the Council. However, both SLTTGCC officials and FPS officials indicated that there has been limited interaction. During our review, FPS reached out to the SLTTGCC to discuss opportunities to increase partnering activities. FPS officials reported having never worked with the Regional Consortium Coordinating Council, which includes state and local government representatives. With limited representation on the Council and little or no interaction with certain cross-sector councils, the sector is missing opportunities to engage and integrate the experience, knowledge, and priorities of state, local, tribal and territorial partners into the plan to help ensure buy-in for protecting critical infrastructure across all levels of government. Moreover, the Council has become progressively less active over the years. According to the 2011 annual report, the lead agency convenes Council meetings quarterly and communicates information about threats, incidents, and effective protection-related practices to sector partners. However, Council members indicated that the frequency of meetings has steadily declined over the years. In 2011, FPS held only one meeting in January; its next meeting was held in May 2012. No working groups or other activities occurred in the interim. At the 2011 meeting, there was a total of four non-DHS Council members who attended. FPS's May 2012 Council meeting may have reflected increased interest, with 14 agencies other than DHS in attendance. However, only one attendee represented state, local, tribal or territorial governments; all other attendees were from federal agencies. FPS officials acknowledged that participation of Council members has been decreasing every year. Most Council members representing federal agencies said that interaction with the sector had not been helpful since their agencies actively participate in the ISC, which provides the guidance their agencies need to meet federal physical security standards. Nevertheless, some Council members said that the sector was valuable as a resource for coordinating security activities and potentially developing a uniform risk assessment tool. Since the sector covers a larger and broader set of government facilities than the ISC-- such as military, state, local, tribal and territorial facilities--the potential benefits of collaboration, as discussed earlier, could lead to a more comprehensive approach to protecting critical government facilities. FPS has identified its limited resources as a significant challenge to leading a sector as large and diverse as the government facilities sector. The 2010 plan states that the sector includes more than 900,000 federal assets, as well as assets from 56 states and territories; more than 3,000 counties; 17,000 local governments; and 564 federally recognized tribal nations. In addition, these facilities represent a wide variety of uses, both domestically and overseas, ranging from office buildings and courthouses to storage facilities and correctional facilities. FPS officials indicated that they have very limited staffing and no dedicated line of funding for activities related to leading the sector, and it was unclear if FPS's security fees could be used to cover the costs of serving as the lead agency for the sector. Because of limited resources, FPS officials said that they could only meet the NIPP's minimum reporting requirements and did not engage in other activities that could address the issues discussed earlier. For example, FPS officials said that they abandoned efforts related to strategic communications and marketing as described in the 2010 annual report, aimed at increasing awareness and participation across the sector because of resource constraints. FPS reported in 2010 that it did not have the capability to plan for any sector-specific agency investments. In 2011, FPS had less than one full-time equivalent employee engaged in sector- specific agency activities, which represents a decline from prior years when FPS had a full-time equivalent employee and several contract employees assisting with its sector responsibilities. As discussed above, FPS is funded using a fee-based structure in which it collects funds from federal tenant agencies for security and protective services. We have previously reported that FPS's involvement in homeland security activities not directly related to facility protection is inconsistent with a requirement in the Homeland Security Act of 2002 that FPS use funding from the fees it collects solely for the protection of federal government buildings and grounds. We recommended to DHS that if FPS continues its involvement in activities not directly related to the protection of federal buildings and grounds, a funding process would be needed that is consistent with the requirement regarding the use of funds from agency rents and fees. Notwithstanding issues related to how its fees may be used, FPS has not fully assessed the resource requirements for serving as the lead sector agency, because it has not completed an action plan or cost estimate for carrying out the 2010 plan. The 2010 plan states that determining the sector's priorities, program requirements, and funding needs for government facility protection is a sector objective. FPS previously reported it was developing an action plan to guide its implementation of the 2010 plan, but according to FPS officials, they are no longer pursuing this, because identifying steps FPS can and will take is difficult without knowing what funding or resources are available. FPS officials also told us that they originally estimated the cost of serving as the lead agency to be around $1 million, but did not provide us with the analysis to support this estimate. According to DHS officials, HSPD-7 is in the process of being updated to reassess how the NIPP and the sectors are overseeing the protection of critical infrastructure, which may result in the sector being restructured. For example, according to DHS, GSA, and Department of the Interior officials, GSA will become a co-lead agency, the monuments and icons sector will be subsumed within the government facilities sector, and an executive committee that includes the ISC may be formed to help advise the sector. Such changes may affect FPS's workload and resources as the lead agency. An action plan could help FPS and DHS refocus efforts in the sector. We have recommended that agencies leading intergovernmental efforts use an action plan to establish priorities, provide rationale for resources, and to propose strategies for addressing challenges.enable FPS and DHS to manage change by prioritizing the activities required of the sector's lead agency and identifying those activities that can be feasibly carried out by FPS given its current resource constraints. An action plan may also be useful to FPS for justifying additional resources, which may help address the challenge posed by its fee-based revenue structure. FPS is responsible for leading efforts to identify, prioritize, and protect critical government facilities across all levels of government under the NIPP. The loss of critical government facilities and the people who work in them because of terrorism, natural hazards, or other causes could lead to catastrophic consequences. The lack of facility information, the absence of sector-wide risk assessments, and ineffective metrics and data undermine the implementation of a risk management approach as outlined by the NIPP risk management framework and envisioned in the 2010 plan. In addition, FPS has not effectively employed the NIPP sector partnership model to engage the Council and represent the depth, breadth, and interests of the sector, particularly non-federal partners. Consequently, key goals of the 2010 plan have not been met, and FPS is limited in its ability to productively contribute to the larger DHS effort to prioritize and safeguard the nation's most critical infrastructure. According to DHS officials, structural changes to the sector may already be under way. Yet, FPS and DHS do not have an informed understanding of the priorities and resources needed to fulfill the lead agency responsibilities, and structural changes may affect these priorities and available resources. An action plan could serve as a valuable tool for FPS and DHS to identify, in tandem with any structural changes, priorities that can be feasibly achieved and the associated resource requirements given FPS's fee-based revenue structure. This may, in turn, help address the overall limited progress made to date in the sector with implementing a risk management approach and developing effective partnerships. To enhance the effectiveness of the government facilities sector, we recommend that the Secretary of DHS direct FPS, in partnership with IP and Council members, to develop and publish an action plan that identifies sector priorities and the resources required to carry out these priorities. With consideration of FPS's resource constraints, this plan should address FPS's limited progress with implementing a risk management approach and developing effective partnerships within the sector. The plan should address, at a minimum, steps needed to: 1. develop appropriate data on critical government facilities; 2. develop or coordinate a sector-wide risk assessment; 3. identify effective metrics and performance data to track progress toward the sector's strategic goals; and 4. increase the participation of and define the roles of non-federal Council members. We provided a draft report to DHS, GSA, Department of Education, Department of Health and Human Services, Department of State, National Archives and Records Administration, National Aeronautics and Space Administration, National Institute of Standards and Technology, Department of the Interior, Environmental Protection Agency, and Department of Justice. DHS concurred with our recommendation to develop and publish an action plan for the sector. DHS's full comments are reprinted in appendix II. The National Archives and Records Administration also agreed with our findings. DHS, GSA, and the National Institute of Standards and Technology provided technical comments, which we considered and incorporated, where appropriate. The other agencies did not provide comments on our draft report. 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 staffs have any questions on 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. Contact information and key contributors to the report are listed in appendix III. To assess the Federal Protective Service's (FPS) leadership of the government facilities sector, we reviewed Homeland Security Presidential Directive 7, Department of Homeland Security's (DHS) National Infrastructure Protection Plan (NIPP), and the 2010 Government Facilities Sector-Specific Plan (the 2010 plan). Based on these documents, we identified the implementation of a risk management approach and development of effective partnerships as two key activities of the NIPP and the 2010 plan that lead agencies are responsible for. These activities form the foundation for identifying, prioritizing, and protecting critical infrastructure. We reviewed the outcomes reported in the 2010 and 2011 sector annual reports to determine FPS's actions, and identified gaps between these actions and the goals and activities in the 2010 plan. We reviewed prior GAO reports and DHS Office of Inspector General reports on critical infrastructure to identify any challenges that FPS faces in leading the implementation of the 2010 plan and key practices on establishing performance metrics and interagency collaboration. In addition, we interviewed FPS officials in Washington, D.C., about the 2010 plan, its sector-related activities as the lead agency, and any challenges to implementing the plan. We interviewed DHS officials from the Office of Infrastructure Protection and Interagency Security Committee about their role as sector partners and their interaction with FPS as the lead agency. We also interviewed members from the sector's Council about their role and participation in the Council and their interaction with FPS. We selected 16 of the 26 members of the Council based on several criteria, including their level of activity as determined by contributions to the 2010 plan and sector annual reports, or participation in the 2011 Council meeting, and all 5 of the state and local government members, and non-governmental organization members. Among federal members of the Council, we also selected federal agencies that served as the lead agencies for the monuments and icons sector, water sector, commercial facilities sector, and education subsector, and federal executive branch agencies with expertise in law enforcement or physical security applicable to the protection of government facilities. We conducted this performance audit from December 2011 to August 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, David Sausville, Assistant Director; Friendly Vang-Johnson; Jennifer DuBord; Delwen Jones; Steven Putansu; and Kathleen Gilhooly made key contributions to this report. Federal Protective Service: Better Data on Facility Jurisdictions Needed to Enhance Collaboration with State and Local Law Enforcement. GAO-12-434. Washington, D.C.: March 27, 2012. Federal Protective Service: Actions Needed to Resolve Delays and Inadequate Oversight Issues with FPS's Risk Assessment and Management Program. GAO-11-705R. Washington, D.C.: July 15, 2011. Homeland Security: Protecting Federal Facilities Remains a Challenge for the Department of Homeland Security's Federal Protective Service. GAO-11-813T. Washington, D.C.: July 13, 2011. Budget Issues: Better Fee Design Would Improve Federal Protective Service's and Federal Agencies' Planning and Budgeting for Security. GAO-11-492. Washington, D.C.: May 20, 2011. Homeland Security: Ongoing Challenges Impact the Federal Protective Service's Ability to Protect Federal Facilities. GAO-10-506T. Washington, D.C.: March 16, 2010. Homeland Security: Greater Attention to Key Practices Would Improve the Federal Protective Service's Approach to Facility Protection. GAO-10-142. Washington, D.C.: October 23, 2009. Homeland Security: Federal Protective Service Has Taken Some Initial Steps to Address Its Challenges, but Vulnerabilities Still Exist. GAO-09-1047T. Washington, D.C.: September 23, 2009. Homeland Security: The Federal Protective Service Faces Several Challenges That Hamper Its Ability to Protect Federal Facilities. GAO-08-683. Washington, D.C.: June 11, 2008. Homeland Security: Preliminary Observations on the Federal Protective Service's Efforts to Protect Federal Property. GAO-08-476T. Washington, D.C.: February 8, 2008. Homeland Security: Guidance and Standards Are Needed for Measuring the Effectiveness of Agencies' Facility Protection Efforts. GAO-06-612. Washington, D.C.: May 31, 2006. Homeland Security: Further Actions Needed to Coordinate Federal Agencies' Facility Protection Efforts and Promote Key Practices. GAO-05-49. Washington, D.C.: November 30, 2004. Homeland Security: Transformation Strategy Needed to Address Challenges Facing the Federal Protective Service. GAO-04-537. Washington, D.C.: July 14, 2004. Critical Infrastructure Protection: DHS Has Taken Action Designed to Identify and Address Overlaps and Gaps in Critical Infrastructure Security Activities. GAO-11-537R. Washington, D.C.: May 19, 2011. Critical Infrastructure Protection: DHS Efforts to Assess and Promote Resiliency Are Evolving but Program Management Could Be Strengthened. GAO-10-772. Washington, D.C.: September 23, 2010. Critical Infrastructure Protection: Update to National Infrastructure Protection Plan Includes Increased Emphasis on Risk Management and Resilience. GAO-10-296. Washington, D.C.: March 5, 2010. The Department of Homeland Security's (DHS) Critical Infrastructure Protection Cost-Benefit Report. GAO-09-654R. Washington, D.C.: June 26, 2009. Influenza Pandemic: Opportunities Exist to Address Critical Infrastructure Protection Challenges That Require Federal and Private Sector Coordination. GAO-08-36. Washington, D.C.: October 31, 2007. Critical Infrastructure: Sector Plans Complete and Sector Councils Evolving. GAO-07-1075T. Washington, D.C.: July 12, 2007. Critical Infrastructure Protection: Sector Plans and Sector Councils Continue to Evolve. GAO-07-706R. Washington, D.C.: July 10, 2007. Critical Infrastructure: Challenges Remain in Protecting Key Sectors. GAO-07-626T. Washington, D.C.: March 20, 2007. Critical Infrastructure Protection: Progress Coordinating Government and Private Sector Efforts Varies by Sectors' Characteristics. GAO-07-39. Washington, D.C.: October 16, 2006. Information Sharing: DHS Should Take Steps to Encourage More Widespread Use of Its Program to Protect and Share Critical Infrastructure Information. GAO-06-383. Washington, D.C.: April 17, 2006.
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U.S. government facilities have been the target of foreign and domestic terrorists. Government facilities are one of 18 critical infrastructure sectors designated under Homeland Security Presidential Directive 7 (HSPD-7). The Department of Homeland Security (DHS) is responsible for identifying, prioritizing, and coordinating the protection of critical infrastructure that, if destroyed, could have a debilitating impact on governance, the economy, national morale, or public health and safety. DHS defines critical infrastructure sector responsibilities in the National Infrastructure Protection Plan (NIPP) and the Federal Protective Service (FPS) is the lead agency for the government facilities sector. As such, FPS is to develop and implement a government facilities sector-specific plan, which was first issued in 2007 and updated in 2010, in coordination with governmental partners. In this report, GAO assesses FPS's efforts as the lead agency for the government facilities sector. To do this, GAO reviewed HSPD-7, the NIPP, the 2010 plan and other related documents to compare FPS's actions and the goals for the sector. GAO also interviewed DHS agency officials and 16 selected sector partners about activities for, and coordination with, the sector. The Federal Protective Service (FPS) has not been effective as the lead agency for the government facilities sector, which includes facilities at the federal, state, local, tribal and territorial level. Under the National Infrastructure Protection Plan (NIPP) and the 2010 sector-specific plan, FPS is responsible for establishing a risk management approach and developing effective partnerships for the sector. However, FPS has not implemented a risk management approach. According to FPS, it has not identified or obtained data on facilities at the federal, state, local, tribal and territorial level, which are fundamental for employing a risk management approach. In addition, despite providing information on the principles of threat, vulnerability, and consequence, FPS has not coordinated or assessed risk across government facilities, another key element of risk management. FPS also lacks effective metrics and performance data to track progress toward implementing a risk management approach and for the overall resilience or protection of government facilities. Consequently, FPS does not have a risk management approach for prioritizing and safeguarding critical government facilities. Furthermore, FPS has not built effective partnerships across different levels of government. While FPS chairs the Government Coordinating Council (the Council)--a mechanism intended to help share activities and policy across different levels of government--the Council's membership lacks a full spectrum of sector partners, particularly non-federal. All five state and local government and non-governmental members of the Council that GAO contacted were unaware of, or did not consider themselves to be part of, the Council. FPS also has not leveraged the State, Local, Tribal and Territorial Government Coordinating Council, an existing mechanism to coordinate with non-federal government organizations, although FPS officials reported recent efforts aimed at enhancing this partnership. As the lead agency for the sector, FPS faces challenges associated with funding and its lack of an action plan. According to FPS officials, FPS has no dedicated line of funding for its activities as the lead agency and resource constraints hinder FPS's capacity to lead this large and diverse sector, which is comprised of more than 900,000 federal assets, as well as assets from 56 states and territories; over 3,000 counties; 17,000 local governments; and 564 federally recognized tribal nations. FPS's use of fee-based revenue to perform homeland security activities not directly related to federal facility protection is inconsistent with the Homeland Security Act of 2002. FPS does not have a full understanding of the resource requirements for serving as the lead agency, because it has not completed a cost estimate or an action plan to guide implementation of the 2010 plan. According to DHS officials, HSPD-7 will be updated, which may result in structural changes to the sector that could affect the lead agency's responsibilities and available resources. An action plan could serve as a valuable tool for FPS and DHS to identify priorities that can be feasibly achieved and the resources required, in tandem with any potential structural changes. GAO recommends that the Secretary of DHS direct FPS, in partnership with others, to develop and publish an action plan that identifies sector priorities and resource requirements, and addresses steps needed to implement a risk management approach and develop effective partnerships. DHS concurred with the recommendation.
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AOC and the CVC team have continued to refine the project's schedule since the November hearing and have made substantive progress in addressing the issues that we and the Subcommittee have raised, particularly concerning the base project's schedule. For example, the CVC team reviewed the sequence and duration of the activities scheduled for interior stonework, finish work, and work associated with the base project's fire protection system, including the acceptance testing to be done by AOC's Fire Marshal Division. To reflect the results of its review, the team revised the project's December 2005 and January 2006 schedules, and in collaboration with the team that is planning for CVC operations, enhanced the manner in which the operations activities are incorporated into the project's master schedule. AOC and its contractors' staff who are involved in planning for CVC operations agree that the January 2006 schedule identifies the related construction and operations activities. The CVC team has not yet fully reassessed the schedule for the expansion spaces and has not yet reached agreement with the Chief Fire Marshal on the requirements for acceptance testing of those spaces. Finally, the CVC team has continued to meet weekly to identify risks facing the project and to discuss mitigation strategies and actions. As of February 1, 2006, the team had identified 62 risks and developed mitigation strategies for all but 1, which had just been identified. The plans vary in their level of detail and stage of implementation. According to AOC's December 2005 and January 2006 schedules, the CVC base project will be ready to open to the public with a temporary certificate of occupancy on February 13, 2007, and the House and Senate expansion spaces will be ready on April 24, 2007. To allow for possible delays and start-up time for operations, AOC has proposed an April 2007 opening date for the base project and a May 2007 occupancy date for the expansion spaces. By the April opening date for the base project, AOC believes, all construction work in the CVC and East Front will be completed, but the CVC's occupancy at any one time will be temporarily limited to 3,500, compared with about 4,200, the normal anticipated occupancy level. This temporary limit will be necessary because the "horizontal exits," or passages, through the expansion spaces, which the life safety code requires for exiting the base CVC project, will not be available until later. These horizontal exits cannot be used until the fire alarm system in the expansion spaces has been fully tested and accepted--work that is not slated to be completed until after the base CVC is scheduled to open. Some additional work will likely be required to provide temporary emergency exit routes from the CVC, but the CVC team does not believe that this work or its costs should be substantial. Mr. Chairman, a brief explanation of AOC's rationale for proposing a CVC opening with a temporary cap on visitor occupancy may be helpful at this point. The current project schedule calls for completing the construction of both the CVC and the expansion spaces before December 31, 2006, but would delay the start of acceptance testing the portions of the fire alarm system in the expansion spaces until such testing for the base CVC project is completed in February 2007. AOC is planning this approach because it believes that starting the acceptance testing for the expansion spaces earlier would prolong the completion of the acceptance testing in the base project and thereby delay the base project's opening to the public. More specifically, the fire protection devices for the atriums, which are a part of the horizontal exits ultimately required by code for full occupancy of the base project, would undergo acceptance testing with the expansion spaces, rather than with the base CVC project. To accommodate this change, AOC shifted the finish work in the atriums from the base CVC schedule to the expansion space schedule, and is planning to conduct the acceptance testing for the atriums and the expansion spaces at the same time, after the acceptance testing for the base CVC project is done. Until the acceptance testing for the expansion spaces has been completed, AOC's Chief Fire Marshal has said that the expansion spaces, including the exits through the atriums, cannot be used as emergency exit routes, and therefore AOC must take measures to provide temporary emergency exit routes from the base CVC project and reduce the number of occupants who can be in the base project until the exit routes are available. Our work to date in monitoring the CVC project and the results of our recently completed risk assessment of the project's schedule point to later opening dates than the schedule indicates. Although the schedule for the base project goes a long way toward responding to our concerns about the amount of time previously provided for a number of activities and extends their duration, CVC team managers and members we interviewed believe that certain work will take longer to complete than the revised schedule allows. For example, they believe that interior stonework and finish work for the base project and the East Front are likely to take longer. According to our risk analysis, which reflects the CVC team's input and assumes that AOC will successfully address the challenges it faces, the CVC is more likely to be ready for opening with a temporary certificate of occupancy between late April and mid-May 2007 than in February, as indicated in AOC's current schedule. AOC is now proposing an April 2007 opening date to provide time for possible construction slippages and operations preparation. The additional time AOC says is necessary for operations preparation after construction completion would mean that the CVC would be ready for opening with a temporary cap on visitor occupancy by about the end of May 2007, according to our analysis. Similarly, our analysis suggests that the House and Senate expansion spaces are more likely to be ready in mid August or early September 2007 than in April or May 2007. We believe the later time frames are more likely because (1) AOC has scheduled the acceptance testing of the expansion spaces after the acceptance testing of the base project and, according to our work, the base project testing will take longer than scheduled and (2) AOC's Chief Fire Marshal believes that the acceptance testing of the expansion spaces will take longer than scheduled. We have discussed the results of our analysis with AOC, and it continues to believe that it will be able to meet its April and May 2007 time frames for the CVC and the expansion spaces, respectively. Furthermore, AOC said that it and the CVC team will continuously review the schedule to identify opportunities for improvement. For example, AOC pointed out that it may be able to have the acceptance testing of the expansion spaces done in segments so that Members and staff will not have to wait for the entire facility to be tested before they can occupy their space. AOC also believes it may be able to revise the scheduling of some East Front mechanical work to save time. We agree that AOC should continuously look for ways to improve the schedule and that improvements may be possible. However, we also believe that AOC will be challenged to meet even the later opening dates we have identified given the problems, challenges, risks, and uncertainties the project faces. A discussion of these follows: Delivery of stone and pace of stone installation remain critical. Although the CVC team has made progress in installing interior wall and floor stone, work on the wall stone has fallen behind schedule in several areas, and the project still faces significant challenges, risks, and uncertainties in this area. These include whether sufficient quantities of the appropriate wall stone will be received in time and whether the pace of installation will be sufficient to complete this work as scheduled. According to information provided by the sequence 2 contractor on February 10, the wall stone supplier still had a 20-truckload backlog and was not shipping wall stone at the scheduled rate, resulting in a delivery shortfall of about 6,000 cubic feet. According to AOC's construction management contractor, stone supply is not affecting interior wall stone installation because a large quantity of stone is currently on site; however, the contractor is concerned about the ability of the stone supplier to meet current and future requirements that include stone for the East Front, adequate stone to maintain productivity, and the 20-truckload backlog. The pace of installation is also an issue. The sequence 2 contractor has recently increased the number of stone masons working on the project and has begun meeting the installation targets in its work plan. However, if the wall stone installation targets are not achieved, whether because the masons are less productive than planned or work spaces are not ready for stonework to begin, completion delays are likely. The sequence 2 contractor has already encountered work spaces in the service level, the orientation lobby, and the East Front that were not available for stonework because concrete was out of tolerance or masonry walls were not ready for wall stone to be hung. Finally, the sequence 2 contractor still needs to install about 120,000 square feet of floor stone in the CVC and could have problems meeting the scheduled completion dates if not enough masons are available, the amount of floor space available is insufficient because other finish work is not done, or other trades are working in the areas where floor stone is to be laid. As of February 10, AOC had not received a floor stone installation plan requested from the sequence 2 contractor, but the sequence 2 contractor said that it intends to finish the plan soon. Stacking of trades could delay completion. Continued delays, particularly in wall stone installation, could adversely affect the sequence 2 contractor's ability to accomplish all of the required finish work on schedule. The sequence 2 contractor has been making progress relative to its current plan for installing wall stone in the auditorium and the orientation lobby, but according to the current project schedule, wall stone installation is delayed in other areas, such as the East Front, the great hall, and the orientation theaters' exterior walls. Furthermore, as of February 10, although the contractor had completed 10 of the 13 milestones relating to wall stone that are being tracked for the Subcommittee, none of the 10 was completed by the date set in the September 2005 baseline schedule, and only 4 were completed by the date set in the November 2005 schedule. (See app. I.) If delays continue, a stacking of trades such as we described at the Subcommittee's November hearing could hold up finish work, such as drywall or ceiling installation, electrical and plumbing work, plastering, or floor stone installation. Such a situation could also increase the risk of accidents and injuries. The CVC team has also identified "trade stacking" as a high risk. The sequence 2 contractor acknowledges the risk, but said that it has structured its schedule to avoid the risk and plans to monitor progress closely to avoid problems. We acknowledge that these steps can be helpful; however, the more the wall stone schedule slips, the greater is the likelihood of "trade stacking," since more and more work will have to be done in less time to meet the schedule. AOC's construction management contractor agrees that this is a serious potential problem. Complex building systems remain a significant risk. The CVC will contain complex building systems, including systems for heating, air conditioning, and ventilation; fire protection; and security. These systems not only have to perform well individually, but their operation has to be integrated. If the CVC team encounters any significant problems with their functioning, either individually or together, during commissioning or testing, the project could be seriously delayed. AOC and the CVC team are aware of these risks and have been taking steps to mitigate them as part of their risk management process. Yet despite these steps, a significant problem could arise during commissioning or testing, and it is important that the team be prepared for such an event. Building design continues to evolve. The CVC has undergone a number of design changes, and design changes are continuing for a number of building components, such as the exhibit gallery and the fire protection and security systems. Some of these changes have resulted in delays, such as in the exhibit gallery and in the East Front. In addition, designs or shop drawings for some elements of the project, such as aspects of the facility's fire protection systems, have not yet been fully approved and are subject to change. At this stage of the project's construction, one might expect the number of design changes to dwindle. However, this is not the case. For example, more than 20 design changes or clarifications were issued last month. Additional design changes are being considered, and the potential exists for such changes to further adversely affect the schedule. Multiple critical activity paths complicate schedule management. In its report on the project's January 2006 schedule, AOC's construction management contractor identified 18 critical activity paths--4 more than in the contractor's report on the project's October 2005 schedule--that are crucial to meeting the scheduled completion date. In addition, the construction management contractor said that several noncritical activities have fallen behind schedule since November 2005, and a number of these have moved closer to becoming critical to the project's completion. As we have previously said, having a large number of critical and near-critical activities complicates project management and increases the risk of missing completion dates. We believe that the CVC team will be particularly challenged to manage all of these areas concurrently and to deal effectively with problems that could arise within these areas, especially if multiple problems arise at the same time. We currently estimate that the total cost to complete the entire CVC project is about $555 million without an allowance for risks and uncertainties and could be as much as about $584 million with such an allowance. As table 1 indicates, our current estimate without an allowance for risks and uncertainties is about $12 million higher than the estimate without such an allowance that we presented at the Subcommittee's November 16, 2005, hearing. This $12 million increase is largely attributable to additional delay costs estimated by AOC's construction management contractor and actual and anticipated changes in the design and scope of the project. In particular, changes in the project's fire protection system, which we discussed at the Subcommittee's October 18, 2005, CVC hearing, are now expected to cost more than previously estimated. Specifically, the system's acceptance testing is expected to be more extensive and to take place later than originally anticipated, and additional temporary construction may be required to ensure fire safety if the CVC is opened to the public before the Senate and House expansion spaces are completed. This additional construction would involve designing and installing--and then removing-- temporary walls and perhaps taking other fire protection measures to create emergency exits from the CVC. As discussed in more detail earlier in this statement, the need for temporary construction may be reduced or eliminated if the fire safety acceptance testing of the expansion spaces and of the CVC can be performed concurrently, rather than over two separate periods, as would be likely if the CVC is opened to the public before the expansion spaces are completed. We discussed this issue during the Subcommittee's July 14, 2005, CVC hearing and recommended then that AOC estimate the cost of these temporary measures so that Congress could weigh the costs and benefits of opening the CVC before the expansion spaces are completed. AOC has agreed to provide this estimate to Congress when it has more information on the status of construction progress on the CVC and expansion spaces and the specific steps that will be necessary to provide adequate temporary exit routes. We now estimate that the total cost to complete the entire project with an allowance for risks and uncertainties could be as much as $584 million, or about $25 million more than we estimated in November 2005. This increase reflects the potential for the project to incur additional costs if difficulties arise in commissioning and testing its complex and sophisticated fire protection, ventilation, and security systems; significant problems with the building's design are identified and need to be corrected during construction; delays cost more than anticipated; and significant discretionary changes in the project's design and scope are requested. To date, about $528 million has been provided for CVC construction. This amount does not include about $7.7 million that was made available for either CVC construction or operations. According to AOC, it expects to use about $2 million of this amount for construction. To obtain the additional funding that it expected to need to complete the project's construction, AOC, in December 2005, requested $20.6 million as part of its budget request for fiscal year 2007. This request was based, in part, on discussions with us and took into account our November 16, 2005, estimate of the cost to complete the project's construction without an allowance for risks and uncertainties and funding from existing appropriations. The request also reflected updates to our November estimate through mid-December 2005. At that time, the $20.6 million request for additional appropriations, coupled with the additional funds that AOC planned to use from existing appropriations, would have been sufficient to cover the estimated cost to complete construction without an allowance for risks and uncertainties. Our work since mid-December 2005 indicates that AOC will need about $5 million more, or about $25.6 million in additional funds, to complete construction without an allowance for risks and uncertainties. This increase reflects the number and magnitude of potential change orders that CVC team members and we believe are likely and additional costs associated with extending the project's expected completion date beyond March 31, 2007, the date contemplated in our last cost estimate. AOC generally agrees with our estimate, particularly with respect to having sufficient contingency funds available for necessary design or scope changes or for additional delay-related costs. Public Law 108-83 limits to $10 million the amount of federal funds that can be obligated or expended for the construction of the tunnel connecting the CVC with the Library of Congress. As of February 14, 2006, AOC estimated that the tunnel's construction would cost about $9.8 million, and AOC's total obligations for the Library of Congress tunnel construction work totaled about $8.7 million. AOC's remaining estimated costs are for potential changes. On February 13, 2006, AOC awarded a contract for the work to connect the tunnel to the Jefferson Building. This work is costing more than AOC had estimated--a possibility we raised in our November 16 testimony before the Subcommittee. Because this work involves creating an opening in the building's foundation and changing the existing structure, we believe that AOC is likely to encounter unforeseen conditions that could further increase its costs. Therefore, we included additional contingency funds for this work in our $555 million estimate of the cost to complete the CVC project's construction. Both AOC and we plan to monitor the remaining tunnel and Jefferson Building construction work closely to ensure that the statutory spending limit is not exceeded. Mr. Chairman, in conclusion, AOC has responded to many of the schedule- related concerns we have identified, but its planned opening date for the CVC is still somewhat optimistic. For AOC to meet even our estimated opening time frame, we believe that it is critically important for the CVC team to do the following: Aggressively take all necessary and appropriate actions to install interior wall and floor stone as expeditiously as possible, including seeing that sufficient quantities of masons, stone, and work space are available when needed to meet the wall stonework plan and the forthcoming floor stone installation plan. Closely monitor construction to identify potential "trade stacking" and promptly take steps to prevent it or effectively address it should it occur. Reassess its risk mitigation plans to ensure that the team takes the steps necessary to prevent a major building system problem during commissioning or testing and has measures in place to deal quickly with problems should they arise. Carefully consider the necessity of proposed scope and design changes and attempt to minimize the impact of necessary changes on the project's schedule and cost. Reassess the capacity of the CVC team (AOC and its contractors) to effectively manage and coordinate the schedule and work from this point forward, particularly with respect to the large number of activities that are currently critical, or close to being critical, to the project's timely completion. Identify and consider the pros and cons (including the estimated costs) of opening the CVC and expansion spaces at about the same time and provide this information to Congress. We have discussed these actions with AOC, and it generally agrees with them. It pointed out that it would be in a better position to assess the pros and cons of opening the CVC and the expansion spaces concurrently when construction is further along and it becomes clearer when the work will actually be done. This appears reasonable to us. We would be pleased to answer any questions that you or Members of the Subcommittee may have. For further information about this testimony, please contact Bernard Ungar at (202) 512-4232 or Terrell Dorn at (202) 512-6923. Other key contributors to this testimony include Shirley Abel, John Craig, Maria Edelstein, Elizabeth Eisenstadt, Brett Fallavollita, Jeanette Franzel, Jackie Hamilton, Bradley James, and Scott Riback. Wall Stone Area 2 base Wall Stone Area 3 base Wall Stone Area 1 Pedestals Wall Stone Area 2 Pedestals Install Walls Sta. 1+00- 2+00 Install Roof Sta. 1+00- 2+00 Install Roof Sta. 0+00-1+00 12/07/05 This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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GAO testified before the Senate Subcommittee on the Legislative Branch, Committee on Appropriations to provide the results of a risk-based analysis of schedule and cost for the Capitol Visitor Center (CVC). Our remarks focused on (1) our assessment of the risks associated with the Architect of the Capitol's (AOC) December 2005 schedule, and our estimate of a time frame for opening the project to the public; and (2) the project's costs and funding, including the potential impact of scheduling issues that have arisen since the Subcommittee's November 16, 2005, hearing on the CVC project's schedule and cost. Since the Subcommittee's November 16 CVC hearing, AOC and the CVC team have moved the project's construction forward and significantly revised the schedule, particularly for the base project. For example, they have reached agreement with AOC's Chief Fire Marshal on the schedule for testing the base project's life safety systems and have enhanced the manner in which the project's operations schedule is incorporated into the project's master schedule. In addition, they have reviewed and revised the schedule, postponing the opening dates for the CVC and the House and Senate expansion spaces by about 2 months each. Under AOC's revised schedule, the CVC would be open to the public in February 2007 with a temporary cap on visitor occupancy, and the expansion spaces would be open in April 2007. However, to allow for possible delays and start-up time for operations, AOC is proposing to open the CVC in April 2007 and the expansion spaces in May 2007, at which time the temporary cap on CVC occupancy would be lifted. We concur with AOC about the need for postponing the opening dates, but do not believe that AOC has scheduled enough time to complete several of the project's critical tasks and to address the problems, challenges, risks, and uncertainties that AOC and the CVC team are attempting to address. If they are successful in addressing these issues, we believe that the CVC can be opened to the public with the temporary cap on visitor occupancy in May 2007 and that the expansion spaces can be opened beginning in mid-August to early September 2007. Congress may be able to begin occupying the expansion spaces earlier if AOC implements a phased opening plan it is considering. However, if AOC experiences major problems completing construction, such as with installing interior stone or testing major building systems, the work could be finished even later than we have estimated. According to our current estimate, the total estimated cost to complete the entire CVC project is about $555 million without an allowance for risks and uncertainties. This estimate exceeds our November 16, 2005, estimate by about $12 million because we and AOC's construction management contractor are now projecting further delay-related costs. Changes in the project's design and scope have also been occurring, and more are likely. For example, the project's fire protection system has been evolving, and the system is now expected to cost more than previously estimated. To date, about $528 million has been provided for CVC construction. Thus, we now estimate that another $25.6 million will be needed to complete construction without an allowance for risks and uncertainties and taking into account funding from existing appropriations that AOC is planning to use. With an allowance for risks and uncertainties, we now estimate that the project could cost as much as about $584 million at completion, or about $25 million more than we estimated in November 2005. Estimated costs for the tunnel connecting the CVC with the Library of Congress are still within, but are now approaching, the $10 million statutorily mandated limit.
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Despite several revisions to schedule milestones since the program's inception, the Chem-Demil Program still is unable to meet these milestones because of unanticipated delays. Most incineration sites have missed important milestones established in 2001. Delays at Anniston, Umatilla, and Pine Bluff have already resulted in their missing the 2001 schedule milestones to begin chemical agent destruction operations (operations phase). Johnston Atoll has missed its schedule milestone for shutting down the facility (closure phase). Although Tooele has not missed any milestones since the 2001 schedule was issued, the site has undergone substantial delays in destroying its stockpile primarily because of a safety-related incident in July 2002. If additional delays occur at the Tooele site, it could also exceed its next milestone as well. Table 1 shows the status of the incineration sites that will miss 2001 schedule milestones. Many of the recent delays at the incineration sites have resulted from operations incidents, from environmental permitting problems, community protection concerns, and funding issues--a trend that we identified in previous reports on the program. Among the events that have caused delays at incineration sites since 2001 are the following: Incidents during operations. At Tooele, a chemical incident involving a plant worker who came into contact with a nerve agent while performing routine maintenance led to the suspension of agent destruction operations from July 2002 to March 2003. An investigation attributed the incident to inadequate or poorly followed worker safety procedures, and a corrective action plan, including an improved safety plan, was instituted before operations resumed. Since operations restarted in March 2003, Tooele has experienced several temporary shutdowns. Environmental permitting. Several environmental permitting issues have delayed the start of agent destruction operations at sites at Umatilla and Anniston. At Umatilla, the delays stemmed from several unanticipated engineering changes related to reprogramming software and design changes that required permit modifications and to a shutdown by state regulators because furnaces were producing an unanticipated high amount of heavy metals during surrogate agent testing. At Anniston, delays occurred because state environmental regulators did not accept test results for one of the furnaces because the subcontractor did not follow state permit-specified protocols. Community protection. Concerns about emergency preparedness for local communities have led to additional delays at Anniston. These concerns included the inadequacy of protection plans for area schools and for special needs residents (e.g., elderly and disabled individuals) who would have difficulty in an evacuation. Although we reported on this issue in July 1996 and again in August 2001, and a senior DOD official identified it as a key concern in September 2001, the Army had difficulty satisfactorily resolving the issue with key state stakeholders. As a result, operations did not begin until August 2003. Funding. Delays at Pine Bluff and Johnston Atoll occurred because DOD redirected fiscal year 2002 destruction program funds to acquire $40.5 million worth of additional emergency protection equipment for Anniston. To cover this unfunded budget expense, the Army reduced Pine Bluff's budget by $14.9 million and Johnston Atoll's budget by $25.1 million, leading to systemization and closure milestone slippages, respectively, at these sites. Program officials told us that the total cost of this schedule slip would ultimately be $116 million due to the extended period before closure. The program is likely to face unfunded requirements as programwide funding requests continue to exceed budgeted amounts. As of October 2003, according to preliminary estimates from FEMA, unfunded CSEPP requirements for all sites are expected to amount to $39.4 million and $49.0 million for fiscal years 2004 and 2005, respectively. Unlike the incineration sites, the two bulk-agent only sites, Aberdeen and Newport, have experienced delays but have not breeched their schedule milestones. In 2002, DOD approved using an alternative technology (neutralization), instead of incineration, at these two sites. This technology is expected to accelerate the rate of destruction at these two sites. The Army estimated that this process would reduce the scheduled end of operations at both sites by 5 years, from 2008 to 2003 at Aberdeen and from 2009 to 2004 at Newport. However, Aberdeen has encountered unanticipated problems with the removal of residual agent from bulk containers and has extended its planned completion date by 6 months, from October 2003 to March 2004. In addition, Newport has faced construction delays and community resistance to offsite treatment of waste byproducts. As a result of these delays, Newport has extended its planned start date for agent operations by 5 months, from October 2003 to February 2004. At two sites, Pueblo, Colorado, and Blue Grass, Kentucky, no milestones were set in the 2001 schedule because DOD had not yet selected a destruction technology. DOD has now selected a destruction technology for these sites, but it made decisions several months later than estimated. More importantly, DOD has set initial schedule milestones for these two sites that go beyond the extended April 2012 CWC deadline. According to DOD officials, these milestones are preliminary and will be reevaluated once contractors finish initial facility designs. The Chem-Demil Program has faced continued delays with the program largely because DOD and the Army have not yet developed a risk management approach to proactively anticipate and address potential problems that could adversely affect program schedules, costs, and safety. Such an approach could also leverage knowledge of potential problems gained at other sites. Instead, according to a DOD official, the program has used a crisis management approach, which has forced it to react to, rather than control, issues. The program had drafted a plan in June 2000 that was intended to address these issues. However, according to a program official, this plan was never approved or implemented because of a change in management in 2001. The delays and schedule extensions have contributed directly to program cost growth, according to program officials. As a result, DOD's total program cost estimate grew from $15 billion to $24 billion between 1998 and 2001. (See fig. 1.) Because of delays encountered since the 2001 revisions, the Army is now in the process of developing new milestones that will extend beyond those adopted in 2001. According to an Army official, the program will use events that have occurred since 2001 in presenting new cost estimates to DOD for preparation of the fiscal year 2005 budget submission. Program officials told us that they estimate new costs had increased by $1.4 billion as of October 2003, and this estimate is likely to rise further as additional factors are considered. Although the United States met the first two chemical weapons treaty deadlines, the continuing delays jeopardize its ability to meet the final two deadlines. (See table 2.) Since reaching the 2002 deadline to destroy 20 percent of the stockpile in July 2001, the Chem-Demil Program has been able to destroy only an additional 3 percent of the stockpile. In order to meet the April 2004 CWC deadline to destroy 45 percent of the stockpile, the program would have to eliminate an additional 22 percent of the stockpile within the next 6 months. Because the program will likely not be able to achieve this rate of destruction, the United States has asked for an extension of the 2004 deadline. According to current destruction schedules, the United States will not meet the 2007 deadline to eliminate 100 percent of the stockpile. As a result, the United States will likely have to ask for an extension of the 2007 deadline to complete the destruction of the entire stockpile. The CWC allows extensions of up to 5 years beyond the 2007 deadline. Unless the program fixes the problems that are causing schedule delays, the United States also risks not meeting this deadline, if extended to 2012. Despite recent efforts to improve the management and streamline the organization of the Chem-Demil Program, the program continues to falter because several long-standing leadership, organizational, and strategic planning weaknesses remain unresolved. The lack of sustained leadership has undercut decision-making authority and obscured accountability. The program's complex structure, with many lines of authority, has left roles and responsibilities unclear. Finally, the program lacks an overarching, comprehensive strategy to guide and integrate its activities and monitor performance. The Chem-Demil Program's lack of sustained leadership above the program level is underscored by the multiple shifts in oversight responsibilities that have occurred three times between DOD and the Army during the past two decades. The most recent change took place in 2001 when oversight responsibility for the program shifted back to DOD's Office of the Secretary of Defense. Table 3 summarizes the changes. These shifts in oversight responsibilities affected the continuity of program decision making and obscured accountability. As a different office assumed major decision authority, the program's emphasis shifted and initiatives that had been started were often not completed. For example, when the Army had oversight responsibility for the program, it established a memorandum of understanding with FEMA to clarify each of their roles and responsibilities related to CSEPP. However, after DOD assumed the program's oversight responsibilities in 2001, DOD did not follow the protocols for coordination that had been established in the memorandum, according to FEMA and DOD officials. As a result, DOD provided funds for emergency preparedness items without having adequate plans for distribution, which delayed the process. This shift in oversight responsibilities from the Army to DOD also left state and local community officials and other stakeholders uncertain as to the credibility of federal officials. According to FEMA and Army officials, coordination between the two agencies has improved in the last few months and efforts are being made to repair relationships with community and state stakeholders. Similar problems have also occurred within the Army as program leadership has changed. Three different officials at the Assistant Secretary level have held senior leadership positions since December 2001. In addition, five officials have served as the Deputy Assistant Secretary of the Army (Chem-Demil) during that time. From April 2002 to February 2003, the program manager's position remained vacant for nearly 1 year, before being filled. However, after only 4 months, the program manager resigned and the Army named a replacement. Frequent shifts in key leadership positions have led to several instances where the lack of continuity affected decision making and obscured accountability. For example, in June 2002, a program official promised to support future funding requests for emergency preparedness equipment from one community, but his successor did not fulfill this promise. Other communities viewed the agreement with one community as an opportunity to substantially expand their own funding requests. The lack of sustained leadership makes it unclear who is accountable when program commitments are made and not fulfilled. Moreover, when key leaders do not remain in their positions to develop the needed long-term perspective on program issues and effectively implement program initiatives, it is difficult to maintain program progress and ensure accountability for leadership actions. As our 2003 report documents, the Army recently reorganized the program. But this change in management structure has not streamlined the program's complex organization nor clarified roles and responsibilities. The establishment of the Chemical Materials Agency (CMA) in January 2003 has left the Director reporting to two different senior Army organizations, which is one more than under the previous structure. This divided reporting approach is still not fully developed, but has the potential to adversely affect program coordination and accountability. The reorganization has also divided the responsibility for various program phases between two offices within CMA. One organization, the Program Manager for the Elimination of Chemical Weapons, will manage the first three phases (design, construction, and systemization) for each site, and a newly created organization, the Director of Operations, will manage the final two phases (operations and closure). This reorganization changes the cradle-to-grave management approach that was used to manage sites in the past and has blurred responsibilities for officials who previously provided support in areas such as quality assurance and safety. Moreover, the reorganization did not address two program components--Assembled Chemical Weapons Alternatives (ACWA) program and community-related CSEPP. DOD will continue to manage ACWA separately from the Army, as congressionally directed. In addition, the Army will continue to manage CSEPP jointly with FEMA. While DOD and the Army have issued numerous policies and guidance documents for the Chem-Demil Program, they have not developed an overarching, comprehensive strategy or an implementation plan to guide the program and monitor its progress. This is contrary to the principals that leading organizations embrace to effectively implement and manage programs. Some key aspects of an approach typically used to effectively manage programs include promulgating a comprehensive strategy that includes a clearly stated mission, long-term goals, and methods to accomplish these goals. An implementation plan that includes annual performance goals, measurable performance indicators, and evaluation and corrective action plans is also important. According to DOD and Army officials, the Chem-Demil Program has relied primarily on guidance and planning documents related to the acquisition process. However, in response to our recent recommendation that they prepare such a strategy and plan, DOD stated that it is in the initial stages of doing so and estimates completion in fiscal year 2004. Since our 2001 report, the Army and FEMA have assisted state and local communities to become better prepared to respond to chemical emergencies. Based on the states' self-assessments and FEMA's reviews, all 10 states with chemical storage sites located within them or nearby are now considered close to being fully prepared to respond to a chemical emergency. This is a marked improvement from the status we reported in 2001 when 3 states reported that they were far from being prepared. Now, 6 of the 10 states are reporting that their status is fully prepared and the remaining 4 are close to being fully prepared. However, these statuses are subject to change because the states and communities themselves can revise or expand their agreed-upon emergency preparedness needs. They can make these changes because the "maximum protection" concept that governs CSEPP is open to interpretation. As a result, they can appear to be less prepared than before. For example, Oregon certified that it was fully prepared, but now has requested additional emergency equipment. This request has changed Oregon's self-reported preparedness status from fully prepared to incomplete. Despite these accomplishments, CSEPP costs continue to rise because, according to Army and FEMA officials, state and local communities may add to their emergency requirements beyond approved requests. Army and FEMA officials explain that the states often identify and expand their requirements, especially as destruction facilities move closer to the start of the operations phase. For example, the states of Colorado, Alabama, and Oregon have all requested funds for infrastructure, including roads and bridges. In June 2002, Oregon certified that its community readiness was adequate and recommended permit approval to allow test burns at Umatilla. Since that time, Oregon has asked for additional emergency preparedness support that exceeds its CSEPP budget. This request follows a pattern of substantially increasing funding requests at the start of the operations phase, as occurred at Anniston in 2001 when it received $40.5 million for additional CSEPP items. Programwide, new requirements continue to exceed approved CSEPP funding levels. FEMA has little control over the additional funding requests made by the states. As of October 2003, FEMA had identified $39.4 and $49.0 million in unfunded requirements for fiscal years 2004 and 2005, respectively. (See table 4.) In our August 2001 report, we recommended that the Army and FEMA (1) provide technical assistance, guidance, and leadership to the three states (Alabama, Indiana, and Kentucky) with long-standing emergency preparedness issues to resolve their concerns; (2) provide all states and their communities with training and assistance in preparing budget and life-cycle cost estimates and provide guidance and plans on reentry; and (3) establish specific measures of compliance with the benchmarks to more evenly assess performance and to correctly identify requirements. The Army is continuing to provide assistance to CSEPP states and communities as requested by FEMA. FEMA now participates more often in local community CSEPP activities and sponsors an annual CSEPP conference in an effort to improve its working relationships. FEMA has also provided software to simplify development of CSEPP financial reporting documents and has published a Reentry and Recovery Workbook. The workbook fills a void in state and local guidance for emergency responders to follow in the event of a chemical emergency. Lastly, FEMA expanded its capability assessment readiness tool to assist local communities in quantifying benchmark scores. We recommended in our September 2003 report that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology and Logistics, in conjunction with the Secretary of the Army, to (1) develop an overall strategy and implementation plan for the chemical demilitarization program and (2) implement a risk management approach that anticipates and influences internal and external factors that could adversely impact program performance. DOD concurred with our recommendations. It said that it was in the initial stages of developing an overall strategy and implementation plan and estimated that it would be completed in fiscal year 2004. It also said that CMA will review the progress of an evaluation of several components of its risk management approach within 120 days and then that DOD would evaluate the results and determine any appropriate action. In our 2001 report, we recommended that the Army and FEMA make improvements to the program, and they have implemented those recommendations. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or members of the Subcommittee may have. For future questions regarding this testimony, please contact me at (202) 512-4300. Individuals making key contributions to this testimony include Donald Snyder, Rodell Anderson, Bonita Oden, John Buehler, Nancy Benco, and Mike Zola. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Since its inception in 1985,the Chemical Demilitarization (Chem-Demil) Program has been charged with destroying the nation's large chemical weapons stockpile. After years of planning and building new facilities, the program started destroying the stockpile in 1990. As of October 2003, the program had destroyed 26 percent of the 31,500-ton agent stockpile, and its total estimated cost to destroy the entire stockpile is more than $25 billion. This testimony summarizes GAO's September 2003 report and addresses the following issues: (1) the status of schedule milestones and cost estimates, (2) the impact of the current schedule on the Chemical Weapons Convention (CWC) deadlines, (3) the challenges associated with managing the program, and (4) the status of the Chemical Stockpile Emergency Preparedness Program (CSEPP). The Chem-Demil Program faces schedule delays and higher costs, but it has improved emergency preparedness in communities near the sites. In 2001, the Chem-Demil Program extended its schedule milestones and increased its cost estimates from $15 billion to about $24 billion. Since then nearly all sites have experienced delays,stemming from problems such as: plant safety issues,environmental requirements, approving emergency preparedness plans, and funding shortfalls. The program needs a risk management plan to mitigate problems affecting program schedules, costs, and safety. Program officials say the delays have raised the cost estimates by an additional $1.4 billion, to more than $25 billion as of September 2003. Based on current schedule slippages, GAO believes that costs will grow higher and further delays will occur. Because of schedule delays, the United States will not meet CWC's April 2004 deadline to destroy 45 percent of the stockpile and it risks not meeting the original 2007 deadline to complete destruction of the entire stockpile. Unless the program fixes the problems causing delays,the United States also risks not meeting CWC's deadline of 2012, if extended. The program has suffered from several long-standing management and organizational issues. The lack of sustained leadership has undercut decision-making authority and obscured accountability. The program's complex structure, with multiple lines of authority, has left roles and responsibilities unclear. It does not have an overarching, comprehensive strategy to guide and integrate its activities and monitor its performance. The Army and the Federal Emergency Management Agency have helped state and local communities become better prepared to respond to chemical emergencies. Despite these gains, CSEPP costs are rising because some states have expanded their preparedness requests beyond the approved budgets. These requests amount to $88 million for fiscal years 2004 and 2005.
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Both DB and DC plans operate in a voluntary system with tax incentives for employers to offer a plan and for employees to participate. In the past, DC plans, such as 401(k) plans, were supplemental to DB plans. However, over the past several decades, there has been a shift in pension plan coverage; the number of DC plans has increased while the number of DB plans has declined. Today, DC plans are the dominant type of private- sector employee pension. Compared to DB plans, DC plans offer workers more control over their retirement asset management and greater portability over their retirement savings, but also shift much of the responsibility and certain risks onto workers. Workers generally must elect to participate in a plan and accumulate savings in their individual accounts by making regular contributions over their careers. Participants typically choose how to invest plan assets from a range of options provided under their plan and accordingly face investment risk. There are several different categories of DC plans, but most are types of cash or deferred arrangements in which employees can direct pre-tax dollars, along with any employer contributions, into an account, with any asset growth tax-deferred until withdrawal. One option available under some 401(k) plans is automatic enrollment, under which workers are enrolled in a 401(k) plan automatically, unless they explicitly choose to opt out. However, automatic enrollment has not been a traditional feature of 401(k) plans and, prior to 1998, plan sponsors feared that adopting automatic enrollment could lead to plan disqualification. In 1998, the Internal Revenue Service (IRS) addressed this issue by stating that a plan sponsor could automatically enroll newly hired employees and, in 2000, clarified that automatic enrollment is permissible for current employees who have not enrolled. Nonetheless, a number of considerations inhibited widespread adoption of automatic enrollment, including remaining concerns such as liability in the event that the employee's investments under the plan did not perform satisfactorily, and concerns about state laws that prohibit withholding employee pay without written employee consent. More recently, provisions of the Pension Protection Act of 2006 (PPA) and subsequent regulations further facilitated the adoption of automatic enrollment by providing incentives for doing so and by protecting plans from fiduciary and legal liability if certain conditions are met. In September 2009, the Department of the Treasury announced IRS actions designed to further promote automatic enrollment and the use of automatic escalation policies. The Employee Retirement Income Security Act of 1974 (ERISA), as amended, defines and sets certain standards for employee benefit plans, including 401(k) plans, sponsored by private-sector employers. ERISA establishes the responsibilities of employee benefit plan decision makers and the requirements for disclosing information about plans. ERISA requires that plan fiduciaries, which generally include the plan sponsor, carry out their responsibilities prudently and do so solely in the interest of the plan's participants and beneficiaries. The Department of Labor's (Labor) Employee Benefits Security Administration (EBSA) is the primary agency responsible for enforcing Title I of ERISA and thereby protecting private-sector pension plan participants and beneficiaries from the misuse or theft of pension assets. EBSA conducts civil and criminal investigations of plan fiduciaries and service providers to determine whether the provisions of ERISA or other relevant federal laws have been violated. In addition to Labor's oversight, the Securities and Exchange Commission (SEC) provides oversight for 401(k) investments. For example, the SEC, among other responsibilities, regulates registered securities including company stock and mutual funds under securities law. One issue of concern with DC plans is that participation and saving rates have been low. In 2007, we reported that the majority of U.S. workers, in all age groups, did not participate in DC plans with their current employers. In fact, only about half of all workers participate in any type of employer-sponsored retirement plan at any given time. According to data from the Current Population Survey, about 48 percent of the total U.S. workforce was not covered by an employer-sponsored plan in 2007. About 40 percent worked for an employer that did not sponsor a plan, and about 8 percent did not participate in the plan that their employer sponsored. Certain segments of the working population have consistently had much lower rates of employment with employers sponsoring a plan, and lower participation rates than the working population overall, such as lower-income workers, younger workers, workers employed by smaller companies, and part-time workers who typically lack coverage compared to all full-time workers. According to our analysis of the 2004 Survey of Consumer Finances, only 62 percent of workers were offered a retirement plan by their employer, and 84 percent of those offered a retirement plan participated. Participation rates were even lower for DC plan participants since only 36 percent of working individuals participated in a DC plan with their current employers at the time of our report. Although our analysis focused on DC plans as a group, 401(k) plans make up the vast majority of DC plans. At the household level, participation rates were also low; only 42 percent of households had at least one member actively participating in a DC plan. Further, only 8 percent of workers in the lowest income quartile participated in DC plans offered by their current employer. Participation rates are low partly because not all employers offer a retirement plan, and even when employers offer such plans, workers may not participate. Some small employers are hesitant to sponsor retirement plans because of concerns about cost. In addition, DC participation rates for the U.S. workforce may be low because some employers sponsor a DB plan rather than a DC plan. When companies do sponsor employer plans, some workers may not be eligible to participate in their employers' plan because they have not met the plan's minimum participation requirements. In addition, workers may choose not to enroll, or delay enrolling, in a retirement plan for a number of reasons. For example, they may think--in some cases, incorrectly--they are not eligible. They may also believe they cannot afford to contribute to the plan and, for low-income workers, it may be difficult for them to contribute. Also, some may be focused on more immediate savings objectives, such as saving for a house. Many non- participants may not have made a specific decision, but rather fail to participate because of a tendency to procrastinate and follow the path that does not require an active decision. We also found that, for workers who participated in DC plans, plan savings were low. The median total DC account balance was $22,800 for individual workers with a current or former DC plan and $27,940 for households with a current or former DC plan. We reported that the account balances of lower-income and older workers were of particular concern. For example, workers in the lowest income quartile had a median total account balance of only $6,400. Older workers, particularly those who were less wealthy, also had limited retirement savings. For example, those aged 50 through 59 and at or below the median level of wealth had median total savings of only $13,800. The median total savings for all workers aged 50 through 59 was $43,200. We noted that the low level of retirement savings could be occurring for a couple of reasons. Workers who participated in a plan had modest overall balances in DC plans, suggesting a potentially small contribution toward retirement security for most plan participants and their households. For individuals nearing retirement age, total DC plan balances were also low, because DC plans were less common before the 1980s and older workers likely would not have had access to these plans their whole careers. Given trends in coverage since the 1980s, older workers close to retirement age were more likely than younger ones to have accrued retirement benefits in a DB plan. In addition, older workers who rely on DC plans for retirement income may also not have time to substantially increase their total savings without extending their working careers, perhaps for several years. Further, the value of the income tax deferral on contributions is smaller for lower-income workers than for similarly situated higher-income workers, making participation less appealing for lower-income workers. In addition to somewhat small savings contributions, 401(k) participants can take actions, such as taking loans, withdrawals, or lump-sum cashouts, that reduce the savings they have accumulated. This "leakage" continues to affect the retirement security of some participants. While participants may find features that allow access to 401(k) savings prior to retirement desirable, leakage can result in significant losses of retirement savings from the loss of compound interest as well as the financial penalties associated with early withdrawals. Current law limits participant access to 401(k) savings in order to preserve the favorable tax treatment for retirement savings and ensure that the savings are, in fact, being used to provide retirement income. The incidence and amount of the principal forms of leakage from 401(k) plans have remained relatively steady through the end of 2008. For example, we found that approximately 15 percent of 401(k) participants between the ages of 15 and 60 initiated at least one form of leakage in 1998, 2003, and 2006, with loans being the most popular type of leakage in all 3 years. We also found that cashouts made when a worker changed jobs, at any age, resulted in the largest amounts of leakage and the greatest proportional loss in retirement savings. Further, we reported that while most firms informed participants about the short-term costs of leakage, few informed them about the long-term costs. As we reported in August of 2009, experts identified three legal requirements that had likely reduced the overall incidence and amounts of leakage, and another provision that may have exacerbated the long-term effects of leakage. Specifically, experts noted that the requirements imposing a 10 percent tax penalty on most withdrawals taken before age 59 1/2, requiring participants to exhaust their plan's loan provisions before taking a hardship withdrawal and requiring plan sponsors to preserve the tax-deferred status of accounts with balances of more than $1,000 at job separation all helped reduce 401(k) leakage. However, experts also noted that the requirement for a 6-month suspension of all contributions to an account following a hardship withdrawal exacerbated the effects of leakage. Treasury officials told us that this provision is intended to serve as a test to ensure that the hardship is real and that the participants have no other assets available to address the hardship. However, a few outside experts believed that this provision deters hardship withdrawals and noted that it seems to contradict the goal of creating retirement income. One expert noted that the provision unnecessarily prevented participants who were able to continue making contributions from doing so. For example, an employed participant taking a withdrawal for a discrete, one-time purpose, such as paying for medical expenses, may otherwise be able to continue making contributions. In our August 2009 report, we recommended that Congress consider changing the requirement for the 6- month contribution suspension following a hardship withdrawal. We also called for measures to provide participants with more information on the disadvantages of hardship withdrawals. Although participants may choose to take money out of their 401(k) plans, fees and other factors outside of participants' control can also diminish their ability to build their retirement savings. Participants often pay fees, such as investment fees and record-keeping fees, and these fees may significantly reduce retirement savings, even with steady contributions and without leakage. Investment fees, which are charged by companies managing mutual funds and other investment products for all services related to operating the fund, comprise the majority of fees in 401(k) plans and are typically borne by participants. Plan record-keeping fees generally account for the next largest portion of plan fees. These fees cover the cost of various administrative activities carried out to maintain participant accounts. Although plan sponsors often pay for record-keeping fees, participants bear them in a growing number of plans. We previously reported that participants can be unaware that they pay any fees at all for their 401(k) investments. For example, investment and record-keeping fees are often charged indirectly by taking them out of investment returns prior to reporting those returns to participants. Consequently, more than 80 percent of 401(k) participants reported in a nationwide survey not knowing how much they pay in fees. The reduction to retirement savings resulting from fees is very sensitive to the size of the fees paid; even a seemingly small fee can have a large negative effect on savings in the long run. As shown in figure 1, an additional 1 percent annual charge for fees would significantly reduce an account balance at retirement. Although all 401(k) plans are required to provide disclosures on plan operations, participant accounts, and the plan's financial status, they are often not required to disclose the fees borne by individual participants. These disclosures are provided in a piecemeal fashion and do not provide a simple way for participants to compare plan investment options and their fees. Some documents that contain fee information are provided to participants automatically, whereas others, such as prospectuses or fund profiles, may require that participants seek them out. According to industry professionals, participants may not know to seek such documents. Most industry professionals agree that information about investment fees--such as the expense ratio, a fund's operating fees as a percentage of its assets--is fundamental for plan participants to compare their options. Participants also need to be aware of other types of fees--such as record- keeping fees and redemption fees or surrender charges imposed for changing and selling investments--to gain a more complete understanding of all the fees that can affect their account balances. Whether participants receive only basic expense ratio information or more detailed information on various fees, presenting the information in a clear, easily comparable format can help participants understand the content of disclosures. In our previous reports, we recommended that Congress consider requiring plan sponsors to disclose fee information on 401(k) investment options to participants, such as the expense ratios, and Congress has introduced several bills to address fee disclosures. SEC identified certain undisclosed arrangements in the business practices of pension consultants that the agency referred to as conflicts of interest and released a report in May 2005 that raised questions about whether some pension consultants are fully disclosing potential conflicts of interest that may affect the objectivity of the advice. The report highlighted concerns that compensation arrangements with brokers who sell mutual funds may provide incentives for pension consultants to recommend certain mutual funds to a 401(k) plan sponsor and create conflicts of interest that are not adequately disclosed to plan sponsors. Plan sponsors may not be aware of these arrangements and thus could select mutual funds recommended by the pension consultant over lower-cost alternatives. As a result, participants may have more limited investment options and may pay higher fees for these options than they otherwise would. Conflicts of interest among plan sponsors and plan service providers can also affect participants' retirement savings. In our prior work on conflicts of interest in DB plans, we found a statistical association between inadequate disclosure of potential conflicts of interest and lower investment returns for ongoing plans, suggesting the possible adverse financial effect of such nondisclosure. Specifically, we detected lower annual rates of return for those ongoing plans associated with consultants that had failed to disclose significant conflicts of interest. These lower rates generally ranged from a statistically significant 1.2 to 1.3 percentage points over the 2000 to 2004 period. Although this work was done for DB plans, some of the same conflicts apply to DC plans as well. Problems may occur when companies providing services to a plan also receive compensation from other service providers. Without disclosing these arrangements, service providers may be steering plan sponsors toward investment products or services that may not be in the best interest of participants. Conflicts of interest may be especially hidden when there is a business arrangement between one 401(k) plan service provider and a third-party provider for services that they do not disclose to the plan sponsor. The problem with these business arrangements is that the plan sponsor will not know who is receiving the compensation and whether or not the compensation fairly represents the value of the service being rendered. Without that information, plan sponsors may not be able to identify potential conflicts of interest and fulfill their fiduciary duty. If the plan sponsors do not know that a third party is receiving these fees, they cannot monitor them, evaluate the worthiness of the compensation in view of services rendered, and take action as needed. Because the risk of 401(k) investments is largely borne by the individual participant, such hidden conflicts can affect participants directly by lowering investment returns. We previously recommended that Congress consider amending the law to explicitly require that 401(k) service providers disclose to plan sponsors the compensation that providers receive from other service providers. Although Congress has not changed the law, Labor has proposed regulations to expand fee and compensation disclosures to help address conflicts of interests. A recent change in law to facilitate automatic enrollment shows promise for increasing participation rates and savings. Under automatic enrollment, a worker is enrolled into the plan automatically, or by default, unless they explicitly choose to opt out. In addition, for participants who do not make their own choices, plan sponsors also establish default contribution rates--the portion of an employee's salary that will be deposited in the plan--and a default investment fund--the fund or other vehicle into which deferred savings will be invested. The Pension Protection Act of 2006 and recent regulatory changes have facilitated plan sponsors' adoption of automatic enrollment. In fact, plan sponsors have increasingly been adopting automatic enrollment policies in recent years. According to Fidelity Investments, the number of plans with automatic enrollment has increased from 1 percent in December 2004 to about 16 percent in March 2009, with higher rates of adoption among larger plan sponsors. Fidelity Investments estimates that 47 percent of all 401(k) participants are in plans with automatic enrollment. Employers may also adopt an automatic escalation policy, another policy intended to increase retirement savings. Under automatic escalation, in the absence of an employee indicating otherwise, an employee's contribution rates would be automatically increased at periodic intervals, such as annually. For example, if the default contribution rate is 3 percent of pay, a plan sponsor may choose to increase an employee's rate of saving by 1 percent per year, up to some maximum, such as 6 percent. One of our recent reports found that automatic enrollment policies can result in considerably increased participation rates for plans adopting them, with some plans' participation rates increasing to as high as 95 percent and that these high participation rates appeared to persist over time. Moreover, automatic enrollment had a significant effect on subgroups of workers with relatively low participation rates, such as lower-income and younger workers. For example, according to a 2007 Fidelity Investments study, only 30 percent of workers aged 20 to 29 were participating in plans without automatic enrollment. In plans with automatic enrollment, the participation rate for workers in that age range was 77 percent, a difference of 47 percentage points. Automatic enrollment, through its default contribution rates and default investment vehicles, offers an easy way to start saving because participants do not need to decide how much to contribute and how to invest these contributions unless they are interested in doing so. However, current evidence is mixed with regard to the extent to which plan sponsors with automatic enrollment have also adopted automatic escalation policies. In addition, many plan sponsors have adopted relatively low default contribution rates. While the adoption rate for automatic enrollment shows promise, a lag in adoption of automatic escalation policies, in combination with low default contribution rates, could result in low saving rates for participants who do not increase contribution rates over time. Another recent GAO report offers additional evidence about the positive impact automatic enrollment could have on workers' savings levels at retirement. Specifically, we projected DC pension benefits for a stylized scenario where all employers that did not offer a pension plan were required to sponsor a DC plan with no employer contribution; that is, workers had universal access to a DC plan. When we coupled universal access with automatic enrollment, we found that approximately 91 percent of workers would have DC savings at retirement. Further, we found that about 84 percent of workers in the lowest income quartile would have accumulated DC savings. In our work on automatic enrollment, we found that plan sponsors have overwhelmingly adopted TDFs as the default investment. TDFs allocate their investments among various asset classes and shift that allocation from equity investments to fixed-income and money market investments as a "target" retirement date approaches; this shift in asset allocation is commonly referred to as the fund's "glide path." Recent evidence suggests that participants who are automatically enrolled in plans with TDF defaults tend to have a high concentration of their savings in these funds. However, pension industry experts have raised questions about the risks of TDFs. For example, some TDFs designed for those expecting to retire in or around 2010 lost 25 percent or more in value following the 2008 stock market decline, leading some to question how plan sponsors evaluate, monitor, and use TDFs. GAO will be addressing a request from this committee to examine some of these concerns. DC plans, particularly 401(k) plans, have clearly overtaken DB plans as the principal retirement plan for U.S. workers and are likely to become the sole retirement savings plan for most current and future workers. Yet, 401(k) plans face major challenges, not least of which is the fact that many employers do not offer employer-sponsored 401(k) plans or any other type of plan to their workers. This lack of coverage, coupled with the fact that participants in 401(k) plans sometimes spend their savings prior to retirement or have their retirement savings eroded by fees, make it evident that, without some changes, a large number of people will retire with little or no retirement savings. Employers, workers, and the government all have to work together to ensure that 401(k) plans provide a meaningful contribution to retirement security. Employers have a role in first sponsoring 401(k) plans and then looking at ways to encourage participation, such as utilizing automatic enrollment and automatic escalation. Workers have a role to participate and save in 401(k) plans when they are given the opportunity to do so. In addition, both employers and workers have a role in preserving retirement savings. Government policy makers have an important role in setting the condition and the appropriate incentives that both encourage desired savings behavior but also protects participants. Recent government action that has helped enhance participation in 401(k) plans is a good first step. But action is still needed to improve disclosure on fees, especially those that are hidden, and measures need to be taken to discourage leakage. As this Committee and others move forward to address these issues, improvements may be made to 401(k) plans that can help assure that savings in such plans are an important part of individuals' secure retirement. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further questions about this statement, please contact Barbara D. Bovbjerg at (202) 512-7215 or [email protected]. Individuals making key contributions to this statement included Tamara Cross, David Lehrer, Joseph Applebaum, James Bennett, Jennifer Gregory, Angela Jacobs, Jessica Orr, and Craig Winslow. Retirement Savings: Automatic Enrollment Shows Promise for Some Workers, but Proposals to Broaden Retirement Savings for Other Workers Could Face Challenges. GAO-10-31. Washington, D.C.: October 23, 2009. Retirement Savings: Better Information and Sponsor Guidance Could Improve Oversight and Reduce Fees for Participants. GAO-09-641. Washington, D.C.: September 4, 2009. 401(k) Plans: Policy Changes Could Reduce the Long-term Effects of Leakage on Workers' Retirement Savings. GAO-09-715. Washington, D.C.: August 28, 2009. Private Pensions: Alternative Approaches Could Address Retirement Risks Faced by Workers but Pose Trade-offs. GAO-09-642. Washington, D.C.: July 24, 2009. Private Pensions: Conflicts of Interest Can Affect Defined Benefit and Defined Contribution Plans. GAO-09-503T. Washington, D.C.: March 24, 2009. Private Pensions: Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors. GAO-08-774. Washington D.C.: July 16, 2008. Private Pensions: GAO Survey of 401(k) Plan Sponsor Practices (GAO-08-870SP, July 2008), an E-supplement to GAO-08-774. GAO-08-870SP. Washington, D.C.: July 16, 2008. Private Pensions: Low Defined Contribution Plan Savings May Pose Challenges to Retirement Security, Especially for Many Low-Income Workers. GAO-08-8. Washington, D.C.: November 29, 2007. Private Pensions: Information That Sponsors and Participants Need to Understand 401(k) Plan Fees. GAO-08-222T. Washington, D.C.: October 30, 2007. Private Pensions: 401(k) Plan Participants and Sponsors Need Better Information on Fees. GAO-08-95T. Washington, D.C.: October 24, 2007. Employer-Sponsored Health and Retirement Benefits: Efforts to Control Employer Costs and the Implications for Workers. GAO-07-355. Washington, D.C.: March 30, 2007. Private Pensions: Increased Reliance on 401(k) Plans Calls for Better Information on Fees. GAO-07-530T. Washington, D.C.: March 6, 2007. Employee Benefits Security Administration: Enforcement Improvements Made but Additional Actions Could Further Enhance Pension Plan Oversight. GAO-07-22. Washington, D.C.: January 18, 2007. Private Pensions: Changes Needed to Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees. GAO-07-21. Washington, D.C.: November 16, 2006. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Over the past 25 years, the number of defined benefit (DB) plans has declined while the number of defined contribution (DC) plans has increased. Today, DC plans are the dominant type of employer-sponsored retirement plans, with more than 49 million U.S. workers participating in them. 401(k) plans currently cover over 85 percent of active DC plan participants and are the fastest growing type of employer-sponsored pension plan. Given these shifts in pension coverage, workers are increasingly relying on 401(k) plans for their pension income. Recently, policy makers have focused attention on the ability of 401(k) plans to provide participants with adequate retirement income and the challenges that arise as 401(k) plans become the predominant retirement savings plan for employees. As a result, GAO was asked to report on (1) challenges to building and maintaining of savings in 401(k) plans, and (2) recent measures to improve 401(k) participation and savings levels. There are challenges to building and saving through 401(k) plans. While low participation rates may be due, in part, to the fact that some workers participate in DB plans, there is also a large portion of workers who do not have access to an employer-sponsored retirement plan, as well as some who do not enroll in such a plan when an employer offers it. We found that for those who did participate, their overall balances were low, particularly for low-income and older workers who either did not have the means to save or have not had the opportunity to save in 401(k)s for much of their working lifetimes. There are also challenges workers face in maintaining savings in 401(k) plans. For example, 401(k) leakage--actions participants take that reduce the savings they have accumulated, such as borrowing from the account, taking hardship withdrawals, or cashing out the account when they change jobs--continues to affect retirement savings and increases the risk that 401(k) plans may yield insufficient retirement income for individual participants. Further, various fees, such as investment and other hidden fees, can erode retirement savings and individuals may not be aware of their impact. Automatic enrollment of employees in 401(k) plans is one measure to increase participation rates and saving. Under automatic enrollment, which was encouraged by the Pension Protection Act of 2006 and recent regulatory changes, employers enroll workers into plans automatically unless they explicitly choose to opt out. Plan sponsors are increasingly adopting automatic enrollment policies, which can considerably increase participation rates, with some plans' rates reaching as high as 95 percent. Employers can also set default contribution rates and investment funds. Though target-date funds are a common type of default investment fund, there are concerns about their risks, particularly for participants nearing retirement.
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As has been reported by many researchers, some Gulf War veterans developed illnesses that could not be diagnosed or defined and for which other causes could not be specifically identified. These illnesses have been attributed to many sources, including a large number of unusual environmental hazards found in the Gulf. The Congress enacted the Persian Gulf War Veterans' Benefits Act (P.L. 103-446, Nov. 2, 1994) which, among other things, allowed VA to pay disability compensation to veterans suffering from undiagnosed illnesses attributed to their service in the Persian Gulf. Compensable conditions include but are not limited to abnormal weight loss, cardiovascular symptoms, fatigue, gastrointestinal symptoms, headaches, joint and muscle pains, menstrual disorders, neurologic symptoms, neuropsychological symptoms, skin disorders, respiratory disorders, and sleep disturbances. Under the procedures that VA established to process undiagnosed illness claims, veterans submit completed claim forms to a VA regional office (VARO). Each VARO is responsible for fully developing the claims. VAROs obtain medical records from the military services; arrange for a VA medical examination; and obtain evidence from other sources, such as private health care providers or knowledgeable lay persons, if the veteran identifies such sources. Once the claim is developed, the claims file is transferred to one of the four area processing offices that VA has designated for processing undiagnosed illness claims. As mentioned earlier, over 700,000 men and women served in the Persian Gulf War. VA reported that as of February 1996, it has processed 7,845 undiagnosed illness claims and has identified an additional 6,655 claims that are being evaluated for undiagnosed illnesses. Of the processed claims, VA had denied compensation for undiagnosed illness to 7,424 veterans--a denial rate of 95 percent. In February 1995, VA issued a regulation (38 C.F.R. 3.317) that specifies the evidence required before compensation can be paid for an undiagnosed illness claim. Under the regulation, veterans must provide objective indications of a chronic disability. Objective indications include both signs--evidence perceptible to the examining physician--and other nonmedical indications that are capable of independent verification. In the final rule, VA explained that nonmedical indicators of a disabling illness include but are not limited to such circumstances or events as (1) time lost from work; (2) evidence that a veteran has sought medical treatment for his or her symptoms; and (3) evidence affirming changes in the veteran's appearance, physical abilities, or mental or emotional attitude. The evidence requirements contained in the regulation are consistent with the Joint Explanatory Statement that accompanied the Veterans' Benefits Improvements Act of 1994. According to the VA regulation, a veteran can only be compensated for disabilities caused by undiagnosed illnesses that (1) manifest themselves during service in the Gulf War or (2) arise within 2 years of a veteran's departure from the Persian Gulf. If the illness arose after the veteran left the Gulf, the veteran must be at least 10-percent disabled to be compensated. In addition, the veteran must demonstrate that the disabling condition is chronic--present for 6 months or longer. In some cases, lay statements can provide critical support for a veteran's undiagnosed illness claim. As stated in the VA claims processing manual, lay statements may be especially important in cases where an undiagnosed illness is manifest solely by symptoms that the veteran reports and that would, therefore, not be subject to verification through medical examination. Examples of such symptoms include headaches and fatigue. According to VA, lay statements from individuals who establish that they are able from personal experience to make their observations or statements will be considered as evidence if they support the conclusion that a disability exists. While veterans are ultimately responsible for proving their claims, VA is required by statute to assist the veteran in developing facts to prove the claim. The U.S. Court of Veterans' Appeals has also held in its decisions that VA has a duty to assist veterans with proving their claims and is required to obtain relevant facts from sources identified by claimants. A VA letter dated February 15, 1995, instructed all VA regional offices that "if a veteran alleges that a disability began after military service, request objective evidence (lay or medical) to establish that fact." Many types of evidence can be used to support undiagnosed illness claims. The denied claims that we reviewed contained primarily service medical records and VA medical examinations. About 15 percent of the claims included medical records from private physicians seen by the veterans after leaving military service and less than 3 percent contained nonmedical evidence related to an undiagnosed illness, such as lay statements and records showing lost time from work. The granted claims that we reviewed also contained primarily service medical records and VA examinations. In these cases, however, veterans were usually able to provide VA with a history, after leaving the Persian Gulf, of treatment for the granted undiagnosed condition. Some granted claims were supported with nonmedical evidence, such as a sworn statement from an individual with knowledge of the veteran's disability. Many of the veterans evaluated for undiagnosed illnesses are also examined for other diagnosable service-connected illnesses and injuries. While VA does not often grant compensation for undiagnosed conditions, these veterans often receive compensation for diagnosable injuries or illnesses. Of the cases that we reviewed where the claimed undiagnosed illness(es) had been denied, about 60 percent of the veterans had been granted compensation for at least one service-connected diagnosable condition, such as hypertension, hearing loss, or knee disorders. About one-half of these veterans were granted a disability payment; the remainder, with minor impairments, are eligible for free care for their conditions through the VA medical system. The lack of evidence to support undiagnosed illness claims may in part be the result of poor VA procedures to elicit such information, as the following examples indicate. In late 1995, VA's central office conducted a review of 203 completed undiagnosed illness claims. VA found that additional specialty examinations should have been ordered in 23 cases (about 11 percent). At the time of our work, VA stated that the required examinations would be scheduled and the veterans' cases would be reconsidered based on the additional evidence. In 5 of the 79 denied cases that we reviewed, VA had not requested records from physicians who had treated the veteran since leaving military service. For one case, VA officials stated that an attempt was made to obtain the evidence but the doctor failed to respond. In three cases officials stated that the medical records were not obtained due to error. According to area processing office officials, private medical records were not obtained in the other case because the veteran visited the doctor after the presumptive period. Although VA recognizes the importance of nonmedical objective evidence--for example, work records and lay statements from knowledgeable individuals--in supporting some undiagnosed illness claims, VA's standard compensation claim form does not request such evidence. The form does ask veterans to identify individuals who know about the veteran's medical treatment while in the service; in many cases, however, the claimed undiagnosed illness was not treated in the service. According to VA officials, the form was designed to obtain evidence about typical illnesses and injuries that usually occur while veterans are in the service as opposed to Persian Gulf illnesses that can become manifest after veterans leave military service. While the VA form does not specifically request nonmedical information, about 15 percent of the veterans did provide VA with the names of individuals who were knowledgeable about their claimed illness. However, VA did not obtain statements from these individuals. Officials at the area processing offices cited several reasons why lay statements were not obtained or used. These reasons include the veteran's failure to provide a complete address for the knowledgeable individual and that the evidence fell outside the presumptive period. In one case, an area processing office official stated that VA should have obtained the statements. While the head of the claims processing unit at one area processing office questioned the value of lay statements and whether VA was responsible for obtaining them, VA central office officials acknowledged that VA was responsible for obtaining lay statements and a central office official told us that statements would be obtained for the cases that we identified and that the claims would be reconsidered after the statements were obtained. After the Congress passed legislation allowing compensation for undiagnosed illnesses, VA reexamined all completed Gulf War claim files to determine if compensation was warranted. In some of these cases that we reviewed, there was no indication that VA had informed the veteran after the legislation about the specific types of medical and nonmedical evidence that could be submitted to support the claim. According to VA officials, VA had decided to provide this information to the veterans on a case-by-case basis. VA's central office acknowledged that the existing procedures to develop undiagnosed illness claims are not adequate and that area processing offices could do a better job of requesting both medical and nonmedical evidence from veterans in support of undiagnosed illness claims. VA has taken a step to provide better information to veterans regarding evidence to support undiagnosed illness claims. VA has developed a letter that clearly states the types of medical and nonmedical evidence that can be used to support these claims. VA is now sending this letter to all veterans who file undiagnosed illness claims. In the denied cases that we reviewed, even when VA followed all appropriate procedures to develop claims, the veterans did not always provide the necessary evidence that would allow their claims to be granted. Only 30 percent of the veterans in the denied cases that we reviewed provided evidence that they had sought medical treatment for the claimed undiagnosed condition after leaving the service--some veterans said that they could not afford medical treatment from private providers while others indicated that they were too busy to see a physician. About 40 percent of the veterans in the denied cases that we reviewed were informed that their denied undiagnosed illness claims would be reconsidered if additional evidence was submitted; and VA thoroughly described the evidence that would be acceptable. However, only 4 percent of these cases included any additional information from the veteran. Twenty-three percent of the veterans in the denied cases that we reviewed did not show up for all the scheduled examinations. As a result, VA was unable to identify and thoroughly evaluate the claimed disabling conditions. VA does not always correctly categorize the reason undiagnosed illness claims were denied. VA requires each of its area processing offices to record the reason that undiagnosed illness claims were denied. Reported results are compiled and presented periodically to the Congress. According to VA, most claims are denied because the claimed disability did not become manifest on active duty in the Persian Gulf or during the 2-year presumptive period. Table 1 shows the latest data submitted by VA. Of the denied claims that we reviewed, most--68 percent--had been categorized by VA as being denied because the claimed illness did not become manifest on active duty or during the presumptive period. However, in most of these cases, VA had explained in its decision letter to the veteran that insufficient evidence was presented to demonstrate that the claimed conditions existed, was chronic, or was disabling to a compensable degree of 10 percent or more. By failing to appropriately categorize denied claims, VA may be creating the impression that many veterans with otherwise compensable disabilities do not receive benefits solely as a result of the presumptive period. Our review suggests that if the presumptive period was extended, VA would still be required to deny the claims unless the veteran provided additional evidence regarding the chronic nature or disabling impact of the illness. VA officials acknowledged that their current reports could be misinterpreted. They told us that VA will assess the extent of the problem and take the necessary corrective action. We obtained comments on a draft of this report from VA officials, including the Deputy Under Secretary for Benefits. The officials generally agreed with our findings and noted that the agency is taking additional steps to address the concerns that we raised. Specifically, VA officials reiterated their commitment to providing veterans with better information regarding acceptable evidence to support undiagnosed illness claims and to more accurately categorize the reasons that claims are denied. The officials told us that VA's central office will also undertake additional claims reviews to ensure that field offices are following all appropriate procedures. VA's comments included some technical changes, primarily for clarification, which we incorporated in this report as appropriate. As arranged with your office, unless you announce its contents earlier, we plan no further distribution of this report until 7 days after the date of this letter. At that time, we will send copies to the Chairman, Senate Committee on Veterans' Affairs; the Secretary of Veterans Affairs; and other interested parties. This work was performed under the direction of Irene Chu, Assistant Director, Health Care Delivery and Quality Issues. If you or your staff have any questions, please contact Ms. Chu or me on (202) 512-7101. Other major contributors to this report are listed in appendix II. To identify the evidence standards that VA established to process Persian Gulf War claims, we visited the VA central office in Washington, D.C., and two of the four area processing offices that VA designated as responsible for processing undiagnosed illness claims--Louisville, Kentucky, and Nashville, Tennessee (which together processed 72 percent of undiagnosed illness claims). We also conducted telephone discussions with officials at the other two area processing offices--Phoenix, Arizona, and Philadelphia, Pennsylvania. We also obtained pertinent documents and records from these offices. To obtain information about the undiagnosed illness disability compensation claims, we statistically sampled 79 of the 4,990 claims that VA had denied as of September 21, 1995. We randomly selected the claims from VA's database of completed Persian Gulf War claims. Our sample size provides a 90-percent confidence level that the characteristics of our sample match the total population of denied claims within a specified error rate. The error rate was no greater than 11 percent. We also reviewed the claims files of 26 randomly selected veterans from the 273 whose claims for undiagnosed illnesses had been granted as of September 21, 1995. We selected four granted claims each from the Nashville, Louisville, and Philadelphia offices and 14 from the Phoenix office. We selected additional claims from the Phoenix office because it had processed 32 percent of all granted claims although it only processed 11 percent of all Persian Gulf claims. This was not a statistical sample; therefore, the results cannot be projected to the universe of granted claims. Instead, we reviewed these claims to allow a comparison with the denied claims. In conducting our samples we reviewed documents pertinent to our work, including the veterans' application forms; letters from VA to the veterans about additional evidence; medical examinations; and rating statements with the letters containing VA's decisions. Data about all Persian Gulf War illnesses and other information were abstracted from those documents and entered into a database for analysis. The purpose of our review of the denied and granted claim files was to identify the evidence contained therein and gain additional information on VA's reasons and bases for denying or granting the claims. We made no effort to assess the appropriateness of VA's decisions. We performed our review between August 1995 and March 1996 in accordance with generally accepted government auditing standards. Richard Wade, Evaluator-in-Charge Jon Chasson, Senior Evaluator Robert DeRoy, Assistant Director, Data Analysis and Evaluation Support Cynthia Forbes, Senior Evaluator Michael O'Dell, Senior Social Science Analyst Susan Poling, Assistant General Counsel Pamela A. Scott, 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. 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Pursuant to a congressional request, GAO reviewed the procedures the Department of Veterans Affairs (VA) uses to process Persian Gulf War undiagnosed illness claims. GAO found that: (1) before VA will provide benefits, veterans must provide it with evidence of a chronic disability and verifiable evidence of time lost from work, prior medical treatment, or changes in appearance, physical abilities, or psychological condition; (2) both denied and approved claims consist primarily of service medical records and VA medical examinations, but approved claims usually include an independent medical history and sometimes include nonmedical evidence; (3) denied claims lacked sufficient evidence because of poor VA procedures and veterans' failure to collect relevant information; and (4) while VA reports that most denied claims were denied because the alleged disability did not become evident during active duty or the subsequent 2-year presumptive period, it stated in denial letters to veterans that their claims lacked sufficient evidence.
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OPM and the Equal Employment Opportunity Commission (EEOC) each play important roles in ensuring equal employment opportunity (EEO) in the federal workplace through their leadership and oversight of federal agencies. In their oversight roles, OPM and EEOC require federal agencies to analyze their workforces, and both agencies also report on governmentwide representation levels. Under OPM's regulations implementing the Federal Equal Opportunity Recruitment Program (FEORP), agencies are required to determine where representation levels for covered groups are lower than in the civilian labor force and take steps to address those differences. Agencies are also required to submit annual FEORP reports to OPM in the form prescribed by OPM. EEOC's Management Directive 715 (MD-715) provides guidance and standards to federal agencies for establishing and maintaining effective equal employment opportunity programs, including a framework for executive branch agencies to help ensure effective management, accountability, and self-analysis to determine whether barriers to equal employment opportunity exist and to identify and develop strategies to mitigate or eliminate the barriers to participation. Specifically, EEOC's MD-715 states that agency personnel programs and policies should be evaluated regularly to ascertain whether such programs have any barriers that tend to limit or restrict equitable opportunities for open competition in the workplace. The initial step is for agencies to analyze their workforce data with designated benchmarks, including the civilian labor force. If analyse of their workforce profiles identify potential barriers, agencies are to examine all related policies, procedures, and practices to determine whether an actual barrier exists. EEOC requires agencies to report the results of their analyses annually. In addition, EEOC recently issued a report on the participation of individuals who reported targeted disabilities in the federal workforce. Targeted disabilities are those disabilities that the federal government, as a matter of policy, has identified for special emphasis. The targeted disabilities are deafness, blindness, missing extremities, partial paralysis, complete paralysis, convulsive disorders, mental retardation, mental illness, and distortion of limb and/or spine. The data that we are reporting provide a demographic snapshot of the career SES as well as the levels that serve as the SES developmental pool for October 2000 and September 2007. Table 1 shows that governmentwide, the number and percentage of women and minorities in the career SES and SES developmental pool increased between October 2000 and September 2007. As shown in table 2, the percentage of both women and minorities in the SES increased in 15 of the 24 CFO Act agencies by 2007. For the remaining CFO Act agencies, most experienced an increase in either the percentage of women or minorities between October 2000 and September 2007. As we reported in 2003, the gender, racial, and ethnic profiles of the career SES at the 24 CFO Act agencies varied significantly in October 2000. The representation of women ranged from 13.7 percent to 41.7 percent, with half of the agencies having 27 percent or fewer women in the career SES. For minority representation, rates varied even more and ranged from 3.1 percent to 35.6 percent, with half of the agencies having less than 15 percent minorities in the career SES. In 2007, the representation of women and minorities, both overall and in more than half of the individual agencies, was higher than it was in October 2000. The representation of women ranged from 19.9 percent to 45.5 percent with more than half of the agencies having 30 percent or more women. For minority representation, rates ranged from 6.1 percent to 43.8 percent, with more than half of the agencies having over 16 percent minority representation, and more than 90 percent of the agencies having more than 13 percent minority representation in the career SES. For this report, we did not analyze the factors that contributed to the changes in representation from October 2000 through September 2007. As we said previously, OPM and EEOC, in their oversight roles, require federal agencies to analyze their workforces and both agencies also report on governmentwide representation levels. In our 2003 report, we (1) reviewed actual appointment trends from fiscal years 1995 to 2000 and actual separation experience from fiscal years 1996 to 2000; (2) estimated by race, ethnicity, and gender the number of career SES who would leave government service from October 1, 2000, through October 1, 2007; and (3) projected what the profile of the SES would be if appointment and separation trends did not change. We estimated that more than half of the career SES members employed on October 1, 2000, will have left service by October 1, 2007. Assuming then-current career SES appointment trends, we projected that (1) the only significant changes in diversity would be an increase in the number of white women with an essentially equal decrease in white men and (2) the proportions of minority women and men would remain virtually unchanged in the SES corps, although we projected slight increases among most racial and ethnic minorities. Table 3 shows career SES representation as of October 1, 2000, our 2003 projections of what representation would be at the end of fiscal year 2007, and actual fiscal year 2007 data. We projected increases in representation among both minorities and women. Fiscal year 2007 data show that increases did take place among those groups and that those increases generally exceeded the increases we projected. The only decrease among minorities occurred in African American men, whose representation declined from 5.5 percent in 2000 to 5.0 percent at the end of fiscal year 2007. Table 4 shows SES developmental pool representation as of October 1, 2000, our 2003 projections of what representation would be at the end of fiscal year 2007, and actual fiscal year 2007 data. We projected increases in representation among both minorities and women. Fiscal year 2007 data show that increases did generally take place among those groups. The representation of American Indian/Alaska Native men remained unchanged from the October 2000 baseline. As stated previously, we have not analyzed the factors contributing to changes in representation; therefore, care must be taken when comparing changes in demographic data since fiscal year 2000 to the projections we made in 2003, and to the 2007 actual data we present in both tables 3 and 4. For example, we have not determined whether estimated retirement trends materialized or appointment and separation trends used in our projections continued and the impact these factors may have had on the diversity of the SES and its developmental pool. Considering retirement eligibility and actual retirement rates of the SES is important because individuals normally do not enter the SES until well into their careers; thus, SES retirement eligibility is much higher than the workforce in general. As we have said in previous reports, as part of a strategic human capital planning approach, agencies need to develop long- term strategies for acquiring, developing, motivating, and retaining staff. An agency's human capital plan should address the demographic trends that the agency faces with its workforce, especially retirements. In 2006, OPM reported that approximately 60 percent of the executive branch's 1.6 million white-collar employees and 90 percent of about 6,000 federal executives will be eligible for retirement over the next 10 years. If a significant number of SES members were to retire, it could result in a loss of leadership continuity, institutional knowledge, and expertise among the SES corps, with the degree of loss varying among agencies and occupations. This has important implications for government management and emphasizes the need for good succession planning for this leadership group. Rather than simply recreating the existing organization, effective succession planning and management, linked to the strategic human capital plan, can help an organization become what it needs to be. Leading organizations go beyond a "replacement" approach that focuses on identifying particular individuals as possible successors for specific top- ranking positions. Rather, they typically engage in broad, integrated succession planning and management efforts that focus on strengthening both current and future capacity, anticipating the need for leaders and other key employees with the necessary competencies to successfully meet the complex challenges of the 21st century. Succession planning also is tied to the federal government's opportunity to affect the diversity of the executive corps through new appointments. In September 2003, we reported that agencies in other countries use succession planning and management to achieve a more diverse workforce, maintain their leadership capacity, and increase the retention of high-potential staff. Racial, ethnic, and gender diversity in the SES is an important component for the effective operation of the government. Individuals do not typically enter the career SES until well into their careers. As of the end of fiscal years 2000 and 2007, the average age of women and minorities at the time of their appointment to the SES was about age 50 and did not change dramatically over this 7-year period except for certain groups, as shown in table 5. The average age at appointment for American Indian/Alaska Native women declined from age 48 in 2000 to age 42 in 2007 and increased during this time for both American Indian/Alaska Native men (from age 50 in 2000 to 53 in 2007) and white women (from age 47 in 2000 to 49 in 2007). Similarly, the average age of women and minorities at the time of retirement from the career SES did not change much between 2000 and 2007. As shown in table 6, all of those who retired did so, on average, at around age 60, with the exception of Asian/Pacific Islander men, whose average retirement age in 2007 was 64; Hispanic men, whose average retirement age in 2000 was 57 and in 2007 was 58; and African American men, whose average retirement age in 2000 was 62 and 59 in 2007. In addition to examining the average age of individuals at the time of their appointment to and retirement from the career SES, we analyzed the length of time that a cohort of individuals served in the SES and differences in length of service. We reviewed data on the 625 individuals appointed to the career SES in fiscal year 1990. Because of questions with the records of 11 individuals, we excluded them from our analysis and analyzed the records of the remaining 614 individuals appointed to the SES in fiscal year 1990 and followed them through September 2007. We found that 432 of the 614 had left the SES by that date--338 had retired voluntarily, 66 had resigned, and 28 had left for other reasons, such as disability or mandatory retirement. Those individuals who had voluntarily retired served in the SES an average of 9.2 years, as shown in table 7. Table 7 also shows that women stayed in the SES longer than men; women who voluntarily retired stayed, on average, for 11.4 years, and men who voluntarily retired stayed, on average, for 8.8 years. The average length of service among minorities ranged from 4.1 years for Asian/Pacific Islander women to 12 years for American Indian/Alaska Native men. The average number of years in the SES does not include those appointed to the SES in 1990 who, as of September 30, 2007, died (10); took other types of retirement, such as disability or mandatory retirement (17); or were terminated (1). As shown in table 8, as of September 2007, about one-third of the 614 individuals we identified who were appointed to the career SES in 1990 remained in the SES. More women from the original cohort remained than men. We also reviewed the representation of career SES members who reported having targeted disabilities. EEOC reported that it first officially recognized the term targeted disabilities in its Management Directive 703, which was approved on December 6, 1979. In its report, EEOC stated that some individuals with disabilities are reluctant to self-identify their disability status because they are concerned that (1) such disclosure will preclude them from employment or advancement or subject them to discrimination and (2) their disability status will not remain confidential. It is not clear the extent to which individuals with disabilities do not identify or report them. Governmentwide, the representation of career SES members reporting targeted disabilities declined from 0.52 in fiscal year 2000 to 0.44 in fiscal year 2007. Table 9 shows the representation of SES members with targeted disabilities governmentwide and within the CFO Act agencies. In both 2000 and 2007, half of the CFO Act agencies (12) did not employ any SES members with targeted disabilities. Executive branch agencies have processes for selecting members into the career SES and developmental programs that are designed to create pools of candidates for senior positions. Federal executive agencies are to follow competitive merit staffing requirements for initial career appointments to the SES or for appointment to formal SES candidate development programs, which are competitive programs designed to create pools of candidates for SES positions. Each agency head is to appoint one or more Executive Resources Boards (ERB) to conduct the merit staffing process for initial SES career appointments. ERBs review the executive and technical qualifications of each eligible candidate and make written recommendations to the appointing official concerning the candidates. The appointing official selects from among those candidates identified by the ERB as best qualified and certifies the executive and technical qualifications of those candidates selected. Candidates who are selected must have their executive qualifications certified by an OPM- administered Qualifications Review Board (QRB) before being appointed to the SES. According to OPM, it convenes weekly QRBs to review the applications of candidates for initial career appointment to the SES. QRBs are independent boards of three senior executives that assess the executive qualifications of all new SES candidates. At least two of the three QRB members must be career appointees. In addition, OPM guidance states that QRB members cannot review candidates from their own agencies. An OPM official stated that an OPM official acts as administrator, attending each QRB to answer questions, moderate, and offer technical guidance but does not vote or influence voting. OPM guidance states that the QRB does not rate, rank, or compare a candidate's qualifications against those of other candidates. Instead, QRB members judge the overall scope, quality, and depth of a candidate's executive qualifications within the context of five executive core qualifications--leading change, leading people, results driven, business acumen, and building coalitions--to certify that the candidate's demonstrated experience meets the executive core qualifications. To staff QRBs, an OPM official said that OPM sends a quarterly letter to the heads of agencies' human capital offices seeking volunteers for specific QRBs and encourages agencies to identify women and minority participants. Agencies then inform OPM of scheduled QRB participants, without a stipulation as to the profession of the participants. OPM solicits agencies once a year for an assigned quarter and requests QRB members on a proportional basis. The OPM official said that OPM uses a rotating schedule, so that the same agencies are not contacted each quarter. Although QRBs generally meet weekly, an OPM official said that QRBs can meet more than once a week, depending on case loads. The official said that because of the case load of recruitment for SES positions recently, OPM had been convening a second "ad hoc" QRB. According to another OPM official, after QRB certification, candidates are officially approved and can be placed. In addition to certification based on demonstrated executive experience and another form of certification based on special or unique qualities, OPM regulations permit the certification of the executive qualifications of graduates of candidate development programs by a QRB and selection for the SES without further competition. OPM regulations state that for agency candidate development programs, agencies must have a written policy describing how their programs will operate and must have OPM approval before conducting them. According to OPM, candidate development programs typically run from 18 to 24 months and are open to GS-15s and GS-14s or employees at equivalent levels from within or outside the federal government. Agencies are to use merit staffing procedures to select participants for their programs, and most program vacancies are announced governmentwide or to all sources. OPM regulations provide that candidates who compete governmentwide for participation in a candidate development program, successfully complete the program, and obtain QRB certification are eligible for noncompetitive appointment to the SES. OPM guidance states that candidate development program graduates are not guaranteed placement in the SES. Agencies' ERB chairs must certify that candidates have successfully completed all program activities, and OPM staff review candidate packages to verify that regulatory requirements have been met. An "ad hoc" QRB then reviews the candidates' training and development and work experiences to ensure he or she possesses the required executive qualifications. OPM also periodically sponsors a centrally administered federal candidate development program. According to an OPM official, the OPM-sponsored federal candidate development program can be attractive to smaller agencies that may not have their own candidate development program, and OPM administers the federal program for them. According to OPM officials, from the first OPM-sponsored federal candidate development program, 12 graduated in September 2006. Of those, 9 individuals were placed in SES positions within 1 year of graduating from the program. In January 2008, OPM advertised the second OPM-sponsored federal candidate development program but subsequently suspended the program. In June 2008, OPM re-advertised the second OPM-sponsored federal candidate development program, and 18 candidates were selected for the program and have started their 12-month training and development program. We provided the Acting Director of OPM and the Chair of EEOC with a draft of this report for their review and comment. OPM provided technical comments via e-mail, which we incorporated as appropriate, but did not otherwise comment on the report. In an e-mail, EEOC said it had no comments. We are sending copies of this report to the Acting Director of OPM, the Chair of EEOC, and other interested congressional parties. We 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 questions about this report, please contact me at (202) 512-9490 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. Appendix I: Demographic Profiles of Career SES, GS-15, and GS-14 Employees Governmentwide and at the 24 Chief Financial Officers Act Agencies Equal employment opportunity (EEO) group 5.8 2.8 1.3 56.5 22.9 0.1 100.0 20.5 68.6 12.1 We included GS-15, GS-14, and equivalent employees. GS-equivalent employees are those in equivalent grades under other pay plans that follow the GS grade structure and job evaluation methodology or are equivalent by statute. Data on the SES and the SES developmental pool for 2000 in this report differ from prior GAO products. We first identified SES and SES developmental pool data for 2000 in our 2003 report (GAO-03-34), in which we excluded the FBI from the SES and the SES developmental pool because that report contained projected SES and the SES developmental pool levels for the end of fiscal year 2007 based on separation and appointment data, and the FBI did not submit separation and appointment data to the CPDF for 2000. We subsequently cited data on the SES and SES developmental pool for 2000 from that report in four additional products (GAO-04-123T, GAO-07-838T, GAO-08-609T, and GAO-08-725T). Data on the SES and the SES developmental pool for 2007 include the FBI. 5.7 2.9 0.6 63.4 19.7 0.0 100.0 16.9 75.0 11.6 9.3 22.7 3.0 0.9 52.6 28.6 0.0 100.0 18.8 62.0 9.4 19.4 5.0 1.8 0.9 59.8 20.0 0.0 100.0 20.2 72.9 13.1 11.7 2.8 2.1 0.5 73.7 14.6 0.1 100.00 11.7 82.5 8.8 5.4 9.1 1.5 1.1 39.5 37.3 0.0 100.0 23.2 49.4 9.9 22.8 4.8 2.1 1.1 62.3 21.2 0.1 100.0 16.5 72.9 10.5 9.9 6.5 2.0 1.7 52.2 31.4 0.4 100.0 16.0 59.4 6.9 13.1 .8 1.6 1.1 51.1 28.2 0.5 100.0 20.3 60.6 9.0 15.0 9.6 1.7 1.3 43.0 36.7 0.2 100.0 20.2 53.0 10.0 16.1 3.1 The Department of Homeland Security did not exist before March 2003. Its creation united 22 agencies or parts of agencies, including the U.S. Customs Service, which was formerly located in the Department of the Treasury; the Federal Emergency Management Agency; and the Coast Guard. 24.7 3.0 2.2 38.6 20.3 0.2 100.0 40.9 57.0 18.4 28.1 9.0 1.5 0.4 62.7 21.1 0.3 100.0 16.0 72.7 9.8 8.6 4.0 3.6 1.5 54.3 27.7 0.1 100.0 17.9 64.7 10.3 The data on Justice for 2000 in this report differ from such data in prior GAO products. We first identified Justice SES and GS-15 and GS-14 data for 2000 in our 2003 report (GAO-03-34), in which we excluded the FBI from Justice data because that report contained projected SES and SES developmental pool levels for the end of fiscal year 2007 based on separation and appointment data, and the FBI did not submit separation and appointment data to the CPDF for 2000. We subsequently cited 2000 data from that report in four additional products (GAO-04-123T, GAO-07-838T, GAO-08-609T, GAO-08-725T). The data on Justice for 2007 include the FBI. 9.8 2.0 1.5 51.3 30.2 0.0 100.0 18.5 60.4 9.1 15.7 5.3 3.6 0.9 65.4 17.2 0.2 100.0 17.2 78.1 12.5 6.9 4.1 1.9 0.3 60.6 18.5 0.0 100.0 20.9 76.3 15.8 9.3 .1 0.0 0.0 40.2 41.5 0.0 100.0 18.3 46.3 6.1 14.8 .1 2.6 2.0 47.4 29.6 0.0 100.0 23.0 59.2 11.8 25.9 11.1 5.7 3.1 49.7 18.1 0.0 100.0 32.1 66.3 16.6 20.7 13.4 3.4 1.4 42.2 31.5 0.0 100.0 26.3 52.6 10.4 19.0 .9 1.0 1.2 52.3 32.6 0.9 100.0 14.2 58.7 5.8 The number of GS-15s, GS-14s and equivalents decreased because the Department of State stopped reporting data on Foreign Service employees to the Office of Personnel Management's Central Personnel Data File in fiscal year 2006. In addition to the individual named above, Kiki Theodoropoulos, Assistant Director; Clifton Douglas, Jr.; Jessica Drucker; Karin Fangman; Kirsten B. Lauber; Mary Martin; Michael R. Volpe; and Gregory H. Wilmoth made key contributions to this report.
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A diverse Senior Executive Service (SES), which generally represents the most experienced segment of the federal workforce, can be an organizational strength by bringing a wider variety of perspectives and approaches to policy development and implementation, strategic planning, problem solving, and decision making. In a January 2003 report (GAO-03-34), GAO provided data on career SES members by race, ethnicity, and gender as of October 2000 and a statistically estimated projection of what the profile of the SES would be in October 2007 if appointment and separation trends did not change. In response to a request for updated information on the diversity in the SES, GAO is providing information from the Office of Personnel Management's (OPM) Central Personnel Data File (1) on the representation of women and minorities in the SES and the SES developmental pool (i.e., GS-15 and GS-14 positions) for the executive branch as of fiscal year 2007 and comparing this representation to fiscal year 2000 levels and to levels GAO projected for October 2007 in its 2003 report; (2) for fiscal years 2000 and 2007, the average age at which women and minorities were appointed to and retired from the SES as well as information on those in the SES reporting targeted disabilities; and (3) on the overall processes used in executive branch agencies for selecting and certifying members into the SES. The representation of women and minorities in the SES and the SES developmental pool increased governmentwide from October 2000 through September 2007, but increases did not occur in all agencies. Over these 7 years, increases occurred in more than half of the 24 major executive branch agencies, but in both 2000 and 2007 the representation of women and minorities continued to vary significantly at those agencies. In 2003, we projected that increases would occur in the representation of women and minorities in the SES and SES developmental pool by 2007. These increases generally did occur. Looking beyond racial, ethnic, and gender profiles, GAO also reviewed the average age at appointment to and retirement from the career SES as well as the disability status reported by career SES employees for fiscal years 2000 and 2007. For the most part, career SES members were, on average, about age 50 at the time of their appointment to the SES and about age 60 at the time of their retirement. The average age at appointment to and retirement from the career SES generally did not vary much by race, ethnicity, or gender. GAO also calculated how long, on average, individuals served in the SES, and found that the length of their stay in the SES did vary. For example, women stayed in the SES longer than men; women who voluntarily retired stayed, on average, for 11.4 years, and men who voluntarily retired stayed, on average, for 8.8 years. The average length of service among minorities ranged from 4.1 years for Asian/Pacific Islander women to 12 years for American Indian/Alaska Native men. Governmentwide less than 1 percent of the career SES in 2000 and 2007 had self-reported targeted disabilities, and their representation declined slightly over this time. Executive branch agencies have established processes for selecting members into the SES and have developmental programs that are designed to create pools of candidates from which new members can be selected. These agencies use Executive Resources Boards to review the executive and technical qualifications of eligible candidates for initial SES career appointments and make recommendations based on the best qualified. An OPM-administered board reviews candidates' qualifications before appointment to the SES.
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NNSA, a separately organized agency within DOE, is responsible for the management and security of the nation's nuclear weapons, nonproliferation, and naval reactor programs. To conduct these activities, NNSA's fiscal year 2005 request is about $9 billion, with about $6.6 billion targeted for nuclear weapons programs managed by NNSA's Office of Defense Programs. For many years, various external studies have found problems with the organization of NNSA's principal activity--the Office of Defense Programs. For example, one such study found a dysfunctional management structure with convoluted, confusing, and often contradictory reporting channels, while another study cited ambiguities and overlaps in the roles of headquarters and the Albuquerque Operations Office as a primary source of inefficiencies and conflict within the program. In December 2000, we reported organizational problems at three levels--within the Office of Defense Program's headquarters functions, between headquarters and the field offices, and between contractor-operated sites and their federal overseers. These problems resulted in overlapping roles and responsibilities for the federal workforce overseeing the nuclear weapons program and confusion and duplication of effort for the contractors implementing the program at sites within the nuclear weapons complex. In December 2002, NNSA formally announced the beginning of an overall reorganization and workforce reduction intended to enhance its operational efficiency and programmatic effectiveness. Prior to its December 2002 reorganization, NNSA's organization consisted of multiple layers. In particular, under the Office of Defense Programs--NNSA's largest program--seven area offices reported to three operations offices that in turn reported to the Deputy Administrator for Defense Programs. The Deputy Administrator then reported to the Administrator. Figure 1 shows NNSA's prior organization. To remove a layer of management, NNSA closed the Albuquerque, Oakland, and Nevada operations offices. The new organization consists of eight site offices located at each of NNSA's major contractors, one service center located in Albuquerque, New Mexico, and headquarters program offices that all report directly to the Administrator. NNSA headquarters sets requirements, defines policies, and provides high-level guidance. Site office managers are the designated contracting officers responsible for delivering federal direction to the contractor at each site and for ensuring the site's safe and secure operation. The site office managers also manage each NNSA site office. Under the realignment, a single service center has been established in Albuquerque, New Mexico, to provide business and technical support services to the eight site offices and headquarters programs. Prior to the reorganization, about 200 staff provided these services in the Oakland and Nevada operations offices and in offices in Germantown, Maryland, and Washington, D.C. These services are now being consolidated in the new service center, resulting in the reassignment of the 200 staff to the Albuquerque service center. Figure 2 shows NNSA's new organization structure. NNSA plans to staff the service center with 475 employees, down from 678 in December 2002. As part of its reorganization, NNSA decided to reduce the size of its federal staff. Originally, NNSA set an overall staff reduction target of 20 percent. However, in August 2003, NNSA reduced the target to 17 percent. The current target includes a 26 percent reduction at headquarters and a 30 percent reduction at the service center. Three site offices--Kansas City, Nevada, and Savannah River--are experiencing reductions, although overall staff size at all eight site offices will increase by 16 employees. NNSA is relying on a combination of buyouts, directed reassignments, and attrition to achieve these targets by its September 30, 2004, deadline. Standards that we have developed require federal agencies to establish and maintain an effective system of internal controls over their operations. Such a system is a first line of defense in safeguarding assets and preventing and detecting errors. Under our standards, managers should, among other things, ensure that their staffs have the required skills to meet organizational objectives, that the organizational structure clearly defines key areas of authority and responsibility, that progress be effectively measured, and that operations be effectively monitored. In addition to these internal control standards, in January 2001, and again in January 2003, we identified strategic human capital management as a governmentwide, high-risk area after finding that the lack of attention to strategic human capital planning had created a risk to the federal government's ability to perform its missions economically, efficiently, and effectively. In that context, we have stated that strategic workforce planning is needed to address two critical needs: (1) aligning an organization's human capital program with its current and emerging mission and programmatic goals and (2) developing long-term strategies for acquiring, developing, and retaining staff to achieve programmatic goals. There are five key principles that strategic workforce planning should address irrespective of the context in which the planning is done. It should involve top management, employees, and other stakeholders in developing, communicating, and implementing the strategic workforce plan; determine the critical skills and competencies that will be needed to achieve current and future programmatic results; develop strategies that are tailored to address gaps in number, deployment, and alignment of human capital approaches for enabling and sustaining the contributions of all critical skills and competencies; build the capability needed to address administrative, educational, and other requirements important to support workforce planning strategies; and monitor and evaluate the agency's progress toward its human capital goals and the contribution that human capital results have made toward achieving programmatic results. In light of shortcomings in strategic human capital management reported by us, the President's Management Agenda identified strategic management of human capital as a governmentwide initiative. Established in August 2001, the President's Management Agenda identified a strategy for improving the management and performance of the federal government. The agenda included five governmentwide initiatives: the strategic management of human capital, competitive sourcing, improved financial performance, expanded electronic government, and budget and performance integration. Regarding strategic management of human capital, two principals are considered central to its success. One, people are assets whose value can be enhanced through investment. As with any investment, the goal is to maximize value while managing risk. Two, an organization's human capital approach should be designed, implemented, and assessed by the standards of how well they help the organization achieve results and pursue its mission. Effective strategic workforce planning is considered an essential element of strategic human capital management. Also called human capital planning, it focuses on developing long-term strategies for acquiring, developing, and retaining an organization's total workforce (including full- and part-time federal staff and contractors) to meet the needs of the future. NNSA's reorganization has resulted in some progress in delineating lines of authority between NNSA headquarters and its field offices, thus addressing some past problems; however, at the working level, NNSA has not formalized a program management structure that identifies its program managers or what their responsibilities and qualifications should be, particularly regarding their role in directing and overseeing contractor activity under its new organization. Furthermore, the reorganization has created gaps in the responsibility for important safety oversight that need to be addressed. Without first clarifying such key management issues, NNSA cannot, among other things, ensure the improved discipline and accountability it seeks in managing its programs. By delineating lines of authority between NNSA headquarters and its field offices, NNSA's reorganization has addressed past problems, such as communications problems resulting from overlapping roles and responsibilities of the federal workforce overseeing the nuclear weapons program. For example, according to NNSA site office managers, the streamlined structure has improved vertical communication because communication channels between headquarters and the field are more direct and do not involve an extra layer of management in the operations offices. Site office managers also state that by now reporting directly to the NNSA Administrator's office, the time required to make decisions has been reduced. In addition, the realignment provides NNSA site office managers with additional authority to manage contractors and assigns them responsibility for the day-to-day security and safety of contractor operations. As a result, it has strengthened the hand of local NNSA site office managers who now have the authority to shut down operations at the sites, if necessary, due to security or safety concerns. Despite this progress NNSA's reorganization still suffers from two shortcomings. First, the reorganization plan does not yet fully delineate the authority and responsibility of program managers, who are responsible for ensuring that program goals and requirements are met, or reconcile these responsibilities with the mutual responsibilities of contracting officers and their designated representatives who manage the contract. Specifically, under the new reorganization, the contracting officer is responsible for appointing contracting officer representatives to carry out specific functions, such as monitoring, inspection, and other functions of a technical nature not involving a change in the scope, cost, or terms and conditions of the contract. These contracting officer representatives then assist in directing and overseeing the contractor for the programs that they represent. NNSA is attempting to improve program management accountability and discipline by requiring program managers to direct all work to the contractors through a contracting officer or a designated contracting officer representative instead of through the now defunct operations offices or by bypassing the formal contract administrators and informally directing the contractor, as was done in the past. NNSA's policy on program management, however, is still being developed. NNSA's Assistant Deputy Administrator for the Office of Program Integration told us that the exact number of program managers within the Office of Defense Programs has yet to be determined because disagreement exists within the program about who currently is or is not a program manager. Furthermore, NNSA has not yet articulated its qualification standards for program managers. These standards are important to program success. As we noted in our report on NNSA's Stockpile Life Extension Program, problems with the W-87 refurbishment were caused, in part, because the assigned program manager was not qualified to perform all required tasks and was not enrolled in DOE's project management qualification program. Senior NNSA officials in headquarters expect NNSA's policy to be issued by May 2004, and implementation plans for this policy to be developed by summer 2004. NNSA officials told us that even after the policy is issued, its implementation is expected to take some time because it will likely require a change in the behavior and culture of program managers and the manner in which they operate. NNSA's delay in issuing program management policy and appointing program managers is currently creating confusion. According to NNSA's existing policy concerning the appointment of contracting officer representatives, headquarters-based program officials must first be designated as program managers before they can be designated as contracting officer representatives for a site. As a result, any uncertainty surrounding the number of program managers and their responsibilities has the potential to disrupt the appointment of contracting officer representatives. However, despite the present uncertainty surrounding the designation of program managers, site offices are appointing contracting officer representatives. For example, the Sandia Site Office appointed 25 of its 36 contracting officer representatives using available NNSA headquarters staff, as of June 2003. However, NNSA provided us with a list of its designated program managers as of December 2003 (the latest date for which data were available) that did not officially recognize 21 of the 25 headquarters-based contracting officer representatives that had been formally appointed by the Sandia Site Office. Until NNSA fully implements its policies to delineate program management authority and responsibility, it remains unclear under the new reorganization and management structure how program management authorities and responsibilities will be exercised in the day-to-day management of contractors and site operations and NNSA cannot ensure that the full discipline and accountability it seeks through its reorganization is fully achieved or that its long-standing organizational structure problems are corrected. The second outstanding problem with NNSA's reorganization is that it has created gaps in the responsibility for safety oversight that need to be addressed. For example, managers at NNSA's Pantex Site Office, which oversees the contractor operating the Pantex Plant--an assembly/disassembly plant for nuclear weapons in Amarillo, Texas-- stated that authority and responsibility for certain safety-related oversight is unclear. Specifically, according to the Pantex Site Office manager, when the realignment abolished the Albuquerque Operations Office, it left a void regarding who would take over certain nuclear explosive safety oversight activities previously performed by that office. Among other things, nuclear explosives safety oversight includes activities such as evaluating the adequacy of controls associated with tooling, testers, and operational processes to prevent and/or minimize the consequences of an accident involving nuclear explosives. While NNSA's Assistant Deputy Administrator for Military Application and Stockpile Operations--an NNSA program--assumed overall responsibility for nuclear explosive safety, NNSA has not resolved exactly who is to provide the day-to-day oversight previously conducted by the Albuquerque Operations Office. In this regard, the Pantex Site Office manager stated that there is no clear procedure for conducting oversight to ensure the prevention of deliberate, unauthorized use of a nuclear weapon--an important goal of NNSA. The Pantex Site Office manager--the risk acceptance official for the site-- stated that he would therefore not authorize the continuation of certain work related to one current weapon system requiring use of a particular safety process. Furthermore, in October 2003, NNSA issued its safety- oriented "Functions, Responsibilities, and Authorities Manual" intended to clarify issues concerning delineation of authority. However, according to the Assistant Manager for Nuclear Engineering at the Pantex Site Office, the manual still does not clarify the authority and responsibility of nuclear explosives safety oversight. Senior NNSA headquarters officials stated that they are aware of problems concerning nuclear explosive safety oversight and that corrective action plans have been recently developed and are scheduled to be implemented through 2006. The Defense Nuclear Facilities Safety Board recently expressed broader concerns in a December 8, 2003, letter to NNSA's Administrator that many orders, directives, standards, supplemental directives, and site office procedures, which had been issued to help ensure the safe operation of NNSA's defense nuclear facilities, have not been modified to reflect current roles and responsibilities within NNSA. The board further stated that in some cases, particularly those involving supplemental directives that the now-defunct Albuquerque Operations Office had issued, the documents may no longer have a clear owner within the NNSA organization, and deviations from the processes that these directives prescribed are now becoming more frequent within NNSA. NNSA's reorganization is not likely to ensure that it has sufficient staff with the right skills in the right places because NNSA chose to downsize its federal workforce without first determining what critical skills and capabilities it needed to meet its mission and program goals. Consequently, NNSA will not know the composition of its workforce until it completes the 17 percent workforce reduction on September 30, 2004-- the deadline specified in the reorganization plan--and then determines the knowledge, skills, and capabilities of its remaining employees. Without a functional long-term workforce plan, NNSA runs the risk of facing further, more serious staff shortages or skill imbalances, thereby affecting its ability to adequately oversee its contractors. In December 2001, in addressing NNSA's use of its excepted service authority, we reported that NNSA did not have the coherent human capital and workforce planning strategies it needed to develop and maintain a well-managed workforce over the long run. As a result, we recommended that NNSA not allocate any additional excepted service positions until it developed comprehensive human capital and workforce planning strategies. Subsequently, in February 2002, we testified that NNSA's lack of a long-term strategic approach to ensure a well-managed workforce precluded it from identifying its current and future human capital needs, including the size of the workforce, its deployment across the organization, and the knowledge, skills, and abilities needed to fulfill its mission. Despite these earlier recommendations to develop thorough human capital and workforce planning strategies, NNSA embarked on a major initiative, expected to span nearly 2 years, not only to reorganize, but also to reduce the size of its workforce. NNSA's December 2002 reorganization plan called for a reduction in its federal workforce from 1,695 to 1,356 staff, or a reduction of about 20 percent, by September 30, 2004. The planned 20 percent reduction involved a 29 percent reduction in headquarters staff, a 26 percent reduction in administrative support staff through the closure of the three operations offices and the consolidation of administrative support staff in a new Service Center, and a 6 percent reduction in Site Office staff. A senior NNSA official stated that "getting things done" was a primary factor in deciding to quickly implement the reorganization and workforce reduction. As such, NNSA officials stated that the staff reduction targets were based more on judgment than a rigorous workload analysis. A senior NNSA official explained that NNSA managers knew that there was work overlap and redundancy in the organization, but were concerned that a more formal, rigorous analysis of requirements or workload could hamper what they believed was an urgent need to achieve organizational realignment and workforce reduction results. The official also said that NNSA management had decided that if and when staffing changes became necessary, such adjustments would then be made. The NNSA Administrator implemented what it termed a managed staffing process soon after the workforce reduction target was announced in an effort to focus on its short-term staff reduction targets and deadline. He asked NNSA headquarters, service center, and site office managers to report their organization's existing functions and staff in 2003, their anticipated changes to functions and associated staff requirements by the end of fiscal year 2004, and any staff surplus or deficit. Based on regular updates of this information, the NNSA Administrator has adjusted the total staff reduction target twice since December 2002, once in April 2003 and a second time in August 2003, to its current 17 percent target--primarily to accommodate an increase of 38 positions. This new target is to be accomplished by an increase of 23 positions in headquarters and 40 positions in the site offices, respectively, and a decrease of 25 positions at the Albuquerque Service Center. A February 2004 status report stated that NNSA created and staffed the 38 new positions to perform functions not previously identified, or for which original staffing targets were not adequate for mission accomplishment. NNSA is progressing towards its staff reduction targets and deadline primarily through buyouts, directed reassignments, and attrition combined with a freeze on hiring and promotions, although exceptions can be allowed to fill critical positions. A total of 174 staff have thus far taken the buyout, which could be as high as $25,000 per person depending on such factors as length of federal service and grade level. NNSA human capital managers report that 99 of the 200 administrative support staff in Oakland, Las Vegas, Germantown, and Washington, D.C., offices have formally stated that they would relocate to the Albuquerque Service Center. However, officials are not sure how many staff will actually relocate because, for example, they believe that some staff do not really want to relocate and are seeking alternative employment. As of March 6, 2004, NNSA is 13 staff short of achieving its 17 percent staffing reduction target. NNSA has also begun a number of specific workload reduction initiatives intended to accomplish its mission with fewer federal personnel. However, the outcome of these initiatives may not be known for some time so their affect on NNSA's workforce capabilities both in the short-term and long- term cannot be predicted. For example, in the area of safety, NNSA reduced the number of Site Office Facility Representatives from 68 in December 2002 to 53 in December 2003. Site Office Facility Representatives are typically responsible for day-to-day oversight of contractor operations to ensure that the contractor's work practices and performance are being completed in a safe and environmentally responsible manner. NNSA is pursuing changes to the Facilities Representative Program, among other things, to allow for greater coverage in areas of higher risk to the public, such as nuclear safety, and reduced coverage of standard industrial hazard facilities. NNSA is also considering shifting federal responsibility for employee safety to the contractor. While continuing to pursue its short-term workforce reduction goals, NNSA began to develop a framework to determine its long-term human capital needs. In December 2003, NNSA issued a workforce plan designed to comprehensively meet the requirements of DOE's Human Capital Management Improvement Program and the strategic workforce planning aspect of the President's Management Agenda. The framework specifically identified strategic workforce planning as a means to mitigate the impact of losing a large percentage of the NNSA workforce and as the process for ensuring that the right people with the right skills are in the right place at the right time. The workforce planning model for the longer term-- Workforce Plan 2004--called for the analysis of present workforce competencies, the identification of competencies needed in the future, a comparison of future needs with the present workforce in order to identify competency gaps and surpluses, the preparation of plans for building the workforce needed in the future, and an evaluation process to ensure that the workforce planning model remains valid and that mission objectives are being met. Despite this effort, NNSA's workforce plan is of limited usefulness because it depends on workforce data that are either already obsolete or not yet available. For example, the number, skill, position, and location of employees are a moving target and subject to continuous change until the downsizing effort is completed in September 2004. Furthermore, several NNSA site office managers acknowledged that their workforce focus has been on their short-term downsizing objective. A senior NNSA official agreed that the agency's workforce planning needed to be more long-term, but added that under the circumstances of NNSA's organizational downsizing, management primarily focused on meeting short-term needs. NNSA human capital officials also told us that NNSA's decreased reliance on DOE for practically all human capital management, resulting from NNSA's creation as a separately organized agency under DOE in 2000, required the building of a human resource structure, staff, and operation, which has taken some time to get up and running. NNSA plans to update information in its workforce plan, including its workforce composition and skills, as well as determine workforce needs for the long-term. With this information, NNSA can then conduct a skill gap analysis that is necessary to target recruitment, hiring, and training programs long-term. As we have found in other government agencies, by carrying out downsizing without sufficient consideration of the strategic consequences, NNSA runs the risk of not having the right skills in the right place at the right time, thereby affecting its ability to adequately oversee its contractors and ensure the safety and security of its various facilities in the future. The situation may be further exacerbated by the fact that, according to NNSA estimates, 35 percent of NNSA employees will be eligible to retire in the next 5 years. The lack of adequate strategic and workforce planning in the course of downsizing efforts can negatively affect the agency's ability to provide quality service and lead to such negative effects as the loss of institutional memory and an increase in work backlogs. The impact of gaps in the numbers and skills of staff used to carry out its contractor oversight mission is already becoming apparent. For example, NNSA site offices are 39 staff short of their targets and some site offices, namely Pantex, Y-12, and Los Alamos, are having some difficulty filling critical skills in safety and security. At the Albuquerque Service Center, significant skill gaps exist for accountants and contract specialists. For example, the service center has only 26 of 54 contract specialist positions filled. NNSA's preoccupation with more short-term downsizing objectives and staffing strategy without the benefit of a strategic human capital plan may have contributed to the workforce imbalances it now is experiencing. NNSA's implementation of its proposed risk-based approach to rely more on contractors' assurances and self-assessments and less on NNSA's direct oversight may be premature because NNSA's reorganization has not yet established a program management structure or long-term workforce plan for ensuring that it has sufficient staff with the right skills in the right places. Others and we have reported on a number of problems over the years related to NNSA's performance of effective federal oversight of its contractors. Against this backdrop, NNSA has begun taking steps to accommodate implementation of the new contractor oversight approach in parallel with its reorganization. Under this new approach, contractors will develop comprehensive contractor assurance systems, or systems of management controls, and NNSA will primarily rely upon these systems and controls to ensure that contractors properly execute their missions and activities. Although the overall concept of a risk-based approach to federal oversight has merit, the unresolved issues stemming from NNSA's major ongoing reorganization may compromise its ability to effectively carry out this approach while successfully meeting its responsibility for safe and secure operations. NNSA's reliance on contractors to operate its facilities and carry out its missions makes effective oversight of contractor activities critical to its success. Over the years, we have reported on problems related to NNSA's performance of effective federal oversight of its contractors. For example: In May 2003, we reported on problems with NNSA's oversight, particularly regarding assessing contractors' security activities. We noted that, without a stable and effective management structure and with ongoing confusion about security roles and responsibilities, inconsistencies had emerged among NNSA sites on how they assessed contractors' security activities. Consequently, we stated that NNSA could not be assured that all facilities are subject to the comprehensive annual assessments that DOE policy requires. Weaknesses in NNSA oversight also occurred at the Lawrence Livermore National Laboratory. Specifically, in our May 2003 report on a new waste treatment facility at the laboratory, we concluded that a delay in initiating storage and treatment operations at the new facility occurred because NNSA managers did not carry out their oversight responsibilities to provide clear requirements and ensure contractor compliance with these requirements. In July 2003, we reported on problems with NNSA's oversight, particularly with regard to cost and schedule, of the Stockpile Life Extension Program. In particular, we found that Life Extension Program managers used reports that contained only limited information on cost growth and schedule changes against established baselines. We also found that program managers believed that they had not been given adequate authority to properly carry out the life extensions. In February 2004, we reported on problems with NNSA's oversight with regard to business operations at the Los Alamos National Laboratory. Beginning in the summer of 2002, a series of problems with business operations surfaced at the Los Alamos National Laboratory, raising questions about the effectiveness of controls over government purchase cards and property. Among the questions raised were allegations of fraudulent use of government purchase cards and purchase orders, concerns about the adequacy of property controls over items such as computers, and disputed rationales for the laboratory's firing of two investigators. DOE and NNSA identified multiple causes for these business operations problems, one of which was that NNSA's oversight was too narrowly focused on specific performance measures in the contract rather than on overall effectiveness. In addition to these concerns, DOE 's Office of Inspector General has raised broader concerns about the adequacy of oversight. For example, in November 2003, DOE's Office of Inspector General released its annual report on management challenges, including oversight of contracts and project management as two of three internal control challenges facing the department. Against this backdrop and in the midst of a major reorganization and staff reduction effort, NNSA is proposing to change its contractor oversight approach. NNSA's August 2003 draft Line Oversight and Contractors' Assurance System policy would rely more on contractor self-assessment and reporting, among other methods, and less on NNSA's direct oversight. The proposal would require a comprehensive contractor assurance system, or system of management controls, to be in place and would primarily rely upon these systems and controls to ensure that its missions and activities are properly executed in an effective, efficient, and safe manner. NNSA would use a risk-based, graded approach to its oversight and tailor the extent of federal oversight to the quality and completeness of the contractors' assurance systems and to evidence of acceptable contractor performance. NNSA's oversight functions would include review and analysis of contractor performance data, direct observations of contractor work activities in nuclear and other facilities, annual assessments of overall performance under the contract, and certifications by the contractor or independent reviewers that the major elements of risk associated with the work performed are being adequately controlled. NNSA stated in its draft policy and in public meetings before the Defense Nuclear Facilities Safety Board that the department plans to phase in this new oversight approach over the next few years. NNSA has already begun taking steps to accommodate implementation of the new contractor oversight approach in parallel with its reorganization. For example, the new contract effective October 1, 2003, between Sandia Corporation and NNSA's Sandia Site Office describes 10 key attributes for its assurance system, such as having rigorous, risk-based, and credible self-assessments, feedback, and improvement activities, and using nationally recognized experts and other independent reviewers to assess and improve its work process and to carry out independent risk and vulnerability studies. Sandia's contractor plans to implement "assurance systems" beginning with its low-risk activities in fiscal year 2004, and medium- and high-risk activities in fiscal year 2005. Once satisfied that the contractor's assurance system is effective and results in an improvement in the contractor's performance in key functional areas, NNSA will consider conducting oversight at the assurance systems level rather than at the level of individual transactions. At the time of our review, NNSA officials at the Sandia Site Office did not know how they would assess or validate the contractor assurance system or what level of assurance they would require before they would shift from "transactional" oversight to "systems level" oversight. Although the overall concept of a risk-based approach seems reasonable, we are concerned about NNSA's ability to effectively carry it out. For example, considerable effort is needed at the Los Alamos and Lawrence Livermore National Laboratories to successfully implement a risk-based approach to laboratory oversight. According to the Associate Director for Operations at the Los Alamos National Laboratory, the laboratory's ability to manage risk is at a beginning level of maturity. Other officials at the Los Alamos laboratory, including officials from the Performance Surety Division and the Quality Improvement Office, said that the laboratory and NNSA have different perceptions of risks at the laboratory and how to manage those risks. In our February 2004 report, we expressed concerns about NNSA's oversight approach and warned that such autonomy for the laboratories was inadvisable this soon into the process of recovery from a string of embarrassing revelations. We recommended that NNSA needs to maintain sufficient oversight of mission support activities to fulfill its responsibilities independently until the laboratories have demonstrated the maturity and effectiveness of contractor assurance systems and the adequacy of the contractor's oversight have been validated. NNSA disagreed with our view of its proposal to rely more on a contractor's system of management controls and less on NNSA's own independent oversight, but acknowledged that there have been problems with oversight in the past. NNSA officials remained convinced that the proposed risk- based approach will be successfully implemented, resulting in improved contractor oversight. We continue to be concerned about whether NNSA is ready to move to its proposed system. For example, during this review, officials from NNSA's Nevada Site Office expressed concerns about the performance of the management and operating contractor for the Nevada Test Site, citing repeated problems with contractor's compliance with basic procedures. For example, officials from NNSA's Nevada Site Office expressed concern that there were repeated incidents where the contractor did not follow lock-out/tag-out procedures, resulting in, for example, the contractor drilling holes into wires that would cause power systems to shut down. Furthermore, the Defense Nuclear Facilities Safety Board, in recent public meetings, has expressed concerns about nuclear safety under the proposed NNSA contractor assurance policy and said that NNSA should not delegate responsibility for such an inherently high-risk area of operations. Finally, because NNSA has not fully determined (1) who will give program direction to its contractors and (2) through a comprehensive workforce plan, that it has sufficient staff with the right skills in the right places, NNSA's proposed approach to rely more on contractors' assurances and self-assessments and less on NNSA's direct oversight may be premature. NNSA is concurrently making significant and fundamental changes to its organization, workforce composition, and contractor oversight approach that require careful management forethought, strategy, and analysis. Preliminary indications are that some of these changes have had a positive effect on certain aspects of NNSA, but the final impact of these changes will not be apparent for several years. Specifically, NNSA's reorganization has resulted in some progress in delineating authority and improving communication between headquarters and the field. However, the reorganization has not resolved confusion regarding authority over program management. In addition, by downsizing its federal workforce without first determining what critical skills and capabilities it needed, NNSA's workforce reduction targets were more arbitrary than data-driven, contributing to short-term skill imbalances and making data-driven workforce planning for the longer term more difficult. Specifically, NNSA cannot begin to conduct a formal, substantive skill gap analysis to plan for the long term until it completes the current workforce reduction and collects critical workforce data on knowledge, skills, and competencies, among other things. Finally, because important program management and workforce issues still need to be resolved, NNSA's implementation of its proposal to rely more on contractors' assurances and self-assessments and less on NNSA's direct oversight appears to be premature. In order to increase the likelihood that NNSA's reorganization will achieve NNSA's goal of increased management discipline and accountability in program management and contractor oversight, we are making three recommendations to the NNSA Administrator and the Secretary of Energy: establish a formal program management structure, policy, and implementation guidance for directing the work of its contractors, especially concerning how program managers will interact with contracting officers at site offices to help direct and oversee contractor activity; complete and implement data-driven workforce planning for the longer term that (1) determines the critical skills and competencies that will be needed to achieve current and future programmatic results, including contractor oversight; (2) develops strategies tailored to address gaps in number, skills and competencies, and deployment of the workforce; and (3) monitors and evaluates the agency's progress toward its human capital goals and the contribution that human capital results have made toward achieving programmatic results, and postpone any decrease in the level of NNSA's direct federal oversight of contractors until NNSA has a program management structure in place and has completed its long-term workforce plan. We provided NNSA with a draft of this report for review and comment. NNSA agreed in principle with our recommendations; however, it felt that it already had efforts underway to address them. Specifically, with respect to our recommendation about program management, NNSA stated that it has established a formal process for using appropriately designated officials to direct contractor activity and that its formal program management policy was nearly established. We recognize in our report NNSA's effort to develop processes and formalize its program management policy; however, we believe that NNSA needs not only a policy, but also a structure and implementation guidance so that the managers providing direction to NNSA's contractors are clearly identified and can be held accountable. With respect to our recommendation on workforce planning, NNSA agreed with our recommendation, but it disagreed that its current plan was based on short-term or arbitrary management judgments. In this respect, our conclusions were based on discussions with knowledgeable senior agency officials at NNSA headquarters and site offices as well as a review of NNSA management council minutes. More importantly, we continue to believe in, and NNSA does not dispute, the need for a long-term data driven workforce plan that will ensure that NNSA meets its long-term goals. Finally, regarding our last recommendation on federal oversight of contractors, NNSA stated that it had no intention of further decreasing direct oversight of contractors, was hiring staff to fill vacant positions at site offices, and that its proposed contractor assurance systems would only be implemented after a site manager/contracting officer was convinced that the contractor's system would be at least as effective as the current system. While we are pleased that NNSA has stated that it will not decrease its direct oversight, our recommendation is intended to ensure that NNSA has the critical systems it needs in place to perform its function--effective, direct federal oversight. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this report. At that time, we will send copies to the Secretary of Energy and the Administrator of NNSA, the Director of the Office of Management and Budget, and appropriate congressional committees. We will make copies available to others on request. In addition, the report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me at (202) 512-3841. Major contributors to this report are listed in appendix II. In addition to the individual named above, Arturo Holguin, Robert Kigerl, Jonathan McMurray, Christopher Pacheco, Anthony Padilla, Judy Pagano, and Ellen Rubin made key contributions to this report.
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The National Nuclear Security Administration (NNSA), a separately organized agency within the Department of Energy (DOE), is responsible for the management and security of the nation's nuclear weapons, nonproliferation, and naval reactor programs. NNSA oversees contractors that operate its facilities to ensure that activities are effective and in line with departmental policy. In December 2002, NNSA began implementing a major reorganization aimed at solving important long-standing organizational issues. GAO reviewed NNSA's overall reorganization efforts to assess (1) the extent to which it is addressing in practice the past problems concerning the unclear delineation of authority and responsibility, (2) workforce planning, and (3) its impact on federal oversight of contractor activities. NNSA's reorganization has addressed some past problems by better delineating lines of authority and improving communication; however, NNSA has not formalized a program management structure that identifies program managers or details their responsibilities and qualifications as they relate to the direction and oversight of contractor activity under the new organization. Without first resolving such key management issues, NNSA cannot, among other things, ensure the improved discipline and accountability it seeks in managing its programs. NNSA's reorganization is not likely to ensure that the agency has sufficient staff with the right skills in the right places because NNSA downsized its federal workforce without first determining the critical skills and capabilities needed to meet its mission and program goals. Consequently, NNSA will not know the composition of its workforce until it completes the 17 percent workforce reduction on September 30, 2004--the deadline specified in the reorganization plan--and then determines the knowledge, skills, and capabilities of its remaining employees. Without a functional long-term workforce plan, NNSA runs the risk of facing further, more serious staff shortages or skill imbalances, thereby diminishing its ability to adequately oversee its contractors. NNSA's implementation of a proposed risk-based approach to rely more on contractors' assurances and self-assessments and less on NNSA's direct oversight may be premature because it has not yet established a program management structure or long-term workforce plan for ensuring sufficient staff with the right skills in the right places. Under this proposal, contractors will develop comprehensive assurance systems, or systems of management controls, and NNSA will primarily rely upon these contractor systems and controls to ensure that contractors properly execute their work. Although the overall concept of a risk-based approach to federal oversight has merit, NNSA's proposed transition to conduct less direct federal oversight could be compromised by outstanding reorganization issues.
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Explosives, like all hazardous materials (hazmat), are subject to regulations to ensure safe handling and transportation, among other things. Hazmat regulations are coordinated with international standards and generally govern the labeling, packaging, and transportation of hazmat in commerce. Explosives are one of nine classes of hazmat. In order to be transported, explosives must be assigned a classification. The classification, which includes a number that denotes the risk level of the explosive (from most to least hazardous), dictates associated transportation requirements, such as by which transportation modes the explosives can travel and how they are packaged. For example, class 1.1 explosives, which pose a mass explosion hazard, cannot travel by aircraft but can travel by truck. Meanwhile, certain class 1.4 explosives, which pose a minor explosion hazard, that meet specific requirements can travel by aircraft or U.S. Postal Service. Classifications also include "compatibility groups" that denote which explosives can be transported together. For example, the regulations do not allow blasting detonators, which are used to trigger an explosive device, to be transported in the same truck as primary explosive substances. Unlike some other classes of hazmat that can be self-classified (meaning the shipper classifies the material), in order to be classified, explosives must be first examined by one of six PHMSA-approved third party test labs. The explosives manufacturer, which ultimately submits an application to PHMSA for classification, first selects and hires one of the test labs and makes a sample of the explosive available to the test lab for examination. The test lab uses international standards to test the material and to recommend a classification. PHMSA then reviews the manufacturer's application, including the test lab's report and recommended classification, and approves a classification for the explosive (see fig. 1). In 2010 and 2014, the DOT OIG reported weaknesses in PHMSA's management and oversight of the approvals process. For example, in 2010, the DOT OIG raised questions about the effectiveness of PHMSA's oversight and found that PHMSA had not inspected any of the test labs in 10 years and that test labs did not always submit annual reports as required. In 2014, the DOT OIG reported that PHMSA had addressed these issues. However, the 2014 report found PHMSA evaluation forms missing for many explosives classification reviews, a situation that DOT OIG noted was an internal control weakness. As a result, the DOT OIG recommended PHMSA require the use of evaluation forms to document its review of explosive classification applications. According to a DOT OIG official, PHMSA effectively addressed this recommendation in 2015. PHMSA's oversight of the classification of new explosives includes two key parts--(1) approving and monitoring the test labs and (2) reviewing and approving the manufacturers' applications for classification of a new explosive and the labs' test classification recommendations. PHMSA has several activities to approve and oversee test labs, but its efforts to ensure consistency are limited by PHMSA's lack of a systematic approach to developing and issuing guidance for these labs. In response to the DOT OIG's findings of oversight weaknesses from 2010, PHMSA strengthened its activities to approve and monitor test labs. Specifically, to ensure that test lab examiners meet the requirements specified in regulation, PHMSA established an approval process that includes interviewing examiners and reviewing test lab and examiner qualifications and recertifying test labs every 5 years through an on-site inspection. PHMSA officials stated that in addition to ensuring compliance with regulations, an important goal of PHMSA's oversight of test labs is to promote consistency across test labs. PHMSA officials stated that efforts to promote consistency are particularly important given turnover--half of test labs were approved in 2012 or later. However, while PHMSA works to promote consistency through various types of communications with test labs, it lacks a systematic approach to determining what guidance is needed and to issuing such guidance. Internal control standards state that agencies should communicate quality information so that external parties can help the agency achieve its objectives and address related risks. Likewise, we have previously reported that agencies benefit from procedures that continually reassess and improve guidance processes and documents to respond to the concerns of regulated entities. According to PHMSA officials, regulations and international standards described in a United Nations test manual set forth certain requirements for testing new explosives. However, PHMSA officials told us they give test labs flexibility in how to apply these requirements on a case-by-case basis when testing new explosives to recommend classifications. PHMSA officials told us that granting this flexibility allows test labs to use their expertise and professional judgment. For example, PHMSA officials noted examiners can deviate from the proscribed tests in the test manual if they justify their reasoning for doing so based on their expertise, and officials at one test lab stated that, given the variation in the specific attributes of different new explosives, such flexibility can improve their ability to effectively test a new explosive. However, PHMSA and some test lab officials also stated that this flexible approach can lead to inconsistencies across test labs, such as a test lab examiner being unaware of a common deviation from the proscribed test or similar types of explosives being subject to different tests. For example, one examiner reported learning of an "unwritten rule" that test labs can use alternative tests in cases where multiple samples of the explosive cannot be destroyed due to costs, such as for large and expensive explosives. Four of the six test labs we spoke to said written guidance from PHMSA could help address "unwritten rules" such as commonly used modifications to the test manual. Although four of the five manufacturers we spoke to said the labs are consistent in quality of testing, two noted that test lab report quality can vary. PHMSA has ongoing efforts to promote consistency across test labs. Specifically, PHMSA officials stated that they: Discuss issues, best practices, and PHMSA's recommended approaches with test lab examiners during in-person annual meetings and quarterly teleconferences. PHMSA also distributes agendas and minutes associated with these teleconferences and meetings. Five of the six test labs we spoke to said PHMSA's quarterly teleconferences and annual meetings are helpful to share issues and good practices. However, three test labs noted that test lab examiners are hesitant to volunteer information or ask questions during these meetings since the test labs compete with one another for business. As one test lab noted, if one test lab has information that the others do not, this test lab has an incentive not to mention this information in order to have a business advantage over competitors. Issue letters of interpretation to communicate PHMSA's views on specific issues in response to questions or concerns, which are posted on PHMSA's website. However, PHMSA officials and one test lab stated that while the letters of interpretation include topical guidance, they are hard to find, are not organized by topic, and can contradict each other. As described above, PHMSA's approach to providing guidance is not systematic, and therefore PHMSA may be missing areas where more guidance would be beneficial to helping test labs understand PHMSA's expectations and to improving PHMSA's ability to reach its objective of consistency among test labs. Moreover, PHMSA officials acknowledge that they currently do not have a comprehensive written document that encompasses all PHMSA guidance for test labs. They stated that they are currently evaluating whether to issue such a document. PHMSA officials stated that the development of such a document could involve compiling the content of existing written communication such as the letters of interpretation, which, as described above, PHMSA officials stated are not currently easily accessible. However, PHMSA officials have not specified a systematic approach for these efforts, including an effort to identify test labs' needs such as explaining the "unwritten rules" that affect PHMSA's expectations for test labs. Without such an approach to improving its guidance, PHMSA may not be providing test labs with the information needed to effectively meet PHMSA's goal of promoting consistency. PHMSA has a multi-part application review and approval process for the classification of new explosives, including a check for completeness by a program officer, two levels of technical review, and the completion of an evaluation form (see fig. 2). According to PHMSA officials, PHMSA's role in approving classifications, which is outlined in regulation, is essential to fulfilling its role in regulating hazmat transportation in the U.S. Furthermore, PHMSA officials say its application review process serves quality assurance purposes, since test labs, which are paid by the manufacturers, compete for business and may be pressured by manufacturers to provide a specific classification. Two of the six test labs we spoke to reported facing pressure from manufacturers on how to conduct tests or which classification to recommend. A third test lab also stated that manufacturers often aim to have their explosive classified as class 1.4 since, as mentioned previously, such explosives can be transported by aircraft. One manufacturer noted that having an explosive classified as a 1.4 to travel by aircraft makes the product more competitive since air travel is the fastest option to get the product to an overseas customer. PHMSA officials stated that they are checking for multiple things in their technical reviews, and that in addition to ensuring that explosives are classified correctly, these technical reviews also help PHMSA to improve test labs' performance. Specifically, PHMSA officials stated that they keep notes in an Excel spreadsheet on recurring issues identified in application reviews, which are then used to inform topics for annual and quarterly meetings with the test labs. According to PHMSA officials, its overarching goal in reviewing applications is to ensure that every new explosive is classified correctly, and as a result, application review processing times can vary greatly depending on many factors, such as the quality of the application; the complexity of the application and the explosive device; and the timeliness of test-lab response when PHMSA technical reviewers reach out with questions or requests for additional information. PHMSA officials also noted that technical reviewers may give some applications by more recently approved test labs or examiners a closer look to develop a "comfort level" with their testing procedures, which can slow the review. Similarly, officials noted there has been turnover among PHMSA's technical reviewers, which can slow the process since the second-level technical reviewer provides guidance and feedback to the first-level reviewers as part of their training. PHMSA officials also noted that they began emphasizing the process step of completing an evaluation form for each application in response to DOT OIG's 2014 report, which affected application review times. Other stakeholders we spoke with had varying views on PHMSA's review process. The manufacturers and the explosives manufacturing association we spoke to generally had two key complaints about PHMSA's process, seeing it as overly time consuming and opaque. Time-Consuming: Industry stakeholders noted that the time required for PHMSA's review can be lengthy. Specifically, four of the five manufacturers and an explosives industry association said PHMSA's review takes too long, while one manufacturer noted that turnaround times have recently improved. For example, three manufacturers told us that in their experience PHMSA's review often takes up to 6 months. Manufacturers and the association stated that PHMSA's review process delays manufacturers' ability to get a return on investments made in developing a new explosive. Opaque: Some manufacturers noted that PHMSA's review process is opaque, leaving the manufacturer unsure of their application's status. In particular, four of the five selected manufacturers and an explosives manufacturing industry association we spoke to stated that PHMSA could better communicate where applications are in the review process. Manufacturers and the explosives industry association stated that the uncertainty surrounding PHMSA's review process creates business planning uncertainties, such as when to allocate staff and resources to manufacturing and sales. Furthermore, some manufacturers and the manufacturers' association questioned the value of what they see as an overly time-consuming and opaque process and suggested that PHMSA should place more trust in the test lab results to reduce the amount of time PHMSA takes to review applications. For example, one manufacturer noted that PHMSA's review adds little value since, in the manufacturer's experience, PHMSA rarely changes a classification from the one recommended by the test lab. This manufacturer noted that PHMSA's efforts would be best suited to overseeing the test labs rather than reviewing applications and that the test lab should have the final determination on the classification. In contrast to some manufacturers' views, other stakeholders, including carrier associations and test lab examiners, were supportive of PHMSA's oversight role, including the review and approval of test labs' classification recommendations. One air carrier association stated that PHMSA's oversight is critical given what the association believes to be the test labs' potential conflict of interest since test labs are paid by manufacturers and since explosives, if misclassified, could pose a major risk during air transport. The carrier associations we spoke to that represent air, rail, and trucking modes noted that PHMSA's oversight is effective insofar as explosives are classified correctly and incidents are rare. Specifically, according to PHMSA data, PHMSA receives about 16,000 hazmat incident reports each year, and of that number, an average of about 35 per year involved explosives between 2005 and 2015. A total of 388 such incidents occurred during that time period. Over the same time period, excluding fireworks, only two incidents involving explosives resulted in injuries, but no such incidents resulted in fatalities. In addition, all of the six test labs we spoke with were generally supportive of PHMSA's oversight role. For example, one test lab noted that PHMSA's review is important for liability protection for the test labs, and expressed discomfort at the notion of test labs becoming responsible for assigning approvals without PHMSA's review, noting that while such a change could speed the approval process, it could also decrease quality and consistency across test labs. Recently, PHMSA has taken some steps to respond to manufacturers' concerns about the uncertainty and lack of transparency of the process. PHMSA established an internal goal of 120 days for average application processing times and, since the second quarter of fiscal year 2015, has posted quarterly average application processing times on its website. For the second quarter of fiscal year 2016, PHMSA reported the average was 99 days. In addition, in a February 2016 memo on reforming the explosive classification approval review process, PHMSA noted that to increase transparency, it had increased the information provided to manufacturers in its online status reports so that manufacturers could have better visibility into where each application is in the process. Representatives from one manufacturer we spoke to stated they appreciated the new ability to better track the status of applications through PHMSA's review process. In its February 2016 memo, which cited manufacturers' concerns with the approval process, PHMSA outlined improvement efforts that align with goals in PHMSA's Office of Hazardous Materials Safety 2013-2016 strategic plan. These goals include increasing outreach, streamlining the regulatory system, and enhancing risk management. To increase outreach, as described above, PHMSA increased the amount of information about applications online. PHMSA also described several efforts that align with the goals of streamlining the regulatory system and enhancing risk management. For example, in the memo, PHMSA stated it would immediately begin a one-level technical review for certain applications, including explosives classified as 1.1. Although these explosives pose the greatest risk of mass explosion, PHMSA officials stated that the review is relatively low risk since these explosives have the most stringent packaging and transportation requirements. To be classified as 1.1, the explosive must meet the standard of being stable and not forbidden from transport but does not need to undergo further testing and scrutiny that would be required to determine whether an explosive could be classified at a lower risk that, for example, might allow it to go on an aircraft. In the reform memo, PHMSA also indicated that it would continue to look for future opportunities for streamlining. In particular, PHMSA said it would look for (1) other types of applications where a streamlined one-level technical review is appropriate and (2) specific types of explosive approvals that could be standardized in the regulations, which could allow for self-classification, meaning the manufacturer could determine the classification. PHMSA officials stated that identifying areas for self-classification involves research conducted either by PHMSA or by the industry to determine whether the standard is sufficient to reduce the amount of time PHMSA takes for its review without increasing the risk of misclassifying explosives. Despite these recent reform efforts, PHMSA officials stated that limited staff resources create challenges for application turnaround. According to data provided by PHMSA, between 2006 and 2015, on average, PHMSA officials reviewed 1,700 applications for new explosive classifications annually. As mentioned previously, each of these applications is subject to a multi-step review process, including a completeness check by a project officer, a two-level technical review, and approval or rejection letter signed by an approving official. As noted in figure 3, as of the time of our review, there were seven PHMSA officials involved with this review process--two project officers, four technical reviewers (three first level and one second level), and one primary approving official. Furthermore, these seven officials have other responsibilities outside of reviewing explosives classifications. For example, technical reviewers assist with high priority hazmat issues such as crude oil by rail and lithium ion batteries, and the second level technical reviewer also supervises the work of the first level reviewers and represents PHMSA in international working groups. According to PHMSA officials, although these activities are important to the agency, they can take time away from explosives approvals. Another challenge that affects PHMSA's improvement efforts is a lack of sufficient data and data planning. Internal control standards for the federal government state that management should design the entity's information system to achieve objectives and respond to risks. These standards state that an information system includes both manual and technology-enabled information processes and represents the life cycle of information used for the entity's operational processes. To effectively design an entity's information system, the standards state that entities should consider the information requirements, including the expectations and needs of both internal and external users. Currently, according to PHMSA officials, PHMSA stores classification application information in a system--called the FYI system--that is a document management system, not a database. PHMSA officials stated that the FYI system does not allow for standard fields to be entered that could then be easily analyzed across applications. Instead, PHMSA reviewers complete a separate Microsoft Word document evaluation form for each approval that is filed electronically. PHMSA officials noted that in addition to not being designed for evaluation or analysis across applications, the manual process of filling out the evaluation form can cause delays in the application review process. Due to the limitations of this current data system, PHMSA was unable to provide us data that we requested in several areas. Specifically, PHMSA was unable to provide data on the following: The number of applications in which PHMSA approved a classification that was different from the one recommended by the test lab. PHMSA officials stated that to compile this data would be a manual process requiring staff to go through each application file and manually compare the recommended classification from the test lab to the final approved classification. PHMSA officials stated that as a result of these limitations, PHMSA does not know how many applications required such a change. A manufacturer's association suggested that information on how often PHMSA changes a test lab's recommended classification could help inform the extent to which PHMSA's final review adds value to the process. PHMSA officials stated they did not think that such information would be instructive in the level of value the final PHMSA review adds since currently, the quality of test labs' recommendations may be influenced by the knowledge that PHMSA will be providing a final review. However, PHMSA officials stated that they would like to be able to analyze this type of information. The amount of time applications spent in each part of PHMSA's review process. PHMSA officials stated that although they had developed a method to track information on applications' total time in PHMSA's review process, to obtain more detailed information on how long applications spent in each part of the process would be difficult and time consuming given the limitations of the current system. The amount of time different types of applications spent in PHMSA's review process. Because of the effort involved in this type of analysis, PHMSA officials stated that PHMSA does not have historical information on timeframes for different types of explosives applications. However, officials stated they had implemented a software fix that would allow them to obtain this information going forward. The number of applications for which PHMSA had to request additional information from test labs, which PHMSA officials cited as a common reason for extended timeframes of application reviews, or any information on the reasons PHMSA had to request additional information from test labs. Such information could potentially help PHMSA target guidance efforts to labs. The extent to which the length of PHMSA's review of new applications varied by test lab, which could potentially help PHMSA analyze the consistency of test lab reports and target guidance efforts to labs. PHMSA officials described several ongoing efforts to improve the agency's data systems. PHMSA officials stated that PHMSA's goal is to develop a risk-based, data-driven system that allows PHMSA to use data to identify potential risks, to address workflow process weaknesses, and to use resources more effectively. Moreover, PHMSA officials stated that fiscal year 2016 funds have been designated to transition the FYI system to a PHMSA-wide portal to better capture information in applications and develop the ability to analyze information across applications. In addition, PHMSA officials stated that a statistician has joined their staff to assist with data analysis, and PHMSA has three contracts with outside organizations to improve PHMSA's use of data for analytics, enhanced risk management, and quality assurance. While PHMSA has taken these steps towards improving its data system, and officials described some desired information fields and capabilities, the agency does not have a plan documenting the data fields or information needs required to reach its stated goals. PHMSA officials stressed one narrower aim for the new system--to provide greater transparency and predictability in the review process to better meet the needs of explosives manufacturers. For example, PHMSA officials stated that they would like the ability to track and report average processing times for each review process step. PHMSA officials stated that processing time information could also help the agency manage its staffing resources. While PHMSA officials discussed their desire for this added capability, they did not describe in a systematic way and have not documented in a plan how an improved information system could potentially help meet their goals of streamlining the review system and enhancing risk management, or how it could help them meet their stated goals of using data to identify potential risks, address workflow process weaknesses, and use resources more effectively. For example, while, as described above, PHMSA identified several factors, such as an application's quality and complexity of the application and the explosive device, that can result in a longer application review time, PHMSA did not discuss or provide documentation considering how an improved information system could allow it to better track and analyze these issues. Similarly, while PHMSA officials stated that test labs' quality and experience could affect the length of its review, PHMSA officials have not developed data fields that could highlight such information in applications and be incorporated into the new system, potentially improving PHMSA's ability to analyze the quality and consistency both across test labs and the reviewers. This could help the agency target efforts to streamline its process. Finally, as mentioned previously, PHMSA has recently identified reforms such as a one-level technical review and proposed standardization for certain types of explosives, and has noted that it would like to explore new areas for these opportunities. Without defining the necessary data elements to capture during the classification application review process, PHMSA may be unable to analyze the effects of previous reform efforts or identify opportunities for further reform. Without a systematically developed plan, PHMSA may miss opportunities to create an information system that allows PHMSA to better meet the expectations of both external stakeholders, such as manufacturers, and internal stakeholders--i.e., PHMSA officials themselves. Although PHMSA has taken steps to strengthen its oversight of the explosives classification process that align with its strategic goals, PHMSA's ability to be responsive to stakeholder concerns and to overcome challenges may be limited without a more systematic approach to improvements in two areas: guidance to test labs and information systems. Without systematically determining what guidance would most benefit test labs and how to best communicate this guidance to test labs, PHMSA's efforts to support increased consistency among test labs and respond to test labs' desire for clearer guidance in certain areas may fall short. Similarly, without developing a data plan that clearly defines what information PHMSA most needs to meet its various objectives, the effectiveness of PHMSA's data improvement efforts to meet the expectations of internal and external users may be reduced. In contrast, a carefully developed and implemented data plan could potentially help PHMSA respond to manufacturers' concerns about the timeliness of PHMSA's review process and mitigate PHMSA's challenges related to limited staff resources while also helping it meet its goals related to outreach, transparency, and developing a risk-based approach. To improve PHMSA's oversight of the explosives classification process, the Secretary of Transportation should direct the PHMSA Administrator to take the following two actions: 1. Develop and implement a systematic approach for improving the guidance PHMSA provides test labs. 2. Develop a written plan describing information requirements for PHMSA's new data system. Such a data plan should include information requirements needed to meet PHMSA's goals and address risks. We provided a draft of this product to the Department of Transportation (DOT) for comment. In written comments, reproduced in appendix I, DOT concurred with our recommendations. DOT stated that it continues to dedicate resources to improve the safety, oversight, and system efficiency of the explosives classification approval program and described several recent actions taken to enhance its oversight. In addition, DOT provided a technical comment that we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of the Department of Transportation, 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) 512-2834 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 II. In addition to the contact named above, Alwynne Wilbur (Assistant Director), Tim Bober, Tara Carter, David Hooper, Emily Larson, SaraAnn Moessbauer, Malika Rice, Amy Rosewarne, and Kelsey Sagawa made key contributions to this report.
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Explosives accounted for 4 million of the total 2.6 billion tons of hazardous materials transported in the U.S. in 2012. DOT's PHMSA is responsible for regulating the transport of explosives, which includes classifying new explosives prior to transportation. The classification denotes the risk level and requirements, such as which transportation modes can be used to transport the explosive. To be classified, an explosive must be examined by a PHMSA-approved third-party test lab. PHMSA must then approve the test lab's classification recommendation. The Fixing America's Surface Transportation Act includes a provision for GAO to review DOT's oversight of this process. This report addresses: (1) PHMSA's oversight of the classification of new explosives and related stakeholder views and (2) PHMSA's efforts to improve the oversight process and any associated challenges. GAO collected PHMSA data on applications processed (2006-2015) and explosives incidents (2005-2015) and interviewed officials from PHMSA, all six approved test labs, carrier and explosive manufacturer associations, and five explosives manufacturers selected in part to represent a range of industries. The Department of Transportation's (DOT) Pipeline and Hazardous Materials Safety Administration's (PHMSA) oversight of the labs that issue classification recommendations for new explosives is limited by a lack of guidance, and stakeholders have mixed views on PHMSA's oversight. To receive a classification for a new explosive, manufacturers must have an approved test lab examine the explosive and submit an application to PHMSA with the test lab's recommended classification. PHMSA's oversight includes: (1) approving and monitoring the test labs and (2) reviewing applications and classification recommendations. Although PHMSA has several activities to oversee test labs, its efforts to promote test lab consistency--one objective of its oversight--are hindered by the lack of a systematic approach to developing guidance. GAO has reported that agencies benefit from procedures to improve guidance to respond to regulated entities' concerns. PHMSA officials stated that they grant test labs flexibility on how to apply standards and regulations. However, four of the six test labs said guidance could explain "unwritten rules" such as common testing modifications. Without a systematic approach to determining what guidance is needed, PHMSA's ability to achieve consistency is limited. Stakeholder views on PHMSA's oversight processes, in particular its process for approving classification recommendations, are mixed. PHMSA officials view their role as final approver of classifications as critical. However, some manufacturers stated that PHMSA's review process is time consuming and opaque and questioned whether it adds value. In contrast, other stakeholders such as carrier associations were supportive of PHMSA's oversight role. In 2015, PHMSA began taking steps to improve the transparency of its process by, for example, posting information online on average application processing times. PHMSA has begun oversight improvement efforts that align with its strategic goals to increase outreach, streamline its classification application review process, and enhance risk management, but it faces staffing and data challenges. For example, PHMSA has eliminated one of two technical reviews for certain explosive classification applications. According to PHMSA officials, such streamlining could help PHMSA better manage its limited staff resources--7 PHMSA officials process an average of 1,700 new explosives annually, along with other duties--a workload that creates challenges for application turnaround. However, PHMSA's data challenges reduce its ability to strategically improve its process, and PHMSA lacks a plan for data system improvements under way. Internal control standards state that management should design the entity's information system to achieve objectives and respond to risks. Currently, PHMSA's data system does not allow the agency to aggregate or analyze most information across applications, limiting PHMSA's ability to analyze its processes or outcomes in order to achieve objectives or respond to risks. PHMSA officials stated that fiscal year 2016 funds have been designated to upgrade its system, but PHMSA does not have a plan documenting what fields or information needs are required for the system in order to reach agency goals. Without a plan to guide the development of the new data system, PHMSA may miss opportunities to use it to better manage staff resources, identify future and evaluate past reforms, and meet agency goals. To improve oversight of the classification of new explosives, PHMSA should (1) develop and implement a systematic approach for improving PHMSA's guidance for test labs; and (2) develop a written plan describing information requirements for its new data system. DOT concurred with the recommendations.
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Located organizationally within the Department of the Treasury, the Office of Thrift Supervision through its five regional offices supervises 1,210 federal and state chartered savings institutions--commonly called thrifts--to maintain the safety, soundness, and viability of the industry. Thrifts primarily emphasize residential mortgage lending and are an important source of housing credit. Most of these institutions have assets of under $500 million and are locally owned and managed. Together, they are responsible for about $770 billion in assets. As part of its goal of maintaining safety and soundness, OTS is responsible for examining and monitoring thrifts' efforts to adequately mitigate the risks associated with the century date change. To ensure consistent and uniform supervision on Year 2000 issues, OTS and the other regulators coordinate their supervisory efforts through FFIEC. For example, the regulators jointly prepared and issued an August 1996 FFIEC letter to banks, thrifts, and credit unions informing them of the Year 2000 problem and its potential adverse impacts. Together, they also developed and issued in May 1997 an FFIEC examination program and guidance on how to use it. More recently, the regulators established an FFIEC working group to develop guidance on mitigating the risks associated with using contractors that provide automated systems services and software to thrifts. According to OTS, virtually every insured financial institution relies on computers--either their own or those of a third-party contractor--to process and update records and to perform a variety of other functions. Because computers are essential to their survival, OTS believes that all its institutions are vulnerable to the problems associated with the year 2000. Failure to address Year 2000 computer issues could lead, for example, to errors in calculating interest and amortization schedules. Moreover, automated teller machines may malfunction, performing erroneous transactions or refusing to process transactions. In addition, errors caused by Year 2000 miscalculations may expose institutions and data centers to financial liability and loss of customer confidence. Other supporting systems critical to the day-to-day business of thrifts may be affected as well. For example, telephone systems, vaults, and security and alarm systems could malfunction. In addressing the Year 2000 problem, thrifts must also consider the computer systems that interface with, or connect to, their own systems. These systems may belong to payment system partners, such as wire transfer systems, automated clearinghouses, check clearing providers, credit card merchant and issuing systems, automated teller machine networks, electronic data interchange systems, and electronic benefits transfer systems. Because these systems are also vulnerable to the Year 2000 problem, they can introduce errors into thrift systems. In addition to these computer system risks, thrifts also face business risks from the year 2000, that is, exposure from its corporate borrower's inability to manage their own Year 2000 compliance efforts successfully. Consequently, in addition to correcting their computer systems, thrifts have to periodically assess the Year 2000 efforts of large corporate customers to determine whether they are sufficient to avoid significant disruptions to operations. OTS and the other regulators established an FFIEC working group to develop guidance on assessing the risk corporate borrowers pose to thrifts. OTS has taken a number of actions to raise the awareness of the Year 2000 issue among thrifts and to assess the Year 2000 impact on the industry. To raise awareness, OTS formally alerted thrifts in August 1996 to the potential dangers of the Year 2000 problem by issuing an awareness letter to thrift chief executive officers. The letter, which included a statement from the interagency Federal Financial Institutions Examination Council, described the Year 2000 problem and highlighted concerns about the industry's Year 2000 readiness. It also called on thrifts to perform a risk assessments of how systems are affected and develop a detailed action plans to fix them. In May 1997, OTS, along with the other regulators, issued a more detailed awareness letter that described the five-phase approach to planning and managing an effective highlighted external issues requiring management attention, such as reliance on vendors, risks posed by exchanging data with external parties, and the potential effect of Year 2000 noncompliance on corporate borrowers; discussed operational issues that should be considered in Year 2000 planning, such as whether to replace or repair systems; related its plans to facilitate Year 2000 evaluations by using uniform examination guidance and procedures; and directed thrifts to (1) inventory core computer functions and set priorities for Year 2000 goals by September 30, 1997, and (2) to complete programming changes and to have testing of mission-critical systems underway by December 31, 1998. As of November 30, 1997, OTS had completed its initial assessment of all thrifts for which it has supervisory responsibility. In conducting this assessment, OTS performed off-site examinations of the thrifts that addressed whether (1) their systems were ready to handle Year 2000 processing, (2) they had established a structured process for correcting Year 2000 problems, (3) they prioritized systems for correction, (4) they had determined the Year 2000 impact on other internal systems' important to day-to-day operations, such as vaults, security and alarm systems, elevators, and telephones, (5) they had estimated Year 2000 project costs and targeted sufficient resources, (6) their milestones for renovating and testing mission-critical systems were consistent with those recommended by FFIEC, and (7) they had been closely tracking the progress of service bureau and vendor Year 2000 remediation efforts. Thrifts were also asked to submit Year 2000 assessment reports, action plans, and their most recent progress reports. According to OTS, this assessment showed that the thrift industry was generally aware of and addressing the potential impact of Year 2000. For example, 94 percent of thrifts had assigned Year 2000 oversight duties or a senior officer or committee and 90 percent were then developing a Year 2000 action plan. However, OTS did find that about 170 thrifts were designated at high risk due to poor performance in conducting awareness and assessment phase activities. OTS is following up on this initial assessment with on-site exams to all thrifts to be completed by the end of June 1998. To help thrifts prepare for these visits, OTS developed a detailed Year 2000 checklist. It is a self-assessment tool addressing the five phases of the Year 2000 correction process and about 10 other areas, including reliance on vendors and borrowers' credit risk that informs thrifts of key activities to be performed and allows them to quantify their progress. OTS also issued additional examination guidance and procedures to supplement those of the FFIEC. This supplemental guidance, if implemented correctly, will address the FFIEC examination procedure shortcomings (i.e., lack of detailed questions, vague terminology) reported in our previous testimony. To ensure OTS completes the on-site visits by June 1998, each regional office has been given the authority to establish its own plans for assessing institutions. OTS' national Year 2000 coordinator is currently reviewing regional plans to assess their reasonableness. To make sure regions stay on track, the coordinator is monitoring regional progress in completing the on-site reviews on a biweekly basis and, starting in April, on a weekly basis. More recently, on March 13, 1998, OTS issued a memorandum to the regional offices that, among other things, reiterated its supervisory goal of ensuring that the thrift industry becomes Year 2000 compliant and provided guidance on exam followup for thrifts assigned a Year 2000 rating less than satisfactory. OTS has also been participating with other regulators to conduct on-site Year 2000 assessments of major data processing servicers and software vendors. These servicers and vendors provide support and products to a majority of financial institutions. OTS and the other regulators expect to complete their first round of servicer and vendor assessments in April 1998. OTS is providing the results of the servicer assessments to OTS-supervised thrifts that use these services. Together with the results of on-site assessments conducted at thrifts, OTS expects to have a better idea of where the industry stands, which thrifts need close attention, and thus where to focus its supervisory efforts. As noted in our summary, OTS must successfully address a number of issues to provide adequate assurance that the thrift industry will meet the Year 2000 challenge. Also noted, these issues for the most part are similar to those we found at FDIC and NCUA. First, like the other regulators, OTS is behind in assessing individual institution's readiness. As with NCUA and FDIC, OTS got off to a late start assessing the readiness of the institutions it oversees and, consequently, was late in completing assessment phase activities. For example, it did not complete its initial assessment of all thrifts until November 1997. According to OMB guidance and our Assessment Guide, these activities should have been completed by the summer of 1997. Because OTS is behind the recommended timelines, the time available for assessing institutions' progress during renovation, validation, and implementation phases and for taking needed corrective actions is compressed. Second, OTS and the other regulators are still developing key guidance to help institutions complete their Year 2000 efforts. In their May 1997 letter to thrifts, banks, and credit unions, the financial regulators recommended that institutions begin (1) developing contingency plans to mitigate the risk that Year 2000-related problems will disrupt operations and (2) ensuring that their data processing services, software vendors, and large corporate customers are making adequate Year 2000 progress. In recommending these measures, the regulators noted that they have found that some financial institutions were heavily relying on their service providers to solve their Year 2000 problems. They outlined an approach for dealing with vendors that included (1) evaluating and monitoring vendor plans and milestones, (2) determining whether contract terms can be revised to include Year 2000 covenants, and (3) ensuring that vendors have the capacity to complete the projects and are willing to certify Year 2000 compliance. The regulators also noted that all institutions--even those who have Year 2000-compliant systems--could still be at risk if they have significant business relations with corporate customers who, in turn, have not adequately considered Year 2000 issues. If these customers default or are late in repaying loans, then banks and thrifts could experience financial harm. The regulators recommended that institutions begin developing processes to periodically assess large corporate customer Year 2000 efforts and to consider writing Year 2000 compliance into their loan documentation. The regulators agreed to provide guidance on contingency planning and dealing with vendors and borrowers. The guidance on vendors and borrowers is expected to be issued in mid-March 1998 and the contingency planning guidance by the end of April 1998. As noted in our last testimony, these time lags in providing guidance increase the risk that thrifts have taken little or no action on contingency planning and dealing with vendors and corporate borrowers in anticipation of pending regulator guidance. Moreover, in the absence of guidance, thrifts may have initiated action that does not effectively mitigate risk of Year 2000 failures. Third, although OTS has been working hard to assess industrywide compliance, it has yet to determine the level of technical resources needed to adequately evaluate the Year 2000 conversion efforts of the thrifts and vendors who service them. Instead, OTS is using its existing resources to perform the evaluations. Specifically, OTS is using its 24 information systems examiners to (1) evaluate the progress of the roughly 250 institutions with in-house or complex systems, (2) work with systems examiners from the other regulators to assess the progress of about 260 computer centers of data processing vendors that service thrifts, and (3) assist 84 OTS safety and soundness examiners with their evaluations of the remaining 1,000 institutions that rely heavily or entirely on vendors. As institutions and vendors progress in their Year 2000 efforts, we are concerned that the evaluations of the examiners will increase in length and technical complexity, and put a strain on an already small pool of technical resources. Without sufficient resources, OTS could be forced to slip its schedule for completing the current on-site exams or, worse, reduce the scope of its evaluations in order to meet its deadline. In the first case, institutions would be left with less time to remediate any deficiencies. In the second, OTS might overlook issues that could lead to failures. In either case, the risk of noncompliance by thrifts and service bureaus--and the government's exposure to losses--is significantly increased. OTS officials told us they are in the process of adding four additional systems examiners. They also believe that it is effective to use its safety and soundness examiners to perform Year 2000 assessments at the thrifts not visited by the system examiners. Finally, these officials expressed concern that even if they could hire more technical examiners, it is very hard to find and hire staff with these skills. However, without the requisite analysis, OTS cannot know whether adding four additional examiners will meet it needs. In addition, by using safety and soundness examiners, OTS runs the risk of having examiners make incorrect judgments about the readiness of thrifts. This risk will only increase as we get closer to the millennium because the latter phases of correction--renovation, testing, and implementation--take a higher level of technical knowledge to asses whether these steps are performed correctly. Looking forward, the challenge for OTS--and the other regulators--is to make the best use of limited resources in the time remaining. The challenge is immense: thousands of financial institutions, numerous service providers and vendors, and a finite number of examiners and time to address the problem. By mid-1998, however, OTS and the other regulators should have available a good picture of how their industry stands. The on-site examinations will be complete as will the assessment of vendors and service providers. This information should provide good definition as to the size and magnitude of the problem. That is, how many institutions are at high risk of not being ready for the millennium and require immediate attention and which service providers are likely to be problematic. Further, by carefully analyzing available data, OTS should be able to identify common problems or issues that are generic to thrifts that are of similar size, use specific service providers, etc. This in turn will allow regulators to be able to develop a much better understanding of which areas require attention and where to focus limited resources. In short, regulators have an opportunity to regroup, develop specific strategies, and have a more defined sense of where the risks lie and the actions required to mitigate those risks. OTS internal systems are critical to the day-to-day operation of the agency. For example, they facilitate the collection of thrift assessments, monitor the financial condition of thrifts, provide the Congress and the public with information on thrift mortgage activity, schedule and track examinations, and calculate OTS employee payroll benefits. As with the other regulators, the effects of Year 2000 failure on OTS could range from annoying to catastrophic. OTS system failures could, for example, result in inaccurate or uncollected assessments, inaccurate or unpaid accounts payable, and miscalculated payroll and benefits. Because of the systems' importance, Treasury hired a contractor to assess OTS' internal Year 2000 efforts, and the contractor reported its results in October 1997. The contractor reported that OTS had made good progress in completing its assessment phase activities and was well underway in performing renovation and testing for selected systems. We also found that OTS was making substantial progress in remediating its systems. For example, 13 of OTS' 15 mission-critical systems have already been renovated, tested, and implemented. The remaining two--the Home Mortgage Disclosure Act system and the Interest Rate Risk system--are expected to be completed by the end of this year. OTS has also inventoried and assessed the nonmission-critical systems that were developed and maintained outside the Information Resources Management office at OTS' headquarters. In addition, it has assessed other electronic equipment important to day-to-day operations, such as telecommunications equipment, office equipment, security systems, and personal computers and made plans to modify or replace the equipment it identified as being noncompliant. Despite OTS' good efforts to convert its internal systems, the contractor (1) found that OTS had not prepared contingency plans as part of its assessment phase activities and (2) recommended that it develop such plans. As of the time of our work, OTS had not yet implemented this recommendation. It was still developing these plans to ensure continuity of operations in the event its remediated systems fail or the two systems being renovated are not fixed in time. Our Assessment Guide calls on agencies to initiate contingency plans during the assessment phase so that they have enough time to (1) identify the manual or other fallback procedures, (2) define the specific conditions that will cause the activation of these procedures, and (3) test the procedures. The agency expects to complete these plans by the middle of 1998. Our final concern is that even though OTS has corrected the majority of its mission-critical systems and is making good progress toward remediating other systems and equipment, it does not have a comprehensive Year 2000 program plan. To its credit, the agency has prepared plans for correcting its systems and has been reporting its progress to Treasury on a monthly basis. However, OTS did not develop a single plan providing a clear understanding of the interrelationships and dependencies among the automated systems that support its business operations, such as thrift supervision, office equipment, payroll, and facilities. Instead, OTS officials told us they prepared separate plans for (1) systems operated and maintained by the Information Resources Management office, (2) systems operated and maintained by other offices and regions, and (3) office equipment and facilities. Without an integrated plan, OTS cannot provide assurance that all systems and interrelationships had been assessed and corrected. This increases the risk that systems will not operate as intended in the year 2000 and beyond. In conclusion, Mr. Chairman, we believe that OTS has a good appreciation for the Year 2000 problem and has made significant progress, especially with regard to its effort in correcting its own systems. However, OTS and the other regulators are facing a finite deadline that offers no flexibility. OTS needs to take several actions to improve its ability to enhance the ability of thrifts to meet the century deadline with minimal problems and to enhance the agency's ability to monitor the industry's efforts and to take appropriate and swift measures against thrifts that are neglecting their Year 2000 responsibilities. We, therefore, recommend that OTS work with the other FFIEC members to complete their guidance to institutions on mitigating the risks associated with corporate customers and reliance on vendors. Further, OTS should work with the other FFIEC members to complete the contingency planning guidance by its April 1998 deadline. Additionally, a combination of factors--including starting the thrift assessment process late and issuing more specific guidance to thrifts at a relatively late date--are hindering OTS' and the other regulators' ability to develop more positive assurance that their institutions will be ready for the year 2000. Accordingly, we recommend that OTS work with the other FFIEC members to develop, in an expeditious manner, more explicit instructions to thrifts for carrying out the latter stages of the Year 2000 process--renovation, validation, and implementation--which are the critical steps to ensuring Year 2000 compliance. Because OTS and the other regulators will have more complete information on the status of institutions, servicers, and vendors by mid-1998, we recommend that OTS work with the other FFIEC members to develop a tactical plan that details the results of its assessments and provides a more explicit road map of the actions it intends to take based on those results. This should include an assessment of the adequacy of OTS' technical resources to evaluate the Year 2000 efforts of the thrifts and the servicers and vendors that service them. Finally, with regard to OTS' internal systems, we recommend that the Director instruct the agency to develop (1) contingency plans for each of OTS' mission-critical systems and core business processes and (2) a comprehensive Year 2000 program plan. Mr. Chairman, that concludes my statement. We welcome any questions that you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO discussed the progress being made by the Office of Thrift Supervision (OTS) in ensuring that the more than 1,200 thrifts it oversees have adequately mitigated the risks associated with the year 2000 date change. GAO noted that: (1) the year 2000 problem poses a serious dilemma for thrifts due to their heavy reliance on information systems; (2) regulators have a monumental task in making sure that financial institutions have adequate guidance in preparing for the year 2000 and in providing a level of assurance that such guidance is being followed; (3) further, regulators will likely face some tough decisions on the readiness of individual institutions as the millennium approaches; (4) GAO found that OTS is taking the problem very seriously and is devoting considerable effort and resources to ensure the thrifts it oversees mitigate the year 2000 risks; (5) despite aggressive efforts, OTS still faces significant challenges in providing a high level of assurance that individual thrifts will be ready; (6) in fact, the problems GAO found at OTS are generally the same as those found at the other regulators reviewed; (7) OTS was late in addressing the problem and consequently, is behind the year 2000 schedule recommended by both GAO and the Office of Management and Budget; (8) in addition, key guidance--being developed under the auspices of the Federal Financial Institutions Examination Council (FFIEC)--needed by thrifts and other financial institutions to complete their own preparations is also late which, in turn, could potentially hurt individual institutions' abilities to address year 2000 issues; (9) OTS needs to better assess whether it has an adequate level of technical resources to evaluate the industry's year 2000 efforts; (10) these problems hinder the regulators' ability to develop more positive assurance that institutions will be ready for the century date change; (11) consequently, the challenge for them at this point is how can they use their resources from here to the millennium to ensure that thrifts, banks, and credit unions mitigate year 2000 risks; (12) OTS has done much to mitigate the risk to its mission-critical internal systems and has already renovated, tested, and implemented 13 of its 15 mission-critical systems; (13) however, it has not yet completed contingency plans necessary to ensure business continuity in case system renovations or replacements are not completed in time or do not work as intended; (14) compounding this problem is the fact that OTS has not developed a comprehensive year 2000 conversion program plan providing a clear understanding of the interrelationships and dependencies among the automated systems that support, for example, its supervisory functions, office equipment, and facilities; and (15) such a plan provides added assurance that all systems are assessed.
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The implications of the current lack of clarity with regard to the term "significant impact" and the discretion that agencies have to define it were clearly illustrated in a report that we prepared for the Senate Committee on Small Business 2 years ago. One part of our report focused on a proposed rule that EPA published in August 1999 that would, upon implementation, lower certain reporting thresholds for lead and lead compounds under the Toxics Release Inventory program from as high as 25,000 pounds to 10 pounds. At the time, EPA said that the total cost of the rule in the first year of implementation would be about $116 million. The agency estimated that approximately 5,600 small businesses would be affected by the rule, and that the first-year costs of the rule for each of these small businesses would be from $5,200 to $7,500. However, EPA certified that the rule would not have a significant impact, and therefore did not trigger certain analytical and procedural requirements in the RFA. EPA' determination that the proposed lead rule would not have a significant impact on small entities was not unique. Its four major program offices certified about 78 percent of the substantive proposed rules that they published in the 2 1/2 years before SBREFA took effect in 1996, but certified 96 percent of the proposed rules published in the 2 1/2 years after the act's implementation. In fact, two of the program offices--the Office of Prevention, Pesticides and Toxic Substances and the Office of Solid Waste--certified all 47 of their proposed rules in this post-SBREFA period as not having a significant impact. The Office of Air and Radiation certified 97 percent of its proposed rules during this period, and the Office of Water certified 88 percent. EPA officials told us that the increased rate of certification after SBREFA's implementation was caused by a change in the agency's RFA guidance on what constituted a significant impact. Prior to SBREFA, EPA's policy was to prepare a regulatory flexibility analysis for any rule that the agency expected to have any impact on any small entities. The officials said that this guidance was changed because the SBREFA requirement to convene an advocacy review panel for any proposed rule that was not certified made the continuation of the agency's more inclusive RFA policy too costly and impractical. In other words, EPA indicated that SBREFA--the statute that Congress enacted to strengthen the RFA-- caused the agency to use the discretion permitted in the RFA and conduct fewer regulatory flexibility analyses. EPA's current guidance on how the RFA should be implemented includes numerical guidelines that establish what appears to be a high threshold for what constitutes a significant impact. Under those guidelines, an EPA rule could theoretically impose $10,000 in compliance costs on 10,000 small businesses, but the guidelines indicate that the agency can presume that the rule does not trigger the requirements of the RFA as long as those costs do not represent at least 1 percent of the affected businesses' annual revenues. The guidance does not take into account the profit margins of the businesses involved or the cumulative impact of the agency's rules on small businesses--even within a particular subject area like the Toxics Release Inventory. We have issued several other reports in recent years on the implementation of the RFA and SBREFA that, in combination, illustrate both the promise and the problems associated with the statutes. For example, in 1991, we examined the implementation of the RFA with regard to small governments and concluded that each of the four federal agencies that we reviewed had a different interpretation of key RFA provisions. We said that the act allowed agencies to interpret when they believed their proposed regulations affected small government, and recommended that Congress consider amending the RFA to require the Small Business Administration (SBA) to develop criteria regarding whether and how to conduct the required analyses. In 1994, we examined 12 years of annual reports prepared by the SBA Chief Counsel for Advocacy and said the reports indicated variable compliance with the RFA--a conclusion that the Office of Advocacy also reached in its 20-year report on the RFA. SBA repeatedly characterized some agencies as satisfying the act's requirements, but other agencies were consistently viewed as recalcitrant. Other agencies' performance reportedly varied over time or varied by subagency. We said that one reason for agencies' lack of compliance with the RFA's requirements was that the act did not expressly authorize SBA to interpret key provisions in the statute and did not require SBA to develop criteria for agencies to follow in reviewing their rules. We said that if Congress wanted to strengthen the implementation of the RFA, it should consider amending the act to (1) provide SBA with authority and responsibility to interpret the RFA's provisions and (2) require SBA, in consultation with the Office of Management and Budget (OMB), to develop criteria as to whether and how federal agencies should conduct RFA analyses. In our 1998 report on the implementation of the small business advocacy review panel requirements in SBREFA, we said that the lack of clarity regarding whether EPA should have convened panels for two of its proposed rules was traceable to the lack of agreed-upon governmentwide criteria as to whether a rule has a significant impact. Nevertheless, we said that the panels that had been convened were generally well received by both the agencies and the small business representatives. We also said that if Congress wished to clarify and strengthen the implementation of the RFA and SBREFA, it should consider (1) providing SBA or another entity with clearer authority and responsibility to interpret the RFA's provisions and (2) requiring SBA or some other entity to develop criteria defining a "significant economic impact on a substantial number of small entities." In 1999, we noted a similar lack of clarity regarding the RFA's requirement that agencies review their existing rules that have a significant impact within 10 years of their promulgation. We said that if Congress is concerned that this section of the RFA has been subject to varying interpretations, it may wish to clarify those provisions. We also recommended that OMB take certain actions to improve the administration of these review requirements, some of which have been implemented. Last year we issued two reports on the implementation of SBREFA. One report examined section 223 of the act, which required federal agencies to establish a policy for the reduction and/or waiver of civil penalties on small entities. All of the agencies' penalty relief policies that we reviewed were within the discretion that Congress provided, but the policies varied considerably. Some of the policies covered only a portion of the agencies' civil penalty enforcement actions, and some provided small entities with no greater penalty relief than large entities. The agencies also varied in how key terms such as "small entities" and "penalty reduction" were defined. We said that if Congress wanted to strengthen section 223 of SBREFA it should amend the act to require that agencies' policies cover all of the agencies civil penalty enforcement actions and provide small entities with more penalty relief than other similarly situated entities. Also, to facilitate congressional oversight, we suggested that Congress require agencies to maintain data on their civil penalty relief efforts. The other report that we issued on SBREFA last year examined the requirement in section 212 that agencies publish small entity compliance guides for any rule that requires a final regulatory flexibility analysis under the RFA. We concluded that section 212 did not have much of an impact on the agencies that we examined, and its implementation also varied across and sometimes within the agencies. Some of the section's ineffectiveness and inconsistency is traceable to the definitional problems in the RFA that I discussed previously. Therefore, if an agency concluded that a rule imposing thousands of dollars of costs on thousands of small entities did not trigger the requirements of the RFA, section 212 did not require the agency to prepare a compliance guide. Other problems were traceable to the discretion provided in section 212 itself. Under the statute, agencies can designate a previously published document as its small entity compliance guide, or develop and publish a guide with no input from small entities years after the rule takes effect. We again recommended that Congress take action to clarify what constitutes a "significant economic impact" and a "substantial number of small entities," and also suggested changes to section 212 to make its implementation more consistent and effective. Two years ago we convened a meeting at GAO on the rule review provision of the RFA, focusing on why the required reviews were not being conducted. Attending that meeting were representatives from 12 agencies that appeared to issue rules with an impact on small entities, representatives from relevant oversight organizations (e.g., OMB and SBA's Office of Advocacy), and congressional staff from the House and Senate committees on small business. The meeting revealed significant differences of opinion regarding key terms in the statute. For example, some agencies did not consider their rules to have a significant impact because they believed the underlying statutes, not the agency-developed regulations, caused the effect on small entities. There was also confusion regarding whether the agencies were supposed to review rules that had a significant impact on small entities at the time the rules were first published in the Federal Register or those that currently have such an impact. It was not even clear what should be considered a "rule" under the RFA's rule review requirements--the entire section of the Code of Federal Regulations that was affected by the rule, or just the part of the existing rule that was being amended. By the end of the meeting it was clear that, as one congressional staff member said, "determining compliance with (the RFA) is less obvious than we believed before." Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions.
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The Regulatory Flexibility Act of 1980 (RFA) requires agencies to prepare an initial and a final regulatory flexibility analysis. The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) seeks to strengthen RFA protections for small entities, and some of the act's requirements are built on "significant impact." GAO has reviewed the implementation of RFA and SBREFA several times in recent years, with topics ranging from specific provisions in each statute to the overall implementation of RFA. Although both of these reforms have clearly affected how federal agencies regulate, GAO believes that their full promise has not been realized, and key questions about RFA remain unanswered. These questions lie at the heart of RFA and SBREFA, and their answers can have a substantive effect on the amount of regulatory relief provided through those statutes. Because Congress did not answer these questions when the statutes were enacted, agencies have had to develop their own answers, and those answers differ.
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The Coast Guard is responsible for 11 statutory missions that are divided into non-homeland security and homeland security missions, as shown in table 1. The Homeland Security Act of 2002 requires that the authorities, functions, and capabilities of the Coast Guard to perform all of its missions be maintained intact and without significant reduction, except as specified in subsequent acts. It also prohibits the Secretary of Homeland Security from reducing "substantially or significantly...the missions of the Coast Guard or the Coast Guard's capability to perform those missions." The Coast Guard utilizes aircraft and vessels to conduct its 11 missions. The Coast Guard operates two types of aircraft--fixed-wing (airplanes) and rotary-wing (helicopters), including its new C-27J aircraft-and two types of vessels-cutters and boats. A cutter is any vessel 65 feet in length or greater, having adequate accommodations for crew to live on board. Larger cutters (major cutters), over 179 feet in length, include the National Security Cutter and the High and Medium Endurance Cutters. Cutters from 65 to 175 feet in length include Patrol Cutters such as the Fast Response Cutter and the 110-foot Patrol Boat, among others. In contrast, all vessels less than 65 feet in length are classified as boats and usually operate closer to shore and on inland waterways. As of the end of fiscal year 2015, Coast Guard assets included 61 fixed-wing aircraft, 142 rotary-wing aircraft, 40 major cutters, 205 cutters, and 1,750 boats. Figure 1 shows three of the Coast Guard's newest assets. The Coast Guard began a 30-year recapitalization effort in the late 1990s to modernize its aircraft and vessel fleets by rebuilding or replacing assets. Figure 2 provides a timeline of key events and related acquisition studies and reports in this recapitalization program, which was formerly known as the Deepwater Program. As part of its recapitalization effort, in 1998, the Coast Guard created the Deepwater Program baseline to reflect asset performance levels at that time and to serve as a basis for developing performance goals for the acquisition of new assets that were to replace certain legacy assets. However, a performance gap analysis conducted in 2002 determined the revised asset mix, as designed by the recapitalization program, would have significant capability gaps in meeting emerging mission requirements following the September 11, 2001, terrorist attacks. As a result, the Coast Guard completed a Mission Needs Statement in 2005 to incorporate the additional capabilities and subsequently updated the annual resource hours needed to meet its increased mission demands. In 2007, based on the 2005 Mission Needs Statement, DHS approved a program of record for all of the Coast Guard's major acquisition programs at an estimated cost of $24.2 billion. This program of record delineated the specific number of aircraft and vessels the Coast Guard planned to acquire to meet the annual resource hours outlined by the 2005 Mission Needs Statement baseline. Further, as part of its recapitalization efforts, the Coast Guard submits an annual 5-year Capital Investment Plan Report to Congress that includes, among other things, projected funding for capital assets in such areas as acquisition, construction, and improvements. In 2016, the Coast Guard again revised its Mission Needs Statement in response to statutory requirements and committee report language, but, this revision states it was not intended to provide details on the specific assets the Coast Guard needs to meet its mission requirements. Further, according to the Coast Guard, the 2016 update to the Mission Needs Statement is to provide a foundation for long-term investment planning that is to culminate with detailed modeling scenarios to evaluate the effectiveness of various fleet mixes, and inform the Coast Guard's Capital Investment Plan. Since the 2016 revision does not identify specific assets or resource hours necessary to meet the Coast Guard's mission requirements, the 2005 Mission Needs Statement remains the baseline document outlining the Coast Guard's mission needs and the resource hours per asset necessary to achieve them. Since fiscal year 2008, the Coast Guard has used the Standard Operational Planning Process for annually developing and communicating strategic commitments and allocating resource hours, by asset type (i.e., aircraft, cutters, and boats), throughout its chain of command for meeting mission responsibilities. As part of the Standard Operational Planning Process, Coast Guard headquarters annually issues a Strategic Planning Direction, which is to be the primary mechanism for allocating asset resource hours and providing strategic direction to field commands. Resource hours are subsequently allocated by asset type at the Area, District, and Sector levels for meeting strategic commitments and executing the 11 statutory missions. After assets are deployed, field unit personnel are to record resource hours used by Coast Guard assets to accomplish missions, such as domestic ice breaking or marine environmental protection operations. These asset resource hours are input into one of two operational reporting databases-the Asset Logistics Maintenance Information System (ALMIS) or the Abstract of Operations System (AOPS). After the data have been entered, the Coast Guard Business Intelligence system is used to extract and combine asset resource hour and performance data each quarter to create Operational Performance Assessment Reports. The historical and current-year data on asset operational hours used, by mission, from these reports, as well as Planning Assessments, are to be communicated back to Coast Guard headquarters and incorporated into the Standard Operational Planning Process to inform asset hour allocations in the Strategic Planning Direction for the following year. Since the Coast Guard developed acquisition plans for its Deepwater recapitalization program, many of the assumptions that initially informed these plans, including the 2005 Mission Needs Statement baseline for those assets, have changed and are no longer accurate, as we reported in June 2014 and May 2015. While the Coast Guard is continuing to acquire and deploy new assets each year, the Coast Guard operated assets in fiscal year 2015 below the baseline level of resource hours outlined for these assets in the 2005 Mission Needs Statement. For example, in fiscal year 2015, a mix of new and legacy Patrol Cutters, including new Fast Response Cutters, used 82,233 resource hours of the 174,000 resource hours specified in the 2005 baseline--a 52 percent difference. The asset resource hours used in fiscal year 2015 were below the 2005 baseline level, in part, because not all of the new assets planned as part of the 2005 baseline were deployed and fully operational by fiscal year 2015. In addition, as we have previously reported, the Coast Guard continues to operate many of its legacy assets, which do not always achieve their expected operational capacities. Specifically, some legacy cutters are up to 50 years old and are expected to be in operation for several more years until the replacement cutters can be deployed. We have also reported that the Coast Guard has experienced delays in acquiring some of its planned assets and some of the Coast Guard's new assets that have been deployed have faced operational challenges. Nevertheless, because of changes in the assumptions underlying the 2005 Mission Needs Statement baseline, it may not accurately reflect the Coast Guard's current needs, specifically (1) the planned fleet mix of aircraft and vessels has changed, and (2) the planned operational capacities of these new assets have, in some cases, been revised downward. See Appendix I for more information on the Coast Guard asset baselines and actual resource hours used in fiscal year 2015, as well as changes to its planned fleet mix and operational capacities over time. The Coast Guard's planned aircraft and vessel fleet mix has changed since the 2005 Mission Needs Statement baseline was developed. For example, in 2005, the Coast Guard planned for the acquisition of HC-144 and HC-130 aircraft for its fixed-wing aircraft fleet. However, we reported in March 2015 that the unexpected transfer of C-27J aircraft from the Department of Defense in December 2013 represented a significant change to this aircraft fleet mix. As a result of this change, the Coast Guard decreased its planned acquisition of HC-144 aircraft. In another example, with regard to its aircraft fleet, the Coast Guard initially planned for fixed-wing Unmanned Aerial Vehicles and Vertical Take-Off and Landing Unmanned Air Vehicles in the 2005 baseline, but, as of May 2016, Coast Guard officials stated these unmanned assets have not yet been acquired. For the major cutter fleet, the Coast Guard had planned for 8 National Security Cutters and 25 Offshore Patrol Cutters to replace the legacy fleet of High and Medium Endurance Cutters in its 2005 Mission Needs Statement baseline. However, Congress recently provided the Coast Guard with funding for a ninth National Security Cutter as part of the Consolidated Appropriations Act, 2016, representing an unanticipated addition to its planned major cutter fleet. The expected operational capacities planned for assets in the 2005 Mission Needs Statement baseline have, in several cases, been subsequently revised downward to reflect more realistic and achievable operational targets. For example, regarding fixed-wing aircraft, the Coast Guard originally planned for each HC-144 aircraft to operate 1,200 flight hours per year. However, we reported in March 2015 that the Coast Guard had decided to reduce the HC-144 flight hours from 1,200 hours to 1,000 hours per year due primarily to the high cost of maintaining the aircraft at the 1,200-hour per year pace. For patrol cutters, the 2005 Mission Needs Statement baseline planned for each Fast Response Cutter to operate for 3,000 hours per year. However, the Coast Guard's April 2016 report to Congress on its capital investments states that the planned resource hours for each Fast Response Cutter is 2,500 hours per year--a reduction of 500 hours per cutter from the 2005 baseline. Further, for major cutters, the Coast Guard's 2005 baseline planned for each National Security Cutter and Offshore Patrol Cutter to operate at 4,140 resource hours per year--equivalent to 230 days away from home port--using a crew rotation concept. However, in March 2015, we reported that because of certain risk factors, uncertainty exists regarding the Coast Guard's ability to achieve this operational capacity. We recommended that the Coast Guard specify mitigation actions to effectively address risk factors identified in the report, such as when and how National Security Cutter maintenance requirements could be completed within the 135 days allocated under the crew rotational concept. DHS concurred with the recommendation and, in March 2016, it stated that the Coast Guard was developing various testing plans and would submit a final crew rotation concept plan to Congress by December 2017, in response to requirements in the Coast Guard and Maritime Transportation Act of 2012. Moreover, we noted in our March 2015 report that these same risk factors may also affect the planned operational capacity of the Offshore Patrol Cutters, which are still under development. In its simplest form, a business case requires a balance between the concept selected to satisfy mission needs and the resources needed to transform the concept into a set of products, in this case aircraft and vessels. For the past 6 years, we have consistently found that there is a significant difference between the funding the Coast Guard estimates it needs to carry out its program of record for its major acquisitions and what it has traditionally requested and received through annual appropriations. To date, the Coast Guard's attempts to address this difference by establishing its future fleet's mission needs within reasonable budget constraints have been unsuccessful. For example, in September 2012, we reported that the Coast Guard had completed two efforts (Fleet Mix Phases One and Two) to reassess the mix of assets that comprised its former Deepwater program, but both efforts used its 2005 Mission Needs Statement and 2007 program of record as the basis of the analysis and did not consider realistic fiscal constraints. In particular, the Coast Guard began Fleet Mix Phase One in 2008 that considered the 2007 program of record to be the "floor" for asset capabilities and quantities and did not impose cost constraints. Consequently, the results were not used as a basis for trade-off decisions. In the second effort, Fleet Mix Phase Two, the Coast Guard analyzed how long it would take to buy the program of record under two different funding constraints: (1) an upper bound of $1.64 billion per year and (2) a lower bound of $1.2 billion per year. However, both scenarios are greater than the Coast Guard's last four budget requests, indicating the upper bound funding level is unrealistic and the lower bound is optimistic. Further, the analyses did not assess options lower than the current program of record. Therefore, neither of these analyses prepared the Coast Guard to make the trade-offs required to develop a solid business case that matched its needed capabilities with anticipated resources. Instead of developing a solid business case, we reported in June 2014 that the Coast Guard is shaping its asset capabilities through the budget process. As the Coast Guard has faced fiscal constraints in recent years, this has led to asset capability gaps. As a result, the Coast Guard does not have a long-term plan that demonstrates how it will maintain today's service level and meet identified needs. For example, the Coast Guard has already experienced a gap in heavy icebreaking capability and is falling short of meeting current and future major cutter operational hours. While some of these operational capability gaps are being filled through Congressional appropriations that exceed Coast Guard budget requests and transfers of assets from other agencies, the Coast Guard is likely to continue to face similar shortfalls and gaps while the Offshore Patrol Cutter fleet, estimated to absorb about two-thirds of the Coast Guard's acquisition funding from 2018 until 2034, is being built. During this time, the Coast Guard faces other recapitalization needs--such as rebuilding the 87-foot patrol boat fleet, the MH-60 and MH-65 helicopter fleets, and possibly extending the service lives of the 270-foot Medium Endurance Cutters, among many other projects--that it may not be able to fund with its remaining budget. Office of Management and Budget, Department of Homeland Security, and Coast Guard efforts are underway to address these funding gaps, but to date, these efforts have not led to the difficult trade-off decisions needed to create a solid business case and improve the affordability of the Coast Guard's proposed fleet mix. We recommended in June 2014, that the Coast Guard develop a 20-year fleet modernization plan that identifies all acquisitions needed to maintain the current level of service--aircraft and vessels--and the fiscal resources needed to buy the identified assets. We further recommended that the plan should consider trade-offs if the fiscal resources needed to execute the plan are not consistent with annual budgets. The Coast Guard concurred with our recommendation, but its response did not fully address our concerns or set forth an estimated date for completion. As of June 2016, the Coast Guard has yet to complete this plan. Without such a plan, it will remain difficult for the Coast Guard to fully understand the extent to which future needs match the current level of resources and its expected performance levels--and capability gaps--if funding levels remain constant. In addition to the 20-year fleet modernization plan, we have made several recommendations in recent years for the Coast Guard to improve its recapitalization business case by, among other things, identifying the cost, capabilities, and quantity and mix of assets needed; as well as the trade-offs necessary to meet fiscal constraints. Specific recommendations include the following: In March 2015, we recommended that the Coast Guard inform Congress of the time frames and key milestones for publishing revised annual flight hour needs for fixed-wing aircraft, as well as the corresponding changes to the composition of its fixed-wing fleet to meet these needs. In September 2012, we recommended that the Commandant of the Coast Guard conduct a comprehensive portfolio review to develop revised baselines that reflect acquisition priorities and realistic funding scenarios. In July 2011, we recommended that the Secretary of Homeland Security develop a working group that includes participation from DHS and the Coast Guard's capabilities, resources, and acquisition directorates to review the results of multiple studies--including Fleet Mix Phases One and Two and DHS's cutter study--to identify cost, capability, and quantity trade-offs that would produce a program that fits within expected budget parameters. The Coast Guard concurred with these recommendations, but is still in the process of addressing all recommendations, except the 2011 recommendation that they chose not to implement. For example, the Coast Guard is currently conducting a fleet-wide analysis--including aircraft, vessels, and information technology--intended to be a fundamental reassessment of the capabilities and mix of assets the Coast Guard needs to fulfill its missions. The Coast Guard is undertaking this effort consistent with direction from Congress and expects to have it completed to inform the fiscal year 2019 President's Budget. Coast Guard officials stated that their efforts will help them to respond to a number of recent legislative mandates, which include the following: Fixed-Wing Aircraft Fleet Mix Analysis: This is to include a revised fleet analysis of the Coast Guard's fixed-wing aircraft and is due in September 2016. Rotary-wing Contingency Plan: This plan is to address the planned or unplanned losses of rotary wing airframes; to reallocate resources as necessary to ensure the safety of the maritime public nationwide; and to ensure the operational posture of Coast Guard units. This plan is due in February 2017. Long-Term Acquisition Plan: This plan is to be a 20-year Capital Investment Plan that describes for the upcoming fiscal year and for each of the 20 fiscal years thereafter, such information as the numbers and types of legacy aircraft and vessels to be decommissioned; the numbers and types of aircraft and vessels to be acquired; and the estimated level of funding in each fiscal year required to acquire the cutters and aircraft, as well as related command, control, communications, computer, intelligence, surveillance, and reconnaissance systems and any changes to shoreside infrastructure. These plans are to be produced every other year to provide an update on the status of all major acquisitions. Mission Needs Statement: On the date on which the President submits to Congress a budget for fiscal year 2019 and every 4 years thereafter, the Commandant is to submit an integrated major acquisition need statement which, among other things, is to identify current and projected gaps in Coast Guard capabilities using specific mission hour targets and explain how each major acquisition program addresses gaps identified in Capital Investment Plan reports to be provided to Congress. Concept of Operations: This document is to be used in conjunction with the Mission Needs Statement as a planning document for the Coast Guard's recapitalization needs. It is to determine the most cost- effective method of executing mission needs by addressing (1) gaps identified in the Mission Need Statement, (2) the funding requirements proposed in the 5-year Capital Investment Plan, and (3) options for reasonable combinations of alternative capabilities of aircraft and vessels, to include icebreaking resources and fleet mix. This document is due in September 2016. In May 2016, we reported that Coast Guard headquarters does not provide field units with realistic goals for allocating assets, by mission. Rather, headquarters' allocations of assets in the annual Strategic Planning Directions that we reviewed for fiscal years 2010 through 2016 were based on assets' maximum performance capacities. For example, the Strategic Planning Directions allocated each Hercules fixed-wing aircraft 800 hours per year, each Jayhawk helicopter 700 hours per year, and each 210-foot or 270-foot Medium Endurance Cutter 3,330 hours per year, irrespective of the condition, age, or availability of these assets. As a result, we found that, as shown in figure 3, the asset resource hours allocated in the Strategic Planning Directions have consistently exceeded the asset resource hours actually used by Coast Guard field units during fiscal years 2010 through 2015. For example, in fiscal year 2015, the Strategic Planning Direction allocated a total of 1,075,015 resource hours for field unit assets whereas the actual asset resource hours used was 804,048 hours, or about 75 percent of the allocated hours for that year. Coast Guard field unit officials we spoke with, and Coast Guard planning documents we reviewed for our May 2016 report, indicated that the Coast Guard is not able to achieve the resource hour allocation capacities set by the headquarters' Strategic Planning Directions for several reasons, including the declining condition of legacy assets and unscheduled maintenance. Further, we also reported that our review of Coast Guard planning documents and discussions with field unit officials showed that Operational Planning Directions developed by field unit commands can differ from headquarters' Strategic Planning Directions. For example, officials from one district told us on the basis of their analyses, they determined that their district could realistically use only about two-thirds of the performance capacity hours allocated by the Strategic Planning Direction for boats for one mission. In response to our findings, we recommended that the Coast Guard more systematically incorporate field unit input to inform more realistic asset allocation decisions--in addition to asset maximum capacities currently used--in the annual Strategic Planning Directions to more effectively communicate strategic intent to field units. The Coast Guard concurred with our recommendation and stated that it was taking actions to better incorporate field unit input for fiscal year 2017. If implemented as planned, this would meet the intent of this recommendation. In May 2016, we also reported that the Coast Guard does not maintain documentation on the extent to which risk factors have affected the allocation of asset resource hours to missions through its Strategic Planning Directions. For example, Coast Guard officials told us that the Coast Guard conducts a National Maritime Security Risk Assessment every 2 years to inform its asset allocations; however, the Coast Guard does not document how these risk assessments have affected asset allocation decisions across its missions. Coast Guard officials stated that changes made to Strategic Planning Directions' asset allocations, by mission, are discussed in verbal briefings but it is not their practice to maintain documentation on the extent to which risk factors affect asset allocation decisions. Without documenting this, the Coast Guard lacks a record to help ensure that its decisions are transparent and the most effective ones for fulfilling its missions given existing risks. We recommended that the Coast Guard document how risk assessments conducted are used to inform and support annual asset allocation decisions. The Coast Guard concurred with our recommendation and stated that it will begin to document these decisions in its fiscal year 2017 Strategic Planning Direction. If implemented as planned, this would meet the intent of this recommendation. In May 2016, we reported that the Coast Guard is taking steps to improve its asset allocation process. The actions include the following: Improving data quality for resource hours assigned to each mission: Coast Guard guidance states that its field units should report at least one primary employment category, such as one of the 11 statutory missions, for the time an asset is deployed. Coast Guard officials told us that data on resource hours, by mission, for all assets may not be accurate because the Coast Guard does not have a systematic way for field units to (1) record time spent on more than one mission during an asset's deployment or (2) consistently account for time assets spend in transit to designated operational areas. For example, officials from six of the nine Coast Guard districts we interviewed told us that they generally record one mission per asset deployment, even though each asset's crew may have performed two or more missions during a deployment. Officials from the remaining three districts told us that if their assets' crews perform more than one mission per deployment, the crews generally apportion the number of hours spent on each mission performed. Coast Guard officials stated that the resource hour data were accurate enough for operational planning purposes, and that they were in the process of determining how best to account for time spent by assets on multiple missions and in transit in order to obtain more accurate and complete data on the time assets spend conducting each of its missions. For example, in April 2014, the Coast Guard issued instructions to its field units to provide definitions, policies, and processes for reporting their operational activities and also established a council to coordinate changes among the various operational reporting systems used by different field units. Tracking how increased strategic commitments affect resource hours available: According to Coast Guard officials, the Strategic Planning Directions' allocations of certain asset hours in support of strategic commitments have grown from fiscal year 2010 to fiscal year 2016. Headquarters and field unit officials we met with told us that it has become increasingly difficult to fulfill these growing strategic commitments when asset performance levels have generally remained the same or declined in recent years. Further, in February 2015, the Coast Guard Commandant testified before a congressional subcommittee that the Coast Guard's mission demands continue to grow and evolve and that given the age and condition of some of its legacy assets, the success of future missions relies on the continued recapitalization of Coast Guard aircraft, cutters, boats, and infrastructure. To meet these challenges, the Coast Guard is taking steps to provide more transparency regarding asset resource hours needed to support strategic commitments and the remaining resource hours available to field unit commanders. For example, starting in fiscal year 2015, the Coast Guard began using a new data field to track the time assets spent supporting its Arctic strategy. In conclusion, given that many of the assumptions underlying the Coast Guard's acquisition plans have changed since 2005 and are no longer accurate, and the importance of ensuring that limited acquisition resources are invested as efficiently and effectively as possible, the Coast Guard should continue to follow through with our recommendations to identify the cost, capability, and quantity of its fleet mix, as well as the trade-offs that would need to be made given fiscal constraints. Furthermore, to ensure that assets are deployed consistent with Coast Guard mission priorities, the Coast Guard should follow through with implementing our prior recommendations to improve its annual resource allocation process. Chairman Hunter, Ranking Member Garamendi, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff have any questions about this testimony, please contact Jennifer Grover at (202) 512-7141 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 Christopher Conrad (Assistant Director), Nancy Kawahara (Analyst-in-Charge), Bryan Bourgault, John Crawford, Tracey Cross, Dominick Dale, Michele Fejfar, Laurier Fish, Eric Hauswirth, Tracey King, Michele Mackin, and Katherine Trimble. Key contributors for the previous work that this testimony is based on are listed in each product. The following figures detail the (1) actual number of asset resource hours utilized in fiscal year 2015 and (2) the expected, planned operational capacity baseline in varying years by each major asset category (fixed- wing aircraft, rotary-wing aircraft, major cutters, and patrol cutters). The 2005 baseline was updated from the 1998 baseline to reflect the changes in the Coast Guard's mission as a result of the additional homeland security missions it was tasked with after 9/11. The actual number of asset resource hours utilized is generally lower than the baselines for a variety of reasons; including, among other things, the fact that not all assets were planned to be acquired and operational by fiscal year 2015.
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Following the terrorist attacks of September 11, 2001, the Coast Guard has been charged with expanded security-related missions. Constrained budgets in recent years have underscored the importance of ensuring that the Coast Guard has the proper mix of assets and that it can effectively allocate these assets to achieve its missions. In recent years, the Coast Guard has begun to deploy new assets, and has taken actions to assess what assets it needs to carry out its missions and how to best allocate its current assets. However, the Coast Guard continues to face decisions about what assets it needs and how to best allocate these assets to meet its mission responsibilities. This statement addresses the Coast Guard's (1) mission needs, and (2) process for allocating asset resource hours across missions and units. This testimony is based on GAO's May 2016 report on the Coast Guard's allocation of assets, and GAO's body of work over the past 6 years on Coast Guard major acquisitions, as well as selected updates obtained in May 2016. For the selected updates, GAO reviewed Coast Guard documentation and analyzed fiscal year 2015 data on Coast Guard asset resource hour utilization, which GAO found to be sufficiently reliable for the purposes of this testimony statement. Since the U.S. Coast Guard developed acquisition plans for its asset recapitalization program, many of the assumptions that initially informed these documents, including its 2005 Mission Needs Statement baseline, are no longer accurate. For example, in March 2015, GAO reported that the Coast Guard received an unexpected transfer of 14 C-27J aircraft from the Air Force, representing a significant change to its aircraft fleet mix. In addition, Congress recently provided the Coast Guard with funding for a ninth National Security Cutter--one more than it had planned for in 2005. Further, the Coast Guard has reduced the operational capacities of several assets to reflect more realistic and achievable operational targets. For example, the Coast Guard reduced the operational capacity of the Fast Response Cutter from 3,000 hours per vessel per year to 2,500 hours. GAO has also consistently found that there is a significant difference between the funding the Coast Guard estimates it needs for its major acquisitions and what it has traditionally requested and received. The Coast Guard's attempts to address this difference by establishing its future fleet's mission needs within reasonable budget constraints have been unsuccessful. GAO has made several recommendations for the Coast Guard to improve its recapitalization business case, including that the Coast Guard develop a 20-year fleet modernization plan that identifies all acquisitions needed to maintain the current level of service and the fiscal resources needed to acquire them. The Coast Guard concurred with the recommendation and has actions underway, but has not completed this plan. Given that key changes have taken place since 2005, the Coast Guard should continue to take steps to address GAO's recommendations. GAO reported in May 2016 that the Coast Guard uses the Standard Operational Planning Process to annually allocate asset resource hours to field units for meeting missions, but the headquarters' Strategic Planning Directions used in this process do not provide field units with strategic, realistic goals. Rather, headquarters' Strategic Planning Directions allocate maximum resource hour capacities for each asset. These allocations have consistently exceeded actual asset resource hours used by field units. GAO recommended, among other things, that the Coast Guard more systematically incorporate field unit input to inform more realistic asset allocation decisions--in addition to asset maximum capacities currently used--in the annual Strategic Planning Directions to more effectively communicate strategic intent to field units. The Coast Guard concurred with GAO's recommendation and stated that it was taking actions to better incorporate field unit input for fiscal year 2017. GAO is not making any new recommendations in this statement.
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The test results we received are misleading and of little or no practical use to consumers. Comparing results for 15 diseases, we made the following observations: (1) each donor's factual profile received disease risk predictions that varied across all four companies, indicating that identical DNA can yield contradictory results depending solely on the company it was sent to for analysis; (2) these risk predictions often conflicted with the donors' factual illnesses and family medical histories; (3) none of the companies could provide the donors who submitted fictitious African American and Asian profiles with complete test results for their ethnicity but did not explicitly disclose this limitation prior to purchase; (4) one company provided donors with reports that showed conflicting predictions for the same DNA and profile, but did not explain how to interpret these different results; and (5) follow-up consultations offered by three of the companies provided only general information and not the expert advice the companies promised to provide. The experts we spoke with agreed that the companies' claims and test results are both ambiguous and misleading. Further, they felt that consumers who are concerned about their health should consult directly with their physicians instead of purchasing these kinds of DTC genetic tests. See appendix I for comprehensive information on the test results we received for each donor. Different companies often provide different results for identical DNA: Each donor received risk predictions for the 15 diseases that varied from company to company, demonstrating that identical DNA samples produced contradictory results. Specifically, in reviewing the test results across all four companies for the donors' factual profiles, we found that Donor 1 had contradictory results for 11 diseases, Donor 2 for 9 diseases, Donor 3 for 12 diseases, Donor 4 for 10 diseases, and Donor 5 for 9 diseases. Specific examples of these contradictory predictions are listed below; note that some of the diseases we compared were only tested by three of the four companies. To facilitate comparison among companies, we chose to use the terms "below average," "average," and "above average" to describe the risk predictions we received; the exact language used by each of the companies is reprinted in appendix I. For Donor 1, Company 1 predicted an above-average risk of developing leukemia, while Company 2 predicted a below-average risk, and Company 3 reported that she had an average risk for developing the disease. In addition, Companies 2 and 4 told the donor that her risk for contracting breast cancer was above average, but Companies 1 and 3 found her only to be at average risk. See figure 1. Companies 1 and 2 claimed that Donor 2 had an above-average risk of developing type 1 diabetes, while Company 3 reported that she was at below-average risk for the disease. Further, Company 2 predicted she was at above-average risk for restless leg syndrome, Company 1 claimed she was at below-average risk for the condition, and Company 4 found that she was at average risk. See figure 2. Company 4 claimed that Donor 3's risk of developing prostate cancer was above-average, Company 3 found that he was at below-average risk, and Companies 1 and 2 found that he was at average risk. For hypertension, Company 3 found that he had an above-average risk of developing the condition, Company 2 found that he was at below- average risk, and Company 1 found he was at average risk. See figure 3. Donor 4 was told by Companies 1 and 4 that he was at above-average risk for celiac disease, but Company 2 reported that he was only at average risk. In addition, Companies 1 and 4 found that he was at below-average risk for multiple sclerosis, while Companies 2 and 3 found that he was at average risk. See figure 4. For Donor 5, Companies 2 and 3 reported an above-average risk for heart attacks, and Companies 1 and 4 identified only an average risk. Company 2 found him to be at below-average risk for atrial fibrillation, while Companies 1, 3, and 4 predicted an average risk. See figure 5. These contradictions can be attributed in part to the fact that the companies analyzed different genetic "markers" in assessing the donors' risk for disease. As described in a recent article published in the science journal Nature, researchers determine which markers occur more frequently in patients with a specific disease by conducting "genome-wide association studies, which survey hundreds of thousands or millions of markers across control and disease populations." DTC companies use these publicly available studies to decide which markers to include in their analyses, but none of the companies we investigated used the exact same markers in its tests. For example, Company 1 looked at 5 risk markers for prostate cancer, while Company 4 looked at 18 risk markers. In our post-test interviews, representatives from all four companies acknowledged that, in general, DTC genetic test companies test for different risk markers and that this could result in companies having different results for identical DNA. When we asked the representatives whether they thought that any DTC genetic test companies currently on the market were more accurate than others, all claimed that their own companies' tests were better than those offered by their competitors. For example, Company 1 said that it offers consumers more information than other companies because its results are based on both preliminary research reports as well as clinical data. Company 2 claimed that other companies do not test for as many markers as it does and that while none of the companies are "wrong," using more markers is "probably more accurate." Company 2 also stated that disparate test results from different companies are "caused, in part, due to a lack of guidance from the federal government, CDC in particular." Company 3 similarly claimed to test for more markers than other companies and stated that its test is "the best." Company 3 also said that there is a movement within the DTC genetic test industry to standardize test results, but that such standardization is a work in progress. Finally, Company 4 claimed that it uses stricter criteria to select risk markers than other companies. Company 4 also told us that it has been involved in a collaborative effort with other DTC genetic test companies to develop standard sets of markers, but stated that there are many unresolved differences in philosophy and approach. When we asked genetics experts if any of the companies' markers and disease predictions were actually more accurate than the others, they told us that there are too many uncertainties and ambiguities in this type of testing to rely on any of the results. Unlike well-established genetic testing for diseases like cystic fibrosis, the experts feel that these tests are "promising for research, but the application is premature." In other words, "each company's results could be internally consistent, but not tell the full story.... the science of risk prediction based on genetic markers is not fully worked out, and that the limitations inherent in this sort of risk prediction have not been adequately disclosed." As one expert further noted, "the fact that different companies, using the same samples, predict different...directions of risk is telling and is important. It shows that we are nowhere near really being able to interpret ." We also asked our experts if any of our donors should be concerned if the companies all agreed on a risk prediction; for example, all four companies told Donor 1 she was at increased risk for Alzheimer's disease. The experts told us this consensus means very little because there are so many demographic, environmental, and lifestyle factors that contribute to the occurrence of the types of diseases tested by the four companies. Risk predictions sometimes conflict with diagnosed medical conditions or family history: Four of our five donors received test results that conflicted with their factual medical conditions and family histories. When we asked the experts about these discrepancies, they told us that the results from these DTC tests are not conclusive because the tests are not diagnostic, as is noted on all of the companies Web sites. Because risks are probabilistic by definition, it is very likely that consumers will receive results from these companies that do not comport with their knowledge of their own medical histories. However, one expert noted that the discrepancies between actual health and the predications made by these companies also serve to illustrate the lack of robustness of such predictive tests. Moreover, experts fear that consumers may misinterpret the test results because they do not understand such distinctions. For example, a consumer with a strong family history of heart disease may be falsely reassured by below-average risk predictions related to heart attacks and consequently make poor health choices. In fact, one expert told us that "family history is still by far the most consistent risk factor for common chronic conditions. The presence of family history increases the risk of disease regardless of genetic variants and the current genetic variants do not explain the familial clustering of diseases." Another expert stated that "the most accurate way for these companies to predict disease risks would be for them to charge consumers $500 for DNA and family medical history information, throw out the DNA, and then make predictions based solely on the family history information." Examples we identified include the following: Donor 2 has a family history of heart disease yet all four companies predicted that she was at average risk for having a heart attack. Donor 2 also has a family history of type 1 diabetes, but Company 3 reported that she was at below-average risk for the disease. Donor 3 has a family history of heart disease, but Companies 1, 2, and 3 reported that he was at average risk for having a heart attack and Company 4 reported he was at below-average risk. Donor 4 had a pacemaker implanted 13 years ago to treat atrial fibrillation. However, Company 1 and 2 found that he was at below- average risk for developing atrial fibrillation, and Companies 3 and 4 claimed that he was at average risk. Donor 4 is also a colon cancer survivor, but Company 2 reported that he was at average risk of developing the disease. Donor 5 has Type 2 diabetes, but Companies 1, 2, and 3 indicated that he had an average risk of developing the disease. Donor 5 is also overweight, but all four companies found him to be at average risk for obesity. In our post-test interviews, representatives from all four companies reiterated that their tests are not diagnostic, but they all believe that their tests provide consumers and their doctors with useful information. Specifically, Company 1 stressed that its tests empower consumers to recognize their risk of developing a health-related condition and then take the information to a doctor for further discussion. Company 2 emphasized that its tests provide consumers with the "incentive" to be "aggressive" about their health, while Company 3 said its goal is to "empower individuals with information to help them make necessary lifestyle changes." Similarly, Company 4 stated that its risk predictions are a useful first step in that they offer "something for the consumer and their physician to consider in deciding whether or when to proceed with more invasive or costly tests." However, experts we spoke with cautioned that most doctors are not adequately prepared to use DTC genetic test information to treat patients. In addition, experts noted that there is currently no data or other evidence to suggest that consumers have taken steps to improve their health as a result of taking DTC genetic tests. As one expert noted, "even if such information is found to be an especially effective motivator of behavioral change, we're in trouble...because for everyone you find who is at increased disease risk, you'll find another who is at decreased risk. So if this information is actually powerful in motivating behavior then it will also motivate undesirable behaviors in those found to be at low risk." Fictitious profiles did not receive complete test results: Many of these studies the companies use to make risk predictions apply only to those of European ancestry. Consequently, our fictitious Asian and African American donors did not always receive risk predictions that were applicable to their race or ethnicity, although the companies either did not disclose these limitations prior to purchase or placed them in lengthy consent forms. The experts we spoke to agreed that these limitations should be "clearly disclosed upfront" and suggested that our fictitious donors try to get their money back. Companies 2 and 3 did give us a refund, but Company 1 refused and company 4 never responded to our request. In our post-test interviews, company representatives acknowledged that race and ethnicity do affect disease risk predictions, but that most genetic research has only been done on persons of European ancestry and therefore such individuals receive more accurate results. Representatives from Company 1 also said that the company can provide only current information and that one of its primary goals is to expand upon this research by collecting DNA from as many persons as possible. Further, Companies 2 and 4 stated that they believe they communicate this limitation to consumers on their Web sites or in their test result reports, though our observations do not support this claim. Examples of the discrepancies we identified include the following: Company 1 provided Donor 1's fictitious African American profile with test results based on her race for just 1 of the 15 diseases we compared: type 2 diabetes. For the remaining diseases, Company 1 provided a risk prediction but included a disclaimer, such as "this result applies to people of European ancestry. We cannot yet compute more precise odds" for those of African American descent. However, Company 1 did not explicitly disclose the fact that African Americans would receive incomplete results prior to purchase, even though it did ask consumers to specify their ethnicity as part of the purchase process. The company only vaguely refers to any testing limitations on the first page of its consent form, which states that "gene/disease associations are typically based on ethnicity and the associations may not have been studied in many world populations and may not apply in the same or similar ways across populations." Company 2 claimed on its Web site that it had "better coverage [of genes] associated with the most important diseases for all ethnicities" than its competitors. However, the company provided Donor 2's fictitious Asian profile with test results for just 6 of the 15 diseases we compared. The company did not explain these discrepancies and did not disclose the testing limitations prior to purchase, even though it requested that consumers specify their race or ethnicity as part of the purchase process. The only references to these limitations are made in the "frequently asked questions" section and on page six of an eight- page service agreement, where the company notes that "the genetic result reported may in some cases only be applicable to a certain group of people, e.g. based on gender, ethnicity, lifestyle, family history etc. that you may or may not belong to." Company 3 sent Donor 3's fictitious African American profile results for just 3 of the 15 conditions we compared. The company did not disclose this limitation prior to purchase even though it requested that consumers specify their race or ethnicity during the purchase process. For 10 of the 15 conditions we compared, Company 4 sent all of our donors results that applied only to individuals of European ancestry. However, for restless leg syndrome, the predictions were accompanied by the following statement: "most conditions have only been studied in people of European ancestry. But this condition is a little different." For atrial fibrillation, colon cancer, type 2 diabetes, and heart attack, the predictions were accompanied by the following statement "most conditions have only been studied in people of European ancestry, but this one also has been studied in other groups." The company provided no additional explanation as to how these differences applied to our donors. The only other reference to testing limitations is made on page five of a nine- page consent form, where the company notes that "most of the published studies in this area of genetic research have focused on people of Western European descent. We do not know if, or to what extent, these results apply to people of other backgrounds." Company 1 provided conflicting predictions for the same DNA within the same test result report: Company 1 provided our donors with conflicting risk predictions for atrial fibrillation, celiac disease, and obesity. In reviewing the test results for just the factual profiles, we observed the following: Donor 1 received a "clinical report" predicting that she had an average risk for developing atrial fibrillation and a "research report" stating that she was at below-average risk for the disease. Donor 2 received a "clinical report" stating that she was at below- average risk of developing celiac disease and a "research report" claiming that she was at above-average risk. Donor 4 received one "research report" claiming that was at above- average risk for obesity and another "research report" stated that he was at average risk. According to information in the test results, the company distinguishes between clinical and research reports by noting that predictions based on the clinical reports are for "conditions and traits for which there are genetic associations supported by multiple, large, peer-reviewed studies." In contrast, the research reports provide information "that has not yet gained enough scientific consensus to be included in our clinical reports." However, there is no additional information explaining how consumers should interpret the results. Because the company does not offer any follow-up consultations on test results, our fictitious donors could not request clarification. When we interviewed representatives from Company 1 about this issue after our testing, they simply reiterated the information contained in the results, describing research reports as being peer reviewed and "almost clinical" but noting that clinical reports are "four star" in that they are widely accepted according to scientific standards. Follow-up consultations provide only general information: As part of the test results, all four companies provide generally accepted health information related to the diseases that were tested, including a description of symptoms, treatments, and methods of prevention. This information is not targeted to specific consumers; all of our donors' results contained the same descriptions of treatments and methods of prevention, regardless of the risk predictions they received. For example, all the companies note that stopping smoking and increasing exercise are ways to reduce the risk for heart attacks. Representatives for Company 4 also encouraged consumers to make dietary changes such as adopting a Mediterranean diet or eating curry to prevent Alzheimer's disease, claims that cannot be proven, according to our experts. To supplement this information, Companies 2, 3, and 4 offer follow-up consultations. Only Company 4 has U.S. board-certified genetic counselors on staff for this purpose, but all three companies claimed on their Web sites that their representatives would help consumers understand the implications of their disease risk predictions. However, for the most part, these representatives provided our donors with little guidance beyond the information contained in the test reports; at times, it seemed as though they were simply reading information directly from these reports. When our donors asked for more information on alarming results that indicated that they were at increased risk for serious diseases like colon cancer and Alzheimer's disease, representatives for Companies 2 and 3 pointed out symptoms to be aware of, but acknowledged that there is very little the donors could do to mitigate these risks. Representatives for Companies 2 and 4 also conceded that the donors' own doctors would probably not know what to do with the test results, a fact that our experts repeatedly noted. Examples include the following: Company 2 offers follow up consultations with "experts" to help consumers "interpret their results." In our post-test interviews, the company further noted that it provides the option of speaking with genetic counselors or a medical geneticist, but that consumers rarely exercise this option. Because the company is located outside the country, we were unable to determine whether all of its counselors are board certified in the United States; however, one counselor told us that he was not certified. During one of our undercover follow-up calls, Donor 4 asked what to do about his test results in general and what lifestyle changes he should make as a result. The representative told Donor 4 that he could not tell him what to do because he was not a physician and that the donor should take his results to a physician if he wanted advice on making any changes. When Donor 4 expressed concern that his doctor may not know what to do with the test results, the expert told him "True, not all physicians are familiar with these tests, so if you were to take it into a physician's office, they may not be familiar with it." Furthermore, when discussing Donor 3's increased risk for colon cancer, one of Company 2's experts told our donor that while he should become familiar with the symptoms such as blood in the stool, there was not much else he could do because "colon cancer is quite silent." Company 3 states that "because of the complexity and inherent uncertainties in genetic information, we recommend that you discuss the results of your genetic test with a genetic professional....Our on- staff Genetic Counselors are available any time to review your...results with you." In our post-test interviews, the company further claimed that its genetic counselors are certified by the American Board of Genetic Counseling and that the counselors review family history and provide consumers with additional information that is not in the test results. However, our donors spoke to the same person, who admitted that she was not a board-certified genetic counselor. She told us that she had completed her master's in genetic counseling and just had to take her test to become licensed. Donor 5 called Company 3 because he was extremely concerned about the company's prediction that he had genetic markers that are highly correlated with Alzheimer's disease. Instead of providing addition information, the counselor simply acknowledged that "there is no cure or prevention strategy with Alzheimer's." Company 4 notes that its "genetic counselors are healthcare professionals who are trained to help you understand what genetic information means for you and for your family." In our post-test interview, the company stressed that its counselors explain the results, discuss beneficial next steps, and ensure that consumers and their physicians understand the meaning and limitations of the tests. However, when Donor 2 asked what she could do about her test results, the counselor told her that she could take the results to a physician. When Donor 2 pressed the counselor about whether a doctor would know what to do, the counselor responded "With this stuff? Probably not, no, I think they're learning just like everyone else." Posing as consumers seeking information about genetic testing on the Internet and through phone calls and face-to-face meetings, we found that 10 of the 15 companies we investigated engaged in some form of fraudulent, deceptive, or otherwise questionable marketing practices. For example, at least four companies claimed that a consumer's DNA could be used to create personalized supplements to cure diseases. One company's representative fraudulently used endorsements from high-profile athletes to try to convince our undercover investigators to purchase its supplements. He also told our fictitious consumers that they could earn commission checks and receive free supplements if they could convince their friends to purchase the products. More detailed information on our experiences with this company follows table 2. Another flagrant example of deceptive marketing involved several companies' claims that they could predict which sports children would excel in based on DNA analysis. We also found examples of highly misleading representations about the reliability of the tests and the ability of health care practitioners to use the results to help treat patients. In addition, two companies are placing consumers' privacy at risk by condoning the potentially illegal practice of testing DNA without prior consent. Selected audio clips from our undercover calls and meetings are available at http://www.gao.gov/products/GAO-10-847T. Table 2 contains a selection of representations made by these companies. Note that companies 1 through 4 are the same companies we proactively tested, as discussed earlier in this testimony. Company 5: On its Web site, Company 5 claimed that it would use a consumer's DNA to "create a personalized formula for nutritional supplements and skin repair serum with 100% active ingredients individually selected to enhance or diminish the biological processes causing you to age." To investigate these claims, we posed as a fictitious consumer interested in purchasing the product and met in person with a company representative. During our initial meeting, the representative not only fraudulently suggested that Michael Phelps and representatives for Lance Armstrong endorsed the product, he also implied that the company's supplements could cure high cholesterol and arthritis, claims that one of our experts characterized as "absolute lies." Moreover, the FDA and the National Institutes of Health have clearly stated that no dietary supplement can treat, prevent, or cure any disease. As part of the company's promotional materials we found that the company's DNA assessment cost $225 and that the customized supplements cost about $145 per month. However, if our fictitious consumer immediately purchased a 3-month supply of supplements, she would be able to get the DNA test for free. The representative also told her that she could become a company affiliate and earn commission checks and free products by recruiting new affiliates. She, along with another fictitious consumer, subsequently registered as company affiliates, and ultimately received commission checks totaling more than $250. In addition to sending us the test kits, the company sent us packages of starter supplements in a bag that was not labeled with an ingredient list. In an attempt to compare the test results from Company 5 with the results we received from Companies 1 through 4, we again used the same five donors and replicated the same methodology: submitting DNA samples using one factual profile and one fictitious profile. However, when we received the results, we found that Company 5 did not provide a set of risk predictions for specific diseases, making it impossible for us to compare the results against those we received from the other four companies. Instead, the company sent our donors a list of gene variants tested, a description of bodily functions affected by those variants, and a determination of whether the donors needed additional "nutritional support" to maintain health. In comparing the results, we found that each donor appeared to have a unique assessment and that using the fictitious profile did not seem to affect the results. However, the results were so ambiguous and confusing that they did not provide meaningful information. For example: Donor 1 was told that she needed "maximum support" to maintain the "VDR gene" which accounts for "75% of the entire genetic influence on bone density" among healthy people. Maximum support means that the "protein molecule expressing a specific enzyme, hormone, cytokine or structural protein is functioning minimally" and maximum nutritional support is needed to keep the body functioning optimally. Donor 5 was told that he needed "added support" to maintain the "EPHX" gene, which "detoxifies" epoxides or "highly reactive foreign chemicals present in cigarette smoke, car exhaust, charcoal-grilled meat, smoke from wood burning, pesticides, and alcohol." "Added support" means that the gene is functioning less than optimally and therefore needs added nutritional support. According to one of the experts we spoke with, these claims are simply "nonsensical" and "while it is true that one can find alleles of many of these genes that don't have the same activity as 'normal,' we have no idea of (a) whether that reduced activity has any real health implications and (b) what one would reasonably do about it if so." Along with the test results, the company sent supplements that it claimed were "blended" based on our donors' DNA assessments. The supplements arrived in the same type of unlabeled bag as the starter supplements. This time, the ingredients were printed inside the test result booklet sent to each donor and included substances such as raspberry juice powder, green tea extract, and garlic powder. The recommended daily dose is 10 supplements per day. Based on a review of all the ingredient lists, our five donors appeared to get supplements with different combinations of substances. However, we did not test the supplements to verify their contents. Moreover, an expert we spoke with told us that there is no scientific basis for claiming that supplements can be customized to DNA. In post-test interviews, Company 5 told us that this company differs from others in that it does not attempt to diagnose or calculate a predisposition to any disease. Instead, the company said that it focuses on the overall health and well-being of their clients by creating personalized nutritional supplements based on their client's specific DNA. When we asked about the ingredients in the supplements, the company told us that all supplements have a base formula of ingredients that their scientists have determined to be "beneficial for everyone." Additional nutrients are then added to the base formula based on deficiencies identified by the company's DNA test. When we asked about the endorsements, we were told that several celebrities and professional athletes use the company's products, but that many of these high-profile clients do not want to disclose this affiliation. We briefed FDA, the National Institutes of Health, and FTC on our findings on May 25, 2010; June 7, 2010; and June 17, 2010, respectively. In addition, we have referred all the companies we investigated to FDA and FTC for appropriate action. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the committee may have at this time. For additional information about this testimony, please contact Gregory D. Kutz at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. The following individuals made key contributions to this testimony: Jennifer Costello and Andrew O'Connell, Assistant Directors; Eric Eskew; Grant Fleming; Christine Hodakievic; Barbara Lewis; Vicki McClure; Ramon Rodriguez; Anthony Salvemini; Barry Shillito; Tim Walker; John Wilbur; and Emily Wold. This appendix provides (1) a description of both the factual and fictitious profiles used by each donor and (2) tables documenting the risk predictions we received from all four companies for the 15 diseases we compared. To the extent possible, we have used in the risk prediction language directly from the test results. However, Company 2 did not use terms like "average" or "below average" to describe risk. Instead the company used charts showing each consumer's risk level as compared to others with the consumer's gender and ethnicity or as compared to those of European ancestry. The results were color coded, with green to light green appearing to correspond to a below-average risk level, yellow corresponding to an average risk level, and orange and red corresponding to an above-average risk level. To facilitate comparison, we chose to use these corresponding terms to describe the results, as shown in the table. In addition, Company 1 used two different types of reports in its test results: clinical and research. According to the company, the clinical reports contain "information about conditions and traits for which there are genetic associations supported by multiple, large, peer-reviewed studies." Research reports contain "information from research that has not yet gained enough scientific consensus to be included in our clinical reports." Where applicable, we noted when a risk prediction was derived from a research report; all the other predictions were derived from the clinical reports. Donor 1: Donor 1 is a 37-year old Caucasian female, who eats a balanced diet and exercises regularly. She has elevated cholesterol and arthritis in her back. In addition, she has a strong family history of colon cancer and a grandparent who was diagnosed with dementia. In Donor 1's fictitious profile, she is a 68-year old, African American female, who is overweight and rarely exercises. She has type 2 diabetes, hypertension, and asthma, but has no family history of colon cancer or dementia. Donor 2: Donor 2 is a 41-year-old Caucasian female. She is in good health; however she has a family history of breast cancer, type 1 diabetes, and heart disease. In Donor 2's fictitious profile, she is a 19-year-old Asian female who smokes, drinks and uses recreational drugs. She suffers from heart arrhythmias and an elevated resting heart rate, but has no family history of breast cancer or diabetes. Donor 3: Donor 3 is a 48-year-old Caucasian male who has never smoked and rarely drinks. The donor has asthma as well as a family history of heart disease. In Donor 3's fictitious profile, he is a 69-year-old African American male who is overweight, smokes, and is in somewhat poor health. He has a family history of bone and lung cancer, but no history of asthma or heart disease. Donor 4: Donor 4 is a 61-year-old Caucasian male who smokes. The donor has elevated cholesterol, has an elevated resting heart rate, and has had colon cancer. Thirteen years ago, the donor had a pacemaker implanted to treat atrial fibrillation. In Donor 4's fictitious profile, he is a 53-year-old Caucasian male who has never smoked. He has hypertension and prostate cancer but has no family history of colon cancer or atrial fibrillation. Donor 5: Donor 5 is a 63-year-old Caucasian male who eats a balanced diet and exercises. He has elevated cholesterol and blood sugar. The donor suffers from type 2diabetes and is obese. He also has a family history of Alzheimer's disease. In Donor 5's fictitious profile, he is a 29-year-old Hispanic male who chews tobacco and suffers from asthma. However, he has no family history of diabetes or Alzheimer's disease.
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In 2006, GAO investigated companies selling direct-to-consumer (DTC) genetic tests and testified that these companies made medically unproven disease predictions. Although new companies have since been touted as being more reputable--Time named one company's test 2008's "invention of the year"--experts remain concerned that the test results mislead consumers. GAO was asked to investigate DTC genetic tests currently on the market and the advertising methods used to sell these tests. GAO purchased 10 tests each from four companies, for $299 to $999 per test. GAO then selected five donors and sent two DNA samples from each donor to each company: one using factual information about the donor and one using fictitious information, such as incorrect age and race or ethnicity. After comparing risk predictions that the donors received for 15 diseases, GAO made undercover calls to the companies seeking health advice. GAO did not conduct a scientific study but instead documented observations that could be made by any consumer. To assess whether the tests provided any medically useful information, GAO consulted with genetics experts. GAO also interviewed representatives from each company. To investigate advertising methods, GAO made undercover contact with 15 DTC companies, including the 4 tested, and asked about supplement sales, test reliability, and privacy policies. GAO again consulted with experts about the veracity of the claims. GAO's fictitious consumers received test results that are misleading and of little or no practical use. For example, GAO's donors often received disease risk predictions that varied across the four companies, indicating that identical DNA samples yield contradictory results. One donor was told that he was at below-average, average, and above-average risk for prostate cancer and hypertension. GAO's donors also received DNA-based disease predictions that conflicted with their actual medical conditions--one donor who had a pacemaker implanted 13 years ago to treat an irregular heartbeat was told that he was at decreased risk for developing such a condition. Also, none of the companies could provide GAO's fictitious African American and Asian donors with complete test results, but did not explicitly disclose this limitation prior to purchase. Further, follow-up consultations offered by three of the companies failed to provide the expert advice that the companies promised. In post-test interviews with GAO, each of the companies claimed that its results were more accurate than the others'. Although the experts GAO spoke with believe that these tests show promise for the future, they agreed that consumers should not rely on any of the results at this time. As one expert said, "the fact that different companies, using the same samples, predict different directions of risk is telling and is important. It shows that we are nowhere near really being able to interpret [such tests]." GAO also found 10 egregious examples of deceptive marketing, including claims made by four companies that a consumer's DNA could be used to create personalized supplement to cure diseases. Two of these companies further stated that their supplements could "repair damaged DNA" or cure disease, even though experts confirmed there is no scientific basis for such claims. One company representative even fraudulently used endorsements from high-profile athletes to convince GAO's fictitious consumer to purchase such supplements. Two other companies asserted that they could predict in which sports children would excel based on DNA analysis, claims that an expert characterized as "complete garbage." Further, two companies told GAO's fictitious consumer that she could secretly test her fiance's DNA to "surprise" him with test results--though this practice is restricted in 33 states. Perhaps most disturbing, one company told a donor that an above average risk prediction for breast cancer meant she was "in the high risk of pretty much getting" the disease, a statement that experts found to be "horrifying" because it implies the test is diagnostic. To hear clips of undercover contacts, see http://www.gao.gov/products/GAO-10-847T . GAO has referred all the companies it investigated to the Food and Drug Administration and Federal Trade Commission for appropriate action.
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Enlisted servicemembers can be separated from the military when they are found to be unsuitable for continued military service. According to DOD regulations, enlisted servicemembers can be separated for reasons such as misconduct, failure to overcome substance abuse, and certain mental health conditions, including a personality disorder. A personality disorder by itself does not make enlisted servicemembers unsuitable for military service. DOD requires that the disorder be severe enough that it interferes with an enlisted servicemember's ability to function in the military. DOD and the military services require that to diagnose a personality disorder a psychiatrist or psychologist use criteria established in the Diagnostic and Statistical Manual of Mental Disorders (DSM), which was developed by the American Psychiatric Association. Similarly, in the private sector, clinicians use criteria in the DSM to diagnose a personality disorder, but in some instances, clinicians other than psychiatrists or psychologists, such as licensed clinical social workers, may make this diagnosis. Diagnosing a personality disorder in a servicemember who has served in combat can be complicated by the fact that some symptoms of a personality disorder may be similar to symptoms of combat-related mental health conditions. For example, both personality disorder and PTSD have similar symptoms of feelings of detachment or estrangement from others, and irritability. According to the American Psychiatric Association and the American Psychological Association, the only way to distinguish a personality disorder from a combat-related mental health condition, such as PTSD, is by getting an in-depth medical and personal history from the servicemember that is corroborated, if possible, by family and friends. According to DOD officials, the three key requirements that the military services must follow when separating an enlisted servicemember are designed to help ensure that enlisted servicemembers are separated for the appropriate reason. Documentation of compliance with these requirements is to be included in the separation packet found in the enlisted servicemember's personnel record, as required by the military services. The separation packet is required to contain other documents related to the enlisted servicemember's separation. According to officials from the military services, the servicemember's immediate commander gives the separation packet to an installation official who is to review the packet to verify that the requirements for the personality disorder separation have been met. If this review verifies that the requirements have been met, the separation packet is then sent to a commander at the installation who has authority for approving a personality disorder separation for that enlisted servicemember. This commander is a higher- level officer than the enlisted servicemember's immediate commander. A military installation may have more than one commander who has the authority to approve separations because of a personality disorder. However, each commander with separation authority approves separations only for enlisted servicemembers under his or her command. Once enlisted servicemembers have been separated from military service, they receive certificates of release from the military, which include information on the reason for separation and an official characterization of their time in the service. For enlisted servicemembers separated because of a personality disorder, their certificates of release would state that the reason for their separation was a personality disorder. Employers may request to see separated servicemembers' certificates of release to verify their military service, and employers may make employment decisions based on the information they see on servicemembers' certificates of release. Enlisted servicemembers have protections available to them when going through the separation process. All enlisted servicemembers can submit statements on their own behalf to the commander with separation authority, consult with legal counsel prior to separation, and obtain copies of the separation packet that is sent to the commander with separation authority. In addition, enlisted servicemembers with 6 or more years of military service are eligible to request a hearing before an administrative board. An administrative board hearing allows enlisted servicemembers to have legal representation, call witnesses, and speak on their own behalf in defending against the recommended separation. The board includes at least three members who, following a hearing, make a recommendation to the commander with separation authority as to whether the enlisted servicemember should be separated. Enlisted servicemembers also have protections available to them after they have been separated. They may challenge the reasons given for their separations after they have been separated from the military. Within 15 years after separation from the military, enlisted servicemembers may appeal their separation to a discharge review board. Further, enlisted servicemembers may appeal the discharge review board's decision by applying to a board for the correction of military records. The four military installations we visited varied in their compliance with DOD's three key requirements for personality disorder separations. For the four installations, compliance with the first requirement--to notify enlisted servicemembers of their impending separation because of a personality disorder--was at or above 98 percent. For the second requirement, that enlisted servicemembers must be diagnosed with a personality disorder by a psychiatrist or psychologist who determines that the personality disorder interferes with servicemembers' ability to function in the military, the compliance rates ranged from 40 to 78 percent. Compliance ranged from 40 to 99 percent for the third requirement, that enlisted servicemembers receive formal counseling about their problem with functioning in the military. Our review of the documentation in the enlisted Navy servicemembers' separation packets found that compliance varied by requirement. Across the four installations, the percentage of enlisted servicemembers' separation packets that documented compliance with the notification requirement ranged from 98 to 100 percent. Of the 312 enlisted servicemembers' separation packets included in our review, only 4 did not contain documentation that the servicemembers received notification that they were being separated because of a personality disorder. We did not assess whether the separation packets for these 4 servicemembers had documentation that indicated compliance for the remaining two key separation requirements. Across the four installations, the percentage of enlisted servicemembers' separation packets that had documentation indicating compliance with all three parts of the second requirement--that enlisted servicemembers separated because of a personality disorder (1) be diagnosed with a personality disorder (2) by a psychiatrist or psychologist who (3) determines that the personality disorder interferes with servicemembers' ability to function in the military--ranged from 40 to 78 percent. Noncompliance with this requirement occurred in two ways: enlisted servicemembers' separation packets did not contain the medical form used to document the three parts of this requirement or servicemembers' separation packets contained the medical form but documentation on the form for one or more of the three parts of this requirement was missing or incorrect. Figure 1 summarizes the four installations' compliance rates for this requirement. We found that 34 enlisted servicemembers' separation packets did not contain a medical form, which is used to document compliance with the three parts of this requirement. We also found that of the enlisted servicemembers' separation packets that contained a medical form, the medical form in 66 of these packets did not contain information needed to fulfill all three parts of the requirement. For example, 27 of these 66 enlisted servicemembers' medical forms had documentation indicating that the servicemember had been diagnosed with a personality disorder, but there was also information in the medical form indicating that the diagnosis was not made by a psychiatrist or psychologist. In some of these cases, we found that the diagnosis of a personality disorder was made by a licensed clinical social worker or other type of provider, such as a battalion surgeon. We found that compliance with the requirement that enlisted servicemembers receive formal counseling about their problem with functioning in the military ranged from 40 to 99 percent. Across the four installations, we found that 42 enlisted servicemembers' separation packets did not contain a counseling form documenting that servicemembers received formal counseling as required. As a result, these 42 servicemembers' separation packets were noncompliant with this requirement. Figure 2 summarizes the four installations' compliance rates for this requirement. Our review of the documentation in 59 enlisted Navy servicemembers' separation packets found that compliance varied by requirement. Of the separation packets that we reviewed, 95 percent had documentation indicating that enlisted servicemembers had been notified of their impending separation because of a personality disorder. (Three enlisted servicemembers' separation packets did not contain documentation of this requirement, and as a result, we did not assess compliance with the remaining two requirements for these three servicemembers' separation packets.) The requirement that enlisted servicemembers be diagnosed with a personality disorder by a psychiatrist or psychologist who determines that the personality disorder interferes with servicemembers' ability to function in the military had a compliance rate of 82 percent for the 56 remaining enlisted Navy servicemembers' separation packets that we reviewed. Of the 56, we found that 1 enlisted Navy servicemember's separation packet did not contain a medical form, which is used to document compliance with the three parts of this requirement. We also found that 9 of the 56 enlisted Navy servicemembers' separation packets contained a medical form, but did not have documentation indicating compliance with all three parts of this requirement. Most of these--6--did not have documentation indicating that the diagnosis of a personality disorder was made by a psychiatrist or psychologist. For the requirement for formal counseling, 77 percent of the 56 enlisted Navy servicemembers' separation packets contained documentation that enlisted servicemembers received formal counseling about their problem with functioning in the military. DOD does not have reasonable assurance that its key personality disorder separation requirements have been followed. DOD policy directs the military services to implement and ensure consistent administration of DOD's requirements for separating enlisted servicemembers because of a personality disorder. In turn, according to officials in each of the military services, the military services delegate to commanders with separation authority at the military installations sole responsibility for ensuring that the requirements are followed for enlisted servicemembers under their command. According to military officials at the installations we visited, to ensure compliance with DOD's key separation requirements, the commander with separation authority has an official at the installation examine the enlisted servicemember's separation packet prior to the separation to determine that all requirements have been met. Military officials responsible for reviewing the separation packets at the installations we visited explained that when the official who is reviewing the separation packet discovers that a requirement for separation has not been documented, the reviewing official is supposed to take steps to resolve the situation. For example, if the official reviewing the separation packets does not find documentation that enlisted servicemembers have been formally counseled about their problem with functioning in the military, the reviewing official would verify that the formal counseling had occurred and then obtain documentation of that counseling session. Similarly, a Navy legal official told us that enlisted servicemembers' separation packets should be reviewed to make sure that DOD's key separation requirements have been met before the separations are approved. When we asked about the low rates of compliance for some of the separation requirements that we found at the Army, Air Force, and Marine Corps installations we visited and for the enlisted Navy servicemembers' records that we reviewed, the military officials responsible for reviewing the separation packets with whom we spoke could not explain why these separations were approved if compliance with the separation requirements was not documented in the separation packet. Having given sole responsibility to the commanders with separation authority to ensure compliance, the military services have not established a way to determine whether these commanders are ensuring that DOD's key requirements are met. Furthermore, DOD does not have reasonable assurance that its requirements for separating enlisted servicemembers because of a personality disorder have been followed. At the four installations we visited, enlisted servicemembers who were separated because of a personality disorder varied in the extent to which they selected the protections available to them during the separation process, depending on the specific protection. Based on our review of separation packets in the enlisted servicemembers' personnel records, we found that a small proportion of enlisted servicemembers--12 percent-- stated that they wanted to submit statements on their own behalf to the commander with separation authority. Of these servicemembers who submitted a statement, 18 percent submitted a statement that either questioned whether the diagnosis of a personality disorder was an accurate diagnosis or requested not to be separated. All of these servicemembers were separated. We also found that 38 percent of enlisted servicemembers at the installations we visited stated that they wanted to consult with legal counsel prior to their separation. According to legal officials at the installations we visited, enlisted servicemembers may seek legal counsel to discuss the implications of a personality disorder separation, seek advice on how to stay in the military, or obtain information on their eligibility for Department of Veterans Affairs' benefits, such as health and educational benefits, after separation. For enlisted Navy servicemembers whose separation packets we reviewed, 5 percent selected to submit statements and 5 percent selected to consult with counsel prior to separation. Based on our review of enlisted servicemembers' separation packets for the installations we visited, we found that the majority of servicemembers requested copies of their separation packets, which are sent to the commander with separation authority. Specifically, 289 of 312 enlisted servicemembers in our review at the four installations--93 percent-- requested copies of their separation packets, while 66 percent of enlisted Navy servicemembers in our review requested copies of their separation packets. We also found that no enlisted servicemembers--either at the installations we visited or among the enlisted Navy servicemembers whose separation packets we reviewed--requested a hearing before an administrative board prior to their separation. Enlisted servicemembers may challenge the reason given for their separation to a discharge review board after the separation has been completed. For the four installations we visited and for enlisted Navy servicemembers, we found that three enlisted servicemembers applied to their military service's discharge review board to challenge the reason for their separation. Of these three, one servicemember received a change to the reason for separation because the discharge review board found that the separation because of a personality disorder was unjust. For this servicemember, the reason for separation was changed from personality disorder to the reason of secretarial authority of that military service. The other two servicemembers who applied for a change to their reason for separation did not receive a change because the discharge review board found that the documentation present in the personnel record supported the personality disorder separation. The two servicemembers who were unsuccessful in their appeal to the discharge review board did not choose to appeal the discharge review board's decision to the board for the correction of military records. DOD has established requirements that are intended to help ensure that enlisted servicemembers separated because of a personality disorder are separated appropriately. Failure to comply with these requirements increases the risk of enlisted servicemembers being inappropriately separated because of a personality disorder. For enlisted servicemembers, the stakes are high because a personality disorder separation can carry a long-term stigma in the civilian world. Because DOD relies on the military services to ensure compliance with its key personality disorder separation requirements, and because the military services rely solely on commanders with separation authority to ensure compliance with these requirements, there is a lack of reasonable assurance that the requirements have been met. During our review of enlisted servicemembers' separation packets at the four military installations and for enlisted Navy servicemembers' separation packets we reviewed, the low rates of compliance we found for some of the key personality disorder separation requirements indicate that the military services need a system, beyond relying on the commanders who are making separation decisions, to ensure compliance with DOD's personality disorder separation requirements. Additionally, DOD needs to monitor the military services' compliance with these requirements. Until this happens, DOD does not have reasonable assurance that personality disorder separations of enlisted servicemembers have been appropriate. To help ensure that DOD's requirements for personality disorder separations are met and to help increase assurance that these separations are appropriate, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness to 1. direct the Secretaries of the Army, the Air Force, and the Navy and the Commandant of the Marine Corps to develop a system to ensure that personality disorder separations are conducted in accordance with DOD's requirements and 2. ensure that DOD monitors the military services' compliance with DOD's personality disorder separation requirements. In written comments on a draft of this report, DOD concurred with our recommendation that the military services develop a system to ensure that personality disorder separations are conducted in accordance with DOD's requirements. DOD partially concurred with our recommendation that DOD monitor the military services' compliance with DOD's personality disorder separation requirements. DOD stated that it will strengthen policy guidance related to the military services' standardized compliance reporting, but that it is the responsibility of the military services to ensure compliance with DOD policy. However, as we stated in our draft report, DOD's reliance on the military services to ensure compliance with its separation requirements has not provided reasonable assurance that these requirements will be followed. We believe that the low rates of compliance we found for some of DOD's key personality disorder separation requirements suggest the need for another system to ensure compliance with these requirements, as well as the need for DOD to monitor the military services' compliance. DOD suggested that we change the title of our draft report to indicate that our subject area was personnel management and not defense health care. We have not changed the title. For an enlisted servicemember to be separated because of a personality disorder, the servicemember must first be diagnosed as having a personality disorder. Therefore, we consider our review of DOD's separation process for servicemembers with personality disorders a review of a health care issue. In its comments, DOD also identified two inaccuracies in our description of DOD's separation requirements. DOD pointed out that its policy does not state that a servicemember's written notification of the impending separation has to come from a servicemember's commander, as we indicated in our draft report. According to DOD, the policy does not specify who must provide this written notification. We revised our draft report to clarify our discussion of this requirement. However, this change did not affect the results of our compliance review because we determined compliance based on whether servicemembers' separation packets contained a notification letter and not on who notified the servicemember. DOD also pointed out that its policy does not state that servicemembers must receive formal counseling from their supervisors about their problem with functioning in the military, as we stated in our draft report. According to DOD, the policy does not state who should provide the formal counseling to the servicemember; however, we were told by a DOD separation policy official that the counseling should be done by the servicemember's supervisor. We revised our draft report to clarify our discussion of this requirement. This also did not change the results of our compliance review because we assessed compliance based on whether servicemembers' separation packets contained a counseling form and not on who counseled the servicemember. DOD also provided technical comments, which we incorporated as appropriate. DOD's written comments are reprinted in appendix II. We are sending copies of this report to the Secretary of Defense; the Secretaries of the Army, the Air Force, and the Navy; the Commandant of the Marine Corps; and appropriate congressional committees and addressees. We will also provide copies to others upon request. In addition, this report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To meet our objectives, we examined Department of Defense (DOD) separation regulations that the military services are required to follow to help ensure that enlisted servicemembers are separated for the appropriate reasons. For our review, we examined (1) the extent to which selected military installations complied with DOD requirements for separating enlisted servicemembers because of a personality disorder, (2) how DOD ensures compliance with personality disorder separation requirements by the military services, and (3) the extent to which enlisted servicemembers who are separated because of a personality disorder selected protections available to them. For this review, we included enlisted servicemembers from the Army, Air Force, Navy, and Marine Corps. We included only enlisted servicemembers because officers are able to resign at any time rather than be involuntarily separated. We included enlisted servicemembers who deployed at least once in support of Operation Enduring Freedom (OEF) or Operation Iraqi Freedom (OIF). The Coast Guard was excluded because it is under the direction of the Department of Homeland Security and represents a very small portion of servicemembers deployed in support of OEF and OIF. For this review, enlisted servicemembers are those in the active duty component and Reserve component--reservists and National Guard members--who were discharged or released from active duty from November 1, 2001--the first full month of combat operations for OEF-- through June 30, 2007--the latest date for which data were available from DOD at the time of our review. We obtained data from DOD's Defense Manpower Data Center (DMDC) on the number of enlisted servicemembers who had been separated from the military because of a personality disorder from November 1, 2001, through June 30, 2007. These data came from DMDC's Active Duty Military Personnel Transaction File and DMDC's Reserve Components Common Personnel Data Transaction File, which are databases that contain servicemember-level data, such as Social Security number, education level, date of birth, pay grade, separation program designator code, and reenlistment eligibility. The Active Duty Military Personnel Transaction File contains a transaction record for every individual entrance, separation, or reenlistment in the Army, Air Force, Navy, and Marine Corps within a specific time frame. The Reserve Components Common Personnel Data Transaction File contains this information for every individual entrance, separation, or reenlistment in the Army National Guard, Army Reserve, Air National Guard, Air Force Reserve, Navy Reserve, and Marine Corps Reserve within a specific time frame. We also asked that DMDC indicate, from its Contingency Tracking System Deployment File, if any enlisted servicemembers who were separated because of a personality disorder were also deployed, for at least one tour of duty, in support of OEF or OIF. The Contingency Tracking System Deployment File is a database that includes data elements for all servicemembers deployed in support of OEF/OIF. A contingency tracking system deployment is defined as a servicemember being physically located within the OEF or OIF combat zones/areas of operation, or specifically identified by the military service as directly supporting the OEF/OIF mission outside of the designated combat zone. We determined that the DMDC data were sufficiently reliable because we corroborated these data with information in the enlisted servicemembers' personnel records. Based on our analysis of the data provided by DMDC, we selected four military installations across the Army, Air Force, and Marine Corps to visit based on whether the installation had the highest or second highest number of enlisted OEF/OIF servicemembers separated because of a personality disorder for that service. We selected one installation each from the Air Force and the Marine Corps. We selected two Army installations because at the time of our review, the Army had the majority of servicemembers deployed in support of OEF/OIF when compared with the Air Force and the Marine Corps. Among Marine Corps installations, we selected Camp Pendleton, in California, which had the second highest number of enlisted servicemembers separated because of a personality disorder during this time period. This installation was selected because the Marine Corps installation with the highest number of enlisted servicemembers separated because of a personality disorder was in the midst of a deployment cycle and requested that we not visit. The other military installations we selected were Fort Carson (Army), Colorado; Fort Hood (Army), Texas; and Davis-Monthan Air Force Base (Air Force), Arizona. In addition to the four military installations we visited, we visited Naval Base San Diego. We selected Naval Base San Diego based on DMDC's data, which identified this naval base as having the second highest number of enlisted OEF/OIF Navy servicemembers separated because of a personality disorder from November 1, 2001, through June 30, 2007. During the course of our review, Navy officials at this base told us that enlisted Navy servicemembers selected for our review were transferred to the transient personnel unit at Naval Base San Diego from a Navy ship at various points in the separation process. According to a Navy official, most enlisted Navy servicemembers were diagnosed, formally counseled, and notified of their impending separation while on board a Navy ship and were transferred to the transient personnel unit at Naval Base San Diego to receive their certificates of release. Other enlisted Navy servicemembers were diagnosed, formally counseled, and notified of their impending separation while at Naval Base San Diego. We could not generalize our findings to Naval Base San Diego because some of the elements of the separation process could have been completed while these servicemembers were on board a Navy ship. Therefore, we have reported the results of our review of enlisted Navy servicemembers' records separately from our presentation of findings based on our review of the other four military installations. To determine the extent to which the four military installations and enlisted Navy servicemembers' records that we reviewed complied with DOD personality disorder separation requirements, we reviewed DOD's and the military services' enlisted administrative separation regulations and instructions to identify the key requirements for separating enlisted servicemembers because of a personality disorder. We also interviewed officials at each of the military services' headquarters who are responsible for overseeing separation policy. We interviewed additional officials at each of the four selected installations and at Naval Base San Diego, including mental health providers, staff judge advocates, legal counsel with defense services, unit commanders, administrators of the Medical Evaluation Board, and officials in the transition/separation offices, to understand the administrative separation process. Additionally, to determine whether the selected installations and enlisted Navy servicemembers' records that we reviewed complied with DOD's requirements for separating servicemembers because of a personality disorder, we obtained and reviewed the personnel records of selected servicemembers to verify that their certificates of release indicated that they were separated because of a personality disorder. We obtained these records from each military service's central repository, where the personnel records of servicemembers who have been separated from the military are stored. According to military service officials responsible for separation policy, the separation packet, which is found in the enlisted servicemember's personnel record, is required to contain documents related to the separation, including documents indicating that DOD's three key requirements have been met. For three of the installations we selected, we reviewed the personnel records of a random, generalizable sample of enlisted servicemembers who deployed at least once in support of OEF/OIF and who were separated from that installation because of a personality disorder from November 1, 2001, through June 30, 2007. For the other installation we selected, we reviewed the personnel records of all enlisted servicemembers who deployed at least once in support of OEF/OIF and who were separated from that installation because of a personality disorder from November 1, 2001, through June 30, 2007, because the number of servicemembers separated from that installation was too small to draw a random, generalizable sample. In total, we included 343 enlisted servicemembers' personnel records across the four installations. Of these 343 records, 312 enlisted servicemembers' personnel records were included in our documentation review because their personnel records contained separation packets, which we needed to review to determine compliance. Of the 31 servicemembers' personnel records that were excluded from our review, 3 had separation packets that were illegible. The remaining 28 servicemembers' personnel records did not have separation packets available for our review. We also obtained 94 enlisted Navy servicemembers' personnel records from the Navy's central repository, where the personnel records of servicemembers who have been separated are stored after they leave the Navy. We reviewed the personnel records of all enlisted Navy servicemembers who deployed at least once in support of OEF/OIF and who were separated from Naval Base San Diego because of a personality disorder from November 1, 2001, through June 30, 2007, because the number of enlisted servicemembers separated from Naval Base San Diego was too small to draw a random, generalizable sample. We reviewed these personnel records to determine if they contained separation packets, which are required by the Navy. Of the 94 enlisted Navy servicemembers, 59 servicemembers' personnel records were included in our review because their records contained separation packets, which were needed for us to determine compliance. We excluded 35 enlisted Navy servicemembers' personnel records from our evaluation of compliance. One enlisted servicemember's separation packet was illegible and 34 enlisted servicemembers' separation packets were not available for review. In our review, we determined compliance for each of the three key personality disorder separation requirements by reviewing the documentation in the enlisted servicemembers' separation packets to see if it indicated compliance with that requirement. If the enlisted servicemember's separation packet did not include documentation that the servicemember had been notified of the impending separation because of a personality disorder--one of the key requirements for a personality disorder separation--we did not assess compliance with the other two key requirements. Table 2 describes the criteria we used to determine compliance. Our review of compliance can be generalized to each of the four installations we visited, but not to the military services. For enlisted Navy servicemembers whose separation packets we reviewed, we cannot generalize to Naval Base San Diego or to the Navy. To determine how DOD ensures compliance by the military services with requirements for separating enlisted servicemembers because of a personality disorder, we reviewed DOD regulations and interviewed DOD and the military services' officials responsible for separation policy. Additionally, we interviewed military officials responsible for legal services at the installations we visited and at Naval Base San Diego about how they ensure compliance with DOD's key requirements for personality disorder separations. To determine the extent to which enlisted servicemembers at the four installations we visited and enlisted Navy servicemembers selected the protections available to them during the separation process, we reviewed the same 371 enlisted servicemembers' separation packets as we reviewed to determine compliance with DOD's personality disorder separation requirements--312 separation packets for enlisted servicemembers from the Army, Air Force, and Marine Corps installations and 59 separation packets for enlisted servicemembers from the Navy. Enlisted servicemembers are given a list of the protections available to them and select protections from this list, which are included in servicemembers' separation packets. From our review of the separation packets, we determined whether enlisted servicemembers selected the protections available, but did not determine whether servicemembers received the protections that they selected. To determine the extent to which enlisted servicemembers selected protections available after being separated, we obtained information from each military service's discharge review board and board for the correction of military records. Using this information, we determined whether the same 371 enlisted servicemembers, whose separation packets we reviewed to determine compliance with DOD's personality disorder separation requirements, challenged the reason for their separation. We conducted this performance audit from May 2007 through August 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Mary Ann Curran, Assistant Director; Sarah Burton; Christie Enders; Krister Friday; Becky Hendrickson; Martha R.W. Kelly; Lisa Motley; Jason Vassilicos; and Suzanne Worth made key contributions to this report.
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At DOD, a personality disorder can render a servicemember unsuitable for service. GAO was required to report on personality disorder separations and examined (1) the extent that selected military installations complied with DOD's separation requirements and (2) how DOD ensures compliance with these requirements. GAO reviewed a sample of 312 servicemembers' records from four installations, representing the Army, Air Force, and Marine Corps, that had the highest or second highest number of Operation Enduring Freedom or Operation Iraqi Freedom servicemembers separated because of a personality disorder. The review is generalizable to the installations, but not to the services. GAO also reviewed 59 Navy servicemembers' records, but this review is not generalizable to the installation or the Navy because parts of the separation process could have been completed at multiple locations. GAO's review of enlisted servicemembers' records found that the selected military installations GAO visited varied in their documented compliance with DOD's requirements for personality disorder separations. DOD has requirements for separations because of a personality disorder, which is defined as an enduring pattern of behavior that deviates markedly from expected behavior and has an onset in adolescence or early adulthood. The three key requirements established by DOD are that enlisted servicemembers (1) must be notified of their impending separation because of a personality disorder, (2) must be diagnosed with a personality disorder by a psychiatrist or psychologist who determines that servicemembers' personality disorder interferes with their ability to function in the military, and (3) must receive formal counseling about their problem with functioning in the military. For the four installations, compliance with the notification requirement was at or above 98 percent. The compliance rates for the requirement related to the personality disorder diagnosis ranged from 40 to 78 percent. For the requirement for formal counseling, compliance ranged from 40 to 99 percent. GAO's review of the documentation in the enlisted Navy servicemembers' records found that compliance varied by requirement. Ninety-five percent of enlisted Navy servicemembers' records had documentation indicating that enlisted servicemembers had been notified of their impending separation because of a personality disorder. Eighty-two percent had documentation that indicated compliance with the requirement that enlisted servicemembers must be diagnosed with a personality disorder by a psychiatrist or psychologist who determines that the personality disorder interferes with servicemembers' ability to function in the military. Seventy-seven percent had documentation indicating compliance with the requirement for formal counseling. DOD does not have reasonable assurance that its key personality disorder separation requirements have been followed. DOD policy directs the military services to implement and ensure consistent administration of DOD's requirements for separating enlisted servicemembers because of a personality disorder. According to military service officials, the military services delegate to commanders with separation authority at military installations sole responsibility for ensuring that the separation requirements are followed for enlisted servicemembers under their command. When asked about the low rates of compliance for some of the separation requirements that GAO found, military officials responsible for reviewing the servicemembers' records with whom GAO spoke could not explain why these separations were approved if compliance with the separation requirements was not documented in the servicemembers' records. The military services have not established a way to determine whether the commanders with separation authority are ensuring that DOD's key separation requirements are met, and DOD does not have reasonable assurance that its requirements have been followed.
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Under the LLRW Policy Act of 1980, as amended, the federal government is responsible for the disposal of LLRW owned or generated by DOE. DOE defines LLRW as all radioactive waste that does not fall within other classifications, such as spent (used) nuclear fuel and other high-level waste. Mixed waste is LLRW with hazardous components, such as lead and mercury. LLRW can include material of varying levels of radioactivity, from barely contaminated soil and debris to LLRW with enough radioactivity to require remote handling. LLRW can include items such as contaminated equipment, protective clothing, rags, and packing materials and is managed at multiple sites under a variety of contractors. (See app. I for a list of DOE sites that disposed of the majority of LLRW in fiscal years 2004 and 2005.) DOE sites typically dispose of LLRW at (1) on-site facilities, if suitable capacity is available, (2) DOE's regional disposal facilities at the Hanford Site or the Nevada Test Site, or (3) a commercial facility. The selection of the disposal facility is based partly on the facility's waste acceptance criteria. These criteria specify the allowable types and amounts of radioactive materials, and types of containers acceptable at the disposal facility. In 2000, we reported that DOE had not developed full life-cycle costs for its disposal facilities or established guidance to ensure that its contractors base their disposal decisions on departmentwide considerations of cost- effectiveness, among other things. We also reported in 2001 that cost analyses concerning the use of DOE's on-site disposal facilities should be periodically updated to take into account changing economic conditions. Subsequently, the House Committee on Appropriations directed DOE to prepare an objective analysis of the life-cycle costs of LLRW disposal for various federal and commercial disposal options. The committee was concerned that DOE needed to include in its life-cycle cost analysis certain cost elements, such as packaging, transportation, disposal, and postclosure maintenance and surveillance. In response, in its 2002 report to Congress on life-cycle cost analysis of LLRW disposal, DOE listed among its next steps for EM sites to consider the cradle-to-grave costs as they make LLRW management decisions. On July 18, 2002, EM issued guidance directing each site office to develop the mechanisms necessary to ensure that contractors' LLRW disposal decisions include the best estimate of full cradle-to-grave costs and analysis of alternatives. Several other documents on life-cycle cost analyses are also available. For example, DOE has a cost-estimating guide, developed in the mid-1990s, that provides a chapter dedicated to life-cycle cost analysis, including definitions, processes, limitations, common errors made in life-cycle cost analysis, methods, examples, and diagrams. In addition, although not directly applicable to LLRW management, guidance and manuals prepared by other federal agencies for other DOE programs may be useful to the sites in explaining life-cycle cost analysis methods. For example, the National Institute of Standards and Technology has published two documents on life-cycle cost analysis that are applicable to DOE's Federal Energy Management Program. DOE sites prepare various types of cost analyses in making LLRW management decisions, but these analyses do not consistently use complete, current, or well-documented life-cycle cost analysis to ensure that the lowest-cost LLRW management alternatives are identified. As a result, the decisions the sites make may not take into account the most cost-effective alternative. These inconsistencies have occurred, in large part, because DOE's guidance lacks necessary detail and its oversight of contractor practices is weak. Complete life-cycle cost analysis is cradle to grave and includes all costs associated with the management and disposal of LLRW. As DOE's 2002 report to Congress explained, the costs preceding disposal vary greatly and can be significantly greater than the actual cost of disposal. As a result, DOE concluded it is essential to consider pre-disposal costs as well as disposal costs. Table 1 shows the cost elements of a complete life-cycle cost analysis, according to DOE's 2002 report. DOE LLRW generator sites we visited did not always include all life-cycle costs--including the postclosure costs of long-term maintenance and surveillance of the disposal site--and did not always consider alternative actions when deciding on how to manage and dispose of LLRW. For example, despite DOE's guidance to include all disposal costs in its life- cycle cost analyses, DOE contractors at two sites--Rocky Flats, Colorado, and Paducah, Kentucky--did not consistently consider postclosure costs in the analyses supporting their LLRW disposal decisions for fiscal year 2004. In contrast, the contractor at Fernald, Ohio, prepared a life-cycle cost analysis that included estimated postclosure costs for both the Nevada Test Site and for Envirocare of Utah, a commercial disposal facility. Nevada Test Site officials told us they do not include these future costs in their disposal fees because they operate on an annual appropriated funds basis. Nevada Test Site officials estimated that if they were to include postclosure costs in their fee, these costs would add an additional $2.38 per cubic foot of waste to the fee. Envirocare of Utah, on the other hand, includes the estimated postclosure costs in its disposal fees, as required by the state of Utah. Costs for certain LLRW activities vary widely among disposal sites and should be considered in preparing life-cycle cost analysis. For example, EM's 2002 report to Congress found that costs for one predisposal cost element--waste characterization--can be higher for wastes shipped to the Nevada Test Site and the Hanford Site for disposal than for wastes sent to Envirocare of Utah. Waste characterization costs for the two DOE sites ranged from $130 to $2,400 per cubic meter, while these same costs ranged from $30 to $880 per cubic meter at Envirocare of Utah. The major factors contributing to this cost differential are (1) required procedures for accepting, handling, and disposing of LLRW with higher levels of radioactivity at the Nevada Test Site and Hanford and (2) the higher cost to the generator of characterizing wastes that are shipped in containers to the Nevada Test Site and Hanford Site for disposal. Although waste characterization is an important element in life-cycle cost analysis, the Rocky Flats contractor did not include the costs of these activities in its cost analysis. In addition, waste generators do not always include potential lower-cost alternatives when making LLRW decisions. For example, in fiscal year 2004, the Paducah contractor shipped 600 cubic meters of LLRW in trucks to Envirocare of Utah. Although in its preliminary analysis, the site contractor believed that using rail could save 25 percent in transportation costs, contractor officials indicated they did not validate these preliminary assumptions or complete a formal cost analysis of the rail option. DOE contractors' cost analyses are not always current. Despite DOE's 2002 recommendation that cost estimates should be revisited periodically, one DOE waste generator disposed of large volumes of LLRW in fiscal year 2004 on the basis of cost studies completed several years earlier. Specifically, the contractor at Fernald acknowledged shipping over 100,000 cubic meters of LLRW to Envirocare of Utah in fiscal year 2004, using a cost analysis completed in 1994. This analysis, while considering all life- cycle cost elements, had not been updated during this 10-year period to account for any changes that might have occurred in cost elements, such as changes in disposal rates, costs for packaging, treatment, or transportation. For example, disposal rates charged by Envirocare of Utah can change from year to year, based on price discounts offered for larger LLRW disposal volumes. We also found that three of the five DOE sites that had expanded on-site facilities since 2002 did not complete an analysis comparing the life-cycle costs of on-site and off-site disposal alternatives. A 2001 congressional conference report requires DOE to perform such an analysis "before proceeding with any new on-site disposal cell." DOE asserts that the report language does not apply to ongoing facility development or expansion. Officials at two sites indicated they did not believe they needed to complete such a life-cycle cost analysis because the expansion of their on-site disposal facility was already accounted for in the initial facility design, completed before 2002. The third site completed a life-cycle cost analysis of LLRW waste streams for its on-site facility. However, site officials did not complete a life-cycle cost analysis of off-site disposal because they assumed that the costs of off-site transportation and disposal would be significant enough to preclude the off-site option. Although the remaining two sites completed life-cycle cost studies comparing on-site and off-site disposal costs, these studies were not submitted to the congressional appropriations committees. DOE contractors' cost analyses are not always well documented. In some cases, we could not determine how contractors incorporated cost analyses into their disposal decisions because documentation was incomplete. According to DOE and contractor site officials at Rocky Flats, disposal decisions were at times based on noncost factors, such as schedule or safety. For example, a 2003 cost study determined that using trucks to transport building debris to a nearby rail loading area less than 1 mile away would be more cost-effective than extending a rail line to the building. However, contractor officials told us they decided to build a rail extension to the building being demolished because the extra traffic at the site caused by trucks hauling the LLRW to the rail line could endanger the health and safety of the workers. This decision, however, was not documented. Contractor officials at Rocky Flats agreed that such LLRW management decisions were not consistently documented to show the rationale for how cost was balanced against other factors. At other sites, cost analyses were informal and not documented. For example, contractor officials responsible for LLRW disposal at Paducah told us that they made some disposal decisions informally because they believed their knowledge of the factors involved made it unnecessary to complete a formal analysis. In addition, Oak Ridge contractor officials coordinating the removal of LLRW from the site told us they did not complete a formal analysis of disposal options for each waste stream because their contract did not require such an analysis. DOE sites have not consistently used life-cycle cost analysis, in part because EM's 2002 guidance memo on life-cycle cost analysis lacks the necessary detail for how and when to use it. Consequently, each site was responsible for deciding how to incorporate cost into its LLRW management decisions. For example, although EM's guidance directed sites "to develop mechanisms necessary to establish that its LLRW disposal decisions include the best estimate of full 'cradle to grave' costs and analysis of alternatives," the guidance did not do the following things: Lay out a systematic, consistent method for (1) analyzing all cost elements or (2) comparing key alternatives within these cost elements to determine the lowest cost. Consequently, as we found, analyses often did not include cost elements that might have altered a disposal decision. Specify when or under what circumstances sites should prepare cost analyses. As we found, some sites did not update their analyses to show that their original LLRW management decisions were still supported by current economic conditions; Refer sites to relevant DOE orders, manuals, or other reference materials that could provide consistent direction on life-cycle cost analysis. Such references could include, for example, the DOE order for real property asset management, the DOE manual on preparing life- cycle cost estimates, Office of Management and Budget guidance for completing a cost-effective analysis, and the National Institute of Standards and Technology guidance for completing life-cycle cost analysis, or portions of these documents. Lay out how final LLRW management decisions should be documented. For example, the guidance does not explain how sites should weigh disposal costs against noncost factors such as safety and health. As we found, without adequate documentation at some of the sites we visited, it was difficult for site contractors to justify the decisions they had made. DOE site offices were ineffective in overseeing contractors' use of life- cycle cost analysis, which also contributed to ineffective implementation of the guidance. At the sites we visited, neither DOE nor the contractors had taken identifiable steps to implement the guidance on life-cycle cost analysis. First, DOE has not incorporated life-cycle cost guidance into contracts. Most of the incentive-based contracts at the sites we visited require contractors to comply with DOE Order 430.1A on life-cycle asset management, which requires the use of life-cycle cost analysis. However, neither that order, nor its successor, DOE Order 430.1B, provide sufficient detail on life-cycle cost analysis definitions, methods, examples, or diagrams that would be useful in preparing such analyses. In contrast, DOE's cost-estimating guide provides a chapter dedicated to life-cycle cost analysis. This chapter includes definitions, processes, limitations, a list of common errors made in life-cycle cost analysis, methods, examples, and diagrams. However, the estimating guide is not explicitly cited in DOE Order 430.1A or 430.1B, or in the site contracts. As a result, the contractor official responsible for controlling LLRW costs at Rocky Flats, for example, could not tell us whether the contractor used DOE's cost-estimating guide, particularly the chapter on life-cycle cost analysis in LLRW management decisions, because he was not familiar with the guide. Second, DOE field offices have not taken steps to implement guidance or to evaluate contractors' use of life-cycle cost analysis. For example, contractor officials at Paducah were not aware of EM's July 18, 2002, guidance memo on life-cycle cost analysis until we showed a copy to them at the time of our visit. In addition, in October 2002, DOE's Rocky Flats Field Office sent a memo to its contractor, Kaiser-Hill Company, concerning this EM guidance. According to the memo, the department was already aware that the contractor used licensed commercial disposal facilities and that disposal decisions considered technical acceptability, schedule, and cost benefit; the field office therefore concluded that the mechanisms to establish cost-effective disposal decisions by Kaiser-Hill were already in place and thus satisfied the intent of the EM guidance. However, we found no indication at any of the sites we visited that DOE officials had specifically assessed the contractor's use of life-cycle cost analysis in making LLRW management decisions. When we brought our concerns to EM officials on the inconsistent use of life-cycle cost analysis at the sites, they responded that EM has relied on the use of incentive-based contracts to ensure contractors are making cost- effective LLRW management decisions, rather than encouraging the use of life-cycle cost analysis. Incentive-based contracts provide specific incentives for specified performance outcomes, often driven by site- specific goals and objectives in areas such as health, safety, schedule, cost, or other areas, as negotiated between DOE and the contractor. We recognize that incentive-based contracts might help DOE meet goals such as accelerated cleanup and that these contracts may, in some cases, reduce overall site costs. However, their use may not necessarily identify lowest- cost waste management alternatives, unless the contract provides this specific focus. Since the department relies on incentive-based contracts, it is critical that the contract's total estimated cost be based on, among other things, life-cycle cost analyses of LLRW management alternatives and that the contract specify the proper use of life-cycle cost analysis. Without the proper use of life-cycle cost analysis in establishing and overseeing incentive-based contracts, DOE cannot be assured that the contractor has identified the lowest life-cycle cost alternatives for LLRW management. For example, the Rocky Flats contractor, operating under an incentive-based contract, prepared various analyses of transportation alternatives from 2000 to 2003, but these analyses did not comprehensively address sitewide LLRW disposal needs because they were incomplete and not updated. Specifically, two DOE contractor draft studies in 1999 and 2000 indicated that adding rail as an alternative for shipping LLRW from Rocky Flats to off-site disposal facilities could save millions of dollars in transportation costs. Despite this cost-saving potential, the contractor decided in 2000 to rely exclusively on trucks for all Rocky Flats LLRW shipments. Subsequently, in 2002, the contractor analyzed transportation alternatives specifically for shipping certain contaminated LLRW soil off- site. Although the analysis concluded that using rail to transport this soil alone could save up to $216,000, the contractor continued using trucks exclusively in fiscal year 2003 and most of fiscal year 2004 to transport this waste to Envirocare of Utah. In 2003 the contractor determined that the total volume of this LLRW soil would be significantly higher than previously estimated, further increasing the cost-saving potential of using rail, but nevertheless did not update or formalize the analysis. Instead, the contractor decided to send the soil by rail only after determining that it would use rail for shipping debris from an altogether separate LLRW project at Rocky Flats. In September 2004, the site began to transport the LLRW soil by rail, after it had already sent over 4,200 truck shipments of soil to Utah in fiscal years 2003 and 2004. Use of rail instead of trucks to ship the LLRW soil might have saved the site over $4 million during fiscal year 2004. Comprehensive, complete, and current analyses of transportation alternatives for sitewide LLRW disposal needs might have better identified the lowest-cost transportation alternative, therefore providing an opportunity for reducing LLRW management costs for the site. In April 2005, as part of our ongoing engagement, we briefed the Subcommittee on Energy and Water Development, House Committee on Appropriations, on the preliminary results of our work. We stated that DOE LLRW generators were not consistently using life-cycle cost analyses in their disposal decisions because of poor guidance and weak oversight. One month later, in its report to accompany the fiscal year 2006 energy and water appropriations bill, the full Appropriations Committee emphasized its intention to have DOE use life-cycle cost analysis in LLRW management decisions. Using our preliminary findings, the committee noted its concern with the department's reliance on incentive-based contracts as a mechanism for ensuring cost-effective decision making rather than using life-cycle cost analyses, as directed. According to the committee, while contractors should pursue cost- effective cleanup activities at their sites, it is up to the federal management responsible for those contractors to provide guidance and make decisions that benefit the whole DOE complex. As such, the committee directed the Secretary of Energy to report to the committee within 30 days of enactment of the 2006 Energy and Water Development Appropriations Act, on the specific steps the department will take to ensure that contractors use life- cycle cost analysis in considering LLRW options, and that DOE maintains a viable oversight function to oversee the implementation of such guidance. The committee further recommended that a third of EM's budget for managing the cleanup program, or $82,924,000, be withheld until after the Secretary of Energy delivers a report to the committee. To better coordinate disposal efforts among sites and program offices, increase efficiencies, and minimize life-cycle costs, DOE has begun developing a national LLRW disposition strategy. Although DOE expects to begin implementing this strategy by March 2006, specific schedules have not yet been established for when the strategy will be fully in place, and it faces several significant challenges. These include developing a database that can be used to manage LLRW complexwide and overcoming organizational obstacles created by the department's varied missions. DOE has recognized that its current approach---having each site responsible for developing mechanisms necessary to control costs--may result in cost inefficiencies and could limit its ability to meet departmentwide strategic objectives, such as accelerated waste cleanup and site closure. To overcome these problems, EM has begun developing a National Disposition Strategy, which it plans to implement in 2006. EM plans to use the strategy to evaluate predisposal, storage, treatment, and disposal options across the department. The focus of the strategy will be on DOE LLRW that is shipped off-site for disposal and on waste for which DOE currently has no treatment or disposal options. EM hopes to make specific recommendations regarding waste without treatment or disposal options, develop a LLRW database, and reduce predisposal costs. To implement a successful strategy, EM expects to integrate sites' waste disposition plans by (1) identifying and quantifying LLRW by waste category and site, (2) developing potential treatment and disposal options, and (3) identifying federal and commercial site capabilities for disposal of LLRW. DOE has not yet established specific schedules for when the strategy will be fully in place. EM plans to develop this national disposition strategy in two phases. In Phase I, EM will examine those DOE sites that now have significant quantities of EM LLRW, including Oak Ridge, Savannah River, Idaho National Laboratory, Hanford (including the Office of River Protection), Fernald, Portsmouth (in Ohio), and Paducah (in Kentucky). DOE will also take into account LLRW requiring disposal from fiscal year 2005 to about fiscal year 2035. In Phase II, EM will examine the LLRW managed by other DOE program offices, such as NNSA and the Office of Science. Efforts in Phase II will require considerable coordination among different DOE program offices. To develop and implement its national strategy for LLRW disposition, DOE needs basic data--both current and forecasted--from individual sites on their disposition plans. However, EM does not have complete data, either for its own sites or for non-EM sites with LLRW. Although DOE continues to report progress in disposing of LLRW, the LLRW volumes it reports as needing disposal are not complete. EM's databases do not include all LLRW expected to be generated in the future as part of ongoing environmental cleanup or waste produced by non-EM generators. This information may be time-consuming and costly to obtain from the different program offices. For example, when we sought information on current and forecasted LLRW volumes from the Office of Science, NNSA, and the Office of Nuclear Energy, Science, and Technology (Nuclear Energy), only the Office of Science provided the requested information. NNSA and Nuclear Energy did not provide this information because, according to officials from each of these program offices, the information was not readily available. Regarding cost information, EM's 2002 report to Congress recommended that DOE sites consider all life-cycle costs in evaluating alternatives for LLRW management, but it cautioned that DOE's data collection and reporting processes needed to be improved to make any departmentwide cost analyses useful. EM officials stated that they will consider LLRW costs in their National Disposition Strategy. Currently, according to EM, DOE does not have uniform requirements for defining, monitoring, and reporting waste disposal costs, and sites may differ significantly in their protocols for collecting cost information. However, EM agrees that if DOE is to use life- cycle cost analysis to improve the bases for sites' disposal decisions, standardized protocols for collecting and reporting the data would have to be established. DOE recognizes these problems and has begun to develop some information it needs to support the evolving disposition strategy. Specifically, DOE is determining (1) what data it needs; (2) whether it can use the data in existing databases or has to develop a new database; and (3) how these data should be organized in a database. EM's ability to develop an integrated strategy for managing LLRW is further complicated by the fact that DOE has multiple program and site offices with different missions, and these offices oversee a variety of site contractors who manage waste with many different characteristics. DOE's experience with the use of a supercompactor at its Oak Ridge site illustrates the difficulty EM faces in developing a waste disposition strategy that covers multiple program offices. At this site, EM and NNSA program offices have their own contractors that are responsible for various activities, including managing or disposing of LLRW. In 1997, DOE awarded BNFL a 6-year fixed-price contract to decontaminate and decommission three buildings once used to enrich uranium at the Oak Ridge gaseous diffusion plant. These buildings comprised more than 4.8 million square feet and housed more than 328 million pounds of material. To dispose of this waste, BNFL had constructed a supercompactor, the largest of its type in the nuclear industry. Using this supercompactor, the contractor was able to reduce the volume of several thousand tons of LLRW by 75 percent and save an estimated $100 million in LLRW management and disposal costs. Despite the supercompactor's potential for reducing LLRW volumes and lowering costs for the other program offices at the Oak Ridge site, the contractor, with the approval of the DOE site office, decided in 2004 to dismantle the supercompactor and ship it as LLRW to Envirocare of Utah for disposal. According to NNSA officials at the Y-12 Plant, also located at the Oak Ridge site, they have contaminated buildings that need to be dismantled and disposed of, but neither DOE nor the contractor consulted with NNSA officials about the potential use of the supercompactor for NNSA's ongoing compacting needs. Similarly, contractor officials at EM's Paducah Site in Kentucky, which is about 300 miles away, stated that they might have benefited from the use of the supercompactor but were not given the opportunity to consider alternatives to its disposal. For example, Paducah had about 37,000 tons of remaining scrap metal, as of June 26, 2005, that its current on-site compactor is incapable of crushing, according to a contractor official at the Paducah site. A DOE official at the Oak Ridge site stated that it would probably not be cost-effective to ship debris to the supercompactor from other sites, and the supercompactor could not cost-effectively be relocated. However, neither DOE nor contractor officials provided any documentation of cost analysis to support this statement. Although the dismantling, shipping, and disposal of the supercompactor may have been the correct decision, DOE did not conduct a departmentwide assessment of volume reduction needs and capabilities, and the costs or potential obstacles associated with maintaining or moving the supercompactor under various LLRW management alternatives. Consequently, DOE may have missed a potential cost-saving opportunity. Oak Ridge officials told us that they are currently developing an integrated disposition plan to better coordinate LLRW management activities specifically for the Oak Ridge site. According to DOE, other integrated activities underway at Oak Ridge include, among other things, a pilot program between EM and the Office of Science to dispose of LLRW that needs no further storage or processing. As a result of lawsuits and state regulatory and legislative actions in two states--Washington and Nevada--DOE cannot currently rely on either of its federal disposal facilities--Hanford or the Nevada Test Site--to dispose of mixed LLRW. Consequently, DOE is incurring increased costs for storage and treatment. Texas may provide DOE with new disposal options, but not sooner than December 2007. Specifically: In July 2004, Washington state asked a U.S. district court to prohibit DOE from sending LLRW from other DOE sites to Hanford for disposal. DOE voluntarily suspended LLRW shipments pending the court's decision. In May 2005, the court ruled in favor of the state, issuing a preliminary injunction prohibiting DOE from sending LLRW from other sites to Hanford for disposal. In addition, in November 2004, Washington state voters passed an initiative, now incorporated in Washington state law, that would prohibit DOE from accepting out-of- state waste until existing waste at Hanford is cleaned up. The scope and constitutionality of the initiative are currently being litigated in federal district court. DOE officials told us that its inability to ship mixed LLRW to Hanford from other states is increasing costs and may delay cleanup and closure plans at several sites. For example, at Rocky Flats, approximately 1,000 cubic meters of mixed LLRW, intended for disposal at Hanford, instead had to be shipped off-site for commercial treatment, temporary storage, and eventual disposal at Envirocare of Utah to avoid delaying site cleanup; the Rocky Flats contractor estimates incremental storage, handling, treatment, and disposal costs of this LLRW may exceed $8 million. In Nevada, as of August 2005, DOE was still awaiting approval from state regulators for a permit to dispose of, at the Nevada Test Site, mixed LLRW from other sites. After DOE filed its permit application in December 2000, Nevada objected to DOE's planned method of disposal. DOE is working with the state regulators to achieve a mutually agreeable resolution, and state officials indicate this issue could be resolved by the end of 2005. Until DOE receives this permit, DOE cannot dispose of mixed LLRW generated at other sites at the Nevada Test Site. In 2004, the Nevada Attorney General objected to DOE's plan to ship certain LLRW from DOE's Fernald, Ohio, site for disposal at the Nevada Test Site, asserting in a letter to DOE that the plan violated federal law and regulations. Pending a resolution of these issues, DOE signed a $7.5 million contract in April 2005 with a commercial facility in Texas to temporarily store 6,800 cubic meters of this LLRW for up to 2 years. Texas may provide DOE with additional storage options. In February 2005, the state approved a license amendment for Waste Control Specialists to enlarge its LLRW storage facility. In addition, the state has begun a technical review of WCS's application for a LLRW disposal facility license, which could be issued by December 2007. Given the large volumes of LLRW generated by DOE activities, it is imperative that DOE recognize the importance of life-cycle cost analysis in identifying the most cost-effective alternatives for managing LLRW and then weighing the cost of these alternatives against noncost factors, such as safety and schedule. However, EM's July 2002 guidance on life-cycle cost analysis did not include information on how or when such an analysis should be completed. Moreover, the department has not performed oversight to ensure that contractors are completing life-cycle cost analyses. EM has elected not to encourage the use of life-cycle cost analysis in making LLRW management decisions, relying instead on incentive-based contracts to ensure contractors are making cost-effective decisions. However, we believe that this contract mechanism does not necessarily ensure that contractors identify the lowest-cost LLRW management options. Without complete, well-documented life-cycle cost analysis, EM may be overlooking cost-saving opportunities that could have resulted from pursuing alternative disposal options. Furthermore, this lack of transparency diminishes confidence in DOE's ability to ensure that contractors have considered life-cycle costs, regardless of whether the lowest-cost alternative is selected. Although DOE has been disposing of LLRW for decades, it still lacks an integrated national strategy for doing so. Such a departmentwide strategy is crucial for ensuring that LLRW management needs throughout DOE are identified and addressed in a cost-effective manner that also meets other departmental goals, such as timely site cleanup. Specifically, an integrated approach could help consolidate similar types of LLRW to obtain economies of scale and lower per-unit disposal costs across the complex. DOE will need to develop basic information on LLRW volumes departmentwide and by program office, and to overcome the challenges posed by DOE's complex organization and multiple missions, and recent state actions. To promote cost-effective LLRW management, we are recommending that the Secretary of Energy take the following four actions: Prepare comprehensive guidance on life-cycle cost analysis that, at a minimum, specifies (1) a systematic, consistent method of analyzing all cost elements or of comparing key alternatives within these cost elements to determine the lowest cost; (2) when and under what circumstances sites should prepare cost analyses; (3) relevant DOE orders, manuals, or other reference materials that should be consulted to provide consistent direction on how and when to perform the analysis; and (4) how final LLRW management decisions should be documented to demonstrate that life-cycle cost factors were adequately weighed against noncost factors, such as safety, health, or schedule. Incorporate the revised life-cycle cost guidance into new or existing site contracts or into the departmental orders cited in those contracts. Direct DOE to oversee contractors to ensure that site contractor officials properly use life-cycle cost analyses in evaluating LLRW management alternatives. Actively promote and monitor the development of a timely, national LLRW management strategy that is based on departmentwide data on LLRW needing disposal, and ensure that the implementation of the strategy is fully carried out. We provided DOE with a draft of this report for review and comment. Overall, DOE generally agreed with our conclusions and thanked us for the recommendations, but disagreed with or wanted to clarify certain statements in the draft report and provided technical comments, which we incorporated as appropriate. Specifically, DOE agreed that its sites are not consistently using life-cycle cost analysis in making LLRW management decisions. It also agreed that its current guidance and oversight in the area of life-cycle cost analysis for LLRW management decisions should be strengthened and noted that it is currently reevaluating its guidance documents and their implementation. In addition, DOE expressed appreciation for our support of an effective National Disposition Strategy for LLRW management, and expects this strategy to be available by March 2006. DOE also provided comments on several specific statements in our report. First, DOE disagreed with our statement on the lack of an effective, integrated approach for LLRW management at Oak Ridge and offered examples of integration, which we have incorporated into our report. Nonetheless, we found that not all LLRW activities at Oak Ridge were integrated into a sitewide LLRW management strategy. For example, NNSA officials told us their future need to decontaminate and decommission numerous buildings on the site had not yet been included in any sitewide LLRW management strategy. Second, in its technical comments, DOE stated that our discussion of the supercompactor at Oak Ridge was misleading and did not agree that cost savings would have been realized if the supercompactor had been retained and redeployed to another site. We believe that our discussion of the supercompactor is accurate. It was intended to illustrate the difficulty EM faces in developing a waste disposition strategy that covers multiple program offices. In its technical comments, DOE told us that the contractor at Oak Ridge completed a cost analysis and decided that the supercompactor should not be reused. Nevertheless, neither DOE nor contractor officials provided us with any documentation of a cost analysis to support the dismantling and disposition of the supercompactor. DOE also told us that the contractor who owned the supercompactor and Oak Ridge management "openly solicited" other contractors in the complex about potentially reusing the supercompactor but did not find any interest. However, NNSA officials at Oak Ridge told us that neither DOE nor the contractor consulted with them about the potential use of the supercompactor, and the contractor at Paducah told us that it might have benefited from the supercompactor but was not given the opportunity to consider alternatives to its disposal. Finally, DOE also stated that the lack of consistency that we found in implementing cost guidance and preparing formal documentation should not be interpreted to mean that the department's waste disposal systems are necessarily inefficient or overly expensive, and asserted that flexibility is needed in the level of detailed cost analysis required. However, we did not conclude that the lack of consistent implementation and the lack of documentation was indicative of an inefficient or overly costly LLRW management system. Rather, we stated that we could not determine how contractors incorporated costs analyses into their disposal decisions because documentation did not exist or was incomplete. Conclusions cannot be drawn about the cost-effectiveness of LLRW management decisions if contractors do not adequately document their decisions for not using life-cycle cost analysis and DOE does not require them to do so. While we would agree that flexibility may be important in determining the level of cost analyses required, we believe this flexibility should be accompanied by proper documentation to support the level of analysis completed and the degree to which life-cycle cost principles were followed. DOE's comments on our draft report are presented in appendix II. We are sending copies of the report to the Secretary of Energy, the Director of the Office of Management and Budget, and appropriate congressional committees. We will make copies available to others on request. In addition, the report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me at (202) 512-3841. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. Other staff contributing to this report are listed in Appendix III. Knolls Atomic Power Laboratory/Nuclear Fuel Services Brookhaven National Lab/ Brookhaven Science Associates Oak Ridge National Laboratory/ University of Tennessee/Battelle West Valley/West Valley Nuclear Services Remaining generator sites (27) In addition to the individual named above, Daniel Feehan, Doreen Feldman, Thomas Kingham, Mehrzad Nadji, Omari Norman, Christopher Pacheco, Judy Pagano, Carol Herrnstadt Shulman, and Peter Zwanzig made key contributions to this report.
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In 2004, the Department of Energy (DOE) disposed of more than 378,000 cubic meters of low-level radioactive waste (LLRW)--contaminated building rubble, soil, and debris. In 2002, DOE directed its sites to use life-cycle cost analysis to manage LLRW. Life-cycle cost analysis examines the total cost of various options to manage LLRW over its life, including its packaging, treatment, transport, and disposal, to identify the lowest-cost alternative. GAO determined whether (1) DOE sites use life-cycle cost analysis to evaluate LLRW management alternatives and (2) DOE has a strategy for cost-effectively managing LLRW departmentwide, including state actions that may affect this strategy. The six DOE sites we visited, representing more than 70 percent of the LLRW disposed of by DOE during 2003 and 2004, did not consistently use life-cycle cost analysis because of weak DOE guidance and a lack of oversight of contractors' implementation of this guidance. As a result, DOE cannot ensure that lowest-cost LLRW management alternatives are identified, so that managers make decisions that fully weigh costs against noncost factors, such as safety and schedule. For example, DOE contractors at two sites did not consistently consider alternative transportation modes or postclosure maintenance and surveillance costs of disposal sites in their analyses for fiscal year 2004 disposal decisions. GAO also could not always determine how contractors used cost analyses in disposal decisions because of incomplete documentation. While DOE's guidance requires each site to develop the mechanisms necessary to ensure use of life-cycle cost analysis, it does not specify, for example, (1) a systematic, consistent method of analyzing all cost elements to determine the lowest cost, or (2) when analyses should be performed. Also, no such guidance was incorporated into site contracts, and DOE site offices had not evaluated contractors' use of life-cycle cost analysis. DOE has recognized that its current approach--having each site responsible for developing mechanisms necessary to control costs--may result in cost inefficiencies and may limit its ability to meet departmentwide strategic objectives. As a result, DOE plans to begin implementing a national LLRW disposition strategy by March 2006 to better coordinate disposal efforts--specific schedules have not yet been established for when the strategy will be fully in place. However, DOE faces challenges in developing and implementing this strategy. First, it needs to gather complete data on the amount of LLRW needing disposal. Second, the fact that DOE's multiple program and site offices have differing missions and oversee many contractors presents coordination challenges. For example, one program office dismantled and disposed of a supercompactor used to reduce the volume of large LLRW items without a DOE-wide assessment of LLRW compacting needs and without considering other potential cost-effective uses for the supercompactor that might benefit other DOE sites. Third, DOE faces state actions that have restricted access to disposal facilities, making it more difficult to coordinate and integrate disposal departmentwide.
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Missile defense is important because at least 25 countries now possess or are acquiring sophisticated missile technology that could be used to attack the United States, deployed troops, friends, and allies. MDA's mission is to develop and field an integrated, layered BMDS capable of defending against enemy ballistic missiles launched from all ranges and during all phases of the missiles' flight. DOD has spent and continues to spend large sums of money to defend against this threat. Since the mid-1980s, about $107 billion has been spent, and over the next 5 years, another $49 billion is expected to be invested. While the initial set of BMDS assets was fielded during 2004-2005, much of the technical and engineering foundation was laid by this prior investment. DOD also expects to continue investing in missile defense for many more years as the system evolves into one that can engage an enemy ballistic missile launched from any range during any phase of the missile's flight. To enable MDA to field and enhance a missile defense system quickly, the Secretary of Defense, in 2002, directed a new acquisition strategy. The Secretary's strategy included removing the BMDS program from DOD's traditional acquisition process until a mature capability was ready to be handed over to a military service for production and operation. Therefore, development of the BMDS program is not segmented into concept refinement, technology development, and system development and demonstration phases, as other major defense acquisition programs are. Instead, MDA initiates one development phase that incorporates all acquisition activities and that is known simply as research and development. MDA also has approval to use research and development funds, rather than procurement funds, to acquire assets that could be made available for operational use. To carry out its mission, MDA is fielding missile defense capabilities in 2-year increments known as blocks. The first block--Block 2004--fielded a limited initial capability that included early versions of GMD, Aegis BMD, PAC-3, and C2BMC. This was the capability that was put on alert status in 2006. MDA formally began a second BMDS block on January 1, 2006, that will continue through December 31, 2007. This block is expected to provide protection against attacks from North Korea and the Middle East. During the 2-year block timeframe, MDA is focusing its program of work on the enhancement and fielding of additional quantities of the GMD, Aegis BMD, and C2BMC elements, as well as fielding a Forward-Based X- Band radar that is part of the Sensors element. When MDA defined the block in March 2005, shortly after submitting its fiscal year 2006 budget request to Congress, it also included three other elements--Airborne Laser (ABL), Space Tracking and Surveillance System (STSS), and Terminal High Altitude Area Defense (THAAD)--that are primarily developmental in nature. According to MDA, these elements were included in the block even though they were not expected to be operational until future blocks because the elements offered some emergency capability during the block timeframe. In March 2006, MDA removed THAAD from Block 2006. According to MDA, this action better aligned resources and fielding plans. The development of two other elements--Multiple Kill Vehicle (MKV) and Kinetic Energy Interceptor (KEI)--also continued in fiscal year 2006, but these elements were not considered part of Block 2006 because, according to MDA officials, the elements provide no capability--emergency or operational--during the block. The bulk of the funding that MDA requests for the BMDS each fiscal year is for the development, fielding, and sustainment of BMDS elements. For example, in fiscal year 2006, funding for the nine BMDS elements collectively accounted for 72 percent of MDA's research and development budget. MDA requests funds for each of these elements, with the exception of C2BMC and THAAD, under separate budget line items. In addition, MDA issues separate contracts for each of the nine elements. Prior to beginning each new block, MDA establishes and submits block goals to Congress. These goals present the business case for the new block. MDA presented its Block 2006 goals to Congress in March 2005, shortly after submitting its fiscal year 2006 budget. At that time, MDA told Congress that the agency expected to field the following assets: up to 15 GMD interceptors, an interim upgrade of the Thule Early Warning Radar, a Forward-Based X-Band radar, 19 Aegis BMD missiles, 1 new Aegis cruiser for the missile defense mission, 4 new Aegis destroyers capable of providing long-range surveillance and tracking, and 8 Aegis destroyers upgraded for the engagement mission. MDA's cost goal for the development of the six elements that compose the block, the manufacture of assets being fielded, and logistical support for fielded assets was $19.3 billion. MDA also notified Congress of the Block 2006 performance goals established for the BMDS. These goals were composed of numerical values for the probability of engagement success, the land area from which the BMDS could deny a launch, and the land area that the BMDS could defend. Fiscal year testing goals were also established by element program offices, but these goals were not formally reported to Congress. We examined numerous documents and held discussions with agency officials. In determining the elements' progress toward Block 2006 goals, we looked at the accomplishments of six BMDS elements--ABL, Aegis BMD, BMDS Sensors, C2BMC, GMD, and STSS--that compose the Block 2006 configuration. Our work included examining System Element Reviews, test plans and reports, production plans, and Contract Performance Reports. We also interviewed officials within each element program office and within MDA functional offices. In assessing whether MDA's flexibility impacts BMDS oversight and accountability, we examined documents such as those defining MDA's changes to Block 2006 goals, acquisition laws for major DOD programs, and BMDS policy directives issued by the Secretary of Defense. We examined the current status of MDA's quality assurance program by visiting various contractor facilities and holding discussions with MDA officials, such as officials in the Office of Quality, Safety, and Mission Assurance. We performed our work from June 2006 through March 2007 in accordance with generally accepted government auditing standards. MDA made progress during fiscal year 2006, but it will not achieve the goals it set for itself in March 2005. One year after establishing its Block 2006 goals, the agency informed Congress that it planned to field fewer assets, reduce performance goals, and increase the block's cost goal. It is also likely that in addition to fielding fewer assets, other Block 2006 work will be deferred to offset growing contractor costs. MDA is generally on track to meet its revised quantity goals, but the performance of the BMDS cannot yet be fully assessed because there have been too few flight tests conducted to anchor the models and simulations that predict overall system performance. Several elements continue to experience technical problems that pose questions about the performance of the fielded system and could delay the enhancement of future blocks. In addition, the Block 2006 cost goal cannot be reconciled with actual costs because work travels to and from other blocks and individual element program offices report costs inconsistently. During the first year of Block 2006, MDA continued to improve the BMDS by enhancing its performance and fielding additional assets. In addition, the BMDS elements achieved some notable test results. For example, the GMD element completed its first successful intercept attempt since 2002. The test was also notable because it was an end-to-end test of one engagement scenario, the first such test that the program has conducted. Also, the Aegis BMD element conducted a successful intercept test of its more capable Standard Missile-3 design that is being fielded for the first time during Block 2006. In March 2006, soon after the formal initiation of Block 2006, MDA announced that events such as hardware delays, technical challenges, and budget cuts were causing the agency to field fewer assets than originally expected. MDA's goal now calls for fielding 3 fewer GMD interceptors; deferring the upgrade of the Thule radar until Block 2008, when it can be fully upgraded; producing 4 fewer Aegis BMD missiles; upgrading 1 less Aegis destroyer for the engagement mission; and delivering 3 C2BMC Web browsers rather than the more expensive C2BMC suites. With the exception of the GMD interceptors, MDA is on track to deliver the revised quantities. The GMD program planned to emplace 8 interceptors during calendar year 2006, but was only able to emplace 4. Program officials told us that the contractor has increased the number of shifts that it is working and that this change will accelerate deliveries. However, to meet its quantity goal, the GMD program will have to more than double its interceptor emplacement rate in 2007. MDA also reduced the performance expected of Block 2006 commensurate with the reduction in assets. However, insufficient data are available to determine whether MDA is on track to meet the new goal. Although the GMD test program has achieved some notable results, officials in DOD's Office of the Director of Operational Test and Evaluation told us that the element has not completed sufficient tests to provide a high level of confidence that the BMDS can reliably intercept intercontinental ballistic missiles. Further testing is needed as well to confirm that GMD can use long-range tracking data developed by Aegis BMD to prepare--in real time--a weapon system task plan for GMD interceptors. Delayed testing and technical problems may also impact the performance of the current and future configurations of the BMDS. For example, the performance of the Block 2006 configuration of the Aegis BMD missile is unproven because design changes in the missile's solid attitude and divert system and one burn pattern of the third stage rocket motor were not flight-tested before they were cut into the production line. The current configuration of the GMD interceptor also continues to struggle with an anomaly that has occurred in each of the element's flight tests. The anomaly has not yet prevented the program from achieving its primary test objectives, but neither its source nor a solution has been clearly identified or defined. The reliability of some GMD interceptors remains uncertain as well because inadequate mission assurance/quality control procedures may have allowed less reliable or inappropriate parts to be incorporated into the manufacturing process. Program officials plan to introduce new parts into the manufacturing process, but not until interceptor 18. MDA also plans to retrofit the previous 17 interceptors, but not until fiscal year 2009. In addition to the performance problems with elements being fielded, the ABL element that is being developed to enhance a future BMDS configuration experienced technical problems with its Beam Control/Fire Control component. These problems have delayed a lethality demonstration that is needed to demonstrate the element's leading-edge technologies. ABL is an important element because if it works as desired, it will defeat enemy missiles soon after launch, before decoys are released to confuse other BMDS elements. MDA plans to decide in 2009 whether ABL or KEI, whose primary boost phase role is to mitigate the risk in the ABL program, will become the BMDS boost phase capability. While MDA reduced Block 2006 quantity and performance goals, it increased the block's cost goal from about $19.3 billion to approximately $20.3 billion. The cost increases were caused by the addition of previously unknown operations and sustainment requirements, realignment of the GMD program to support a successful return to flight, realignment of the Aegis BMD program to address technical challenges and invest in upgrades, and preparations for round-the-clock operation of the BMDS. Although MDA is expected to operate within its revised budget of $20.3 billion, the actual cost of the block cannot be reconciled with the cost goal. To stay within its Block 2004 budget, MDA shifted some of that block's work to Block 2006 and is counting it as a cost of Block 2006, which overstates Block 2006 cost. In addition, MDA officials told us that it is likely that some Block 2006 work will be deferred until Block 2008 to cover the $478 million fiscal year 2006 budget overruns experienced by five of the six element prime contractors. If MDA reports the cost of deferred work as it has in the past, the actual cost of Block 2006 will be complicated further. Another factor complicating the reconciliation of Block 2006 cost is that the elements report block cost inconsistently. Some elements appropriately include costs that the program will incur to reach full capability, while others do not. Because the BMDS has not formally entered the system development and demonstration phase of the acquisition cycle, it is not yet required to apply several important oversight mechanisms contained in certain acquisition laws that, among other things, provide transparency into program progress and decisions. This has enabled MDA to be agile in decision making and has facilitated fielding an initial BMDS capability quickly. On the other hand, MDA operates with considerable autonomy to change goals and plans, making it difficult to reconcile outcomes with original expectations and to determine the actual cost of each block and of individual operational assets. Over the years, a framework of laws has been created that make major defense acquisition programs accountable for their planned outcomes and cost, give decision makers a means to conduct oversight, and ensure some level of independent program review. The application of many of these laws is triggered by a program's entry into system development and demonstration. To provide accountability, once major defense programs cross this threshold, they are required by statute to document program goals in an acquisition program baseline that as implemented by DOD has been approved by a higher-level DOD official prior to the program's initiation. The baseline provides decision makers with the program's best estimate of the program's total cost for an increment of work, average unit costs for assets to be delivered, the date that an operational capability will be fielded, and the weapon's intended performance parameters. Once approved, major acquisition programs are required to measure their program against the baseline, which is the program's initial business case, or obtain the approval of a higher-level acquisition executive before making significant changes. Programs are also required to regularly provide detailed program status information to Congress, including information on cost, in Selected Acquisition Reports. In addition, Congress has established a cost-monitoring mechanism that requires programs to report significant increases in unit cost measured from the program baseline. Other statutes provide for independent program verifications and place limits on the use of appropriations. For example, 10 U.S.C. SS 2434 prohibits the Secretary of Defense from approving system development and demonstration unless an independent estimate of the program's life-cycle cost has been conducted by the Secretary. In addition, 10 U.S.C. SS 2399 requires completion of initial operational test and evaluation before a program can begin full-rate production. These statutes ensure that someone external to the program examines the likelihood that the program can be executed as planned and will yield a system that is effective and suitable for combat. The use of an appropriation is also controlled so that it will not be used for a purpose other than the one for which it was made, except as otherwise provided by law. Research and development appropriations are typically specified by Congress to be used to pay the expenses of basic and applied scientific research, development, test, and evaluation. On the other hand, procurement appropriations are, in general, to be used for production and manufacturing. In the 1950s, Congress established a policy that items being purchased with procurement funds be fully funded in the year that the item is procured. This is meant to prevent a program from incrementally funding the purchase of operational systems. Full funding ensures that the total procurement costs of weapons and equipment are known to Congress up front and that one Congress does not put the burden on future Congresses of deciding whether they should appropriate additional funds or expose weapons under construction to uneconomic start-up and stop costs. The flexibility to defer application of specific acquisition laws has benefits. MDA can make decisions faster than other major acquisition programs because it does not have to wait for higher-level approvals or independent reviews. MDA's ability to quickly field a missile defense capability is also improved because assets can be fielded before all testing is complete. MDA considers the assets it has fielded to be developmental assets and not the result of the production phase of the acquisition cycle. Additionally, MDA enjoys greater flexibility than other programs in the use of its funds. Because MDA uses research and development funds to manufacture assets, it is not required to fully fund those assets in the year of their purchase. Therefore, as long as its annual budget remains fairly level, MDA can request funds to address other needs. On the other hand, the flexibilities granted MDA make it more difficult to conduct program oversight or to hold MDA accountable for the large investment being made in the BMDS program. Block goals can be changed by MDA, softening the baseline used to assess progress toward expected outcomes. Similarly, because MDA can redefine the work to be completed during a block, the actual cost of a block cannot be compared with the original cost estimate. MDA considers the cost of deferred work, which may be the delayed delivery of assets or other work activities, as a cost of the block in which the work is performed even though the work benefits or was planned for a prior block. Further, MDA does not track the cost of the deferred work and, therefore, cannot make adjustments that would match the cost with the block that is benefited. For example, during Block 2004, MDA deferred some planned development, deployment, characterization, and verification activities until Block 2006 so that it could cover contractor budget overruns. The costs of the activities are now considered part of the cost of Block 2006. Also, although Congress provided funding for these activities during Block 2004, MDA used these funds for the overruns and will need additional funds during Block 2006 to cover their cost. Planned and actual unit costs of fielded assets are equally difficult to reconcile. Because MDA is not required to develop an approved acquisition program baseline, it is not required to report the expected average unit cost of assets. Also, because MDA is not required to report significant increases in unit cost, it is not easy to determine whether an asset's actual cost has increased significantly from its expected cost. Finally, using research and development funds to purchase fielded assets further reduces cost transparency because these dollars are not covered by the full-funding policy as are procurement funds. Therefore, when a program for a 2-year block is first presented in the budget, Congress is not necessarily fully aware of the dimensions and cost of that block. For example, although a block may call for the delivery of a specific number of interceptors, the full cost of those interceptors is requested over 3 to 5 years. Calculating unit costs from budget documents is difficult because the cost of components that will become fielded assets may be spread across 3 to 5 budget years--a consequence of incremental funding. During Block 2004, poor quality control procedures caused the missile defense program to experience test failures and slowed production. MDA has initiated a number of actions to correct quality control weaknesses, and the agency reports that these actions have been largely successful. Although MDA continues to identify quality assurance procedures that need strengthening, recent audits by MDA's Office of Quality, Safety, and Mission Assurance show such improvements as increased on-time deliveries, reduced test failures, and sustained improvement in product quality. MDA has taken a number of steps to improve quality assurance. These include developing a teaming approach to restore the reliability of key suppliers, conducting regular quality inspections to quickly identify and find resolutions for quality problems, adjusting award fee plans to encourage contractors to maintain a good quality assurance program and encourage industry best practices, as well as placing MDA-developed assurance provisions on prime contracts. For example, as early as 2003, MDA made a critical assessment of a key supplier's organization and determined that the supplier's manufacturing processes lacked discipline, its corrective action procedures were ineffective, its technical data package was inadequate, and personnel were not properly trained. The supplier responded by hiring a Quality Assurance Director, five quality assurance professionals, a training manager, and a scheduler. In addition, the supplier installed an electronic problem-reporting database, formed new boards--such as a failure review board--established a new configuration management system, and ensured that manufacturing activity was consistent with contract requirements. During different time periods between March 2004 and August 2006, MDA measured the results of the supplier's efforts and found a 64 percent decrease in open quality control issues, a 43 percent decline in test failures, and a 9 percent increase in on-time deliveries. MDA expanded its teaming approach in 2006 to another problem supplier and reports that many systemic solutions are already underway. During fiscal year 2006, MDA's audits continued to identify both quality control weaknesses and quality control procedures that contractors are addressing. During 2006, the agency audited six contractors and identified 372 deficiencies and observations. As of December 2006, the six contractors had collectively closed 157, or 42 percent, of the 372 audit findings. MDA also reported other signs of positive results. For example, in 2006, MDA conducted a follow-on audit of Raytheon, the subcontractor for GMD's exoatmospheric kill vehicle. A 2005 audit of Raytheon had found that the subcontractor was not correctly communicating essential kill vehicle requirements to suppliers, did not exercise good configuration control, and could not build a consistent and reliable product. The 2006 audit was more positive, reporting less variability in Raytheon's production processes, increasing stability in its statistical process control data, fewer test problem reports and product waivers, and sustained improvement in product quality. In our March 15, 2007, report, we made several recommendations to DOD to increase transparency in the missile defense program. These included: Develop a firm cost, schedule, and performance baseline for those elements considered far enough along to be in system development and demonstration, and report against that baseline. Propose an approach for those same elements that provides information consistent with the acquisition laws that govern baselines and unit cost reporting, independent cost estimates, and operational test and evaluation for major DOD programs. Such an approach could provide necessary information while preserving the MDA Director's flexibility to make decisions. Include in blocks only those elements that will field capabilities during the block period and develop a firm cost, schedule, and performance baseline for that block capability, including the unit cost of its assets. Request and use procurement funds, rather than research, development, test, and evaluation funds, to acquire fielded assets. DOD partially agreed with the first three recommendations and recognized the need for greater program transparency. It committed to provide information consistent with the acquisition laws that govern baselines and unit cost reporting, independent cost estimates, and operational test and evaluation. DOD did not agree to use elements as a basis for this reporting, expressing its concern that an element-centric approach to reporting would have a fragmenting effect on the development of an integrated system. We respect the need for the MDA Director to make decisions across element lines to preserve the integrity of the system of systems. We recognize that there are other bases rather than elements for reporting purposes. However, we believe it is essential that MDA report in the same way that it requests funds. Currently MDA requests funds and contracts by element, and at this time, that appears to be the most logical way to report. MDA currently intends to modify its current block approach. We believe that a management construct like a block is needed to provide the vehicle for making system-of-system decisions and to provide for system-wide testing. However, at this point, the individual assets to be managed in a block--including quantities, cost, and delivery schedules--can only be derived from the individual elements. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or members of the subcommittee may have. For future questions about this statement, please contact me at (202) 512- 4841 or [email protected]. Individuals making key contributions to this statement include Barbara H. Haynes, Assistant Director; LaTonya D. Miller; Michael J. Hesse; Letisha T. Jenkins; Sigrid L. McGinty; Kenneth E. Patton; and Steven B. Stern. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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Over the next 5 years the Missile Defense Agency (MDA) expects to invest $49 billion in the Ballistic Missile Defense (BMD) system's development and fielding. MDA's strategy is to field new capabilities in 2-year blocks. In January 2006, MDA initiated its second block--Block 2006--to protect against attacks from North Korea and the Middle East. Congress requires GAO to assess MDA's progress annually. GAO's March 2007 report addressed MDA's progress during fiscal year 2006 and followed up on program oversight issues and the current status of MDA's quality assurance program. GAO assessed the progress of each element being developed by MDA, examined acquisition laws applicable to major acquisition programs, and reviewed the impact of implemented quality initiatives. During fiscal year 2006, MDA fielded additional assets for the Ballistic Missile Defense System (BMDS), enhanced the capability of some assets, and realized several noteworthy testing achievements. For example, the Ground-based Midcourse Defense (GMD) element successfully conducted its first end-to-end test of one engagement scenario, the element's first successful intercept test since 2002. However, MDA will not meet its original Block 2006 cost, fielding, or performance goals because the agency has revised those goals. In March 2006, MDA: reduced its goal for fielded assets to provide funds for technical problems and new and increased operations and sustainment requirements; increased its cost goal by about $1 billion--from $19.3 to $20.3 billion; and reduced its performance goal commensurate with the reduction of assets. MDA may also reduce the scope of the block further by deferring other work until a future block because four elements incurred about $478 million in fiscal year 2006 budget overruns. With the possible exception of GMD interceptors, MDA is generally on track to meet its revised quantity goals. But the deferral of work, both into and out of Block 2006, and inconsistent reporting of costs by some BMDS elements, makes the actual cost of Block 2006 difficult to determine. In addition, GAO cannot assess whether the block will meet its revised performance goals until MDA's models and simulations are anchored by sufficient flight tests to have confidence that predictions of performance are reliable. Because MDA has not formally entered the Department of Defense (DOD) acquisition cycle, it is not yet required to apply certain laws intended to hold major defense acquisition programs accountable for their planned outcomes and cost, give decision makers a means to conduct oversight, and ensure some level of independent program review. MDA is more agile in its decision-making because it does not have to wait for outside reviews or obtain higher-level approvals of its goals or changes to those goals. Because MDA can revise its baseline, it has the ability to field fewer assets than planned, defer work to a future block, and increase planned cost. All of this makes it hard to reconcile cost and outcomes against original goals and to determine the value of the work accomplished. Also, using research and development funds to purchase operational assets allows costs to be spread over 2 or more years, which makes costs harder to track and commits future budgets. MDA continues to identify quality assurance weaknesses, but the agency's corrective measures are beginning to produce results. Quality deficiencies are declining as MDA implements corrective actions, such as a teaming approach designed to restore the reliability of key suppliers.
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The Olympic Games take place every 4 years, with the Winter and Summer Games alternating on a 2-year cycle. The Ted Stevens Olympic and Amateur Sports Act (Amateur Sports Act), 36 U.S.C.SS 220501 et seq., which was originally enacted in 1978 as the Amateur Sports Act, gives the U.S. Olympic Committee (USOC) exclusive jurisdiction over all matters pertaining to the participation of the United States in the Olympic Games, including the representation of the United States in such Games and the organization of the Games when held in the United States. The Amateur Sports Act was amended in 1998 to incorporate the Paralympic Games under the umbrella of USOC. Although organized separately, the 1996 Summer Olympic Games marked the first time the Paralympic Games were held in conjunction with the Olympic Games in the United States. On May 27, 1997, SLOC was awarded the rights to host the 2002 Winter Paralympic Games. Lake Placid, NY, a small village with a population of 3,500 at the time, served as the host city for the Winter Olympic Games in 1980. According to information compiled by a USOC official, 1,072 athletes from 37 countries participated in 38 skiing, skating, and sledding events at 6 venue locations for an audience of 517,000 people. At that time, the Paralympic Games were not held in conjunction with the Olympic Games. According to a Department of Commerce report following the Games, and as shown in figure 1, about $363 million was spent on planning and staging these Games. The Lake Placid Organizing Committee (LPOC) funded about $121 million (33 percent) of the total cost. The State of New York provided about $63 million (17 percent) for building and constructing venues, such as the alpine, cross-country, and biathlon skiing facilities in the Lake Placid area. In addition, the federal government provided about $179 million (50 percent) in funding and support. According to the Department of Commerce report, of the $179 million in federal funding and support, Congress specifically designated about $96 million for Olympic-related projects, and the remaining approximately $83 million was approved and provided through the normal funding procedures of the departments of Defense, Transportation, Commerce, Energy, the Interior, and Justice. Collectively, the departments of Commerce and the Interior provided about $102 million (57 percent) of the total federal expenditures. As shown in figure 2, federal funding and support for the Games, or about $127 million (71 percent of the federal share), was used for venue construction (37 percent) and housing for the athletes (34 percent). Specifically, the federal government helped finance the ski jumps, speed skating oval, skating arena, winter sports arena, luge run, parking facilities, dressing rooms, and storage facilities. The federal government also provided housing and infrastructure support projects for the athletes, trainers, and coaches, such as the temporary and permanent buildings erected on a 55-acre site near Lake Placid used to house the athletes participating in the Games. These facilities were also used for security operations. The remaining direct federal funding and support were used for safety- and security-related activities, which accounted for about $23 million (13 percent); transportation projects, such as highway, airport, and railway improvements, which accounted for about $16 million (9 percent); and staging-and-operations activities during the Olympic events, which accounted for about $13 million (7 percent). Appendix II lists the specific federally sponsored Olympic-related projects and activities and the amounts of federal funding and support for each. In February 2002, according to SLOC officials, Salt Lake City will become the largest city to host the Winter Olympic Games and will also become the host of the largest Winter Olympic Games held to date. SLOC officials expect that this city, with a population of approximately 1.5 million people, will host 3,500 Olympic athletes participating in 70 sporting events at 10 venues. Additionally, SLOC officials expect 1,100 Paralympic athletes to participate in 34 sporting events at 10 venues. As of July 31, 2001, the total direct cost for projects and activities related to planning and staging the 2002 Winter Olympic Games in Salt Lake City is estimated at $1.9 billion. As shown in figure 3, SLOC plans to fund about $1.3 billion (70 percent). Additionally, Utah state officials working with SLOC report that Utah state agencies and institutions are planning to provide about $150 million (8 percent) and the Salt Lake City local government is planning to provide about $75 million (4 percent) for such projects as roads and bus systems directly related to supporting the Games. Finally, of the $1.9 billion, it is estimated that the federal government will provide approximately $342 million (18 percent) of the total direct cost for planning and staging the Games. Specifically, 18 federal agencies reported that they have provided or plan to provide an estimated $342 million in funding and support for projects and activities directly related to the planned 2002 Games. Of the $342 million in federal funding and support provided or planned for the 2002 Games, Congress had specifically designated about $208 million (61 percent) for specific Olympic-related projects and activities. About $134 million (39 percent) was approved by the agencies and provided through their normal funding procedures. As shown in figure 4, the federal government's involvement includes safety- and security-related activities, transportation, housing and infrastructure support, venue building and construction, and staging operations during the Games. In total, not including additional security costs that may be incurred as a result of the terrorist attacks of September 11, 2001, the federal government plans to spend about $185 million on safety- and security-related activities. Such activities range from venue perimeter security projects and activities during the Games themselves to heightened security-related activities of individual agencies necessitated by the Games. For example, the General Services Administration (GSA) plans to spend about $1.6 million to protect its facilities during the Games. These are funds that GSA would not have had to spend were it not for the Olympic Games. The next largest amount of federal funding and support is about $106 million for transportation projects. The Department of Transportation plans to spend this amount in part to provide a temporary spectator transportation system. This system will consist of Salt Lake City transit buses and drivers and borrowed transit buses and drivers from other cities across the United States, bus maintenance, construction and operation of park-and-ride lots, and loading and unloading facilities. In addition, the Department of Transportation is planning to provide an additional $25 million, of the total $27 million allocated for venue construction, to support the building and construction of access roads to certain venues for the Games. An estimated $19 million in federal funds is also being provided to support staging-and-operations activities during the Games. The Department of Housing and Urban Development is providing an estimated $4 million for Salt Lake City redevelopment projects and temporary housing for the athletes participating in the Games. Appendix III lists the specific federally sponsored Olympic-related projects and activities and the amounts of federal funding and support for each. Los Angeles, then a metropolis of more than 11 million people, hosted the 1984 Olympic Games. According to information compiled by a USOC official, about 7,078 athletes from 140 nations participated in 221 sporting events at 27 venues for an audience of an estimated 8 million visitors to the Olympic Games. At that time, the Paralympic Games were not held along with the Olympic Games. As shown in figure 5, the reported total direct cost to plan and stage the 1984 Games was approximately $707 million. Of this amount, LAOOC reported providing about $629 million (89 percent) of the total direct cost for the Games. The remaining approximately $78 million of the total direct cost for planning and staging the Games, as we reported in September 2000, was provided by the federal government through the departments of Agriculture, Commerce, Defense, Justice, State, Transportation, Health and Human Services, the Treasury, and Veterans Affairs, as well as the Federal Communications Commission and the U.S. Information Agency. Although data on California and Los Angeles government funding and support for the 1984 Games were not available, according to the former LAOOC Vice-President for Government Relations for the 1984 Games, state and local funding was minimal. According to this official, Los Angeles voters passed a charter amendment in November 1978 prohibiting any capital expenditure by the city on the Olympic Games that would not, by binding commitment, be reimbursed. As noted in our September 2000 report, Los Angeles city officials believed that the host cities for Olympic Games held before 1984 often overextended themselves by trying to complete state-of-the-art Olympic venues and related capital improvement projects. Such actions, in their view, pushed those host cities into debt that remained long after the Games. As a result, city officials decided that they (1) would not undertake any new construction or capital improvements specifically for the Olympic Games and (2) would encourage spectators to use the transit or bus systems in place at the time or simply to drive their cars to the events. Figure 5 also shows that the approximately $78 million in federal funding and support represented about 11 percent of the total cost for projects and activities related to the Games. As shown in figure 6, about $74 million of the federal expenditures was used to support safety- and security-related activities for the Games. The remaining $4 million was used for staging- and-operations activities during the events. Of the $78 million total, Congress specifically designated about $76 million for mostly security- related projects and activities, and $2 million (3 percent) was approved by the federal agencies and provided through their normal funding procedures. Appendix IV lists the specific federally sponsored Olympic- related projects and activities and the amounts of federal funding and support for each. Atlanta, GA, is a large metropolitan area that had a population of more than 3.4 million in 1996 when it served as the host city for the Summer Olympic Games. According to information compiled by a USOC official, about 10,332 Olympic athletes from 197 countries participated in 271 sporting events at 29 venues, for an audience estimated at 8.3 million people. Also, 3,310 Paralympic athletes from 104 countries participated in sporting events at 16 venues. As shown in figure 7, the total direct cost for planning and staging these Games was about $2.4 billion. According to the information compiled by SLOC officials, of the $2.4 billion, the Atlanta Committee for Olympic Games (ACOG) and the Atlanta Paralympic Organizing Committee (APOC) contributed nearly $2 billion (82 percent) for the 1996 Games. ACOG- and APOC-funded projects and activities included transportation, safety and security, Paralympic operations, temporary and permanent facilities, and telecommunications. According to information from SLOC, local governments where the various venues were located during the Games contributed about $234 million (10 percent), which was used to help construct some of the facilities used to support the Games. The federal government's share of the total cost to plan and stage the event, as we reported in our September 2000 report, was about $193 million, or 8 percent of the approximately $2.4 billion in total direct costs. Of the approximately $193 million provided by the federal government, $86 million (45 percent) was specifically designated by Congress for Olympic- related projects and activities and $106 million (55 percent) was approved by the agencies and provided through their normal funding procedures. Similar to previous Olympic Games, ensuring adequate safety and security was a primary concern of federal officials at the Games in Atlanta. As shown in figure 8, safety- and security-related projects related to the Games represented about $101 million (52 percent) of the federal government's total direct cost. The federal agencies providing safety- and security- related funding and support included the departments of Agriculture, Defense, Health and Human Services, the Interior, Justice, State, Transportation, the Treasury, and Veterans Affairs. Funding and support was also provided by the Corporation for National and Community Services, the Federal Emergency Management Agency, the Federal Executive Board, and the Environmental Protection Agency. About $68 million (36 percent) of the $193 million in federal expenditures was used for venue construction and staging operations during the Olympic events. For example, approximately $18 million was used to construct the Whitewater Rapids Venue, and approximately $5 million was used for the pre-trial and Olympic Whitewater Rapids events operations during the Games. Transportation represented about $21 million (11 percent) of the federal funds expended on the Games, housing and infrastructure projects represented $2 million (1 percent), and venue construction represented about $36 million (19 percent). We provided copies of a draft of this report to the heads of OMB, SLOC, and USOC and to former officials of LAOOC for their review and comments. Additionally, for their review and comments, we provided to each of the federal agencies listed in Appendix III copies of a draft of their reported figures regarding (1) the amount of federal funding and support and (2) the applicable projects and activities for the planned 2002 Olympic and Paralympic Games at Salt Lake City, UT. We received oral comments from agency-designated officials or audit liaisons at OMB and most of the federal agencies, and from the former LAOOC Vice-President for Government Relations. Generally these officials had no comments, or they provided technical changes--to correct the reported amounts of federal funding and support provided for the Olympic Games, or to improve clarity--which were made where appropriate. We also received written comments from the president and chief executive officer of SLOC, which generally agreed with our report. Briefly, he stated that our report accurately reflected the growth of the Olympic and Paralympic Games during the past 20 years and pointed out that the increase in the federal government's share of the cost occurred in traditional areas of government functions, security and transportation, while federal expenditure on nongovernment functions, such as venue construction, had significantly decreased. He also cited two significant factors, outside the scope of our work, that contributed to the growth in cost: the technological advances in measuring and in broadcasting the results of the competitions. Finally, he explained that one of his top priorities is to help reverse the trend of the Games to be "bigger and better" than those before, and that he plans to make a series of recommendations to the International Olympic Committee president on reducing the scope and controlling the growth in cost for future Olympic Games. Unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 15 days from the date of this report. We will then send copies of this report to Senator Robert C. Byrd, Chairman of the Senate Committee on Appropriations; Ted Stevens, Ranking Minority Member, Senate Committee on Appropriations; and C. W. Bill Young, Chairman, and David R. Obey, Ranking Minority Member, of the House Committee on Appropriations. We are also sending copies to Senators Fritz Hollings, Chairman, and John McCain, Ranking Minority Member, of the Senate Committee on Commerce, Science and Transportation; and Representatives W. J. Billy Tauzin, Chairman, and John D. Dingell, Ranking Minority Member, of the House Committee on Energy and Commerce. We are also sending copies of this report to Senator Orrin Hatch and Representatives James V. Hansen, Jim Matheson, and Christopher Cannon, of Utah. Copies of this report will also be sent to the Director of OMB; the secretaries of the departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, the Interior, Housing and Urban Development, Labor, State, Transportation, the Treasury, and Veterans Affairs; and the Attorney General. We are also sending copies to the heads of the Environmental Protection Agency, Federal Communications Commission, Federal Emergency Management Agency, General Services Administration, and Tennessee Valley Authority; and to the Postmaster General. We will also make copies available to others upon request. Major contributors to this report included Sherrill Johnson, Michael Rives, Frederick Lyles, Melvin Horne, and Michael Yacura. If you have any questions, please contact me at (202) 512-8387 or [email protected]. As discussed in this report, the objectives of this assignment were to determine: the total direct cost of planning and staging the Winter Olympic Games held in 1980 at Lake Placid, NY; and the Winter Olympic Games and Paralympic Games planned for 2002 at Salt Lake City, UT; the Summer Olympic Games held in 1984 at Los Angeles, CA; and the Summer Olympic Games and Paralympic Games held in 1996 at Atlanta, GA; the total direct government funding and support at the local, state, and federal levels, where available, for each of these Games; how the federal funding and support were used; a complete roster of all the reported projects and activities for each of the Games; and the amount of federal funds and support specifically designated by Congress for Olympic-related purposes, and the amount of federal funding and support approved by the agencies and provided through their normal funding procedures for each of these Games. To respond to the first objective, because there is no central source for the needed information, we obtained data on the costs incurred by the principal parties that funded and supported these events. These parties included (1) applicable Olympic Games Organizing Committees that are private organizations established by the host cities to plan and stage the Games; (2) state and local governments associated with the designated host cities for the Games; and (3) federal government agencies. Our primary sources of information included: Salt Lake City Organizing Committee (SLOC) officials, who are currently responsible for planning and staging the Games planned for 2002 at Salt Lake City, and Olympic organizing committee reports following the 1984 Olympics and the1996 Olympic Games and Paralympic Games, which provided financial statements showing the total amount of the private- sector costs for each of the Games; Utah and California state and local government officials cognizant of their respective state and local governments' funding and support for the Games held in Salt Lake City and in Los Angeles; and Department of Commerce report published in 1982 after the 1980 Winter Olympic Games; our previously published report regarding federal funding and support for the 1984 Olympics and the 1996 Summer Olympic and Paralympic Games; and OMB and 22 federal organizations, including the U.S. Postal Service, for the planned 2002 Winter Olympic and Paralympic Games at Salt Lake City. The federal agencies included the Department of Agriculture, Department of Commerce, Department of Defense, Department of Education, Department of Energy, Department of Health and Human Services, Department of Housing and Urban Development, Department of the Interior, Department of Justice, Department of Labor, Department of State, Department of Transportation, Department of the Treasury, Department of Veterans Affairs, Environmental Protection Agency, Federal Communications Commission, Federal Emergency Management Agency, Federal Executive Board, General Services Administration, National Aeronautics and Space Administration, Social Security Administration, and U.S. Postal Service. To respond to the second objective, we also contacted state and local government officials associated with the designated host city for the Games, and we made inquiries of the 22 federal organizations listed above. The effort to identify federal funding and support was aided considerably by OMB's implementation of our past recommendation to require a consolidated reporting of federal agency funding and support for the Olympic Games. Specifically, the President's 2002 Budget listed for the first time all federal Olympic spending in one table, which identified the federal agencies and the amounts spent or planned to be spent for the 2002 Games in Salt Lake City. We began with these listed agencies and obtained the necessary supporting information to verify or update their reported figures. We relied upon the agency officials' reports of (1) funding and support, and (2) projects and activities directly related to planning and staging the Olympic Games or Paralympic Games. To respond to the third objective, we relied upon information we and other agencies previously reported pertaining to the amount of congressionally designated and agency-approved federal funding and support for the Games held in 1980 at Lake Placid, NY; in 1984 at Los Angeles, CA; and in 1996 at Atlanta, GA. We depended upon the agencies to update the amount of congressionally designated and agency-approved federal funding and support, and to report this information to us for the planned 2002 Games at Salt Lake City, UT. At each agency we obtained, to the extent possible, supporting information for (1) the agency's reported federal funding and support, and (2) the agency's identification and description of its Olympic-related projects and activities. The figures reported by the agencies for the planned 2002 Games at Salt Lake City, UT, included all funding and support as of July 31, 2001. We did not independently verify the data but relied upon each agency to make its own determination as to (1) the funding and support, and (2) the project or activity's direct relationship to planning and staging the Olympic and Paralympic Games. We conducted our review from August 2001 to October 2001, in accordance with generally accepted government auditing standards. Totals may not add due to rounding. Description of project or activity Training exercises, travel, vehicle lease, utilities, etc. Assist with implementing a master safety plan Executive Office of U.S. Attorneys Salary and other costs for staff Grant to UCAN to upgrade security and communication Diplomatic security: Department of State will assist in providing protective security details to foreign dignitaries below the Head of State level, as well as establishing a diplomatic security presence in Salt Lake City. Description of project or activity Olympic Transportation Planning ($1.4 million of these funds were used for two temporary park-and-ride lots) Temporary RTRs: communications facilities in venue areas east of mountains Aviation Security Operations Center - (joint operations with UOPSC, Customs, USSS) Provo ASR - temporary radar Automation upgrades at Salt Lake TRACON Telecommunications support additional circuits required Temporary air traffic control towers at outlying airports Physical security upgrades to FAA facilities ALSF 2 - Salt Lake Int'l Airport approach lighting system Olympic Aviation System Plan; grant to Wasatch Front Regional Council for development of Olympic Planning Study (airports) Description of project or activity Aviation systems and standards (flight procedures) Establish Olympic Transportation Working Group (OTWG) and complete several Venue Transportation Integration Plans (VTRIPS) Construct additional storage tracks at Light Rail Vehicle Storage Facility and purchase/install automatic electric switch on the North/South LRT Line at 100 S. Main Street. Construct Silver Creek Jct. park-and- ride; purchase venue load and unload equipment; and construct Silver Creek Jct. bus garage (supplemented by UT-0-0039) Description of project or activity Construct busway at Snowbasin, bus garage at Silver Creek Jct., and Olympic Park park-and-ride lot (supplemental to UT-03-0040) Personnel costs are generally not included in these amounts. Totals may not add due to rounding. Congress appropriated $76,170,000, and DOD spent $48,750.000. The unused funding authority was returned to the U.S. Treasury. Description of project or activity Donated excess supplies for Paralympics Safety-and security-related services for Paralymic events Olympic venue bike path construction Paralympics: loan of EPA employees Salary for safety- and security- related services (federal employees) 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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Since 1980, the Winter and Summer Olympic and Paralympic Games hosted in the United States have increased in size and magnitude, as have the total direct costs to plan and stage them. The reported direct costs to plan and stage the games discussed in this report ranged from $363 million to more than $2.4 billion. Although the total dollar amount of federal funding and support has increased, the total federal share of the reported total direct costs to plan and stage the games has decreased. Since 1980, the amount of funding and support provided by state and local governments has increased. Generally, federal funding and support for the total direct costs of each of these games was either specifically designated by Congress or approved by the federal agencies.
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In October 1990, the Federal Accounting Standards Advisory Board (FASAB) was established by the Secretary of the Treasury, the Director of the Office of Management and Budget (OMB), and the Comptroller General of the United States to consider and recommend accounting standards to address the financial and budgetary information needs of the Congress, executives agencies, and other users of federal financial information. Using a due process and consensus building approach, the nine-member Board, which has since its formation included a member from DOD, recommends accounting standards for the federal government. Once FASAB recommends accounting standards, the Secretary of the Treasury, the Director of OMB, and the Comptroller General decide whether to adopt the recommended standards. If they are adopted, the standards are published as Statements of Federal Financial Accounting Standards (SFFAS) by OMB and by GAO. In addition, the Federal Financial Management Improvement Act of 1996, as well as the Federal Managers' Financial Integrity Act, requires federal agencies to implement and maintain financial management systems that will permit the preparation of financial statements that substantially comply with applicable federal accounting standards. Issued in December 1995 and effective beginning with fiscal year 1997, SFFAS No. 5, Accounting for Liabilities of the Federal Government, requires the recognition of a liability for any probable and measurable future outflow of resources arising from past transactions. The statement defines probable as that which is likely to occur based on current facts and circumstances. It also states that a future outflow is measurable if it can be reasonably estimated. The statement recognizes that this estimate may not be precise and in such cases, it provides for recording the lowest estimate and disclosing in the financial statements the full range of estimated outflows that are likely to occur. SFFAS No. 6, Accounting for Property, Plant, and Equipment, which is effective beginning in fiscal year 1998, deals with various accounting issues pertaining to PP&E. This statement establishes several new accounting categories of PP&E, collectively called stewardship PP&E. Other PP&E is referred to as general PP&E. One of the new stewardship categories--federal mission PP&E--is defined as tangible items owned by a federal government entity, principally DOD, that have no expected nongovernmental use, are held for use in the event of emergency, war, or natural disaster, and have an unpredictable useful life. Federal mission PP&E, which includes ships, submarines, aircraft, and combat vehicles, is a major part of DOD's total PP&E. SFFAS No. 6 also provides information on how SFFAS No. 5's standard on liabilities should be applied to PP&E. Specifically, SFFAS No. 6 discusses how to recognize the liability for the clean up of hazardous waste in PP&E. While this statement modifies SFFAS No. 5 with respect to the timing of liability recognition for general PP&E, it has no effect on accounting for liabilities related to aircraft and other federal mission PP&E. We undertook this review to assist DOD in its efforts to meet the new federal accounting standard, SFFAS No. 5, and because of our responsibility to audit the federal government's consolidated financial statements beginning with fiscal year 1997. Our objectives were to determine (1) the status of DOD's efforts to implement the new federal accounting standard for disclosure of liabilities, such as aircraft disposal, and (2) whether an estimate of the minimum disposal liability for aircraft, including the removal and disposal of hazardous materials, could be made. The following was done to accomplish our objectives. To assess the status of DOD's efforts to implement SFFAS No. 5, we reviewed DOD regulations and interviewed officials from the DOD Comptroller's office. To gain an understanding of the procedures and the financial and logistical management information systems that can be used to accumulate and report on aircraft disposal costs, we (1) examined the management and financial reporting for these programs used by the services, (2) reviewed applicable DOD and service instructions and regulations, and (3) interviewed DOD, Air Force, Army, and Navy officials. To determine if the liability is reasonably estimable, we identified the financial and logistical management information systems and reporting mechanisms in place that contain information about the costs of aircraft disposal, including demilitarization and hazardous material disposal processes. We visited DOD's designated aircraft storage, reclamation, and disposal facility at the Aerospace Maintenance and Regeneration Center (AMARC) where data were readily available for addressing removal and disposal costs of older, out of service aircraft systems. To determine if the liability could be estimated for newer aircraft, we selected five aircraft for review. The five aircraft selected were the Air Force's F-16 and B-1B, the Navy's F-14 and F-18, and the Army's AH-64 Apache Helicopter. We chose these five aircraft because they represent the primary fighter or attack and bomber aircraft for each of the services, have the largest number in their class, and represent about 17 percent of the services' combined active and inactive inventory. Because environmental costs are more variable and are likely to raise more complex estimation issues, we performed a more in-depth analysis of these costs. Using data initially obtained at AMARC, information in the DOD hazardous material disposal manual, and visits to maintenance depots, we prepared a list of hazardous materials associated with each of these aircraft. On a case-by-case basis, we then obtained depot level officials' concurrence that these items represent the primary hazardous material on each of these aircraft. To compute the cost of removing hazardous materials from each aircraft, we reviewed documents that stated a standard or estimated removal time for each of the hazardous material items from the depot responsible for program depot maintenance on the applicable aircraft and AMARC's hourly labor rate. We did not independently verify the data obtained from the inventory and financial systems or the reported removal times. We interviewed the services' environmental engineers to determine which hazardous materials require disposal. To determine the costs of disposing of these materials, we reviewed disposal and shipping records at AMARC and the various depots. For those materials that were not scheduled for disposal, we interviewed various depot personnel to determine their methods for reusing and recycling them. We also discussed disposal procedures with various offices of the Defense Reutilization and Marketing Service. During our review, we contacted personnel and/or conducted work at various locations including the Army Aviation and Troop Command Headquarters, St. Louis, Missouri; Aerospace Maintenance and Regeneration Center, Davis-Monthan Air Force Base, Arizona; Air Logistics Centers at Hill Air Force Base, Utah, and Tinker Air Force Base, Oklahoma; Office of the Chief of Naval Operations; Naval Aviation Depots at Jacksonville, Florida and North Island, California; Corpus Christi Army Depot, Corpus Christi, Texas; offices of the Defense Reutilization and Marketing Service, Battle Creek, Michigan; and applicable headquarters offices in the Washington, D.C., area. We conducted our review from July 1996 through June 1997 in accordance with generally accepted government auditing standards. We provided a draft of this report to the Department of Defense for review and comment. We received oral comments which have been incorporated as appropriate. Although SFFAS No. 5 is effective beginning with fiscal year 1997, as of the end of the fiscal year on September 30, 1997, DOD had not established a policy to implement this federal accounting standard. On September 30, 1997, the DOD Comptroller's office posted revisions to the electronic version of DOD's Financial Management Regulation to include SFFAS Nos. 1 through 4, but SFFAS No. 5 was not included. In addition, the DOD Comptroller, who is responsible for developing and issuing guidance on accounting standards, and the Under Secretary of Defense (Acquisition and Technology), who is responsible for the operational activities associated with aircraft disposal, have not provided implementation guidance to the services to assist them in estimating the disposal costs for aircraft. Service officials stated that they are reluctant to estimate a liability for their aircraft until they receive DOD-wide guidance. Unless prompt action to implement this standard is taken, it is unlikely that DOD's fiscal year 1997 financial statements will include an estimate of aircraft disposal costs as required. One of the key criteria cited in SFFAS No. 5 for a liability to be reported is that a future cost is probable--that is, the future outflow of resources is likely to occur. While the likelihood of a future outflow may be difficult to determine and an entity may have difficulty deciding whether to record a liability for certain events, DOD continually disposes of aircraft and has an amount for disposal costs in its annual budget. Thus, because it is known at the time of acquisition that costs will be incurred for the disposal of aircraft, the probability criterion for recording a liability is met. The Congress has also recognized that disposal costs will be incurred and has emphasized the importance of accumulating and considering this information. For example, the National Defense Authorization Act for Fiscal Year 1995 requires the Secretary of Defense to determine, as early in the acquisition process as feasible, the life-cycle costs for major defense acquisitions, including the materials to be used and methods of disposal. The life-cycle cost estimates are required before proceeding with the major acquisition. All aircraft are eventually disposed of using the same basic processes. Any estimate of the disposal liability must take into account these processes and use them as the basis for determining costs. The disposal process starts with the decision to remove an aircraft from service, referred to as retirement (Army), decommissioning (Air Force), and striking (Navy) of military aircraft. Aircraft disposal consideration begins when the services prepare an updated force structure plan. The plan shows the projected requirements for each type of aircraft and includes new procurement and various attrition factors including crashes, programmed retirements, airframe stress tests, parts reclamation needs, and foreign military sales. Active aircraft not needed to meet the services' current and forecasted requirements are sent to AMARC, DOD's designated storage and disposal facility for aircraft for temporary or long-term storage and eventual disposal. Aircraft arriving at AMARC are either placed in a flyable or temporary hold status, prepared for foreign military sales, salvaged for parts, or placed into long-term storage awaiting either eventual disposal or reuse determination. AMARC officials stated that, in general, planes that undergo the storage process are not recalled and are ultimately disposed of through sales or salvage. Once the military services have determined no further need exists for the aircraft, they are released for disposal. These aircraft and related parts are subjected to demilitarization processes to prevent further military use before they are transferred to the Defense Reutilization and Marketing Service (DRMS) for sale as scrap.Demilitarization may take place at the air base, at AMARC, or at the local DRMS field office. Part of the demilitarization process involves removing all remaining hazardous materials from the aircraft. Aircraft acquired by the services are, in general, considered mission assets. The Air Force's Reliability and Maintainability Information System (REMIS), the Navy's Aircraft Inventory Reporting System (AIRS), the Army's Continuing Balance System-Expanded (CBS-X), and AMARC's Aircraft Status Directory identify the number of active and inactive aircraft and are used by the services to keep track of their aircraft inventories. As shown in table 1, DOD reported about 18,000 active aircraft as of September 30, 1996, the most recent data available. The aircraft inventory serves as the basis for estimating the disposal liability although factors such as foreign military sales would have to be considered in adjusting the number of aircraft. According to a March 1997 AMARC report, about 4 percent of AMARC's inventory at any given time is scheduled for foreign military sales. Aircraft lost during operations, however, are generally replaced to maintain the inventory at certain levels. As a result, operational losses may not reduce the total liability for aircraft disposal. The second key criterion in SFFAS No. 5 for reporting of a liability is that an amount be reasonably estimable. Information is available to develop cost estimates for each of the major aircraft disposal processes described in the previous section--demilitarization, storage maintenance, and hazardous materials removal and disposal. These processes account for most of the aircraft disposal costs. Our review focused on five aircraft (the Air Force's F-16 and B-1B, the Navy's F-14 and F-18, and the Army's Apache Helicopter). Although data were available for each of the disposal processes, we performed a more detailed analysis of the costs associated with the removal and disposal of hazardous materials because these costs are more variable and likely to present more complex estimation issues. The information in the following sections indicates the types and sources of information available for DOD to develop an aircraft disposal cost estimate. As stated in SFFAS No. 5, this process may result in a range of potential aggregate costs, the lowest of which should be recorded unless an amount within the range which is most likely to occur is estimable. Demilitarization includes removing weapons and other designated items from the aircraft and then taking the aircraft off line. Other demilitarization actions include removing equipment that has, directly or indirectly, a significant military utility or capacity, such as sensitive radar equipment. A salvage or residual value for the aircraft was deducted from the demilitarization costs, since historically the remains of aircraft are sold as scrap at the time of disposal. As shown in table 2, demilitarization costs varied considerably for the three aircraft in our review for which this information was readily available from program offices. Although the B-1B and the Apache Helicopter are newer aircraft for which demilitarization plans and costs have not yet been developed, disposal cost estimates could be based on cost experience for other aircraft with similar missions. AMARC officials stated that disposal tasks are generally similar among aircraft although the quantity and complexity of specific items may differ. For new weapons systems, including aircraft, the disposal costs, including demilitarization costs, are to be developed as part of the life-cycle costs required by the National Defense Authorization Act for Fiscal Year 1995. Jacksonville Naval Depot officials stated that the demilitarization cost for the F-14 was significantly more than the other two aircraft because of the complexity of the disposal work effort and the related costs. Aircraft are stored at AMARC's long-term storage facility. All openings, cracks, and joints have to be sealed and delicate surfaces protected from the hot sun, wind, and sand. The preservation process is repeated every 4 to 5 years to ensure that each aircraft is adequately protected. According to AMARC's costing system, the maintenance costs of aircraft in long-term storage are about $400 per aircraft per year. According to an AMARC official, aircraft, on average, are kept in long-term storage for 20 years. They also stated that, in general, planes that undergo the storage process are not recalled and are ultimately disposed of through sales or salvage. Such storage costs could result in a significant liability. For example, if the current active inventory of 18,000 aircraft were all maintained in storage for the average of 20 years and AMARC's estimated maintenance cost of $400 per aircraft per year were used, the storage costs would be at least $140 million. All five aircraft types we reviewed contained hazardous materials that must be removed, and if necessary, disposed of when the aircraft are taken out of service. Some hazardous materials can be recycled and reused multiple times, but the materials may ultimately have to be disposed of appropriately. For the five aircraft, sufficient information was available in DOD's and the services' financial and management information systems to estimate a cost for the removal of hazardous materials contained in these aircraft. Costs associated with disposal of these materials are currently insignificant, but will need to be considered based on assumptions of final disposal methods. There are numerous sources available to DOD for identifying which materials used in aircraft are considered hazardous and have to be cleaned up before aircraft disposal. DOD Manual 4160.21-M, known as the Property Disposal Manual and 40 Code of Federal Regulations (C.F.R.) 261 identify which materials are considered hazardous. Environmental managers at the services' program offices and at the depots responsible for the aircraft, as well as maintenance personnel, are knowledgeable about the hazardous materials unique to specific aircraft. In addition, environmental managers at various Defense Reutilization and Marketing Offices (DRMOs) are familiar with the hazardous materials on aircraft. The aircraft we reviewed contain various hazardous materials, as shown in table 3. See appendix I for definitions of these materials. Some hazardous materials in aircraft are not shown in the above table. For example, there are many items on the aircraft, such as cadmium-plated bolts and other small items, that are too numerous to separately remove and account for during the disposal process. Because the cadmium plated items are sold for scrap and the specific items and quantities are not separately identified, they were not included in the sample aircraft analysis. However, DOD and the services would have to consider the significance of such items in the aggregate on a servicewide or DOD-wide basis. Information on the removal costs of hazardous materials in older aircraft is generally available at AMARC and is based on its experience in aircraft disposal. However, AMARC officials said they did not yet have significant experience in dismantling and disposing of the five aircraft in our review. Therefore, the officials suggested that a reasonable estimation approach would be to use removal times that are reported by the cognizant depots that perform maintenance on these systems. The removal times for each hazardous material can then be multiplied by AMARC's hourly labor rate. Using this estimation method, table 4 shows the estimated cost of removing hazardous materials from the five aircraft. The wide variance in hazardous material removal costs can be accounted for by differences in the size and complexity of the five aircraft. For example, the B-1B weighs about 190,000 pounds compared to the smaller F-16 which weighs about 18,000 pounds. Moreover, the B-1B has over 1,000 items associated with pyrotechnics that cost an estimated $92,000 to remove. The cost to remove pyrotechnics from the F-16 is only about $1,700 per aircraft. Similarly, it takes a significant number of staff hours, estimated at about $11,000, to remove the fuel from the B-1B tanks and fuel lines and to take the protective measures for the fuel system. For the F-16, the same procedures take just a few hours at an estimated cost of about $200. The fuel is removed from the aircraft because it can be reused. The Apache Helicopter hazardous material removal cost estimate is much less than for the other aircraft because it contains considerably less hazardous material. For example, it costs an estimated $68 per aircraft to remove pyrotechnics from the Apache compared to about $1,700 to remove pyrotechnics from an F-16. The F-16 cost estimate includes removing one or two ejection seats and canopies and related detonating cord devices, compared to removing only emergency escape explosive bolts and related material for the Apache's crew doors. For some mission assets, such as nuclear submarines, the actual hazardous material disposal costs are significant. However, unlike the removal costs, hazardous material disposal costs for the five aircraft in our review appear not to be significant because these materials are often reutilized, recycled, consumed (as is the case for fuel), or sold. Also, DOD does not track disposal costs by specific aircraft system since hazardous materials are disposed of in bulk. For example, AMARC transfers its nonrecyclable fuel to Davis-Monthan Air Force Base, which then disposes of it along with the base's waste fuel through its bulk disposal contract. For the first 6 months of fiscal year 1996, AMARC paid Davis-Monthan less than $54,000 to dispose of all of its hazardous material. However, although recycling and reuse accounts for much of the hazardous material disposal costs, currently the possibility that reuse or recycling needs and capacity will change in the future must be considered in estimating the ultimate disposal costs for hazardous materials. DOD officials have pointed out that the total disposal cost estimate for aircraft will result in a significant liability--much of which would not require outlays in the current year. Thus, one way to provide a proper context for this reported liability and make it more meaningful to decisionmakers would be to, in a footnote to the financial statements, provide a breakdown of the liability based on the approximate time periods the aircraft are expected to be taken out of service. Table 5 is a simplified illustration of how the aircraft disposal liability could be reported by time period. For the purposes of this illustration, the following assumptions were used: (1) all aircraft had the same disposal costs, (2) 50 percent of the aircraft were currently awaiting disposal and the remaining aircraft were to be disposed of over the next 10 years, and (3) the total estimated liability was $500. This information could provide an important context for congressional and other budget decisionmakers on the total liability by showing the potential annual impact of the actions that have already occurred or are expected to occur during various budget periods including those outside the annually submitted Future Years Defense Program. Further, if the time periods used to present these data are consistent with budget justification documents, such as DOD's Future Years Defense Program, this type of disclosure would provide a link between budgetary and accounting information, one of the key objectives of the CFO Act. As of September 30, 1997, DOD had not incorporated SFFAS No. 5 in its Financial Management Regulation. In addition, the DOD Comptroller and the Under Secretary of Defense (Acquisition and Technology) had not issued implementation guidance to the services to assist them in estimating aircraft disposal costs. Such costs are both probable and estimable and therefore meet the criteria stated in SFFAS No. 5 for reportable liabilities. DOD and the military services have information available to develop cost estimates on each of the major aircraft disposal processes. Development of the needed policy and implementing guidance is necessary to help ensure that an estimate of aircraft disposal costs is recorded in DOD's fiscal year 1997 financial statements as required. Moreover, life-cycle cost estimates that include disposal costs will provide important information to the Congress and other decisionmakers on the true costs of aircraft as well as other weapon systems. We recommend that you ensure that the DOD Comptroller incorporate SFFAS No. 5 in DOD's Financial Management Regulation, the DOD Comptroller and the Under Secretary of Defense (Acquisition and Technology) promptly issue joint implementing guidance for the services on the SFFAS No. 5 requirements for recognition of a liability for aircraft disposal costs, and the DOD Comptroller include the estimated aircraft disposal liability in DOD's fiscal year 1997 financial statements. In commenting on a draft of this report, Department of Defense officials concurred with our recommendations that SFFAS No. 5 be incorporated in DOD's Financial Management Regulation and that joint implementing guidance be issued promptly on the SFFAS No. 5 requirements for recognition of a liability for aircraft disposal costs. In addition, DOD stated that current disposal cost estimates can be reasonably determined for aircraft that have been in the active inventory for some time. However, DOD stated that it would be necessary to delay the reporting of the aircraft disposal liability until fiscal year 1998 because the development and coordination of procedures and reporting guidance would take time to complete. They also stated that the cleanup cost provisions in SFFAS No. 6 must be considered. SFFAS No. 5 was issued almost 2 years ago, to allow agencies ample time to develop implementing policies and procedures prior to its fiscal year 1997 effective date. As stated in the report, information is available on all of the major aircraft disposal processes to develop a reasonable estimate of these costs. Such an estimate need not be precise--SFFAS No. 5 permits the reporting of a range. Also, as noted in this report, the cleanup cost provisions of SFFAS No. 6 do not affect the reporting of the aircraft disposal liability. Accordingly, we believe that DOD, with a concentrated effort, can develop an estimate of aircraft disposal costs for its fiscal year 1997 financial statements. 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. You should submit your statement to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight within 60 days of 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 over 60 days after the date of this report. We are sending copies of this report to the Chairmen and Ranking Minority Members of the House and Senate Committees on Appropriations, the House and Senate Committees on the Budget, the Senate Committee on Armed Services, the House Committee on National Security, the Senate Committee on Governmental Affairs, the House Committee on Government Reform and Oversight and its Subcommittee on Government Management, Information, and Technology, and the Director of the Office of Management and Budget. We are also sending copies to the Acting Under Secretary of Defense (Comptroller), the Air Force Assistant Secretary for Financial Management and Comptroller, the Army Assistant Secretary for Financial Management and Comptroller, the Navy Assistant Secretary for Financial Management and Comptroller, the Under Secretary of Defense (Acquisition and Technology), the Deputy Under Secretary of Defense for Environmental Security, and the Acting Director, Defense Finance and Accounting Service. Copies will be made available to others upon request. Please contact me at (202) 512-9095 if you have any questions concerning this report. Major contributors to this report are listed in appendix II. Hazardous material - Any waste that, because of its quantity, concentration or toxicity, corrosiveness, mutagenicity or flammability, or physical, chemical, or infectious characteristics may (1) cause, or significantly contribute to, an increase in mortality or an increase in serious irreversible or incapacitating reversible illness or (2) pose a substantial present or potential hazard to human health or the environment when improperly treated, stored, transported, disposed of, or otherwise managed. Some of the hazardous materials contained in the aircraft we reviewed are discussed below. Batteries - Batteries consist of the following types: lead-acid, lithium-sulfur dioxide, magnesium, silver-bearing, mercury, and nickel cadmium. Unless batteries are to be recycled or reused, they must be turned in as hazardous material or hazardous waste. Composites - Carbon composite fiber material made of long carbon fibers mixed with bonding and hardening agents, such as epoxy resins. The health hazards associated with composite fibers appear to be similar to the effects of fiberglass, including inhalation of the fibers, which can cause bronchial irritation. Coolant - A fluid that circulates through a machine or over some of its parts in order to draw off heat. This includes chemical substances used in aircraft for cooling radar and related equipment. Certain forms of this material may be harmful if skin contact occurs. Fire suppressant - Substances used to keep materials on aircraft, such as fuel, from igniting and burning. Halon, one such suppressant, is an ozone-depleting substance that is reclaimed or recovered. Fuel cells - Fuel cells, which hold fuel, are not in themselves considered hazardous material, but because they are contaminated with fuel they can become hazardous. Aviation fuel contains benzene and toluene, both hazardous materials. Hydrazine - Supplemental liquid propellant, found only on the F-16, used to power an emergency power unit in the event of main engine failure. Hydrazine is an extremely dangerous material if inhaled and has to be specially handled during transfer by teams dressed in protective gear. Magnesium Thorium - Alloy of thorium and magnesium used to produce a strong, lightweight aircraft component. Thorium presents an internal and external radiation hazard. Petroleum, oil, and lubricants - Includes jet fuel, hydraulic fluid, antifreeze products, and other lubricants found on aircraft. In some states, these products are not considered hazardous. Pyrotechnics - Explosive devices used to jettison the canopy and activate the pilot's ejection seat. On helicopters, these devices are used to shear off hinge pins on the fuselage doors to enable crew to extricate themselves in the event of a crash-landing. Dieter M. Kiefer, Assistant Director Marshall S. Picow, Auditor in Charge Gary L. Nelson, Auditor Darryl S. Meador, 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. 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Pursuant to a legislative requirement, GAO reviewed: (1) the status of the Department of Defense's (DOD) efforts to implement the new federal accounting standard for disclosure of liabilities, such as aircraft disposal; and (2) whether an estimate of the minimum disposal liability for aircraft, including the removal and disposal of hazardous materials, could be made. GAO noted that: (1) DOD has not implemented the federal accounting standard that requires recognizing and reporting liabilities such as those associated with aircraft disposal, nor has DOD provided guidance to the military services; (2) aircraft disposal is an ongoing process and the cost can be reasonably estimated; (3) accordingly, these activities meet the criteria for a reportable liability; (4) information on the three major disposal processes--demilitarization, storage and maintenance, and hazardous materials removal and disposal--is available to develop cost estimates; (5) Congress has recognized the importance of accumulating and considering disposal cost information; and (6) in the National Defense Authorization Act for Fiscal Year 1995, Congress required DOD to develop life-cycle environmental costs, including demilitarization and disposal costs, for major defense acquisition programs.
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Artisanal and small-scale mining of gold in the DRC is a significant driver of the country's economy. ASM gold mining in the DRC employs a large number of people, constitutes a potential major source of tax revenue, and represents a potential engine of development for the country, according to a 2015 study by USAID. More than 1,000 ASM gold mine sites of varying size operate in the DRC, primarily in remote provinces in the eastern region, commonly employing groups of 30 to 300 miners (see app. II for a map showing DRC provinces). In parts of the DRC, artisanal and small-scale mining provides alternative employment opportunities in the absence of a viable agricultural sector. In addition, mining--including ASM gold mining--provides miners with cash-on-hand and requires little or no specialized knowledge. ASM gold miners work as diggers, rock crushers, sorters, and traders. Most ASM gold miners use shovels, picks, and other rudimentary tools, such as mining pans. Because of the scarcity of mechanical equipment in some areas, ASM gold miners grind the mined gold manually into a powder, often with a pair of rocks or a tire rim, and extract gold from this powder using a sluice, mining pan, and washing pool and sometimes using hazardous chemicals such as mercury (see fig. 1). According to a 2016 study by the International Peace Information Service (IPIS), ASM gold mining sites in the eastern DRC annually produced a combined total of about 12 metric tons of gold, with an estimated value of $437 million, in 2013 through 2015. This study found that a miner produced an average of 0.17 grams per day, worth about $6.07 on global markets, but retained earnings of $1.84 to $2.75 per day. However, significant portions of many miners' wages went toward paying off loans (i.e., prefinancing) that the miners incurred for food, tools, and other basic necessities. As a result, when production levels were low, miners could easily enter a cycle of indebtedness. According to the government of the DRC, the average annual official ASM gold production in 2010 through 2016 was about 279 kilograms (0.28 metric tons) of gold, with an estimated value of $10.1 million per year. Total official ASM gold production was about 1,955 kilograms (1.95 metric tons), with an estimated value of about $71 million in 2010 through 2016 (see table 1). The reported official supply chain for ASM gold produced in the DRC involves multiple key actors authorized by the DRC government, according to reports we reviewed and stakeholders we interviewed. However, these and other sources indicate that the vast majority of DRC- sourced ASM gold is mined, traded, and exported unofficially, without authorization. Additionally, the majority of ASM gold miners reportedly work in the presence of elements of the Congolese army or illegal armed actors, according to a report and stakeholders. The official supply chain for ASM gold produced in the DRC involves multiple actors, including miners, local traders, and exporters, according to USAID and UNGoE reports we reviewed and stakeholders we interviewed. Those sources indicated that these key actors are required to obtain government authorization, such as official mining cards, or register with the provincial or national government to trade or export ASM gold in the DRC. However, according to these reports and stakeholders, almost all DRC-sourced ASM gold is produced and traded unofficially and smuggled from the country. Figure 2 illustrates the reported official and unofficial supply chains for DRC-sourced ASM gold. According to these sources, unregistered local traders or exporters generally sell DRC-sourced ASM gold to regional buyers in Uganda, Burundi, or Rwanda or global buyers in Dubai, United Arab Emirates. The USAID and UNGoE reports we reviewed and stakeholders we interviewed generally described the official supply chain for DRC-sourced ASM gold as follows: Artisanal and small-scale miners purchase government mining cards and join cooperatives, which allows them to work in artisanal mining zones known as the zone d'exploitation artisanal (ZEA). According to a USAID report, ASM gold is considered legal under DRC law when it is produced by a registered cooperative working within a ZEA or a mining area that has been inspected and found to be "green"--that is, conflict free--within the past year by a government-accredited, validated mission. Miners in provinces where most of the ASM gold is produced are subject to an average provincial production tax of about 8 percent, according to USAID. Local traders, known as negociants, register with the government to purchase gold from villages near mine sites and sell it to larger traders or exporters. Generally, there are two types of local traders: petit negociants, who buy and sell small quantities (one-half gram or less), and grande negociants, who buy and sell larger quantities (1 to 50 kilograms) of gold. According to a USAID report, registered local traders in these provinces are subject to an average provincial tax of about 1 percent on sales volume. National exporters, known as comptoirs, register with the national government to export gold purchased from the local traders. Registered exporters are subject to a 2 percent national export tax, according to a USAID report. Global buyers, including international refiners, jewelers, and banks, buy ASM gold from registered exporters in the DRC for further processing for use in electronic components, jewelry, or gold bars. Despite the existence of an official supply chain, almost all ASM gold is smuggled out of the DRC and is therefore not reflected in official export statistics or subject to provincial or national taxes, according to reports we reviewed as well as stakeholders we interviewed. These sources indicate that smuggling activities often begin at the mine site and involve both registered and unregistered actors. For example, ASM gold miners mine for gold at undesignated sites and sell it to both registered and unregistered local traders. Unregistered traders purchase gold at or near mining areas and either sell the gold to larger registered or unregistered traders or exporters located in regional trading centers in the DRC--for example, in Bukavu, South Kivu Province, or Butembo, North Kivu Province--or smuggle the gold from the DRC themselves, according to USAID and UNGoE reports reflecting fieldwork completed in 2014 and 2016. Registered local traders also participate in smuggling by selling gold to unregistered exporters and to regional and global buyers outside the DRC. Additionally, registered exporters participate in smuggling by underreporting their exports of ASM gold to avoid taxes, according to reports reflecting fieldwork completed in 2014 through 2016. A UNGoE study estimated that unreported exports of ASM gold from the DRC and neighboring countries in the first 9 months of 2015 amounted to about $200 million. Some of the factors that contribute to smuggling include limited government control over the remote areas where ASM gold is primarily produced, inadequate infrastructure, and corruption, according to reports we reviewed and DRC government officials we interviewed. DRC government officials told us that smuggling is also a consequence of weak border enforcement. Reports we reviewed indicate that the smuggling of ASM gold from the DRC has resulted in a substantial loss of tax revenue. Most ASM gold produced in the DRC is smuggled through regional buyers in neighboring African countries and then to Dubai, UAE, according to several reports. UNGoE, OECD, and NGO officials told us that gold buyers located outside the DRC--for example, in Uganda-- often rely on networks of traders who purchase gold at mines in the eastern DRC and smuggle it out of the country. These sometimes- complex supply chain networks include traders and exporters who are often from other countries in the region or from China, India, the Middle East, or Europe, according to an OECD representative. Reports we reviewed and stakeholders we interviewed also noted that ASM gold smuggled from the DRC is typically transported from Dubai to other international markets such as India or Switzerland. Since 2012, the Dubai Multi Commodities Centre, a UAE government entity, has provided guidelines on responsible sourcing to gold refiners through its accreditation program. However, joining the program is voluntary, and the entity's jurisdiction does not include all refineries in the UAE, according to Dubai Multi Commodities Centre officials. In interviews, Dubai government officials and refiners and a representative of an auditing firm told us that accredited refiners generally do not purchase gold directly from the DRC or most adjoining countries (see app. II for a map showing the countries adjoining the DRC). Furthermore, these individuals noted that refiners take various actions to ensure that gold sourced from these countries does not enter their supply chains. However, the refiners also acknowledged having purchased gold in the local gold market in Dubai (known as the gold souk), despite the fact that, according to a UNGoE report, traders and jewelers operating in the souk may have purchased gold from the DRC. In interviews, traders and jewelers at the gold souk told us that they required minimal documentation and generally did not ask questions about country of origin when buying gold. For example, one trader told us he was willing to purchase up to 50 kilograms of gold without any source-of-origin documentation. As a result, the extent of comingling of gold from the souk and gold from refiners who follow responsible sourcing guidelines is unclear. In recent years, progress has been made in reducing the presence of armed groups at tantalum, tin, and tungsten mine sites, according to UNGoE, OECD, and IPIS reports. However, the widespread availability of gold in remote, difficult-to-access areas of the eastern DRC and the lack of a functioning traceability system allow armed groups to operate at gold mine sites with minimal government and international oversight. According to reports we reviewed and stakeholders we interviewed, interference by armed groups of state and nonstate actors occurs primarily at mine sites through, among other things, illegal taxation and control of mining areas, pillaging, and forced labor. For example, a 2016 IPIS study found that, as of 2015, an estimated 64 percent of ASM gold miners worked at mines with state and nonstate armed group interference. Armed groups have also been known to operate illegal road barriers, where they collect revenue from miners or traders transporting gold. Furthermore, according to the IPIS study and UNGoE officials, most instances of armed group interference at mining sites involve illegal taxation. As of 2016, among the conflict minerals, gold provided by far the most significant financial benefit to armed groups, according to UNGoE. Elements of the Armed Forces of the Democratic Republic of the Congo (FARDC) constitute the largest armed presence and source of interference at gold mine sites, according to the 2016 IPIS study. According to DRC government officials, although FARDC is present to maintain security at or around gold mine sites, some undisciplined FARDC elements have interfered at mining sites. However, these officials noted that the military is working to bring such elements under control by taking legal action against FARDC officers and soldiers found to be in violation of the law. In addition, a report by the Congo Research Group, based on fieldwork conducted in 2015, indicates that fragmentation has greatly increased among illegal nonstate armed groups in eastern DRC. With the disappearance or weakening of armed groups such as the March 23 Movement and the Democratic Forces for the Liberation of Rwanda from the DRC, illegal armed groups are now smaller and more fragmented, tending to pillage mines rather than impose permanent control, according to IPIS representatives. IPIS representatives noted that FARDC elements, in contrast, tend to impose more permanent control and illegal taxation. The DRC government and USAID, as well as several other entities, have undertaken initiatives to encourage the sourcing of conflict-free ASM gold from the DRC. However, some of these initiatives face challenges, such as the limited number of validated mine sites, as well as ongoing security risks. To mitigate supply chain-related concerns, in 2015, the DRC government developed the Traceability Initiative for Artisanal Gold (ITOA) to establish conflict-free sources of ASM gold. ITOA relies on a system of tamper- proof envelopes and agents to track and certify the source and chain of custody of gold. The DRC government seeks to implement ITOA at mining sites that have been validated as "green" (i.e., conflict free, with no child labor) and are located in officially designated ZEAs. According to USAID documents, the DRC government aims to pilot ITOA at two mine sites in the Maniema and South Kivu provinces and to scale the system on the basis of the pilot. DRC officials told us that they expect the ITOA pilot to be launched in the summer of 2017. However, the limited number of mine sites that have been validated and thus licensed to operate, as well as the relatively high provincial taxes in the mining sector in the DRC compared with taxes in neighboring countries, as reported by USAID and UNGoE, continue to limit incentives for sourcing conflict-free ASM gold. For example, as of April 2016, only 37 of more than 1,000 ASM gold mine sites had been validated as green, according to a DRC government accredited joint validated mission. The government's ability to validate mines has been hindered by factors such as insecure conditions and lack of funding, according to a 2015 report by the Enough Project. Furthermore, relatively high government taxes discourage actors along the supply chain from selling gold through legal channels, according to reports we reviewed and stakeholders we interviewed. A USAID report found that regional tax rates in the DRC and neighboring countries had been largely equalized but that provincial taxes in the DRC remained high. For example, Support Service and Management of Small Scale Mining, or SAESSCAM--a provincial government entity--requires miners to pay a 10-percent production tax in addition to other fees, according to a USAID document. SAESSCAM is responsible for providing training in safe and effective mining techniques, among other things, but focuses primarily on collecting taxes from miners, according to USAID and OECD reports we reviewed. USAID is assisting the DRC government in its efforts to encourage the responsible sourcing of conflict-free ASM gold and provides training to mining cooperatives and government officials in the mining sector. Since 2015, USAID has partnered with the DRC government to assist with implementing ITOA, including helping to validate mine sites. In addition, since 2016, USAID has worked with Tetra Tech through the Capacity Building for Responsible Minerals Trade Program and Partnership Africa Canada (PAC) through the Just Gold project to scale up pilot initiatives for the production and sale of ASM gold. The pilot is focused on increasing the volume of conflict-free gold and improving the integrity of traceability systems in the DRC. For example, miners are taught more-sustainable exploitation techniques and offered project equipment. As of March 2017, the Just Gold project had exported about 1,429 grams (1.4 kilograms) of ASM gold. Table 2 shows the two pilot projects USAID had initiated as of June 2017 to develop and expand existing traceability schemes for ASM gold produced in the DRC. USAID progress reports cite the limited number of buyers, including refiners, and security as key challenges affecting these pilot projects. According to USAID officials, some potential buyers are unwilling to purchase ASM gold from the DRC because of associated risks related to potential armed group interference. USAID officials also told us that the low volume of ASM gold available from the limited number of pilot mine sites poses an additional challenge to attracting buyers. In interviews, Dubai Multi Commodities Centre officials and refinery representatives in Dubai told us that, while they do not currently purchase any ASM gold produced in the DRC, they would be open to exploring options to buy such gold if they had some assurance from a partner such as USAID. USAID officials explained that their current focus is on identifying London Bullion Market Association (LBMA) refiners, who examine their supply chains more closely. Additionally, ongoing security risks affect the implementation of pilot projects, according to USAID progress reports. For example, in February 2017, one of the potential pilot sites at Matete was attacked, leading to suspension of on-site activities. According to USAID documents, an armed group of approximately 30 men attacked several buildings in Matete, killing one military soldier and taking hostages. Contractor staff were immediately moved to another compound for security and were subsequently evacuated, unharmed. In 2016, USAID established a pilot projects target of developing traceability and due diligence schemes for ASM gold at 25 mine sites. USAID met this target in December 2016, having developed traceability and due diligence schemes at 26 mine sites, primarily through the Just Gold project. USAID officials told us that they are supporting the development of a traceability scheme for ASM gold so that gold from validated sites can comply with ICGLR standards. Other entities--OECD, ICGLR, and LBMA--have undertaken regional initiatives to encourage the responsible sourcing of gold. OECD guidance. Since 2012, OECD has developed guidance on encouraging responsible supply chains for ASM gold. For example, the guidance notes that stakeholders should engage in legalizing and formalizing the artisanal mining communities to encourage conflict- free sourcing. In 2016, OECD reported that implementation of Section 1502 of the Dodd-Frank Act had increased awareness about the supply chain of conflict minerals in the region. ICGLR regional certification mechanism. In 2010, ICGLR developed a regional certification mechanism to ensure that conflict minerals, including gold, are fully traceable. However, two reports we reviewed raised concerns about the validity of ICGLR certificates issued to comptoirs exporting ASM gold, given that traceability schemes for ASM gold are lacking. In addition, UNGoE, OECD, and DRC officials told us that the ICGLR's mechanism has not been fully implemented and is not adequately monitored owing to limited incentives for member states to accomplish regional goals. LBMA accreditation. In 2012, LBMA, which represents the global market for gold and silver, established its "Responsible Gold Guidance" to ensure that the gold refiners it accredits purchase only conflict-free gold. According to LBMA, compliance with this framework is mandatory for all refiners wishing to sell into the London bullion market. USAID officials told us that USAID is seeking to identify buyers from the LBMA refiners for its ASM gold pilot projects. Since we reported in August 2016, a USAID-funded, population-based study published in 2016 has provided additional data on sexual violence in the DRC. In addition, as we previously reported, population-based surveys on sexual violence are under way or planned in two adjoining countries, Burundi and Uganda. We also identified some new case-file data on sexual violence in the DRC and adjoining countries; however, as we reported previously, case-file data on sexual violence are not suitable for estimating an overall rate of sexual violence. Finally, a 2017 UN report indicates that the DRC government has made some progress in addressing sexual violence. We identified a USAID-funded, population-based study surveying the rate of sexual violence in the eastern DRC that had been published since August 2016. Published in September 2016, the study used data collected in June and July 2016 to estimate that 31.6 percent of women and 32.9 percent of men reported exposure to some form of sexual and gender-based violence in their lifetime. Among women who were exposed to sexual violence, 12.7 percent reported exposure to conflict-related sexual violence, while 87.4 percent reported exposure to community- based sexual violence. Among men who were exposed to sexual violence, 68.1 percent reported exposure to conflict-related sexual violence, while 31.9 percent reported exposure to community-based sexual violence. Table 3 summarizes the results of this and other selected, population- based surveys of the rate of gender-based sexual violence in the DRC that have been published since 2008. The surveys' results are not directly comparable because of variations in the periods of reported incidents, the genders and ages of survey participants, and the geographic areas covered, as well as the definitions of sexual violence used. For example, while the August 2010 survey estimated the rate of sexual violence over a lifetime, other surveys estimated the rate of sexual violence over both a lifetime and a 12-month period. Additionally, some surveys collected information only on women, while others surveyed both men and women. In addition to these studies of sexual violence in the eastern DRC, population-based surveys in Uganda and Burundi are under way or planned, as we previously reported. According to ICF International, fieldwork for the 2016 Uganda Demographic and Health Survey is now complete, and the final report is expected in October 2017; fieldwork for the 2016 Burundi survey is currently ongoing, and the final report is expected in December 2017. Figure 3 shows the anticipated publication dates for population-based surveys on sexual violence that are currently under way or planned in Uganda and Burundi. The figure also shows the publication dates for the population-based surveys, with data on rates of sexual violence in the eastern DRC, Rwanda, and Uganda that have been published since we started reporting on sexual violence in the region in 2011. Since we reported in August 2016, State and UN entities have provided additional case-file information about instances of sexual violence in the DRC and adjoining countries. State's annual country reports on human rights practices provided the following case-file data pertaining to sexual violence in the DRC, Burundi, Rwanda, and Uganda: DRC. In 2016, the United Nations documented 267 adult victims and 171 child victims of sexual violence in conflict. This violence was perpetrated by illegal armed groups as well as state security forces and civilians and was concentrated in North Kivu Province, according to State. Burundi. One organization--Seruka Center--working with victims of sexual violence in Bujumbura reported 1,288 cases of sexual assault during 2016. According to State, the actual number of rapes was likely higher, given factors that prevent women and girls from seeking medical treatment. Another organization--Humura Center-- responsible for investigating cases of sexual violence and rape received 160 cases of sexual and gender-based violence in 2016, according to State. Rwanda. In 2016, Rwanda's National Public Prosecution Authority reported 190 cases of rape. According to State's report, domestic violence against women in 2016 was common, but most incidents were not reported or prosecuted. Uganda. State's 2016 report reiterated that rape remained a serious problem throughout the country and that the government did not consistently enforce the law. As we noted previously, the police crime report through June 2015, the most recent available, registered 10,163 reported sexual offenses. In addition, UN entities reported the following case-file data about sexual violence in the DRC and Burundi: DRC. Data collected by the Congolese government with support from the UN Population Fund indicate that from January 2016 through March 2017, gender-based violence service providers responded to at least 24,364 incidents of gender-based violence. Women and girls were the victims in 97 percent of the reported cases in 2016. In addition, in 2016, the UN Organization Stabilization Mission in the DRC, known as MONUSCO, verified 637 cases of conflict-related sexual violence, with illegal armed groups responsible for 74 percent of cases, and state security forces, mainly FARDC, responsible for the remaining 26 percent of cases. Burundi. In 2016, UNHCR--the UN Refugee Agency--reported 2,250 gender-based violence incidents targeting refugees in neighboring countries, with 23 percent of incidents occurring in Burundi or en route from the country. Since 2013, the DRC government has made some progress in addressing sexual violence in the eastern DRC, according to a 2017 UN report. The report notes improvements in the capacity of DRC state security forces to address sexual violence in the following respects: adoption of codes of conduct prohibiting sexual violence; investigation of alleged incidents in order to hold perpetrators accountable; and formation of specialized police units capable of addressing sexual violence. In addition, law enforcement measures such as arrests and prosecutions have increased, and training for the military has improved, according to an official from the UN Special Representative of the Secretary-General on Sexual Violence in Conflict. This official also noted that in 2014, the DRC government appointed a Personal Representative to the President on Sexual Violence and Child Recruitment to advise the President on sexual violence issues, ensuring that sexual violence remains on the government's agenda. More recently, the DRC government and the United Nations have expressed interest in exploring linkages between mining and sexual violence, according to this official. However, the official told us that while reports suggest a link between mining and sexual violence in the region, the UN and the DRC government have not been able to prove such a linkage because of limited resources for travel to the areas where mining occurs and the limited availability of women with specialized knowledge to investigate these issues. We provided a draft of this report to the SEC, State, and USAID for comment. State and USAID provided technical comments, which we incorporated as appropriate. SEC did not provide comments. We are sending copies of this report to appropriate congressional committees and to the SEC, State, and USAID. The report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8612 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. In this report, we provide information about (1) the supply chain for gold produced through artisanal and small-scale mining in the Democratic Republic of the Congo (DRC); (2) efforts by the DRC and the U.S. government and others that may encourage the sourcing of conflict-free artisanal and small-scale mined (ASM) gold; and (3) sexual violence in the eastern DRC and neighboring countries that has been published since August 2016, when we last reported on this topic. To address our first two objectives, we reviewed key reports and documents from the U.S. Agency for International Development (USAID), international organizations, and nongovernmental organizations (NGO). We reviewed these reports for methodological rigor, relevance, and timeliness to ensure that they were sufficiently reliable to support their own conclusions or conclusions we made based on their work. We also reviewed these reports' methodologies related to site selection, sources and quality of evidence, and the nature and timing of fieldwork in the DRC. We reviewed U.S. agency documents, such as a 2015 USAID- funded report related to conflict minerals in the DRC, as well as USAID internal documents that included a program implementation plan and annual and quarterly internal progress reports on responsible sourcing of ASM gold in the DRC. We also reviewed annual reports by the United Nations Group of Experts (UNGoE) from 2011 through 2016, annual baseline reports on the DRC by the Organisation for Economic Co- operation and Development (OECD) from 2014 and 2015, and reports by NGOs such as the Enough Project and Global Witness. (For a complete listing of the documents we reviewed, see the bibliography at the end of this report.) In reviewing these reports, we focused on discussion of the ASM gold supply chain; associated barriers and incentives, if any; and efforts to encourage responsible sourcing. We also interviewed Department of State (State), USAID, and United Nations (UN) officials and OECD and NGO representatives. We traveled to Dubai, United Arab Emirates, where we interviewed officials from the Ministry of Economy and Dubai Multi Commodities Centre, representatives of gold refineries, accounting firms, local traders, and jewelers. We interviewed DRC government officials in Santa Clara, California, and Washington, D.C., regarding the local supply chain for gold and efforts to ensure responsible sourcing. To address our third objective, we identified and assessed any information on sexual violence in eastern DRC and the three adjoining countries--Rwanda, Uganda, and Burundi--that had been published or become otherwise available since we issued our August 2016 report on sexual violence in these areas. We discussed the collection of sexual violence-related data in the DRC and adjoining countries, including population-based survey data and case-file data, during interviews with State and USAID officials and with NGO representatives and researchers whom we interviewed for our prior review of sexual violence rates in eastern DRC and adjoining countries. We also interviewed an official from the UN Special Representative of the Secretary-General on Sexual Violence in Conflict. We conducted this performance audit from August 2016 to August 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. The Democratic Republic of the Congo (DRC) is a vast, mineral-rich nation with an estimated population of about 75 million people and an area that is roughly one-quarter the size of the United States, according to the United Nations. Nine countries adjoin the DRC. Figure 4 shows the DRC provinces and adjoining countries. In addition to the individual named above, Godwin Agbara (Assistant Director), Farahnaaz Khakoo-Mausel (Analyst-in-Charge), Andrew Kurtzman, Elisa Yoshiara, Reid Lowe, Justin Fisher, Michael Hoffman, Grace Lui, and Neil Doherty made key contributions to this report. Bafilemba, Fidel, and Sasha Lezhnev. Congo's Conflict Gold Rush: Bringing Gold into the Legal Trade in the Democratic Republic of the Congo. Washington, DC: Enough Project, April 2015. Blore, Shawn. Capacity Building for a Responsible Minerals Trade (CBMRT): Working with Producers to Responsibly Source Artisanal Gold from the Democratic Republic of the Congo. Washington, D.C.: U. S. Agency for International Development, May 2015. Dranginis, Holly. Going for Gold: Engaging the Jewelry Industry in Responsible Gold Sourcing in Africa's Great Lakes Region. Washington, D.C.: Enough Project, November 2014. Global Witness. River of Gold: How the State Lost Out in an Eastern Congo Gold Boom, while Armed Groups, a Foreign Mining Company, and Provincial Authorities Pocketed Millions. London, United Kingdom: July 2016. Global Witness. City of Gold: Why Dubai's First Conflict Gold Audit Never Saw the Light of Day. London, United Kingdom: February 2014. Kelly, Jocelyn T.D. "'This Mine Has Become Our Farmland': Critical Perspectives on the Coevolution of Artisanal Mining and Conflict in the Democratic Republic of the Congo." Resources Policy, vol. 40 (January 2014): 100-108. Mthembu-Salter, Gregory. Baseline Study One: Musebe Artisanal Mine, Katanga, Democratic Republic of Congo. Paris, France: Organisation for Economic Co-operation and Development, May 2014. Mthembu-Salter, Gregory. Baseline Study Two: Mukungwe Artisanal Mine, South Kivu, Democratic Republic of Congo. Paris, France: Organisation for Economic Co-operation and Development, November 2014. Mthembu-Salter, Gregory. Baseline Study Three: Production, Trade and Export of Gold in Orientale Province, Democratic Republic of Congo. Paris, France: Organisation for Economic Co-operation and Development, May 2015. Mthembu-Salter, Gregory. Baseline Study Four: Gold Trading and Export in Kampala, Uganda. Paris, France: Organisation for Economic Co- operation and Development, May 2015. Organisation for Economic Co-operation and Development. Report on the Implementation of the Recommendation on Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High- Risk Areas. Paris, France: April 28, 2016. Organisation for Economic Co-operation and Development. Mineral Supply Chains and Conflict Links in Eastern Democratic Republic of Congo: Five years of Implementing Supply Chain Due Diligence. Paris, France: November 19, 2015. Partnership Africa Canada. All That Glitters Is Not Gold: Dubai, Congo and the Illicit Trade of Conflict Minerals. Ottawa, Canada: May 2014. Southern Africa Resource Watch. Congo's Golden Web: The People, Companies and Countries That Profit from the Illegal Trade in Congolese Gold. Johannesburg, South Africa: May 2014. Stearns, Jason, and Christoph Vogel. The Landscape of Armed Groups in the Eastern Congo. New York, N.Y.: Congo Research Group, December 2015. United Nations. Letter Dated 28 December 2016 from the Group of Experts on the Democratic Republic of the Congo Addressed to the President of the Security Council. New York, N.Y.: December 28, 2016. United Nations. Letter Dated 23 May 2016 from the Group of Experts on the Democratic Republic of the Congo Addressed to the President of the Security Council. New York, N.Y.: May 23, 2016. United Nations. Letter Dated 12 January 2015 from the Chair of the Security Council Committee Established Pursuant to Resolution 1533 (2004) Concerning the Democratic Republic of the Congo Addressed to the President of the Security Council. New York, N.Y.: January 12, 2015. United Nations. Letter Dated 22 January 2014 from the Coordinator of the Group of Experts on the Democratic Republic of the Congo Addressed to the President of the Security Council. New York, N.Y.: January 23, 2014. U.S. Department of Interior. Conflict Minerals from the Democratic Republic of the Congo--Gold Supply Chain. Washington, D.C.: U.S. Geological Survey, October 2015. Weyns, Yannick, Lotte Hoex, and Ken Matthysen. Analysis of the Interactive Map of Artisanal Mining Areas in Eastern DR Congo. Antwerp, Belgium: International Peace Information Service, October 2016. SEC Conflict Minerals Rule: 2017 Review of Company Disclosures in Response to the U.S. Securities and Exchange Commission Rule, GAO-17-517R. Washington, D.C.: April 26, 2017. Conflict Minerals: Insights from Company Disclosures and Agency Actions. GAO-17-544T. Washington, D.C.: April 5, 2017. SEC Conflict Minerals Rule: Companies Face Continuing Challenges in Determining Whether Their Conflict Minerals Benefit Armed Groups. GAO-16-805. Washington, D.C.: August 25, 2016. SEC Conflict Minerals Rule: Insights from Companies' Initial Disclosures and State and USAID Actions in the Democratic Republic of the Congo Region. GAO-16-200T. Washington, D.C.: November 17, 2015. SEC Conflict Minerals Rule: Initial Disclosures Indicate Most Companies Were Unable to Determine the Source of Their Conflict Minerals. GAO-15-561. Washington, D.C.: August 18, 2015. Conflict Minerals: Stakeholder Options for Responsible Sourcing Are Expanding, but More Information on Smelters Is Needed. GAO-14-575. Washington, D.C.: June 26, 2014. SEC Conflict Minerals Rule: Information on Responsible Sourcing and Companies Affected. GAO-13-689. Washington D.C.: July 18, 2013. Conflict Minerals Disclosure Rule: SEC's Actions and Stakeholder- Developed Initiatives. GAO-12-763. Washington, D.C.: July 16, 2012. The Democratic Republic of Congo: Information on the Rate of Sexual Violence in War-Torn Eastern DRC and Adjoining Countries. GAO-11-702. Washington, D.C.: July 13, 2011. The Democratic Republic of the Congo: U.S. Agencies Should Take Further Actions to Contribute to the Effective Regulation and Control of the Minerals Trade in Eastern Democratic Republic of the Congo. GAO-10-1030. Washington, D.C.: September 30, 2010.
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Over the past decade, the United States and the international community have sought to improve security in the DRC, the site of one of the world's worst humanitarian crises. In the eastern DRC, armed groups have committed severe human rights abuses, including sexual violence, and reportedly profit from the exploitation of "conflict minerals," particularly gold. Congress included a provision in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that, among other things, required the Securities and Exchange Commission (SEC) to promulgate regulations regarding the use of conflict minerals from the DRC and adjoining countries. The SEC adopted these regulations in 2012. The act also included a provision for GAO to annually assess the SEC regulations' effectiveness in promoting peace and security and report on the rate of sexual violence in the DRC and adjoining countries. In April 2017, GAO reported on companies' disclosures, in response to the SEC regulations, of conflict minerals they used in calendar year 2015 (see GAO-17-517R ). In this report, GAO provides information about (1) the supply chain for ASM gold in the DRC; (2) efforts to encourage responsible sourcing of ASM gold; and (3) sexual violence in eastern DRC and neighboring countries published since August 2016, when GAO last reported on this topic. GAO reviewed U.S., UN, and nongovernment and international organizations' reports; interviewed U.S., DRC, and United Arab Emirates (UAE) officials and other stakeholders; and conducted fieldwork in Dubai, UAE. GAO is not making any recommendations. The supply chain for artisanal and small-scale mined (ASM) gold--a significant driver of the Democratic Republic of the Congo (DRC) economy--involves multiple actors, according to reports GAO reviewed and stakeholders interviewed (see figure). Officially, these actors are required to obtain DRC government authorization and pay provincial or national taxes to mine, trade, or export ASM gold, according to these sources. However, almost all DRC-sourced ASM gold is produced and traded unofficially and smuggled from the country, according to reports and stakeholders. Further, elements of the Congolese army as well as illegal armed groups, frequently exploit ASM gold, often through illegal taxes on its production and transport, according to reports and stakeholders. The DRC government, the U.S. Agency for International Development (USAID), and international organizations have undertaken several initiatives to encourage the responsible sourcing of ASM gold--that is, the production and traceability of gold that has not financed conflict or human rights abuses such as sexual violence. For example, since 2015, USAID has worked with the DRC government to implement a traceability scheme for ASM gold and has worked with Tetra Tech and Partnership Africa Canada to scale up pilot initiatives for the production and sale of conflict-free ASM gold. However, the limited number of mines validated as conflict free and the relatively high mining-related official provincial taxes in the DRC, compared with taxes in neighboring countries, provide few incentives for responsible sourcing of ASM gold, according to reports GAO reviewed. In 2016, a USAID-funded, population-based study of the rate of sexual violence in parts of the eastern DRC estimated that 32 percent of women and 33 percent of men in these areas had been exposed to some form of sexual and gender-based violence in their lifetime. According to the United Nations, the DRC government has taken some steps to address sexual violence in the eastern region.
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The military services have a long history of interoperability problems during joint operations. For example, the success of the Persian Gulf war in 1991--a major joint military operation--was hampered by a lack of basic interoperability. The current certification requirement was established to help address these problems. The Joint Staff's Director for C4 systems (J-6) is assigned primary responsibility for ensuring compliance with the certification requirement. DISA's Joint Interoperability Test Command is the sole certifier of C4I systems. According to Joint Staff guidance, commanders in chief, the services, and DOD agencies are required to adequately budget for certification testing. They can either administer their own tests with Test Command oversight or ask the Test Command to administer them. Certification is intended to help provide the warfighter with C4I systems that are interoperable and to enable forces to exchange information effectively during a joint mission. Specifically, certification by the Test Command is confirmation that (1) a C4I system has undergone appropriate testing, (2) the applicable requirements for interoperability have been met, and (3) the system is ready for joint use. However, while a system may pass certification testing, it may not have been tested against all systems with which it may eventually interoperate. This is because some systems with which they must interoperate become available later and commanders sometimes use systems in new ways that were not envisioned during testing. DOD guidance requires that a system be tested and certified before approval to produce and field it. Depending on the acquisition category and dollar threshold of the program, the approval authority may be the Under Secretary of Defense (Acquisition and Technology), with advice from the Defense Acquisition Board; the Assistant Secretary of Defense (Command, Control, Communications, and Intelligence), with advice from the Major Automated Information System Review Council; or the DOD component head (such as the commander in chief of a unified combatant command, the head of a military service, or a DOD agency head). A DOD Directive established the Military Communications Electronics Board to provide guidance on interoperability issues referred to it by the Secretary of Defense and the Chairman of the Joint Chiefs of Staff. The Board addresses interoperability issues through two subpanels: (1) The Interoperability Improvement Panel monitors C4I interoperability issues surfaced by the commanders in chiefs, military services, and DOD agencies and (2) The Interoperability Test Panel resolves testing disputes (such as appeals of Test Command certification decisions made by commanders in chief, military services, and DOD agencies). The Test Panel may waive the certification requirement to support developmental efforts, demonstrations, exercises, or normal operations. The waiver is not intended to be permanent, and is typically granted for 1 year. Commanders in chief, services, and DOD agencies are generally not complying with the certification requirement. As a result, we found instances in which existing, newly fielded, and modified systems are not certified for interoperability. Test Command analysis showed that a significant number of existing C4I systems had not been submitted for certification as required. According to Test Command officials, as of December 1997, the DOD Defense Integration Support Tool database of C4 systems listed about 1,000 systems that may exchange information with another system. In addition, there are about 1,176 unclassified intelligence systems, according to the Office of the Assistant Secretary of Defense, C3I. Test Command officials said they did not know precisely how many of these systems require certification. Nor did the Office of the Assistant Secretary of Defense know which intelligence systems would require certification because they were unable to determine which of these systems were outdated (i.e., legacy systems), stand alone systems, or one-service-only systems. While the Test Command has generally certified increasingly more systems during the past 4 years, officials acknowledged that "they have not even begun to scratch the surface" of the universe of systems that may require testing and certification. During fiscal years 1994 through 1997, the Test Command certified 149 C4I systems. According to Test Command officials, DOD's Defense Integration Support Tool database attempts to list all C4 systems and other mission critical systems, but it does not contain all C4 systems or indicate whether the systems have been certified. According to DISA documentation, the purpose of the Defense Integration Support Tool is to support a DOD-wide information management requirement for data collection, reporting, and decision support in areas such as planning and interoperability. After discussions with DOD officials regarding this issue, DOD has recently included certification status as part of the database and, as of January 1998, 44 systems reflected this information. We recently reported in two separate reports that the Defense Integration Support Tool database is incomplete and inaccurate. In response to our October 1997 report, DOD acknowledged that this database is its official automated repository and backbone management tool for DOD's inventory of systems. Accordingly, DOD said that it had begun to take major actions to enhance the database by instituting a validation and data quality program to ensure that the database contains accurate and complete data. DOD further stated that it would closely monitor this program to ensure that the data quality is at the highest level as required for reports to senior Defense managers and the Congress. Since this database is an important management tool, it is essential that it be complete and accurate. In several instances, new systems have been fielded without consideration of the certification requirement. Two recently fielded Air Force systems--a weather prediction system and a radar system--were not tested for certification by the Test Command, despite June 1996 memorandums from the Joint Staff stating that the service must plan for testing to ensure compliance with interoperability guidelines. Further, since 1994, the Assistant Secretary of Defense (Command, Control, Communications, and Intelligence) has approved three of nine major automated information systems for production and fielding that had not been certified for interoperability. For example, the recently fielded Defense Message System was not certified by the Test Command. Test Command officials stated that the system has undergone some interoperability testing but, because of shortfalls, was not certified. A decision was made to field the system while the shortfalls are resolved. Test Command officials believe the system will eventually be certified. No newly developed systems purchased through the Command and Control Initiatives Program were tested by the Test Command. (This program allows commanders in chief to purchase low-cost improvements to their command and control systems.) According to DISA officials, DISA had assessed these systems' interoperability requirements and reminded the users to submit the systems for testing. In addition, during the last 3 years, no systems purchased through the Advanced Concept Technology Demonstrators program were tested and certified. (This program allows a new capability to be quickly developed, purchased, and exercised in the field before an acquisition commitment is made.) According to Test Command officials, previously certified systems that were later modified are not consistently submitted for recertification as required. Although Test Command officials do not know the exact number of modified systems that require recertification, they are aware of several systems--such as the Navy's AEGIS shipboard weapon system and the Air Force's Airborne Warning and Control System. Joint Staff officials believe that, although the certification requirement is outlined in several DOD and Joint Staff guidance documents, some system managers are unaware of it. In a study chartered by J-6 and completed in January 1996, only 12 of 424 (less than 3 percent) surveyed acquisition managers and Defense System Management College students knew about the DOD and Joint Staff interoperability requirements. The study team found that this lack of knowledge prevented users from placing interoperability in the initial requirements documents and acquisition managers from building interoperability into approved programs. As a result, the Joint Staff began an effort in 1996 to better educate system managers about the requirement. However, the study points out that education is not a panacea for all interoperability problems. Our analysis showed that some DOD organizations, although aware of the requirement, did not submit fielded systems for testing. For example, some program managers did not submit their modified systems for certification because they believed their design, although fielded, was not mature enough for testing. The program managers did not seek a waiver for their systems and ignored the certification requirement. Test Command officials told us that they lack the authority to compel program managers to bring their systems in for testing and must rely on the managers' cooperation. In addition, in fiscal year 1995, only three intelligence systems were certified by the Test Command. Because Test Command officials believed that DOD's intelligence community was ignoring the certification requirement, in 1996 the Command negotiated an agreement with DOD's Intelligence Information Systems Management Board (which has responsibility for a portion of intelligence systems) to facilitate better participation in the certification process. In fiscal year 1997, the number of intelligence systems tested and certified increased to 14. Test Command officials believe that the increase is a direct result of the agreement. Further, according to Test Command officials, DOD officials do not always budget the resources needed for interoperability testing as required by Joint Staff guidance. In certain cases, the services do not budget sufficient funds to cover secondary C4I systems that are used to test the primary C4I system for interoperability because the services cannot afford to pay for all the testing DOD policy requires. For example, the services are required to provide secondary systems for 10 tactical data link interoperability tests a year. In this case, however, according to a Test Command official, the Army budgets for only seven or eight tests a year. The services are responsible for acquiring systems that satisfy service-unique requirements, and this responsibility sometimes takes precedence over satisfying joint interoperability requirements. In his 1996 report to the Secretary of Defense, the Chairman of the Joint Chiefs of Staff recommended that funding for DOD C4I systems be reviewed, since the services' funding decisions may not further DOD's overall goal of promoting C4I joint interoperability. Finally, the various approval authorities are allowing some new systems to be fielded without verifying their certification status. According to a Joint Staff J-6 spokesman, the Joint Staff J-6 representative is to ensure that interoperability certification is addressed at the approval authority acquisition meetings. If the Joint Staff J-6 representative is unable to attend these meetings, the issue of certification is not raised. However, J-6 coordination is obtained on all acquisition decision memorandums granting production and fielding approval. Nevertheless, systems receive approval for production and fielding even though they may not have been certified or obtained waivers. In several instances, the Test Command identified interoperability problems in systems that DOD organizations had not submitted for testing. The following are examples: In 1996, the Test Command expressed concerns to the Air Force that its Joint Tactical Information Distribution System, a computer terminal used to provide surveillance data on F-15 aircraft, had not been certified. The system (a proof of concept demonstration) had operated for 3 years. According to a Test Command memorandum, Command representatives witnessed numerous interoperability problems caused by this system during joint exercises. The memorandum indicated that if the exercise had been a real world situation, the system's interoperability problems could have resulted in numerous deaths of pilots and enemy penetrations of U.S. airspace. In a written response, the Air Force stated that it disagreed with the Test Command's assessment of the problems. Furthermore, the Air Force said that certification of the system was not the best use of resources because the Air Force planned to eventually replace it. According to Test Command officials, the system is scheduled for testing in 1998. Still not certified, the system has been operational for over 1 year since the Air Force's response. Test Command officials have been unable to persuade the Navy's AEGIS program office to submit all fielded versions of the ship's weapon system for interoperability testing. Command representatives have observed the weapon system experiencing significant interoperability problems in several recent joint exercises. The Test Command is aware of five fielded versions of AEGIS software, and the program office states there are many more. However, the Test Command has tested and certified only the oldest version (in May 1995), the most basic of the five versions. The need for interoperability certification testing of the uncertified versions has been discussed at joint interoperability meetings and with DISA. The responsible DISA official requested, under Test Command letterhead, that AEGIS submit uncertified versions for joint testing. However, according to AEGIS program officials, none of these versions has been jointly tested because the newer versions either have not yet been tested with other Navy-only systems or are not yet demonstrating adequate interoperability performance in testing with Navy-only systems. The Test Command has been unable to persuade users to test DOD's Air Defense System Integrator, which provides tactical data link translation and message-forwarding functions. The system has been acquired outside the normal DOD acquisition process. About 30 versions of this system have been fielded; none has been jointly tested. According to Test Command officials, the system is experiencing significant interoperability problems because it does not conform to required standards. Interoperability problems with this system could result in hostile systems leaking through U.S. defenses or friendly systems being attacked. Without certification of the interfaces that translate and forward messages among systems, for example, the proper tracking and targeting information may not be provided to our theater air missile defense system. At several 1997 meetings with representatives from all the services, the Joint Staff, and the Test Command, problems with the system were discussed. Solutions are still being developed and implemented. Noncompliance with interoperability testing and certification stems from weaknesses in the certification process itself. For example, DOD lacks a complete and accurate listing of C4I systems requiring certification and a plan to prioritize systems for testing. As a result, the Test Command may not be focusing its limited resources on certifying the most critical systems first. The process also does not include a mechanism to notify the services about interoperability problems identified in joint exercises, and the Test Command has only recently begun to contact the services regarding the noted problems. Finally, according to a Test Panel official, the Panel does not have a formal process to inform DOD organizations that systems with expired waivers require an extension or certification. Neither the Joint Staff nor DISA has given the Test Command a priority list for testing C4I systems. As a result, the Command tests systems without regard to systems that should receive a high priority for testing. Test Command officials believe that such a list would help them better plan their test schedule. Generally, the Command develops a master test schedule based on the notification of systems ready for testing by the commanders in chiefs, services, and DOD agencies. As these notifications are received, the Command updates its schedule. Furthermore, DOD has not identified the exact number of systems to be certified. A Command official told us that, even if systems are identified, it is difficult to test all C4I systems required to be certified. According to Test Command officials, they are able to test no more than 200 systems per year. Our analysis shows that the Command generally reviews about 100 systems per year and in 1997 certified 44 individual systems for interoperability (not including systems receiving multiple certifications due to modifications or testing with additional systems). According to the official, a list prioritizing systems for testing would assist the Command to use its scarce resources to test the most important systems first. In June 1996, the Military Communications Electronic Board reviewed existing command and control systems submitted by the services and determined that 42 were crucial to the needs of military commanders. Our analysis showed that, as of October 1997, 23 had not been tested or certified. According to Test Command officials, the 23 systems were not certified for various reasons. The officials stated that they did not know about 13 of the systems; 7 are scheduled or are to be scheduled for testing, but the schedules could slip; 2 were not submitted for testing by the commanders in chief, service, or DOD agency because 1 is a low priority for testing and the other needs redesign (although both have been operational for several years); and 1 was considered too immature to test. Without an approved DOD-wide testing strategy, the Test Command's scarce resources may not be best used to test the right C4I systems at the right time. Joint Staff, Test Command, and commander in chief officials believe that one area that should receive high priority in any plan for interoperability testing is theater air and missile defense systems. This functional area is heavily dependent on systems being interoperable. According to Test Command officials, about 100 major systems are involved in theater air and missile defense, and about 45 percent of these have not been tested or certified for interoperability. DOD officials stated that significant interoperability problems in these defense systems could have dire consequences for joint and coalition forces. Some joint exercises conducted during the last 2 years have demonstrated the need for better interoperability in this functional area. Interoperability problems in these exercises resulted in the simulated downing of friendly aircraft in one exercise and in the nonengagement of hostile systems in another. Test Command officials stated that they do not generally advise services' system program managers on interoperability problems identified in exercises. While not required to do so, the Test Command is in the best position to advise the commanders in chief, services, and DOD agencies because according to Command officials they discover, evaluate, and document these problems. As part of its mission and apart from certification testing, the Command provides operational support and technical assistance to the commanders in chief, the services, and DOD agencies during exercises. In reports summarizing the results of four joint exercises during 1996 and 1997, the Test Command noted that 15 systems experienced 43 "significant interoperability problems"--defects that could result in the loss of life, equipment, or supplies. The vast majority of these problems were caused by system-specific software problems. Specific problems experienced included failure to accept changes in mislabeled data identifying a friendly aircraft as a hostile aircraft, thereby causing the simulated downing of a commercial airliner; excess messages overloading systems, causing system crashes and the loss of command and control resources during critical periods; improper track identification, creating the potential for either a hostile system to penetrate defenses or a friendly system to be inadvertently destroyed; and duplicate tracks distorting the joint tactical picture, denying vital information to battle managers and shooters. In table 1, we list the 15 systems that experienced significant problems and indicate their certification status. When the services' program managers are not advised, significant interoperability problems may arise in subsequent exercises and operations. According to Test Command officials, after our inquiries the Command began exploring ways to formally track and follow up on these problems. After our visit, Command officials stated they were beginning to identify the problem systems and contact the program managers to request that systems be retested. However, as of December 1997, Command officials had contacted only three system managers, and none of the systems have been tested. According to a Test Panel official, the Panel does not have a formal process to ensure that fielded systems with expired waivers are tested. As a result, most systems with expired waivers were allowed to operate without testing or an extension of the waiver. According to Panel documents, 13 waivers have been granted since May 1994. Of the 13 waivers granted, 3 have not expired and 1 was recently extended after the original waiver had been expired for 4 months (even though the system has caused interoperability problems). The remaining nine waivers have expired. Of these nine, only three are for systems that have had some interoperability testing and certification by the Test Command. Of the remaining six systems with expired waivers, two were expired for less than a year, two were expired for more than a year, and two were expired for more than 2 years. Commanders in chief, the services, and DOD agencies are generally not complying with the C4I certification requirement. Inadequate compliance with this requirement increases the likelihood that C4I systems will not be interoperable, thereby putting lives, expensive equipment, and the success of joint military operations at greater risk. Improvements to the certification process are needed to provide better assurance that C4I systems most critical to joint operations are certified for interoperability. Better information is needed to track the status of waivers. Finally, the risks associated with operating uncertified systems in joint operations is heightened when systems are permitted to proceed into production and fielding without full consideration of the certification requirement. To ensure that systems critical to effective joint operations do not proceed to production without due consideration given to the need for interoperability certification, we recommend that the Secretary of Defense require the acquisition authorities to adhere to the requirement that C4I systems be tested and certified for interoperability prior to the production and fielding decision unless an official waiver has been granted. To improve the process for certifying C4I systems for interoperability, we recommend that the Secretary of Defense, in consultation with the Chairman of the Joint Chiefs of Staff, direct the service secretaries, in collaboration with the Director of DISA to verify and validate all C4 data in the Defense Integration Support Tool and develop a complete and accurate list of C4I systems requiring certification and Director of DISA to ensure that the status of system's certification is added to the Defense Integration Support Tool and that this database be properly maintained to better monitor C4 systems for interoperability compliance. We also recommend that the Secretary of Defense request that the Chairman of the Joint Chiefs of Staff direct the Joint Staff (in collaboration with the commanders in chief, the services, and the Director of DISA) to develop a process for prioritizing C4I systems for testing and certification and Joint Staff (in collaboration with the commanders in chief, the services, and the Director of DISA) to develop a formal process to follow up on interoperability problems observed during exercises, report the problems to the relevant DOD organization, and inform organizations that the systems are required to be tested for interoperability. We recommend that, to improve DOD's information on the status of waivers from interoperability certification, the Chairman of the Joint Chiefs of Staff establish a system to monitor waivers. The system should inform DOD organizations when waivers expire and request that they either seek an extension of the waivers or test their systems for interoperability. In written comments on a draft of this report, DOD generally concurred with all of our recommendations noting that a number of efforts are underway to improve the interoperability certification process. To improve the process, DOD is revising relevant policy and procedures to enhance their adequacy (in terms of clarity, enforcement, and integration of effort) and is improving the accuracy and utility of its Defense Integration Support Tool database. Agreeing with the need to prioritize systems for testing, DOD stated it will develop a process to set priorities for testing and certification. To follow up on interoperability issues learned during exercises, DOD intends to use several sources of information to develop a formal process to ensure identified problems are adequately addressed by the appropriate organizations. DOD also intends to revise the charter of the Test Panel to require quarterly review of waivers from certification testing. DOD's comments are reprinted in appendix II. DOD also provided technical comments, which we have incorporated where appropriate. To determine whether DOD organizations were complying with the certification requirement, we analyzed DOD data on C4I systems to identify systems' certification status. Specifically, we obtained a listing of all C4 systems in the Defense Integration Support Tool from DISA Headquarters in Arlington, Virginia, and the number of unclassified intelligence systems from the Office of the Assistant Secretary of Defense, C3I in Arlington, Virginia. We compared the systems on these lists with a list of all systems certified from October 1993 through September 1997 obtained from the Joint Interoperability Test Command in Fort Huachuca, Arizona. We also obtained a list of C4I systems included in Command and Control Initiatives Program budget proposals from October 1994 through September 1997 and a listing of C4I systems included in DOD's Advanced Concept Technology Demonstrators program. We compared these lists with the Test Command's list of certified systems. We did not verify the accuracy or validity of any DOD list. We also obtained, reviewed, and analyzed DOD policy, Joint Staff instructions, and other documents regarding compatibility, interoperability, and integration of C4I systems. We obtained these documents and discussed interoperability issues in the Washington, D.C., area in interviews with cognizant officials from the Office of the Deputy Under Secretary of Defense (Advanced Technology); the Office of the Assistant Secretary of Defense, C3I; the Office of the Director, Operational Test and Evaluation; the Joint Chiefs of Staff Directorate for C4 (J-6); the Directorate for Force Structure, Resources and Assessment (J-8); and DISA. In addition, we reviewed documents and interviewed cognizant officials regarding interoperability issues, including certification of C4I systems, from the U.S. Atlantic Command, Norfolk, Virginia; U.S. Central Command, MacDill Air Force Base, Florida; U.S. Pacific Command, Camp Smith, Hawaii; U.S. European Command, Germany; the Naval Center for Tactical Systems Interoperability, San Diego, California; U. S. Army Communications and Electronics Command, Fort Monmouth, New Jersey; and individual system program offices or support activities in each of the military services, including the Navy AEGIS program office, Dahlgren, Virginia; the Air Force Air Combat Command Directorate of Operations for Command and Control and Intelligence, Surveillance, and Reconnaissance, Langley Air Force Base, Virginia; the Army Communications and Electronics Command Software Engineering Center, Fort Monmouth, New Jersey; and the Naval Air Warfare Center, Weapons Division, Point Mugu, California. To determine whether improvements were needed in the certification process, we interviewed Test Command officials on interoperability and certification issues, including testing priorities and exercise problem follow-up, and compared the Command's list of certified systems from October 1993 through September 1997 with a June 14, 1996, list of DOD's crucial C2 systems. We also reviewed reports on lessons learned and demonstrations and exercises obtained from the Joint Staff J-8 and the Test Command, respectively, to identify C4I systems with interoperability problems. We then compared the problem C4I systems with the Test Command's certification list to analyze whether the systems were certified, uncertified, or modified and not recertified. We also interviewed officials and obtained and analyzed waiver documents from the Military Communications Electronics Board's Interoperability Test Panel. We reviewed the waivers to determine the reasons for them and the time period involved. Finally, to determine initiatives that affect interoperability, we reviewed DOD's C4I for the Warrior concept; the Defense Information Infrastructure Master Plan; the 1996 assessment of combat support agencies report by the Chairman of the Joint Chiefs of Staff; the 1996 Command, Control, Communications, Computer, Intelligence, Surveillance, and Reconnaissance Task Force reports; and the Levels of Information System Interoperability reports by the Task Force. We conducted our review from January 1997 to January 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of Defense, the Army, the Navy, and the Air Force and other appropriate congressional committees. Copies will also be made available to others on request. Please contact me at (202) 512-5140 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix III. Improving ways of complying with the certification process alone will not solve all of the issues related to interoperability. The Department of Defense (DOD) has a number of initiatives underway that address various aspects of interoperability: the C4I for the warrior concept; the Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance Architecture Framework; the Defense Information Infrastructure strategy; and the Levels of Information Systems Interoperability initiative. Initiated in 1992, the C4I for the warrior concept is to provide a global command, control, communications, computer, and intelligence system that directly links and supports the combat troops of all services who engage in military operations. The system will display anywhere around the world a real-time, true picture of the battlespace, detailed mission objectives, and a clear view of enemy targets. This advanced technology concept is to support DOD's vision for the evolution of the U.S. armed force's capabilities to the year 2010. The Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance Architecture Framework, published in June 1996 by the DOD Integration Task Force, is to address a DOD-wide lack of a shared understanding of the architecture process and insufficiently precise terminology. According to the Task Force, architectures can be a key factor in guiding and controlling the acquisition and evolution of interoperable and efficient C4I systems. If adopted, the framework will provide a common approach for the commanders in chief, the services, and DOD agencies to follow in developing their C4I architectures. The Task Force report stated that the framework has, in part, the ultimate potential of "facilitating, improving, and ensuring compatibility, interoperability, and integration among command, control, communications, computers, intelligence, surveillance, and reconnaissance capabilities." While a final report was issued in June 1996, the framework has not been implemented as DOD policy. Currently, adoption of the framework in DOD policy is not planned according to a Joint Staff official. A current version of the framework itself was issued in July 1998. However, a J-6 official expects full implementation to take 1 to 2 years after its publication. DOD issued a Defense Information Infrastructure master plan in November 1994 to integrate its communications networks, computers, software, databases, applications, weapon system interfaces, data, security services, and other services that meet DOD's information processing and transport needs. The plan is updated periodically and provides a description of the Defense Information Infrastructure's major components. The infrastructure is largely an unintegrated collection of systems with unique characteristics. These systems support a hierarchical, vertical military chain of command structure. They were not designed to support joint operations and are therefore limited when information requirements are based on horizontal or functional sources. The current infrastructure inhibits interoperability necessary to give commanders a unified picture of the battlespace, reduces ability to provide links between the battlefield and the support base, and limits connection to the U.S. industrial base. One part of the Defense Information Infrastructure plan is to establish a common operating environment that provides integrated support services and corresponding software for standard functional applications. The idea for the common operating environment originated with an observation about command and control systems. Certain functions (mapping, track management, and communication interfaces, for example) are so fundamental that they are required for virtually every command and control system. Yet, in stand-alone systems across DOD, these functions are built over and over again in incompatible ways, even when the requirements are the same or vary only sightly between systems. The common operating environment is intended to standardize the underlying computing infrastructure used to process information. It is to improve interoperability by creating architecture principles that, if adhered to, will allow for the sharing of software products and services and information across the Defense Information Infrastructure. Both the Defense Information Infrastructure plan and the common operating environment are long-term strategies that extend through the year 2010. Finally, DOD's 1993 Levels of Information Systems Interoperability initiative is to improve C4 and intelligence systems' interoperability. System developers are to use this tool to assess interoperability, determine capabilities needed to support system development, and determine the degree of interoperability needed between C4I and other systems. The tool has not yet been fully tested or implemented. Major testing is planned for July 1998. Concerns regarding the success of some of these initiatives have been expressed by various DOD organizations. Specifically, in its June 1996 report, the DOD Integration Task Force stated that compliance with the common operating environment standards will not ensure that systems will be interoperable because, in part, it does not eliminate the problems of data translation, remapping, and duplication. Further, Test Command officials and others believe the DOD Information Infrastructure and common operating environment requirements need refinement before they can ensure interoperability. For example, these officials believe that the level of compliance with the infrastructure and the common operating environment must be higher than currently required to ensure interoperability. In addition, in a December 1996 report, the Chairman of the Joint Chiefs of Staff listed several challenges to achieving interoperability through DOD's initiatives, including security of the infrastructure, overall integration of the DOD organizations into a common operating environment, and the lack of a formal enforcement mechanism to ensure the services conform to the standards. George Vindigni Yelena K. Thompson David G. Hubbell The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Pursuant to a congressional request, GAO reviewed: (1) whether Department of Defense (DOD) organizations are complying with interoperability testing and certification requirements for command, control, communications, computers, and intelligence (C4I) systems; and (2) what actions, if any, are needed to improve the current certification process. GAO noted that: (1) DOD does not have an effective process for certifying existing, newly developed, and modified C4I systems for interoperability; (2) many C4I systems have not been certified for interoperability and, in fact, DOD does not know how many require certification; (3) improvements to the certification process are needed to provide DOD better assurance that C4I systems critical to effective joint operations are tested and certified for interoperability; (4) DOD organizations are not complying with the current interoperability testing and certification process for existing, newly developed, and modified C4I systems; (5) according to Test Command officials, many C4I systems that require interoperability testing have not been certified or have not received a waiver from the requirement; (6) the extent of this noncompliance could have far-reaching effects on the use of such systems in joint operations; (7) noncompliance with interoperability testing and certification stems from weaknesses in the certification process itself; (8) while DOD guidance requires that all new systems be certified or obtain a waiver from certification testing before they enter production and fielding, systems proceed to these latter acquisition stages without being certified; (9) this occurs, in part, because Defense Information Systems Agency (DISA) Joint Interoperability Test Command officials lack the authority to compel DOD organizations to submit their C4I systems for testing; (10) although DOD guidance spells out a specific interoperability certification requirement, many DOD organizations are unaware of it; (11) others simply ignore the requirement because it is not strictly enforced or because they do not adequately budget for such testing; (12) another fundamental weakness in the process is the lack of a complete and accurate listing of C4I systems requiring certification and a plan to prioritize systems for testing; (13) as a result, the Test Command may not be focusing its limited resources on certifying the most critical systems first; (14) prioritization is important since the Command has reviewed only about 100 systems per year, and a requirement for recertification of modified systems continually adds to the number of systems requiring certification; and (15) the process does not include notifying the services about interoperability problems, and the Test Command has only recently begun to contact the services regarding the noted problems.
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In 1972, Congress passed FACA in response to a concern that federal advisory committees were proliferating without adequate review, oversight, or accountability. FACA states that Congress intended that the number of advisory committees be kept to the minimum necessary, and that the advisory committees operate under uniform standards and procedures in the full view of Congress and the public. Although Congress recognized the value of advisory committees to public policymaking, it included in FACA measures intended to ensure that (1) valid needs exist for establishing and continuing advisory committees, (2) the committees are properly managed and their proceedings are as open as possible to the public, and (3) Congress is kept informed of the committees' activities. Congress ensured through FACA that the public had access to advisory committee information and activities, including charters, reports, and transcripts of committee meetings and other records. Under FACA, the President, the Director of the Office of Management and Budget (OMB), and agency heads are to control the number, operations, and costs of advisory committees. To help accomplish these objectives, FACA directed that a Committee Management Secretariat be established in OMB to be responsible for all matters relating to advisory committee administration. In 1977, the President transferred advisory committee functions from OMB to GSA. The President also delegated to GSA all of the functions vested in the President by FACA, except that the annual report to Congress required by section 6(c) of the act was to be prepared by GSA for the President's consideration and transmittal to Congress. To fulfill its responsibilities, GSA has developed regulations and other guidance to assist agencies in implementing FACA, has provided training to agency officials, and was instrumental in creating and has collaborated with the Interagency Committee on Federal Advisory Committee Management. GSA is also in the process of linking an internet-based reporting system with its internal database that is used to track committee transactions. FACA requires that each agency head designate an advisory committee management officer to help manage the committees, and that designated federal officials shall be responsible for the individual committees. According to FACA, a committee's designated federal official must approve or call a committee meeting, approve the agenda, and chair or attend each meeting. In February 1993, the President issued Executive Order 12838, which directed agencies to reduce by at least one-third, the number of discretionary advisory committees by the end of fiscal year 1993. Discretionary committees are those created under agency authority or authorized by Congress. OMB, in providing guidance to agencies on the executive order, established a maximum ceiling number of discretionary advisory committees for each agency and a monitoring plan. Under the guidance, agencies were to annually submit committee management plans to OMB and GSA. These plans were to include performance measures that were to be used to evaluate each committee's goals or mission, information on new committees planned for the upcoming year, actions taken to maintain reduced committee levels, and the results of a status review of nondiscretionary committees, which are committees mandated by Congress or established by the President. OMB approval was required before the creation of new discretionary committees. Later, in 1995, OMB dropped the requirement for prior approval of new committees, as long as an agency was beneath its approved ceiling. Since fiscal year 1988, the number of federal advisory committees has declined. There were 1,020 advisory committees in fiscal year 1988. The number of advisory committees grew to 1,305 in fiscal year 1993 and then declined over the next several years to 963 committees in fiscal year 1997. This decrease occurred after the President's February 1993 executive order to reduce the number of advisory committees. Advisory committees are made up of individuals, not organizations, and a total of 36,586 individuals served as members of the 963 committees in fiscal year 1997. Members of the 1,020 committees in fiscal year 1988 numbered 21,236 individuals. From fiscal years 1988 to 1997, the number of individuals serving on advisory committees had generally increased. Advisory committees incur costs to operate, and GSA reported that the cost to operate the 963 committees in fiscal year 1997 was about $178 million. However, the cost to operate the 1,020 committees in fiscal year 1988 was about $93 million. The costs incurred over the 9-year period were on a steady increase through fiscal year 1992, after which they began to increase only sporadically. In constant 1988 dollars, the costs to operate advisory committees went from about $93 million in fiscal year 1988 to about $136 million in fiscal year 1997. On average, between fiscal years 1988 and 1997, the number of members per advisory committee increased from about 21 to 38, and the cost per advisory committee increased from $90,816 to $184,868. In constant 1988 dollars, the average costs per advisory committee increased from $90,816 to $140,870 over the same period. Appendix I contains statistics on the number of federal advisory committees and their (unadjusted) costs and membership from fiscal years 1988 through 1997. In 1988, we reported that GSA had focused its oversight responsibilities under FACA on preparing the President's annual reports to Congress and issuing guidance to agencies. We found that GSA had not appropriately ensured that (1) advisory committees were properly established, (2) committees were reviewed annually, (3) annual reports were submitted to the President before they were due to Congress, and (4) follow-up reports on presidential advisory committees' recommendations were prepared for Congress. At that time, GSA attributed these shortcomings to insufficient staff and management inattention. The Secretariat is under the GSA Associate Administrator for Governmentwide Policy. For fiscal year 1997, the Secretariat had eight employees and a budget of $645,000 ($491,490 in constant 1988 dollars). It had five employees in September 1988 and a budget of $220,000 for fiscal year 1988. To determine whether GSA had ensured that federal advisory committees were established with complete charters and justification letters, we obtained from GSA advisory committee charters and justification letters that agencies had submitted from October 1, 1996, through July 21, 1997. The charters were for 203 committees, and the justification letters were for 107 of the 203 committees. GSA regulations require justification letters for discretionary committees (107 of the 203 committees) but not for nondiscretionary committees (96 of the 203 committees). We reviewed the charters and letters to determine whether each contained the items of information (e.g., the committee's objectives and why the committee is essential to the agency) required by FACA and GSA regulations. If an item of information was missing from the charter or letter, we reviewed information in the applicable GSA file to ascertain whether the file documented that GSA acted to obtain the missing item. To determine whether GSA had comprehensively reviewed each advisory committee annually, we first requested from GSA the annual report for each of the 1,000 advisory committees that existed in fiscal year 1996. In total, we reviewed the annual reports for 978 advisory committees; the reports for 22 committees were missing from GSA's files. According to GSA regulations, the Committee Management Secretariat is to make its annual review of each committee by using the committee's annual report. We read the reports to see if they contained the information that GSA regulations prescribe. We then discussed with Secretariat officials how they used information from the reports to make comprehensive reviews. To determine whether GSA had submitted annual reports on advisory committees to the President in a timely manner, we examined documentation regarding when GSA had submitted annual reports to the President for fiscal years 1988 through 1996. We compared the dates on the letters GSA used to transmit the reports to the President with the date that FACA requires the President to report to Congress, which is December 31, or 3 months after the end of a fiscal year. To determine whether GSA had ensured that follow-up reports to Congress were prepared on recommendations by presidential advisory committees, we contacted agencies' committee management officers to ascertain whether they knew of the follow-up requirement and whether the follow-up reports were submitted to Congress. According to GSA regulations, agencies are to prepare the reports and submit them to Congress, but GSA is to ensure that it is done. We discussed GSA's role with Secretariat officials and contacted committee management officers for the 17 cases that were identified in the President's annual reports to Congress for fiscal years 1995 and 1996 as requiring follow-up reports. These officers were employees of the 9 agencies that were accountable for the 17 cases. In general, to identify and understand GSA's oversight responsibilities, we interviewed Secretariat officials and reviewed applicable laws, regulations, and GSA guidance to agencies regarding advisory committee activities. We did not assess the extent to which GSA provided the agencies with guidance on advisory committee activities beyond the guidance for establishing advisory committees, the comprehensive annual reviews, and the follow-up reports on presidential advisory committees. Also, we did not assess OMB's role in dealing with advisory committees beyond reviewing its guidance to agencies for implementing Executive Order 12838. We did our work in Washington, D.C., between June 1997 and April 1998 in accordance with generally accepted government auditing standards. After we completed our work, the Secretariat provided a summary table of advisory committee data for the entire 1997 fiscal year. These data are to be included in the President's annual advisory committee report for fiscal year 1997, and they were incorporated in this report for comparison to previous years. We requested comments on a draft of this report from the Administrator of GSA and the Director of OMB or their designees. Written comments provided by GSA are discussed near the end of this letter and are reproduced in appendix II. An OMB official responsible for federal advisory committee matters provided oral comments on May 13, 1998, which are discussed near the end of this letter. FACA and GSA regulations require that agencies consult with GSA before establishing advisory committees. As part of this consultation, FACA requires agencies to submit charters for all committees, and GSA regulations require them to also submit justification letters for discretionary advisory committees. These documents must contain specific information. FACA outlines that agencies are to include 10 specific items in the charter, including the committee's objectives and scope of activities, the time period necessary to carry out its purpose, and the estimated annual staff years and cost. GSA regulations state that agencies must address three items in the justification letter: why the committee is essential to conduct the agency's business, why the committee's functions cannot be performed by the agency or other means, and how the agency plans to attain balanced membership. GSA's role is to review agency proposals to establish advisory committees and determine whether FACA requirements and those imposed by regulation are met. The regulations say that GSA is to review the proposals and notify the agency of its views within 15 days, if possible. However, GSA does not have the authority to stop the formation of an advisory committee. Nor does it have the authority to terminate an existing committee. GSA can only recommend to the President, Congress, or an agency head that an advisory committee not be formed or that an existing committee not be continued. In our review of the 203 charters and 107 justification letters submitted to GSA from October 1, 1996, through July 21, 1997, we found that 36 percent of the charters and 38 percent of the letters were missing at least one item that was required by FACA or GSA regulations. Seventy-four charters were missing a total of 85 items, such as stating the period of time necessary for the committee to carry out its purpose and estimating annual operating costs and staff years. For the justification letters, 41 were missing a total of 88 items, such as a description of the agency's plan to attain balanced membership. Appendix III shows the number of specific items that we found missing in the charters and justification letters. We found minimal evidence in GSA's files to indicate that GSA raised questions about these missing items. GSA completed its reviews of the charters and notified the agencies, generally by letter, of its views within an average of 5 days and positively concurred in establishing the 203 advisory committees. Secretariat officials told us that, while they concurred with the need for the 203 committees, the agencies were responsible for ensuring that the charters and justification letters were properly done. These officials said that most charters and letters were done well and met the spirit of FACA. They also said that the problems that did exist relating to incomplete or inadequate charters and letters may have occurred due to review oversight by Secretariat analysts. The officials believed that some of the missing items of information were more significant than others. For example, they believed that missing information pertaining to estimated annual operating costs and staff years and a description of the agency's plan to attain a fairly balanced membership were more significant than information on the agency or official to whom the committee reports and the time necessary for the committee to carry out its purpose. Nevertheless, the officials recognized that all of the required information should be in the charter and justification letters. They also said that they plan to provide the analysts with tools to better enable them to make comprehensive reviews. FACA requires GSA to make an annual comprehensive review of each advisory committee to determine whether it is carrying out its purpose, whether its responsibilities should be revised, and whether it should be abolished or merged with another committee. After completing the reviews, GSA is required to recommend to the President and to the agency head or Congress any actions GSA deems should be taken. GSA regulations require that agencies prepare an annual report for each committee, including the agencies' recommendations for continuing, merging, or terminating committees. For continuing committees, the annual reports are to describe such things as how the committee accomplishes its purpose; the frequency (or lack) of meetings and the reason for continuing the committee; and why it was necessary to have closed committee meetings, if such meetings were held. The annual reports also are to include the committee's costs. GSA's regulations call for it to use the data it receives in the agencies' annual reports, including the agencies' recommendations to continue or terminate the committees, in conducting the comprehensive annual review. However, GSA did not use the data provided by the agencies to assess on its own whether committees were carrying out their purposes, whether their responsibilities should be revised, or whether the committees remain necessary. We reviewed 978 advisory committees' annual reports that were submitted to GSA by the agencies for fiscal year 1996. We were unable to review another 22 reports that GSA reported receiving because they were missing from GSA's files. For those annual reports that we reviewed, agencies generally reported the required information, with the exception of explaining why some continuing committees did not meet during the year. According to data GSA obtained from the annual reports, 212 advisory committees (about 21 percent of the total number of 1,000 committees) did not meet during fiscal year 1996. Agencies did not have to explain why no meetings were held for the 113 new and terminated committees in 1996. However, agencies were required to explain why the remaining 99 continuing committees did not meet. In our review of the 99 committees' annual reports, we found that 47 gave reasons why the committees had not met, including reasons such as the committees' having no agenda items to consider, lacking funding, and having delays in appointing members. Fifty-two annual reports did not explain why the committees had not met or why they should continue. We found no evidence that GSA had requested follow-up information on why the committees had not met or why the agencies believed that the committees should continue. Secretariat officials told us that they do not verify the agencies' data, and that they accept the data without further review, including the agencies' recommendations to continue, merge, or terminate committees. The officials said they could not undertake reviews on their own because they do not have the expertise or program knowledge to determine which committees should be continued or terminated. Regardless of whether this is the case, we believe that it is incumbent upon Secretariat officials to follow up with agencies to determine why committees have not met before accepting agencies' recommendations that the committees be continued. Secretariat officials also told us that they have held discussions with congressional staff about the possibility of reducing the number of committees mandated by Congress that may no longer be warranted. Such committee terminations would require legislation. Although we did not evaluate this issue as a part of this review, we believe it illustrates the benefits to GSA of following up with agencies when they do not report why committees did not meet or why the agencies believed the committees should continue. For example, of the 52 committees that did not explain why they did not meet in fiscal year 1996, 25 were mandated by Congress. By delving into the specifics of why no meetings were held, GSA might develop information to assist Congress in determining the potential for terminating some congressionally mandated committees by clarifying reasons to continue them. We recognize that there are legitimate reasons why committees may not meet in any given year. The President is required to report annually to Congress on the activities, status, and changes in the composition of advisory committees. The annual reports are due to Congress by December 31 for each preceding fiscal year. GSA prepares the annual reports for the President on the basis of information provided in agencies' annual advisory committee reports. GSA did not submit most of its annual reports to the President in time for him to meet the December 31 reporting date to Congress. For seven of the last nine annual reports, covering fiscal years 1988 through 1996, GSA transmitted the reports to the President after they were due to Congress. In the last 4 years, one report was delivered to the President 5 days before the due date to Congress; three reports were delivered, on average, about 3 months after the due date. As of April 27, 1998, GSA had not submitted the fiscal year 1997 report to the President. According to Secretariat officials, the December 31 reporting date to Congress is unattainable because, among other things, agencies have other end of fiscal year reporting requirements, in addition to the advisory committee reports. Secretariat officials also told us that they plan to ask Congress for a later reporting date. We did not examine the reasonableness of the December 31 reporting date. FACA requires the President, or his delegate, to report to Congress within 1 year on his proposals for action or reasons for inaction on recommendations made by a presidential advisory committee. According to FACA's legislative history, these follow-up reports are intended to justify the investments in the advisory committees, provide accountability to the public and Congress, and require the President to state his response to the advisory committees' recommendations. According to GSA regulations, the agency providing support to the advisory committee is responsible for preparing and transmitting the follow-up report to Congress. However, the regulations also state that the Secretariat (1) is responsible for ensuring that the follow-up reports are prepared by the agency supporting the presidential committee and (2) may solicit OMB and other appropriate organizations to help, if needed, to obtain agencies' compliance. GSA identified 17 presidential advisory committee reports in the President's annual reports for fiscal years 1995 and 1996 that required follow-up reports. We contacted the nine agencies that were responsible for the follow-up reports to determine whether the reports were prepared within the year and delivered to Congress. According to agency officials, follow-up reports were not required in 4 of the 17 cases because the advisory committees were erroneously listed as having issued a report with recommendations to the President. Follow-up reports were required in the remaining 13 cases but, according to agency officials, none were transmitted to Congress. These presidential advisory committees included, for example, the Glass Ceiling Commission, the President's Cancer Panel, and the Federal Council on the Aging. Six of the nine committee management officers told us that they were unaware of the reporting requirement. Secretariat officials said that agencies are responsible for preparing and delivering the follow-up reports to Congress; therefore, they had not contacted the nine agencies to see whether the reports were prepared and delivered. Although it has no authority to stop a federal advisory committee from being formed or to terminate an existing committee, GSA is obligated to ensure that its FACA responsibilities are fulfilled completely and in a timely manner. These responsibilities are not insignificant. Congress imposed them to help ensure that federal advisory committees are needed, that the committees are properly managed, and that Congress is kept informed of the committees' activities in a timely manner. Although we recognize that GSA believes it does not have the expertise or program knowledge to determine whether federal advisory committees are needed, it has the authority to ask agencies to provide justification for their recommendations. For example, GSA could follow up with agencies to determine why committees have not met before accepting agencies' recommendations that the committees be continued. The Committee Management Secretariat intends to ask Congress to move to a later date the reporting deadline for the President's annual report to Congress on the activities of federal advisory committees. The Secretariat's view and proposed action do not relieve it of its responsibilities under FACA, and the Secretariat has not fulfilled those responsibilities. We recommend that the Administrator of GSA direct the Committee Management Secretariat to fully carry out the responsibilities assigned to it by FACA in a timely and accurate manner. In particular, the Secretariat should (1) consult with the agencies to ensure that the charters and justification letters for federal advisory committees contain the information required by law or regulation, (2) follow up with agencies when their annual reports contain information that raises questions about whether committees should be continued, and (3) ensure that agencies file the required follow-up reports to Congress on presidential advisory committee recommendations. The Secretariat should also make the necessary arrangements with agencies to submit its annual report to the President on time or follow through with its intention to ask Congress to move the reporting date. GSA and OMB provided comments on a draft of this report. In an April 27, 1998, letter (see app. II), the GSA Administrator said the Associate GSA Administrator for Governmentwide Policy will ensure that the Committee Management Secretariat takes immediate and appropriate action to implement our recommendation. The Administrator also said GSA will continue to improve its oversight of advisory committees by (1) proposing amendments to FACA to address some of the issues addressed by our report; (2) proposing new governmentwide regulations relating to FACA in June 1998; and (3) finalizing its new internet-based reporting system by the end of fiscal year 1998, which will allow agencies to electronically transmit data to GSA. On May 13, 1998, an OMB official responsible for advisory committee matters said that we had conducted a thorough review of GSA's oversight responsibilities in meeting FACA's procedural requirements, and that GSA appeared to have undertaken some corrective actions that will address many of our concerns and had scheduled other corrective actions during 1998. The OMB official said they would work with GSA to ensure the success of the GSA efforts. The GSA Administrator and the OMB official made additional comments, which we address here and as appropriate in appendix II for GSA. In general comments, GSA said that the draft report had not fully examined the extent to which GSA's actions have achieved FACA's principal stated outcomes of accountability for committee accomplishments and public access to committee deliberations and products. In addition, GSA said it has sought through its actions to strengthen the ability of other responsible officials at the agency level to perform more adequately their required FACA responsibilities. We recognize that GSA plays a broad role in overseeing advisory committee activities and are aware of its past initiatives, such as the creation of the interagency committee on FACA; the governmentwide training program for agency personnel who manage advisory committees; and the reduction of discretionary advisory committees under Executive Order 12838, which we mentioned in this report. But GSA also has a narrower, more focused role of carrying out its specific responsibilities that FACA and GSA regulations require. This latter role was the focus of this report. Nevertheless, we have cited some of GSA's other activities in the text of this report. GSA also said that it is in the process of linking its new internet-based reporting system with an internal FACA database that it uses to track committees. By capturing data electronically, GSA expects that gaps in required data will be identified more easily and corrected contemporaneously. We believe such a system, if successful, should enable GSA to better ensure that its analysts have the full range of required information available to them as they perform GSA's required FACA oversight responsibilities. GSA and OMB took exception to our finding that advisory committees were not comprehensively reviewed by GSA. GSA and OMB stated that advisory committees are reviewed annually by GSA through (1) the annual reporting process used by the agencies to certify the need for specific committees (which are the advisory committee annual reports) and (2) the annual process developed to implement Executive Order 12838 and OMB Circular A-135, which require the committee management plans. Under FACA, GSA has the responsibility to judge whether there is a convincing case for continuing a committee and cannot delegate this responsibility to the agencies under current law. The advisory committee annual reports were the basis for our analysis and conclusion that GSA was not independently assessing whether the committees should be continued or terminated. The committee management plans are used primarily to ensure that the number of discretionary advisory committees within the agencies does not exceed the ceiling established under Executive Order 12838 and to focus on the need for new, not existing, committees. A discussion of what should be included in the plans can be found in the Background section of this report. The management plans that we reviewed did not contain all of the information that would be needed for GSA to determine or question the continuing need for committees. For example, an explanation of why a committee had not met during the year is not required to be included in the management plan. Thus, we have not changed our conclusion. We are sending copies of this report to the Chairman, Senate Committee on Governmental Affairs; the Ranking Minority Member, House Subcommittee on Government Management, Information, and Technology; the Chairmen and Ranking Minority Members of the House Committee on Government Reform and Oversight and other interested congressional committees; the Administrator, GSA; the Director, OMB; and other interested parties. We will also make the report available to others on request. Major contributors to this report are listed in appendix IV. If you have any questions about this report, please call me on (202) 512-8676. Total costs(millions) The following are GAO's comments on GSA's April 27, 1998, letter. 1. Although agreeing that not every committee charter and justification letter that we reviewed included all of the required information, GSA suggested that the 36-percent error rate in the charters and the 38-percent error rate in the justification letters were misleading. Regarding committee charters, GSA said that a fairer assessment of GSA's and agencies' compliance with FACA would be to determine the error rate on the basis of the number of data items found not to be in compliance (85) divided by the total number of data items in the 203 charters we reviewed (2,030). This calculation provides an error rate of 4.2 percent. We do not believe that this would be a meaningful analysis because the charters or justification letters are the unit of analysis. That is, FACA and GSA regulations require each charter or justification letter to include a full set of specific data so that GSA analysts and others can properly and fully assess whether the committee is needed and whether it meets the FACA requirements for public participation and disclosure. GSA said that among the 85 missing items in the charters that we identified, 33 related to the period of time necessary for a committee to carry out its purpose. GSA said that 95 percent of all charters submitted to GSA for review are for advisory committees that are of a continuing nature, and that a default presumption of 2 years (based upon the sunset provision of FACA) is applied. GSA suggested that the default presumption mooted the absence of a stated period in the charters. It said that removal of these 33 data items from the 85 found to be in error would result in an overall error rate of 2.6 percent. We cannot ignore these 33 data items in an analysis of compliance with FACA requirements. Congress specifically required that charters include the time necessary for a committee to carry out its purpose, just as it required that charters include the committee's termination date if it is less than 2 years after the committee is established. We believe that Congress included these two items, as well as the other eight items, in the charters to help keep Congress and the public informed about committee activities. Further, it seems to us that a benefit of including such information in the charters is to help agencies focus in the beginning of the process on the amount of time the committees should be taking to accomplish their purposes. 2. GSA suggested that two of the items required in the justification letter--explanations of why a committee is essential and why a committee's function cannot be performed by other means--are contained in the two other submissions by the agencies. GSA said it is in the process of revising its regulations to eliminate redundant information and certifications among the advisory committee annual reports, consultation letters (which are the justification letters), and annual committee management plans, which are required by OMB and GSA to implement Executive Order 12838 and OMB Circular A-135. GSA suggested that as long as an item of information is contained in one of the required documents, it need not be in the others. It said that if these data items were removed from our analysis, the error rate, on the basis of the number of data elements found to be in error divided by the total number of data elements, would be 10.6 percent. As previously stated, we do not believe that this would be a meaningful analysis because it is the justification letters that should be the unit of analysis and not the individual data elements. Further, the two items in the justification letter to which GSA referred are only required to be in the justification letter and, therefore, agencies might not include them in the other two reports. For example, the two items do not need to be included in the advisory committee annual reports if the committee is new--during fiscal year 1996, there were 52 new committees. Additionally, only the justification letters are submitted when the committees are established; the other two reports are submitted on an annual basis that does not necessarily coincide with the justification letter submissions by the agencies. It would also appear to be more efficient for GSA analysts reviewing the charters to be able to rely on the justification letters for all needed information, rather than having to retrieve other documents that may or may not include relevant information. 3. We deleted the section in the draft report that is referred to in these comments. GSA has corrected the underreporting of advisory committee members and costs, which we brought to their attention during the course of our work. The underreporting was also acknowledged by GSA at the November 5, 1997, hearing on FACA before the House Subcommittee on Government Management, Information, and Technology. Jill P. Sayre, Attorney The first copy of each GAO report and testimony is free. 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Pursuant to a congressional request, GAO reviewed whether the General Services Administration (GSA), through its Committee Management Secretariat, was carrying out its oversight responsibilities under the Federal Advisory Committee Act (FACA), focusing on whether GSA had: (1) ensured that federal advisory committees were established with complete charters and justification letters; (2) comprehensively reviewed each advisory committee annually; (3) submitted annual reports on advisory committees to the President in a timely manner; and (4) ensured that agencies prepared follow-up reports to Congress on recommendations by presidential advisory committees. GAO noted that: (1) compared to when GAO last reported in 1988, little had changed during the period it studied on how the Secretariat carried out its FACA responsibilities; (2) with 963 federal advisory committees, 57 sponsoring agencies, and submissions for each committee during fiscal year (FY) 1997, GSA's Committee Management Secretariat reviewed a large amount of paperwork for the purpose of ensuring that sponsoring agencies were: (a) following the requirements placed upon them by FACA; and (b) implementing GSA regulations; (3) the Secretariat conducted these reviews while performing other duties, such as providing formal training to federal employees who were directly involved with the operations of advisory committees and collaborating with an interagency committee on advisory committee management; (4) nevertheless, the Secretariat was responsible under FACA and GSA regulations for ensuring that those requirements were all fulfilled; (5) GSA, in consultation with the agencies, did not ensure that advisory committees were established with complete charters and justification letters as required by FACA or GSA regulations; (6) 36 percent of the charters and 38 percent of the letters GAO reviewed did not contain one or more items required by FACA or GSA regulations; (7) GSA did not independently assess, as it conducted the annual comprehensive reviews required by FACA, whether committees should be continued, merged, or terminated; (8) although GSA collected the FY 1996 annual reports, GSA officials said they accepted the data in them without further review; (9) GAO found this acceptance to be the norm even when information in a FY 1996 annual report should reasonably lead to further inquiries; (10) GSA did not submit most of its FACA annual reports to the President in time for him to meet the statutory reporting date to Congress nor did it ensure that FACA-required follow-up reports on presidential advisory committee recommendations were prepared for Congress; (11) Secretariat officials told GAO that agencies must take greater responsibility for preparing complete charters and justification letters and committee annual reports for sending follow-up reports to Congress; and (12) FACA has given the Secretariat responsibilities for ensuring that agencies satisfy the requirements for forming and operating advisory committees, and the Secretariat is not carrying out these responsibilities.
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In the 1990s, Congress and the executive branch laid out a statutory and management framework that provides the foundation for strengthening government performance and accountability, with GPRA as its centerpiece. GPRA is a continuation of more than 50 years of efforts to link resources with results. These management reforms of the past--the Budget and Accounting Procedures Act of 1950, Planning-Programming-Budgeting- System, Management by Objectives, and Zero-Base-Budgeting--failed partly because they did not prove to be relevant to budget decision makers in the executive branch or Congress. GPRA melds the best features, and avoids the worst, of its predecessors. Unlike most of its predecessors, GPRA is grounded in statute, giving Congress an oversight stake in the success of this initiative. Moreover, unlike these other initiatives, GPRA explicitly sought to promote a connection between performance plans and budgets. The expectation was that agency goals and measures would be taken more seriously if they were perceived to be used and useful in the resource allocation process. GPRA has now entered its 10th year, has survived two successive administrations, and has periodically formed the basis for congressional oversight. The current administration has implemented several efforts to more completely integrate information about cost and performance during its annual budget review process. The President's Management Agenda (PMA), by focusing on 14 targeted areas--5 mutually reinforcing governmentwide goals and 9 program initiatives--seeks to improve the management and performance of the federal government. Budget and performance integration is one of the administration's five priorities in the PMA, while PART is the central element in the performance budgeting piece of the PMA. To track both agencies' progress towards and current status in achieving each of the five PMA initiatives, OMB implemented an Executive Branch Management scorecard. We have found that the value of the scorecard, with its red, yellow, and green "stoplight" grading system, is not, in fact, the scoring, but the degree to which scores lead to a sustained focus and demonstrable improvements. The Scorecard criteria for the budget and performance integration initiative include elements such as the integration of budget and planning staff, an integrated performance plan and budget grounded in outcome goals and aligned with the staff and resources necessary to achieve program targets, and whether the agency can document program effectiveness. While the scorecard focuses on the capacity of agency management to develop an infrastructure for performance budgeting, OMB's PART is meant to more explicitly infuse performance information into the budget formulation process at a level at which funding decisions are made. PART was applied during the fiscal year 2004 budget cycle to 234 "programs." OMB rated programs as "effective," "moderately effective," "adequate," or "ineffective" based on program design, strategic planning, management, and results. If OMB deemed a program's performance information and/or performance measures insufficient or inadequate, a fifth rating of "results not demonstrated" was given. According to OMB, the assessments were a factor in funding decisions for the President's fiscal year 2004 budget request. In an unprecedented move, OMB has made the assessment tool, rating results, and supporting materials available on its Web site. OMB has said that it will apply PART to another 20 percent of programs and reassess the fiscal year 2004 programs in developing the President's fiscal year 2005 budget request. Moreover, it has announced its intention to use agencies' updated strategic plans, which were due in March 2003, as templates for future budget requests. During GPRA's first 10 years, the federal government has managed, for the first time, to generate a systematic, governmentwide effort to develop strategic and performance plans covering the essential functions of government. While clearly a work in progress, the formulation of performance goals and indicators has laid the foundation for a more fundamental transformation in how the government does business. As we begin this next decade of performance management at the federal level, we may have reached a crossroad. Building on agencies' hard-won achievements in developing plans and measures, the government now faces the challenge of promoting the use of that information in budget decision making, program improvement, and agency management. Promoting a more explicit use of performance information in decision making promises significant rewards, but it will not be easy, and in fact, is fraught with risks. Decision makers need a road map that defines what successful performance budgeting would look like, and that identifies the key elements and potential pitfalls on the critical path to success. In a sense, what is needed is a strategic plan for performance budgeting. In the remainder of this testimony I will discuss some of these key elements and risks, including a definition and expectations for performance budgeting itself; the underpinnings of credible performance information and measures; addressing the needs of various potential users; the alignment of performance planning with budget and financial management structures; elevating budget trade-offs; and the continuing role of congressional oversight. Performance-based budgeting can help enhance the government's capacity to assess competing claims in the budget by arming budgetary decision makers with better information on the results of both individual programs as well as entire portfolios of tools and programs addressing common performance outcomes. Although not the answer to vexing resource trade- offs involving political choice, performance information could help policymakers address a number of questions, such as whether programs are contributing to their stated goals, well-coordinated with related initiatives at the federal level or elsewhere, and targeted to those most in need of services or benefits. It can also provide information on what outcomes are being achieved, whether resource investments have benefits that exceed their costs, and whether program managers have the requisite capacities to achieve promised results. Although performance budgeting can reasonably be expected to change the nature of resource debates, it is equally important to understand what it cannot do. Previous management reforms have been doomed by inflated and unrealistic expectations, so it is useful to be clear about current goals. Performance budgeting cannot replace the budget process as it currently exists, but it can help shift the focus of budgetary debates and oversight activities by changing the agenda of questions asked in these processes. Budgeting is essentially the allocation of resources; it inherently involves setting priorities. In its broadest sense, the budget debate is the place where competing claims and claimants come together to decide how much of the government's scarce resources will be allocated across many compelling national purposes. Performance information can make a valuable contribution to this debate, but it is only one factor and it cannot substitute for difficult political choices. There will always be a debate about the appropriate role for the federal government and the need for various federal programs and policies--and performance information cannot settle that debate. It can, however, help move the debate to a more informed plane, one in which the focus is on competing claims and priorities. In fact, it raises the stakes by shifting the focus to what really matters--lives saved, children fed, successful transitions to self- sufficiency, and individuals lifted out of poverty. Under performance budgeting, people should not expect that good results will always be rewarded through the budget process while poor results will always have negative funding implications. Viewing performance budgeting as a mechanistic arrangement--a specific level of performance in exchange for a certain amount of funding--or in punitive terms--produce results or risk funding reductions--is not useful. Such mechanistic relationships cannot be sustained. Rather than increase accountability, these approaches might instead devalue the process by favoring managers who meet expectations by aiming low. The determination of priorities is a function of competing values and interests that may be informed by performance information but also reflects such factors as equity, unmet needs, and the appropriate role of the federal government in addressing these needs. OMB's PART initiative illustrated that improving program design and management may be a necessary investment in some cases. For example, the Department of Energy's Environmental Management (Cleanup) program was rated "ineffective" under PART. The administration recommended additional funds for the program compared to fiscal year 2002 funding and reported that the Department will continue to work with federal and state regulators to develop revised cleanup plans. The Department of State's Refugee Admissions to the U.S. program was rated "adequate" under PART; in addition to recommending increased funding, the administration will review the relationship between this program and the Office of Refugee Resettlement at the Department of Health and Human Services. For its part, State will continue its ongoing efforts to improve strategic planning to ensure that goals are measurable and mission-related. Ultimately, performance budgeting seeks to increase decision makers' understanding of the links between requested resources and expected performance outcomes. Such integration is critical to sustain and institutionalize performance management reforms. As the major annual process in the federal government where programs and activities come up for regular review and reexamination, the budget process itself benefits as well if the result of integration is better, more reliable performance information. For performance data to more fully inform resource allocations, decision makers must feel comfortable with the appropriateness and accuracy of the outcome information and measures presented--that is, they are comprehensive and valid indicators of a program's outcomes. Decision makers likely will not use performance information that they do not perceive to be credible, reliable, and reflective of a consensus about performance goals among a community of interested parties. Moreover, decisions might be guided by misleading or incomplete information, which ultimately could further discourage the use of this information in resource allocation decisions. Accordingly, the quality and credibility of outcome-based performance information and the ability of federal agencies to produce such evaluations of their programs' effectiveness are key to the success of performance- based budgeting. However, in the fiscal year 2004 President's budget request, OMB rated 50 percent of PART programs as "results not demonstrated" because they found that the programs did not have adequate performance goals and/or data to gauge program performance were not available. Likewise, GAO's work has noted limitations in the quality of agency performance and evaluation information and in agency capacity to produce rigorous evaluations of program effectiveness. We have previously reported that agencies have had difficulty assessing many program outcomes that are not quickly achieved or readily observed and contributions to outcomes that are only partly influenced by federal funds. Furthermore, our work has shown that few agencies deployed the rigorous research methods required to attribute changes in underlying outcomes to program activities. If budget decisions are to be based in part on performance data, the integrity, credibility, and quality of these data and related analyses become more important. Developing and reporting on credible information on outcomes achieved through federal programs remains a work in progress. For example, we previously reported that only five of the 24 Chief Financial Officers (CFO) Act agencies' fiscal year 2000 performance reports included assessments of the completeness and reliability of their performance data in their transmittal letters. Further, although concerns about the quality of performance data were identified by the inspectors general as either major management challenges or included in the discussion of other challenges for 11 of the 24 agencies, none of the agencies identified any material inadequacies with their performance data in their performance reports. Moreover, reliable cost information is also important. Unfortunately, as we recently reported, most agencies' financial management systems are not yet able to routinely produce information on the full cost of programs and projects as required by the Federal Financial Management Improvement Act of 1996 (FFMIA). The ultimate objective of FFMIA is to ensure that agency financial management systems routinely provide reliable, useful, and timely financial information, not just at year-end or for financial statements, so that government leaders will be better positioned to invest resources, reduce costs, oversee programs, and hold agency managers accountable for the way they run programs. To achieve the financial management improvements envisioned by the CFO Act, FFMIA, and more recently, the PMA, agencies need to modernize their financial management systems to generate reliable, useful, and timely financial information throughout the year and at year-end. Meeting the requirements of FFMIA presents long- standing, significant challenges that will be attained only through time, investment, and sustained emphasis on correcting deficiencies in federal financial management systems. In the past, we have also noted limitations in agency capacity to produce high-quality evaluations of program effectiveness. Through GPRA reporting, agencies have increased the information available on program results. However, some program outcomes are not quickly achieved or readily observed, so agencies have drawn on systematic evaluation studies to supplement their performance data collection and better understand the reasons behind program performance. However, in survey based on 1995 data covering 23 departments and independent agencies, we found that agencies were devoting variable but relatively small amounts of resources to evaluating program results. Many program evaluation offices were small, had other responsibilities, and produced only a few effectiveness studies annually. Moreover, systematic program evaluations--and units responsible for producing them--had been concentrated in only a few agencies. Although many federal programs attempt to influence complex systems or events outside the immediate control of government, we have expressed continued concern that many agencies lack the capacity to undertake the program evaluations that are often needed to assess a federal program's contributions to results where other influences may be at work. In addition to information on the outcomes, impact evaluations using scientific research methods are needed to isolate a particular program's contribution to those outcomes. Yet in our survey, we found that the most commonly reported study design was judgmental assessment of program effects. These judgmental assessments, one-time surveys, and simple before-and-after studies accounted for 40 percent of the research methods used in agencies' evaluation studies conducted during the period we studied. There are inherent challenges affecting agencies' capacity to conduct evaluations of program effectiveness. For example, many agency programs are designed to be one part of a broader effort, working alongside other federal, state, local, nonprofit, and private initiatives to promote particular outcomes. Although information on the outcomes associated with a particular program may be collected, it is often difficult to isolate a particular program's contribution to those outcomes. Additionally, where federal program responsibility has devolved to the states, federal agencies' ability to influence program outcomes diminishes, while at the same time, their dependence on states and others for data with which to evaluate programs grows. In past reports, we have identified several promising ways agencies can potentially maximize their evaluation capacity. For example, careful targeting of federal evaluation resources on key policy or performance questions and leveraging federal and nonfederal resources show promise for addressing key questions about program results. Other ways agencies might leverage their current evaluation resources include adapting existing information systems to yield data on program results, drawing on the findings of a wide array of evaluations and audits, making multiple use of an evaluation's findings, mining existing databases, and collaborating with state and local program partners to develop mutually useful performance data. Our work has also shown that advance coordination of evaluation activities conducted by program partners is necessary to help ensure that the results of diverse evaluation activities can be synthesized at the national level. Improvements in the quality of performance data and the capacity of federal agencies to perform program evaluations will require sustained commitment and investment of resources, but over the longer term, failing to discover and correct performance problems can be much more costly. More importantly budgetary investments need to be viewed as part of a broader initiative to improve the accountability and management capacity of federal agencies and programs. Improving the supply of performance information is in and of itself insufficient to sustain performance management and achieve real improvements in management and program results. Rather, it needs to be accompanied by a demand for that information by decision makers and managers alike. The history of performance budgeting has shown that the supply of information will wither if it is perceived to have failed to affect decision making. Accordingly, PART may complement GPRA's focus on increasing the supply of credible performance information by promoting the demand for this information in the budget decision making process. Successful use of performance information in budgeting should not be defined only by the impact on funding levels in presidential budget requests and the congressional budget process. Rather, resource allocation decisions are made at various other stages in the budget process, such as agency internal budget formulation and execution and in the congressional oversight and reauthorization process. If agency program managers perceive that program performance and evaluation data will be used to make resource decisions throughout the resource allocation process and can help them make better use of these resources, agencies may make greater investments in improving their capacity to produce and procure quality information. For example, in our work at the Administration on Children and Families, we describe three general ways in which resource allocation decisions at the programmatic level are influenced by performance: (1) training and technical assistance money is often allocated based on needs and grantee performance, (2) partnerships and collaboration help the agency work with grantees towards common goals and further the administration's agenda, and (3) organizing and allocating staff around agency goals allow employees to link their day-to-day activities to longer-term results and outcomes. It is important to note that these and other examples from our work at the Veterans Health Administration and the Nuclear Regulatory Commission affect postappropriations resource decisions, that is, the stage where programs are being implemented during what is generally referred to as budget execution. Sustaining a focus on performance budgeting in the federal government is predicated upon aligning performance goals with all key management activities--budgeting, financial management, human capital management, capital acquisition, and information technology management. The closer the linkage between an agency's performance goals, its budget presentation, and its net cost statement, the greater the reinforcement of performance management throughout the agency and the greater the reliability of budgetary and financial data associated with performance plans. Clearer and closer association between expected performance and budgetary requests can more explicitly inform budget discussions and focus them--both in Congress and in agencies--on expected results, rather than on inputs or transactions solely. Throughout government, as figure 1 shows, there exists a general lack of integration among budget, performance, and financial reporting structures. Moreover, these structures can vary considerably across the departments and agencies of the federal government. For example, the current budget account structure was not created as a single integrated framework, but developed over time to reflect the many roles it has been asked to play and to address the diverse needs of its many users. It reflects a variety of different orientations which for the most part do not reflect agency performance goals or objectives. Agency budget accounts, for instance, can be organized by items of expense, organizational unit, program, or a combination of these categories. The general lack of integration between these structures can hamper the ability of agencies to establish and demonstrate the linkage between budget decisions and performance goals. While special analyses can help illustrate these linkages, such efforts are often burdensome and awkward. A systematic capacity to crosswalk among these disparate structures can help encourage a more seamless integration of resources with results. Better matching of full costs associated with performance goals helps increase decision makers' understanding of the links between requested resources and expected performance outcomes. This will eventually require linkages between performance planning and budget structures (to highlight how requested resources would contribute to agency goals) as well as linkages between performance plans and financial reporting structures (to highlight the costs of achieving agency goals). Ultimately, over the longer term, this integration may require changing the structures themselves to harmonize their orientations. Our work indicates that progress has been made. Agencies are developing approaches to better link performance plans with budget presentations and financial reporting. They have made progress in both in establishing linkages between performance plans and budget requests and in translating those linkages into budgetary terms by clearly allocating funding from the budget's program activities to performance goals. For example, table 1 and figure 2 show the approaches used by the Department of Housing and Urban Development (HUD) in its last three performance plans. In table 1, for fiscal years 2000 and 2001, HUD used summary charts to array its requested resources by general goal but progressed from portraying this linkage with an "x" in fiscal year 2000 to using funding estimates derived from its budget request in fiscal year 2001. Figure 2 shows the fiscal year 2002 plan in which HUD removed the summary charts and instead directly portrayed the linkages in the body of the plan. We have also seen progress in agencies' initial efforts to link annual performance reporting with annual audited financial statements. For example, for fiscal year 2000, 13 of the 24 agencies covered by the CFO Act, compared to 10 in fiscal year 1999, reported net costs in their audited annual financial statements using a structure that was based on their performance planning structure. Better understanding the full costs associated with program outcomes is another important but underdeveloped element of performance budgeting. This entails a broader effort to more fully measure the indirect and accrued costs of federal programs. The administration has proposed that agencies be charged for the government's full share of the accruing costs of all pension and retiree health benefits for their employees as those benefits are earned. Such a proposal could help better reflect the full costs accrued in a given year by federal programs. Recognizing long-term costs is also important to understanding the future sustainability and flexibility of the government's fiscal position. For activities such as environmental cleanup costs, the government's commitment occurs years before the cash consequences are reflected in the budget. These costs should be considered at the time resource commitments are made. Building on past work, we are currently exploring these issues in greater detail. More broadly, timely, accurate, and useful financial information is essential for managing the government's operations more efficiently, effectively, and economically; meeting the goals of financial reform legislation (such as the CFO Act); supporting results-oriented management approaches; and ensuring ongoing accountability. We have continued to point out that the federal government is a long way from successfully implementing the statutory reforms of the 1990s. Widespread financial management system weaknesses, poor recordkeeping and documentation, weak internal controls, and a lack of information have prevented the government from having the cost information needed to effectively and efficiently manage operations or accurately report a large portion of its assets, liabilities, and costs. Looking forward, it is appropriate to ask why all of this effort is worthwhile. Certainly making clear connections between resources, costs, and performance for programs is valuable. Improving evaluation capacity has the potential to create the demand to support further improvements. However, the real payoff will come in strengthening the budget process itself. The integration of budgeting and performance can strengthen budgeting in several ways. First, the focus on outcomes can broaden the debate and elevate budget trade-offs from individual programs to a discussion of how programs work together to achieve national goals. Although the evaluation of programs in isolation may be revealing, it is often critical to understand how each program fits with a broader portfolio of tools and strategies-- such as regulations, direct loans, and tax expenditures--to accomplish federal goals. For example, in fiscal year 2000, the federal health care and Medicare budget functions included $319 billion in entitlement outlays, $91 billion in tax expenditures, $37 billion in discretionary budget authority, and $5 million in loan guarantees. (See fig. 3.) Achieving federal/national policy goals often depends on the federal government's partners--including other levels of government, private employers, nonprofits, and other nongovernmental actors. The choice and design of these tools are critical in determining whether and how these actors will address federal objectives. GPRA required the President to prepare and submit to Congress a governmentwide performance plan to highlight broader, crosscutting missions, such as those discussed above. Unfortunately, this was not done in fiscal years 2003 and 2004; we hope that the President's fiscal year 2005 budget does include such a plan. Second, a focus on performance can help us shift our view from incremental changes to an evaluation of the base itself. Making government adapt to meet the challenges of the future is broader than strengthening performance-informed resource decisions. Fiscal pressures created by the retirement of the baby boom generation and rising health care costs threaten to overwhelm the nation's fiscal future. Difficult as it may seem to deal with the long-term challenges presented by known demographic trends, policymakers must not only address the major entitlement programs but also reexamine other budgetary priorities in light of the changing needs of this nation in the 21st century. Reclaiming our fiscal flexibility will require the reexamination of existing programs, policies, and activities. It is all too easy to accept "the base" as given and to subject only new proposals to scrutiny and analysis. As we have discussed previously, many federal programs, policies, and activities--their goals, their structures, and their processes--were designed decades ago to respond to earlier challenges. In previous testimony, we noted that the norm should be to reconsider the relevance or "fit" of any federal program, policy, or activity in today's world and for the future. Such a review might ferret out programs that have proven to be outdated or persistently ineffective, or alternatively could prompt appropriate updating and modernizing activities through such actions as improving program targeting and efficiency, consolidation, or reengineering of processes and operations. This includes looking at a program's relationship to other programs. Finally, and most critically, Congress must be involved in this debate and the resulting decisions and follow-up oversight activities. Congressional buy-in is critical to sustain any major management initiative, but 50 years of past efforts to link resources with results have shown that any successful effort must involve Congress as a partner given Congress' central role in setting national priorities and allocating the resources to achieve them. In fact, the administration acknowledged that performance and accountability are shared responsibilities that must involve Congress. It will only be through the continued attention of Congress, the administration, and federal agencies that progress can be sustained and, more important, accelerated. Congress has, in effect, served as the institutional champion for many previous performance management initiatives, such as GPRA and the CFO Act, by providing a consistent focus for oversight and reinforcement of important policies. More generally, effective congressional oversight can help improve federal performance by examining the program structures agencies use to deliver products and services to ensure that the best, most cost-effective mix of strategies is in place to meet agency and national goals. As part of this oversight, Congress should consider the associated management and policy implications of crosscutting programs. Given this environment, Congress should also consider the need for processes that allow it to more systematically focus its oversight on programs with the most serious and systemic weaknesses and risks. At present, Congress has no direct vehicle to provide its perspective on governmentwide performance issues. Congress has no established mechanism to articulate performance goals for the broad missions of government, to assess alternative strategies that offer the most promise for achieving these goals, or to define an oversight agenda targeted at the most pressing crosscutting performance and management issues. Congress might consider whether a more structured oversight approach is needed to permit a coordinated congressional perspective on governmentwide performance matters. Such a process might also facilitate congressional input into the OMB PART initiative. For example, although the selection of programs and areas for review is ultimately the President's decision, such choices might be informed and shaped by congressional views and perspectives on performance issues. How would "success" in performance budgeting be defined? Simply increasing the supply of performance information is not enough. If the information is not used--that is, if there is insufficient demand--the quality of the information will deteriorate and the process either will become rote or will wither away. However, for the reasons noted, the success of performance budgeting cannot be measured merely by the number of programs "killed" or a measurement of funding changes against performance "grades." Rather, success must be measured in terms of the quality of the discussion, the transparency of the information, the meaningfulness of that information to key stakeholders, and how it is used in the decision-making process. If members of Congress and the executive branch have better information about the link between resources and results, they can make the trade-offs and choices cognizant of the many and often competing claims at the federal level. A comprehensive understanding of the needs of all participants in the budget process, including what measures and performance information are required at different stages of the budget cycle, is critical. Making performance budgeting a reality throughout the federal government will be facilitated by efforts to improve the structural alignment of performance planning goals with budget and cost accounting structures and presentations. However, developing credible performance measures and data on program results will be absolutely critical in determining whether the performance perspective becomes a compelling framework that decsion makers will use in allocating resources. Performance budgeting is difficult work. It requires taking a hard look at existing programs and carefully reconsidering the goals those programs were intended to address--and whether those goals are still valid. It involves analyzing the effectiveness of programs and seeking out the reasons for success or failure. It involves navigating through the maze of federal programs and activities, in which multiple agencies may operate many different programs, to address often common or complementary objectives. However, the task of revising and reforming current programs and activities that may no longer be needed or that do not perform well is fraught with difficulties and leads to real "winners" and "losers." Notwithstanding demonstrated weaknesses in program design and shortfalls in program results, there often seems to be little "low hanging fruit" in the federal budget. In fact, some argue that because some programs are already "in the base" in budgetary terms, they have a significant advantage over new initiatives and new demands.
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Since the Government Performance and Results Act (GPRA) was enacted in 1993, federal agencies increasingly have been expected to link strategic plans and budget structures with program results. The current administration has taken several steps to strengthen and further the performance-resource linkage by making budget and performance integration one of its five management initiatives included in the President's Management Agenda. GAO has reported and testified numerous times on agencies' progress in making clearer connections between resources and results and how this information can inform budget deliberations. The administration's use of the Program Assessment Rating Tool (PART) for the fiscal year 2004 President's budget and further efforts in fiscal year 2005 to make these connections more explicit, have prompted our examination of what can and cannot be expected from performance budgeting. Performance management is critical to delivering program results and ensuring accountability, but it is not without risks. Building on agencies' hard-won achievements in developing plans and measures, the government faces the challenge of promoting the use of that information in budget decision making, program improvement, and agency management. More explicit use of performance information in decision making promises significant rewards, but it will not be easy. Decision makers need a road map that defines what successful performance budgeting would look like, and identifies key elements and potential pitfalls. Credible performance information and measures are critical for building support for performance budgeting. For performance data to more fully inform resource allocation decisions, decision makers must feel comfortable with the appropriateness and accuracy of the outcome information and measures presented--that is, that they are comprehensive and valid indicators of a program's outcomes. Decision makers likely will not use performance information that they do not perceive to be credible, reliable, and reflective of a consensus about performance goals among a community of interested parties. The quality and credibility of outcome-based performance information and the ability of federal agencies to evaluate and demonstrate their programs' effectiveness are key to the success of performance budgeting. Successful performance budgeting is predicated on aligning performance goals with key management activities. The closer the linkage between an agency's performance goals, its budget presentation, and its net cost statement, the greater the reinforcement of performance management throughout the agency and the greater the reliability of budgetary and financial data associated with performance plans. Clearer and closer association between expected performance and budgetary requests can more explicitly inform budget discussions and shift the focus from inputs to expected results. The test of performance budgeting will be its potential to reshape the kinds of questions and trade-offs that are considered throughout the budget process. The real payoff will come in strengthening the budget process itself. The focus on outcomes potentially can broaden the debate and elevate budget trade-offs from individual programs to a discussion of how programs work together to achieve national goals. It is critical to understand how programs fit within a broader portfolio of tools and strategies for program delivery. Shifting perspectives from incremental budgeting to consideration of all resources available to a program, that is, base funding as well as new funds, potentially can lead to a reexamination of existing programs, policies, and activities. Prudent stewardship of our nation's resources is essential not only to meeting today's priorities, but also for delivering on future commitments and needs.
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Faced with a goal of increasing the Department's investments in modernization without increasing overall defense budgets, DOD has recently focused on the cost of support operations and their associated infrastructure, with the objective of finding ways to provide required support resources and capability at reduced costs. DOD recognizes that portions of its support structure are inefficient and continue to absorb a large share of the defense budget. To the extent support costs can be reduced, available future defense dollars could be used for modernization or other defense priorities. The Office of the Secretary of Defense (OSD) requested that DSB identify DOD activities that the private sector could do more efficiently and to determine the expected savings from outsourcing. DSB, a civilian advisory board to DOD, issued two reports in 1996 addressing outsourcing and other opportunities for substantially reducing DOD support services. The first focused solely on outsourcing and privatization issues. The second, incorporating findings from the earlier report, had a broader scope that included other methods for reducing infrastructure costs. In preparation for the Quadrennial Defense Review (QDR), OSD's Program Analysis and Evaluation (PA&E) directorate assessed the DSB's savings estimates from the second report. Our analysis also focused on the second report's findings and recommendations. The first DSB task force concluded that DOD could realize savings of 30 to 40 percent of logistics costs and achieve broad improvements in service delivery and responsiveness by outsourcing support services traditionally done by government personnel. The report cited evidence from the Center for Naval Analyses (CNA) public-private competition studies of commercial and depot maintenance activities. The Board also noted that an Outsourcing Institute study found that the private sector saved about 10 to 15 percent by outsourcing but that the public sector savings from outsourcing would be higher because of the inefficiency of government service organizations. The DSB task force stated that an aggressive DOD outsourcing initiative could generate savings ranging from $7 billion to $12 billion annually by fiscal year 2002. Building on the earlier study, DSB's second task force report provided a new vision wherein DOD would only provide warfighting, direct battlefield support, policy- and decision-making, and oversight activities. All other activities would be done by the private sector. DSB said that DOD would need to make an investment of about $6 billion but would ultimately save about $30 billion annually by the year 2002, primarily through outsourcing support functions. Of these $30 billion in annual savings, $6 billion was to come from CONUS logistics infrastructure activities, which DSB defined as including inventory control points, distribution depots, maintenance depots, and installation supply and repair. About $4.2 billion of the savings would be achieved by outsourcing these activities; the remaining $1.8-billion savings would be achieved through improvements in inventory management practices and equipment reliability. Table 1 shows a breakout of the estimated logistics infrastructure savings. According to the DSB estimates, the $6-billion savings represents an approximate 40-percent reduction in the $14 billion the Board estimated DOD spends annually for CONUS logistics activities. According to a DSB task force member, estimates for the cost of installation supply and repair activities were unavailable. Therefore, the group used $14 billion as a rough estimate to approximate total CONUS logistics cost, not including activities already contracted out. Although we were unable to substantiate those numbers, the data that is available indicates that DSB's estimate of $14 billion for CONUS logistics costs is conservative. For example, the Navy has reported that more than $8.5 billion of Navy resources was applied in fiscal year 1996 to maintenance programs in support of fleet ships and aircraft. The report also stated that to gain economies and achieve significant savings, DOD needs to consider dramatic changes in the way it does business. DSB said the Department must get out of the material management/distribution and repair business by expanding contractor logistics support to all fielded weapon systems and by expanding the use of "prime vendors" for all commodities. Contractor logistics support, which relies on a contractor to provide long-term, total life-cycle logistics support, combines depot-level maintenance with wholesale and selected retail material management functions. Under the "prime vendor" concept, DOD would rely on a single vendor to buy, warehouse, and distribute inventory to the customer as needed, thus removing the Defense Logistics Agency and the services from their present middleman role. Our reviews of best practices within the private sector and ongoing work at DOD indicate that DOD has significant opportunities for reducing logistics costs and improving performance by changing its business processes. This work also indicates that determining the most cost-effective processes to use requires an evaluation of costs and benefits of each situation. These findings are consistent with the general theme of the DSB's reports that opportunities exist for savings in the operation of DOD's logistics support activities. However, DSB focused on outsourcing, while our work has focused first on reengineering and streamlining, and outsourcing where appropriate and more cost-effective. Over the past several years, DOD has considered a number of actions to improve the efficiency and effectiveness of its logistics system. As with the private sector, such actions should include using highly accurate information systems, consolidating certain activities, employing various process streamlining methods, and outsourcing. For example, defense maintenance depots have about 40-percent excess capacity, and we have advocated consolidating workloads to take advantage of economies of scale and eliminate unnecessary duplication. Consolidating workloads from two closing depots would allow the Air Force, for instance, to achieve annual savings of over $200 million and reduce its excess capacity from 45 percent to about 8 percent. In addition, our work has pointed out the benefits of outsourcing when careful economic analysis indicates the private sector can provide required support at less cost than a DOD activity can. For example, the Defense Logistics Agency has successfully taken steps to use prime vendors to supply personnel items directly to military facilities. The consumable items under these vendor programs account for 2 percent of the consumable items DOD manages. DOD's prime vendor program for medical supplies, along with other inventory reduction efforts, has resulted in savings that we estimate exceed $700 million. More importantly, this program has moved DOD out of the inventory storage and distribution function for these supplies, thus emptying warehouses, eliminating unnecessary layers of inventory, and reducing the overall size of the DOD supply system. Also, service is improved because DOD buys only the items that are currently needed and consumers can order and receive inventory within hours of the time the items are used. While DOD has achieved benefits from outsourcing, it has been shown that adequate competition has been key to achieving significant reductions. Public-private competition studies by CNA have stressed this point. In its 1993 review of the Navy's Commercial Activities Program, CNA noted that about half the competitions were won by the in-house team and that when competitions with no savings were excluded, the savings from contracts awarded to the public sector were 50 percent and those to the private sector were 40 percent. CNA officials concluded that because of competition both sectors were spurred to increase efficiency and reduce costs and DOD achieved greater savings. CNA also concluded that savings would have been less had the public sector been excluded from competition. Likewise, our review of DOD's public-private competition program for depot maintenance determined that such competitions resulted in reduced costs. Facing increasing pressures to maintain market competitiveness, private companies have been reevaluating their organization and processes to cut costs and improve customer service. The most successful improvements include (1) using highly accurate information systems that provide cost, tracking, and control data; (2) consolidating and/or centralizing certain activities; (3) employing various methods to streamline work processes; and (4) shifting certain activities to third-party providers. Each company's overall business strategy and assessment of "core competencies" guide which tools to use and how to use them. Private companies use a variety of approaches to meet their logistics support needs. For example, Southwest Airlines contracts out almost all maintenance, thus avoiding costly investments in facilities, personnel, and inventory. However, in contrast, having already made a significant investment in building infrastructure and training personnel, British Airways reached a different decision about its support operations. While it has sold off and/or outsourced some activities (namely engine repair and parts supply) and improved remaining in-house repair operations, the airline now has become a third-party supplier of aircraft overhaul. Whether the organization decides to consolidate, reengineer, or outsource activities, or to do some combination thereof, the private firms and consultants with whom we met stressed that identifying and understanding the organization's core activities and obtaining accurate cost data for all in-house operations are critical to making informed business decisions and assessing overall performance. Core activities are those that are essential for meeting an organization's mission. Before making decisions on what cost-saving options should be used, an organization should develop a performance-based, risk-adjusted analysis of benefits and costs for each option to provide (1) the foundation for comparing the baseline benefits and costs with proposed options and (2) a basis for decisionmakers to use in selecting a feasible option that meets performance goals. The organization should also factor into the analysis the barriers and risks in implementing the options. Thus, the best practice would be to make an outsourcing decision only after a core assessment and comprehensive cost-benefit analysis have been performed rather than to take a blanket approach and outsource everything in a certain area. PA&E's analysis of the DSB's estimated $6 billion in annual logistics savings found that the estimate was overstated by about $1 billion and that another $3 billion in projected savings would be difficult to achieve or unlikely to be achieved. According to PA&E officials, DSB's $6-billion savings estimate was overstated by about $1 billion because contract administration and oversight costs were understated and one-time inventory savings (spread over 6 years) was claimed as steady state savings. Further, in assessing the degree of difficulty in achieving the savings, PA&E concluded that about $1 billion would be difficult to achieve, but was possible if Congress changed the required 60/40 public-private split to 50-50, which has since occurred. PA&E also believed that another $2 billion was unlikely to be saved primarily because of timing and DOD's culture. It did not believe that DOD could carry out the proposals within the DSB's 6-year schedule, if at all. PA&E's assessment concluded that the remaining $2 billion of the DSB's $6-billion savings estimate was achievable or already identified in DOD's future year defense program. PA&E officials defined as achievable those savings that they believed could be realized given DSB's 25-percent savings assumption and the then-current legal restrictions on outsourcing depot maintenance activities. About $0.2 billion in savings would involve maximizing the use of outsourcing under legislative constraints as they existed at that time, such as the 60/40 rule. The remainder of the achievable savings have already been identified in DOD's future year defense program. Table 2 shows PA&E's revised estimate of the DSB's logistics savings. Our analysis confirms PA&E's conclusion that the DSB's logistics savings estimates are not well supported and are unlikely to be as large as estimated. Specifically, we found that (1) the Board's projected annual savings from reliability improvements are overstated by over $1 billion; (2) the DSB's 25-percent savings rate from outsourcing appears to be overly optimistic; and (3) DSB, while recognizing it would be difficult to do so, assumed that DOD would overcome impediments that prevent the outsourcing of all logistics functions. We do not know by how much or whether these questions would change the $2 billion in savings that PA&E concluded were achievable. In addition to overstating inventory management savings noted by PA&E, the DSB task force overstated its estimate of annual savings from equipment reliability improvements. The Board's estimate of $1.5 billion in annual savings by year 2002 (6 years from the year of DSB's study) is overstated by at least $1.2 billion. DSB based its estimate on a Logistics Management Institute (LMI) study that assessed the reductions of operation and support costs that result from improved reliability and maintainability due to technological advancements. Such advancements may include using improved materials and fewer component parts; thus reducing the number of spare purchases and the need for scheduled and unscheduled maintenance. Accomplishing these advancements requires an investment that must be evaluated in light of the expected return on investment. For its study, LMI assumed an aggressive technology improvement program. For example, it assumed a 9 to 1 return on investment that would accrue over 20 years, with savings starting the second year. Further, it assumed that any given investment would generate a savings stream for at least 10 years. Based on these assumptions and its analysis, LMI concluded that with an annual investment starting at $100 million and leveling at $500 million within 5 years, DOD could achieve $300 million in savings in the sixth year. DOD would not achieve the $1.5-billion savings that DSB included in its savings estimate until the fourteenth year. Thus, even without questioning LMI's aggressive assumptions, the DSB's savings estimate is overstated by at least $1.2 billion. DSB assumed that outsourcing all logistics activities would reduce DOD's logistics costs by 25 percent. The Board based this projection on public-private competition studies, industry studies by such companies as Caterpillar and Boeing, and anecdotal evidence. While we believe that savings can be achieved through appropriate outsourcing, these savings are a result of competition rather than from outsourcing itself. The studies DSB cited were primarily for commercial activities--such as base operations, real property maintenance, and food service. As we have reported, these activities generally have highly competitive markets. For some logistics activities, such as nonship depot maintenance, our recent work has shown that competitive markets do not currently exist. To the extent that competitive markets do not exist, the amount of savings that can be generated through outsourcing may be reduced. As we reported in 1996, 76 percent of the 240 open depot maintenance contracts we examined were awarded noncompetitively (i.e., sole source). More recently, we reported that the percentage of noncompetitive depot maintenance contracts had increased for activities other than shipyards. For the three services, about 91 percent of the 15,346 new depot maintenance contracts awarded from the beginning of fiscal year 1996 to date were sole source. Moreover, the DSB recommended contractor logistics support arrangements for new and modified weapon systems. Our past work demonstrates that most contractor logistics support depot work is sole sourced to the original equipment manufacturer, raising cost and future competition concerns. Furthermore, eliminating the public sector from competition, as advocated by DSB, could further decrease savings. In developing its savings estimates for CONUS logistics, DSB assumed that DOD would outsource all logistics activity. However, certain barriers, including legal and cultural impediments, must be overcome to fully implement DSB's recommendations. While it may be possible to implement DSB's recommendations, in some cases, implementation may require congressional action, and in others, implementation may take substantially longer than DSB's 6-year estimate. We did not quantify how much these impediments will reduce DSB's savings, but consistent with PA&E's analysis, these factors will mitigate portions of the projected savings. Although it recommended that essentially all logistics--including material management and depot maintenance, distribution, and other activities--be outsourced, DSB recognized that outsourcing is limited or precluded by various laws and regulations. For example, fundamental to determining whether or not to outsource is the identification of core functions and activities. Section 2464 of title 10 U.S.C. states that DOD activities should maintain the government-owned and government-operated core logistics capability necessary to maintain and repair weapon systems and other military equipment needed to fulfill national strategic and contingency plans. The delineation of core activities has historically proven to be extremely difficult. For example, proponents of increased privatization have questioned the justification for retaining many support activities as core and have recommended revising the core logistics requirement. Section 311 of the 1996 DOD Authorization Act directed the Secretary of Defense to develop a comprehensive depot maintenance policy, including a definition of DOD's required core depot maintenance capability. While DOD has identified a process for determining core depot maintenance capability requirements, it has not completed its evaluation. Moreover, DOD has not developed a process for identifying core requirements for other logistics functions and activities. Thus, core requirements in these areas are also unknown. The 1998 DOD Authorization Act again requires that the Department identify its core depot maintenance requirements, this time under the new provisions described above. Additionally, 10 U.S.C. 2466 states that no more than 50 percent of the depot maintenance funds made available in a given fiscal year may be spent for depot maintenance conducted by nonfederal personnel. This provision, along with other relevant provisions significantly affects DSB's savings estimate because about 50 percent of depot maintenance would not be subject to outsourcing. Section 2469 of title 10 states that DOD-performed depot maintenance and repair workloads valued at not less than $3 million cannot be changed to contractor-performed work without using competitive procedures that include both public and private entities. This requirement for public-private competition affects the DSB savings estimate because DSB assumed the requirement would be eliminated. The 1998 DOD Authorization Act also added a new section 2469a to title 10 that affects public-private competitions for certain workloads from closed or realigned installations. Further, during the congressional deliberation on the 1997 DOD Authorization Act, DOD provided Congress a list of statutory encumbrances to outsourcing, including 10 U.S.C. 2461, which requires studies and reports before converting public workloads to a contractor; 10 U.S.C. 2465, which prohibits contracts for performance of fire-fighting and security guard functions; section 317 of the National Defense Authorization Act for Fiscal Year 1987 (P.L. 99-661), which prohibits the Secretary of Defense from contracting for the functions performed at Crane Army Ammunition Activity or McAllister Army Ammunition Plant; 10 U.S.C. 4532, which requires the Army to have supplies made by factories and arsenals if they can do so economically; and 10 U.S.C. 2305 (a)(1), which specifies that in preparing for the procurement of property or services, the Secretary of Defense shall specify the agency's needs and solicit bids or proposals in a manner designed to achieve full and open competition. DOD officials have repeatedly recognized the importance of using resources for the highest priority operational and investment needs rather than maintaining unneeded property, facilities, and overhead. However, DOD has found that infrastructure reductions, whether through outsourcing or some other means, are difficult and painful because achieving significant cost savings may require up-front investments, the closure of installations, and the elimination of military and civilian jobs. In addition, according to DOD officials, the military services fear that savings achieved from outsourcing would be diverted to support other DOD requirements and may not be available to the outsourcing organization to fund service needs. DSB recognized DOD's cultural resistance to outsourcing logistics activities and said that overcoming resistance may take some time. DOD has a tradition of remarkable military achievement but it also has an entrenched culture that resists dramatic changes from well-established patterns of behavior. In 1992, we reported that academic experts and business executives generally agreed that a culture change is a long-term effort that takes at least 5 to 10 years to complete. Although a change in DOD's management culture is underway, continual support of its top managers is critical to successful completion of cultural change. We agree with DSB that there are many opportunities for significant reductions in logistics infrastructure costs. However, the Board's projected savings are overly optimistic. Further, savings opportunities from consolidating and reengineering must be considered in addition to outsourcing. Even though the Board recognized that there are impediments to outsourcing, PA&E's and our analyses show that because of such impediments, not all logistics activities can be outsourced. This is particularly true for the legislative barriers--principally, the legislated workload mix between the public and private sectors. Moreover, PA&E's and our analyses show estimating errors of about $1 billion for contract administration and inventory reductions and another $1 billion for reliability improvements. These combined adjustments will further reduce the Board's projected savings by another 30 percent. Notwithstanding the problems with DSB's estimates, DOD's effort to reduce costs and achieve savings is extremely important, and we encourage DOD to move forward as quickly as possible to develop a realistic and achievable cost-reduction program. As discussed in our high-risk infrastructure report, breaking down cultural resistance to change, overcoming service parochialism, and setting forth a clear framework for a reduced defense infrastructure are key to effectively implementing savings. To aid in achieving the most savings possible, we recommend that the Secretary of Defense require the development of a detailed implementation plan for improving the efficiency and effectiveness of DOD's logistics infrastructure, including reengineering, consolidating, outsourcing logistics activities where appropriate, and reducing excess infrastructure. We recommend that the plan establish time frames for identifying and evaluating alternative support options and implementing the most cost-effective solutions and identify required resources, including personnel and funding, for accomplishing the cost-reduction initiatives. We also recommend that DOD present the plan to Congress in much the same way it presented its force structure reductions in the Base Force Plan and the bottom-up review. This would provide Congress a basis to oversee DOD's plan and would allow the affected parties to see what is going to happen and when. In commenting on a draft of this report (see app. II), DOD said that DSB had considered legal barriers to outsourcing and had expressly sought to identify the savings that could result if they were lifted. As noted in the report, we believe it is unlikely that the legal barriers cited would be lifted within the time frame DSB envisioned. DOD said that actions consistent with our recommendation were underway and there was no need for the recommended plan. Specifically, DOD said that the Secretary of Defense was preparing a more detailed plan for implementing the strategy formulated by QDR. Subsequently, on November 12, 1997, the Secretary of Defense announced the publication of the Defense Reform Initiative Report. This report contained the results of the task force on defense reform established as a result of QDR. The task force, which was charged with identifying ways to improve DOD's organization and procedures, defined a series of initiatives in four major areas: reengineering, by adopting modern business practices to achieve world-class standards of performance; consolidating, by streamlining organizations to remove redundancy and competing, by applying market mechanisms to improve quality, reduce costs, and respond to customer needs; and eliminating infrastructure, by reducing excess support structure to free resources and focus on competencies. This report is a step in the right direction and sets forth certain strategic goals and direction. However, the intent of our recommendation was that a detailed implementation plan be developed, and we have modified our final recommendations accordingly. Our scope and methodology are provided in appendix I. We are sending copies of this report to interested congressional committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; the Director of the Office of Management and Budget; and interested congressional committees. Copies will be made available to others upon request. Please contact me at (202) 512-8412 if you or your staff have any questions concerning this report. Major contributors to this report were James Wiggins, Julia Denman, Hilary Sullivan, and Jeffrey Knott. John Brosnan from our Office of General Counsel provided the legal review. The scope of our review was limited to reviewing the Defense Science Board's (DSB) projected $6 billion annual savings for the continental United States (CONUS) logistics. To determine the basis of DSB's savings estimate and recommendations, we reviewed the two DSB reports that made savings estimates based on outsourcing: Report of the Defense Science Board Task Force on Outsourcing and Privatization, August 28, 1996, and Report of the Defense Science Board 1996 Summer Study on Achieving an Innovative Support Structure for 21st Century Military Superiority: Higher Performance at Lower Costs, November 1996. We discussed the assumptions with task force members and reviewed supporting data that was available to us. We requested DSB task force minutes pertaining to these studies; however, we did not receive them in time to include them in our review. We reviewed the Center for Naval Analyses (CNA) studies of public-private competitions cited by DSB as well as CNA's more recent studies and discussed those studies with CNA officials. A CNA official said that CNA analysts performed limited testing of the computer-generated data they had used in analyzing the results from the commercial activity competitions. He said that the data was reasonably accurate for the purposes of their studies. We did not independently verify the data used in CNA's studies because we did not rely solely on CNA's studies for our conclusions. To further evaluate DSB's savings estimates and recommendations we (1) reviewed Program Analysis and Evaluation's (PA&E) analysis and discussed that analysis and conclusions with PA&E officials and (2) reviewed the Logistics Management Institute's (LMI) study, Using Technology to Reduce Cost of Ownership, Volume 1: Annotated Briefing (LG404RD4, April 1996), and discussed the studies' assumptions and conclusions with LMI officials. In addition, we reviewed our past reports and testimony on depot maintenance, public-private competitions, and infrastructure reductions. To determine other infrastructure savings opportunities for the Department of Defense (DOD), we relied on our past reports and testimony on commercial "best practices," public-private competitions, and depot maintenance. In addition, we also drew on ongoing work on outsourcing practices within the private sector. We performed our review at the following locations: Logistics Management Institute, Arlington, Va.; DOD's Office of Maintenance Policy, Office of Program Analysis and Evaluation; and the Defense Science Board, Washington, D.C. We also had discussions with officials from the Center for Naval Analyses, Alexandria, Va. We conducted our review in July and August 1997, and, except where noted, in accordance with generally accepted government auditing standards. Air Force Depot Maintenance: Information on the Cost Effectiveness of B-1B and B-52 Support Options (GAO/NSIAD-97-210BR, Sept. 12, 1997). Navy Depot Maintenance: Privatizing the Louisville Operations in Place Is Not Cost Effective (GAO/NSIAD-97-52, July 31, 1997). Defense Depot Maintenance: Challenges Facing DOD in Managing Working Capital Funds (GAO/T-NSIAD/AIMD-97-152, May 7, 1997). Depot Maintenance: Uncertainties and Challenges DOD Faces in Restructuring Its Depot Maintenance Program (GAO/T-NSIAD-97-111, Mar. 18, 1997) and (GAO/T/NSIAD-112, Apr. 10, 1997). Defense Outsourcing: Challenges Facing DOD as It Attempts to Save Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar. 12, 1997). Navy Ordnance: Analysis of Business Area Price Increases and Financial Losses (GAO/AIMD/NSIAD-97-74, Mar. 14, 1997). High-Risk Series: Defense Infrastructure (GAO/HR-97-7, Feb. 1997). Air Force Depot Maintenance: Privatization-in-Place Plans Are Costly While Excess Capacity Exists (GAO/NSIAD-97-13, Dec. 31, 1996). Army Depot Maintenance: Privatization Without Further Downsizing Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept. 18, 1996). Navy Depot Maintenance: Cost and Savings Issues Related to Privatizing-in-Place the Louisville, Kentucky, Depot (GAO/NSIAD-96-202, Sept. 18, 1996). Defense Depot Maintenance: Commission on Roles and Mission's Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July 15, 1996). Defense Depot Maintenance: DOD's Policy Report Leaves Future Role of Depot System Uncertain (GAO/NSIAD-96-165, May 21, 1996). Defense Depot Maintenance: More Comprehensive and Consistent Workload Data Needed for Decisionmakers (GAO/NSIAD-96-166, May 21, 1996). Defense Depot Maintenance: Privatization and the Debate Over the Public-Private Mix (GAO/T-NSIAD-96-146, Apr. 16, 1996) and (GAO/T-NSIAD-96-148, Apr. 17, 1996). Military Bases: Closure and Realignment Savings Are Significant, but Not Easily Quantified (GAO/NSIAD-96-67, Apr. 8, 1996). Depot Maintenance: Opportunities to Privatize Repair of Military Engines (GAO/NSIAD-96-33, Mar. 5, 1996). Closing Maintenance Depots: Savings, Personnel, and Workload Redistribution Issues (GAO/NSIAD-96-29, Mar. 4, 1996). Navy Maintenance: Assessment of the Public-Private Competition Program for Aviation Maintenance (GAO/NSIAD-96-30, Jan. 22, 1996). Depot Maintenance: The Navy's Decision to Stop F/A-18 Repairs at Ogden Air Logistics Center (GAO/NSIAD-96-31, Dec. 15, 1995). Military Bases: Case Studies on Selected Bases Closed in 1988 and 1991 (GAO/NSIAD-95-139, Aug. 15, 1995). Military Base Closure: Analysis of DOD's Process and Recommendations for 1995 (GAO/T-NSIAD-95-132, Apr. 17, 1995). Military Bases: Analysis of DOD's 1995 Process and Recommendations for Closure and Realignment (GAO/NSIAD-95-133, Apr. 14, 1995). Aerospace Guidance and Metrology Center: Cost Growth and Other Factors Affect Closure and Privatization (GAO/NSIAD-95-60, Dec. 9, 1994). Navy Maintenance: Assessment of the Public and Private Shipyard Competition Program (GAO/NSIAD-94-184, May 25, 1994). Depot Maintenance: Issues in Allocating Workload Between the Public and Private Sectors (GAO/T-NSIAD-94-161, Apr. 12, 1994). Depot Maintenance (GAO/NSIAD-93-292R, Sept. 30, 1993). Depot Maintenance: Issues in Management and Restructuring to Support a Downsized Military (GAO/T-NSIAD-93-13, May 6, 1993). Air Logistics Center Indicators (GAO/NSIAD-93-146R, Feb. 25, 1993). Defense Force Management: Challenges Facing DOD as It Continues to Downsize Its Civilian Workforce (GAO/NSIAD-93-123, Feb. 12, 1993). Navy Maintenance: Public-Private Competition for F-14 Aircraft Maintenance (GAO/NSIAD-92-143, May 20, 1992). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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 basis for the Defense Science Board's (DSB) estimate that the Department of Defense (DOD) could potentially save $6 billion annually by reducing its logistics infrastructure costs within the continental United States, focusing on: (1) the opportunities for logistics infrastructure savings; and (2) DOD's and GAO's analyses of the DSB's projected logistics infrastructure savings. GAO noted that: (1) GAO agrees with the DSB that DOD can reduce the costs of its logistics activities through outsourcing and other initiatives; (2) DOD has already achieved over $700 million in savings from the use of a prime vendor program and other inventory-related reduction efforts for defense medical supplies; (3) according to studies by the Center for Naval Analyses, competition for work, including competition between the public sector and the private sector--regardless of which one wins--can result in cost savings; (4) many private-sector firms have successfully used outsourcing to reduce their costs of operations; (5) the DOD Program Analysis and Evaluation (PA&E) directorate's analysis shows, however, that the DSB's estimated annual savings of $6 billion is overstated by about $4 billion because of errors in estimates, overly optimistic savings assumptions, and legal and cultural impediments; (6) according to PA&E's analysis, this $4 billion includes: (a) $1 billion in overstated contract administration and oversight savings and one-time inventory savings; and (b) $3 billion in savings that would be unlikely or would be difficult to achieve within the Board's 6-year time frame, given certain legislative requirements and DOD's resistance to outsourcing all logistics functions; (7) GAO's analysis confirmed PA&E's conclusion that the Board's estimated savings were overstated; (8) GAO's analysis also raised questions about the Board's projected savings, but GAO does not know by how much or whether these questions would change the $2 billion in savings that PA&E concluded were achievable; (9) GAO questioned whether DOD would achieve a 25-percent savings from outsourcing, as the Board assumed, because the savings were based primarily on studies of public-private competitions in highly competitive private-sector markets; (10) however, competitive markets may not exist in some areas; (11) notwithstanding GAO's concerns about the magnitude of savings, DOD can make significant reductions in logistics costs; (12) the Secretary of Defense recently issued a strategic plan for achieving such reductions; (13) this report is a step in the right direction; and (14) DOD now needs an implementation plan based on a realistic assessment of the savings potential of various cost-reduction alternatives and the time frames for accomplishing various activities required to identify and implement the most cost-effective solutions.
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In the absence of international cash donation management policies, procedures, and plans, DOS developed an ad hoc process to manage the cash donations flowing to the U.S. government from other countries for Hurricane Katrina relief efforts. By September 21, about $115 million had been received and as of December 31, 2005, DOS reported that $126 million had been donated by 36 countries. Our review noted that DOS's ad hoc procedures did ensure the proper recording of international cash donations and we were able to reconcile the funds received with those held in the designated DOS account at Treasury. Also, an NSC-led interagency working group was established to determine uses for the international cash donations for domestic disaster relief. In October 2005, $66 million of the $126 million donated had been accepted by FEMA under the Stafford Act and used for a Hurricane Katrina relief grant. As of March 16, 2006, the other $60 million from international donations remained undistributed. Once accepted by FEMA under the Stafford Act, funds would be limited to use on activities in furtherance of the act. We were told that the NSC-led interagency working group did not transfer the funds to FEMA because it wanted to retain the flexibility to spend the donated funds on a wider range of assistance than is permitted under the Stafford Act. During this period and while deliberations were ongoing, the funds were kept in an account that did not pay interest, thereby diminishing the purchasing power of the donated funds and losing an opportunity to maximize the resources available for relief. Under the Stafford Act, FEMA could have held the funds in an account that can pay interest, but Treasury lacks the statutory authority to credit DOS-held funds with interest. A number of options could be considered to address this situation if there are dual goals of flexibility and maintaining purchasing power. Table 1 below shows the dates of key events in the receipt and distribution of the international cash donations according to documentation received and interviews with DOS and FEMA officials. In early September 2005, FEMA officials identified an account at the U.S. Treasury for recording international cash donations and a number of potential uses for the donations that would help meet relief needs of the disaster. By September 21, 2005, about $115 million in foreign cash donations had been received. In a paper submitted to the NSC-led interagency working group, dated September 22, 2005, DOS recognized that every effort should be made to disburse the funds to provide swift and meaningful relief to Hurricane Katrina victims without compromising needed internal controls to ensure proper management and effective use of the cash donations and transparency. FEMA officials told us that on September 23, 2005, they had identified and proposed to the NSC-led interagency working group that the international cash donations could be spent on the following items for individuals and families affected by Hurricane Katrina: social services assistance, medical transportation, adapting homes for medical and handicap needs, job training and education, living expenses, building materials, furniture, and transportation. At NSC's request, on October 7, 2005 FEMA presented more detailed proposals for using the foreign donations. On October 20, 2005, with the NSC-led interagency working group consensus, DOS transferred to FEMA $66 million of the international donations to finance case management services to help up to 100,000 households affected by Hurricane Katrina define what their needs are and to obtain available assistance. As of February 2006, the remaining $60 million had not been released, pending the NSC-led interagency working group determination about the acceptance and use of the remaining funds. DOS and FEMA officials told us that for the remaining $60 million in donated funds, the NSC-led interagency working group had considered a series of proposals received from a number of both public and private entities. At the time of our review, we were told that the NSC-led interagency working group decided that the vital needs of schools in the Gulf Coast area would be an appropriate place to apply the donations, and that they were working with the Department of Education to finalize arrangements to provide funding to meet those needs. FEMA officials told us that under the Stafford Act, they could use donated funds for projects such as rebuilding schools, but projects for new schools buildings are not consistent with Stafford Act purposes unless replacing a damaged one. Also, according to DHS officials, the Act would have required that receiving entities match FEMA funds for these purposes. However, because of the devastation, the entities would have difficulty matching FEMA funds, which in essence limited FEMA from doing these types of projects. According to DHS, FEMA considered whether it would be useful for donated funds to contribute to the non-federal share for applicants having trouble meeting the non-federal share, but would need legislative authority to use it to match federal funds. We contacted NSC to further discuss these matters; however NSC did not respond to our requests for a meeting. On March 16, 2006, DOS and the Department of Education signed a Memorandum of Agreement regarding the use of $60 million of the international cash donations. Advance planning is very important given the outstanding pledges of $400 million or more that DOS officials indicated may still be received. While acknowledging that the U.S. government has never previously had occasion to accept such large amounts of international donations for disaster relief, going forward, advance planning is a useful tool to identify potential programs and projects prior to the occurrence of an event of such magnitude. In the case of Hurricane Katrina, while the NSC-led interagency working group reviewed various proposals on the use of the remaining $60 million, DOS held the funds in an account at the U.S. Treasury that did not earn interest. Treasury lacks the statutory authority to credit those DOS-held funds with interest. For the time the funds were not used, their purchasing power diminished due to inflation. If these funds had been placed in an account that could have been credited with interest to offset the erosion of purchasing power, the amount of funds available for relief and recovery efforts would have increased while decision makers determined how to use them. The U.S. government would be responsible for paying the interest if these funds were held in an account at the Treasury that can pay interest. Although the Stafford Act does not apply to the donated funds maintained in the DOS account at Treasury, the Stafford Act does provide that excess funds accepted under the Act may be placed in Treasury securities, and the related interest paid on such investments would be credited to the account. Had the foreign monetary donations been placed in Treasury securities, we estimate that by February 23, 2006, the remaining funds for relief efforts would have increased by nearly $1 million. The Administration's report, The Federal Response To Hurricane Katrina: Lessons Learned, released on February 23, 2006, recognized that there was no pre-established plan for handling international donations and that implementation of the procedures developed was a slow and often frustrating process. The report includes recommendations that DOS should establish before June 1, 2006, an interagency process to determine appropriate uses of international cash donations, and ensure timely use of these funds in a transparent and accountable manner, among others. DOS officials recognized that the ad hoc process needed to be formalized and planned to develop such procedures by June 1, 2006. When developing policies and procedures, it is important that consideration also be given to strategies that can help maintain the purchasing power of the international donations. If the goal is to maintain both purchasing power and flexibility, then among the options to consider are seeking statutory authority for DOS to record funds in a Treasury account that can pay interest similar to donations accepted under the Stafford Act pending decisions on how the funds would be used, or to allow DOS to deposit the funds in an existing Treasury account of another agency that can pay interest pending decisions on how the funds would be used. In the absence of guidance, we found a lack of accountability in the management of the in-kind assistance. Specifically, FEMA did not have a process in place that confirmed that the in-kind assistance sent to distribution sites was received. The lack of guidance, inadequate information about the nature and content of foreign offers of in-kind assistance, and insufficient advance coordination also resulted in the arrival of food and medical assistance that could not be used in the United States. Also, the ad hoc procedures created to manage foreign military donations allowed for confusion about which agency--FEMA or DOD-- should accept and be responsible for oversight of such donations. Because of the lack of guidance to track assistance, USAID/OFDA created a database to track the assistance as it arrived. We found that USAID/OFDA reasonably accounted for the assistance given the lack of information on the manifests and the amount of assistance that was arriving within a short time. However, on September 14, 2005, FEMA did request USAID/OFDA to track the assistance from receipt to final disposition. However, the system USAID/OFDA created did not include confirming that the assistance was received at the FEMA distribution sites. In part, USAID/OFDA did not set up these procedures on its own in this situation, because its mission is to deliver assistance in foreign countries and it had never distributed assistance within the United States. FEMA officials told us that they assumed USAID/OFDA had these controls in place. FEMA and USAID/OFDA officials could not provide us with evidence that confirmed that the assistance sent to distribution sites was received. Without these controls in place to ensure accountability for the assistance, FEMA does not know if all or part of these donations were received at FEMA distribution sites. Internal controls, such as a system to track that shipments are received at intended destinations, provides an agency with oversight, and for FEMA in this case, they help ensure that international donations are received at FEMA destination sites. We noted that the guidance the agencies created did not include policies and procedures to help ensure that food and medical supplies that the U.S. government agreed to receive and came into the United States met U.S. standards. The lack of guidance, inadequate information up-front about the nature and content of foreign offers of in-kind assistance, and insufficient advance coordination with regulatory agencies before agreeing to receive them, resulted in food and medical items, such as MREs and medical supplies, that came into the United States even though they did not meet USDA or FDA standards and thus could not be distributed in the United States. We noted that FEMA's list of items that could be used for disaster relief that was provided to DOS was very general and did not provide any exceptions, for example, about contents of MREs. DHS commented on our report that FEMA repeatedly requested from DOS additional information about the foreign items being offered and DOS did not respond. Both instances represent lost opportunities to have prevented the arrival of items that could not be distributed in the United States. The food items included MREs from five countries. Because of the magnitude of the disaster, some normal operating procedures governing the import of goods were waived. According to USDA and FDA officials, under normal procedures, entry documents containing specific information, which are filed with U.S. Customs and Border Protection, are transmitted to USDA and FDA for those agencies' use in determining if the commodities are appropriately admissible into the United States. Without consultation or prior notification to USDA or FDA, the Commissioner of U.S. Customs and Border Protection authorized suspension of some normal operating procedures for the import of regulated items like food and medical supplies. Consequently, USDA and FDA had no involvement in the decision making or process of agreeing to receive regulated product donations, including MREs and medical supplies, and no opportunity to ensure that they would all be acceptable for distribution before the donated goods arrived. Both USDA and FDA, based on regulations intended to protect public health, prevented distribution of some international donations, which resulted in the assistance being stored at a cost of about $80,000. In the absence of policies and procedures, DOS, FEMA, and DOD created ad hoc policies and procedures to manage the receipt and distribution of foreign military goods and services. However, this guidance left open which agency--FEMA or DOD--was to formally accept the foreign military assistance and therefore each agency apparently assumed the other had done so under their respective gift authorities. As a result, it is unclear whether FEMA or DOD accepted or maintained oversight of the foreign military donations that were vetted through the DOS Task Force. The offers of foreign military assistance included, for example, the use of amphibious ships and diver salvage teams. FEMA did not maintain oversight of the foreign military donations that it accepted through the DOS task force. A FEMA official told us that they were unable to tell us how the foreign military donations were used because FEMA could not match the use of the donations with mission assignments it gave Northern Command. Moreover, FEMA and Northern Command officials told us of instances in which foreign military donations arrived in the United States that were not vetted through the DOS task force. For example, we were told of military MREs that were shipped to a military base and distributed directly to hurricane victims. For the shipments that were not vetted through the Task Force, DOS, FEMA, and DOD officials could not provide us information on the type, amount, or use of the items. As a result, the agencies cannot determine if these items of assistance were safeguarded and used as intended. In closing, since the U.S. government had never before received such substantial amounts of international disaster assistance, we recognize that DOS, FEMA, USAID/OFDA, and DOD created ad hoc procedures to manage the receipt, acceptance, and distribution of the assistance as best they could. Going forward, it will be important to have in place clear policies, procedures, and plans on managing and using both cash and in- kind donations in a manner that provides accountability and transparency. If properly implemented, the six recommendations included in our report issued today will help to ensure that the cognizant agencies fulfill their responsibilities to effectively manage and maintain appropriate and adequate internal control over foreign donations. Mr. Chairman, this concludes GAO's prepared statement. We would be happy to respond to any questions that you or Members of the Committee may have. For further information on this testimony, please contact either Davi M. D'Agostino at (202) 512-5431 or [email protected] or McCoy Williams at (202) 512-9095 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals making key contributions to this testimony included Kay Daly, Lorelei St. James, Jay Spaan, Pamela Valentine, and Leonard Zapata. 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 response to Hurricane Katrina, countries and organizations donated to the United States government cash and in-kind donations, including foreign military assistance. The National Response Plan establishes that the Department of State (DOS) is the coordinator of all offers of international assistance. The Federal Emergency Management Agency (FEMA) within the Department of Homeland Security (DHS) is responsible for accepting the assistance and coordinating its distribution. GAO's testimony covers (1) the amount and use of internationally donated cash and (2) the extent to which federal agencies with responsibilities for international in-kind assistance offered to the United States had policies and procedures to ensure the appropriate accountability for the acceptance and distribution of that assistance. Because the U.S. government had not received such substantial amounts of international disaster assistance before, ad hoc procedures were developed to accept, receive and distribute the cash and in-kind assistance. Understandably, not all procedures would be in place at the outset to provide a higher level of accountability. The Administration recognized the need for improvement in its recent report on lessons learned from Hurricane Katrina. GAO was able to track the cash donations received to designated U.S. Treasury accounts or disbursed. In the absence of policies, procedures, and plans, DOS developed an ad hoc process to manage $126 million in foreign cash donations to the U.S. government for Hurricane Katrina relief efforts. As cash donations arrived, a National Security Council (NSC)-led interagency working group was convened to make policy decisions about the use of the funds. FEMA officials told GAO they had identified and presented to the working group a number of items that the donated funds could be spent on. The NSC-led interagency working group determined that use of those donated funds, once accepted by FEMA under the Stafford Act, would be more limited than the wider range of possible uses available if the funds were held and then accepted under the gift authorities of other agencies. In October 2005, $66 million of the donated funds were spent on a FEMA case management grant, and as of March 16, 2006, $60 million remained undistributed in the DOS-designated account at the Treasury that did not pay interest. Treasury may pay interest on funds accepted by FEMA under the Stafford Act. According to DOS, an additional $400 million in international cash donations are likely to arrive. It is important that cash management policies and spending plan options are considered and in place to deal with the forthcoming donations so that the purchasing power of the donated cash is maintained for relief and reconstruction. FEMA and other agencies did not have policies and procedures in place to ensure the proper acceptance and distribution of in-kind assistance donated by foreign countries and militaries. In-kind donations included food and clothing. FEMA and other agencies established ad hoc procedures. However, in the distribution of the assistance to FEMA sites, GAO found that no agency tracked and confirmed that the assistance arrived at their destinations. Also, lack of procedures, inadequate information up front about the donations, and insufficient coordination resulted in the U.S. government agreeing to receive food and medical items that were unsuitable for use in the United States and storage costs of about $80,000. The procedures also allowed confusion about which agency was to accept and provide oversight of foreign military donations. DOD's lack of internal guidance regarding the DOS coordinating process resulted in some foreign military donations that arrived without DOS, FEMA, or DOD oversight.
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According to the State Department, no country in the world poses a more immediate narcotics threat to the United States than Mexico. Estimates indicate that up to 70 percent of the more than 300 tons of cocaine that entered the United States in 1994 came through Mexico. In March 1996, the State Department reported that Mexico supplied up to 80 percent of the foreign-grown marijuana consumed in the United States and from 20 to 30 percent of the heroin. Furthermore, during the past 3 years, Mexican trafficking organizations operating on both sides of the border have replaced U.S.-based outlaw motorcycle gangs as the predominant methamphetamine manufacturers and traffickers in the United States. The Drug Enforcement Administration (DEA) estimates that up to 80 percent of the methamphetamine available in the United States is either produced in Mexico and transported to the United States or manufactured in the United States by Mexican traffickers. Mexican drug-trafficking organizations have complete control over the production and distribution of methamphetamine. In recent years, drug-trafficking organizations in Mexico have become more powerful, expanding their methamphetamine operations and also their cocaine-related activities. According to DEA, Mexican drug traffickers have used their vast wealth to corrupt police and judicial officials as well as project their influence into the political sector. According to DEA's Administrator, some Mexican organizations have the potential of becoming as powerful as their Colombian counterparts. Furthermore, proximity to the United States, endemic corruption, and little or no financial regulation have combined to make Mexico a money-laundering haven for the initial placement of drug profits into the world's financial systems. Drug traffickers use a variety of air, land, and sea conveyances and routes to move cocaine from Colombia to Mexico and then overland through Mexico into the United States. Traditionally, traffickers have relied on twin-engine general aviation aircraft to deliver cocaine shipments that ranged from 800 to 1,000 kilograms. Beginning in 1994, however, some trafficking groups began using larger Boeing 727-type jet aircraft that can fly faster than U.S. and Mexican detection and monitoring aircraft and deliver up to 10 metric tons of cocaine per trip. To date, there have been eight known deliveries using this means of transport. Furthermore, as we recently reported, traffickers in the Caribbean have changed their primary means of delivery and are increasingly using commercial and noncommercial maritime vessels. According to U.S. Embassy officials, about two-thirds of the cocaine currently entering Mexico is transported by maritime means. Mexico has taken some counternarcotics actions. Mexico eradicated substantial amounts of marijuana and opium poppy crops in 1995 with the assistance of up to 11,000 soldiers working on drug eradication programs. According to the Department of State, Mexican personnel effectively eradicated 29,000 acres of marijuana and almost 21,000 acres of opium poppy in 1995. Furthermore, President Zedillo directed the Mexican Air Force to use its F-5 aircraft to assist in air interdiction efforts in 1995. On the other hand, the amount of cocaine seized and the number of drug-related arrests in Mexico have declined from 1993 to 1995 compared to those before U.S. assistance was terminated. For example, the average annual amount of cocaine seized in Mexico between 1990 and 1992 was more than 45 metric tons, including more than 50 tons in 1991. In contrast, from 1993 to 1995, average cocaine seizures declined to about 30 metric tons annually. The number of drug-related arrests declined by nearly two-thirds between 1992 and 1995. Mexico's efforts to stop the flow of drugs have been limited by numerous problems. First, despite the efforts that President Zedillo has undertaken since late 1994, both State and DEA have reported that corruption in Mexico is still widespread and that pervasive corruption is seriously undermining counternarcotics efforts. Second, serious economic and political problems have limited Mexico's counternarcotics effectiveness. In December 1994, Mexico experienced a major economic crisis--a devaluation of the peso that eventually resulted in a $20-billion U.S. financial assistance package. In addition, high rates of unemployment and inflation have continued to limit Mexico's economic recovery. Also, Mexico has had to focus funds and resources on the Chiapas region to suppress an insurgency movement. Third, Mexico has lacked some basic legislative tools needed to combat drug-trafficking organizations, including the use of wiretaps, confidential informants, and a witness protection program. New legislation authorizing these activities recently passed the Mexican Congress and is expected to be enacted following ratification by the Mexican states. Also, until May 1996, the laundering of drug profits was not a criminal offense and Mexico's laws lacked sufficient penalties to effectively control precursor chemicals that are used to manufacture methamphetamine. To counter the growing threat posed by these chemicals, the United States encouraged Mexico to adopt strict chemical control laws. Fourth, the counternarcotics capabilities of the Mexican government to interdict drug-trafficking activities are hampered by inadequately equipped and poorly maintained aircraft. In addition to equipment problems, some Mexican pilots, mechanics, and technicians are not adequately trained. For example, many F-5 pilots receive only a few hours of proficiency training each month, which is considered inadequate to maintain the skills needed for interdiction. Moreover, assigning the aircraft to interdiction efforts may not have an immediate impact because of deficiencies in the capabilities and maintenance of the F-5s. Between fiscal years 1975 and 1992, Mexico was the largest recipient of U.S. counternarcotics assistance, receiving about $237 million in assistance. In fiscal year 1992, the United States provided about $45 million n assistance that included excess helicopters, aviation maintenance support, military aviation training, and some equipment. In early 1993, the Mexican government assumed responsibility for the cost of all counternarcotics efforts in Mexico. Since then, U.S. aid has declined sharply and, in 1995, amounted to about $2.6 million, mostly for helicopter spare parts and a limited amount of training to Mexican personnel. According to the State Department, U.S. efforts in Mexico are guided by an interagency strategy developed in 1992 that focused on strengthening the political commitment and institutional capability of the Mexican government, targeting major trafficking organizations, and developing operational initiatives such as drug interdiction. A key component of the strategy, developing Mexican institutional capabilities to interdict drugs, was severely hampered when State Department funding was largely eliminated in January 1993. U.S. policy decisions have also affected drug control efforts in the transit zone and Mexico. In November 1993, the President issued Presidential Decision Directive 14, which changed the focus of the U.S. international drug control strategy from interdicting cocaine as it moved through the transit zone of the Caribbean and Mexico to stopping cocaine in the source countries of Bolivia, Colombia, and Peru. To accomplish this, drug interdiction resources were to be reduced in the transit zone, while, at the same time, were to be increased in the source countries. As we reported in April 1996, the Department of Defense (DOD) and other agencies involved in drug interdiction activities in the transit zone began to see major reductions in their drug interdiction resources and capabilities in fiscal year 1993. The amount of U.S. funding for the transit zone declined from about $1 billion in fiscal year 1992 to about $569 million in fiscal year 1995--a decline of 43 percent. Reductions in the size of the counternarcotics program have resulted in corresponding decreases in the staff available to monitor how previously provided U.S. helicopters and other assistance are being used, a requirement of section 505 of the Foreign Assistance Act of 1961, as amended. The Mexican government, however, has objected to direct oversight of U.S.-provided assistance and, in some instances, has refused to accept assistance that was contingent upon signing such an agreement. In other instances, Mexico's position resulted in lengthy negotiations between the two countries to develop agreements that satisfied the requirements of section 505 and were more sensitive to Mexican concerns about national sovereignty. Prior to the "Mexicanization" policy, the State Department employed several aviation advisers who were stationed at the aviation maintenance center in Guadalajara and the pilot training facility at Acapulco. One of the duties of these advisers was to monitor how U.S. assistance was being used. However, with the advent of the Mexicanization policy in 1993, the number of State Department and contract personnel was greatly reduced and the U.S.-funded aviation maintenance contract was not renewed. As a result, the State Department currently has no personnel in the field to review operational records on how the 30 U.S.-provided helicopters are being used. According to U.S. officials, the U.S. Embassy relies heavily on biweekly reports that the Mexican government submits. Unless they request specific operational records, U.S. personnel have little knowledge of whether helicopters are being properly used for counternarcotics activities. There are also limitations in U.S. interdiction efforts. The 1993 change in the U.S. drug interdiction strategy reduced the detection and monitoring assets in the transit zone. U.S. Embassy officials stated that this reduction created a void in the radar coverage, and some drug-trafficking aircraft are not being detected as they move through the eastern Pacific. DOD officials told us that radar voids have always existed throughout the transit zone and the eastern Pacific area. These voids are attributable to the vastness of the Pacific Ocean and the limited range of ground- and sea-based radars. As a result, DOD officials believe that existing assets must be used in a "smarter" manner, rather than flooding the area with expensive vessels and ground-based radars, which are not currently available. In Mexico, U.S. assistance and DEA activities have focused primarily on interdicting aircraft as they deliver their illicit drug cargoes. However, as previously mentioned, traffickers are increasingly relying on maritime vessels for shipping drugs. Commercial smuggling primarily involves moving drugs in containerized cargo ships. Noncommercial smuggling methods primarily involved "mother ships" that depart Colombia and rendezvous with either fishing vessels or smaller craft, as well as "go-fast" boats that depart Colombia and go directly to Mexico's Yucatan Peninsula. Efforts to address the maritime movements of drugs into Mexico are minimal, when compared with the increasing prevalence of this trafficking mode. State Department officials believe that Mexican maritime interdiction efforts would benefit from training offered by the U.S. Customs Service and the U.S. Coast Guard in port inspections and vessel-boarding practices. Since our June 1995 testimony, a number of events have occurred that could affect future drug control efforts by the United States and Mexico. Specifically: The U.S. Embassy elevated counternarcotics from the fourth highest priority--its 1995 ranking--in its Mission Program Plan to its co-first priority, which is shared with the promotion of U.S. business and trade. In July 1995, the Embassy also developed a detailed embassywide counternarcotics plan for U.S. efforts in Mexico. The plan involves the activities of all agencies involved in counternarcotics activities at the Embassy, focusing on four established goals, programs that the Embassy believes will meet these goals, and specific milestones and measurable objectives. It also sets forth funding levels and milestones for measuring progress. The Embassy estimated that it will require $5 million in State Department funds to implement this plan during fiscal year 1996. However, only $1.2 million will be available, according to State Department personnel. After taking office in December 1994, President Zedillo declared drug trafficking "Mexico's number one security threat." As such, he advocated legislative changes to combat drugs and drug-related crimes. During the most recently completed session, the Mexican Congress enacted legislation that could improve some of Mexico's counternarcotics capabilities such as making money laundering a criminal offense. However, legislation to provide Mexican law enforcement agencies with some essential tools needed to arrest and prosecute drug traffickers and money launderers requires ratification by the Mexican states. These tools include the use of electronic surveillance and other modern investigative techniques that, according to U.S. officials, are very helpful in attacking sophisticated criminal organizations. Furthermore, to date, the Mexican Congress has not addressed several other key issues, such as a requirement that all financial institutions report large cash transactions through currency transaction reports. In March 1996, Presidents Clinton and Zedillo established a high-level contact group to better address the threat narcotics poses to both countries. The Director of the Office of National Drug Control Policy cochaired the first contact group meeting in late March, which met to review drug control policies, enhance cooperation, develop new strategies, and begin to develop a new plan for action. Binational working groups have been formed to plan and coordinate implementation of the contact group's initiatives. According to officials from the Office of National Drug Control Policy, a joint antinarcotics strategy is expected to be completed in late 1996. In April 1996 the United States and Mexico signed an agreement that will facilitate the transfer of military equipment and, shortly thereafter, the United States announced its intention to transfer a number of helicopters and spare parts to the Mexican government. Twenty UH-1H helicopters are scheduled to be transferred in fiscal year 1996 and up to 53 in fiscal year 1997. State Department personnel stated that the details about how the pilots will be trained, as well as how the helicopters will be operated, used, and maintained, are being worked out. It is too early to tell whether these critical efforts will be implemented in such a way as to substantially enhance counternarcotics efforts in Mexico. This concludes my prepared remarks. I would be happy to respond to any questions. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed counternarcotics activities in Mexico, focusing on: (1) the nature of the drug-trafficking threat from Mexico; (2) Mexican government efforts to counter drug-trafficking activities; and (3) recent initiatives by the United States and Mexico to increase counternarcotics activities. GAO noted that: (1) U.S. and Mexican drug interdiction efforts have had little, if any, impact on the flow of illegal drugs from Mexico to the United States; (2) the amount of cocaine seized and the number of drug-related arrests have significantly declined since 1992; (3) widespread corruption, economic difficulties, and inadequate equipment and personnel training have hampered Mexico's capabilities to detect and interdict drug traffickers; (4) a substantial amount of Mexico's resources have been focused on economic concerns; (5) U.S. counternarcotics assistance has declined by 43 percent since 1992; (6) U.S. policy decisions and reductions in the counternarcotics program have also affected Mexican and U.S. drug control efforts; (7) Mexico lacks some important legislative tools for curbing drug-related activities; (8) drug interdiction funding declined from $1 billion in fiscal year (FY) 1992 to about $570 million in FY 1995; and (9) although staffing cutbacks have limited U.S. ability to monitor counternarcotics assistance to Mexico, the United States and Mexico have created a framework for increased cooperation and are developing a new binational drug control strategy.
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Since 1955, the executive branch has encouraged federal agencies to obtain commercially available goods and services from the private sector when the agencies determine that such action is cost-effective. OMB formalized the policy in its Circular A-76, issued in 1966. In 1979, OMB supplemented the circular with a handbook that included procedures for competitively determining whether commercial activities should be performed in-house, by another federal agency through an interservice support agreement, or by the private sector. OMB has updated this handbook several times. 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 (e.g., for activities involving 10 or fewer civilians). Generally, however, commercial functions are to be converted to or from contract performance by cost comparison, where the estimated cost of government performance of a commercial activity is compared with the cost of contractor performance in accordance with the principles and procedures set forth in Circular A-76 and the revised 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 on the basis of its most efficient organization, and compares it with the winning offer from the private sector. According to A-76 guidance, an activity should not be moved from one sector to the other (whether public to private or vice versa) unless doing so would save at least $10 million or 10 percent of the personnel costs of the in-house performance (whichever is less). 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. Private-sector offerors who believe that the agency has not complied with applicable procedures have additional avenues of appeal. They may file a bid protest with GAO or file an action in court. Circular A-76 requires agencies to maintain annual inventories of commercial activities performed in-house. A similar requirement was included in the Federal Activities Inventory Reform (FAIR) Act of 1998, which directs agencies to develop annual inventories of their positions that are not inherently governmental. The fiscal year 2001 inventory identified approximately 841,000 full-time equivalent commercial-type positions governmentwide, of which approximately 413,000 were in the Department of Defense (DOD). DOD has been the leader among federal agencies in recent years in its use of OMB Circular A-76; the circular's use by other agencies has been very limited. However, in 2001, OMB signaled its intention to direct greater use of the circular on a government-wide basis. In a March 9, 2001, memorandum, OMB 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. Subsequent guidance expanded the requirement to 15 percent by fiscal year 2003, with the ultimate goal of competing at least 50 percent. Although comprising a relatively small portion of the government's overall service contracting activity, competitive sourcing under Circular A-76 has been the subject of much controversy because of concerns about the process raised both by the public and private sectors. Federal managers and others have been concerned about the organizational turbulence that typically follows the announcement of A-76 studies. Government workers have been concerned about the impact of competition on their jobs, the opportunity for input into the process, and the lack of parity with industry offerors to protest A-76 decisions. Industry representatives have complained about unfairness in the process and the lack of a level playing field between the government and the private sector in accounting for costs. Concerns have also been raised about the adequacy of the oversight of subsequent performance, whether the work is being performed by the public or private sector. Amid these concerns over the A-76 process, the Congress enacted section 832 of the National Defense Authorization Act, Fiscal Year 2001. The act 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 to contactor personnel. The act also required the Comptroller General to appoint highly qualified and knowledgeable persons to serve on the panel and ensure that the following entities received fair representation on the panel: DOD Persons in private industry Federal labor organizations OMB Appendix I lists the names of the Panel members. The legislation mandating the Panel's creation required that the Panel complete its work and report the results of its study to the Congress no later than May 1, 2002. The Panel's report was published on April 30, 2002. In establishing the Panel, a number of steps were taken to ensure representation from all major stakeholders as well as to ensure a fair and balanced process. This began with my selection of Panel members, which was then followed by the Panel's establishment of a process to guide its work. To ensure a broad array of views on the Panel, we used a Federal Register notice to seek suggestions on the Panel's composition. On the basis of the suggestions received in response to that notice, as well as the need to include the broad representation outlined in legislation, I personally interviewed potential panel members. I believe that we selected a group of outstanding individuals representative of diverse interest groups from the public and private sectors, labor unions, and academia with experience in dealing with sourcing decisions at both the federal and local government levels. Once convened, the Panel, as a group, took a number of steps at the outset to guide its deliberations and ensure a full and balanced consideration of the issues. The first step was the adoption of the following mission statement: Mission of the Commercial Activities Panel The mission of the Commercial Activities Panel is to improve the current sourcing framework and processes so that they reflect a balance among taxpayer interests, government needs, employee rights, and contractor concerns. The Panel also agreed that all of its findings and recommendations would require the agreement of at least a two-thirds supermajority of the Panel in order to be adopted. The Panel further decided that each Panel member would have the option of having a brief statement included in the report explaining the member's position on the matters considered by the Panel. In addition to the Federal Register notice soliciting input on issues to be considered by the Panel, the Panel held 11 meetings over the period of May 2001 to March 2002. Three of these were public hearings in Washington, D.C.; Indianapolis, Indiana; and San Antonio, Texas. In the public hearings, Panel members heard testimony from scores of representatives of the public and private sectors, state and local governments, unions, contractors, academia, and others. Panelists heard first-hand about the current process, primarily the cost comparison process conducted under OMB Circular A-76, as well as alternatives to that process. Appendix II provides more detail on the topics and concerns raised at the public hearings. The Panel also maintained an E-mail account to receive written comments from any source. After the completion of the field hearings, the Panel members met in executive session several times, augmented between meetings by the work of staff to help them (1) gather background information on sourcing trends and challenges, (2) identify sourcing principles and criteria, (3) consider A-76 and other sourcing processes to assess what works and what does not, and (4) assess alternatives to the current sourcing processes. As the Panel began its work, it recognized the need for a set of principles that would provide a framework for sourcing decisions. Those principles, as they were debated and fleshed out, provided an important vehicle for assessing what does or does not work in the current A-76 process, and provided a framework for identifying needed changes in the process. The Panel coalesced around a set of sourcing principles. The principles helped frame the Panel's deliberations and became a reference point for the Panel's work. Moreover, the principles were unanimously adopted by the Panel and included as part of the Panel's recommendations. While each principle is important, no single principle stands alone, and several are interrelated. Therefore, the Panel adopted the principles and their accompanying narrative comments as a package and then used these principles to assess the government's existing sourcing system and to develop additional Panel recommendations. The Panel believes that federal sourcing policy should: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Support agency missions, goals, and objectives. Be consistent with human capital practices designed to attract, motivate, retain, and reward a high-performing federal workforce. Recognize that inherently governmental and certain other functions should be performed by federal workers. Create incentives and processes to foster high-performing, efficient, and effective organizations throughout the federal government. Be based on a clear, transparent, and consistently applied process. Avoid arbitrary full-time equivalent or other arbitrary numerical goals. Establish a process that, for activities that may be performed by either the public or the private sector, would permit public and private sources to participate in competitions for work currently performed in-house, work currently contracted to the private sector, and new work, consistent with these guiding principles. Ensure that, when competitions are held, they are conducted as fairly, effectively, and efficiently as possible. Ensure that competitions involve a process that considers both quality and cost factors. Provide for accountability in connection with all sourcing decisions. The principles and their accompanying commentary are included in their entirety in appendix III. During our deliberations, the Panel noted that there are some advantages to the current A-76 system. First, A-76 cost comparisons are conducted under an established set of rules, the purpose of which is to ensure that sourcing decisions are based on uniform, transparent, and consistently applied criteria. Second, the A-76 process has enabled federal managers to make cost comparisons between sectors that have vastly different approaches to cost accounting. Third, the current A-76 process has been used to achieve significant savings and efficiencies for the government. Savings result regardless of whether the public or the private sector wins the cost comparison. This is because competitive pressures have served to promote efficiency and improve the performance of the activity studied. Despite these advantages, the Panel also heard frequent criticisms of the A-76 process. The Panel's report noted that both federal employees and private firms complain that the A-76 competition process does not meet the principles' standard of a clear, transparent, and consistently applied process. For example, some Federal employees have complained that A-76 cost comparisons have included functions that were inherently governmental and should not have been subject to a cost comparison at all. While OMB guidance exists to help define what functions should be considered inherently governmental, the Panel's third principle recognized that making such determinations remains difficult. Also, others have expressed concern that some government officials in a position to affect contracting decisions may subsequently take positions with winning contractors. In this regard, various legislative provisions exist that place restrictions on former government employees taking positions with winning contractors. Time did not permit the Panel to explore the extent to which additional legislation may be needed in this area. Since January 1999, GAO has issued 25 decisions on protests involving A- 76 cost comparisons. Of these decisions, GAO sustained 11 and denied 14. "Sustaining" a protest means that GAO found that the agency had violated procurement statutes or regulations in a way that prejudiced the protester. Protests involving A-76 represent a very small percentage of the many hundreds of bid protest decisions that GAO issued in the past 3 years. They do, however, indicate an unusually high percentage of sustained protests. In protest decisions covering all procurements, GAO has sustained about one-fifth of the protests, while in A-76 protests GAO has sustained almost half. (It should be kept in mind, though, that most A-76 decisions are not protested, just as most contract award decisions are not protested.) These sustained protests generally reflect only the errors made in favor of the government's most efficient organization since only the private-sector offeror has the right to protest to GAO. In addition, while any public-private competition is, by nature, challenging and open to some of the concerns that have been raised regarding the A-76 process, the high rate of successful A-76 protests suggests that agencies have a more difficult time applying the A-76 rules than they do applying the normal (i.e., Federal Acquisition Regulation) acquisition rules. At least in part, this may be because the Federal Acquisition Regulation (FAR) rules are so much better known. While training could help overcome this lack of familiarity (and many agencies, particularly those in DOD, have been working on A-76 training), the Panel noted that the FAR acquisition and source selection processes are already better known and better understood; they, in a sense, serve as a "common language" for procurements and source selections. In the Panel's view, the most serious shortcoming of the A-76 process is that it has been stretched beyond its original purpose, which was to determine the low-cost provider of a defined set of services. Circular A-76 has not worked well as the basis for competitions that seek to identify the best provider in terms of quality, innovation, flexibility, and reliability. This is particularly true in today's environment, where solutions are increasingly driven by technology and may focus on more critical, complex, and interrelated services than previously studied under A-76. In the federal procurement system today, there is common recognition that a cost-only focus does not necessarily deliver the best quality or performance for the government or the taxpayers. Thus, while cost is always a factor, and often the most important factor, it is not the only factor that may need to be considered. In this sense, the A-76 process may no longer be as effective a tool, since its principal focus is on cost. During its year-long study, the Panel identified several key characteristics of a successful sourcing policy. First, the Panel heard repeatedly about the importance of competition and its central role in fostering economy, efficiency, high performance, and continuous performance improvement. The means by which the government utilizes competition for sourcing its commercial functions was at the center of the Panel's discussions and work. The Panel strongly supported a continued emphasis on competition as a means to improve economy, efficiency, and effectiveness of the government. The Panel also believed that whenever the government is considering converting work from one sector to another, public-private competitions should be the norm. Direct conversions generally should occur only where the number of affected positions is so small that the costs of conducting a public-private competition clearly would outweigh any expected savings. Moreover, there should be adequate safeguards to ensure that activities, entities, or functions are not improperly separated to reduce the number of affected positions and avoid competition. A second theme identified by the Panel and consistently cited at the public hearings was the need for a broader approach to sourcing decisions, rather than an approach that relies on the use of arbitrary quotas or that is unduly constrained by personnel ceilings. Critical to adopting a broader perspective is having an enterprisewide perspective on service contract expenditures, yet the federal government lacks timely and reliable information about exactly how, where, and for what purposes, in the aggregate, taxpayer dollars are spent for both in-house and contracted services. The Panel was consistently reminded about, and fully agreed with, the importance of ensuring accountability throughout the sourcing process, providing the workforce with adequate training and technical support in developing proposals for improving performance, and assisting those workers who may be adversely affected by sourcing decisions. Improved accountability extends to better monitoring of performance and results after competitions are completed--regardless of the winner. The Panel heard about several successful undertakings involving other approaches to sourcing decisions. Some involved business process reengineering and public-private partnerships, and emphasized labor- management cooperation in accomplishing agency missions. For example, in Indianapolis, Indiana, on August 8, 2001, the Panel heard from representatives from several organizations that had taken different approaches to the sourcing issue. Among them were the Naval Surface Warfare Center in Crane, Indiana, which reengineered its business processes to reduce costs and gain workshare, and the city of Indianapolis, which effectively used competition to greatly improve the delivery of essential services. In doing so, the city also provided certain technical and financial assistance to help city workers successfully compete for work. These entities endeavored to become "most efficient organizations." It was from these examples and others that the Panel decided that all federal agencies should strive to become "high-performing organizations." Third, sourcing policy is inextricably linked to the government's human capital policies. This linkage has many levels, each of which is important. It is particularly important that sourcing strategies support, not inhibit, the government's efforts to attract, motivate, and retain a high-performing in- house workforce, as well as support its efforts to access and collaborate with high-performance, private-sector providers. Properly addressed, these policies should be complementary, not conflicting. In addition to the principles discussed earlier, the Panel adopted a package of additional recommendations it believed would improve significantly the government's policies and procedures for making sourcing decisions. It is important to emphasize that the Panel decided to consider and adopt these latter recommendations as a package, recognizing the diverse interests represented on the Panel and the give and take required to reach agreement among a supermajority of the Panelists. As a result, a supermajority of the Panel members recommended the adoption of the following actions: Conduct public-private competitions under the framework of an integrated FAR-based process. The government already has an established mechanism that has been shown to work as a means to identify high-value service providers: the negotiated procurement process of the Federal Acquisition Regulation. The Panel believed that in order to promote a more level playing field on which to conduct public-private competitions, the government needed to shift, as rapidly as possible, to a FAR-type process under which all parties would compete under the same set of rules. Although some changes in the process would be necessary to accommodate the public-sector proposal, the same basic rights and responsibilities would apply to both the private and the public sectors, including accountability for performance and the right to protest. This and perhaps other aspects of the integrated competition process could require changes to current law or regulation (e.g., requirements in title 10 of the U.S. Code that DOD competitive sourcing decisions be based on low cost). Make limited changes to the existing A-76 process. The development of an integrated FAR-type process will require some time to be implemented. In the meantime, the Panel expected current A-76 activities would continue, and therefore believed some modifications to the existing process could and should be made. Accordingly, the Panel recommended a number of limited changes to OMB Circular A-76. These changes would, among other things, strengthen conflict-of-interest rules, improve auditing and cost accounting, and provide for binding performance agreements. Encourage the development of high-performing organizations (HPOs). The Panel recommended that the government take steps to encourage HPOs and continuous improvement throughout the federal government, independent of the use of public-private competitions. In particular, the Panel recommended that the Administration develop a process to select a limited number of functions currently performed by federal employees to become HPOs, and then evaluate their performance. Then, the authorized HPOs would be exempt from competitive sourcing studies for a designated period of time. Overall, however, the HPO process is intended to be used in conjunction with, not in lieu of, public-private competitions. The successful implementation of the HPO concept will require a high degree of cooperation between labor and management, as well as a firm commitment by agencies to provide sufficient resources for training and technical assistance. In addition, a portion of any savings realized by the HPO should be available to reinvest in continuing reengineering efforts and for further training or incentive purposes. Let me speak specifically to the creation of HPOs. Many organizations in the past, for various reasons, have found it difficult to become high- performing organizations. Moreover, the federal government continues to face new challenges in making spending decisions for both the long and near term because of federal budget constraints, rapid advances in technology, the impending human capital crisis, and new security challenges brought on by the events of September 11, 2001. Such a transformation will require that each organization reverse decades of underinvestment and lack of sustained attention to maintaining and enhancing its capacity to perform effectively. The Panel recognized that incentives are necessary to encourage both management and employees to promote the creation of HPOs. It envisioned that agencies would have access to a range of financial and consulting resources to develop their plans, with the costs offset by the savings realized. The Panel's report focused primarily on HPOs in the context of commercial activities, given its legislative charter. However, there is no reason why the concept could not be applied to all functions, since much of the government's work will never be subject to competition. HPOs may require some additional flexibility coupled with appropriate safeguards to prevent abuse. The Panel also envisioned the use of performance agreements and periodic performance reviews to ensure appropriate transparency and accountability. Although a minority of the Panel did not support the package with the three additional recommendations noted above, some of them indicated that they supported one or more elements of the package. Importantly, there was a good faith effort, even at the last minute of the report's preparation, to maximize agreement and minimize differences among Panelists. In fact, changes were made even when it was clear that some Panelists seeking changes were highly unlikely to vote for the supplemental package of recommendations. As a result, on the basis of Panel meetings and my personal discussions with Panel members at the end of our deliberative process, the major differences among Panelists were few in number and philosophical in nature. Specifically, disagreement centered primarily on (1) the recommendation related to the role of cost in the new FAR-type process and (2) the number of times the Congress should be required to act on the new integrated process, including whether the Congress should specifically authorize a pilot program that tests that process for a specific time period. Many of the Panel's recommendations can be accomplished administratively under existing law, and the Panel recommended that they be implemented as soon as practical. The Panel also recognized that some of its recommendations could require changes in statutes or regulations and that making the necessary changes would take some time. Any legislative changes should be approached in a comprehensive and considered manner rather than a piecemeal fashion in order for a reasonable balance to be achieved. Like the guiding principles, the other recommendations were the result of much discussion and compromise and should be considered as a whole. Moreover, although the Panel viewed the use of a FAR-type process for conducting public-private competitions as the end state, the Panel also recognized that some elements of its recommendations represent a shift in current procedures for the federal government. Therefore, the Panel's report outlined the following phased implementation strategy that would allow the federal government to demonstrate and then refine its sourcing policy on the basis of experience: A-76 studies currently under way or initiated during the near term should continue under the current framework. Subsequent studies should be conducted in accordance with the improvements listed in the report. OMB should develop and oversee the implementation of a FAR-type, integrated competition process. In order to permit this to move forward expeditiously, it may be advisable to limit the new process initially to civilian agencies, where its use would not require legislation. Statutory provisions applying only to DOD agencies may require repeal or amendment before the new process could be used effectively at DOD, and the Panel recommended that any legislation needed to accommodate the integrated process in DOD be enacted as soon as possible. As part of a phased implementation and evaluation process, the Panel recommended that the integrated competition process be used in a variety of agencies and in meaningful numbers across a broad range of activities, including work currently performed by federal employees, work currently performed by contractors, and new work. Within 1 year of initial implementation of the new process, and again 1 year later, the Director of OMB should submit a detailed report to the Congress identifying the costs of implementing the new process, any savings expected to be achieved, the expected gains in efficiency or effectiveness of agency programs, the impact on affected federal employees, and any lessons learned as a result of the use of this process together with any recommendations for appropriate legislation. GAO would review each of these OMB reports and provide its independent assessment to the Congress. The Panel anticipated that OMB would use the results of its reviews to make any needed "mid-course corrections." On the basis of the results generated during the demonstration period, and on the reports submitted by OMB and GAO, the Congress will then be in a position to determine the need for any additional legislation. The federal government is in a time of transition, and we face a range of challenges in the 21st century. This will require the federal government to transform what it does, the way that it does business, and who does the government's business. This may require changes in many areas, including human capital and sourcing strategies. On the basis of the statutory mandate, the Commercial Activities Panel primarily focused on the sourcing aspects of this needed transformation. I supported the adoption of the set of principles as well as the package of additional recommendations contained in the Panel's report. Overall, I believe that the findings and recommendations contained in the Panel's report represent a reasoned, reasonable, fair, and balanced approach to addressing this important, complex, and controversial area. I hope that the Congress and the Administration will continue to consider and act on this report and its recommendations. I particularly want to urge the Congress and the Administration to consider the importance of encouraging agencies to become high-performing organizations on an ongoing basis. Agencies should not wait until faced with the challenge of public-private competitions to seek efficiencies to retain work in-house. In addition, most of the government's workers will never be subject to competitions. As a result, I believe that the Panel's recommendation pertaining to high- performing organizations could be an important vehicle for fostering much needed attention to how we enhance the economy, efficiency, and effectiveness of the federal government in ways other than through competition. Finally and most importantly, in considering the Panel's package of recommendations or any other changes that may be considered by the Congress and the Administration, the guiding principles, developed and unanimously agreed upon by the Panel, should be the foundation for any future action. Let me also add that I appreciate the hard work of my fellow Panelists and their willingness to engage one another on such a tough issue--one where we found much common ground despite a range of divergent views. I also want to thank the GAO staff and the other support staff who contributed to this effort. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other members of the subcommittee may have. David M. Walker, Chairman Comptroller General of the United States E. C. "Pete" Aldridge, Jr. Under Secretary of Defense for Acquisition, Technology and Logistics Frank A. Camm, Jr. Senior Analyst, RAND Mark C. Filteau President, Johnson Controls World Services, Inc. Washington, D.C., June 11, 2001 "Outsourcing Principles and Criteria" Status quo is not acceptable to anyone. Sourcing decisions require a strategic approach. Federal workers should perform core government functions. Need for MEOs throughout the government. Government needs clear, transparent, and consistently applied sourcing criteria. Avoid arbitrary FTE goals. Objective should be to provide quality services at reasonable cost. Provide for fair and efficient competition between the public and private sectors. Sourcing decisions require appropriate accountability. Indianapolis, Indiana, August 8, 2001 "Alternatives to A-76" Crane Naval Surface Warfare Center's reengineering process led to significant efficiencies and reduced workforce trauma. Employees must be involved with any reform effort. Secrecy is counterproductive. Committed leadership, effective implementation, and well-planned workforce transition strategies are key to any reform effort. Privatization-in-place was used effectively at Indianapolis Naval Air Warfare Center to avert a traditional Base Realignment and Closure action. The city of Indianapolis provided certain technical and financial assistance to help workers successfully compete for the work. Certain technology upgrades in Monterey, California, via a public-private partnership led to efficiencies and increased effectiveness. Measuring performance is critical. A-76 is only one of many efficiency tools available to federal managers. Other tools include Bid to goal, which helps units become efficient and thus avoid A-76, Transitional Benefit Corporation, a concept that promotes the transfer of government assets to the private sector and provides transition strategies for employees, and ESOP, under which employees own a piece of the organization that employs them. ESOPs have been established in a few federal organizations. San Antonio, Texas, August 15, 2001 "A-76: What's Working and What's Not" A-76 process is too long and too costly. Cost of studies can greatly reduce government savings. Cost to industry in both dollars and uncertainty. Demoralized workers quit. But successful contractors need these workers. Larger A-76 studies can yield greater savings, but these studies become much more complex. Lack of impetus for savings without competition. One-step bidding process should be used. MEO and contractors should Compete together in one procurement action, Be evaluated against the same solicitation requirements using the same Be awarded contracts based on best value. Provide more training for MEO and A-76 officials. MEOs should have legal status to protest and appeal awards and obtain bid information. A-76 rules should be more clear and applied consistently through a centralized management structure. For bid and monitoring purposes, government costs should be collected and allocated consistent with industry (e.g., activity-based costing). Need to eliminate any suggestion of conflicts of interest. Need incentives for agencies and workers (e.g., share-in-savings). Provide soft landings for workers. Allow workers to form public-sector organizations for bidding. Based on public input, a review of previous studies and other relevant literature, and many hours of deliberation, the Panel developed and unanimously adopted a set of principles that it believes should guide sourcing policy for the federal government. While each principle is important, no single principle stands alone. As such, the Panel adopted the principles as a package. The Panel believes that federal sourcing policy should: 1. Support agency missions, goals, and objectives. Commentary: This principle highlights the need for a link between the missions, goals, and objectives of federal agencies and related sourcing policies. 2. Be consistent with human capital practices designed to attract, motivate, retain, and reward a high-performing federal workforce. Commentary: This principle underscores the importance of considering human capital concerns in connection with the sourcing process. While it does not mean that agencies should refrain from outsourcing due to its impact on the affected employees, it does mean that the federal government's sourcing policies and practices should consider the potential impact on the government's ability to attract, motivate, retain, and reward a high-performing workforce both now and in the future. Regardless of the result of specific sourcing decisions, it is important for the workforce to know and believe that they will be viewed and treated as valuable assets. It is also important that the workforce receive adequate training to be effective in their current jobs and to be a valuable resource in the future. 3. Recognize that inherently governmental and certain other functions should be performed by federal workers. The sourcing principles were taken in their entirety from Commercial Activities Panel, Improving the Sourcing Decisions of Government: Final Report (Washington, D.C.: April 2002). the Federal Activities Inventory Reform (FAIR) Act has helped to identify commercial work currently being performed by the government. It is clear that government workers need to perform certain warfighting, judicial, enforcement, regulatory, and policymaking functions, and the government may need to retain an in-house capability even in functions that are largely outsourced. Certain other capabilities, such as adequate acquisition skills to manage costs, quality, and performance and to be smart buyers of products and services, or other competencies such as those directly linked to national security, also must be retained in-house to help ensure effective mission execution. 4. Create incentives and processes to foster high-performing, efficient, and effective organizations throughout the federal government. Commentary: This principle recognizes that, historically, it has primarily been when a government entity goes through a public-private competition that the government creates a "most efficient organization" (MEO). Since such efforts can lead to significant savings and improved performance, they should not be limited to public-private competitions. Instead, the federal government needs to provide incentives for its employees, its managers, and its contractors to constantly seek to improve the economy, efficiency, and effectiveness of the delivery of government services through a variety of means, including competition, public-private partnerships, and enhanced worker-management cooperation. 5. Be based on a clear, transparent, and consistently applied process. Commentary: The use of a clear, transparent, and consistently applied process is key to ensuring the integrity of the process as well as to creating trust in the process on the part of those it most affects: federal managers, users of the services, federal employees, the private sector, and the taxpayers. 6. Avoid arbitrary full-time equivalent (FTE) or other arbitrary numerical goals. Commentary: This principle reflects an overall concern about arbitrary numbers driving sourcing policy or specific sourcing decisions. The success of government programs should be measured by the results achieved in terms of providing value to the taxpayer, not the size of the in- house or contractor workforce. Any FTE or other numerical goals should be based on considered research and analysis. The use of arbitrary percentage or numerical targets can be counterproductive. 7. Establish a process that, for activities that may be performed by either the public or the private sector, would permit public and private sources to participate in competitions for work currently performed in- house, work currently contracted to the private sector, and new work, consistent with these guiding principles. Commentary: Competitions, including public-private competitions, have been shown to produce significant cost savings for the government, regardless of whether a public or a private entity is selected. Competition also may encourage innovation and is key to improving the quality of service delivery. While the government should not be required to conduct a competition open to both sectors merely because a service could be performed by either public or private sources, federal sourcing policies should reflect the potential benefits of competition, including competition between and within sectors. Criteria would need to be developed, consistent with these principles, to determine when sources in either sector will participate in competitions. 8. Ensure that, when competitions are held, they are conducted as fairly, effectively, and efficiently as possible. Commentary: This principle addresses key criteria for conducting competitions. Ineffective or inefficient competitions can undermine trust in the process. The result may be, for private firms (especially smaller businesses), an unwillingness to participate in expensive, drawn-out competitions; for federal workers, harm to morale from overly long competitions; for federal managers, reluctance to compete functions under their control; and for the users of services, lower performance levels and higher costs than necessary. Fairness is critical to protecting the integrity of the process and to creating and maintaining the trust of those most affected. Fairness requires that competing parties, both public and private, or their representatives, receive comparable treatment throughout the competition regarding, for example, access to relevant information and legal standing to challenge the way a competition has been conducted at all appropriate forums, including the General Accounting Office and the United States Court of Federal Claims. 9. Ensure that competitions involve a process that considers both quality and cost factors.
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The Commercial Activities Panel is a congressionally mandated panel to study and make recommendations for improving the policies and procedures governing the transfer of commercial activities from government to contractor personnel. The growing controversy surrounding competitions, under the Office of Management and Budget's Circular A-76 to determine whether the government should obtain commercially available goods and services from the public or private sectors, led to the establishment of this Panel. In establishing the Panel, several steps were taken to ensure representation from all major stakeholders as well as to ensure a fair and balanced process. To ensure a broad range of views on the Panel, a Federal Register notice was used to seek suggestions for the Panel's composition. As the Panel began its work, it recognized the need for a set of principles for sourcing decisions. These principles provide for an assessment of what does or does not work in the current A-76 process and provide a framework for identifying needed changes. Many of the Panel's recommendations can be accomplished administratively under existing law, and the Panel recommends that they be implemented as soon as practical. The Panel also recognizes that some of the recommendations would require changes in statutes or regulations that could take some time. Any legislative changes should be comprehensive and considered to achieve a reasonable balance.
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Both the UN and United States have a long history of peace support operations upon which to base cost estimates. The UN has carried out 60 peacekeeping missions worldwide since 1948. For each mission, the UN Department of Peacekeeping Operations (DPKO) prepares a budget, which is reviewed in detail at high levels of UN management and is ultimately approved by the General Assembly. The UN assesses each member for its allocated portion of this amount based on the country's per capita gross national income and its membership status on the Security Council. The United States currently pays about 27 percent of the total for each mission, and in fiscal year 2005 directly contributed about $1.3 billion in support of UN peacekeeping operations overall. The United States has also led and participated in a variety of peacekeeping operations since World War II, most recently in Somalia, Haiti, Bosnia, and Kosovo. U.S. military operations are funded largely by DOD appropriations, and, under DOD regulations, the budgets are based primarily on cost estimates generated with the department's Contingency Operations Support Tool. This computer model uses financial formulas that draw upon a database of historical costs from past military operations and other regularly updated cost information. In addition, the State Department has extensive experience posting foreign service officers in conflict areas and funding U.S. police officers to support UN peacekeeping missions, for which it maintains cost estimation formulas and historical cost databases. The UN Security Council has authorized five peacekeeping missions in Haiti since 1993, of which the United States has led two between 1994 and 2004. The primary task of the ongoing MINUSTAH operation is to provide a secure and stable environment through its military and police presence and operational support to the Haitian National Police. MINUSTAH assists the transitional government in police reform and institutional strengthening; disarmament, demobilization and reintegration; elections monitoring; and promotion and protection of human rights and the political process. The initial authorized force strength was 6,700 troops, 1,622 civilian police officers, and 1,697 civilian administrators and staff. Although initially authorized for 6 months, the UN Security Council has renewed the mission's authorization and funding through June 2006. Criticism and controversy, including allegations of sexual misconduct of peacekeepers, have brought calls for reform of UN peacekeeping operations within the UN and from U.S. observers. In 2000, the UN Secretary General convened a high-level panel to review UN peace and security, which recommended a variety of reforms. The 2005 bipartisan Task Force on the United Nations highlighted the need for more rapid deployment and more clearly defined mandates. Proposed legislation, the Henry J. Hyde United Nations Reform Act of 2005, calls for more oversight and investigation over UN operations and mandates that the UN adopt and enforce a code of conduct for all peacekeeping personnel. We estimate that it would cost the United States twice as much as the UN to conduct an operation similar to MINUSTAH. The higher U.S. cost of civilian police, military pay and support, and facilities account for virtually the entire difference between our estimate and the MINUSTAH budget, and reflects the additional cost of ensuring high U.S. standards for training, troop welfare, and personnel security. From May 1, 2004, to June 30, 2005--the first 14 months of MINUSTAH-- the UN budgeted mission costs totaled $428 million. This budget assumed a phased deployment of 6,700 military personnel, 750 personnel in formed police units, 872 civilian police officers, and 1,184 civilian administrators and staff. It included the cost of personnel, operational support, equipment, facilities, and transportation. Using the same basic parameters of troop and staff deployment in Haiti for 14 months, we estimated that the United States would likely budget about $876 million, nearly twice the UN estimate, for a comparable U.S. peacekeeping operation. (This cost estimate is based on a variety of assumptions, described in detail in app. I.) The United States was financially responsible for $116 million of the budgeted cost of MINUSTAH, based on the U.S. assessed contribution of 27.1 percent of the DPKO regular budget. Hence, we estimate that conducting a U.S. operation similar to MINUSTAH would cost the United States about 7.5 times as much as its official contribution to the UN for that mission ($876 million versus $116 million). Major disparities in the cost for civilian police, military pay and support, and facilities account for virtually all of the difference between the UN budget and our cost estimate. Our estimate reflects the additional expense of paying salaries for personnel that would otherwise be donated by other countries as well as the cost of ensuring U.S. standards for police training, the equipment and welfare of military personnel, and the security of staff posted overseas. (See table 1 for a detailed comparison of the UN budget and our estimate by major cost category.) Civilian police. The UN budgeted $25 million to deploy 872 civilian officers for MINUSTAH, while we estimate that it would cost the United States $217 million to deploy the same number of U.S. officers. The UN does not reimburse countries contributing police for the officers' salaries and only pays for living expenses, clothing allowance, and death and disability compensation. U.S. costs, however, include salaries, special pay, benefits, equipment, and special training. Furthermore, U.S. officers deployed in Haiti under MINUSTAH are required to meet standards for training, experience, and skills significantly beyond those applied by the UN. For instance, U.S. officers deployed to Haiti must be proficient in French or Haitian Creole and have a minimum of 8 years' work experience with five years in a position of sworn civilian law enforcement. Candidates must pass several tests that measure physical capabilities and weapons proficiency. UN-sponsored officers deployed to Haiti are required by the UN to demonstrate only the ability to operate a firearm and drive a vehicle; the ability to communicate in French is preferred but not required. Military pay and support. The UN budgeted $131 million for pay and support of military troops, while we estimate it would cost the United States $260 million for the same number of soldiers. The UN costs are based primarily on a per-soldier payment to contributing nations of up to $1,400 monthly for basic pay and allowances, clothing, gear, equipment, and ammunition. U.S. costs include pay and allowances for reservists and active duty personnel as well as clothing, arms, protective gear, and rations. The higher U.S. costs help ensure a basic standard of living for U.S. soldiers and their families and relatively high standards of welfare in the field in terms of equipment, nutrition, health, and morale. For example, estimated costs for food and water for U.S. military personnel total $85 million, compared to $20 million in the UN budget. Medical support for the military and civilian personnel on a U.S. operation would cost an estimated $22 million, over four times the UN budgeted cost of $5 million. According to officials of the Joint Chiefs of Staff, UN multinational forces in Haiti prior to MINUSTAH had difficulty providing adequate troop support and relied on accompanying U.S. forces for supplementary rations and health care. A Rand Corporation study of the multinational force cooperation in Haiti in 1994 indicates that the U.S. forces provided UN forces with intelligence and training, as well as logistical and communications support, including housing, food, transportation, and vehicle maintenance. Facilities. The UN budgeted $100 million for facilities-related costs, while we estimate that the cost to the United States would be $208 million. The UN budget includes acquisition and construction of troop and civilian housing and other facility-related equipment and supplies. While MINUSTAH staff offices are donated by the Government of Haiti, U.S. facilities must meet State Department security standards, which include posting civilian staff within secure U.S. embassy or consulate compounds. In addition to administrative and security expenses, U.S. government agencies with staff in these compounds would be required to contribute a total of about $12 million to the State Department's Capital Security Cost- Sharing Program, which funds the construction of secure embassies worldwide. Estimated costs in other categories are likely to be similar for the UN and the United States. For example, we estimate that the transport of U.S. troops, civilian personnel, and equipment would cost about $100 million; the UN budgeted $94 million for these costs. Various military and nonmilitary factors can influence the composition of a peacekeeping operation and thus impact the estimated cost. We identified three different military scenarios that could substantially affect the estimated costs of a U.S. peacekeeping operation. Greater concentration of reserve troops could almost double the military costs, while a quicker deployment of forces and higher operational tempo would also increase costs. Further, the addition of nation-building and development assistance activities to the scope of an operation in Haiti would increase the estimated cost substantially. According to U.S. experts in military operations and cost estimation we consulted, various factors could significantly influence the cost estimate for a U.S. peacekeeping operation. These factors include the number of troops and types of military units deployed, the pace of deployment, the intensity or operational tempo, the modes of transportation for deployment, and the mix of active duty and reserve troops. These factors depend heavily on the needs of the operation and demands of other military commitments; decisions about such factors involve complex military, political, and financial considerations that can change rapidly. We analyzed the potential impact of three principal cost factors by altering the assumptions of our cost estimate to reflect (1) military forces comprised entirely of reserve soldiers, (2) deployment of military forces within the first 60 days of the operation rather than 180 days, and (3) higher operational tempo (more intensive use of vehicles and equipment). Figure 2 illustrates how altering the assumptions for these factors affects the cost estimate. Deployment of all-reserve forces. Our base cost estimates assume that the military contingent of a U.S. operation would consist primarily of active duty forces (85 percent). Officials from the Joint Chiefs of Staff confirmed that this is one of a number of possible scenarios, depending on the availability of active duty and reserve troops, ongoing military commitments, specific operational needs, and other factors. A change in this fundamental assumption can have a significant impact on the estimated cost of the operation, as pay for troops is one of the largest components of the estimate. We altered this assumption to reflect an operation comprised entirely of reserve forces, which increased the cost estimate by $477 million. This difference has such a significant impact because DOD does not include regular pay for active duty troops in the cost estimates; the department would incur these costs regardless of whether the troops were deployed in Haiti, the United States, or elsewhere. In contrast, pay for reserve troops is considered a direct cost of the operation since DOD would pay reservists full salaries only when activated for the operation. More rapid deployment. Although the UN Security Council Resolution establishing MINUSTAH calls for an immediate deployment of peacekeeping forces, the MINUSTAH budget reflects full military deployment within 180 days of mission authorization. Thus, similar to the UN budget, our base cost estimate assumes a military force strength below authorized levels during the first six months of the operation. We altered this assumption to reflect full deployment within the first 60 days. We estimate that this would increase U.S. costs by about $60 million, consisting essentially of military pay and support for additional troops deployed during the operation's initial months. Higher operational tempo. DOD measures the intensity of a military operation, or operational tempo, on a scale from 1 to 3, with normal operations being level 1. The higher the operational tempo, the more heavily the forces use equipment and vehicles and the higher the cost for fuel, operations, and maintenance. Military experts we consulted at the Institute for Defense Analysis and the Joint Chiefs of Staff indicated that a peacekeeping operational tempo would normally be considered to be at level 1.5, as reflected in our base cost estimate. We altered this assumption to reflect a slightly higher operational tempo, level 2, which increased the estimated military costs by $23 million due to increased equipment, maintenance, and other support costs. Our estimate does not include costs for complementary nation-building and development activities, which would be needed to support the economic and political goals of a peacekeeping operation. In 2004, to bolster MINUSTAH, official donors agreed with the Government of Haiti on an Interim Cooperative Framework, to which they pledged a total of $1.3 billion for an array of activities to strengthen political governance and promote national dialogue, strengthen economic governance and contribute to institutional development, promote economic recovery, and improve access to basic services. From July 2004 to March 2005, bilateral and multilateral donors have spent more than $382 million for such activities (see table 2). The United States directly funded over 27 percent of this total, or $102 million, through its bilateral aid programs in Haiti. The United States has made additional contributions to this aid effort through its financial support of UN agencies and multilateral financial organizations, including the World Bank and the Inter-American Development Bank. Table 2 shows the distribution of funding for these activities by donor and type of activity. Our cost estimate assumes that the United States and other donors would spend the same amount on these programs and activities regardless of whether the United States undertook a peacekeeping operation in Haiti. Historically, the United States has depended on other official donors and multilateral organizations to participate in reconstruction and rebuilding efforts following an armed conflict. In addition to cost, other factors would be considered when determining the most appropriate role of the United States and the UN in conducting peacekeeping operations. The United States and the UN each have strengths that can affect the achievement of peacekeeping objectives in Haiti. Past U.S. operations in Haiti have benefited from a strong central communications, command and control structure and a vast military infrastructure supporting its operations, particularly in terms of troop deployment, military intelligence, and public information. Among the strengths of a UN mission are its multinational participation, its extensive experience in peace operations, and a coordinated network of agencies to assist nation building. U.S. peacekeeping operations have benefited from strong communications, command and control structures, direct access to well-trained military personnel and equipment, and other advantages of a large, well-established military infrastructure. U.S.-led peacekeeping efforts in Haiti have been widely recognized as operationally effective, having achieved their military objectives rapidly and with minimal loss of life. As we previously reported, U.S. leadership has enhanced operational effectiveness of UN peacekeeping in Haiti. In the 1995 UN Mission to Haiti, the United States provided leadership to multinational forces that ensured adequate troops and resources were available to carry out assigned tasks, used its command and control structure for the operation, and applied its doctrine for "operations other than war" to help guide actions. Officials from the Joint Chiefs of Staff with experience with more recent multinational forces in Haiti also highlighted rigorous training, a reliable communications infrastructure, and a cohesive command structure as key factors that made U.S. forces operationally effective there. Furthermore, by virtue of the vast U.S. military infrastructure of DOD and other U.S. agencies, U.S. peacekeeping forces have many elements that UN peacekeeping studies have identified as critical for mission effectiveness, particularly in Haiti. In March 2000, the UN high-level panel reviewing UN peace and security identified elements critical to effective peacekeeping. In May 2005, a UN Security Council evaluation of MINUSTAH emphasized the particular importance of three of these elements for operations in Haiti--rapid troop deployment, effective tactical intelligence, and a public information strategy--noting that MINUSTAH was hindered by weaknesses in these elements. Dedicated DOD organizations support U.S. military operations in these three elements, and have contributed to military successes in past operations in Haiti. Funding for these organizations is not reflected in cost estimates in this report because they are part of the infrastructure that supports all DOD objectives and operations, and costs are not readily attributable to specific contingency operations. Rapid deployment. The 2000 UN report on peacekeeping indicated that it was important to fully deploy an operation within 30 to 90 days after the adoption of a Security Council Resolution establishing the mission. According to the report, the first 6 to 12 weeks following a ceasefire or peace accord are often the most critical for establishing a stable peace and a credible new operation; opportunities lost during that period are hard to regain. At DOD, the Deputy Under Secretary of Defense for Readiness is responsible for developing and overseeing policies and programs, including training, to ensure the readiness of U.S. forces for peacetime contingencies, crises, and warfighting. Military readiness of both personnel and equipment is a major objective throughout DOD. The department spends more than $17 billion annually for military schools that offer nearly 30,000 military training courses to almost 3 million military personnel and DOD civilians. With continued heavy military involvement in operations in Iraq and Afghanistan, DOD is also spending billions of dollars sustaining or replacing its inventory of key equipment items. The United States has historically deployed troops in Haiti relatively rapidly. (Fig. 3 illustrates deployment of U.S. marines in Haiti.) For example, in 1994 the United States deployed an operation in Haiti within 60 days of the issuance of a UN Security Council Resolution authorizing the restoration of Haiti's constitutionally elected leadership to power. The 20,000-member force quickly established itself in 500 locations throughout Haiti and achieved its primary goals within 76 days. Intelligence apparatus. The 2000 UN report on peacekeeping indicated that missions should be afforded the necessary field intelligence and other capabilities to mount an effective deterrence against violent challengers. For its intelligence needs in an operation in Haiti, DOD can draw upon the extensive resources of the U.S. intelligence community, consisting of a wide array of agencies, departments, and offices throughout the U.S. government. The Defense Intelligence Agency, for example, employing over 7,500 military and civilian employees worldwide, produces and manages foreign military intelligence for warfighters, defense policymakers, and force planners in support of U.S. military planning and operations. The Central Intelligence Agency and the U.S. Navy, Army, Marine Corps, and Air Force, among other organizations, also provide intelligence support to U.S. military operations. U.S. forces had these resources at their disposal when they led multinational forces in Haiti in 1994-95, successfully disbanding the Haitian army and paramilitary groups and confiscating the weapons caches held by government opponents within 7 months. Public information. The 2000 UN report indicated that an effective communications and public information capacity is an operational necessity for nearly all UN peacekeeping operations. According to the report, "effective communication helps to dispel rumor, to counter disinformation, and secure the cooperation of local populations." Furthermore, it can provide leverage in dealing with leaders of local rival groups and enhance the security of UN personnel. The report recommends that such strategies and the personnel to carry them out be included in the very first elements deployed to help start up a mission. At DOD, the Assistant Secretary of Defense for Public Affairs is responsible for developing programs and plans relating to DOD news media relations, public information, internal information, community relations, and public affairs in support of DOD objectives and operations. DOD developed a public affairs strategy that was a central element of the operation it led in Haiti in 2004; it included issuing regular press releases and briefing local and international media frequently on the progress and developments of the operation. U.S. military forces in Haiti were met with relatively little violent opposition, resulting in a minimal loss of life, either Haitian or American. The UN's strengths in peacekeeping in Haiti are rooted in the multinational character of its operation as well as extensive experience with peacekeeping and related nation building. The UN's experience has enabled it to develop a structure for coordinating international organizations involved in nation building and give it access to a pool of experienced and skilled international civil servants, including personnel with diverse language capabilities. Multinational participation. The multinational cooperation on UN peacekeeping missions, such as in MINUSTAH, provides some notable advantages. According to a 2005 study sponsored by the Rand Corporation, the UN may have the ability to compensate for its relatively small military presence with its reputation of international legitimacy and local impartiality. Furthermore, its multinational character likely lends the UN a reputation for impartiality that a single nation may not enjoy. The study concluded that this has afforded the UN a degree of success with relatively small missions that include both security and nation-building components. MINUSTAH represents a multinational effort that is not dominated by any single country. (Fig. 4 illustrates multinational peacekeeping operations under MINUSTAH.) During its first year of operation in Haiti, MINUSTAH comprised 7,624 military staff and police personnel from 41 countries. Unlike earlier U.S.-led operations, where the U.S. troops represented up to 90 percent of military personnel, U.S. participation on the ground in MINUSTAH was limited to 29 U.S. military and police personnel--less than 1 percent of the total. As officials of the Joint Chiefs of Staff pointed out, development of coalition partners through multinational operations is important not only for strengthening ongoing and future operations in Haiti, but also for building strong international capacity for facing future military challenges globally. The advantages for the United States include a lower overall cost for peacekeeping and reduced exposure of U.S. personnel to the inherent dangers of operating in conflict zones. However, according to DOD and State Department officials, the multinational nature of a military force may also limit its operational effectiveness by introducing variations in training among the personnel from different nations and difficulties in communications, command, and control. Experienced peacekeeping officials. The UN has developed a cadre of senior officials that has gained experience with peacekeeping and nation- building activities over many missions. While there are acknowledged deficiencies in UN peace operations, the UN established a best practices unit in DPKO in 1995 to study and adopt lessons learned. Senior MINUSTAH officials, including the Chilean UN Special Representative and his deputies, the Brazilian Force Commander, and the Canadian Police Commissioner bring experience in peacekeeping and development activities from diverse geographic areas, and particularly from other countries in the region. The international nature of the UN also provides access to a large pool of civil servants and security personnel with native language speaking abilities and translation skills. In Haiti, 11 French- speaking countries have provided peacekeeping troops and police officers for MINUSTAH. Structure for coordinating international assistance. The UN has fostered a network of agencies and development banks. UN peacekeeping missions can draw directly upon this network in coordinating the extensive humanitarian and developmental activities that are related to operations with expansive, integrated mandates that include nation building. In Haiti, MINUSTAH has established a framework for coordination integral to the mission's organization. With UN co-sponsorship, official donors in this network, including the World Bank and the Inter-American Development Bank, have pledged $1.3 billion in development assistance. The UN Development Program coordinates the efforts of nine agencies in Haiti, which, during the first year of MINUSTAH, disbursed $60 million in development assistance. To help ensure that these funds are well coordinated and support MINUSTAH's objectives, these UN agencies operating in Haiti report directly to a senior MINUSTAH official, who also serves as the chief UN Development Program representative for Haiti. While a U.S. peacekeeping operation in Haiti would be more expensive than the current UN mission, it would be subject to higher operational standards and supported by an extensive military infrastructure. Strong, well-trained, and quickly deployed U.S. forces have proven militarily effective in short-term operations in Haiti in the past. However, involving the international community extensively in peacekeeping operations such as MINUSTAH has notable advantages for leveraging development funding, experience, and other resources of nations and organizations. The situation in other peacekeeping missions may differ significantly from the conditions in Haiti, and complex domestic and international political considerations may ultimately weigh heavily in determining the role of U.S. and UN peacekeepers in future operations. Chief among these are the political interests of the United States and other UN member states. We provided a draft of this report to the Departments of Defense and State and the United Nations for their comment. They provided technical corrections, which we incorporated into the report as appropriate, but they had no further comments. We are sending copies of this report to the Secretaries of Defense and State and the Secretary-General of the United Nations. We will also make copies available to others on request. In addition, it will be available at no cost on our Web site at http://www.gao.gov. If you have any questions regarding this report, please contact me at (202) 512-8979 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO contacts and staff acknowledgments are listed in appendix II. To compare the cost of a specific United Nations (UN) mission with the cost that the United States would have incurred had an operation been deemed in the U.S. national interest and undertaken without UN involvement, we obtained and analyzed cost data from the UN and the U.S. Government. To determine the UN costs for peacekeeping operations, we analyzed the 2004-2005 budget and supporting documents for the UN Stabilization Mission to Haiti (MINUSTAH). We spoke with officials of the UN Department of Peacekeeping Operations and other UN departments, offices, and agencies at UN headquarters in New York about the assumptions, cost factors and ratios, and cost estimation methods used to generate the budget. We used MINUSTAH as our case study because it illustrates the various categories of cost for a contemporary mission located in a country where the United States has an expressed national interest. Additionally, we believe this case provides a strong basis for estimating costs, given the long history of U.S. and UN military intervention in Haiti. We chose the period May 1, 2004 to June 30, 2005 for analysis because it reflected the first approved mission budget and incorporated the initial start-up costs. According to UN officials, the budget provides a reasonable estimate of costs, though actual expenses may vary from the budget. We also discussed with UN officials the methodology for determining the U.S. assessment for MINUSTAH, which was 27.1 percent of the mission budget. We did not include peacekeeping support costs, which are indirect costs allocated to the mission for overhead and administrative expenses incurred outside of Haiti (at UN headquarters and the UN Logistics Base in Brindisi, Italy), as the U.S. Government does not allocate corresponding overhead and administrative costs to individual operations in a comparable way. To estimate the military costs of a unilateral U.S. operation, we developed a comparable U.S. operational scenario based on the MINUSTAH budget and supporting documents, assuming deployment of the same number of military, civilian, and police peacekeeping personnel and aircraft in Haiti over a similar time period of time (14 months). To devise the military portion of the scenario, we interviewed DOD officials and contractor staff involved in developing cost estimates for U.S. contingency operations. The Department of Defense (DOD) Office of the Comptroller and its contractor, the Institute for Defense Analyses (IDA), generated cost estimates for the military components of this scenario using the DOD's Contingency Operations Support Tool (COST), since DOD financial management regulations designate COST as the department's common cost-estimating platform. The cost estimate DOD provided included only the incremental costs of the operation--those directly attributable to the operation that would not be incurred if the operation did not take place. We based the scenario, and hence the cost estimate, on the following assumptions, which correspond closely with MINUSTAH budget assumptions and actual UN personnel deployments. Military contingents: 6,594 total personnel divided as follows: Hospital units: 500 personnel Military police: 820 personnel Light infantry: 5,074 personnel less the number of aviation support personnel for 8 UH-60 Black Hawk and 10 CH-47 Chinook helicopters. Type of military personnel: 85 percent active duty, 15 percent reserve. Theater of operations: Haiti. Operation dates: orders provided April 30, 2004; costs end June 30, 2005. Deployment schedule: gradual deployment to theater over 180 day period; 30-day pre-deployment and deployment phase for active duty units and 60 days for reserve units; 6-month rotation period for all units; 7-day re-deployment for all units. Operational tempo: level 1.5 for pre-deployment, deployment, and sustainment. Construction of troop housing equivalent to semi-rigid soft wall dormitory tents. Transportation: departure from Columbus, Georgia, to Port-au-Prince, Haiti; personnel deployed and rotated by commercial air; all equipment shipped by sea. We obtained input on the scenario design from DOD's Joint Chiefs of Staff, who validated it as reasonable. However, the military component of the scenario and the corresponding cost estimate have some limitations. An actual U.S. military plan may differ significantly from the UN plan, due to differences between U.S. and UN military infrastructures in operations, structure, doctrine, and circumstances at the time of the operation. Additionally, we did not include reconstitution--the cost of returning equipment to useable standards after operation--in our cost estimate, since the UN does not include this cost in its peacekeeping mission budgets, and we assumed that reconstitution would occur after the initial budget cycle on which our comparison is based. Further, some cost factors used in COST, such as some pre-deployment costs and transportation for certain supplies and mail, are based on various contingency operations, such as Operation Iraqi Freedom, and may not be representative of costs in Haiti. To estimate civilian police costs, we obtained and analyzed data from the Department of State's Bureau for International Narcotics and Law Enforcement Affairs on actual contract costs for providing civilian police to support UN missions. As these contracts do not include the costs for daily subsistence and transportation, we calculated these additional costs based on the U.S. government meals and incidental expense rate for Port-au-Prince and published contract airfare schedules. We applied the average costs per officer to the total number of civilian police officers included in the MINUSTAH budget. Formed police units were not calculated in this manner, as we assumed that such personnel would be provided in the military portion of the operation as military police and are included as such in that estimate. To estimate U.S. civilian personnel costs for the operation, we obtained and analyzed data from the Department of State to determine the average annual cost of a foreign service officer in Haiti during fiscal year 2005, including salary and benefits, office furnishings, housing, residential furnishings, post differential, airfare, shipping, rest and recuperation, danger pay, cost of living adjustments, educational allowance for one child, and miscellaneous expenses. We applied this average cost to the number of non-administrative international staff included in the MINUSTAH budget. (We subtracted several senior executive positions from this number, as the ambassador and U.S. Agency for International Development mission director and other senior U.S. officials already posted to Haiti would likely serve their functions.) To estimate the cost of locally-employed national staff, we obtained staffing information for the U.S. embassy in Port-au-Prince for fiscal years 2004 and 2005 from the Department of State and calculated the average annual salary for locally-employed national staff in Haiti. We applied this figure to the number of non-administrative national staff included in the MINUSTAH budget. We calculated benefits for this staff at 27.6 percent of salaries, per information on these costs provided by the Department of State. To estimate civilian facilities and administrative costs, we obtained and analyzed data provided by the Department of State and the U.S. embassy in Port-au-Prince. The department's Capital Security Cost-Sharing Program requires agencies posting staff overseas to pay fees into a cost- sharing pool that funds construction of secure embassies and consulates. We used data on these fees to calculate the total cost-sharing fee for the civilian staff in our U.S. operational scenario for Haiti. To determine administrative support costs, we obtained and analyzed cost data from the Department of State's International Cooperative Administrative Support Services program for the Port-au-Prince embassy for fiscal year 2004. We calculated the average administrative cost per non-administrative foreign service officer and applied this amount to the total number of non-administrative civilian personnel in the MINUSTAH budget. To estimate the cost of deploying civilian volunteers, we obtained and analyzed data from two U.S.-based nongovernmental organizations that contract with the U.S. government to provide volunteers for development and humanitarian activities overseas. These organizations provided the cost estimates for deploying 153 volunteers in Haiti for 14 months, which corresponds to the parameters of the MINUSTAH budget for volunteers. Our cost estimate includes the average of these two estimates. For all of the cost data used in these estimates, we obtained and analyzed supporting information or discussed the data source with the corresponding officials and determined that the data were sufficiently reliable for the purposes of this report. To analyze factors that could substantially affect the estimated costs of the U.S. operation, we developed alternative scenarios and cost estimates, varying one major assumption for each scenario. We identified the assumptions to vary through discussions with DOD and Institute for Defense Analysis officials, who identified those factors they believed, based on their experience, would have the most influence on the cost estimate for the operation's military component. The three variations we selected were (1) an all-reserve force, (2) deployment of all troops in Haiti within the first 60 days of the operation, and (3) an operational tempo of 2. DOD generated alternative cost estimates for each scenario, using COST, and we compared these with the base estimate to identify and explain the major differences associated with each alternative scenario. To identify and assess the strengths of the United States and the UN in leading peacekeeping operations in Haiti, we obtained and analyzed UN reports and evaluations relating to MINUSTAH and information on past U.S.-led operations in Haiti. We interviewed officials from DOD, the Department of State, and the UN, as well as peacekeeping experts from the Stimson Center in Washington, D.C., to discuss their views on factors that contribute to successful peacekeeping operations. We also reviewed published reports from various organizations relating to the effectiveness of UN and U.S. peacekeeping operations. We conducted our review from June through February 2006 in accordance with generally accepted government auditing standards. Key contributors to this report include Tetsuo Miyabara (Assistant Director), James Michels, Charles Perdue, Kendall Schaefer, Suzanne Sapp, Grace Lui, Lynn Cothern, Joseph Carney, and Sharron Candon.
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The UN employs about 85,000 military and civilian personnel in peacekeeping operations in 16 countries. The United States has provided about $1 billion annually to support UN peacekeeping operations. In addition, the United States has led and participated in many such operations. UN reports and congressional hearings have raised concerns about accountability for UN peacekeeping operations and the need for reforms. We were asked to provide information relating to the cost and relative strengths of UN and U.S. peacekeeping. In particular, we have (1) compared the cost of the ongoing UN Stabilization Mission in Haiti with the cost that the United States would have incurred had an operation been deemed in the U.S. national interest and undertaken without UN involvement; (2) analyzed factors that could materially affect the estimated costs of a U.S. operation; and (3) identified the strengths of the United States and the UN for leading the operation. We developed our cost estimate of a U.S.-led operation using cost models from the Departments of Defense and State. The estimate is based on various military assumptions, such as the use of primarily active duty troops. It includes only those costs directly attributable to the operation that would not otherwise be incurred. We estimate that it would cost the United States about twice as much as the United Nations (UN) to conduct a peacekeeping operation similar to the current UN Stabilization Mission in Haiti (designated "MINUSTAH"). The UN budgeted $428 million for the first 14 months of this mission. A U.S. operation in Haiti of the same size and duration would cost an estimated $876 million, far exceeding the U.S. contribution for MINUSTAH of $116 million. Virtually all of the cost difference is attributable to (1) civilian police, (2) military pay and support, and (3) facilities, and reflects high U.S. standards for police training, troop welfare, and security. Various military and nonmilitary factors can substantially affect the estimated costs of a U.S. operation. We analyzed three military factors: the mix of reserve and active duty troops, the rate of deployment, and the operational tempo. Deploying all reserve troops would increase the cost estimate by $477 million, since it would require paying more reservists a full salary. Deploying troops at a faster rate than the UN--within the first 60 days instead of 180--would cost an additional $60 million. Conducting the operation at a higher tempo--with more intensive use of vehicles and equipment--would increase estimated costs by $23 million. In addition to military considerations, including nation-building and development assistance activities in the scope of the operation would increase the cost significantly. Official donors, including the United States, distributed $382 million for these activities during the first year of MINUSTAH. Cost is not the sole factor in determining whether the United States or the UN should lead an operation, and each offers strengths for this responsibility. U.S.-led operations in Haiti between 1994 and 2004 benefited from a vast military infrastructure, which provided strong communications, command and control, readiness to deploy, tactical intelligence, and public information. The UN's strengths include multinational participation, extensive peacekeeping experience, and an existing structure for coordinating nation-building activities. Complex political considerations are likely to influence decisions about the role of the United States and the UN in peacekeeping.
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Palliative care is an important and emerging issue for health care providers, educators, and the general public. As medical advances increase life expectancy, more and more people suffer from chronic and progressively disabling diseases that require treatment for depression and assistance with pain and symptom management. Some recent studies have pointed to significant problems within the health care system that preclude the achievement of the best possible quality of life for patients and their families. Areas identified for improvement include education and training for health care providers, improved pain and symptom management, and access to appropriate and quality health care services. The Assisted Suicide Funding Restriction Act of 1997 contains a provision designed to focus federal funding on research, training, and demonstration projects that would address these specific problem areas. The act authorizes funding in a number of palliative care topics (see table 1) and directs the Secretary of HHS to emphasize palliative medicine among its research and funding priorities under section 781. Section 781 is within title VII of the Public Health Service Act, which authorizes numerous programs for health professions education and training. Section 781 was first funded in 1993 to conduct health professions education research in four broad topic areas related to (1) educational indebtedness, (2) effect of programs for minority and disadvantaged individuals, (3) extent of investigations and disciplinary actions by state licensing authorities, and (4) primary care. The Bureau of Health Professions within the Health Resources and Services Administration (HRSA) is the HHS agency responsible for administering grants funded under section 781 of title VII. The extent of palliative care instruction varies considerably across and within the three major phases of the physician education and training process. The first phase is undergraduate medical education--or medical school--where students typically receive 2 years of classroom, or didactic, instruction followed by 2 years of clinical training. The United States has 144 accredited medical schools. The second phase is graduate medical education--or residency training--where residents receive 3 to 8 years of clinical training in a medical specialty. The United States has over 7,700 accredited residency programs. The third phase is continuing medical education, which provides physicians who are already practicing medicine with the education and training necessary to maintain or learn new skills. Continuing medical education courses are provided primarily by medical schools and state medical societies, but such courses are also provided by medical associations and consultants. Throughout these three phases, a variety of formal accreditation and certification processes are used to test student competency and to judge the quality of instruction and training. Our review at medical schools showed mixed amounts of attention given to palliative care issues. Accrediting organizations have generally steered away from standards requiring instruction in topics as specific as pain management, preferring to leave such matters to the discretion of the faculty at each school. To determine the extent to which the schools addressed these topics, we surveyed all U.S. medical schools on seven palliative care topics. For each of the seven palliative care topics we asked about, at least half of the 125 U.S. medical schools that responded to our survey said they had some degree of required instruction. (See fig. 1.) Instruction in palliative care for chronic illness was required by the fewest number of schools (56 percent). For the remaining topics, the percentage of schools requiring the topic was higher; for example, over three-quarters required instruction in the topic of pain management for the terminally or chronically ill, and 94 percent required instruction in depression identification and treatment. Our survey responses showed that some schools have added these topics fairly recently. For example, 24 percent of schools reported adding pain management as a required subject within the last 3 years. (For a more detailed summary of our medical school survey results, see app. II.) Many schools reported a need to change palliative care instruction, particularly in the area of clinical training. Overall, 30 percent of schools reported a need to change their classroom curriculum in palliative care, and close to 50 percent reported wanting to provide students with more hands-on training experience in diagnosing and treating patients with pain due to chronic or terminal illness. Evaluation processes vary in the extent to which they measure students' knowledge of palliative care issues. (See fig. 2.) The percentage of medical schools that reported testing competency in the topics we surveyed ranged from 36 percent for interdisciplinary health care for end of life to 72 percent for identifying and treating depression. Many medical schools also rely heavily on national examinations--the U.S. Medical Licensing Examination or the National Board of Osteopathic Medical Examiners' exam--to evaluate student knowledge. A study is currently under way to examine the degree to which the U.S. Medical Licensing Examination tests student knowledge in end-of-life care issues and to develop a method to evaluate student performance on these test questions in the future. Our review also indicated that attention to palliative care issues in residency programs varied as well. Accrediting bodies at the graduate level generally require some specific areas of instruction, although, as in medical schools, the primary responsibility for curriculum and training content is assumed by the program director and faculty. Required topics of instruction, such as domestic violence, vary by specialty, and few specialties have requirements including specific palliative care topics.Because of the large number of accredited residency programs in the United States, we did not administer a survey similar to the one we developed for medical schools. We relied on existing surveys done by professional associations that asked residency programs to report whether the subjects of end-of-life care and suicide were included in their training programs. The American Medical Association's (AMA) 1996 survey showed that nearly half of the nation's 7,787 residency programs include instruction in end-of-life care and over a third teach issues related to suicide. While historical data on the subject of suicide prevention are not available, AMA's data show greater numbers of residency programs now offer instruction in end-of-life care than in the past. In 1996, nearly 50 percent of residency programs taught end-of-life care, compared with 38 percent in 1994. To some extent, the percentage of residency programs that taught palliative care subjects corresponded to the degree to which these skills might be needed in the specialty area covered by the program. For example, 93 percent of family practice residency programs in the subspecialty of geriatrics reported teaching end-of-life care, while only 10 percent of pathology residency programs in the subspecialty of pediatric pathology reported teaching the subject. However, the percentage of programs that reported teaching end-of-life care was surprising for some specialties for which the need for physicians skilled in end-of-life care seems more evident. For example, nearly half of internal medicine residency programs in the subspecialty of oncology reported not teaching end-of-life care, although physicians treating patients with cancer often deal with terminal patients. (See app. III for a detailed summary of AMA's 1996 residency program survey results.) The knowledge and skill of resident physicians is evaluated by each residency program's internal evaluations and national examinations. These examinations include the U.S. Medical Licensing Examination as well as examinations some physicians take to become certified in a medical specialty. The extent to which board examinations include questions related to palliative care has not been quantified, and student performance on palliative care questions that may be included on the exams has not been evaluated. The availability of continuing medical education courses that focus on palliative care issues for terminally or chronically ill people appears limited. Many states and medical associations require physicians to continue their medical education to maintain their medical license or membership benefits, but they generally do not require courses on specific topics such as palliative care. Because of the number and variety of continuing medical education providers, information on the existence of continuing medical education courses dedicated to palliative care issues was not readily available. However, we queried the AMA's database of over 2,000 accredited continuing medical education activities and found that few specifically addressed palliative care. In addition, an official with the American Osteopathic Association said there are few continuing medical education courses related to palliative care for doctors of osteopathy. An example of a course that specifically addresses palliative care issues is a self-study program developed by the American Academy of Hospice and Palliative Medicine, which covers a variety of palliative care topics. Recognizing a need for more courses in this area, private efforts are under way to develop more conferences on end-of-life care issues as well as promote those that already exist. The fiscal year 1998 conference committee report on HHS appropriations specifies $452,000 for section 781. Officials in HRSA plan to use $150,000 of this amount for seven medical education projects, including one project on palliative care. All seven projects will be conducted by one medical education research center. HRSA plans to provide the funds for the seven projects in May 1998. Because budgets are not maintained separately for each project, HRSA and medical education research center officials were not able to specify the amount of funding dedicated for the palliative care project. The project will assess current medical school courses on death and dying to determine if they meet recommended methods for teaching end-of-life care. The remaining $302,000 will be used to support projects focused on increasing the knowledge about the needs and resources of the nation's health professions. Information obtained through these projects will be used to assess the effectiveness of current workforce programs. HRSA officials said they consider this research as higher in priority. In addition, the officials said that due to the importance of health workforce research, future funding of palliative care projects in medical education is uncertain. HRSA did not include palliative care research for medical education in its fiscal year 1999 budget justification. HRSA officials do not plan to fund any of the other types of palliative care topics authorized under the Assisted Suicide Funding Restriction Act. They said these other initiatives, such as demonstration projects to reduce restrictions on access to hospice programs, are not related to the traditional focus of title VII to support health professions education and training. Projects of these types are generally administered by HHS agencies other than HRSA. For example, the act authorizes research funding under section 781 for advancing the biomedical knowledge of pain management, which has been primarily the domain of the National Institutes of Health (NIH). The act also authorizes research under section 781 for using specific outcome measures to assess the quality of care for patients with disabilities or terminal or chronic illness; measuring outcomes and quality of care is an area of expertise for HHS's Agency for Health Care Policy and Research (AHCPR). Several HHS agencies fund projects related to palliative care under their own program authority. Some of these projects directly address the types of research, training, and demonstration projects authorized in the Assisted Suicide Funding Restriction Act, including the following: Research authorized by the act includes projects to advance biomedical knowledge of pain management and assess the quality of care for patients with terminal illness by measuring and reporting specific outcomes. NIH--the federal government's primary focal point for biomedical research--estimates that in fiscal year 1997, it spent over $82 million on various types of pain management research. NIH also established a pain research consortium to enhance and coordinate pain research across the various components of NIH. NIH's National Institute of Mental Health has also begun suicide prevention research projects. HHS' Assistant Secretary for Planning and Evaluation is providing $174,000 to evaluate the quality of hospice care in nursing homes--a topic directly related to this provision. Training authorized by the act includes projects to teach physicians about palliative care issues. HRSA's HIV/AIDS Bureau is in the process of completing an evaluation of a Canadian instruction module on palliative care and plans to make recommendations on how the module should be modified for use in the United States. AHCPR, which funds projects to improve the effectiveness of health care services, issued guidance in 1994 on management of cancer pain that included discussions and recommendations on palliative therapies used to relieve or ease pain. Demonstrations authorized by the act include projects to fund home health care services, community living arrangements, and attendant care services. The Health Care Financing Administration, which is responsible for administering Medicare and Medicaid, has supported these types of demonstration projects. For example, states can obtain waivers to use Medicaid funds for home health care services, community living arrangements, and attendant care services, which are not normally covered by Medicaid but that are considered necessary to care for and improve the quality of life for medically fragile populations. Other federal projects do not have an explicit objective related to palliative care and suicide prevention but provide opportunity for benefit in this area. For example, AHCPR has many research initiatives that could address improving palliative care for patient populations most prone to suicide. AHCPR and the American Association of Health Plans will provide $7 million over 3 years to assess the quality of care for patients with chronic diseases under varying features of managed care organizations. In addition, AHCPR has initiatives to develop and improve quality of care measures for health care providers and health service delivery, which could include outcomes for palliative care in the future. AHCPR's Medical Treatment Effectiveness Program--which has traditionally focused on identifying and promoting the most effective treatments to prevent, diagnose, or treat diseases such as cancer, AIDS, or cardiovascular disease--could also incorporate palliative care for these and other terminal or chronic illnesses in future research projects. Private foundations, nonprofit organizations, and professional associations have recognized palliative care as an emerging and important area of medicine and research. As a result, a variety of private initiatives are under way that cover many of the areas of research, training, and demonstration projects described in the act. The two most comprehensive initiatives we identified are Last Acts, funded by the Robert Wood Johnson Foundation, and Project on Death in America, sponsored by the Open Society, a foundation created by philanthropist George Soros. Last Acts aims to raise awareness of the need to improve the care of persons who are dying, improve communication and decisionmaking related to end-of-life care, and change the way health care and health care institutions approach care for dying people. Last Acts has task forces and committees to pursue a variety of issues, including improving provider education on palliative care and developing outcomes and evaluation tools for palliative care. Project on Death in America is a $30 million campaign to transform the culture of dying by supporting projects and fostering change in the provision of end-of-life care, public and professional education, and public policy. It conducts its own projects and provides grants to other individuals and institutions. Its major project is a $7 million faculty scholars program for innovative clinical care, research, and educational programs to improve the care of the dying. Private entities also provide funding for a variety of other projects in palliative care--some with a specific focus in physician education or improving access and quality to palliative care. (See table 2). We provided a draft of this report to the Secretary of HHS for review and comment. Although we did not receive comments in time for publication, HRSA and NIH officials informed us that they generally concurred with the report's findings. Additionally, NIH officials stated that a conscious effort is needed to change the curricula of health professions education schools to sensitize providers about the needs of the chronically ill and disabled patients. In particular, they emphasized that attention needs to be given to pain management, depression, and symptom management. In addition, officials from HRSA, NIH, AHCPR, and the Office of Public Health and Science provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of HHS, interested congressional committees, and other interested parties. We will also make copies available to others on request. The information contained in this report was developed by Frank Pasquier, Assistant Director; Timothy S. Bushfield; and Lacinda Baumgartner. Please contact me at (202) 512-6543 or Frank Pasquier at (206) 287-4861 if you or your staff have any questions. We discussed the extent that palliative care issues were taught and tested in medical schools, residency programs, and continuing medical education with representatives from cognizant professional associations including the AMA, the American Osteopathic Association, the AAMC, the American Association of Colleges of Osteopathic Medicine; faculty from various educational institutions; representatives from entities administering national examinations necessary for medical licensure and board certification, such as the National Board of Medical Examiners and the American Board of Internal Medicine; representatives from accrediting bodies for medical schools, residency programs, and continuing education, including the Liaison Committee for Medical Education, the Accreditation Council for Graduate Medical Education, and the Accreditation Council for Continuing Medical Education; and recognized experts in the field of palliative medicine. To gather more specific information about the extent to which the palliative care subjects addressed in the Assisted Suicide Funding Restriction Act were taught in medical schools, we developed and administered a survey to all accredited U.S. allopathic and osteopathic medical schools regarding their curriculum, training, and testing of student knowledge in pain management, depression identification and treatment, and palliative care. After reviewing literature on the subject and consulting with experts, we selected seven topics to capture the range of possible instruction. Our topics included both the broad topic of palliative care and more specific topics, such as pain management. While the specific topics are components of palliative care, they do not individually encompass the broader concept of palliative care. For this reason, we asked the schools to report on each topic separately. In conducting our survey of medical schools, we used mailing lists provided by AAMC and the American Association of Colleges of Osteopathic Medicine that they use to conduct annual medical school curriculum surveys. Our response rate was 85 percent. Results are self-reported, and we did not verify or standardize responses among schools. A summary of the survey results is shown in appendix II. Due to the large number of residency programs and our reporting time frames to the Congress, we did not conduct a similar survey of these programs. However, the AMA provided us with related information reported in its annual survey of 7,787 residency programs accredited by the Accreditation Council for Graduate Medical Education and combined specialty residency programs. The survey covers allopathic programs only. Residency programs responding to this survey in 1996 reported whether the general subjects of end-of-life care and suicide were included in their curricula. More detailed data on subjects specifically related to pain management, depression identification and treatment, and palliative care were not available. AMA survey data did not include information on whether residency programs tested student competency in particular subject areas. We discussed HHS' plans for awarding palliative care grants under section 781 with representatives responsible for administering these grants in the HRSA's Bureau of Health Professions. We also reviewed HRSA's plans for funding section 781 projects in HRSA's 1998 and 1999 Justification of Estimates for Appropriations Committees. We discussed other federal and private palliative care research and education initiatives funded outside section 781 with HHS agencies and private entities involved in similar palliative care activities. HHS agencies or offices we spoke with included AHCPR, NIH, the Health Care Financing Administration, and the Office of the Assistant Secretary for Planning and Evaluation. Private entities we obtained information from regarding ongoing palliative care projects included foundations, such as the Robert Wood Johnson Foundation; nonprofit organizations, such as the Open Society, the United Hospital Fund of New York, and The George Washington University's Center to Improve Care of the Dying; and professional associations, including AMA's Ethics Institute, the American Academy of Hospice and Palliative Medicine, and the American Board of Hospice and Palliative Medicine. The federal and private palliative care projects we identified are examples of the various types of projects being conducted; they are not intended to be a comprehensive listing of palliative care projects. We conducted a survey of all medical schools--both allopathic and osteopathic--in the United States. We asked each school about the extent to which their didactic--or classroom--instruction and clinical training addressed palliative care topics. We received responses from 125--or 85 percent--of these schools. Tables II.1 through II.3 summarize the results of this survey. The AMA surveyed 7,787 residency programs in the United States in 1996. We obtained data on the number of programs that included end-of-life care and suicide prevention topics. Table III.1: U.S. Residency Programs Teaching End-of-Life Care and Suicide Prevention Endocrinology, diabetes, and metabolism Pulmonary disease and critical care medicine (continued) Blood banking and transfusion medicine (continued) Internal medicine and emergency medicine Internal medicine, physical medicine, and rehabilitation Internal medicine and preventive medicine Neurology, diagnostic radiology, and neuroradiology Neurology, physical medicine, and rehabilitation Pediatrics and physical medicine and rehabilitation Pediatrics and child and adolescent psychiatry (continued) Subspecialties are indented. The first copy of each GAO report and testimony is free. 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Pursuant to a legislative requirement, GAO reported on the extent to which projects under section 781 of the Public Health Service Act have furthered the knowledge and practice of palliative care, particularly with regard to curricula offered and used in medical schools. GAO's preliminary work showed that no fiscal year (FY) 1998 funding for section 781 projects would be awarded by its April 30, 1998 reporting date, so GAO focused on determining: (1) the extent to which the physician education and training process currently teaches and tests student competency in palliative care issues; (2) the Department of Health and Human Services' (HHS) plans for funding palliative care projects under section 781; and (3) other federal and private palliative care research and education initiatives. GAO noted that: (1) physicians receive varying amounts of instruction in palliative care topics as they progress through 4 years of medical school and 3 to 8 years of subsequent specialized training in a residence program; (2) each of the seven palliative care areas in GAO's survey was required by 56 percent or more of the 125 medical schools responding to its survey; (3) similarly, about half of the 7,787 specialty and subspecialty residency programs educated students in end-of-life care; (4) GAO's survey showed that many medical schools are interested in providing additional instruction and training in palliative care; (5) about one-third of the schools reported a need to change their curriculum for addressing palliative care for the chronically and terminally ill; (6) close to half reported a need to include more clinical training in managing pain and depression for these patient populations; (7) HHS officials plan to use $150,000 of the $452,000 specified for section 781 in the FY 1998 appropriations conference report to support seven medical education research projects, including one palliative care project; (8) officials from HHS and the medical education research center receiving these funds were not able to specify the amount being spent on the palliative care project because separate budgets are not developed for each project; (9) of the remaining section 781 funds, all $302,000 will be used to support research for improving the distribution and diversity of the health care workforce; (10) because of the higher priority that HHS has assigned to this other research, officials do not plan to use any funds for palliative care research, training, or demonstration projects in 1999; (11) nevertheless, a substantial amount of research related to palliative care is being funded in ways other than through section 781; (12) over the last few years, HHS and private entities have invested tens of millions of dollars into projects similar to those specified in the Assisted Suicide Funding Restriction Act; (13) some HHS agencies have more general projects, not specified in the act, that could also benefit palliative care in the areas of increasing health care access, improving quality of care, and advancing biomedical research; and (14) private foundations and other private organizations have spent millions of dollars to educate and train health care professionals in palliative care and improve the quality of care for the terminally and chronically ill.
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The U.S. government is one of the world's largest property owners, with a real estate portfolio of over 400,000 defense and civilian buildings and over one-half billion acres of land. As we and others have previously reported, federal asset managers are confronted with numerous challenges in managing this multibillion-dollar real estate portfolio, including a large deferred maintenance backlog and obsolete and underutilized properties. These challenges must be addressed in an environment marked by budgetary constraints and growing demands to improve service. In response to this backlog and limited funding for repair and alteration requirements, we have suggested that the Congress consider providing the Administrator of GSA with the authority to experiment with funding alternatives, including public-private partnerships, when they reflect the best economic value available for the federal government. The Congress has already enacted legislation that provides certain agencies with a statutory basis to enter into partnerships. This additional property management tool has been provided to the Department of Veterans Affairs and the Department of Defense. In an effort to provide more agencies with a broader range of property management tools, two bills were introduced, but were not passed, in the 106th Congress that addressed issues of federal property management. The Federal Property Asset Management Reform Act of 2000, S. 2805, would have amended the Federal Property and Administrative Services Act of 1949 to enhance governmentwide property management. Among other provisions, the act would have allowed federal agencies to out-lease underutilized portions of federal real property for 20 to 35 years and retain the proceeds from the transfer or disposition of real property. The Federal Asset Management Improvement Act of 1999, H.R. 3285, provided for the use of (1) partnerships with the private sector to improve and redevelop federal real property, (2) performance measures for federal property management, and (3) proceeds from these partnerships being retained for the improvement of federal real property. Neither of these bills was passed, but their provisions reflect the kinds of actions that could be taken to address the issues surrounding the management of federal real property. The hypothetical public-private partnerships our contractors developed and analyzed for 10 specific GSA properties indicated that partnerships could be a viable management tool. However, more detailed feasibility studies would need to be done before partnerships are undertaken. In addition, we did not compare the benefits of public-private partnerships with other alternatives for addressing problems in federal buildings, such as appropriations for renovations. Such an analysis of all alternatives would need to be performed so that the alternative offering the best economic value for the government could be chosen. OMB staff indicated that where there is a long-term need for the property by the federal government, it is doubtful that a public-private partnership would be more economical than directly appropriating funds for renovation. Public-private partnerships can take on many different forms. The potential benefits of any partnership would be largely defined as the partnership is being formed. The various aspects of the partnership arrangement would be negotiated and agreed upon, such as the terms of the master ground lease, which is the mechanism the federal government would use to lease its property to the partnership, and the redevelopment strategy. Both the private sector and government would share in the distribution of cash flows generated by the property. The hypothetical partnership scenarios developed by our contractors for this study entailed some basic assumptions about the structure of the partnerships but did not detail the specifics of each partnership. For example, the hypothetical partnership scenarios did not guarantee government occupancy of the properties. However, depending on how OMB scores these transactions, some of the scenarios could trigger capital lease-scoring requirements due to the implicit long-term federal need for the space. These issues will need to be further explored before public- private partnerships are created. The redevelopment strategies developed for each property ranged from repairing and modernizing the existing building to demolishing the existing building and increasing the amount of office space by rebuilding multiple buildings on the same site. According to our consultants, the analysis of the partnerships for many of these properties showed a sufficient potential financial return to attract private sector interest in a partnership arrangement. Multiple potential benefits to the federal government of public-private partnerships were also identified. These potential benefits include the utilization of the untapped value of real property, conversion of buildings that are currently a net cost to GSA into net attainment of efficient and repaired federal space, reduction of costs incurred in functionally inefficient buildings, protection of public interests in historic properties, and creation of financial returns for the government. When deciding whether to enter into a partnership, the government will need to weigh the expected financial return and other potential benefits against the expected costs, including potential tax consequences, associated with the partnership. Any cost associated with vacating buildings for the renovation work to be done would also have to be considered in any alternative that is evaluated. For a public-private partnership to be a viable option, there must be interest from the private sector in partnering with the government on a selected property. The potential private sector partner's return from the partnership is a critical factor in its decision on whether to partner with the federal government. According to our contractors, about a 15-percent IRR would likely elicit strong interest from the private sector in a partnership. However, this is only one factor, and the circumstances and conditions of each partnership are unique and would have to be evaluated on a case-by-case basis by both the private sector and the federal government. For example, a somewhat lower IRR could be attractive if other conditions, such as the risk level, are favorable. In addition, when our contractors discussed possible partnership scenarios with local developers, the developers said that to participate, they would want at least a 50-year master ground lease. The slides in appendix I, containing detailed information on the properties, show that the longer lease period would allow for the private sector to maximize its financial return from the partnership. Our contractors determined that 8 of the 10 GSA properties in our study were strong to moderate candidates for public-private partnerships. This determination was based on the (1) estimated IRR for the private sector partner in year 10 of the project, which ranged from 13.7 to 17.7 percent; (2) level of federal demand for the space; and (3) level of nonfederal demand for space. The level of demand for space, both federal and nonfederal, affects the level of risk that the space will be vacant and thus non-income-producing. The stronger the local market is for rental space, the more likely the space will be rented and thus be income-producing for the partnership. The properties that were strong candidates for partnerships were located in areas with a strong federal and nonfederal demand for space; and many had untapped value that the partnership could utilize, such as excess land on which a new or expanded building could be built. Public-private partnerships were not viable for 2 of the 10 GSA properties in our study. This was primarily due to a weak nonfederal demand for space and low financial potential. These properties had estimated potential IRRs of 12.4 and 10.3 percent. In addition to the relatively low IRRs, neither property had the potential of increasing the amount of rentable space available to increase the earning potential of the property, and both were in markets that had vacant office space with little or no demand for new office space. Many factors can affect the viability of a partnership arrangement. In addition to the local federal and nonfederal demand for space, the actual cost of redevelopment of a property to meet federal needs can greatly affect the viability of a partnership arrangement. The higher the cost of renovation, the longer it will take the partnership to recoup its costs and make a profit, thus affecting the appeal of the partnership to the private sector. In GSA's inventory, numerous buildings either have or are at risk of having a negative net cash flow due to their deteriorating condition. Four of the 10 buildings in our study are either vacant or were expected to be vacant by 2002, with little prospect of recruiting other agencies to fill the space because of the condition of the buildings. In addition, two of the other six buildings we studied were at risk of losing their current tenants because of the condition of the buildings. If public-private partnership authority becomes available, decisionmakers and policymakers will need to consider such issues as budget score- keeping rules, the type of facilities that would be appropriate for a partnership arrangement, and congressional review and oversight. In addition, each property is unique and will thus have unique issues that will need to be negotiated and addressed as the partnership is formed. Great care will need to be taken in structuring partnerships to protect the interests of both the federal government and the private sector. Our study designed a conceptual framework for public-private partnerships in order to identify potential benefits of these partnerships. Our study did not identify or address all the issues of partnerships that will need to be considered by the decisionmakers and policymakers as partnerships are developed. Action is needed to fix buildings that are in disrepair and have a negative net cash flow due to their deteriorating condition. As a result of the analysis done by our contractors, it appears that allowing GSA and other property-holding agencies to enter into public-private partnerships may enable them to deal with some of their deteriorating buildings. Partnerships could even provide other financial benefits to the federal government, such as reduced operating expenses and increased income that could be used for renovating other federal buildings. The potential benefits of public-private partnerships do not diminish the need for GSA to pursue and consider other alternatives for addressing problems in deteriorating federal buildings, such as federal financing through appropriations or the sale or exchange of property. Regardless of whether public-private partnership authority is provided, the problems with these buildings need to be addressed. We recommend that the Administrator of GSA use all available strategies to address the problems of buildings in GSA's inventory that have or are at risk of having a negative cash flow as a result of their deteriorating condition. We also recommend that the Administrator of GSA seek statutory authority to establish a pilot program that would demonstrate the actual benefits that may be achieved from public-private partnerships that achieve the best economic value for the government. The Congress should consider providing the Administrator of GSA with the authority to proceed with a pilot program to demonstrate the actual benefits that may be achieved using public-private partnerships that achieve the best economic value for the government as a real property management tool. If such authority is granted, the Congress should consider allowing GSA to enter into master ground leases of sufficient length to attract private sector interest in participating in partnerships with the federal government. Our study found that a 50-year master ground lease was generally sufficient to attract private sector interest. As we stated in April 2001, Congress should also consider allowing agencies to retain the funds from real property transactions. If such authority is granted, Congress should continue its appropriation control and oversight over the use of any funds retained by agencies. On June 28, 2001, we received written comments on this report from GSA's Commissioner for the Public Buildings Service. He agreed with the findings and recommendations in our report and noted a range of property management tools that GSA is currently using to address the physical conditions of its real property inventory. These comments are reprinted in appendix II. GSA officials also provided technical comments, which have been incorporated as appropriate. As suggested in your request letter and discussed with your offices, we hired contractors to develop and analyze hypothetical partnership scenarios for 10 selected GSA buildings to identify the potential benefits to the federal government and private sector of allowing federal agencies to enter into public-private partnerships. GSA's National Capital Region had previously contracted for a study to analyze the financial viability of public-private partnership ventures for three buildings in Washington, D.C. As agreed with your offices, because the majority of the work for these properties had already been done, we had the contractor update its work on these 3 buildings and selected them as 3 of the 10 GSA properties. To help us select the other 7 properties for our study, GSA provided a list of 36 properties that it considered good candidates for public-private partnerships. In preparing this list of properties, GSA officials said that they considered factors such as the strength of the real estate market in each area, the extent to which the property was currently utilized or had land that could be utilized, and the likelihood of receiving appropriations to rehabilitate the property in the near future. We judgmentally selected seven properties from this list to include properties (1) from different geographic areas of the country, (2) of different types and sizes, and (3) with historic and nonhistoric features. To analyze the potential viability of public-private partnerships for each of the 10 selected GSA properties, the contractors did the following: analyzed the local real estate markets, created a hypothetical partnership scenario and redevelopment plan, and constructed a cash flow model. In the contractor's judgement, the partnership scenarios were structured to meet current budget-scoring rules and provisions in H.R. 3285. These provisions included the requirements that the property must be available for lease in whole, or in part, by federal agreements do not guarantee occupancy by the federal government; government will not be liable for any actions, debts, or liabilities of any person under an agreement; and leasehold interests of the federal government are senior to those of any lender of the nongovernmental partner. However, a determination on how the partnerships would be treated for budget-scoring purposes would have to be made after more details are available on the partnerships. We accompanied the contractor on the visits to the seven GSA properties that had not been previously studied. We interviewed or participated in discussions with developers and local officials in the areas where the properties were located and officials from GSA. We reviewed the contractors' work on the 10 properties for reasonableness but did not verify the data used by the contractors. The partnership viability scenarios developed for this assignment are hypothetical, based on information that was made readily available by representatives of the local real estate markets, city governments, and GSA. Any actual partnerships involving these properties may be very different from these scenarios. In-depth feasibility studies must be done to evaluate partnership opportunities before they are pursued. There may be other benefits and costs that would need to be considered, such as the possible federal tax consequences and the costs of vacating property during renovation in some cases. This study only looked at the potential benefits to the federal government and private sector of public-private partnerships as a management tool to address problems in deteriorating federal buildings. We did not evaluate the potential benefits of other management tools that may be available for this purpose. We did, however, discuss the implications of using public- private partnerships with OMB representatives. We did our work between November 2000 and June 2001 in accordance with generally accepted government auditing standards. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then send copies to the Chairmen and Ranking Minority Members of Committees with jurisdiction over GSA, the Director of OMB, and the Administrator of GSA. We will make copies available to others upon request. Major contributors to this report include Ron King, Maria Edelstein, and Lisa Wright-Solomon. If you or your staff have any questions, please contact me or Ron King on (202) 512-8387 or at [email protected] or [email protected]. The partnership viability scenarios developed for this assignment are hypothetical based on information readily available from people in the local real estate markets, city officials, and GSA. Any actual partnerships involving these properties may be very different from these scenarios. In- depth feasibility studies must be done to evaluate the partnership opportunities before they are undertaken. Cash flow Preferred return (to the private partner) Jacksonville, Columbia) Demolition of existing building and rebuild like building (Andover, Charleston) Repair/modernize existing building and construct new building on excess land (Portland) Construct new building on underutilized land and outlease existing buildings and property (Seattle) Repair/modernize existing building and construct new space (GSA HQ, FOB 9) (50 Year Master Lease) (50 Year Master Lease) FDA is scheduled to vacate the building in 2001 and return it to GSA, free of FDA-generated hazardous materials, in 2002 Very desirable location, proximity to the Capitol, Smithsonian, and the Mall Completely renovate the building to greatly update and functionally improve the space Recapture existing laboratory space as office and add an additional 150 parking spaces to the existing 50 in the basement level. (50 Year Master Lease) Master Lease Term Comparison Net (50 Year Master Lease) Master Lease Term Comparison Net (50 Year Master Lease) Master Lease Term Comparison Net (50 Year Master Lease) Building Owners and Managers Association International, a trade association of the office building industry, that developed a standard method of floor measurement in square feet for commercial real property. Net operating income minus master ground lease, debt service, and replacement reserve. A designated downtown section of a city, generally consisting of retail, office, hotel, entertainment, and government land uses with some high- density housing. Amount required for payments of interest and principal (often insurance and tax escrows, too) on money owed. Percentage rate used in discounting cash flows in calculations of net present value. The process of estimating the budgetary effects of pending and enacted legislation and comparing them to limits set in the budget resolution or legislation. Scorekeeping tracks data such as budget authority, receipts, outlays, and the surplus or deficit. Total enclosed floor area of a building measured in square feet. A lease for the use and occupancy of land only for a period of time. The rate of return charged by a lender for the use of funds, expressed in the form of a percentage per year. The present value interest rate received for an investment consisting of payments and income that occur at regular periods; measures the return, expressed as an interest rate, that an investor would earn on an investment. A written agreement between the property owner and a tenant (lessor) that stipulates the conditions under which the tenant (lessee) is entitled to use the property (in this case, real property) in return for periodic payments (rent) for a specified period of time. A controlling lease under which all other interests in the real property are subordinate; for example, if a master lease is for a 5-year term, a sublease cannot legally exceed 5 years. Cash flow minus preferred return to the private partner. Operating income minus operating expenses. Method of converting a cash flow stream over a number of years into the value of that money today, using an appropriate discount rate, in order to make investment decisions. Broad term used to describe the expenses incurred in ordinary recurring activities of a property as opposed to nonrecurring items. Earnings from normal operations that do not take into account proceeds from nonrecurring items. A distribution of income to the private partner prior to the distribution of net cash flow in accordance with the terms of the partnership, generally to compensate the private partner for its cost of capital and risk incurred. Value today (or at some specific date) of an amount to be paid or received later. An arrangement by which the federal government contributes real property and a private entity contributes financial capital and borrowing ability to redevelop or renovate real property to serve, in part or in whole, a public need. A term used in the commercial real estate market that includes occupiable square feet plus the tenants' proportional share of common building areas, such as rest rooms, exit stairways/fire corridors, and lobbies. Amount set aside from net operating income to pay for renovation or replacement of short-lived assets. Unit of area measurement equal to a square measuring one foot on each side. An arrangement whereby a lessee leases the property to a different end user while the lessor maintains ownership and the lessee retains all of its obligations under the lease; terms cannot exceed that of a master lease.
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The U.S. government is one of the world's largest property owners, with a real estate portfolio of more than 400,000 defense and civilian buildings and more than one-half billion acres of land. Each year, the federal government spends billions of dollars to maintain its buildings. Even so, the General Services Administration (GSA) contends that it needs $4 billion, over and above these expenditures, to maintain its existing inventory. This report identifies the potential benefits to the federal government of entering into public-private partnerships on real property--an arrangement in which the federal government contributes real property and a private entity contributes financial capital and borrowing ability to redevelop or renovate the real property. GAO found that public-private partnership authority could be an important management tool to address problems in deteriorating federal buildings, but further study of how the tool would actually work and its benefits compared to other options is needed. Potential net benefits to the federal government of entering into these public-private partnerships include better space, lower operating costs, and increased revenue without up-front federal capital expenditures if further analysis shows that they would not be treated as capital leases for budget-scoring purposes. The potential benefits of public-private partnerships do not diminish the need for GSA to pursue other alternatives for addressing problems in deteriorating federal buildings. GAO summarized this report in testimony before Congress; see Public-Private Partnerships: Factors to Consider When Deliberating Governmental Use as a Real Property Management Tool, by Bernard L. Ungar, Director for Physical Infrastructure Issues, before the Subcommittee on Technology and Procurement Policy, House Committee on Government Reform. GAO-02-46T , October 1 (11 pages).
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EPA administers and oversees grants primarily through the Office of Grants and Debarment, 10 program offices in headquarters, and program offices and grants management offices in EPA's 10 regional offices. Figure 1 shows the key EPA offices involved in grants activities for headquarters and regions. The management of EPA's grants program is a cooperative effort involving the Office of Administration and Resources Management's Office of Grants and Debarment, program offices in headquarters, and grants management offices in the regions. The Office of Grants and Debarment develops grant policy and guidance. It also carries out certain types of administrative and financial functions for the grants approved by headquarters program offices, such as awarding grants and overseeing the financial management of grants. On the programmatic side, headquarters program offices establish and implement national policies for their grants programs and set funding priorities. They are also responsible for the technical and programmatic oversight of their grants. In the regions, grants management offices carry out certain administrative and financial functions for the grants, such as awarding grants approved by the regional program offices, while the regional program staff provide technical and programmatic oversight of their grantees. As of June 2004, 134 grants specialists in the Office of Grants and Debarment and the regional grants management offices were largely responsible for administrative and financial grant functions. Furthermore, 2,089 project officers were actively managing grants in headquarters and regional program offices. These project officers are responsible for the technical and programmatic management of grants. Unlike grant specialists, however, project officers generally have other responsibilities, such as using the scientific and technical expertise for which they were hired. In fiscal year 2003, EPA took 6,753 grant actions involving funding totaling about $4.2 billion. These awards were made to six main categories of recipients, as shown in figure 2. EPA offers two types of grants--nondiscretionary and discretionary: Nondiscretionary grants support water infrastructure projects, such as the drinking water and clean water state revolving fund programs, and continuing environmental programs, such as the Clean Air Program for monitoring and enforcing Clean Air Act regulations. For these grants, Congress directs awards to one or more classes of prospective recipients who meet specific eligibility criteria; the grants are often awarded on the basis of formulas prescribed by law or agency regulation. In fiscal year 2003, EPA awarded about $3.6 billion in nondiscretionary grants. EPA has awarded these grants primarily to states or other governmental entities. Discretionary grants fund a variety of activities, such as environmental research and training. EPA has the discretion to independently determine the recipients and funding levels for these grants. In fiscal year 2003, EPA awarded $656 million in discretionary grants. EPA has awarded these grants primarily to state and local governments, nonprofit organizations, universities, and Native American tribes. To highlight persistent problems and, it is hoped, to focus greater attention on their resolution, we designated EPA's grants management, including achieving environmental results, as a major management challenge in our January 2003 performance and accountability report. In August 2003, we further addressed the question of environmental results. We reported that EPA (1) had awarded some grants before considering how the results of the grantees' work would contribute to achieving environment results; (2) had not developed environmental measures and outcomes for its grants programs; and (3) often did not require grantees to submit workplans that explain how a project will achieve measurable environmental results. We also found that EPA's monitoring efforts had not called for project officers to ask grantees about their progress in using measures to achieve environmental outcomes. For its grants programs, EPA is still not effectively linking grants to environmental results. The problems we identified in our previous 2003 report continue. Further, in our recent report, in 2004, we identified an additional problem. That is, we could not determine from EPA's databases the types of goods and services provided by grants. To identify goods and services obtained from discretionary grants, we surveyed discretionary grant recipients. On the basis of our survey responses, we identified a total of eight categories (see table 1). We estimated that of all the goods and services indicated by grant recipients, 59 percent were in three of these categories: (1) research and development; (2) training, workshops, and education; and (3) journals, publications, and reports. While we were able to identify goods and services from survey responses, we could not link them to results. We reviewed the files of 67 grantees to identify if there was any link between goods and services and program measures or outcomes in grant workplans. We found that none of the 67 grants identified measures and only 9 of the 67 grants identified anticipated outcomes in their workplans. EPA has also found that grantee workplans often do not identify environmental outcomes. In 2003, EPA began conducting internal reviews that--for the first time--quantified the extent to which its grant-issuing offices, including program and regional offices, ensured that environmental outcomes are identified in grant workplans. EPA reported that, overall, less than one-third of the 93 grant workplans reviewed identified environmental outcomes. (See table 2.) Among EPA's offices, the percent of workplans that identify environmental outcomes ranged from 0 to 50. In 2004, EPA plans to review seven other offices. As of July 2004, EPA had completed reviews of three offices. Among these three offices, EPA found environmental outcomes in a little less than half of grant workplans. Final agencywide data will not be available until the end of 2004, when EPA completes its internal reviews. Not surprisingly, given the lack of outcomes in the workplans, OMB found that EPA grant programs are not demonstrating results. In February 2004, OMB found that 8 of the 10 EPA grant programs it reviewed were "not demonstrating results." These programs total about $2.8 billion. (See table 3.) OMB rated the two remaining grant programs--Brownfields and Tribal Assistance Programs--totaling $224 million as "adequate" in demonstrating results. According to EPA's Inspector General, EPA's failure to consistently identify environmental measures and outcomes can weaken grant oversight. For example, the Inspector General recently reported that EPA Region 6 could not determine whether its oversight of water, hazardous waste, and air programs in Louisiana was effective because, in part, Region 6 had not linked these programs to environmental outcomes. Region 6 had focused only on program outputs; it therefore could not determine whether it was using its resources wisely and achieving program results. EPA's program and regional grants officials have identified difficulties in measuring and achieving environmental outcomes. For example: In response to EPA's internal reviews, Region 9 officials noted that it is costly and difficult to measure outcomes when there is a substantial time lag between implementing the grant and achieving environmental outcomes. Moreover, it is difficult to attribute environmental outcomes to one specific grant when dealing with complex ecosystems. In addition, Office of Environmental Information project officers stated that environmental outcome requirements should not apply to support functions like information management. Responding to the recent Inspector General report faulting Region 6 for its oversight of Louisiana's environmental programs, Region 6 officials indicated that they had been unfairly criticized for not implementing environmental measures since the agency, as a whole, had been unable to do so. These concerns demonstrate the need for guidance that addresses the complexities of measuring and achieving environmental results. Furthermore, not every EPA program office has yet developed environmental measures for their grant programs. For example, in June 2004, the Inspector General found that EPA has been working on developing environmental measures for the Clean Water State Revolving Fund program since 1998. However, EPA has not yet developed these measures or a comprehensive plan on how it plans to develop these measures, although it plans to develop these measures by February 2005. In 2003, we reported that EPA's new 5-year grants management plan was promising. In the plan, EPA had established the goal of "identifying and achieving environmental outcomes" with the objectives and associated milestones shown in table 4. As table 4 shows, EPA's progress in implementing the plan's environmental outcomes objectives is behind schedule. EPA plans to issue its environmental outcomes policy--a key objective originally scheduled for 2003--in fall 2004, but the policy will not become effective until January 2005. EPA officials stated that the policy was delayed because of the difficulty in addressing environmental outcomes. Furthermore, as a result of this delay, EPA has delayed meeting the objectives of developing a tutorial for grantees, requiring outcomes in solicitations, and incorporating success on achieving outcomes into the criteria for awarding grants--objectives that are contingent on the issuance of the policy. EPA is also delaying the objective of incorporating grantee's previous success in identifying outcomes into the criteria for awarding new grants in order to give grantees a year to understand the new policy. In the absence of a final outcomes policy, EPA issued an interim policy in January 2004. The interim policy is a positive step in that for the first time EPA is requiring project officers to identify--at the pre-award stage--how proposed grants contribute to achieving the agency's strategic goals under the Government Performance and Results Act of 1993 (GPRA). (See fig. 3, example 1.) As we reported, project officers were linking the grant to the agency's goal after the award decision, so that the linkage was a recordkeeping activity rather than a strategic decision. While the interim policy is a positive first step, it does not require project officers to link grant funding to environmental outcomes. Instead, it "encourages" project officers to link grant funding to outputs, outcomes, and performance goals, as illustrated in figure 3, example 2. EPA officials explained that the interim policy did not require the full strategic plan/GPRA "architecture"--goals, objectives, subobjectives, program/project, outputs, outcomes, and annual performance goals-- because not all EPA staff are trained on how to implement the strategic plan/GPRA architecture. However, when EPA's outcome policy becomes effective, it will require every grant workplan to address the full strategic plan/GPRA architecture, including outcomes. Finally, EPA will not meet the grant management's plan first-year (2004) target for the performance measure of the environmental outcomes goal-- the percentage of grant workplans, decision memoranda, and terms of conditions that discuss how grantees plan to measure and report on environmental outcomes. For this performance measure, using 2003 as its baseline year, EPA determined that, as previously discussed, less than one- third of its grant workplans had environmental outcomes. EPA established targets that progressively increase from this baseline to 70 percent in 2004, to 80 percent in 2005, to 100 percent in 2006. EPA officials do not expect that EPA will meet its target for 2004 because its outcome policy is not yet in place. EPA has drafted a policy and guidance on environmental outcomes in grants. As drafted, this policy appears to have EPA moving in the right direction for addressing environmental outcomes. The policy Is binding on managers and staff throughout the agency, according to EPA officials. Previously, the Office of Grants and Debarment targeted only project officers through brief guidance on outcomes in their training manual. Emphasizes environmental results throughout the grant life cycle-- awards, monitoring, and reporting. In terms of awards, the draft policy applies to both competitive and noncompetitive grants. For example, program offices and their managers must assure that competitive funding announcements discuss expected outputs and outcomes. In terms of grant monitoring, the policy requires program offices to assure that grantees submit interim and final grantee reports that address outcomes. Requires that grants are both aligned with the agency's strategic goals and linked to environmental results. Specifically, the draft policy requires that EPA program offices (1) ensure that each grant funding package includes a description of the EPA strategic goals and objectives the grant is intended to address and (2) provide assurance that the grant workplan contains well-defined outputs, and to the "maximum extent practicable," well-defined outcome measures. According to an EPA official, while the policy requires that program offices assure that there are well-defined outputs and outcomes, the grant funding package--an internal EPA document--will not identify each output and anticipated outcome. EPA is concerned that certain types of grants have too many outputs and outcomes to enumerate. Potential grant recipients also will not be required to submit workplans that mirror the strategic plan/GPRA architecture, owing to EPA's concern that such a requirement would cause the grant to be for EPA's benefit, and thus, more like a contract. EPA included the provision to "the maximum extent practicable" because it recognized that some types of grants do not directly result in environmental outcomes. For example, EPA might fund a research grant to improve the science of pollution control, but the grant would not directly result in an environmental or public health benefit. EPA's forthcoming policy and guidance faces implementation challenges. First, while the guidance recognizes some of the known complexities of measuring outcomes, it does not yet provide staff with information on how to address them. For example, it does not address how recipients will demonstrate outcomes when there is a long time lag before results become apparent. Second, although the policy is to become effective in January 2005, all staff will not be trained by that time. EPA has planned some training before issuing the policy and has issued a long-term training plan that maps out further enhancements for training grant specialists and project officers on environmental results. Finally, EPA has not yet determined how environmental results from its programs will be reported in the aggregate at the agency level. EPA's forthcoming order establishes that program offices must report on "significant results" from completed grants through existing reporting processes and systems, which each program has developed. EPA plans to convene an agencywide work group in fiscal year 2005 to identify ways to better integrate those systems. In conclusion, we believe that if fully implemented, EPA's forthcoming outcome policy should help the agency and the Congress ensure that grant funding is linked to EPA's strategic plan and to anticipated environmental and public health outcomes. We believe that the major challenge to meeting EPA's goal of identifying and achieving outcomes continues to be in implementation throughout the agency. Realistically, EPA has a long road ahead in ensuring that its workforce is fully trained to implement the forthcoming policy and in educating thousands of potential grantees about the complexities of identifying and achieving environmental results. Given EPA's uneven performance in addressing its grants management problems to this point, congressional oversight is important to ensuring that EPA's Administrator, managers, and staff implement its grants management plan, including the critical goal of identifying and achieving environmental results from the agency's $4 billion annual investment in grants. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have. For further information, please contact John B. Stephenson at (202) 512- 3841. Individuals making key contributions to this testimony were Avrum I. Ashery, Andrea W. Brown, Tim Minelli, Carol Herrnstadt Shulman, Rebecca Shea, Bruce Skud, and Amy Webbink. 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 Environmental Protection Agency (EPA) has faced persistent challenges in managing its grants, which constitute over one-half of the agency's budget, or about $4 billion annually. These challenges include achieving and measuring environmental results from grant funding. It is easier to measure grant activities (outputs) than the environmental results of those activities (outcomes), which may occur years after the grant was completed. In 2003, EPA issued a 5-year strategic plan for managing grants that set out goals, including identifying and achieving environmental outcomes. This testimony describes persistent problems EPA has faced in addressing grants' environmental results and the extent to which EPA has made progress in addressing problems in achieving environmental results from its grants. It summarizes and updates two reports GAO issued on EPA's grant management in August 2003 and March 2004. EPA's problems in identifying and achieving environmental results from its grants persist. The agency is still not consistently ensuring that grants awarded are clearly linked to environmental outcomes in grant workplans, according to GAO's analysis and EPA's internal reviews. For example, EPA's 2003 internal reviews found that less than one-third of grant workplans reviewed--the document that lays out how the grantee will use the funding--identified anticipated environmental outcomes. Not surprisingly, given the lack of outcomes in grant workplans, the Office of Management and Budget's recent review of 10 EPA grant programs found that 8 of the grant programs reviewed were not demonstrating results. Furthermore, not every EPA program office has yet developed environmental measures for their grant programs. EPA's progress in addressing problems in achieving environmental results from grants to this point has been slower and more limited than planned. While EPA had planned to issue an outcome policy--a critical ingredient to progress on this front--in 2003, the policy's issuance has been delayed to the fall of 2004, and will not become effective until January 2005. In the meantime, EPA has issued a limited, interim policy that requires program offices to link grants to EPA's strategic goals, but does not link grants to environmental outcomes. Furthermore, as a result of the delay in issuing an outcome policy, EPA officials do not expect to meet the 5-year plan's first-year target for the goal's performance measure. The forthcoming draft policy we reviewed appears to be moving EPA in the right direction for addressing environmental outcomes from its grants. For example, the draft policy emphasizes environmental results throughout the grant life cycle--awards, monitoring, and reporting. Consistent and effective implementation of the policy will, however, be a major challenge. Successful implementation will require extensive training of agency personnel and broad based education of literally thousands of grantees.
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The Disaster Relief Act included approximately $50 billion in supplemental appropriations for fiscal year 2013 to 19 agencies for 61 specific programs for expenses related to the consequences of Hurricane Sandy. Under the authority granted by the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, OMB determined that these supplemental appropriations were to be included in the fiscal year 2013 base subject to sequestration under section 251A of that act. The amounts included in this report are drawn from the Disaster Relief Act as originally enacted, and are not adjusted to account for sequestration. Figure 1 shows the distribution of Sandy disaster relief funding by agency. Appendix II presents more detailed information on the supplemental appropriations provided by the Disaster Relief Act. Most of the agencies' supplemental appropriations provided by the Disaster Relief Act are related to grant programs. As shown in figure 2, grant programs received more than $41 billion of the approximately $50 billion provided by the Disaster Relief Act. The Disaster Relief Act also provides an oversight framework for these funds in regard to improper payments and the recapture of unexpended grant funds. Specifically, the Disaster Relief Act states that all programs and activities receiving these funds shall be deemed "susceptible to significant improper payments," for purposes of the Improper Payments Information Act of 2002 (IPIA), and funds for grants shall be expended by the grantees within the 24- month period following the agency's obligation of funds for the grant, unless OMB waives this requirement for a particular grant program and submits a written justification for such waiver to the Committees on Appropriations of the U.S. Senate and the House of Representatives. The act states that agencies shall include a term in the grant that requires the grantee to return any funds to the agency that are not expended within this 24-month period. In addition, the Disaster Relief Act states that through September 30, 2015, the Recovery Accountability and Transparency Board (Recovery Board) shall develop and use information technology resources and oversight mechanisms to detect and remediate waste, fraud, and abuse in the obligation and expenditure of funds to support oversight of Sandy disaster relief funding. The act also states that the Recovery Board will coordinate its activities with OMB, each federal agency receiving appropriations related to the impact of Hurricane Sandy, and the IG of each such agency. As noted above, the Disaster Relief Act required OMB to establish criteria for agencies to use in developing their Sandy disaster relief internal control plans. Internal controls serve as the first line of defense in safeguarding assets and in preventing and detecting fraud, abuse, and errors. Given the magnitude of funding provided by the Disaster Relief Act, it is important for federal agencies to ensure that the funds appropriated under the act are used for their intended purposes. OMB established the criteria in M-13-07, which provides an overview of the internal control planning and reporting requirements for all programs funded under the act with a focus on (1) developing additional internal controls warranted beyond previously existing controls, (2) managing all Sandy disaster-related funding with the same discipline and rigor as programs that are traditionally designated as high risk for improper payments, and (3) managing unexpended grant funds. M-13-07 notes that as required by OMB Circular No. A-123, Management's Responsibility for Internal Control (OMB Circular A-123), agencies must have established internal control plans to prevent waste, fraud, and abuse of federal program funds.management is responsible for establishing and maintaining internal control to achieve the objectives of effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations. Specifically, OMB Circular A-123 states that As illustrated in figure 3, OMB directed agencies to describe incremental risks identified for each program administering Sandy disaster relief funding as well as the internal control strategy for mitigating each of these risks (if applicable). M-13-07 also discusses the roles of other parties involved in supporting Sandy disaster relief efforts, including the Recovery Board, the Hurricane Sandy Rebuilding Task Force (Task Force), and agency IGs. The Task Force was established on December 7, 2012, under Executive Order 13632.opportunities for federal agencies to work together to support recovery from Hurricane Sandy and to promote strong accountability for the use of the disaster relief funds. M-13-07 also notes that the Task Force is supported by a program management office that is working with agencies to ensure stakeholder engagement, establish performance metrics to gauge recovery efforts, and monitor the execution of Sandy disaster relief funding. Further, M-13-07 emphasizes that agency internal control plans should reflect consideration of early and frequent engagement between agencies and IGs to discuss issues affecting the Disaster Relief Act's disaster-related programs and activities in order to identify and mitigate potential risk. M-13-07 states that the Task Force is responsible for identifying In addition to issuing M-13-07, OMB took steps to help agencies develop internal control plans for managing the risks related to Sandy funds. These activities occurred prior to and following the release of the guidance. On February 19, 2013, OMB sent the Chief Financial Officer community advance notice of the forthcoming OMB guidance. This notice identified minimum requirements for agency internal control plans that would be included and further explained in the OMB guidance. Also, as reported by OMB staff and agency officials, OMB met with the agencies to discuss agency risk assessments and the development of internal control plans. In accordance with M-13-07, each of the 19 agencies that received funds under the act submitted a Sandy disaster relief internal control plan with specific program details using the template provided by OMB. OMB guidance directed agencies to develop internal control plans based on incremental risk. We found that agencies identified incremental risk related to Sandy activities for 38 of the 61 programs receiving funding under the Disaster Relief Act. Our review of the internal control plans disclosed that agencies did not consistently apply M-13-07 in preparing these plans. Specifically, agencies' plans ranged from providing most of the required information to not providing any information on certain programs. M-13-07 provides an overview of the internal control planning and reporting requirements for all programs funded under the act with a focus on three major areas: (1) additional internal controls for Sandy- related activities, (2) improper payments protocol, and (3) management of unexpended grant funds. M-13-07 states that agency internal control plans for Sandy-related program funding shall reflect consideration of elements such as conducting additional levels of review, increasing monitoring and oversight of grant recipients, continuing collaboration with the IG community, and expediting review and resolution of audit findings. The first element of additional internal control listed in M-13-07 is additional levels of review of award decisions, payment transactions, and other critical process elements that impact the use of Disaster Relief Act funds. This requirement applied to the 38 programs that identified incremental risk related to Sandy disaster relief funding. However, M-13- 07 notes that agencies should adopt more expansive review procedures, as appropriate. This allowed agencies to determine whether additional levels of review were necessary for their award decisions, payment transactions, and other critical process elements. M-13-07 did not require agencies to document their rationales for determining whether additional levels of review were appropriate. Table 1 summarizes the requirement to conduct additional levels of review per M-13-07. As illustrated in table 2, our review found that agencies' discussion in their internal control plans of conducting additional levels of review for 38 programs that identified incremental risk related to Sandy activities varied. Certain agencies did not discuss additional levels of review for programs for which they identified incremental risk. Of the 38 programs that identified incremental risk, 8 programs did not discuss award decisions, 11 programs did not discuss payment transactions, and 12 programs did not discuss critical process elements that impact the use of Disaster Relief Act funds. However, it is not clear from the Sandy disaster relief internal control plans whether these agencies determined that additional levels of review were not appropriate for these programs. While the requirement for additional levels of review did not apply to the 23 programs that did not identify incremental risk, some agencies also discussed conducting additional levels of review for certain programs for which they did not identify incremental risk in their Sandy disaster relief internal control plans. Of the 23 programs that did not identify incremental risk, 5 programs discussed additional levels of review for award decisions, payment transactions, and other critical process elements. For example, one agency planned to add an additional level of review by establishing an executive council to make final decisions on project selection for its Hurricane Sandy funding. The second element of additional internal control listed in M-13-07 is increasing monitoring and oversight of grant recipients through (1) increased frequency and specificity of grantee reports, (2) additional site visits, and (3) additional technical assistance and training for grant recipients. This requirement applies to all 17 grant programs that identified incremental risk related to Sandy disaster relief funding. However, M-13-07 notes that agencies should adopt increased monitoring and oversight of grant recipients to the extent appropriate and possible under budgetary constraints. This allowed agencies to justify not designing controls for increased monitoring and oversight of grant recipients because of low program risk or budgetary constraints. M-13-07 did not require agencies to document their rationales for determining whether increased monitoring and oversight of grant recipients were appropriate. Table 3 summarizes the requirement to increase monitoring and oversight of grant recipients per M-13-07. As illustrated in table 4, our review found that agencies' discussion in their internal control plans of increasing monitoring and oversight of grant recipients varied. For most of the 17 grant programs, agencies planned to increase monitoring and oversight mechanisms for their grant recipients. For example, one agency planned to increase monitoring and oversight of grant recipients by requiring financial and milestone progress reports from its Hurricane Sandy grantees on a monthly basis, rather than quarterly, as required of its other grantees. Conversely, certain agencies did not discuss additional monitoring and oversight of grant recipients for some grant programs. Specifically, of the 17 grant programs, 5 did not discuss increasing the frequency and specificity of grantee reporting, 6 did not discuss conducting additional site visits, and 9 did not discuss providing additional technical assistance and training to recipients. However, it is not clear from the Sandy disaster relief internal control plans whether these agencies determined that increasing monitoring and oversight of grant recipients was not necessary for these programs or not possible under budgetary constraints. The third element of additional internal control listed in M-13-07 is that agencies should continue early and frequent engagement with their respective IG. This requirement applied to all programs that identified incremental risk related to Sandy disaster relief funding. Table 5 summarizes the requirement to collaborate with the IG community per M-13-07. As illustrated in table 6, our review found that agencies discussed collaboration with their IGs for most programs, regardless of whether they identified incremental risk. For example, one agency noted in its Sandy disaster relief internal control plan that it planned to hold monthly meetings with its IG to discuss ongoing audits and foster additional coordination through participation in program conferences and training. While the requirement for continued collaboration with the IG community applied to the 38 programs that identified incremental risk, 15 programs that did not identify incremental risk also discussed continuing collaboration with their respective IGs in their Sandy disaster relief internal control plans. Of the 38 programs that identified incremental risk, 3 did not discuss continuing collaboration with the agency's IG to identify and mitigate potential risk. The fourth element of additional internal control listed in M-13-07 is that agencies should expedite the review and resolution of audit findings. M- 13-07 states that agencies shall resolve all audit findings, which include findings from GAO, IG, and single audit reports, within 6 months after completion of the audit to the extent practicable. This requirement applied to all programs that identified incremental risk. Additionally, for grant programs that identified incremental risk, M-13-07 states that agencies should avoid granting extension requests for audit report submission and should explore the feasibility of conducting additional audit activities to review internal control procedures prior to funding the activity. Table 7 summarizes the requirement to expedite review and resolution of audit findings per M-13-07. As illustrated in table 8, our review found that agencies' discussion in their internal control plans of expediting review and resolution of audit findings varied. While the requirement applied to the 38 programs that identified incremental risk, not all agencies discussed resolving all audit findings within 6 months after completion of the audit. Specifically, of the 38 programs, there were 12 programs that identified incremental risk and did not discuss expediting review and resolution of audit findings in their internal control plans. However, while the requirement applied to the 38 programs that identified incremental risk, 5 programs that did not identify incremental risk also discussed expediting review and resolution of audit findings in their Sandy disaster relief internal control plans. For the 17 grant programs, agencies did not discuss avoidance of granting extension requests for audit report submission and exploring the feasibility of conducting additional audit activities prior to funding the activity. Specifically, for the 17 grant programs, 14 did not discuss avoiding granting extension requests for audit report submission and 11 did not discuss exploring the feasibility of conducting additional audit activities prior to funding the activity. It is not clear from the Sandy disaster relief internal control plans whether agencies determined that these additional audit activities prior to funding the activity would not be feasible. The Disaster Relief Act states that all programs and activities receiving funds under the act shall be deemed to be "susceptible to significant improper payments" for purposes of IPIA. M-13-07 adds that all federal programs or activities receiving funds under the act are required to calculate and report an improper payment estimate. Additionally, M-13-07 notes that agencies shall manage all Sandy-related funding with the same discipline and rigor as programs that are traditionally designated as high risk for improper payments. Table 9 summarizes the requirement related to improper payments protocol. As illustrated in table 10, our review of agencies' disaster relief internal control plans for all 61 programs found that agencies discussed developing a sampling methodology to produce and report an estimate of improper payments in the fiscal year 2014 reporting period for 38 programs. Agencies discussed improper payments, but did not discuss producing and reporting an estimate of improper payments for 11 programs. Agencies did not discuss improper payments for 12 programs. The Disaster Relief Act states that funds for grants shall be expended by the grantees within the 24-month period following the agency's obligation of funds for the grant, unless OMB waives this requirement for a particular grant program and submits a written justification for such waiver to the Committees on Appropriations of the U.S. Senate and the House of Representatives. The act also states that agencies shall include a term in the grant that requires the grantee to return any funds to the agency that are not expended within this 24-month period. M-13-07 expands on the act by stating that agencies shall ensure that each proposed grant activity has clear timelines for execution and completion within the statutory period available for grantee expenditure. Table 11 summarizes the requirements related to the management of unexpended grant funds. As illustrated in table 12, our review found that some agencies' internal control plans did not address OMB's four requirements related to the management of unexpended grant funds for all 17 grant programs. However, it is not clear whether all of these four requirements apply to each grant program because agencies may be planning to request waivers of the 24-month expenditure requirement for certain of their grant programs. OMB issued guidance to provide oversight over Sandy disaster funding, which represents an important step toward accountability over these funds. Several weaknesses limited the effectiveness of this guidance in providing a comprehensive oversight mechanism for these funds. Specifically, the guidance (1) focused on the identification of incremental risks without adequate linkages to demonstrate that known risks had been adequately addressed, (2) provided agencies with significant flexibility without requirements for documentation or criteria for claiming exceptions, and (3) resulted in certain agencies' developing their internal control plans at the same time that funds needed to be quickly distributed. The demand for rapid response and recovery assistance suggests that a proactive approach is needed in providing guidance to agencies to ensure accountability over disaster relief funding, prior to a disaster occurring. The internal control plans prepared by the agencies under M-13-07 were intended to mitigate incremental risk, and therefore they did not provide comprehensive information on all known risks and internal controls that may affect the programs that received the Sandy disaster funding. For many years, we and the IG community have identified internal control weaknesses in the federal government related to agencies receiving funds for disaster assistance. For example, following Hurricane Katrina, we reported on a number of internal control weaknesses related to contracting issues, such as federal agencies involved in responding to the disaster that had inadequate acquisition plans for carrying out their assigned responsibilities, insufficient knowledge of the market or unsound ordering practices that led to excessive or wasteful expenditures, and insufficient staff available for monitoring and oversight. We also identified control weaknesses related to grants management following Hurricanes Katrina and Rita, such as determining the amount of damage that was actually disaster related; sharing project information among intergovernmental participants during project development, and limitations in how the status of projects is tracked; and inadequate human capital capacity, especially early on in the recovery. Similarly, IGs have reported on internal control weaknesses related to accountability over disaster assistance. For example, IGs have reported that grantees did not complete their disaster relief projects in a timely manner and did not ensure the use of funds for intended purposes, and that states did not provide timely reporting on activity progress related to grant funding as some activities were not reported on until the projects were complete. When we compared the incremental risks identified by the agencies receiving funds for Sandy disaster relief with risks identified in prior GAO, IG, and financial statement audit reports related to grants management, contract management, improper payments, and other internal control weaknesses for programs receiving Sandy funding, we determined that some of the risks in these reports were not included in the Sandy disaster relief internal control plans. For example, one agency that reported that it will expend its Sandy disaster relief funds through contracts did not identify any incremental risks. Our review of prior GAO, IG, and financial statement audit reports found significant risks related to the agency's contract management. According to Standards for Internal Control in the Federal Government, internal control should provide for an assessment of the risks the agency faces from both external and internal sources. Management needs to comprehensively identify risks and should consider all significant interactions between the entity and other parties as well as internal factors at both the entity-wide and activity levels. Because the internal control plans prepared by the agencies are a subset of the complete set of risks related to programs receiving Sandy disaster relief funding, they are not effective for providing comprehensive oversight of Sandy disaster relief funds.assessment is necessary to help to ensure that agencies have considered all risks when designing internal controls. As described previously, OMB guidance listed various elements of additional internal control that at a minimum should have been reflected in the agencies' internal control plans. However, the guidance included language that allowed agencies significant flexibility in deciding whether they needed to design additional internal controls. M-13-07 did not provide specific criteria for agencies to follow to claim exemptions from requirements, and the guidance did not require agencies to document their rationales for not including additional internal controls in their internal control plans. For example, M-13-07 states that agencies should conduct additional levels of review "as appropriate" and should increase monitoring and oversight of grant recipients "to the extent appropriate to mitigate risk and possible under budgetary constraints." The guidance did not provide criteria for determining "appropriateness" or "budgetary constraints." We found that some agencies did not discuss additional levels of review despite having identified incremental risk and did not discuss increased monitoring and oversight of grant recipients for some of their grant programs. Because M-13-07 did not require agencies to document their reasons for these omissions, the extent to which the agencies considered the need for these additional internal controls is not apparent from the Sandy disaster relief internal control plans. Additionally, M-13-07 required agencies to make an annual certification that the appropriate policies and controls were in place for activities and expenses related to Hurricane Sandy. M-13-07 provides agencies flexibility by stating that this annual certification for Hurricane Sandy funding "can be included" as part of the agencies' annual assurance statements. According to OMB staff, OMB expected agencies to leverage their existing annual internal control review process performed in accordance with OMB Circular A-123 to include the internal controls related to activities and expenses funded by the Disaster Relief Act related to Hurricane Sandy. However, M-13-07 did not include specific requirements linking the annual review of controls to any additional control requirements for disaster-related funding. In light of the amount of funds involved and the risks associated with the funds provided by the Disaster Relief Act, on August 2, 2013, we sent a letter to the Director of OMB requesting consideration for sending written instructions to federal agencies to ensure that agency management includes the programs receiving funds for disaster assistance for Hurricane Sandy in their annual internal control reviews and assessments for fiscal year 2013. Such linkage between the incremental risks and mitigating controls related to disaster funding and efforts to address known internal control risks would be an important factor in providing comprehensive oversight of the internal control risks for the programs receiving disaster relief funds. In addition to the lack of comprehensive information on risks and internal controls, there is a risk that the incremental internal controls for Sandy disaster relief funding may not have been designed in time for its distribution. The Disaster Relief Act, which required OMB to issue guidance, was enacted on January 29, 2013. OMB had a short time frame to develop and issue the internal control guidance. As noted earlier, on February 19, 2013, OMB sent the Chief Financial Officer community advance notice of its impending guidance, and OMB finalized its guidance by issuing M-13-07 on March 12, 2013. In many cases, agencies developed and implemented the internal control plans at the same time that the funds needed to be quickly distributed. The Disaster Relief Act required agencies to submit their internal control plans by March 31, 2013, and agencies reported that they had already obligated approximately $4.6 billion as of that date. The limitations we identified in implementing M-13-07 illustrate that developing comprehensive internal control plans while a disaster unfolds is not feasible, and a proactive approach could help ensure that controls are designed timely. For example, OMB has provided standard procurement guidance, through its Emergency Acquisitions Guide, to assist the federal contracting community with carrying out procurement activities during disasters and other emergencies. As we have previously reported, following a disaster, decision makers face a tension between the demand for rapid response and recovery assistance-- including assistance to victims--and implementing appropriate controls and accountability mechanisms. The risk for fraud and abuse grows when billions of dollars are being spent quickly. Weather-related events have cost the nation tens of billions of dollars in damages over the past decade. In our 2013 high-risk series, we reported that the United States Global Change Research Program has observed that the impacts and costliness of weather disasters will increase in significance, as what are considered "rare" events become more common and intense because of climate change. We previously reported that the growing number of disaster declarations--98 in fiscal year 2011 compared with 65 in 2004-- has contributed to higher federal disaster costs. These impacts pose significant financial risks for the federal government, which owns extensive infrastructure, insures property through federal flood and crop insurance programs, provides technical assistance to state and local governments, and provides emergency aid in response to natural disasters. Without standard internal control guidance in place prior to future disasters, agencies may not be able to ensure that internal controls for disaster relief funding are effectively designed and timely implemented for all related funding. When disasters occur, the destruction caused by those disasters must be addressed immediately, and disaster relief funding must be delivered expeditiously. However, the risk for fraud and abuse increases when billions of dollars are being spent quickly. Our past work and that of the IG community has shown that effective controls and comprehensive accountability mechanisms for the use of resources related to a disaster are essential to ensure that resources are used appropriately. Relying on incremental disaster relief internal control plans cannot ensure that comprehensive information on risks and related internal controls will be adequate to ensure the safeguarding of disaster funds. Although M-13-07 represents an important step in the right direction, establishing more robust internal control guidance that can be applied to future disaster relief funding would allow agencies to proactively identify risks and develop internal controls prior to receiving such funding. Further, linking the additional risks identified in incremental plans to the complete set of known risks and related internal controls can help agency management and external entities, including Congress, to provide effective oversight of the funds. To proactively prepare for oversight of future disaster relief funding, we recommend that the Director of OMB develop standard guidance for federal agencies to use in designing internal control plans for disaster relief funding. Such guidance could leverage existing internal control review processes and should include, at a minimum, the following elements: robust criteria for identifying and documenting incremental risks and mitigating controls related to the funding and requirements for documenting the linkage between the incremental risks related to disaster funding and efforts to address known internal control risks. We requested comments on a draft of the report from the Director of the Office of Management and Budget or her designee. On November 14, 2013, staff from OMB's Office of Federal Financial Management provided oral comments and stated that they generally agreed with our recommendation and requested additional information on the findings to inform future guidance. They also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to interested congressional committees, the Director of the Office of Management and Budget, and the 19 agencies receiving funds under the Disaster Relief Act. 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) 512-2623 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix III. The Disaster Relief Appropriations Act, 2013 (Disaster Relief Act),mandated GAO to review the design of the internal control plans prepared by federal agencies receiving funds under the Disaster Relief Act. This report addresses the extent to which (1) the internal control plans prepared by federal agencies complied with Office of Management and Budget (OMB) guidance and (2) OMB's guidance was effective for providing comprehensive oversight of the internal control risks for the programs receiving funds for Sandy disaster relief. To determine the extent to which the internal control plans prepared by federal agencies complied with OMB guidance, we obtained the Sandy disaster relief internal control plans for the 19 federal agencies administering the 61 programs receiving funds under the Disaster Relief Act and compared them to OMB Memorandum M-13-07 (M-13-07). To determine the extent to which OMB's guidance was effective for providing comprehensive oversight of the internal control risks for the programs receiving funds for Sandy disaster relief, we reviewed the internal control plans and M-13-07 against Standards for Internal Control in the Federal Government. We interviewed OMB staff and agency officials regarding the development and implementation of M-13-07. In addition, we compared the agencies' identified incremental risks to prior GAO and inspector general (IG) findings associated with internal control risks for agency programs receiving funds for Sandy disaster relief. Specifically, we reviewed the following: GAO, High-Risk Series: An Update, GAO reports and findings from 2010 to 2013 that focused on programs receiving funding under the Disaster Relief Act, and GAO work related to Hurricane Katrina or the American Recovery and Reinvestment Act of 2009; agencies' IG reports from 2010 to 2013 that focus on programs receiving Disaster Relief Act funds; agencies' fiscal year 2012 financial statement auditor's reports, including reports on internal control over financial reporting and reported noncompliance with laws and regulations, fiscal year 2012 reported improper payments, and management's statement of assurance related to 31 U.S.C. SS 3512(c)-(d), commonly known as the Federal Managers' Financial Integrity Act, and OMB Circular No. A- 123; agencies' fiscal year 2012 annual reviews of programs and identification of those susceptible to significant improper payments. In addition, we obtained information from agencies regarding the status of obligations of Sandy disaster relief funding and the impact of sequestration on these funds. We also obtained information from agency IGs regarding their ongoing or planned audit work related to Sandy disaster relief funding. We conducted this performance audit from March 2013 to November 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 13 presents the federal agencies and programs or appropriation accounts receiving funding under the Disaster Relief Act. Under the authority granted by the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, OMB determined that these supplemental appropriations were to be included in the fiscal year 2013 base subject to sequestration under section 251A of that act. The amounts included in this report are drawn from the Disaster Relief Act as originally enacted and are not adjusted to account for sequestration. In addition to the contact named above, Michael Hansen (Assistant Director), Kim McGatlin (Assistant Director), Gloria Cano, Oliver Culley, Francine DelVecchio, Gabrielle Fagan, Patrick Frey, James Healy, Wilfred Holloway, Jason Kelly, Jason Kirwan, Felicia Lopez, Andrew Seehusen, Danietta Williams, and Matthew Zaun made key contributions to this report.
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In late October 2012, Hurricane Sandy devastated portions of the Mid-Atlantic and northeastern United States, leaving victims of the storm and their communities in need of financial assistance for disaster relief aid. On January 29, 2013, the President signed the Disaster Relief Appropriations Act, 2013, which provided approximately $50 billion in supplemental appropriations, before sequestration, to 61 programs at 19 federal agencies for expenses related to the consequences of Hurricane Sandy. The act required agencies to submit internal control plans for the funds in accordance with OMB criteria by March 31, 2013. The act mandated GAO to review the design of agencies' internal control plans. This report addresses the extent to which (1) the internal control plans prepared by federal agencies complied with OMB guidance and (2) OMB's guidance was effective for providing comprehensive oversight of the internal control risks for the programs receiving funds for Sandy disaster relief. To address these objectives, GAO reviewed agencies' Sandy disaster relief internal control plans; M-13-07; and relevant GAO, inspector general, and financial statement audit reports. GAO also reviewed the internal control plans and M-13-07 against internal control standards. In response to the Disaster Relief Appropriations Act, 2013, agencies prepared Hurricane Sandy disaster relief internal control plans based on Office of Management and Budget (OMB) guidance but did not consistently apply the guidance in preparing these plans. OMB Memorandum M-13-07 (M-13-07), Accountability for Funds Provided by the Disaster Relief Appropriations Act, directed federal agencies to provide a description of incremental risks they identified for Sandy disaster relief funding as well as an internal control strategy for mitigating these risks. Each of the 19 agencies responsible for the 61 programs receiving funds under the act submitted an internal control plan with specific program details using a template provided by OMB. Agencies' plans ranged from providing most of the required information to not providing any information on certain programs. For example, each of the 61 programs was required to discuss its protocol for improper payments; however, GAO found that 38 programs included this information, 11 included partial information, and 12 included no information. OMB's guidance was an important step in the oversight of Sandy disaster funding, addressing internal controls, improper payments protocol, and unexpended grant funds. However, several weaknesses limited its effectiveness in providing a comprehensive oversight mechanism for these funds. Specifically, the guidance (1) focused on the identification of incremental risks without adequate linkages to demonstrate that known risks had been adequately addressed, (2) provided agencies with significant flexibility without requirements for documentation or criteria for claiming exceptions, and (3) resulted in certain agencies developing their internal control plans at the same time that funds needed to be quickly distributed. GAO found that OMB guidance: Asked agencies to focus on mitigating incremental risk, so the resulting plans did not provide comprehensive information on all known risks and internal controls that may affect the programs that received funding. Linking the additional risks identified in the plans to the complete set of known risks and related internal controls can help agency management and Congress to provide effective oversight of the funds. Allowed agencies significant flexibility in deciding whether they needed to design additional internal controls, and did not provide specific criteria for agencies to claim exemptions from requirements. GAO found that some agencies did not discuss certain additional internal controls in their plans, despite having identified incremental risks. Did not require agencies to document their rationales for not including additional internal controls in their plans. As a result, it was not apparent from the internal control plans the extent to which the agencies considered the need for these additional internal controls. Was developed and issued in a short time frame in response to the act. By the time that the agencies submitted their internal control plans on March 31, 2013, they reported that they had already obligated approximately $4.6 billion. Standard internal control guidance for disaster funding could help ensure that controls are designed timely. GAO recommends that OMB develop more robust guidance for agencies to design internal control plans for future disaster relief funding. OMB staff generally agreed with GAO's recommendation.
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Foster care begins when a child is removed from his or her parents or guardians and placed under the responsibility of a state child welfare agency. Removal from the home can occur because of physical abuse or neglect. It can also occur when a child's own behavior or condition is beyond the control of his or her family or poses a threat to their community. Foster care may be provided by a family member, caregivers previously unknown to the child, or a group home or institution. Ideally, foster care is an intermediate step towards a permanent family home. When reuniting the child with his or her parents or guardian is not in the child's best interest, caseworkers seek a new permanent home for the child, such as an adoptive home or guardianship. However, some children remain in foster care until they reach adulthood. As we have previously reported, children in foster care exhibit more numerous and serious medical conditions, including mental health conditions, than do other children. States are responsible for administering their Medicaid and foster care programs; the programs are overseen at the federal level by HHS through CMS and ACF, respectively. HHS may issue regulations, provide guidance on some issues, or simply provide informational resources for states to consider for their programs, the latter being the case for psychotropic drugs provided to children in state custody. Among these resources are best principles developed by AACAP, a nonprofit professional association. While HHS does not require states to follow these guidelines, AACAP developed them as a model to help inform state monitoring programs for youth in state custody. AACAP guidelines point out that, "as a result of several highly publicized cases of questionable inappropriate prescribing, treating youth in state custody with psychopharmacological agents has come under increasingly intense scrutiny," leading to state implementation of consent, authorization, and monitoring procedures. More recently, Congress passed the Child and Family Services Improvement and Innovation Act in September 2011, requiring states that apply for certain federal child welfare grants to establish protocols for the appropriate use and monitoring of psychotropic drugs prescribed to foster children. The use of psychotropic drugs has been shown to effectively treat mental disorders, such as attention deficit hyperactivity disorder (ADHD), bipolar disorder, depression and schizophrenia. While many psychotropic drugs that have been approved by the FDA as safe and effective in adults have not been similarly approved for children of all ages, prescribing them to children is legal and common medical practice in many instances. According to the National Institute of Mental Health (NIMH), some children with severe mental health conditions would suffer serious consequences without such medication. However, psychotropic drugs can also have serious side effects in adults, including irreversible movement disorders, seizures, and an increased risk for diabetes over the long term. Further, additional risks these drugs pose specifically to children are not well understood. Psychotropic drugs affect brain activity associated with mental processes and behavior. These drugs are also called "psychotherapeutic" drugs. While psychotropic drugs can have significant benefits for those with mental illnesses, they can also have side effects ranging from mild to serious. Table 1 highlights the psychotropic drug classes studied in this report and provides examples of drugs within those classes, as well as conditions treated and possible side effects. Foster children in each of the five selected states were prescribed psychotropic drugs at higher rates than were nonfoster children in Medicaid during 2008. These states spent over $375 million for prescriptions provided through fee-for-service programs to foster and nonfoster children. The higher rates do not necessarily indicate inappropriate prescribing practices, as they could be due to foster children's greater exposure to traumatic experiences and the unique challenges of coordinating their medical care. However, psychotropic drug claims for foster children were also more likely to show the indicators of potential health risks that we established with our experts. According to our experts, no evidence supports the concomitant use of five or more psychotropic drugs in adults or children, yet hundreds of both foster and nonfoster children were prescribed such a medication regimen. Similarly, thousands of foster and nonfoster children were prescribed doses exceeding maximum levels cited in guidelines based on FDA-approved drug labels, which our experts said increases the potential for adverse side effects, and does not typically increase the efficacy of the drugs to any significant extent. Further, foster and nonfoster children under 1 year old were prescribed psychotropic drugs, which our experts said have no established use for mental health conditions in infants and could result in serious adverse effects. The kinds of drugs included in prescription data reported to CMS in 2008 varied by state. Because the claims data we obtained from CMS contained fewer types of medications for Michigan and Oregon, we may understate the rates of psychotropic prescriptions for both foster and nonfoster children in those states. While rates of psychotropic prescriptions are not comparable across states, they are comparable between foster and nonfoster children within the same state. Similarly, the ratio of prescriptions to foster children to prescriptions to nonfoster children is comparable across states. history.various age ranges. Comparing the selected states' monitoring programs for psychotropic drugs provided to foster children with AACAP's guidelines indicates that, as of October 2011, each of the state programs falls short of providing comprehensive oversight as defined by AACAP. Though states are not required to follow these guidelines, the six states we examined had developed monitoring programs that satisfied some of AACAP's best principles guidelines to varying degrees. Such variation is not surprising given that states set their own oversight guidelines and have only recently been required, as a condition of receiving certain federal child welfare grants, to establish protocols for the appropriate use and monitoring of psychotropic drugs prescribed to foster children. HHS has provided limited guidance to the states on how to improve their control measures to monitor psychotropic drug prescriptions to foster children. Without formally endorsing specific oversight measures for states to implement, HHS conducts state reviews and provides other online resources, including the AACAP guidelines, to help states improve their programs. ACF performs Child and Family Services Reviews (CFSR) of states to ensure conformity with federal child welfare requirements--which include provisions for safety, permanency, and family and child well-being--and to assist states as they enhance their capacity to help families achieve positive outcomes. These reviews include the examination of a limited number of children's case files, in part to determine whether the state foster care agency conducted assessments of children's mental health needs and provided appropriate services to address those needs. However, these reviews are not designed to identify specific potential health risk indicators related to psychotropic medications, and since they occur every 2 to 5 years, states cannot rely on these reviews to actively monitor prescriptions. In addition, ACF operates technical assistance centers and provides online resources such as links to state guidance on psychotropic drug oversight, academic studies on psychotropic drugs, and recordings of teleconferences related to the oversight of psychotropic drugs. While HHS makes a variety of resources available to states developing oversight programs for psychotropic drugs, it has not endorsed any specific guidance. In the absence of HHS-endorsed guidance, states have developed varied oversight programs that in some cases fall short of AACAP's recommended guidelines. The AACAP guidelines are arranged into four categories, including consent, oversight, consultation, and information sharing, that contain practices defined as minimal, recommended, or ideal. The following describes the extent to which the selected states' monitoring programs cover these areas. Consent: According to interviews and documentation provided by state Medicaid and foster care officials, all six selected states have implemented some practices consistent with AACAP guidelines for consent procedures, though in varying scope and application. According to AACAP, the consent process should be documented and monitored to ensure that caregivers are aware of relevant information, such as the child's diagnosis, expected benefits and risks of treatments, common side effects, and potentially severe adverse events. Thus, states that do not incorporate consent procedures similar to AACAP's guidelines may increase the likelihood that caregivers are not fully aware of the risks and benefits associated with the decision to medicate with psychotropic drugs, and may limit the caregiver's ability to accurately assess and monitor the foster child's reaction to the drugs. Table 4 lists AACAP's guidelines relative to consent and illustrates the extent to which states have implemented those guidelines. Florida and Michigan provide examples of how states vary in their approach to monitoring consent procedures used for psychotropic drugs prescribed to foster children. For example, Florida requires all prescribers to obtain a standardized written consent form from the parental or legal guardian, or a court order, before a psychotropic drug is administered. The consent form includes the diagnosis, dosage, target symptoms, drug risks and benefits, drug monitoring plan, alternative treatment options, and discussions about the treatment between the child and the parent or legal guardian. Florida law identifies who is authorized to give consent, and obtains assent for psychotropic drug management from minors when age and developmentally appropriate. Florida provides required training to caseworkers, but the names and indications for use of commonly prescribed psychotropic drugs are not included. In contrast, Michigan has policies identifying who is authorized to give consent to foster children, but does not use a standardized consent form that can be used to help inform consent decisions. Instead, Michigan requires that caseworkers maintain in their files the consent forms used by individual prescribers, which likely vary in content and may thus vary in helpfulness to consent givers. Moreover, Michigan does not have training requirements in place to help caseworkers, court personnel, and foster parents become more effective advocates for children in their custody. Training for caseworkers is optional, but according to an agency official, the training was unavailable because no trainer had been hired as of September 2011. Michigan does not have policies for obtaining assent from minors when possible, thus meeting only one of AACAP's guidelines for consent procedures. Oversight procedures: Each of the six states has developed some procedures similar to AACAP's guidelines for overseeing psychotropic drug prescriptions for foster children, as evidenced by interviews and documentation provided by state Medicaid and foster care officials. According to one study, states that implement standards to improve oversight of the use of psychotropic drugs may create enhanced continuity of care, increased placement stability, reduced need for psychiatric hospitalization, and decreased incidence of adverse drug reactions. As such, states that do not incorporate oversight procedures similar to AACAP's recommendations limit their ability to identify the extent to which potentially risky prescribing is occurring in the foster care population. Table 5 lists AACAP's guidelines relative to oversight and illustrates the extent to which selected states have implemented those guidelines. Texas and Maryland provide examples of how states vary in their approach to oversight of psychotropic drug use among foster children. For example, the Texas Department of Family and Protective Services (DFPS) and the University of Texas at Austin College of Pharmacy assembled an advisory committee that included child and adolescent psychiatrists, psychologists, pediatricians, and other mental health professionals to develop psychotropic drug use parameters for foster children. These parameters are used to help identify cases requiring additional review. Factors that trigger additional reviews include dosages exceeding usual recommended levels, prescriptions for children of very young age, concomitant use of five or more psychotropic drugs, and prescriptions by a primary care provider lacking specialized training. According to the Texas foster care agency's data analysis, after Texas released these guidelines in 2005, psychotropic drug use among Texas foster care children declined from almost 30 percent in fiscal year 2004 to less than 21 percent in fiscal year 2010. Texas also analyzes Medicaid claims data to monitor psychotropic drug prescriptions for foster children and to identify any unusual prescribing behaviors. Texas provides quarterly reports to child welfare officials on the use of psychotropic drugs among foster children and treating clinicians have access to a child's medical records on a 24-hour basis. However, the electronic health record system does not always capture the child's height, weight, and allergies, which is optional for prescribers to enter into the system. This information is helpful as a child's weight may be used to determine the recommended dose for some medications, while allergy information may be used to determine whether a child should take a particular medication. In addition, ongoing medical problems are not recorded in the electronic health record system and Texas does not measure the rate of adverse reactions at the macro level among youth in state custody. Maryland fully applies only one of the six AACAP guidelines for oversight procedures and partially applies others. Maryland provides foster children in out-of-home placement with a "medical passport" that serves as a record of the child's previous and current medical file. Each topic included in AACAP's guidelines for maintaining ongoing medical records, including diagnoses, allergies, and medical history, is documented in the passport, and an additional copy of the passport is kept in the child's case record and maintained electronically. However, Maryland has not produced any specific guidelines for the use of all psychotropic prescriptions among foster children, thus limiting the state's ability to identify potentially risky prescribing practices for the foster child population. Without guidelines for psychotropic drugs, there are no criteria to help agency officials monitor the appropriateness of prescriptions. Moreover, Maryland does not review Medicaid claims data statewide specifically for foster children, and therefore does not produce quarterly reports to identify the rate and types of drugs used in the foster care population that could help identify and monitor prescribing trends. In addition, as stated earlier, Maryland's 2008 foster care data were found unreliable. Maryland officials told us that transitioning to a new records system in 2007 resulted in incorrect and missing data for foster children. Consultation program: According to interviews and documentation provided by state Medicaid and foster care officials, five of the six states have implemented some of AACAP's guidelines for consultation, but only one of the six selected states has implemented a consultation program that ensures all consent givers and prescribers are able to seek advice from child and adolescent psychiatrists before making consent decisions for foster children. States that do not have a consultation program to help link consent givers and prescribers with child and adolescent psychiatrists may reduce the extent to which prescribers and consent givers are informed about the expected benefits and risks of treatments, alternative treatments, and the risks associated with no treatment. Table 6 lists the AACAP guidelines relative to consultation programs and illustrates the extent to which selected states have implemented those guidelines. Massachusetts and Oregon provide examples of how states vary their approach in providing expert consultations to caregivers. For example, Massachusetts's foster care agency started an initiative to connect child welfare staff to Medicaid pharmacists who can provide information on medications and the foster child's drug history, including interactions between any current and proposed drugs. In addition, primary care physicians who treat children, including foster care children, also have access to the state-funded Massachusetts Child Psychiatry Access Project, a system of regional children's mental health consultation teams designed to help pediatricians find and consult with child psychiatrists. Massachusetts has six child psychiatrists who are available to provide consultations on a part-time basis to child welfare staff, but these consultations are not available for other consent givers such as foster parents. The foster care agency's consultation program also provides face-to-face evaluations of foster children at the request of consent givers concerned about a child's treatment. In early 2009, Oregon put a consultation program in place to help consent givers make informed decisions. In 2010, Oregon's foster care agency shifted the responsibility for all consent decisions where the agency has legal custody or is the legal guardian of the child from foster parents to child welfare agency officials, who now have access to a child and adolescent psychiatrist and can seek consultations before making consent decisions. However, the consultation program does not conduct face-to-face evaluations of children--by a child and adolescent psychiatrist--at the request of consent givers, nor does it enable prescribing physicians to consult with child and adolescent psychiatrists. Oregon has plans for the development of the Oregon Psychiatric Access Line for Kids, which would allow primary care physicians and nurse practitioners to consult with child psychiatrists, but agency officials told us the program is not operational due to a lack of funding. Information sharing: Four of the six selected states have created websites with information on psychotropic drugs for clinicians, foster parents, and other caregivers. Access to comprehensive information can help ensure that clinicians, foster parents, and other interested parties are fully informed about the use and management of psychotropic drugs. Table 7 lists AACAP's guidelines relative to information sharing and illustrates the extent to which selected states have implemented those guidelines. For example, Florida's foster care agency has partnered with the University of South Florida to implement Florida's Center for the Advancement of Child Welfare Practice to provide needed information and support to Florida's professional child welfare stakeholders. The program's website is consistent with four of AACAP's six guidelines for information sharing. For example, the website includes policies and procedures governing psychotropic drug management, staff publications and educational materials about psychotropic drugs, consent forms, and links to other informative publications and news stories related to foster children and psychotropic drugs. However, the website does not provide reports on prescription patterns for psychotropic drugs or adverse effect rating forms. In comparison, Oregon's foster care agency developed a website that includes information regarding psychotropic medication, but the website is not updated regularly to operate as an ongoing information resource. The website currently has information on state policies and procedures governing the use of psychotropic drugs and also contains web links to consent forms and a medication chart that can be used as a psychotropic medication reference tool. However, the website does not meet three of the six information-sharing guidelines, including those on posting adverse effect rating forms, reporting prescription patterns, and providing links to other informative websites. States with less accessibility to comprehensive information may limit the extent to which physicians, foster parents, and other interested parties are informed about the use and management of psychotropic drugs. The higher rates of psychotropic drug prescriptions among foster children may be explained by their greater mental health needs and the challenges inherent to the foster care system. However, thousands of foster and nonfoster children in the five states we analyzed were found to have prescriptions that carry potential health risks. While doctors are permitted to prescribe these drugs under current laws, increasing the number of drugs used concurrently and exceeding the maximum recommended dosages for certain psychotropic drugs have been shown to increase the risk of adverse side effects in adults. Prescriptions for infants are also of concern, due to the potential for serious adverse effects even when these drugs are used for non-mental health purposes. Comprehensive oversight programs would help states identify these and other potential health risks and provide caregivers and prescribers with the information necessary to weigh drug risks and benefits. The recently enacted Child and Family Services Improvement and Innovation Act requires states to establish protocols for monitoring psychotropic drugs prescribed to foster children. Under the act, each state is authorized to develop its own monitoring protocols, but HHS-endorsed, nationwide guidelines for consent, oversight, consultation, and information sharing could help states close the oversight gaps we identified and increase protections for this vulnerable population. In our draft report, we recommended that the Secretary of HHS evaluate our findings and consider endorsing guidance to state Medicaid and child welfare agencies on best practices for monitoring psychotropic drug prescriptions for foster children, including guidance that addresses, at minimum, informed consent, oversight, consultation, and information sharing. We have received written comments on our draft report from HHS and relevant agencies in 6 states. In written comments, HHS agreed with our recommendation and provided technical comments, which we incorporated as appropriate. In written comments and exit conferences, staff from state Medicaid and foster care agencies provided comments on key facts from the report. Agency comments will be incorporated and addressed in a written report that will be issued in December 2011. Chairman Carper, Ranking Member Brown, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. For additional information about this testimony, please contact Gregory D. Kutz at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Appendix I: Print-friendly version of figure 1 and figure 2 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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Foster children have often been removed from abusive or neglectful homes and tend to have more mental health conditions than other children. Treatment may include psychotropic drugs but their risks to children are not well understood. Medicaid, administered by states and overseen by the Department of Health and Human Services (HHS), provides prescription drug coverage to foster children. This testimony examines (1) rates of psychotropic prescriptions for foster and nonfoster children in 2008 and (2) state oversight of psychotropic prescriptions for foster children through October 2011. GAO selected Florida, Maryland, Massachusetts, Michigan, Oregon, and Texas primarily based on their geographic diversity and size of the foster care population. Results cannot be generalized to other states. In addition, GAO analyzed Medicaid fee-for-service and foster care data from selected states for 2008, the most recent year of prescription data available at the start of the audit. Maryland's 2008 foster care data was unreliable. GAO also used expert child psychiatrists to provide a clinical perspective on its methodology and analysis, reviewed regulations and state policies, and interviewed federal and state officials. Foster children in the five states GAO analyzed were prescribed psychotropic drugs at higher rates than nonfoster children in Medicaid during 2008, which according to research, experts consulted, and certain federal and state officials, could be due in part to foster children's greater mental health needs, greater exposure to traumatic experiences and the challenges of coordinating their medical care. However, prescriptions to foster children in these states were also more likely to have indicators of potential health risks. According to GAO's experts, no evidence supports the concomitant use of five or more psychotropic drugs in adults or children, yet hundreds of both foster and nonfoster children in the five states had such a drug regimen. Similarly, thousands of foster and nonfoster children were prescribed doses higher than the maximum levels cited in guidelines developed by Texas based on FDA-approved labels, which GAO's experts said increases the risk of adverse side effects and does not typically increase the efficacy of the drugs to any significant extent. Further, foster and nonfoster children under 1 year old were prescribed psychotropic drugs, which GAO's experts said have no established use for mental health conditions in infants; providing them these drugs could result in serious adverse effects. Selected states' monitoring programs for psychotropic drugs provided to foster children fall short of best principle guidelines published by the American Academy of Child and Adolescent Psychiatry (AACAP). The guidelines, which states are not required to follow, cover four categories. (1) Consent: Each state has some practices consistent with AACAP consent guidelines, such as identifying caregivers empowered to give consent. (2) Oversight: Each state has procedures consistent with some but not all oversight guidelines, which include monitoring rates of prescriptions. (3) Consultation: Five states have implemented some but not all guidelines, which include providing consultations by child psychiatrists by request. (4) Information: Four states have created websites about psychotropic drugs for clinicians, foster parents, and other caregivers. This variation is expected because states set their own guidelines. HHS has not endorsed specific measures for state oversight of psychotropic prescriptions for foster children. HHS-endorsed guidance could help close gaps in oversight of psychotropic prescriptions and increase protections for these vulnerable children. In our draft report, GAO recommended that HHS consider endorsing guidance for states on best practices for overseeing psychotropic prescriptions for foster children. HHS agreed with our recommendation. Agency comments will be incorporated and addressed in a written report that will be issued in December 2011.
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In February 2011, Boeing won the competition to develop the Air Force's next generation aerial refueling tanker aircraft, the KC-46. To develop a tanker, Boeing modified a 767 aircraft in two phases. In the first phase, Boeing modified the design of the 767 with a cargo door and an advanced flight deck display borrowed from its 787 aircraft and is calling this modified version the 767-2C. The 767-2C is built on Boeing's existing production line. In the second phase, the 767-2C was militarized and brought to a KC-46 configuration. The KC-46 will allow for two types of refueling to be employed in the same mission--a refueling boom that is integrated with a computer- assisted control system and a permanent hose and drogue refueling system. The boom is a rigid, telescoping tube that an operator on the tanker aircraft extends and inserts into a receptacle on the aircraft being refueled. See figure 1 for an example of boom refueling. The "hose and drogue" system is comprised of a long, flexible refueling hose and a parachute-like metal basket that provides stability. Drogue refueling is available via the centerline drogue system in the middle of the aircraft, or via a wing air refueling pod (WARP) located on each wing. WARPs are used for simultaneous refueling of two aircraft. See figure 2 for a depiction of the conversion of the 767 aircraft into the KC-46 tanker with the boom deployed. The Federal Aviation Administration has previously certified Boeing's 767 commercial passenger airplane (referred to as a type certificate) and is to certify the design for both the 767-2C and the KC-46 with Amended and Supplemental type certificates, respectively. The Air Force is then responsible for certifying the airworthiness of the KC-46. The Air Force is also to verify that the KC-46 systems meet contractual requirements and that the KC-46 and various receiver aircraft are certified for refueling operations. Boeing was awarded a fixed price incentive (firm target) contract for development. The contract is designed to hold Boeing accountable for costs associated with the design, manufacture, and delivery of four test aircraft and includes options to manufacture the remaining 175 aircraft. A fixed price incentive development contract was awarded for the program because KC-46 development is considered to be a relatively low-risk effort to integrate mostly mature military technologies onto an aircraft designed for commercial use. The contract limits the government's financial liability and provides the contractor incentives to reduce costs in order to earn more profit. It also specifies that Boeing must correct any deficiencies and bring development and production aircraft to the final configuration at no additional cost to the government. The contract includes firm fixed price contract options for the first 2 production lots, and options with not-to-exceed fixed prices for production lots 3 through 13. The Air Force has already exercised the first 3 production lots totaling 34 aircraft and negotiated firm fixed prices for production lot 3. The original development contract requires Boeing to deliver 18 operational aircraft, 9 WARP sets and 2 spare engines by August 2017. The contract refers to this as required assets available, while we refer to it as fully capable aircraft in this report. In addition, according to the contract, all required training must be complete, and the required support equipment and sustainment support must be in place by August 2017. Barring any changes to KC-46 requirements by the Air Force, the development contract specifies a ceiling price of $4.9 billion for Boeing to develop the first 4 aircraft, at which point Boeing must assume responsibility for all additional costs. Due to several development-related problems experienced over the last 2 years, Boeing currently estimates that development costs will total about $5.9 billion, or about $1 billion over the ceiling price. The government is not responsible for the additional cost. The KC-46 program is meeting total acquisition cost and performance targets, but has experienced some recent schedule delays. The government's cost estimate has declined for a fourth consecutive year and is now about $7.3 billion less than the original estimate. In addition, the aircraft is projected to meet all performance capabilities. However, Boeing experienced some problems developing the aircraft. As a result, it now expects to deliver the first 18 fully capable aircraft in October 2018 instead of August 2017, 14 months later than expected. The Air Force is continuing to work within its total program acquisition cost estimate for the KC-46, which includes development, procurement, and military construction costs. The total program acquisition cost now stands at $44.4 billion. This is about $7.3 billion less than the original estimate of $51.7 billion or about 14 percent less. Average program acquisition unit costs have decreased by the same percent because quantities have remained the same. Table 1 provides a comparison of the initial and current quantity and cost estimates. The Air Force has been able to decrease its cost estimate over the past 4 years primarily because it has not added or changed requirements and therefore there were fewer engineering changes than expected. According to program officials, the Air Force's initial cost estimate included a large amount of risk funding for possible requirements changes, based on its experience with prior major acquisition programs. Military construction costs have also come in below estimates. The program estimates that the KC-46 will achieve its performance capabilities. This includes 9 key performance parameters and 5 key system attributes that are critical to the aircraft's military capability and 7 technical performance capabilities that track progress to meeting contract specifications. For example, the aircraft is expected to be ready for operational use when required at least 89 percent of the time and, once it is deployed for an aerial refueling mission, be able to complete that mission 92 percent of the time. Appendix I provides a description of each of the key performance parameters and system attributes as well as the status of technical performance capabilities. The program has collected actual test data that validates a few of the performance capabilities. For example, the aircraft is using less than 1,557 gallons of fuel per flight hour, its fuel usage rate target. In addition, the program also closely tracks the actual weight of the aircraft because weight has a direct effect on the amount of fuel that can be carried. As of January 2017, the program had approximately 595 pounds of margin to the operational empty weight target of 204,000 pounds. The program also tracks a reliability growth metric--the mean time between unscheduled maintenance events due to equipment failure--and set a reliability goal of 2.83 flight hours between these events by the time the aircraft reaches 50,000 flight hours. According to program officials, as of September 2016, the program had completed about 1,300 flight hours and was achieving 1.56 hours compared to its goal of 1.72 hours by that time. Program officials believe that the reliability will improve as additional flight hours are completed and as unreliable parts are identified and replaced. Program officials also report that the program does not yet have actual flight test data to validate many of the other key and technical performance capabilities, such as those for operational availability and mission capability mentioned above. In lieu of flight test data, it assesses the measures on a monthly basis, relying on other information such as data from ground testing; models and simulations; and prior tanker programs. Test officials eventually expect to collect and analyze this data through flight testing. In some cases the program will be tracking progress towards achieving some performance capabilities while the aircraft is in operation. For example, in addition to the reliability growth metric mentioned above, Boeing is expected to demonstrate that mechanical problems on the aircraft can be fixed within 12 hours at least 71 percent of the time once the aircraft has accumulated 50,000 flight hours. Since our last report in April 2016, the Under Secretary for Acquisition, Technology and Logistics approved the KC-46 program to enter low-rate initial production in August 2016, one year later than originally planned. In addition, the Air Force has exercised contract options for the first 3 low- rate production lots of aircraft. We previously reported that the delay to the low-rate initial production decision was the result of problems Boeing had wiring the aircraft, design issues discovered with the fuel system components, and a fuel contamination event that corroded the fuel tanks of one of the development aircraft. Those problems have been overcome, but time was lost working through them. Until the low-rate initial production decision, the program had met its major milestones. Boeing and KC-46 program officials modified the program schedule in January 2017 to reflect the work remaining, including obtaining Federal Aviation Administration confirmation that the aircraft's parts all match their design drawings. While the Federal Aviation Administration has approved the design of many aircraft components, it is expected that the WARPs will be the last subsystem to receive design approval for all of its parts and to demonstrate that the parts conform to the designs. According to Boeing officials, the company and its WARP supplier had underestimated the level of design drawing details the Federal Aviation Administration needed to review to determine that the parts conformed to the approved design. According to these officials, the WARP supplier has been negotiating with its various sub-tier suppliers over the past 3 years for the necessary design documentation. Program officials estimate that the WARP design will be approved by the Federal Aviation Administration in July 2017, which will then allow Boeing to complete remaining developmental flight tests and meet other key milestones. Program officials do not consider the WARP design to be a significant program risk because the WARPs performed well in flight testing leading up to the low- rate initial production decision. Changes to key milestones are shown in table 2. Overall, the current schedule reflects a 14-month delay in Boeing delivering the first 18 aircraft with 9 WARP sets under the terms of the development contract, referred to as 18 fully capable aircraft in table 2. Instead of meeting an August 2017 date, the program office now estimates that Boeing will deliver the first 18 aircraft by February 2018 and the 9 WARP sets separately by October 2018. Air Force officials are negotiating for considerations from Boeing to account for lost military tanker capability associated with the delivery delays. According to program officials, the lost capability includes lost benefits--such as the Air Force not being able to grow the overall U.S. tanker fleet to 479 aircraft until later--and additional costs--such as the government having to maintain and sustain legacy aircraft and its test infrastructure longer than originally planned. The planned delivery of the first 18 aircraft, though 6 months late, will provide boom and drogue refueling capability to the warfighter. When delivered, the WARPs will enable the refueling of two receiver aircraft simultaneously, a capability that is not used as frequently, according to Air Force officials. Air Force officials said the current schedule and considerations will be part of a contract modification that is expected to be finalized in summer 2017. Figure 3 provides a closer look at the original and current delivery schedules. As shown, under the current schedule Boeing plans to deliver aircraft over a compressed 6-month period of time compared to its original plan to deliver aircraft over a 14-month period of time. This delivery period assumes Boeing will deliver 3 aircraft per month, a greater pace than planned during full rate production. According to program officials, Boeing is already in the process of manufacturing 18 aircraft from the first 3 low- rate production lots; 12 of these aircraft are over 70 percent complete. The current schedule also takes into account the decision by the Under Secretary for Acquisition, Technology and Logistics to designate productions lots 3 and 4 (of 15 aircraft each) as low-rate instead of full- rate lots. This was done to help Boeing avoid a break in production while it completes developmental and operational testing. The program expects to begin delivering these aircraft in 2018 and 2019, respectively. As a result, as shown in figure 4, concurrency between developmental flight testing and production has increased. The Air Force will have contracted for 49 aircraft before developmental flight testing is completed, representing 27 percent of the total aircraft, compared to the original plan of 19 aircraft, or about 11 percent. Further, the first 18 aircraft without WARPs will be delivered before most of operational testing has been completed. There is risk that Boeing may identify problems during flight testing that will lead to design changes. However, according to the terms of the development contract, the cost to fix these discoveries will be borne by Boeing, as it is required to bring all aircraft to the final configuration after completion of testing. Boeing faces two primary challenges in meeting the current delivery schedule, both of which relate to its developmental test schedule. Our analysis indicates that testing may take longer than the program is estimating. If test points are not completed at the planned rate, then aircraft deliveries will be delayed, indicating that the new delivery schedule is optimistic. Electromagnetic Effects Testing Schedule: First, there is risk that Boeing will not be able to complete required electromagnetic effects testing on the KC-46 in May 2017, as currently planned. Boeing officials stated this is because the WARP supplier has not yet provided all detailed design drawings to the Federal Aviation Administration for approval. While Boeing had planned on delivery of an approved WARP by March 2017, it now expects that to occur in late July 2017. The original plan, according to agency officials, was to have all aircraft parts, including the WARPs, conform to design drawings and gain Federal Aviation Administration approval prior to this testing. During the testing, the KC-46's electrical systems will be examined to verify that they do not create any electromagnetic interference, a process that requires a unique government facility that is also in high demand by other programs. Consequently, Boeing officials report that if the KC-46 is not ready for its scheduled time, these critical tests could potentially be delayed until the facility is available. The program is working on ways to mitigate the potential for delays in the delivery of the first 18 aircraft. For example, program officials stated that they are considering separate electromagnetic testing on the aircraft and the WARPs. Flight Test Completion Rate: Second, Boeing is projecting that it can complete test points over the remaining developmental flight test schedule at a rate higher than it has been able to demonstrate consistently. If test points are not completed at the planned rate, then aircraft deliveries will be delayed. The developmental flight test program contains about 29,000 total test points to be completed over a 32-month period. Government test officials report that these test points are a combination of Boeing-specific tests that it is conducting to reduce the risk of test failure and government-specific tests to verify the KC-46's performance. Boeing has completed 53 percent of planned testing since the KC-46 developmental flight test program began in January 2015. The company would need to complete an average of 1,713 test points per month to complete remaining testing on time so that it can begin delivering aircraft in September 2017. As shown in figure 5, Boeing has only completed this number of test points once, in October 2016, when it completed 2,240 test points, which program officials reported was part of a planned test surge. Boeing test data shows that from March 2016 to January 2017, it completed an average rate of 811 test points per month. As shown in figure 6, at that rate, we project that Boeing would finish the remaining 13,706 test points in early June 2018, 9 months later than the planned completion date. The Director for Operational Test and Evaluation has previously assessed and continues to assess the KC-46 schedule as aggressive and unlikely to be executed as planned, stating that execution of the current schedule assumes historically unrealistic test aircraft flight rates. Boeing's test schedule is based on flying 65 flight test hours on 767-2C aircraft per month and 50 hours on KC-46 aircraft per month. The program has actually averaged--across all aircraft in the development test program-- about 25 hours per aircraft per month. A government test official stated that similar programs in the past have sustained a pace of about 30 hours a month per aircraft. Government test officials noted that a large portion of testing completed so far was for Boeing-specific test points that could include tests that were cancelled if Boeing believed it had sufficient data already, and more time will likely be needed to plan and coordinate upcoming government-required testing. Boeing test officials believe the company can complete developmental testing by September 2017 because they plan to increase the number of test points it can complete per month by adding flight hours on nights and weekends. Boeing officials also believe the test pace will gain greater efficiency as the aircraft's design and test plans stabilize. The program was working on a "test once" approach with Boeing, the Federal Aviation Administration, and DOD whereby common test activities required by multiple entities would only be performed once. According to program officials, Boeing is moving away from the test once approach and towards sequential testing as a mitigation strategy. They report that Boeing expects this will help it perform key tests more quickly because it will not need to wait for several systems to be approved for testing. Program officials, however, believe that the transition to a new testing approach will require weeks of test plan rewriting, and that obtaining approval for the design of all parts, including the WARPs, from the Federal Aviation Administration will continue to pose risk to test completion as currently planned. We are not making recommendations in this report. We provided a draft of this report to DOD for comment. DOD did not provide any written comments, but the KC-46 program office provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; the Secretary of the Air Force; and the Director of the Office of Management and Budget. The report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. The program office has 14 key performance parameters and system attributes that are critical to the KC-46 aircraft's military capability and 7 technical performance capabilities that track progress to meeting contract specifications. Table 3 provides a description of each key performance parameter and system attribute. Table 4 provides the status of each technical performance capability. In addition to the contact named above, Cheryl Andrew, Assistant Director; Kurt Gurka; Stephanie Gustafson; Katheryn Hubbell; Nate Vaught; and Robin Wilson made key contributions to this report. KC-46 Tanker Aircraft: Challenging Testing and Delivery Schedules Lie Ahead. GAO-16-346. Washington, D.C.: April 8, 2016. KC-46 Tanker Aircraft: Key Aerial Refueling Capabilities Should Be Demonstrated Prior to the Production Decision. GAO-15-308. Washington, D.C.: April 9, 2015. KC-46 Tanker Aircraft: Program Generally on Track, but Upcoming Schedule Remains Challenging. GAO-14-190. Washington, D.C.: April 10, 2014. KC-46 Tanker Aircraft: Program Generally Stable but Improvements in Managing Schedule Are Needed. GAO-13-258. Washington, D.C.: February 27, 2013. KC-46 Tanker Aircraft: Acquisition Plans Have Good Features but Contain Schedule Risk. GAO-12-366. Washington, D.C.: March 26, 2012.
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The KC-46 tanker modernization program, valued at about $44 billion, is among the Air Force's highest acquisition priorities. Aerial refueling--the transfer of fuel from airborne tankers to combat and airlift forces--is critical to the U.S. military's ability to effectively operate globally. The Air Force initiated the KC-46 program to replace about a third of its aging KC-135 aerial refueling fleet. Boeing was awarded a fixed price incentive contract to develop the first four aircraft, which are being used for testing. Among other things, Boeing is contractually required to deliver a total of 18 aircraft and 9 wing air refueling pod sets by August 2017. This is defined as required assets available. The program plans to eventually field 179 aircraft in total. The National Defense Authorization Act for Fiscal Year 2012 included a provision for GAO to review the KC-46 program annually through 2017. This is GAO's sixth report on this issue. It addresses (1) progress made in 2016 toward achieving cost, performance, and schedule goals and (2) development risk remaining. GAO analyzed key cost, schedule, development, test, and manufacturing documents and discussed results with officials from the KC-46 program office, other defense offices, the Federal Aviation Administration, and Boeing. The KC-46 tanker modernization program is meeting cost and performance targets, but has experienced some recent schedule delays. Costs: As shown in the table below, the program's total acquisition cost estimate has decreased about $7.3 billion, or 14 percent, since the initial estimate. This is primarily because there have been no requirements changes and there have been fewer engineering changes than expected. (then-year dollars in millions) Performance: The program office estimates that the KC-46 will achieve its key and technical performance capabilities, such as completing a mission 92 percent of the time. As noted below, though, much testing remains. Schedule: The program fixed design problems and was approved for low-rate initial production in August 2016, a year late. Boeing (the prime contractor) will not meet the original required assets available delivery schedule due to ongoing Federal Aviation Administration certifications of the aircraft, including the wing air refueling pods, and flight test delays. As shown, the remaining schedule was modified to allow Boeing to deliver the first 18 aircraft and pods separately by October 2018, 14 months later than first planned. GAO's analysis shows there is risk to the current delivery schedule due to potential delays in Federal Aviation Administration certifications and key test events. Boeing must also complete over 1,700 test points on average for each month from February to September 2017, a level that is more than double what it completed in the last 11 months. Program officials agree that there is risk to Boeing's test completion rate until it obtains Federal Aviation Administration approval for the design of all parts, including the pods, but test mitigation strategies are underway. GAO is not making recommendations.
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The purpose of the HUBZone program, which was established by the HUBZone Act of 1997, is to stimulate economic development, through increased employment and capital investment, by providing federal contracting preferences to small businesses in economically distressed communities or HUBZone areas. The types of areas in which HUBZones may be located are defined by law and consist of the following: Qualified census tracts. A qualified census tract has the meaning given the term by Congress for the low-income-housing tax credit program. The list of qualified census tracts is maintained and updated by the Department of Housing and Urban Development (HUD). As currently defined, qualified census tracts have either 50 percent or more of their households with incomes below 60 percent of the area median gross income or have a poverty rate of at least 25 percent. The population of all census tracts that satisfy one or both of these criteria cannot exceed 20 percent of the area population. Qualified nonmetropolitan counties. Qualified nonmetropolitan counties are those that, based on decennial census data, are not located in a metropolitan statistical area and in which 1. the median household income is less than 80 percent of the nonmetropolitan state median household income; 2. the unemployment rate is not less than 140 percent of the average unemployment rate for either the nation or the state (whichever is lower); or 3. a difficult development area is located. Qualified Indian reservations. A HUBZone qualified Indian reservation has the same meaning as the term "Indian Country" as defined in another federal statute, with some exceptions. These are all lands within the limits of any Indian reservation, all dependent Indian communities within U.S. borders, and all Indian allotments. In addition, portions of the State of Oklahoma qualify because they meet the Internal Revenue Service's definition of "former Indian reservations in Oklahoma." Redesignated areas. These are census tracts or nonmetropolitan counties that no longer meet the economic criteria but remain eligible until after the release of the 2010 decennial census data. Base closure areas. Areas within the external boundaries of former military bases that were closed by the Base Realignment and Closure Act (BRAC) qualify for HUBZone status for a 5-year period from the date of formal closure. In order for a firm to be certified to participate in the HUBZone program, it must meet the following four criteria: the company must be small by SBA size standards; the company must be at least 51 percent owned and controlled by U.S. citizens; the company's principal office--the location where the greatest number of employees perform their work--must be located in a HUBZone; and at least 35 percent of the company's full-time (or full-time equivalent) employees must reside in a HUBZone. As of February 2008, 12,986 certified firms participated in the HUBZone program. More than 4,200 HUBZone firms obtained approximately $8.1 billion in federal contracts in fiscal year 2007. The annual federal contracting goal for HUBZone small businesses is 3 percent of all prime contract awards--contracts that are awarded directly by an agency. Our June 2008 report found that a series of statutory changes have resulted in an increase in the number and types of HUBZone areas. These changes could diffuse (or limit) the economic benefits of the program. Further, while SBA relies on federal law to identify qualified HUBZone areas, its HUBZone map is inaccurate. In recent years, amendments to the HUBZone Act and other statutes have increased the number and types of HUBZone areas. The original HUBZone Act of 1997 defined a HUBZone as any area within a qualified census tract, a qualified nonmetropolitan county, or lands within the boundaries of a federally recognized Indian reservation. However, subsequent legislation revised the definitions of the original categories and expanded the HUBZone definition to include new types of qualified areas (see fig. 1). Subsequent to the various statutory changes, the number of HUBZone areas grew from 7,895 in calendar year 1999 to 14,364 in 2006. SBA's data show that, as of 2006, there were 12,218 qualified census tracts; 1,301 nonmetropolitan counties; 651 Indian Country areas; 82 BRAC areas; and 112 difficult development areas. In expanding the types of HUBZone areas, the definition of economic distress has been broadened to include measures that were not in place in the initial statute. For example, a 2000 statute amended the HUBZone area definition to allow census tracts or nonmetroplitan counties that ceased to be qualified to remain qualified for a further 3-year period as "redesignated areas." A 2004 statute permitted these same areas to remain qualified until the release date of the 2010 census data. Further, in 2005, Congress expanded the definition of a qualified nonmetropolitan county to include difficult development areas outside the continental U.S.--areas with high construction, land, and utility costs relative to area income--and such counties could include areas not normally considered economically distressed. As a result, the expanded HUBZone criteria now allow for HUBZone areas that are less economically distressed than the areas initially designated. HUBZone program officials stated that the expansion can diffuse the impact or potential impact of the program on existing HUBZone areas. We recognize that establishing new HUBZone areas can potentially provide economic benefits for these areas by helping them attract firms that make investments and employ HUBZone residents. However, such an expansion could result in less targeting of areas of greatest economic distress. SBA program staff employ no discretion in identifying HUBZone areas because they are defined by federal statute; however, they have not always designated these areas correctly on their Web map. To identify and map HUBZone areas, SBA relies on a mapping contractor and data from other executive agencies (see fig. 2). Essentially, the map is SBA's primary interface with small businesses to determine if they are located in a HUBZone and can apply for HUBZone certification. During the course of our review, we identified two problems with SBA's HUBZone map. First, the map includes some areas that do not meet the statutory definition of a HUBZone area. As noted previously, counties containing difficult development areas are only eligible in their entirety for the HUBZone program if they are not located in a metropolitan statistical area. However, we found that SBA's HUBZone map includes 50 metropolitan counties as difficult development areas that do not meet this or any other criterion for inclusion as a HUBZone area. As a result of these errors, ineligible firms have obtained HUBZone certification and received federal contracts. As of December 2007, 344 certified HUBZone firms were located in ineligible areas in these 50 counties. Further, from October 2006 through March 2008, federal agencies obligated about $5 million through HUBZone set-aside contracts to 12 firms located in these ineligible areas. Second, while SBA's policy is to have its contractor update the HUBZone map as needed, the map has not been updated since August 2006. Since that time, additional data such as unemployment rates from the Bureau of Labor Statistics (BLS) have become available. Although SBA officials told us that they have been working to have the contractor update the mapping system, no subcontract was in place as of May 2008. While an analysis of the 2008 list of qualified census tracts showed that the number of tracts had not changed since the map was last updated, our analysis of 2007 BLS unemployment data indicated that 27 additional nonmetropolitan counties should have been identified on the map, allowing qualified firms in these areas to participate in the program. Because firms are not likely to receive information on the HUBZone status of areas from other sources, firms in the 27 areas would have believed from the map that they were ineligible to participate in the program and could not benefit from contracting incentives that certification provides. In our June 2008 report, we recommended that SBA take immediate steps to correct and update the map and implement procedures to ensure that it is updated with the most recently available data on a more frequent basis. In response to our recommendation, SBA indicated that it plans to issue a new contract to administer the HUBZone map and anticipates that the maps will be updated and available no later than August 29, 2008. Further, SBA stated that, during the process of issuing the new contract, the HUBZone program would issue new internal procedures to ensure that the map is updated continually. Our June 2008 report also found that the policies and procedures upon which SBA relies to certify and monitor firms provide limited assurance that only eligible firms participate in the HUBZone program. While internal control standards for federal agencies state that agencies should document and verify information that they collect on their programs, SBA obtains supporting documentation from firms in limited instances. In addition, SBA does not follow its own policy of recertifying all firms every 3 years, and has not met its informal goal of 60 days for removing firms deemed ineligible from its list of certified firms. Firms apply for HUBZone certification using an online application system, which according to HUBZone program officials employs automated logic steps to screen out ineligible firms based on the information entered on the application. For example, firms enter information such as their total number of employees and number of employees that reside in a HUBZone. Based on this information, the system then calculates whether the number of employees residing in a HUBZone equals 35 percent or more of total employees, the required level for HUBZone eligibility. HUBZone program staff then review the applications to determine if more information is required. While SBA's policy states that supporting documentation normally is not required, it notes that agency staff may request and consider such documentation, as necessary. No specific guidance or criteria are provided to program staff for this purpose; rather, the policy allows staff to determine what circumstances warrant a request for supporting documentation. In determining whether additional information is required, HUBZone program officials stated that they generally consult sources such as firms' or state governments' Web sites that contain information on firms incorporated in the state. SBA ultimately approves the majority of applications submitted. For example, in fiscal year 2007, SBA approved about 78 percent of the applications submitted. To ensure the continued eligibility of certified HUBZone firms, SBA requires firms to resubmit an application. That is, to be recertified, firms re-enter information in the online application system, and HUBZone program officials review it. In 2004, SBA changed the recertification period from an annual recertification to every 3 years. According to HUBZone program officials, they generally limit their reviews to comparing resubmitted information to the original application. The officials added that significant changes from the initial application can trigger a request for additional information or documentation. If concerns about eligibility are raised during the recertification process, SBA will propose decertification or removal from the list of eligible HUBZone firms. Firms that are proposed for decertification can challenge that proposed outcome through a due-process mechanism. SBA ultimately decertifies firms that do not challenge the proposed decertification and those that cannot provide additional evidence that they continue to meet the eligibility requirements. For example, SBA began 6,798 recertifications in fiscal years 2005, 2006, and 2007 and either had proposed to decertify or completed decertification of 5,201 of the firms (about 77 percent) as of January 22, 2008 (the date of the data set). Although SBA does not systematically track the reasons why firms are decertified, HUBZone program officials noted that many firms do not respond to SBA's request for updated information. Internal control standards for federal agencies and programs require that agencies collect and maintain documentation and verify information to support their programs. However, SBA verifies the information it receives from firms in limited instances. For example, our review of the 125 applications that were submitted in September 2007 shows that HUBZone program staff requested additional information but not supporting documentation for 10 (8 percent) of the applications; requested supporting documentation for 45 (36 percent) of the applications; and conducted one site visit. According to HUBZone program officials, they did not more routinely verify the information because they generally relied on their automated processes and status protest process. For instance, they said they did not request documentation to support each firm's application because the application system employs automated logic steps to screen out ineligible firms. For example, the application system calculates the percentage of a firm's employees that reside in a HUBZone and screens out firms that do not meet the 35 percent requirement. But the automated application system would not necessarily screen out applicants that submit false information to obtain a HUBZone certification. Rather than obtaining supporting documentation during certification and recertification on a more regular basis, SBA waits until it conducts program examinations of a small percentage of firms to consistently request supporting documentation. Since fiscal year 2004, SBA's policy has been to conduct program examinations on 5 percent of firms each year. From fiscal years 2004 through 2006, nearly two-thirds of firms SBA examined were decertified, and in fiscal year 2007, 430 of 715 firms (about 60 percent) were decertified or proposed for decertification. The number of firms decertified includes firms that the agency determined were ineligible and were decertified, and firms that requested to be decertified. Because SBA limits its program examinations to 5 percent of firms each year, firms can be in the program for years without being examined. For example, we found that 2,637 of the 3,348 firms (approximately 79 percent) that had been in the program for 6 years or more had not been examined. In addition to performing program examinations on a limited number of firms, HUBZone program officials rarely conduct site visits during program examinations to verify a firm's information. In our report, we recommended that SBA develop and implement guidance to more routinely and consistently obtain supporting documentation upon application and conduct more frequent site visits, as appropriate, to ensure that firms applying for certification are eligible. In response to this recommendation, SBA stated it was formulating procedures that would provide sharper guidance about when supporting documentation and site visits would be required, and plans to identify potential areas of concern during certification that would mandate additional documentation and site visits. As noted previously, since 2004 SBA's policies have required the agency to recertify all HUBZone firms every 3 years. Recertification presents another opportunity for SBA to review information from firms and thus help monitor program activity. However, SBA has failed to recertify 4,655 of the 11,370 firms (more than 40 percent) that have been in the program for more than 3 years. Of the 4,655 firms that should have been recertified, 689 have been in the program for more than 6 years. According to HUBZone program officials, the agency lacked sufficient staff to complete the recertifications. However, the agency hired a contractor in December 2007 to help conduct recertifications, using the same process that SBA staff currently use. Although SBA has acquired these additional resources, the agency lacks specific timeframes for eliminating the backlog. As a result of the backlog, the periods during which some firms go unmonitored and reviewed for eligibility are longer than SBA policy allows, increasing the risk that ineligible firms may be participating in the program. In our recent report, we recommended that SBA establish a specific time frame for eliminating the backlog of recertifications and take the necessary steps to ensure that recertifications are completed in a more timely fashion in the future. In its response to this recommendation, SBA noted that the HUBZone program had obtained additional staff and that the backlog of pending recertifications would be completed by September 30, 2008. Further, to ensure that recertifications will be handled in a more timely manner, SBA stated that the HUBZone program has made dedicated staffing changes and will issue explicit changes to procedures. While SBA policies for the HUBZone program include procedures for certifications, recertifications, and program examinations, they do not specify a timeframe for processing decertifications--the determinations subsequent to recertification reviews or examinations that firms are no longer eligible to participate in the HUBZone program. Although SBA does not have written guidance for the decertification timeframe, the HUBZone program office negotiated an informal (unwritten) goal of 60 days with the SBA Inspector General (IG) in 2006. In recent years, SBA ultimately decertified the vast majority of firms proposed for decertification, but has not met its 60-day goal consistently (see table 1). From fiscal years 2004 through 2007, SBA failed to resolve proposed decertifications within its goal of 60 days for more than 3,200 firms. While SBA's timeliness has improved, in 2007, more than 400 (or about 33 percent) were not resolved in a timely manner. As a consequence of generally not meeting its 60-day goal, lags in the processing of decertifications have increased the risk of ineligible firms participating in the program. In our June 2008 report, we recommended that SBA formalize and adhere to a specific time frame for processing firms proposed for decertification in the future. In response, SBA noted that it would issue new procedures to clarify and formalize the decertification process and its timelines. SBA stated that the new decertification procedures would establish a 60 calendar day deadline to complete any proposed decertification. Our June 2008 report also found that SBA has taken limited steps to assess the effectiveness of the HUBZone program. SBA's three performance measures for the HUBZone program do not directly measure the effect of the program on communities. Moreover, federal agencies did not meet the government-wide contracting goal for the HUBZone program in fiscal years 2003 through 2006 (the most recent years for which goaling data are available). While SBA has some measures in place to assess the performance of the HUBZone program, the agency has not implemented its plans to conduct an evaluation of the program's benefits. According to the Government Performance and Results Act of 1993, federal agencies are required to identify results-oriented goals and measure performance toward the achievement of their goals. We previously have reported on the attributes of effective performance measures, and reported that for performance measures to be useful in assessing program performance, they should be linked or aligned with program goals and cover the activities that an entity is expected to perform to support the intent of the program. According to SBA's fiscal year 2007 Annual Performance Report, the three performance measures for the HUBZone program were: (1) the number of small businesses assisted (which SBA defines as the number of applications approved and the number of recertifications processed), (2) the annual value of federal contracts awarded to HUBZone firms, and (3) the number of program examinations completed. These measures provide some data on program activity and measure contract dollars awarded to HUBZone firms. However, they do not directly measure the program's effect on firms (such as growth in employment or changes in capital investment) or directly measure the program's effect on the communities in which the firms are located (for instance, changes in median household income or poverty levels). Similarly, the Office of Management and Budget (OMB) noted in its 2005 Program Assessment Rating Tool (PART) that SBA needed to develop baseline measures for some of its HUBZone performance measures and encouraged SBA to focus on more outcome-oriented measures that better evaluate the results of the program. The PART assessment also documented plans that SBA had to conduct an analysis of the economic impact of the HUBZone program on a community-by-community basis using data from the 2000 and 2010 decennial census. However, SBA officials indicated that the agency has not devoted resources to implement either of these strategies for assessing the results of the program. Yet by not evaluating the HUBZone program's benefits, SBA lacks key information that could help it better manage the program and inform the Congress of its results. As part of our work, we conducted site visits to four HUBZone areas (Lawton, Oklahoma; Lowndes County, Georgia; and Long Beach and Los Angeles, California) to better understand to what extent stakeholders perceived that the HUBZone program generated benefits. For all four HUBZone areas, the perceived benefits of the program varied, with some firms indicating they have been able to win contracts and expand their firms and others indicating they had not realized any benefits from the program. Officials representing economic development entities varied in their knowledge of the program, with some stating they lacked information on the program's effect that could help them inform small businesses of its potential benefits. In our report, we recommended that SBA further develop measures and implement plans to assess the effectiveness of the HUBZone program. In its response to this recommendation, SBA stated that it would develop an assessment tool to measure the economic benefits that accrue to areas in the HUBZone program and that the HUBZone program would then issue periodic reports accompanied by the underlying data. Although contracting dollars awarded to HUBZone firms have increased since fiscal year 2003--when the statutory goal of awarding 3 percent of federally funded contract dollars to HUBZone firms went into effect-- federal agencies collectively still have not met that goal. According to data from SBA's goaling reports, for the four fiscal years from 2003 through 2006, the percentage of prime contracting dollars awarded to HUBZone firms increased, with the total for fiscal year 2006 at just above 2 percent (see table 2). In fiscal year 2006, 8 of 24 federal agencies met their HUBZone goals. Of the 8 agencies, 4 had goals higher than the 3 percent requirement and were able to meet the higher goals. Of the 16 agencies not meeting their HUBZone goal, 10 awarded less than 2 percent of their small business- eligible contracting dollars to HUBZone firms. Madam Chairwoman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact William B. Shear at (202) 512-8678 or [email protected]. Individuals making key contributions to this testimony included Paige Smith (Assistant Director), Triana Bash, Tania Calhoun, Bruce Causseaux, Alison Gerry, Cindy Gilbert, Julia Kennon, Terence Lam, Tarek Mahmassani, John Mingus, Marc Molino, Barbara Roesmann, and Bill Woods. 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 Small Business Administration's (SBA) Historically Underutilized Business Zone (HUBZone) program provides federal contracting assistance to small firms located in economically distressed areas, with the intent of stimulating economic development. Questions have been raised about whether the program is targeting the locations and businesses that Congress intended to assist. This testimony focuses on (1) the criteria and process that SBA uses to identify and map HUBZone areas; (2) the mechanisms SBA uses to ensure that only eligible small businesses participate in the program; and (3) the actions SBA has taken to assess the results of the program and the extent to which federal agencies have met HUBZone contracting goals. To address these objectives, GAO analyzed statutory provisions as well as SBA, Census, and contracting data and interviewed SBA and other federal and local officials. SBA relies on federal law to identify qualified HUBZone areas, and recent statutory changes have resulted in an increase in the number and types of HUBZone areas--changes that could diffuse the economic benefits of the program. Further, the map that SBA uses to help firms interested in participating in the program to determine if they are located in a HUBZone area is inaccurate. Specifically, the map incorrectly includes 50 metropolitan counties and excludes 27 nonmetropolitan counties. As a result, ineligible small businesses participated in the program, and eligible businesses have not been able to participate. The mechanisms that SBA uses to certify and monitor firms provide limited assurance that only eligible firms participate in the program. Although internal control standards state that agencies should verify information they collect, SBA verifies the information reported by firms on their application or during recertification--its process for monitoring firms--in limited instances and does not follow its own policy of recertifying all firms every 3 years. GAO found that more than 4,600 firms that had been in the program for at least 3 years went unmonitored. Further, SBA lacks a formal policy on how quickly it needs to make a final determination on decertifying firms that may no longer be eligible for the program. Of the more than 3,600 firms proposed for decertification in fiscal years 2006 and 2007, more than 1,400 were not processed within 60 days--SBA's unwritten target. As a result of these weaknesses, there is an increased risk that ineligible firms have participated in the program and had opportunities to receive federal contracts. SBA has taken limited steps to assess the effectiveness of the HUBZone program, and from 2003 to 2006 federal agencies did not meet the government-wide contracting goal for the HUBZone program. Federal agencies are required to identify results-oriented goals and measure performance toward the achievement of their goals. SBA tracks the number of firms certified or recertified, the annual value of contracts awarded to HUBZone firms, and the number of program examinations completed annually, but has not devoted resources to completing an evaluation of the program. Consequently, SBA lacks key information that could help it better manage and assess the results of the program. Finally, most federal agencies did not meet their HUBZone contracting goals during fiscal year 2006, the most recent year for which we had data. While the percentage of prime contracting dollars awarded to HUBZone firms increased in each fiscal year from 2003 to 2006, the 2006 awards fell short of the government-wide 3 percent goal by about one-third.
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DOD contracting officers use a structured approach called the Weighted Guidelines Method to develop profit objectives for use in contract negotiations. Using these profit guidelines, contracting officers address a contractor's (1) risk in fulfilling the contract requirements, known as performance risk; (2) degree of cost risk because of the type of contract (e.g., fixed-price versus cost contract); and (3) investment in facilities that benefit DOD. Prior to the profit policy change, the performance risk factor consisted of three elements: Technical--the technical uncertainties of performance. Management--the degree of management effort necessary to ensure that contract requirements are met. Cost control--the contractor's efforts to reduce and control costs. In the National Defense Authorization Act for Fiscal Year 2000, Congress included provisions to stimulate technical innovation in military research and development. Section 813 required DOD to review its profit guidelines to consider whether modifications to the guidelines--such as placing increased emphasis on technical risk as a factor for determining appropriate profit margins--would provide an incentive for contractors to develop and produce complex and innovative new technologies. After completing its review, DOD reported to Congress that it planned to make two changes to the guidelines. As shown in table 1, the first change was to increase the weight contracting officers would likely assign to technical risk by reducing performance risk from three to two elements. The second was to add a special incentive for contractors that propose significant technological innovation. Using the technology incentive, contracting officers can assign a profit range of 6 to10 percent for the technical element instead of the standard range of 2 to 6 percent. On December 13, 2000, DOD published a final rule in the Federal Register to implement the two changes. (Appendix I presents an example of the application of the incentive to a contract.) During the same time period, DOD sought to realize the benefits of best commercial practices by revising its policies that guide the system acquisition process. The result was a new system acquisition life cyclethat separates technology development and system development. The technology development phase generally begins with paper studies of alternative technology concepts for meeting a mission (concept exploration) and ends with the demonstration of component technology in a relevant environment to reduce the risk of integrating the components or subsystems into a full system (component advanced development). A program is usually initiated at the beginning of system development, at which point the system's technology should be mature. During system development and demonstration, the subsystems and components are integrated into the system, the design is stabilized, and the system is demonstrated in a realistic environment. The system then enters low-rate initial production, during which the manufacturing capability is established. By the time the system reaches full-rate production, the technology should be mature, the design stable, and the manufacturing processes established. The profit guidelines containing the technology incentive do not apply to most research and development contracts and, therefore, the incentive has limited reach in the phases of DOD's acquisition cycle where technology innovation is expected to be high. Many contracts awarded in these high innovation phases have technical reports as contract deliverables, and these are appropriately excluded from the incentive. The profit guidelines containing the incentive do not apply to contracts awarded with competition, which is commonly the case for research and development contracts. Also, contracting officers already have available another mechanism-award fees-to reward innovation. Table 2 shows the expected level of innovation and the typical contract deliverable for each phase of DOD's system acquisition cycle. It also shows what type of profit (fixed/incentive fee versus award fee) is used to reward contractors during each phase--the profit guidelines only apply to fixed/incentive fee contracts. For fixed/incentive fee contracts, the percentage and dollar value of awards made without competition is shown--the profit guidelines only apply to these awards. The table shows that the guidelines (and therefore the technology incentive) do not apply to many contracts in early research and development where innovation is a priority. The profit policy excludes many contracts awarded during technology development (concept exploration and component advanced development). Concept exploration commonly consists of paper studies of alternative concepts for meeting a mission and, therefore, contracts generally have a technical report as their primary deliverable. The technology incentive range does not apply to efforts restricted to studies, analyses, or demonstrations that have a technical report as their primary contract deliverable. Technical reports were excluded from coverage because these efforts do not involve the risk inherent in producing and fielding weapon system hardware. Technology development contracts are typically awarded through competition. DOD's profit guidelines do not apply to competitively awarded contracts because price reasonableness is established through price competition rather than through use of the guidelines. Contracting officers have available another contracting mechanism-- award fees--to reward innovation in research and development. Award fees are used to motivate contractor performance in those areas critical to program success, such as technical, logistics support, cost, and schedule. Contracting officers can use the award fee to encourage contractors to develop innovative new technologies by including these objectives in the criteria for evaluating how much of the award fee the contractor has earned. The definition contained in the policy guidelines of what qualifies for the technology incentive is so broad that it could be applied to almost any contract with enhanced system performance. Our discussions with contracting officials indicate that there is confusion over how and for how long the incentive should be applied. This confusion may lead to inconsistent and possibly inappropriate application of the incentive and could result in contractors being paid more profit for their current level of innovation, not for the intended new technological innovations that significantly enhance performance, improve reliability, or reduce costs. The rule states that contracting officers may use the technology incentive range when a contractor proposes to develop, produce, or apply innovative new technologies during contract performance. It further states that contracting officers are to use the incentive only for the most innovative efforts. The rule defines innovation as "Development or application of new technology that fundamentally changes the characteristics of an existing product or system and that results in increased technical performance, improved reliability, or reduced costs; or New products or systems that contain significant technological advances over the products or systems they are replacing." Although the rule describes in broad terms when the application of the incentive is appropriate, it leaves many questions unanswered in defining key terms. For example, how "new" must a technology be to qualify? Does "new" mean it is just out of the laboratory and has never been used before on any system, or does it refer to a recently developed technology that has been used on other products but not on the product in question? Should the incentive apply to demonstrated technology or to the promise to develop technology? And if a contractor is awarded additional profit for developing, producing, or applying new innovative technology, when should the reward stop? Should it apply only to the immediate contract, or should a contractor receive the reward throughout some portion of production contracts? By the same token, what measures are to be applied in determining whether a technological advance is "significant" or whether new technology "fundamentally changes" a product or system? Without this information, the rule could be interpreted so that the incentive could apply to almost any program with more demanding performance characteristics than the system being replaced. Although, at the time of our review, the new rule had not been widely used, we discussed with agency officials the circumstances under which they might apply the technology incentive. Air Force, Army, and Navy officials agreed that the technology incentive could apply to both research and development and production contracts, but they did not interpret the rule's guidance on when to apply the incentive in the same manner. For example, officials at two Air Force program offices judged that upgrades to their systems that included state-of-the-art technology used on other products would not qualify for the technology incentive, but those at an Army office said that similar applications of state-of-the-art technology to their system would qualify. In fact, contracting officials at two Army program offices told us that all weapon systems at their buying command incorporated state-of-the-art, leading edge technology and would, therefore, qualify for the incentive. On the other hand, officials for one Air Force system did not believe a future upgrade to their system that may incorporate brand-new technology developed by another military service would qualify for the incentive because the other service would have developed the new technology. Finally, the contracting officer for a Navy system that incorporated brand-new, never-before-used, technology that allowed the system to exceed performance requirements stated that the system would qualify for the incentive. These examples point to potential confusion over how the rule's broad definition of technological innovation should be applied. The officials were also uncertain about how long a contractor should be rewarded with the technology incentive for significant, new innovative technology introduced in the research and development phases of the acquisition process. For example, a procurement official for an Army system currently in the latter stages of research and development stated that the system may qualify for the incentive during production, depending on how the language in the rule is interpreted. A technical official for this system at first stated that, hopefully, innovation and risk would be finished before the system enters production, and therefore, the system would not qualify for the incentive at that point. But, after reading the language in the rule ("New products or systems that contain significant technological advances over the products or systems they are replacing"), he said the system may qualify after all. Also, technical officials for the Navy system discussed previously did not disagree with the contracting officer that the system, with new technology that enhanced performance, would qualify for the incentive. However, they stated that, in general, the technology incentive should be awarded during research and development because, by low-rate production, the technology should be set, and, during production, the emphasis should be on making manufacturing processes more efficient and reducing costs. The new profit guidelines do not identify how the incentive relates to the revised policies that guide DOD's system acquisition process. The new acquisition process emphasizes technology maturity before committing to a program to reduce its risk, but the profit guidelines reward contractors with additional profit for introducing new technology, sending mixed signals about the relative importance of innovation and technology maturity. The new profit policy could be interpreted in such a way as to be inconsistent with the new acquisition process. In DOD's traditional system acquisition process, program managers matured a system's technology throughout the weapon system phases, resulting in a system that cost significantly more, took longer to produce, and delivered less than was promised. A new weapon system was encouraged to possess performance features that significantly distinguished it from other systems. Consequently, the acquisition environment led DOD program managers to promote performance features and design characteristics that relied on immature technologies. Managers were also subject to the pressures of successfully competing for the funds to start and sustain a DOD acquisition program. This encouraged managers to launch product developments with more technical unknowns and less knowledge about performance and production risks than best commercial practices dictate. These managers relied on attaining technology, design, and manufacturing knowledge concurrently-in the higher cost environment of product development-throughout the weapon system phases. In keeping with best commercial practices, DOD adopted a new system acquisition approach in which key acquisition and long-term funding commitments are discouraged until technology is mature and risks are far better understood than under the traditional process. DOD's new system acquisition life cycle separates technology development from system development. A system's technology should be mature and demonstrated before a program is initiated and system development begins. According to DOD Instruction 5000.2, "entrance into System Development and Demonstration is dependent on three things: technology (including software) maturity, validated requirements, and funding. Unless some other factor is overriding in its impact, the maturity of the technology will determine the path to be followed." When the system goes into full-rate production, the technology should be mature, the design stable, and the manufacturing processes established. The technology incentive is not tied to the new acquisition cycle, and the profit policy does not address technology maturation and risk reduction, which are central to DOD's revised acquisition policies. The revised acquisition policies stress that technology be mature and demonstrated before it is integrated into a system. But, the profit policy does not discuss when in the acquisition cycle innovative technologies should be rewarded with higher profits. Nor does the profit policy address if or when contractor efforts to mature innovations should be rewarded through use of the technology incentive. As a result, the risk is created that the two policies will work against each other rather than reinforce each other. The new profit policy may reward contractors for existing levels of innovation rather than incentivize additional innovation. The definition of innovation contained in the rule is overly broad and covers all programs that improve performance over systems that are being replaced--the very reason for having a program in the first place. Moreover, the rule is silent on several issues, including how long contractors should be rewarded for significant innovation. And the relationship of the profit policy to the acquisition process is not addressed, sending mixed signals to contractors and contracting officials as to the relative importance of technology innovation and technology maturation at different points in the acquisition cycle. To assure that the technology incentive is appropriately interpreted and applied, we recommend that the Secretary of Defense clarify the definition of innovation contained in the profit policy rule; define how long contractors should be rewarded for innovations introduced during research and development phases; and reconcile the relationship of the technology incentive with DOD's new acquisition process, including the emphasis on technology maturation. In written comments on a draft of this report, DOD partially concurred with the first recommendation that it clarify the definition of innovation contained in the profit policy rule. DOD stated that it would examine how the policy is being used after it has been in place for a year and, at that time, determine if the types of innovation that may be rewarded with the technology incentive factor can be stated more clearly. DOD partially concurred with our second recommendation that it define how long contractors should be rewarded for innovations introduced during research and development phases. DOD stated that, after the policy has been in place for a year, it will re-examine the regulations to determine if there are relevant factors that can be provided for contracting officers to consider in making this judgment. DOD disagreed with our recommendation that it reconcile the relationship of the technology incentive to the new acquisition process. DOD stated that it did not believe the revised profit policy was inconsistent with its new 5000 series acquisition regulations. DOD pointed out that the 5000 series stresses the need for balance among several key factors in planning acquisition strategies and that, ultimately, DOD decides what it will buy and how much technological risk it will accept. According to DOD, after that decision is made, the technology incentive factor can be used to reward contractors for the technical risk they undertake in developing or applying new technologies or significant technological advances. While the 5000 series discusses several factors to be considered in planning acquisition strategies, there is a clear emphasis on technology maturity to reduce program risk as a system progresses through the acquisition process. DOD Regulation 5000.2-R identifies technology maturity as a "principal element of program risk." DOD Instruction 5000.2 provides managers with specific guidance for managing this element of program risk and makes it clear that technology should be matured and demonstrated during the technology development phase before a program is initiated and component technology is integrated into a system. The instruction states that "unless some other factor is overriding in its impact, the maturity of the technology will determine the path to be followed." According to the instruction, "technology must have been demonstrated in a relevant environment ... to be considered mature enough to use for product development in systems integration. If technology is not mature, the DOD Component shall use alternative technology that is mature and that can meet the user's needs." Although the acquisition guidance emphasizes technology maturity to reduce program risk, the profit policy rewards contractors with additional profit for undertaking technical risk in developing or applying new technology at unspecified points in the acquisition cycle. Because the profit policy does not discuss when in the acquisition cycle innovative technologies should be rewarded with higher profits, it could be interpreted in such a way as to be inconsistent with the new acquisition process. We discussed this issue with the officials in the office responsible for developing the new 5000 series. These officials were familiar with the profit policy rule and, while they noted that the two were not necessarily inconsistent, the potential for misinterpretation existed. These officials said that if innovation meant new-but mature-technology, there would be no conflict between the policies. On the other hand, they noted that if "innovation" was misread for "risk taking" or "technology immaturity," especially late in the acquisition cycle, the policies could work against each other. They added that the technology incentive would need to be carefully managed to prevent a conflict and that this could be achieved through means such as training. We continue to believe that the best approach for managing this potential conflict is to explicitly discuss the relationship between the two policies--particularly as they relate to innovation--in the guidelines contained in the profit policy regulation on when the technology incentive should be used. DOD comments appear in appendix II. To determine whether the new profit policy is likely to achieve its objective of stimulating increased innovation, we selected programs at some of DOD's highest dollar buying commands to review how contracting and acquisition officials would apply the new policy to various programs. We selected one buying command to represent each service. We discussed the profit policy rule in general, the types of contracts the rule might apply to, and the points in DOD's acquisition cycle in which it could be applied. We also talked specifically about each program selected to determine whether there were innovative technologies that would have qualified for the technology incentive if the policy had been in effect at the time of contract award. In addition, we asked representatives from some of the programs to reprice a sample contract using the new profit policy to determine whether the profit objective would have been higher. We also analyzed DOD's fiscal year 2000 contracting database (DD350) to identify the types of contracts awarded at each phase of the acquisition cycle, the percentage of dollars awarded using the various profit award mechanisms, and the proportion of dollars awarded with or without competition. To assess the relationship between the new profit policy and the new acquisition process, we analyzed what the acquisition guidance and profit policy say about technology development, maturation, and innovation. We also discussed these policies with DOD officials who developed them. We reviewed relevant documents and held discussions with officials at the U.S. Army Aviation and Missile Command, Huntsville, Alabama; Aeronautical Systems Center, Dayton, Ohio; Naval Air Systems Command, Patuxent River, Maryland; Office of Defense Procurement, Cost, Pricing, and Finance, Washington, D.C.; and Office of the Deputy Under Secretary of Defense (Acquisition Reform) for Acquisition, Technology, and Logistics, Washington, D.C. We performed our review between January 2001 and May 2001 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce the contents of this report earlier, we will not distribute this report until 30 days from its date. At that time, we will send copies of this report to the appropriate congressional committees; the Honorable Donald H. Rumsfeld, Secretary of Defense; and the Honorable Mitchell E. Daniels Jr., Director, Office of Management and Budget. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report are Karen Zuckerstein, Erin Baker, Julia Kennon and John Van Schaik. The following table shows the impact of using the technology incentive on a sample contract repriced for us at one of the buying commands we visited. The actual profit objective calculated prior to the profit policy change was based on technical performance risk valued at the top of the standard range. The repricing to reflect what would likely have occurred after the profit policy change was based on technical performance risk valued at the top of the technology incentive range. No other changes were made in the profit objective calculation.
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In negotiating profit on contracts, the Department of Defense (DOD) requires contracting officers to set negotiating objectives by relying on guidelines in defense regulations. Congress mandated that DOD review its profit guidelines and consider whether modifying them would provide more incentive for contractors to develop and produce complex and innovative new technologies for weapon systems. After completing its review, DOD issued a final rule in December 2000 that added a technology incentive to its guidelines for setting profit objectives on negotiated defense contracts. This report reviews whether the new policy is (1) likely to achieve its intended objective of stimulating increased innovation and (2) consistent with the revised policies for acquiring weapons systems. GAO found that the new profit policy may have limited effect on incentivizing additional innovation because the policy has limited reach during research and development and it does not provide adequate guidance on when to apply the incentive. The policy may not reinforce DOD's emphasis on technology maturity in its guidance on the system acquisition process.
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Public and private organizations rely on computer systems to transfer increasing amounts of money; sensitive, proprietary economic and commercial information; and classified and sensitive but unclassified defense and intelligence information. The increased transfer of critical information increases the risk that malicious individuals will attempt to disrupt or disable our nation's critical infrastructures and obtain sensitive and critical information for malicious purposes. To address the threats to the nation's cyber-reliant critical infrastructure, federal policy emphasizes the importance of public-private coordination. Different types of cyber threats from numerous sources may adversely affect computers, software, a network, an agency's operations, an industry, or the Internet itself. Cyber threats can be unintentional or intentional. Unintentional threats can be caused by software upgrades or maintenance procedures that inadvertently disrupt systems. Intentional threats include both targeted and untargeted attacks. Attacks can come from a variety of sources, including criminal groups, hackers, and terrorists. Table 1 lists sources of threats that have been identified by the U.S. intelligence community and others. Different types of cyber threats can use various cyber exploits that may adversely affect computers, software, a network, an agency's operations, an industry, or the Internet itself (see table 2). Groups or individuals may intentionally deploy cyber exploits targeting a specific cyber asset or attack through the Internet using a virus, worm, or malware with no specific target. Recent reports of cyber attacks illustrate that such attacks could have a debilitating impact on national and economic security and on public health and safety. In May 2007, Estonia was the reported target of a denial-of-service cyber attack with national consequences. The coordinated attack created mass outages of its government and commercial Web sites. In March 2008, the Department of Defense (DOD) reported that, in 2007, computer networks operated by the department, other federal agencies, and defense-related think tanks and contractors were targets of computer network intrusion. Although those responsible were not definitively identified, the attacks appeared to have originated in China. In January 2010, it was reported that at least 30 technology companies-- most in Silicon Valley, California--were victims of intrusions. The cyber attackers gained unauthorized access to files that may have included the companies' computer security systems, crucial corporate data, and software source code. In January 2010, a California-based company filed suit alleging that two Chinese companies stole software code and then distributed it to tens of millions of end users as part of Chinese government-sponsored filtering software. The company is seeking more than $2.2 billion dollars. Academic researchers found that portions of the company's software code had been copied and used in initial versions of the Chinese software. Based on an 8-month investigation, researchers reported that computer systems in India were attacked. The suspected cyberattackers remotely connected to Indian computers using social networks to install bot- networks that infiltrated and infected Indian computers with malware. The incidents were reported to have been traced back to an underground espionage organization that was able to steal sensitive national security and defense information. Federal law and policy call for critical infrastructure protection activities that are intended to enhance the cyber and physical security of both the public and private infrastructures that are essential to national security, national economic security, and national public health and safety. Federal policies address the importance of coordination between the government and the private sector to protect the nation's computer-reliant critical infrastructure. These policies establish critical infrastructure sectors, assign agencies to each sector (sector lead agencies), and encourage private sector involvement. For example, the Department of the Treasury is responsible for the banking and finance sector, while the Department of Energy (DOE) is responsible for the energy sector. Table 3 lists agencies and their assigned sector. In May 1998, Presidential Decision Directive 63 (PDD-63) established critical infrastructure protection (CIP) as a national goal and presented a strategy for cooperative efforts by the government and the private sector to protect the physical and cyber-based systems essential to the minimum operations of the economy and the government. Among other things, this directive encouraged the development of ISACs to serve as mechanisms for gathering, analyzing, and disseminating information on cyber infrastructure threats and vulnerabilities to and from owners and operators of the sectors and the federal government. For example, the Financial Services, Electricity Sector, IT, and Communications ISACs represent sectors or subcomponents of sectors. However, not all sectors have ISACs. For example, according to private sector officials, the DIB sector and the subcomponents of the energy sector, besides electricity, do not have established ISACs. The Homeland Security Act of 2002 created the Department of Homeland Security (DHS). In addition, among other things, it assigned the department the following CIP responsibilities: (1) developing a comprehensive national plan for securing the key resources and critical infrastructures of the United States; (2) recommending measures to protect the key resources and critical infrastructures of the United States in coordination with other groups; and (3) disseminating, as appropriate, information to assist in the deterrence, prevention, and preemption of or response to terrorist attacks. In 2003, The National Strategy to Secure Cyberspace was issued, which assigned DHS multiple leadership roles and responsibilities in this CIP area. They include (1) developing a comprehensive national plan for CIP, including cybersecurity; (2) developing and enhancing national cyber analysis and warning capabilities; (3) providing and coordinating incident response and recovery planning, including conducting incident response exercises; (4) identifying, assessing, and supporting efforts to reduce cyber threats and vulnerabilities, including those associated with infrastructure control systems; and (5) strengthening international cyberspace security. PDD-63 was superseded in December 2003 when Homeland Security Presidential Directive 7 (HSPD-7) was issued. HSPD-7 defined additional responsibilities for DHS, federal agencies focused on specific critical infrastructure sectors (sector-specific agencies), and other departments and agencies. HSPD-7 instructs these sector-specific agencies to identify, prioritize, and coordinate the protection of critical infrastructure to prevent, deter, and mitigate the effects of attacks. HSPD-7 makes DHS responsible for, among other things, coordinating national CIP efforts and establishing uniform policies, approaches, guidelines, and methodologies for integrating federal infrastructure protection and risk management activities within and across sectors. As part of its implementation of the cyberspace strategy and other requirements to establish cyber analysis and warning capabilities for the nation, DHS established the United States Computer Emergency Readiness Team (US-CERT) to help protect the nation's information infrastructure. US-CERT is the focal point for the government's interaction with federal and private-sector entities 24-hours-a-day, 7-days-a-week, and provides cyber-related analysis, warning, information-sharing, major incident response, and national-level recovery efforts. It is charged with aggregating and disseminating cybersecurity information to improve warning of and response to incidents, increasing coordination of response information, reducing vulnerabilities, and enhancing prevention and protection. In addition, the organization is to collect incident reports from all federal agencies and assist agencies in their incident response efforts. It is also to accept incident reports when voluntarily submitted by other public and private entities and assist them in their response efforts, as requested. In addition, as part of its responsibilities, DHS first issued the NIPP in 2006 and then updated it in 2009. The NIPP is intended to provide the framework for a coordinated national approach to address the full range of physical, cyber, and human threats and vulnerabilities that pose risks to the nation's critical infrastructure. The NIPP relies on a sector partnership model as the primary means of coordinating government and private sector CIP efforts. Under this model, each sector has both a government council and a private sector council to address sector-specific planning and coordination. The government and private sector councils are to work in tandem to create the context, framework, and support for coordination and information-sharing activities required to implement and sustain that sector's CIP efforts. The council framework allows for the involvement of representatives from all levels of government and the private sector, so that collaboration and information-sharing can occur to assess events accurately, formulate risk assessments, and determine appropriate protective measures. The government councils are to coordinate strategies, activities, policies, and communications across government entities within each sector. Each government council is to be composed of representatives from various levels of government (i.e., federal, state, local, and tribal) as appropriate to the security needs of each individual sector. In addition, a representative from the sector-specific agency is to chair the council and is to provide cross-sector coordination with each of the member governments. For example, DOE in its role as the sector-specific agency for the energy sector has established and chairs a government council. The establishment of private sector councils (sector councils) is encouraged under the NIPP model, and these councils are to be the principal entities for coordinating with the government on a wide range of CIP activities and issues. Under the model, critical asset owners and operators are encouraged to be involved in the creation of sector councils that are self-organized, self-run, and self-governed, with a spokesperson designated by the sector membership. Specific membership can vary from sector to sector but should be representative of a broad base of owners, operators, associations, and other entities--both large and small--within the sector. For example, the banking and finance sector has established the Financial Services Sector Coordinating Council for Critical Infrastructure Protection and Homeland Security, which is made up of over 40 entities, including banks, insurance companies, and industry associations. Most recently, the White House issued the Cyberspace Policy Review that, among other things, recommended that the White House appoint a cybersecurity policy official for coordinating the nation's cybersecurity policies and activities. Subsequently, in December 2009, the President appointed a Special Assistant to the President and Cybersecurity Coordinator, referred to as the Cybersecurity Coordinator in this report, to be the central coordinator of federal government cybersecurity-related activities. Using the NIPP partnership model, the private and public sectors coordinate to manage the risks related to cyber CIP. This coordination includes sharing information, conducting exercises, and providing resources. Sharing information. Information sharing enables both government and private sector partners to assess events accurately, formulate risk assessments, and determine appropriate courses of action. This includes sharing information on cyber threats and vulnerabilities, providing alerts or warnings about such threats, and recommending mitigation steps. Conducting exercises. Building and maintaining organizational and sector expertise requires comprehensive exercises to test the interaction between stakeholders in the context of serious cyber attacks, terrorist incidents, natural disasters, and other emergencies. Exercises are conducted by private sector owners and operators, and across all levels of government. Providing resources. Maximizing the efficient use of resources is a key part of protecting the nation's critical infrastructure. This includes providing technical and policy expertise, training, commitment of people, and financial aid through grants. Over the last several years, we have reported and made recommendations regarding various aspects of cyber CIP, including identifying information- sharing practices and bolstering the public-private partnership. In 2001, we identified the information-sharing practices of leading organizations and the factors they deemed critical to their success in building successful information-sharing relationships. All of the organizations identified trust as the essential underlying element to successful relationships and said that trust could be built only over time and, primarily, through personal relationships. Other critical success factors identified included (1) establishing effective and appropriately secure communication mechanisms, such as regular meetings and secure Web sites; (2) obtaining the support of senior managers at member organizations regarding the sharing of potentially sensitive member information and the commitment of resources; and (3) ensuring organizational leadership continuity. In addition, to be successful, information-sharing organizations provided identifiable membership benefits, such as current information about threats, vulnerabilities, and incidents. Without such benefits, according to the representatives we met with, members would not continue participating. Over the last several years, we have also made about 30 recommendations in key cybersecurity areas to help bolster private-public partnerships. In 2008, we reported on US-CERT and found that it faced a number of challenges that impeded it from fully implementing a cyber analysis and warning capability and thus being able to coordinate the national efforts to prepare for, prevent, and respond to cyber threats. The challenges included creating warnings that are consistently actionable and timely and employing predictive analysis. We made 10 recommendations to DHS to improve the department's cyber analysis and warning capabilities. These included, among others, addressing deficiencies in its monitoring efforts, including establishing a comprehensive baseline understanding of the nation's critical information infrastructure and engaging appropriate private-sector stakeholders to support a national-level cyber monitoring capability. We also recommended that DHS address the challenges that impeded it in fully implementing cyber analysis and warning, including developing close working relationships with federal and private-sector entities to allow the free flow of information and ensuring consistent notifications that are actionable and timely. DHS agreed with most of these recommendations and initiated related actions. In 2007 and 2009, we determined the extent to which sector plans for CIP fully addressed DHS's cyber security requirements and assessed whether these plans and related reports provided for effective implementation. We found, among other things, that although DHS reported many efforts under way and planned to improve the cyber content of sector-specific plans, sector-specific agencies had yet to update their respective sector- specific plans to fully address key DHS cybersecurity criteria. The lack of complete updates and progress reports was further evidence that the sector planning process had not been effective, thus leaving the nation in the position of not knowing precisely where it stands in securing cyber- critical infrastructures. Not following up to address these conditions also showed DHS was not making sector planning a priority. We recommend that DHS assess whether the existing sector-specific planning process should continue to be the nation's approach to securing cyber and other ed critical infrastructure and, if so, make the process an agency priority and manage it accordingly. DHS concurred with the recommendations. In addition, due to concerns about DHS's efforts to fully implement its CIP responsibilities, as well as known security risks to critical infrastructu re systems, we added cyber CIP as part of our federal IT systems security high-risk area in 2003 and have continued to report on its status s time. Most recently, we testified in 2009 on the results of expert panels that identified the importance of bolstering public-private partnershi discussions with us, the panel identified 12 key areas requiring improvement. One of the key strategies was to bolster public-private partnerships by providing adequate economic and other incentives for greater investment and partnering in cybersecurity. Private sector stakeholders reported that they expect their federal partners to provide usable, timely, and actionable cyber threat information and alerts, access to sensitive or classified information, a secure mechanism for sharing information, security clearances, and a single centralized government cybersecurity organization to coordinate federal efforts. Some other services were less important, such as penetration testing of networks and financial support. Table 4 summarizes the extent to which the 56 private sector survey respondents expect to receive certain services from the federal government in order of most to least expected. The two most expected services private sector stakeholders want from their federal partners are timely and actionable cyber threat and alert information--providing the right information to the right persons or groups as early as possible to give them time to take appropriate action. The percentages of private sector survey respondents reporting that they expect timely and actionable cyber threat and alert information to a great or moderate extent were 98 and 96, respectively. Private sector council representatives stated that they expect their federal partners to provide timely and actionable intelligence on cyber-related issues that they can share within their membership. For example, one private sector official told us that time is of the essence when passing information to their members and that sector members expect to get a response within minutes so they can take appropriate actions as soon as possible. Private sector stakeholders also identified access to sensitive government information, a secure information-sharing mechanism, and obtaining security clearances as key expectations. The percentages of survey respondents reporting that they expect these services to a great or moderate extent were 87, 78, and 74, respectively. Private sector officials stated that they need access to greater amounts of sensitive and classified government information. However, a private sector official indicated that access to classified information is not valuable because it can not be shared. This official stated that they would prefer information that is unclassified and actionable that can be shared. A private sector council member stated that their federal partners take too long to vet sensitive cyber information before private sector partners can receive and share it. In addition, private sector officials and cyber experts stated that having a single or centralized government source for cyber-related information is important to (1) avoid confusion about who is the authoritative source, (2) have a consistent message communicated, and (3) coordinate a national response. Similarly, in March 2009, we testified that a panel of cyber security experts identified that creating an accountable, operational cybersecurity organization would be essential to improving our national cybersecurity posture. The experts told us that there needs to be an independent cybersecurity organization that leverages and integrates the capabilities of the private sector, civilian government, law enforcement, the military, the intelligence community, and the nation's international allies to address incidents against the nation's critical cyber systems and functions. Conversely, private sector survey respondents stated that they expect some services to a lesser extent from their federal partners, including policy expertise, financial support, and penetration testing of their networks. The percentages of survey respondents reporting that they expect these services to a great or moderate extent were only 29, 26, and 25, respectively. In addition, government officials stated that having the government perform penetration testing could be construed as inappropriate by private entities and their customers whose information is stored on those systems. Federal partners are not consistently meeting private sector expectations, including providing timely and actionable cyber threat information and alerts, according to private sector stakeholders. Table 5 illustrates the degree to which the 56 private sector survey respondents reported that they are receiving services from the public sector in order of most to least expected. For example, only 27 percent of private sector survey respondents reported that they were receiving timely and actionable cyber threat information and alerts to a great or moderate extent. In addition, ISAC officials stated that the federal partners are not providing enough cyber threat information that is tailored to their sector's needs or analytical alert information that provides the tactics and techniques being used by cyber threats. According to these ISAC officials, this more specific information is needed to understand what actions will likely protect their networks. Another private sector council official said that a lot of the information they receive does not have enough detail to be useful. Private sector stakeholders also reported a lack of access to classified information, a secure information-sharing mechanism, security clearances, and a single centralized government cyber-information source. Private sector survey respondents reported receiving access to actionable classified information, having access to a secure information sharing mechanism, and having adequate security clearances to a great or moderate extent at only 16, 21, and 33 percent, respectively. The private sector councils reported that they are not getting classified intelligence information that they perceive as being valuable to their efforts to defend their cyber resources from sophisticated attacks and that they do not have enough members with security clearances to receive classified information. Regarding the lack of a centralized source, an ISAC official stated that too many Internet-based information-sharing portals exist in the current cyber-related, public-private partnership and that the partnership could benefit from a "one-stop" portal. Another official suggested that one federal agency should be the clearing house for information and assigning tasks because there are too many government agencies working independently with their own unique missions. Further, a sector council official stated that there is too much duplication of projects and that it is not uncommon to work with six different groups doing almost the same thing and that these groups are not always aware of each other. Federal partners are not meeting private sector stakeholders' expectations, in part, because of restrictions on the type of information that can be shared with the private sector. According to DHS officials, US- CERT's ability to provide information is impacted by restrictions that do not allow individualized treatment of one private sector entity over another private sector entity--making it difficult to formally share specific information with entities that are being directly impacted by a cyber threat. In addition, because US-CERT serves as the nation's cyber analysis and warning center, it must ensure that its warnings are accurate. Therefore, US-CERT's products are subjected to a stringent review and revision process that can adversely affect the timeliness of its products-- potentially adding days to the release if classified or law enforcement information must be removed from the product. In addition, federal officials are restricted to sharing classified information with only cleared private sector officials. Federal officials are also hesitant to share sensitive information with private sector stakeholders, in part, due to the fear that sensitive information shared with corporations could be shared openly on a global basis. By contrast, DOE officials stated that they are willing to share sensitive information with their energy sector member entities due to the long-standing nature of their relationships with the sector and the type of information being shared. In addition, according to federal officials, the limited number of private sector personnel with national security clearances makes it difficult to share classified information. Another issue having an adverse affect on the federal partners' ability to meet private sector expectations is that federal officials do not have an adequate understanding of the specific private sector information requirements. Multiple private sector officials stated that federal partners could improve their methods of acquiring the type of information needed by the private sector. For example, more specific threat information would be focused on the technology being used by a particular entity or specify that a threat intends to target a particular entity, rather than including just broad threat information and alerts. In addition, this more specific information would focus on the specific needs for each sector rather than all of the sectors getting the same information. A private sector official also stated that the federal government often approaches the private sector on issues that are not a priority to the private sector but are issues the federal government thinks the private sector is interested in. Further, a cyber expert suggested that the partnership can improve if the government articulates what it needs from the private sector and assists the critical infrastructure sectors in understanding the direct benefit of their participation. DOD and DHS have started pilot programs that are intended to improve the sharing of timely, actionable, and sensitive information with their private sector partners. Specifically, DOD's Defense Critical Infrastructure Program has a pilot program with some of its private sector DIB contractors to improve sharing of information on cyber threat, alerts, and sensitive data by establishing a new partnership model. This new program is known as the DIB Cyber Security/Information Assurance Program and is to facilitate the sharing of sensitive cyber information between the public and private sector. According to an agency official, this program involves a voluntary agreement between DOD and cleared DIB partners. DOD shares classified and unclassified cyber threat information and best practices. In return, the private sector partners agree to share cyber intrusion information with the DOD Cyber Crime Center, which is to serve as the focal point for information-sharing and digital forensics analysis activities related to protecting unclassified information on DIB information systems and networks. DOD's goal is to transition from pilot to program status and expand the program to all qualified cleared contractors. In addition, the officials stated that they expect to eventually modify DOD contractual language to encourage contractors to increase cybersecurity in their networks. In addition, DHS, in conjunction with DOD and the financial services sector, has developed an information sharing pilot program which began in December 2009. To date, this program has resulted in the federal government sharing 494 of its products, including sensitive information, with the Financial Services ISAC, and the Financial Services ISAC sharing 135 of its products with the government. According to DHS officials, DHS and the Financial Services ISAC are sharing sensitive information they did not share before the agreement. Both of these pilot programs are intended to improve federal partners' ability to share information over a secure mechanism. For example, DHS is using its US-CERT portal, and DOD is developing a DIB Net to communicate with its partners. DHS and DOE have initiatives that specifically address sharing classified information with their partners. DHS officials stated that DHS has a process for clearing individual sector officials at the top secret and sensitive compartmented information levels. Further, in November 2009, DHS issued the Cybersecurity Partner Local Access Plan to improve the sharing of sensitive information between the public and private sectors. According to DOE officials, DOE also has an effort under way to increase the number of private officials from the energy sector with security clearances. DHS has recently developed an integration center known as the National Cybersecurity and Communications Integration Center that is composed of the US-CERT and the National Coordinating Center for Telecommunications. This center is to provide a central place for the various federal and private-sector organizations to coordinate efforts to address cyber threats and to respond to cyber attacks. However, this center was only established in October 2009, is still in development, and does not currently have representation from all relevant federal agencies and private entities as envisioned. In addition, DHS officials stated that they have taken steps to improve US-CERT's cyber analysis and warning capabilities in response to our previous recommendations. While the ongoing efforts may address the public sector's ability to meet the private sector's expectations, much work remains, and it is unclear if the efforts will focus on fulfilling the private sector's most expected services related to information-sharing. If the government does not improve its ability to meet the private sector's expectations, the partnerships will remain less than optimal, and the private sector stakeholders may not have the appropriate information and mechanisms needed to thwart sophisticated cyber attacks that could have catastrophic effects on our nation's cyber-reliant critical infrastructure. Public sector stakeholders reported that they expect the private sector to provide a commitment to execute plans and recommendations, timely and actionable cyber threat information, and appropriate staff and resources. Four of the five government councils reported that the private sector is committed to executing plans and recommendations and providing timely and actionable threat information to a "great" or "moderate" extent. However, government council officials stated that improvements could be made to the partnership. Public sector stakeholders reported that they expect a commitment to execute plans and recommendations, timely and actionable cyber threat information, and appropriate staff and resources to be provided by private sector stakeholders. All five government councils we met with stated that they expected these services from their private sector partners to a "great" or "moderate" extent. Further, most government council representatives stated that they expect better communications and increasing trust between them and their private sector counterparts. For example, they would like the private sector to develop a strong dialogue with the government and keep the government informed about suspicious activities on private sector networks. Table 6 shows the government councils' expected services. While many government councils reported that the private sector is mostly meeting their expectations in several areas, they also reported that improvements could be made. Four of the five government councils stated that they are receiving commitment to execute plans and recommendations and timely and actionable cyber threat information to a great or moderate extent. However, only two of the five government councils reported that the private sector is providing appropriate staff and resources. In addition, the extent to which the private sector is fulfilling the public sector's expectations varies by sector. Of the five councils, the communications government council reported most positively on whether the private sector was providing expected services. Specifically, it reported that its private sector partners were providing 8 of 10 expected services to a great or moderate extent. By contrast, the IT sector council reported that the private sector was providing only 1 of 10 expected services to a great or moderate extent and 5 of 10 expected services to only some extent. Table 7 shows the extent to which the private sector is providing government councils' expected services. Although, in general, the private sector is meeting the expectations of the federal partners, there are still improvements that can be made. For example, while the government coordinating councils reported receiving timely and actionable cyber threat and alert information from the private sector, there are limits to the depth and specificity of the information provided, according to federal officials. One issue is that private sector stakeholders do not want to share their sensitive, proprietary information with the federal government. In addition, information security companies could lose a competitive advantage by sharing information with the government which, in turn, could share it with those companies' competitors. In addition, according to DHS officials, despite special protections and sanitization processes, private sector stakeholders are unwilling to agree to all of the terms that the federal government or a government agency requires to share certain information. Further, in some cases, the lack of private sector commitment has had an adverse affect on the partnership. The private-public partnership remains a key part of our nation's efforts to secure and protect its critical cyber-reliant infrastructure. For more than a decade, this private-public partnership has been evolving. While both private and public sector stakeholders report finding value in the partnership, the degree to which expectations are being met varies. Private sector stakeholders expect their federal partners to consistently provide usable, timely, actionable cyber threat information and alerts and, to a lesser extent, other related services. However, private sector stakeholders are not consistently receiving their expected services from their federal partners because, in part, federal partners are restricted in the type of information that can be shared with the private sector and lack an understanding about each sector's specific information requirements. In addition, many private sector stakeholders interact with multiple federal entities and multiple information sources, which can result in duplication of efforts and inconsistent information being shared. In turn, federal partners primarily expect their private sector partners to provide commitment to execute plans and recommendations, timely and actionable cyber threat and alert information, and appropriate staff and resources, which the private sector is primarily providing; however, while most federal partners stated that these expectations are mostly being met, they identified difficulties with the private sector sharing their sensitive information and the need for private sector partners to improve their willingness to engage and provide support to partnership efforts. Federal and private sector partners have initiated efforts to improve the partnerships; however, much work remains to fully implement improved information sharing. Without improvements in meeting private and public sector expectations, the partnerships will remain less than optimal, and there is a risk that owners of critical infrastructure will not have the appropriate information and mechanisms to thwart sophisticated cyber attacks that could have catastrophic effects on our nation's cyber-reliant critical infrastructure. We recommend that the Special Assistant to the President and Cybersecurity Coordinator and the Secretary of Homeland Security, in collaboration with the sector lead agencies, coordinating councils, and the owners and operators of the associated five critical infrastructure sectors, take two actions: (1) use the results of this report to focus their information-sharing efforts, including their relevant pilot projects, on the most desired services, including providing timely and actionable threat and alert information, access to sensitive or classified information, a secure mechanism for sharing information, and providing security clearance and (2) bolster the efforts to build out the National Cybersecurity and Communications Integration Center as the central focal point for leveraging and integrating the capabilities of the private sector, civilian government, law enforcement, the military, and the intelligence community. We are not making new recommendations regarding cyber-related analysis and warning at this time because our previous recommendations directed to DHS, the central focal point for such activity, in these areas have not yet been fully implemented. The national Cybersecurity Coordinator provided no comments on a draft of our report. DHS provided written comments on a draft of the report (see app. II), signed by DHS's Director of the Departmental GAO/OIG Liaison Office. In its comments, DHS concurred with our recommendations and described steps underway to address them. Regarding our first recommendation, DHS provided an additional example of and further detail about several pilot programs it has initiated to enable the mutual sharing of cybersecurity information at various classification levels. In addition, regarding our second recommendation, DHS stated that it is integrating government components and private sector partners into its National Cybersecurity and Communications Integration Center. DHS also provided general comments. First, DHS noted that it is important to distinguish between actionable information and classified, contextual threat information. Specifically, DHS stated that sharing classified information with the private sector can pose a risk to national security and, consequently, such information is generally non-actionable. While we found that the private-sector stakeholders we surveyed and interviewed expect such information, we do not state that the federal government should share classified information with uncleared individuals. We distinguish in this report between sharing timely and actionable threat and alert information and providing access to classified information. In addition, we discuss US-CERT's review and revision process and identify DHS, DOD, and DOE efforts to provide clearances to private sector partners in order to share such information. Second, DHS stated that the report makes generalizations about private- sector stakeholders which could be seen to suggest that such views were held across the entire cross-sector community. We acknowledge that our findings cannot be generalized across the sectors and clearly articulate that the scope of our review is limited to representatives from five critical infrastructure sectors. Third, DHS also stated that the report focuses on surveyed participants "expectations," while the survey itself focused on "needs." DHS further stated that these two terms are not interchangeable for the concept of information sharing. During our review, we held numerous structured interviews with private and government stakeholders and surveyed private-sector stakeholders and asked separate questions on their expectations and needs. We acknowledge that the terms are not interchangeable and therefore appropriately reported on and distinguished both private and public sectors' expectations and needs. Finally, DHS provided comments on the progress it has made in its sector planning approach and its clearance process. DHS and DOD also provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to interested congressional committees, the national Cybersecurity Coordinator, the Secretary of Homeland Security, and other interested parties. The report also 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 (202) 512-9286 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. Our objectives were to determine (1) private sector stakeholders' expectations for cyber-related, public-private partnerships and to what extent these expectations are being met and (2) public sector stakeholders' expectations for cyber-related public-private partnerships and to what extent expectations are being met. We focused our efforts on five critical infrastructure sectors: Communications, Defense Industrial Base, Energy, Banking and Finance, and Information Technology. We selected these five sectors because of their extensive reliance on cyber- based assets to support their operations. This determination was based on our analysis and interviews with cybersecurity experts and agency officials. Our findings and conclusions are based on information gathered from the five cyber-reliant critical sectors and are not generalizable to a larger population. To determine private sector stakeho public-private partnerships and to what extent these expectations are being met, we collected and analyzed various government and private sector reports and conducted structured interviews with sector coordinating councils representatives from the five critical infrastructure sectors. In addition, we interviewed additional experts in critical infrastructure protection from academia and information technology and security companies to gain a greater understanding of how the partnership should be working. We also interviewed representatives from the Communications, Electricity Sector, Financial Services, Information Technology, and Multi-State Information Sharing and Analysis Centers to understand their information-sharing needs. Finally, we conducted a survey of private sector representatives from the infrastructure sectors. The surveyed representatives were members of the information sharing and analysis centers, sector coordinating councils, associations within a sector, and/or owner/operators within a sector. These surveyed representatives were solicited by the leadership of those organizations to participate in our survey in order for them to fulfill their responsibility to protect the identity of their members. We administered the survey respondents' use of the electronic survey tool. We received 56 survey responses from across the five sectors. The survey results were used to determine the expectations of private sector stakeholders and the extent to which those expectations were being met. lders' expectations for cyber-related To determine public sector stakeholders' expectations for cyber-related public-private partnerships and to what extent these expectations are being met, we collected and analyzed various government and private sector reports and conducted structured interviews with government coordinating councils representatives familiar with the cyber partnership from the Banking and Finance, Communications, Defense Industri Energy, and Information Technology critical infrastructure sectors. We also met with representatives from DHS's National Cyber Security Division and Office of Infrastructure Protection to verify and understand the public sector's role in partnering with the private sector and encouraging the protection of the nation's cyber critical infrastructure. We conducted this performance audit from June 2009 to July 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Michael W. Gilmore, Assistant Director; Rebecca E. Eyler; Wilfred B. Holloway; Franklin D. Jackson; Barbarol J. James; Lee A. McCracken; Dana R. Pon; Carl M. Ramirez; Jerome T. Sandau; Adam Vodraska; and Eric D. Winter made key contributions to this report.
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Pervasive and sustained computer-based attacks pose a potentially devastating impact to systems and operations and the critical infrastructures they support. Addressing these threats depends on effective partnerships between the government and private sector owners and operators of critical infrastructure. Federal policy, including the Department of Homeland Security's (DHS) National Infrastructure Protection Plan, calls for a partnership model that includes public and private councils to coordinate policy and information sharing and analysis centers to gather and disseminate information on threats to physical and cyber-related infrastructure. GAO was asked to determine (1) private sector stakeholders' expectations for cyber-related, public-private partnerships and to what extent these expectations are being met and (2) public sector stakeholders' expectations for cyber-related, public-private partnerships and to what extent these expectations are being met. To do this, GAO conducted surveys and interviews of public and private sector officials and analyzed relevant policies and other documents. Private sector stakeholders reported that they expect their federal partners to provide usable, timely, and actionable cyber threat information and alerts; access to sensitive or classified information; a secure mechanism for sharing information; security clearances; and a single centralized government cybersecurity organization to coordinate government efforts. However, according to private sector stakeholders, federal partners are not consistently meeting these expectations. For example, less than one-third of private sector respondents reported that they were receiving actionable cyber threat information and alerts to a great or moderate extent. Federal partners are taking steps that may address the key expectations of the private sector, including developing new information-sharing arrangements. However, while the ongoing efforts may address the public sector's ability to meet the private sector's expectations, much work remains to fully implement improved information sharing. Public sector stakeholders reported that they expect the private sector to provide a commitment to execute plans and recommendations, timely and actionable cyber threat information and alerts, and appropriate staff and resources. Four of the five public sector councils that GAO held structured interviews with reported that their respective private sector partners are committed to executing plans and recommendations and providing timely and actionable information. However, public sector council officials stated that improvements could be made to the partnership, including improving private sector sharing of sensitive information. Some private sector stakeholders do not want to share their proprietary information with the federal government for fear of public disclosure and potential loss of market share, among other reasons. Without improvements in meeting private and public sector expectations, the partnerships will remain less than optimal, and there is a risk that owners of critical infrastructure will not have the information necessary to thwart cyber attacks that could have catastrophic effects on our nation's cyber-reliant critical infrastructure. GAO recommends that the national Cybersecurity Coordinator and DHS work with their federal and private sector partners to enhance information-sharing efforts. The national Cybersecurity Coordinator provided no comments on a draft of this report. DHS concurred with GAO's recommendations.
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In the aftermath of September 11, 2001, there is heightened concern that terrorists may try to smuggle nuclear or radiological materials into the United States. These materials could be used to produce either an IND or an RDD. An IND is a crude nuclear bomb made with highly enriched uranium or plutonium. Nonproliferation experts estimate that a successful IND could have a yield in the 10 to 20 kiloton range (the equivalent to 10,000 to 20,000 tons of TNT). An IND with a 20-kiloton yield would have the same force as the equivalent of the yield of the bomb that destroyed Nagasaki; it could devastate the heart of a medium-sized U.S. city and result in thousands of casualties and radiation contamination over a wide area. Security experts have also raised concerns that terrorists could obtain radioactive material used in medicine, research, agriculture, and industry to construct an RDD, or dirty bomb. This radioactive material is encapsulated, or sealed in metal, such as stainless steel, titanium, or platinum, to prevent its dispersal and is commonly called a sealed radioactive source. These sealed sources are used throughout the United States and other countries in equipment designed to, among other things, diagnose and treat illnesses, preserve food, detect flaws in pipeline welds, and determine the moisture content of soil. Depending on their use, sealed sources contain different types of radioactive material, such as strontium- 90, cobalt-60, cesium-137, plutonium-238, and plutonium-239. If these sealed sources fell into the hands of terrorists, they could use them to produce a simple, but potentially dangerous weapon, by packaging explosives, such as dynamite, with the radioactive material, which would be dispersed when the bomb went off. Depending on its type, amount, and form (powder or solid), the dispersed radioactive material could cause radiation sickness in people nearby and produce serious economic costs and the psychological and social disruption associated with the evacuation and subsequent cleanup of the contaminated area. While no terrorists have detonated a dirty bomb in a city, Chechen separatists placed a canister containing cesium-137 in a Moscow park in the mid-1990s. Although the device was not detonated and no radioactive material was dispersed, the incident demonstrated that terrorists have the capability and willingness to use radiological materials as weapons of terrorism. Another form of nuclear terrorism occurred with the release of radioactive materials in London. In November 2006, Alexander Litvinenko, a former officer of the Russian Federal Security Service, was poisoned with a gram of polonium-210--about the size of a grain of salt. His poisoning was detected only after he was hospitalized for a few weeks and tested for symptoms of radiation exposure because of hair loss. Following the poisoning, forensic investigators identified, with the help of the victim, 47 sites across London where he had been during the few days between his poisoning and death. Of these locations, about 20 showed signs of this radioactive material. Investigators identified over 900 people who might have been exposed to the polonium, including some who may have been exposed while aboard airplanes. After a thorough examination, a few of these individuals turned out to have significant exposure levels. The decontamination activities at these sites, including a hotel room, spanned 19 days, involved a number of methods and technologies, and cost in excess of $200,000. While state and local government responders would be expected to respond first to a terrorist incident within their jurisdiction, they would also expect that the federal government would be prepared to provide the necessary assistance for them to expedite the recovery from such an incident. Emergency management officials from 13 cities and the majority of their respective states indicated in our survey that they would rely on the federal government to conduct and fund all or almost all analysis and cleanup activities associated with recovering from an RDD or IND incident of the magnitude described in the National Planning Scenarios. However, when asked which federal agencies they would turn to for this assistance, city and state respondents replied inconsistently and frequently listed several federal agencies for the same activity. In our view, these responses indicate that there is confusion among city and state officials regarding federal responsibilities for these activities in the event of a terrorist incident. This confusion, if not addressed, could hamper the timely recovery from an RDD or IND incident. Emergency management officials from all the cities and most of their respective states told us they would rely on the federal government because their technical and financial resources would be overwhelmed by a large RDD incident--and certainly by an IND incident. Most of these officials believe they could adequately address a smaller RDD incident, such as one that is confined to a city block or inside a building. Despite this anticipated reliance on the federal government, we obtained mixed responses as to whether these RDD and IND recovery activities should be primarily a federal responsibility. Fewer than half of the respondents from the cities (6 of 13), but most of those from states (8 of 10) indicated that it should be primarily a federal responsibility. The others stressed the need for shared responsibilities with the federal government. Despite the anticipated reliance by city and state governments on the federal government for analysis and cleanup activities following an RDD or IND incident, FEMA has not developed a national disaster recovery strategy or related plans to guide involvement of federal agencies in these recovery activities, as directed by federal law and executive guidance. To date, much federal attention has been given to developing a response framework, with less attention to recovery. The new FEMA coordinator for the development of a national disaster recovery strategy told us that while the previous administration had drafted a "white paper" addressing this strategy, the new administration has decided to rethink the entire approach. She also told us that FEMA recognizes its responsibility to prepare a national disaster recovery strategy but she could not provide a time frame for its completion. However, she stated that when a recovery strategy is issued it should provide guidance to revise state, local, and other federal agency operational plans to fulfill their respective responsibilities. Moreover, the FEMA official in charge of planning told us that the agency has put on hold issuing component plans that describe how federal capabilities would be integrated to support state and local planning for response to and recovery from RDD and IND incidents. Some existing federal guidance documents addressing the assets and responsibilities of federal agencies for both response and to a lesser extent recovery-related activities have been issued as annexes to the National Response Framework and in other documents. For example, there is a nuclear and radiological incident annex, which describes the policies, situations, concept of operations, and responsibilities of the federal departments and agencies for the immediate response and short-term recovery from incidents involving the release of radiological materials. There are also emergency support function annexes that provide a structure for coordinating federal interagency support in response to domestic incidents. In addition, two other sources of guidance have been issued that, according to FEMA officials, represent stop-gap measures until it can issue more integrated planning guidance. In 2008, FEMA issued updated guidance for protection and recovery following RDD and IND incidents. This guidance was to provide some direction to federal, state, and local emergency response officials in developing operational plans and response protocols for protection of emergency workers after such an incident. In regard to recovery, this document recommended a process to involve the affected public, state and local officials, and other important stakeholders in the identification of acceptable cleanup criteria, given the specifics of the incident. The other document, issued by the Homeland Security Council, pertains to responding to an IND in the first few days prior to the arrival of other necessary federal resources. This document was prepared because the prior FEMA guidance did not sufficiently prepare state and local emergency response authorities for managing the catastrophic consequences of a nuclear detonation. Moreover, DOE, EPA and DOD are developing more detailed operational guidance on their own based on the existing federal guidance. For example, DOE has supported research on operational guidelines for implementation of protective actions described in the FEMA guidance, EPA has drafted guidance for the optimization process following RDD and IND incidents, and DOD has established operational plans for consequence management following terrorist incidents, including RDD and IND attacks. Federal agencies and local jurisdictions have been using the available guidance as a basis for planning RDD and IND exercises to test the adequacy of their plans and skills in a real-time, realistic environment to evaluate their level of preparedness. We identified more than 70 RDD and IND response exercises planned and carried out by federal, state and local agencies since mid-2003. However, officials with FEMA's National Exercise Directorate told us that only three of the RDD response exercises had a recovery component. According to these officials, recovery discussions following an RDD or IND response exercise have typically not occurred because of the time needed to fully address the response objectives of the exercise, which are seen as a higher priority. The most recent response exercise, based in Albany, New York, and planned by DOE, set aside 2 days for federal, state, and local agencies to discuss operational recovery issues. One unresolved operational issue discussed during this exercise pertained to the transition of the leadership of the Federal Radiological Monitoring and Assessment Center (FRMAC) from the initial analysis of the contaminated area, led by DOE, to the later cleanup phase, led by EPA. For example, there are remaining questions regarding the level and quality of the monitoring data necessary for EPA to accept the leadership of FRMAC. While we were told that this transitional issue has been discussed in exercises dating back to the development of the Federal Radiological Emergency Response Plan in 1984, it has only recently been discussed in RDD or IND response exercises. Another unresolved operational recovery issue pertains to the distribution of responsibilities for the ownership, removal, and disposal of radioactive debris from an RDD or IND incident. Both of these operational issues are to be examined again in the first full-scale RDD recovery exercise, planned and led by EPA, to take place April 2010. Although some federal agencies, such as DOE and EPA, have substantial experience using various cleanup methods and technologies to address radiation-contaminated areas, little is known about how these approaches might be applied in an RDD or IND incident. For example, DOE has invested hundreds of millions of dollars in research, development, and testing of methods and technologies for cleaning up and decommissioning contaminated structures and soils--legacies of the Cold War. In addition, since the passage of the Comprehensive Environmental Response, Compensation, and Liability Act in 1980, which established the Superfund program, EPA has undertaken significant efforts to study, develop, and use technologies that can address radioactive contamination. DOD has also played a major role in studying potential applications for innovative technologies for its Superfund sites. Not much is known, however, about the application to RDD and IND incidents of available cleanup methods and technologies because such an incident has never occurred in this country, although research is currently underway to gain a better understanding of potential applications. According to decontamination experts at Lawrence Livermore National Laboratory, current research has focused on predicting the effects of radiation release in urban settings through simulation, small scale testing, and theory. In addition, researchers at EPA's National Homeland Security Research Center informed us that while there are standard methods and technologies for cleaning up radiation-contaminated areas, more research is needed to develop standard national guidance for their application in urban environments. The lack of guidance for identifying cost-effective cleanup methods and technologies in the event of an RDD or IND incident might mean that the cleanup approach taken could unnecessarily increase the cost of recovery. According to a decontamination expert at Idaho National Laboratory, for example, experience has shown that not selecting the appropriate decontamination technologies can generate waste types that are more difficult to remove than the original material and can create more debris requiring disposal--leading to increased costs. Moreover, he told us that without guidance and discussion early in the response phase, a contractor might use an approach for no other reason than it was used before in an unrelated situation. In addition, the Lawrence Livermore National Laboratory decontamination experts told us that decontamination costs can increase dramatically depending on the selection of an initial approach and the length of time before remediation actions are taken. For example, they said that the conventional use of high pressure water hosing to decontaminate a building is effective under normal conditions but could be the wrong cleanup approach for an RDD using cesium-137 because the force of the water would actually cause this radioactive isotope to penetrate even further into porous surfaces. A senior EPA official with the Office of Radiation and Indoor Air told us that studies are currently underway to determine the efficacy of pressure washing for removing contamination from porous urban surfaces. In addition to the lack of knowledge about the application of cleanup methods and technologies for wide-area urban contamination from an RDD or IND incident, there are also limitations in federal capabilities to handle in a timely manner the magnitude of tasks and challenges that would be associated with these incidents. For example, we found that limitations in federal capabilities to complete some analysis and cleanup activities might slow the recovery from an RDD or IND incident, including: (1) characterizing the full extent of areas contaminated with radioactive materials; (2) completing laboratory validation of contaminated areas and levels of cleanup after applying decontamination approaches; and (3) removing and disposing of radioactive debris and waste. Respondents representing most of the cities (9 of 13) and states (7 of 10), and respondents from most FEMA regional offices (6 of 9) and almost all EPA regional offices (9 of 10) expressed concerns about the capabilities of federal agencies to provide the assistance needed to complete the necessary analysis and cleanup activities in the event of an RDD or IND incident. Respondents from nearly all the cities and states we surveyed expressed the need for a national disaster recovery strategy to address gaps and overlaps in current federal guidance. According to one city official, "recovery is what it is all about." In developing such a recovery strategy, respondents from the cities, like those from their states, want the federal government to consult with them in the initial formulation of a recovery strategy through working and focus groups, perhaps organized on a regional basis. Respondents representing most cities (10 of 13) and states (7 of 10) also provided specifics on the type of planning guidance necessary, including integration and clarification of responsibilities among federal, state, and local governments. For example, respondents from some of the cities sought better guidance on monitoring radioactivity levels, acceptable cleanup standards, and management of radioactive waste. Most respondents from cities expressed the need for greater planning interactions with the federal government and more exercises to test recovery plans. One city respondent cited the need for recovery exercises on a regional basis so the cities within the region might better exchange lessons learned. Respondents from most cities (11 of 13) and their states (7 of 10) said that they planned to conduct RDD and IND recovery exercises in the future. Finally, emergency management officials representing almost all cities and states in our survey offered some opinions on the need for intelligence information on RDD and IND threats. They said that sharing information with law enforcement agencies is necessary for appropriate planning for an RDD or IND incident--which they generally consider as low-level threats--but only half of the respondents indicated that they were getting sufficient intelligence information. Emergency management officials from FEMA and EPA regional offices generally concurred with these observations and suggestions of the city and state respondents. While it was more limited in scope than what is usually envisioned as an RDD incident, the aftermath of the 2006 polonium poisoning incident in London had many of the characteristics of an RDD including testing hundreds of people who may have been exposed to radiation and a cleanup of numerous radiation-contaminated areas. All this activity resulted from an amount of radioactive material the size of a grain of salt--many times smaller than the amount of radioactive material found in certain common medical devices that could be used in an RDD. Because of its experience in dealing with the cleanup from the 2006 polonium incident and other actions the United Kingdom has taken to prepare for an RDD or IND attack, we visited that country to examine its recovery preparedness programs. United Kingdom officials told us that the attention to recovery in their country is rooted in decades of experience with the conflict in Northern Ireland, dealing with widespread contamination from the Chernobyl nuclear power plant accident, and a national history of resilience--that is, the ability to manage and recover from hardship. We found that actions the United Kingdom reported taking to prepare for recovery from RDD and IND incidents are similar to many of the suggestions for improvement in federal preparedness that we obtained through our survey of city, state, and federal regional office emergency management officials in the United States. For example, we found that the United Kingdom reported taking the following actions: Enacted civil protection legislation in 2004, with subsequent non-statutory emergency response and recovery guidance to complement this emergency preparedness legislation. The emergency response and recovery guidance describes the generic framework for multi-agency response and recovery for all levels of government. The guidance emphasizes that response and recovery are not discrete activities and do not occur sequentially, rather recovery should be an integral part of response from the very beginning, as actions taken at all times can influence longer-term outcomes of the communities. Developed on-line, updatable national recovery guidance in 2007. This guidance reinforces and updates the early emergency response and recovery guidance by establishing, among other things, a recovery planning process during the response phase so that the potential impacts of early advice and actions are explored and understood for the future recovery of the affected areas. Issued a national handbook for radiation incidents in 2008. This handbook provides scientific information, including checklists for planning in advance of an incident, fact sheets on decontamination approaches, and advice on how to select and combine management of these approaches. Conducted a full-scale RDD recovery exercise in 2008. This exercise, involving several hundred participants, provided a unique opportunity to examine and test the recovery planning process within the urgency of a compressed time frame. The lessons learned from this exercise were incorporated into the United Kingdom's recovery strategy. Issued updated nuclear recovery plan guidance in 2009. This guidance provides direction on recovery from events involving a radiological release from a civil or defense nuclear reactor, as well as the malicious use of radiological or nuclear materials. Among other things, it requires that all high-risk cities in the United Kingdom prepare recovery plans for such incidents. In addition to these initiatives, in 2005, the United Kingdom established a special Government Decontamination Service. This organization was created out of recognition that it would not be cost-effective for each entity--national, regional, and local government--to maintain the level of expertise needed for cleaning up chemical, biological, radiological, and nuclear materials, given that such events are rare. Finally, according to United Kingdom officials, the 2006 polonium incident in London showed the value of recovery planning. In particular, through this incident United Kingdom officials gained an appreciation for the need to have an established cleanup plan, including a process for determining cleanup levels, sufficient laboratory capacity to analyze a large quantity of samples for radiation, and procedures for handling the radioactive waste. Furthermore, they found that implementing cleanup plans in the polonium poisoning incident and testing plans in the November 2008 recovery exercise have helped the United Kingdom to better prepare for a larger RDD or IND incident. Madam Chairwoman, this completes my prepared statement. I would be happy to respond to any questions that you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact me at (202) 512-3841 or [email protected]. Individuals who made important contributions to this testimony were Ned Woodward (Assistant Director), Nancy Crothers, James Espinoza, Tracey King, Thomas Laetz, Tim Persons, Jay Smale, and Keo Vongvanith. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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A terrorist's use of a radiological dispersal device (RDD) or improvised nuclear device (IND) to release radioactive materials into the environment could have devastating consequences. The timely cleanup of contaminated areas, however, could speed the restoration of normal operations, thus reducing the adverse consequences from an incident. This testimony examines (1) the extent to which federal agencies are planning to fulfill their responsibilities to assist cities and their states in cleaning up areas contaminated with radioactive materials from RDD and IND incidents; (2) what is known about the federal government's capability to effectively cleanup areas contaminated with radioactive materials from RDD and IND incidents, and (3) suggestions from government emergency management officials on ways to improve federal preparedness to provide assistance to recover from RDD and IND incidents. We also discuss recovery activities in the United Kingdom. This testimony is based on our ongoing review of recovery preparedness issues for which we examined applicable federal laws and guidance; interviewed officials from the Department of Homeland Security (DHS), Federal Emergency Management Agency (FEMA), Department of Energy (DOE), and Environmental Protection Agency (EPA); and surveyed emergency management officials from 13 large cities and their states, as well as FEMA and EPA regional office officials. DHS, through FEMA, is responsible for developing a comprehensive emergency management system to respond to and recover from natural disasters and terrorists attacks, including RDD and IND attacks. The response phase would involve evacuations and providing medical treatment to those who were injured; the recovery phase would include cleaning up the radioactive contamination from an attack in order to permit people to return to their homes and businesses. To date, much federal attention has been given to developing a response framework, with less attention to recovery. Our survey found that almost all cities and states would be so overwhelmed by an RDD or IND incident that they would rely on the federal government to conduct almost all analysis and cleanup activities that are essential first steps towards recovery. However, we found that the federal government has not sufficiently planned to undertake these activities. For example, FEMA has not issued a national disaster recovery strategy or plans for RDD and IND incidents as required by law. Existing federal guidance provides only limited direction for federal agencies to develop their own recovery plans and conduct exercises to test preparedness. Out of over 70 RDD and IND exercises conducted in the last 5 years, only three have included interagency recovery discussions following a response exercise. Although DOE and EPA have experience in the cleanup of small-scale radiation-contaminated areas, their lack of knowledge and capability to apply approaches to address the magnitude of an RDD or an IND incident could increase recovery costs and delay completion. According to anexpert at Idaho National Laboratory, experience has shown that not selecting the appropriate decontamination technologies can generate waste types that are more difficult to remove than the original material and can create more debris requiring disposal--leading to increased costs. Limitations in laboratory capacity to rapidly test thousands of material samples during cleanup, and uncertainty regarding where to dispose of radioactive debris could also slow the recovery process. At least two-thirds of the city, state, and federal respondents expressed concern about federal capability to provide the necessary analysis and cleanup actions to promote recovery after these incidents. Nearly all survey respondents had suggestions to improve federal recovery preparedness for RDD and IND incidents. For example, almost all the cities and states identified the need for a national disaster recovery strategy to address gaps and overlaps in federal guidance. All but three cities wanted additional guidance, for example, on monitoring radioactivity levels, cleanup standards, and management of radioactive waste. Most cities wanted more interaction with federal agencies and joint exercising to test recovery preparedness. Finally, our review of the United Kingdom's preparedness to recover from radiological terrorism showed that that country has already taken actions similar to those suggested by our survey respondents, such as issuing national recovery guidance, conducting a full-scale recovery exercise, and publishing a national handbook for radiation incidents.
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As computer technology has advanced, federal agencies have become dependent on computerized information systems to carry out their operations and to process, maintain, and report essential information. 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, deliver services to the public, and account for their resources without these information assets. Information security is thus especially important for federal agencies to ensure the confidentiality, integrity, and availability of their information and information systems. Conversely, ineffective information security controls can result in significant risk to a broad array of government operations and assets. Examples of such risks include the following: * Resources, such as federal payments and collections, could be lost or stolen. * 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, intellectual property, and proprietary business information, could be inappropriately disclosed, browsed, or copied for purposes of identity theft, espionage, or other types of crime. * Critical operations, such as those supporting critical infrastructure, national defense, and emergency services, could be disrupted. * Data could be added, modified, or deleted for purposes of fraud, subterfuge, or disruption. * Agency missions could be undermined by embarrassing incidents that result in diminished confidence in the ability of federal organizations to conduct operations and fulfill their responsibilities. Cyber threats to federal information systems and cyber-based critical infrastructures are evolving and growing. In September 2007, we reported that these threats can be unintentional and intentional, targeted or nontargeted, and can come from a variety of sources. Unintentional threats can be caused by inattentive or untrained employees, software upgrades, maintenance procedures, and equipment failures that inadvertently disrupt systems or corrupt data. Intentional threats include both targeted and nontargeted attacks. A targeted attack is when a group or individual attacks a specific system or cyber-based critical infrastructure. A nontargeted attack occurs when the intended target of the attack is uncertain, such as when a virus, worm, or other malicious software is released on the Internet with no specific target. Government officials are concerned about attacks from individuals and groups with malicious intent, such as criminals, terrorists, and adversarial foreign nations. The Federal Bureau of Investigation has identified multiple sources of threats to our nation's critical information systems, including foreign nations engaged in espionage and information warfare, domestic criminals, hackers, virus writers, and disgruntled employees and contractors working within an organization. Table 1 summarizes those groups and types of individuals that are considered to be key sources of cyber threats to our nation's information systems and cyber infrastructures. These groups and individuals have a variety of attack techniques at their disposal. Furthermore, as we have previously reported, the techniques have characteristics that can vastly enhance the reach and impact of their actions, such as the following: * Attackers do not need to be physically close to their targets to perpetrate a cyber attack. * Technology allows actions to easily cross multiple state and national borders. * Attacks can be carried out automatically, at high speed, and by attacking a vast number of victims at the same time. * Attackers can more easily remain anonymous. The growing connectivity between information systems, the Internet, and other infrastructures creates opportunities for attackers to disrupt telecommunications, electrical power, and other critical services. As government, private sector, and personal activities continue to move to networked operations, as digital systems add ever more capabilities, as wireless systems become more ubiquitous, and as the design, manufacture, and service of information technology have moved overseas, the threat will continue to grow. Over the past year, cyber exploitation activity has grown more sophisticated, more targeted, and more serious. For example, the Director of National Intelligence stated that, in August 2008, the Georgian national government's Web sites were disabled during hostilities with Russia, which hindered the government's ability to communicate its perspective about the conflict. The director expects disruptive cyber activities to become the norm in future political and military conflicts. Consistent with the evolving and growing nature of the threats to federal systems, agencies are reporting an increasing number of security incidents. These incidents put sensitive information at risk. Personally identifiable information about Americans has been lost, stolen, or improperly disclosed, thereby potentially exposing those individuals to loss of privacy, identity theft, and financial crimes. Reported attacks and unintentional incidents involving critical infrastructure systems demonstrate that a serious attack could be devastating. 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. When incidents occur, agencies are to notify the federal information security incident center--the United States Computer Emergency Readiness Team (US-CERT). As shown in figure 1, the number of incidents reported by federal agencies to US-CERT has increased dramatically over the past 3 years, increasing from 5,503 incidents reported in fiscal year 2006 to 16,843 incidents in fiscal year 2008 (about a 206 percent increase). The three most prevalent types of incidents reported to US-CERT during fiscal years 2006 through 2008 were unauthorized access (where an individual gains logical or physical access to a system without permission), improper usage (a violation of acceptable computing use policies), and investigation (unconfirmed incidents that are potentially malicious or anomalous activity deemed by the reporting entity to warrant further review). The growing threats and increasing number of reported incidents highlight the need for effective information security policies and practices. However, serious and widespread information security control deficiencies continue to place federal assets at risk of inadvertent or deliberate misuse, financial information at risk of unauthorized modification or destruction, sensitive information at risk of inappropriate disclosure, and critical operations at risk of disruption. In their fiscal year 2008 performance and accountability reports, 20 of 24 major agencies indicated that inadequate information system controls over financial systems and information were either a significant deficiency or a material weakness for financial statement reporting (see fig. 2). Similarly, our audits have identified control deficiencies in both financial and nonfinancial systems, including vulnerabilities in critical federal systems. For example, we reported in September 2008 that, although the Los Alamos National Laboratory--one of the nation's weapons laboratories--implemented measures to enhance the information security of its unclassified network, vulnerabilities continued to exist in several critical areas. In addition, in May 2008 we reported that the Tennessee Valley Authority (TVA)--a federal corporation and the nation's largest public power company that generates and transmits electricity us its 52 fossil, hydro, and nuclear power plants and transmission facilities--had not fully implemented appropriate security practice to secure the control systems used to operate its critical s infrastructures. Similarly, in October 2009 we reported that the National Aeronautics and Space Administration (NASA)--the civilian agency that oversees U.S. aeronautical and space activities--had not always implemented appropriate controls to sufficiently protect the confidentiality, integrity, and availability of the information and systems supporting its mission directorates. Over the last several years, most agencies have not implemented controls sufficiently to prevent, limit, or detect unauthorized access to computer networks, systems, or information. Our analysis of inspectors general, agency, and our own reports determined that agencies did not have adequate controls in place to ensure that only authorized individuals could access or manipulate data on their systems and networks. To illustrate, weaknesses were reported in such controls at 23 of 24 major agencies for fiscal year 2008. 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. At least nine agencies also lacked effective controls to restrict physical access to information assets. We previously reported that many of the data losses occurring 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. An underlying cause of information security weaknesses identified at federal agencies is that they have not yet fully or effectively implemented key elements for an agencywide information security program. An agencywide security program, required by the Federal Information Security Management Act (FISMA), is intended to provide a framework and continuing cycle of activities, including 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 23 of 24 major federal agencies had weaknesses in their agencywide information security programs. Due to the persistent nature of these vulnerabilities and associated risks, we continued to designate information security as a governmentwide high-risk issue in our most recent biennial report to Congress, a designation we have made in each report since 1997. Over the past several years, we and inspectors general have made hundreds of recommendations to agencies for actions necessary to resolve prior significant control deficiencies and information security program shortfalls. For example, we recommended that agencies correct specific information security deficiencies related to user identification and authentication, authorization, boundary protections, cryptography, audit and monitoring, physical security, configuration management, segregation of duties, and contingency planning. We have also recommended that agencies fully implement comprehensive, agencywide information security programs by correcting weaknesses in risk assessments, information security policies and procedures, security planning, security training, system tests and evaluations, and remedial actions. The effective implementation of these recommendations will strengthen the security posture at these agencies. Agencies have implemented or are in the process of implementing many of our recommendations. In June 2009 we proposed a list of suggested actions that could improve FISMA and its associated implementing guidance, including (1) clarifying requirements for testing and evaluating security controls; (2) requiring agency heads to provide an assurance statement on the overall adequacy and effectiveness of the agency's information security program; (3) enhancing independent annual evaluations; and (4) strengthening annual reporting mechanisms. In addition, the White House, OMB, and certain federal agencies have undertaken several governmentwide initiatives that are intended to enhance information security at federal agencies. These key initiatives are discussed below. * Comprehensive National Cybersecurity Initiative: In January 2008, President Bush began to implement a series of initiatives aimed primarily at improving the Department of Homeland Security's (DHS) and other federal agencies' efforts to protect against intrusion attempts and anticipate future threats. While details of these initiatives have not been made public, the Director of National Intelligence stated that they include defensive, offensive, research and development, and counterintelligence efforts, as well as a project to improve public-private partnerships. * The Information Systems Security Line of Business: The goal of this initiative, led by OMB, is to improve the level of information systems security across government agencies and reduce costs by sharing common processes and functions for managing information systems security. Several agencies have been designated as service providers for computer security awareness training and FISMA reporting. * Federal Desktop Core Configuration: For this initiative, OMB directed agencies that have Windows XP and/or Windows Vista operating systems deployed to adopt the security configurations developed by the National Institute of Standards and Technology, the Department of Defense, and DHS. The goal of this initiative is to improve information security and reduce overall information technology operating costs. * Einstein: This is a computer network intrusion detection system that analyzes network flow information from participating federal agencies. The system is to provide a high-level perspective from which to observe potential malicious activity in computer network traffic of participating agencies' computer networks. * Trusted Internet Connections Initiative: This is an effort designed to optimize individual agency network services into a common solution for the federal government. The initiative is to facilitate the reduction of external connections, including Internet points of presence. We currently have ongoing work that addresses the status, planning, and implementation efforts of several of these initiatives. Federal law and policyto protect our nation's computer-reliant critical infrastructures--a practice known as cyber critical infrastructure protection, or cyber CIP. We have reported since 2005 that DHS has yet to fully satisfy its establish DHS as the focal point for efforts key responsibilities for protecting these critical infrastructures. Our reports included recommendations that are essential for DHS to address in order to fully implement its responsibilities. We summarized these recommendations into key areas listed in table 2. DHS has since developed and implemented certain capabilities to satisfy aspects of its responsibilities, but the department still has not fully implemented our recommendations, and thus further action needs to be taken to address these areas. For example, in July 2008, we reported that DHS's US-CERT did not fully address 15 key attributes of cyber analysis and warning capabilities related to (1) monitoring network activity to detect anomalies, (2) analyzing information and investigating anomalies to determine whether they are threats, (3) warning appropriate officials with timely and actionable threat and mitigation information, and (4) responding to the threat. For example, US-CERT provided warnings by developing and distributing a wide array of notifications; however, these notifications were not consistently actionable or timely. As a result, we recommended that the department address shortfalls associated with the 15 attributes in order to fully establish a national cyber analysis and warning capability as envisioned in the national strategy. DHS agreed in large part with our recommendations. Similarly, in September 2008, we reported that since conducting a major cyber attack exercise, called Cyber Storm, DHS had demonstrated progress in addressing eight lessons it had learned from these efforts. However, its actions to address the lessons had not been fully implemented. Specifically, while it had completed 42 of the 66 activities identified, the department had identified 16 activities as ongoing and 7 as planned for the future. Consequently, we recommended that DHS schedule and complete all of the corrective activities identified in order to strengthen coordination between public and private sector participants in response to significant cyber incidents. DHS concurred with our recommendation. Since that time, DHS has continued to make progress in completing some identified activities but has yet to do so for others. Because the threats to federal information systems and critical infrastructure have persisted and grown, efforts have recently been undertaken by the executive branch to review the nation's cybersecurity strategy. As we previously stated, in January 2008 the Comprehensive National Cybersecurity Initiative was established with its primary aim to improve federal agencies' efforts to protect against intrusion attempts and anticipate future threats. In February 2009, President Obama directed the National Security Council and Homeland Security Council to conduct a comprehensive review to assess the United States' cybersecurity-related policies and structures. The resulting report, "Cyberspace Policy Review: Assuring a Trusted and Resilient Information and Communications Infrastructure," recommended, among other things, appointing an official in the White House to coordinate the nation's cybersecurity policies and activities, creating a new national cybersecurity strategy, and developing a framework for cyber research and development. We recently initiated a review to assess the progress made by the executive branch in implementing the policy's recommendations. We also testified in March 2009 on needed improvements to the nation's cybersecurity strategy. In preparation for that testimony, we obtained the views of experts (by means of panel discussions) on critical aspects of the strategy, including areas for improvement. The experts, who included former federal officials, academics, and private sector executives, highlighted 12 key improvements that are, in their view, essential to improving the strategy and our national cybersecurity posture. The key strategy improvements identified by cybersecurity experts are listed in table 3. These recommended improvements to the national strategy are in large part consistent with our previous reports and extensive research and experience in this area. Until they are addressed, our nation's most critical federal and private sector cyber infrastructure remain at unnecessary risk to attack from our adversaries. In summary, the threats to federal information systems are evolving and growing, and federal systems are not sufficiently protected to consistently thwart the threats. Unintended incidents and attacks from individuals and groups with malicious intent, such as criminals, terrorists, and adversarial foreign nations, have the potential to cause significant damage to the ability of agencies to effectively perform their missions, deliver services to constituents, and account for their resources. To help in meeting these threats, opportunities exist to improve information security throughout the federal government. The White House, OMB, and certain federal agencies have initiated efforts that are intended to strengthen the protection of federal information and information systems. In addition, the prompt and effective implementation of the hundreds of recommendations by us and by agency inspectors general to mitigate information security control deficiencies and fully implement agencywide security programs would also strengthen the protection of federal information systems, as would efforts by DHS to develop better capabilities to meets its responsibilities, and the implementation of recommended improvements to the national cybersecurity strategy. Until agencies fully and effectively implement these recommendations, federal information and systems will remain vulnerable. If you have any questions regarding this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected], or David A. Powner at (202) 512-9286 or [email protected]. Other key contributors to this statement include John de Ferrari (Assistant Director), Matthew Grote, Nick Marinos, and Lee McCracken. Information Security: NASA Needs to Remedy Vulnerabilities in Key Networks. GAO-10-4. Washington, D.C.: October 15, 2009. Information Security: Concerted Effort Needed to Improve Federal Performance Measures. GAO-09-617. Washington, D.C.: September 14, 2009. Information Security: Agencies Continue to Report Progress, but Need to Mitigate Persistent Weaknesses. GAO-09-546. Washington, D.C.: July 17, 2009. Cybersecurity: Continued Federal Efforts Are Needed to Protect Critical Systems and Information. GAO-09-835T. Washington, D.C.: June 25, 2009. Privacy and Security: Food and Drug Administration Faces Challenges in Establishing Protections for Its Postmarket Risk Analysis System. GAO-09-355. Washington, D.C.: June 1, 2009. Aviation Security: TSA Has Completed Key Activities Associated with Implementing Secure Flight, but Additional Actions Are Needed to Mitigate Risks. GAO-09-292. Washington, D.C.: May 13, 2009. Information Security: Cyber Threats and Vulnerabilities Place Federal Systems at Risk. GAO-09-661T. Washington, D.C.: May 5, 2009. Freedom of Information Act: DHS Has Taken Steps to Enhance Its Program, but Opportunities Exist to Improve Efficiency and Cost- Effectiveness. GAO-09-260. Washington, D.C.: March 20, 2009. Information Security: Securities and Exchange Commission Needs to Consistently Implement Effective Controls. GAO-09-203. Washington, D.C.: March 16, 2009. National Cyber Security Strategy: Key Improvements Are Needed to Strengthen the Nation's Posture. GAO-09-432T. Washington, D.C.: March 10, 2009. Information Security: Further Actions Needed to Address Risks to Bank Secrecy Act Data. GAO-09-195. Washington, D.C.: January 30, 2009. Information Security: Continued Efforts Needed to Address Significant Weaknesses at IRS. GAO-09-136. Washington, D.C.: January 9, 2009. Nuclear Security: Los Alamos National Laboratory Faces Challenges in Sustaining Physical and Cyber Security Improvements. GAO-08-1180T. Washington, D.C.: September 25, 2008. Critical Infrastructure Protection: DHS Needs to Better Address Its Cyber Security Responsibilities. GAO-08-1157T. Washington, D.C.: September 16, 2008. Critical Infrastructure Protection: DHS Needs to Fully Address Lessons Learned from Its First Cyber Storm Exercise. GAO-08-825. Washington, D.C.: September 9, 2008. Information Security: Actions Needed to Better Protect Los Alamos National Laboratory's Unclassified Computer Network. GAO-08-1001. Washington, D.C.: September 9, 2008. Cyber Analysis and Warning: DHS Faces Challenges in Establishing a Comprehensive National Capability. GAO-08-588. Washington, D.C.: July 31, 2008. Information Security: Federal Agency Efforts to Encrypt Sensitive Information Are Under Way, but Work Remains. GAO-08-525. Washington, D.C.: June 27, 2008. Information Security: FDIC Sustains Progress but Needs to Improve Configuration Management of Key Financial Systems. GAO-08-564. Washington, D.C.: May 30, 2008. Information Security: TVA Needs to Address Weaknesses in Control Systems and Networks. GAO-08-526. Washington, D.C.: May 21, 2008. Information Security: TVA Needs to Enhance Security of Critical Infrastructure Control Systems and Networks. GAO-08-775T. Washington, D.C.: May 21, 2008. Information Security: Progress Reported, but Weaknesses at Federal Agencies Persist. GAO-08-571T. Washington, D.C.: March 12, 2008. Information Security: Securities and Exchange Commission Needs to Continue to Improve Its Program. GAO-08-280. Washington, D.C.: February 29, 2008. Information Security: Although Progress Reported, Federal Agencies Need to Resolve Significant Deficiencies. GAO-08-496T. Washington, D.C.: February 14, 2008. Information Security: Protecting Personally Identifiable Information. GAO-08-343. Washington, D.C.: January 25, 2008. Information Security: IRS Needs to Address Pervasive Weaknesses. GAO- 08-211. Washington, D.C.: January 8, 2008. Veterans Affairs: Sustained Management Commitment and Oversight Are Essential to Completing Information Technology Realignment and Strengthening Information Security. GAO-07-1264T. Washington, D.C.: September 26, 2007. Critical Infrastructure Protection: Multiple Efforts to Secure Control Systems Are Under Way, but Challenges Remain. GAO-07-1036. Washington, D.C.: September 10, 2007. Information Security: Sustained Management Commitment and Oversight Are Vital to Resolving Long-standing Weaknesses at the Department of Veterans Affairs. GAO-07-1019. Washington, D.C.: September 7, 2007. Information Security: Selected Departments Need to Address Challenges in Implementing Statutory Requirements. GAO-07-528. Washington, D.C.: August 31, 2007. Information Security: Despite Reported Progress, Federal Agencies Need to Address Persistent Weaknesses. GAO-07-837. Washington, D.C.: July 27, 2007. Information Security: Homeland Security Needs to Immediately Address Significant Weaknesses in Systems Supporting the US-VISIT Program. GAO-07-870. Washington, D.C.: July 13, 2007. Information Security: Homeland Security Needs to Enhance Effectiveness of Its Program. GAO-07-1003T. Washington, D.C.: June 20, 2007. Information Security: Agencies Report Progress, but Sensitive Data Remain at Risk. GAO-07-935T. Washington, D.C.: June 7, 2007. Information Security: Federal Deposit Insurance Corporation Needs to Sustain Progress Improving Its Program. GAO-07-351. Washington, D.C.: May 18, 2007. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Pervasive and sustained cyber attacks continue to pose a potentially devastating threat to the systems and operations of the federal government. In recent months, federal officials have cited the continued efforts of foreign nations and criminals to target government and private sector networks; terrorist groups have expressed a desire to use cyber attacks to target the United States; and press accounts have reported attacks on the Web sites of government agencies. The ever-increasing dependence of federal agencies on computerized systems to carry out essential, everyday operations can make them vulnerable to an array of cyber-based risks. Thus it is increasingly important for the federal government to have effective information security controls in place to safeguard its systems and the information they contain. GAO was asked to provide a statement describing (1) cyber threats to federal information systems and cyber-based critical infrastructures, (2) control deficiencies at federal agencies that make these systems and infrastructures vulnerable to cyber threats, and (3) opportunities that exist for improving federal cybersecurity. In preparing this statement, GAO relied on its previously published work in this area. Cyber-based threats to federal systems and critical infrastructure are evolving and growing. These threats can be unintentional or intentional, targeted or non-targeted, and can come from a variety of sources, including criminals, terrorists, and adversarial foreign nations, as well as hackers and disgruntled employees. These potential attackers have a variety of techniques at their disposal, which can vastly enhance the reach and impact of their actions. For example, cyber attackers do not need to be physically close to their targets, their attacks can easily cross state and national borders, and cyber attackers can more easily preserve their anonymity. Further, the growing interconnectivity between information systems, the Internet, and other infrastructure presents increasing opportunities for such attacks. In addition, reports of security incidents from federal agencies are on the rise, increasing by over 200 percent from fiscal year 2006 to fiscal year 2008. Compounding the growing number and kinds of threats, GAO--along with agencies and their inspectors general--has identified significant weaknesses in the security controls on federal information systems, resulting in pervasive vulnerabilities. These include deficiencies in the security of financial systems and information and vulnerabilities in other critical federal information systems. GAO has identified weaknesses in all major categories of information security controls at federal agencies. For example, in fiscal year 2008, weaknesses were reported in such controls at 23 of 24 major agencies. Specifically, agencies did not consistently authenticate users to prevent unauthorized access to systems; apply encryption to protect sensitive data; and log, audit, and monitor security-relevant events, among other actions. An underlying cause of these weaknesses is agencies' failure to fully or effectively implement information security programs, which entails assessing and managing risk, developing and implementing security policies and procedures, promoting security awareness and training, monitoring the adequacy of security controls, and implementing appropriate remedial actions. Multiple opportunities exist to enhance cybersecurity. In light of weaknesses in agencies' information security controls, GAO and inspectors general have made hundreds of recommendations to improve security, many of which agencies are implementing. In addition, the White House and the Office of Management and Budget, collaborating with other agencies, have launched several initiatives aimed at improving aspects of federal cybersecurity. The Department of Homeland Security, which plays a key role in coordinating cybersecurity activities, also needs to fulfill its responsibilities, such as developing capabilities for protecting cyber-reliant critical infrastructures and implementing lessons learned from a major cyber simulation exercise. Finally, a panel of experts convened by GAO made several recommendations for improving the nation's cybersecurity strategy. Realizing these opportunities for improvement can help ensure that the federal government's systems, information, and critical cyber-reliant infrastructure are effectively protected.
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Customs began ACE in 1994, and its early estimate of the cost and time to develop the system was $150 million over 10 years. At this time, Customs also decided to first develop a prototype of ACE, referred to as NCAP (National Customs Automation Program prototype), and then to complete the system. In May 1997, we testified that Customs' original schedule for completing the prototype was January 1997, and that Customs did not have a schedule for completing ACE. At that time, Customs agreed to develop a comprehensive project plan for ACE. In November 1997, Customs estimated that the system would cost $1.05 billion to develop, operate, and maintain throughout its life cycle. Customs plans to develop and deploy the system in 21 increments from 1998 through 2005, the first four of which would constitute NCAP. Currently, Customs is well over 2 years behind its original NCAP schedule. Because Customs experienced problems in developing NCAP software in- house, the first NCAP release was not deployed until May 1998--16 months late. In view of the problems it experienced with the first release, Customs contracted out for the second NCAP release and deployed this release in October 1998--21 months later than originally planned. Customs' most recent dates for deploying the final two NCAP releases (0.3 and 0.4) are March 1999 and September 1999, which are 26 and 32 months later than the original deployment estimates, respectively. According to Customs, these dates will slip farther because of funding delays. Additionally, Customs officials told us that a new ACE life cycle cost estimate is being developed, but that it was not ready to be shared with us. At the time of our review, Customs' $1.05 billion estimate developed in 1997 was the official ACE life cycle cost estimate. However, a January 1998 ACE business plan specifies a $1.48 billion life cycle cost estimate. Customs is not building ACE within the context of an enterprise systems architecture, or "blueprint" of its agencywide future systems environment. Such an architecture is a fundamental component of any rationale and logical strategic plan for modernizing an organization's systems environment. As such, the Clinger-Cohen Act requires agency chief information officers (CIO) to develop, maintain, and implement an information technology (IT) architecture. Also, the Office of Management and Budget (OMB) issued guidance in 1996 that requires agency IT investments to be architecturally compliant. These requirements are consistent with, and in fact based on, IT management practices of leading private and public sector organizations. Simply stated, an enterprise systems architecture specifies the system (e.g., software, hardware, communications, security, and data) characteristics that the organization's target systems environment is to possess. Its purpose is to define, through careful analysis of the organization's strategic business needs and operations, the future systems configuration that supports not only the strategic business vision and concept of operations, but also defines the optimal set of technical standards that should be met to produce homogeneous systems that can interoperate effectively and be maintained efficiently. Our work has shown that in the absence of an enterprise systems architecture, incompatible systems are produced that require additional time and resources to interconnect and to maintain and that suboptimize the organization's ability to perform its mission. We first reported on Customs' need for a systems architecture in May 1996 and testified on this subject in May 1997. In response, Customs developed and published an architecture in July and August 1997. We reviewed this architecture and reported in May 1998 that it was not effective because it was neither complete nor enforced. For example, the architecture did not 1. fully describe Customs' business functions and their relationships, 2. define the information needs and flows among these functions, and 3. establish the technical standards, products, and services that would be characteristic of its target systems environment on the basis of these business specifications. Accordingly, we recommended that Customs complete its enterprise information systems architecture and establish compliance with the architecture as a requirement of Customs' information technology investment management process. In response, Customs agreed to develop a complete architecture and establish a process to ensure compliance. Customs is in the process of developing the architecture and reports that it will be completed in May 1999. Also, in January 1999, Customs reported that it changed its internal procedures to provide for effective enforcement of its architecture, once it is completed. Until the architecture is completed and enforced, Customs risks spending millions of dollars to develop, acquire, and maintain information systems, including ACE, that do not effectively and efficiently support the agency's mission needs. Effective IT investment management is predicated on answering one basic question: Is the organization doing the "right thing" by investing specified time and resources in a given project or system? The Clinger-Cohen Act and OMB guidance together provide an effective IT investment management framework for answering this question. Among other things, they set requirements for 1. identifying and analyzing alternative system solutions, 2. developing reliable estimates of the alternatives' respective costs and benefits and investing in the most cost beneficial alternative, and 3. to the maximum extent practical, structuring major projects into a series of increments to ensure that each increment constitutes a wise investment. Customs did not satisfy any of these requirements for ACE. First, Customs did not identify and evaluate a full range of alternatives to its defined ACE solution before commencing development activities. For example, Customs did not consider how ACE would relate to another Treasury- proposed system for processing import trade data, known as the International Trade Data System (ITDS), including considering the extent to which ITDS should be used to satisfy needed import processing functionality. Initiated in 1995 as a project to develop a coordinated, governmentwide system for the collection, use, and dissemination of trade data, the ITDS project is headed by the Treasury Deputy Assistant Secretary for Regulatory, Tariff and Trade Enforcement. The system is expected to reduce the burden federal agencies place on organizations by requiring that they respond to duplicative data requests. Treasury intends for the system to serve as the single point for collecting, editing, and validating trade data as well as collecting and accounting for trade revenue. At the time of our review of ACE, these functions were also planned for ACE. Similarly, Customs did not evaluate different ACE architectural designs, such as the use of a mainframe-based versus client/server-based hardware architecture. Also, Customs did not evaluate alternative development approaches, such as acquisition versus in-house development. In short, Customs committed to and began building ACE without knowing whether it had chosen the most cost-effective alternative and approach. Second, Customs did not develop a reliable life cycle cost estimate for the approach it selected. SEI has developed a method for project managers to use to determine the reliability of project cost estimates. Using SEI's method, we found that Customs' $1.05 billion ACE life cycle cost estimate was not reliable, and that it did not provide a sound basis for Customs' decision to invest in ACE. For example, in developing the cost estimate, Customs (1) did not use a cost model, (2) did not account for changes in its approach to building different ACE increments, (3) did not account for changes to ACE software and hardware architecture, and (4) did not have historical project cost data upon which to compare its ACE estimate. Moreover, the $1.05 billion cost estimate used to economically justify ACE omitted relevant costs. For instance, the costs of technology refreshment and system requirements definition were not included (see table 1). Exacerbating this problem, Customs represented its ACE cost estimate as a precise point estimate rather than explicitly disclosing to investment decisionmakers in Treasury, OMB, and Congress the estimate's inherent uncertainty. Customs' projections of ACE benefits were also unreliable because they were either overstated or unsupported. For example, the analysis includes $203.5 million in savings attributable to 10 years of avoided maintenance and support costs on the Automated Commercial System (ACS)--the system ACE is to replace. However, Customs would not have avoided maintenance and support costs for 10 years. At the time of Customs' analysis, it planned to run both systems in parallel for 4 years, and thus planned to spend about $53 million on ACS maintenance and support during this period. As another example, $650 million in savings was not supported by verifiable data or analysis, and $644 million was based on assumptions that were analytically sensitive to slight changes, making this $644 million a "best case" scenario. Third, Customs is not making its investment decisions incrementally as required by the Clinger-Cohen Act and OMB. Although Customs has decided to implement ACE as a series of 21 increments, it is not justifying investing in each increment on the basis of defined costs and benefits and a positive return on investment for each increment. Further, once it has deployed an increment at a pilot site for evaluation, it is not validating the benefits that the increment actually provides, and it is not accounting for costs on each increment so that it can demonstrate that a positive return on investment was actually achieved. Instead, Customs estimated the costs and benefits for the entire system--all 21 increments, and used this as economic justification for ACE. Mr. Chairman, our work has shown that such estimates of many system increments to be delivered over many years are impossible to make accurately because later increments are not well understood or defined. Also, these estimates are subject to change in light of experiences on nearer term increments and changing business needs. By using an inaccurate, aggregated estimate that is not refined as increments are developed, Customs is committing enormous resources with no assurance that it will achieve a reasonable return on its investment. This "grand design" approach to managing large system modernization projects has repeatedly proven to be ineffective across the federal government, resulting in huge sums invested in systems that do not provide expected benefits. Failure of the grand design approach was a major impetus for the IT management reforms contained in the Clinger-Cohen Act. Software process maturity is one important and recognized measure of determining whether an organization is managing a system or project the "right way," and thus whether or not the system will be completed on time and within budget and will deliver promised capabilities. The Clinger- Cohen Act requires agencies to implement effective IT management processes, such as processes for managing software development and acquisition. SEI has developed criteria for determining an organization's software development and acquisition effectiveness or maturity. Customs lacks the capability to effectively develop or acquire ACE software. Using SEI criteria for process maturity at the "repeatable" level, which is the second level on SEI's five-level scale and means that an organization has the software development/acquisition rigor and discipline to repeat project successes, we evaluated ACE software processes. In February 1999, we reported that the software development processes that Customs was employing on NCAP 0.1, the first release of ACE, were not effective. For example, we reported that Customs lacked effective software configuration management, which is important for establishing and maintaining the integrity of the software products during development. Also, we reported that Customs lacked a software quality assurance program, which greatly increased the risk of ACE software not meeting process and product standards. Further, we reported that Customs lacked a software process improvement program to effectively address these and other software process weaknesses. Our findings concerning ACE software development maturity are summarized in table 2. As discussed in our brief history of ACE, after Customs developed NCAP 0.1 in-house, it decided to contract out for the development of NCAP 0.2, thus changing its role on ACE from being a software developer to being a software acquirer. According to SEI, the capabilities needed to effectively acquire software are different than the capabilities needed to effectively develop software. Regardless, we reported later in February 1999 that the software acquisition processes that Customs was employing on NCAP 0.2 were not effective. For example, Customs did not have an effective software acquisition planning process and, as such, could not effectively establish reasonable plans for performing software engineering and for managing the software project. Also, Customs did not have an effective evaluation process, meaning that it lacked the capability for ensuring that contractor-developed software satisfied defined requirements. Our findings concerning ACE software acquisition maturity are summarized in table 3. To address ACE management weaknesses, we recommended that Customs analyze alternative approaches to satisfying its import automation needs, including addressing the ITDS/ACE relationship; invest in its defined ACE solution incrementally, meaning for each system increment (1) rigorously estimate and analyze costs and benefits, (2) require a favorable return-on-investment and compliance with Customs' enterprise systems architecture, and (3) validate actual costs and benefits once an increment is piloted, compare actuals to estimates, use the results in deciding on future increments, and report the results to congressional authorizers and appropriators; establish an effective software process improvement program and correct the software process weaknesses in our report, thereby bringing ACE software process maturity to a least an SEI level 2; and require at least SEI level 2 processes of all ACE software contractors. In his February 16, 1999, comments on a draft of our report, the Commissioner of Customs agreed with our findings and committed to implementing our recommendations. On April 1, 1999, the Commissioner provided us a status report on Customs efforts to do so. In brief, the Commissioner stated that Customs is conducting and will conduct additional analyses to consider alternative approaches to ACE, and will base these analyses on the assumption that Customs will use and not duplicate ITDS functionality; is developing the capability to perform cost-benefit analyses of ACE increments, and is and will conduct postimplementation reviews of ACE increments; has retained an audit firm to independently validate cost-benefit is developing software process improvement plans to achieve software process maturity of level 2 and then level 3; and is preparing a directive to require at least level 2 processes of all Customs software contractors. Additionally, the Commissioner stated that Customs is developing a plan for engaging a prime integration contractor that is at least SEI level 3 certified. Under this approach, the prime contractor would assist Customs in implementing effective system/software engineering processes and would engage subcontractors to meet specified system development and maintenance needs. Successful systems modernization is absolutely critical to Customs' ability to perform its trade import mission efficiently and effectively in the 21st century. Systems modernization success, however, depends on doing the "right thing, the right way." To be "right," organizations must (1) invest in and build systems within the context of a complete and enforced enterprise systems architecture, (2) make informed, data-driven decisions about investment options based on expected and actual return-on-investment for system increments, and (3) build system increments using mature software engineering practices. Our reviews of agency system modernization efforts over the last 5 years point to weaknesses in these three areas as the root causes of their not delivering promised system capabilities on time andwithin budget. Until Customs corrects its ACE management and technical weaknesses, the federal government's troubled experience on other modernization efforts is a good indicator for ACE. In fact, although Customs does not collect data to know whether the first two ACE releases are already falling short of cost and performance expectations, the data it does collect on meeting milestones show that the first two releases have taken about 2 years longer than originally planned. This is precisely the type of unaffordable outcome that can be avoided by making the management and technical improvements we recommended. Fortunately, Customs fully recognizes the seriousness of the situation and has committed to correcting its ACE management and technical weaknesses. We are equally committed to working with Customs as it strives to do so and with Congress as it oversees this important initiative. This concludes my statement. I would be glad to respond to any questions that you or other Members of the Subcommittee may have at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary, VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. 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Pursuant to a congressional request, GAO discussed the Customs Service's management of its Automated Commercial Environment (ACE) system. GAO noted that: (1) the need to leverage information technology to improve the way that Customs does business in the import arena is undeniable; (2) Customs' existing import processes and supporting systems are simply not responsive to the business needs of either Customs or the trade community, whose members collectively import about $1 trillion in goods annually; (3) these existing processes and systems are paper-intensive, error-prone, and transaction-based, and they are out of step with the just-in-time inventory practices used by the trade; (4) recognizing this, Congress enacted the Customs Modernization and Informed Compliance Act to define legislative requirements for improving import processing through an automated system; (5) Customs fully recognizes the severity of the problems with its approach to managing import trade and is modernizing its import processes and undertaking ACE as its import system solution; (6) begun in 1994, Customs' estimate of the system's 15-year life cycle cost is about $1.05 billion, although this estimate is being increased; (7) in light of ACE's enormous mission importance and price tag, Customs' approach to investing in and engineering ACE demands disciplined and rigorous management practices; (8) such practices are embodied in the Clinger-Cohen Act of 1996 and other legislative and regulatory requirements, as well as accepted industry system/software engineering models, such as those published by the Software Engineering Institute; (9) unfortunately, Customs has not employed such practices to date on ACE; (10) GAO's February 1999 report on ACE describes serious management and technical weaknesses in Customs' management of ACE; and (11) the ACE weaknesses are: (a) building ACE without a complete and enforced enterprise systems architecture; (b) investing in ACE without a firm basis for knowing that it is a cost effective system solution; and (c) building ACE without employing engineering rigor and discipline.
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To qualify for SNF care, Medicare beneficiaries typically need to be admitted to a SNF within 30 days after discharge from a hospital stay of at least 3 days and need care for a condition that was treated during the hospital stay or that arose while receiving SNF care. Medicare may cover up to 100 days per episode of SNF care. Many SNFs also provide long- term care, which Medicare does not cover, to Medicaid or private paying residents. Medicaid, the joint federal-state program for certain low-income individuals, is the primary payer for over 60 percent of SNF residents. Industry advocates have raised questions about Medicaid payment rates in many states being lower than the costs of providing care. While Medicare and Medicaid separately certify SNFs, nearly all SNFs have dual certification and participate in both programs. SNF residents who do not qualify for Medicare or Medicaid may have private insurance pay for their care or they may pay out of pocket. SNFs differ by type of ownership. As of 2014, 70 percent of SNFs were for-profit, 24 percent were nonprofit, and 5 percent were operated by government agencies. In general, for-profit SNFs have a goal of making profits that are distributed among their owners and stockholders. For example, several studies have demonstrated that for-profit SNFs generally have lower nurse-to-resident staffing ratios compared with nonprofit SNFs, likely allowing them to reduce their personnel costs and increase their margins. Nonprofit SNFs receive favorable tax status because they are not allowed to operate for the benefit of private interests. SNFs also vary by chain affiliation. About three-fifths of SNFs were owned or operated by chains (entities that own multiple facilities), while the remainder were independent in 2014, the latest year for which data were available. While most chain-affiliated SNFs are for-profit, some are nonprofit or government-operated. Chains may develop complex administrative structures to spread expenses across multiple SNFs. Researchers have raised questions about the effects of chain ownership on SNF quality of care. SNFs employ three types of nursing staff: RNs, LPNs, and CNAs. As we have previously reported, the responsibilities and salaries of these three types of nurses are related to their levels of education. The staffing mix, or the balance SNFs maintain among RNs, LPNs, and CNAs, is generally related to the needs of the residents served. For example, a higher proportion of RNs may be employed to meet residents' needs in SNFs that serve more residents with acute care needs or in SNFs with specialty care units (such as units for residents who require ventilators). However, SNFs may be unable to pursue their ideal staffing mix for reasons such as high turnover among LPNs and CNAs. Licensed Nurses and Nurse Aides Registered nurses (RN) have at least a 2-year degree and are licensed in a state. Because of their advanced training and ability to provide skilled nursing care, RNs are paid more than other nursing staff. Generally, RNs are responsible for managing residents' nursing care and performing complex procedures, such as starting intravenous feeding or fluids. Licensed practical nurses (LPN) have a 1-year degree, are also licensed by the state, and typically provide routine bedside care, such as taking vital signs. Certified nursing assistants (CNA) are nurse aides or orderlies who work under the direction of licensed nurses, have at least 75 hours of training, and have passed a competency exam. CNAs' responsibilities usually include assisting residents with eating, dressing, bathing, and toileting. CNAs typically have more contact with residents than other nursing staff and provide the greatest number of hours of care per resident day. CNAs generally are paid less than RNs and LPNs. There are no federal minimum standards linking SNFs' nurse staffing to the number of residents, but SNFs that participate in both Medicare and Medicaid are required to have sufficient nursing staff to provide nursing and related services to allow each resident to attain or maintain the highest practicable physical, mental, and psychosocial well-being. In general, every SNF must have licensed nurses (RNs or LPNs) on duty around the clock, including one RN on duty for at least 8 consecutive hours per day, 7 days per week. According to one study, 34 states had established additional minimum requirements for the number of nursing hours per resident day as of 2010. Researchers have found that higher total nurse staffing levels (RNs, LPNs, and CNAs combined) and higher RN staffing levels are typically associated with higher quality of care, as shown by a wide range of indicators. For example, lower total nurse and RN staffing levels have been linked to higher rates of deficiency citations, which may involve actual harm or immediate jeopardy to residents. In addition, higher total nurse and RN staffing levels have been associated with better health outcomes, such as fewer cases of pressure ulcers, urinary tract infections, malnutrition, and dehydration, as well as improved resident functional status. In 2001, a CMS contractor reported the effect of nurse staffing on quality of care in SNFs. The contractor identified staffing thresholds in both a short-stay sample of Medicare SNF admissions and a long-stay sample of nursing home residents who were in the facility for at least 90 days. These thresholds demonstrated incremental benefits of nurse staffing; once these thresholds were met, there were no additional benefits in terms of quality. For the short-stay sample, the thresholds were 0.55 hours per resident day for RNs and 3.51 hours per resident day for all nurses. For the long-stay sample, the thresholds were 0.75 hours per resident day for RNs and 4.08 hours per resident day for all nurses. PPACA required SNFs to separately report expenditures for wages and benefits for direct care staff, including specific data on RNs, LPNs, CNAs, and other medical and therapy staff, and required CMS to redesign the cost report in consultation with private sector accountants experienced with SNF cost reports to meet this requirement. The act also required CMS, in consultation with others, to categorize the expenditures listed on the cost report, regardless of any source of payment for such expenditures, into four functional accounts--direct care (including nursing, therapy, and medical services), indirect care (including housekeeping and dietary services), capital assets (including building and land costs), and administrative services--annually. Finally, the act required CMS to make information on SNFs' expenditures "readily available to interested parties upon request." CMS collects detailed SNF expenditure data in Medicare cost reports and posts the raw data on its website for the public. On their cost reports, SNFs must disclose total costs and allocate general services costs such as housekeeping and nursing administration. CMS officials told us they modified the cost report as required by PPACA in December 2011. Effective for cost reporting periods beginning on or after January 1, 2012, CMS required SNFs to provide expenditure data for full-time and part- time direct care employees who are directly hired and under contract. CMS officials said the agency implemented the PPACA requirement to make information on SNFs' expenditures "readily available to interested parties upon request" by posting the raw data on its website. The CMS website contains the raw cost report data that SNFs submitted for fiscal years 1995 through 2015. The website also notes that CMS "has made a reasonable effort to ensure that the provided data/records/reports are up- to-date, accurate, complete, and comprehensive at the time of disclosure." However, CMS has not taken two key steps to make SNF expenditure data readily accessible on the basis of our interviews with public stakeholders and our observations. First, CMS has not provided the expenditure data in an accessible way. The data's format, volume, and organization can make it difficult for public stakeholders to use the data. CMS posts data for each fiscal year across three separate files. Because of how CMS formats the data, users need certain software packages and programming skills to analyze data for each fiscal year. In addition, CMS has acknowledged that the data files are so large that some users have been unable to download them. One of the researchers we interviewed stated that the amount of time needed to analyze the data typically requires a grant. CMS also does not organize SNF expenditures in a meaningful way for analysis. For example, 12 of the 15 cost centers in the general services category are related to indirect care, so a user must make additional calculations to determine a SNF's total indirect care costs. Second, CMS has not provided the expenditure data in a place that is easy to find on its website. For example, representatives of the two beneficiary advocacy organizations we interviewed told us they were unable to find the cost report data on the CMS website and noted the importance of making the SNF expenditure data easy to locate. CMS officials told us they did not know who would use SNF expenditure data or for what purpose. Public stakeholders could make better use of SNF expenditure data if CMS took steps to make the data more accessible. For example, representatives of the two beneficiary advocacy organizations and one researcher we interviewed said CMS could incorporate summary expenditure measures into Nursing Home Compare, the CMS website that contains summary measures of SNF quality. Prior research has demonstrated that presenting cost and finance measures in a manner that consumers can easily interpret, displaying them alongside quality data, and focusing on information that is relevant to consumers can help increase their effectiveness. For example, the California HealthCare Foundation's CalQualityCare.org website provides ideas on how to communicate SNF expenditure measures to consumers. This website allows consumers to find facility data and compare long-term care providers across California. CMS officials told us that adding SNF expenditure measures to Nursing Home Compare is a possibility in the next 2 to 5 years. The officials noted that, as of December 2015, CMS had not begun considering the posting of SNF expenditure data on Nursing Home Compare nor begun systematically evaluating how to publicly report expenditure measures. The officials explained that the agency is currently focused on implementing an electronic system for collecting SNF direct care staffing data (known as the Payroll-Based Journal) and making changes to existing measures in Nursing Home Compare this year. In March 2016, CMS released a public data set on its website that contains information on utilization, payments, and submitted charges for services SNFs provided to Medicare beneficiaries in 2013. Upon releasing the data set, CMS officials stated they were committed to greater data transparency. In making data accessible to public stakeholders, federal internal control standards related to external communication suggest that agencies consider the audience, nature of information, availability, cost, and legal or regulatory requirements to ensure that information is communicated in a quality manner. Until CMS takes steps to make SNF expenditure data easier to use and locate, public stakeholders will have difficulty accessing the only publicly available source of financial data for many SNFs. Despite CMS's statement that it has made a reasonable effort to ensure the accuracy of SNF cost report data, we found that the agency performs minimal quality control of the SNF expenditure data in the Medicare cost reports to ensure data reliability. Instead, CMS largely relies on SNFs to validate their own data. CMS requires SNFs to self-certify to the accuracy and completeness of their cost report data. However, according to CMS officials and one researcher we interviewed, there is little incentive for SNFs to ensure the accuracy and completeness of their data because the data do not affect the amount of Medicare payments each SNF receives. However, CMS does use the cost report data to update overall SNF payment rates. Despite this, CMS officials told us the agency conducts "extremely limited" reviews of cost report data because of funding and resource constraints. The officials said they rarely adjust SNFs' reported costs and focus instead on improper payment reviews. For these reasons, CMS officials and the two researchers we interviewed told us they could not place full confidence in the reliability of the SNF expenditure data in the cost reports. Federal internal control standards require agencies to use quality information. The standards highlight the importance of processing obtained data into quality information, central to which is its accessibility and reliability. Reliable information that is accurate and complete can help agencies evaluate performance, make informed decisions, address risks, and achieve key objectives. Until CMS takes steps to ensure the accuracy and completeness of the SNF expenditure data, the data's reliability cannot be ensured. Our analysis found that, for each fiscal year from 2011 through 2014, direct and indirect care costs were lower as a percentage of revenue, on average, at for-profit SNFs compared with nonprofit and government SNFs. Costs were similarly lower at chain SNFs compared with independent SNFs. Over the 4-year period we examined, the percentage of revenue spent on direct and indirect care remained relatively constant, on average, at for-profit and nonprofit SNFs but decreased at government SNFs. For both chain and independent SNFs, the percentage of revenue spent on direct and indirect care remained relatively constant, on average, from fiscal years 2011 through 2014. (See fig. 1.) For for-profit and nonprofit SNFs, both overall costs and total revenues increased, on average, in each of the 4 years we examined. For example, for-profit and nonprofit SNFs generally had small annual increases in their direct care costs. However, because their revenue also increased slightly each year, on average, their direct care costs remained relatively constant as a percentage of revenue. Both overall costs and direct care costs decreased, on average, at government SNFs in each fiscal year from 2011 through 2014. Total revenues also decreased, on average, at government SNFs between fiscal years 2011 and 2014. Regardless of ownership type and chain affiliation, SNFs' costs for capital-related assets and administrative services accounted for a similar percentage of revenue, on average, during each fiscal year from 2011 through 2014. According to the cost report data, capital-related asset costs accounted for 4 percent to 7 percent of revenue, on average, at for- profit, nonprofit, and government SNFs in each year. Similarly, costs for capital-related assets at chain and independent SNFs generally accounted for 5 percent to 6 percent of revenue, on average, in each year. During these 4 years, costs for administrative services accounted for 8 percent to 9 percent of revenue, on average, regardless of ownership type and chain affiliation. In addition, median margins were higher for for-profit and chain SNFs than for other SNFs. As a group, for-profit SNFs had a higher median margin (between 16 percent and 19 percent) than nonprofit and government SNFs (between 12 percent and 15 percent and between 3 percent and 13 percent, respectively) for each fiscal year between 2011 and 2014. Similarly, median margins were generally higher at chain SNFs (between 16 percent and 19 percent) than at independent SNFs (between 12 percent and 17 percent) in each year. All SNF organization types had positive median all-payer margins each year, meaning that their payments more than covered their costs. Moreover, from fiscal years 2011 through 2014, median margins increased regardless of ownership type and chain affiliation, but the amount of the increase differed between organization types. The median margin increased more at government SNFs than at for-profit and nonprofit SNFs and more at independent SNFs than at chain SNFs. During the 4-year period, the median margin at government SNFs increased 10 percentage points (from 3 percent to 13 percent), while it increased 3 percentage points at for-profit SNFs (from 16 percent to 19 percent) and at nonprofit SNFs (from 12 percent to 15 percent). In addition, independent SNFs' median margin increased by 5 percentage points (from 12 percent to 17 percent) and chain SNFs' median margin increased by 3 percentage points (from 16 percent to 19 percent). (See fig. 2.) SNFs' nursing staff levels, as measured by nurse time per resident day, were relatively stable for fiscal years 2012 through 2014, but there was some variation by type of ownership. For-profit SNFs generally had less nursing time per resident day in each of the 3 years we examined. After our adjustment for resident case-mix, we continued to observe the same trends. These trends were generally consistent with the small annual increases in direct care costs we observed at for-profit and nonprofit SNFs during this period. Table 1 shows SNFs' reported (unadjusted) and adjusted total nurse and RN time per resident day. Examining each fiscal year separately, we estimated that a SNF's margin generally had a small, but statistically significant, effect on its nursing time per resident day. After controlling for other factors, we estimated that a SNF's case-mix adjusted total nurse and RN time per resident day (reflecting the time nurses spend on both direct patient care and administrative duties) decreased slightly as its margin increased. For fiscal year 2012, we estimated that if a SNF with a margin of 20 percent and a case-mix adjusted total nurse time of 4 hours per resident day increased its margin to 21 percent, its total nurse time would fall to 3 hours and 51.9 minutes per resident day (a decrease of 8.1 minutes). For the same year, we estimated that a SNF's case-mix adjusted RN time per resident day decreased by 0.6 minutes for each percentage point increase in its margin. Similarly, for fiscal year 2013, we estimated that a 1 percentage point increase in a SNF's margin decreased its case-mix adjusted total nurse time per resident day by 5.1 minutes and its case-mix adjusted RN time per resident day by 0.4 minutes. Finally, for fiscal year 2014, we estimated that a SNF's case-mix adjusted total nurse time per resident day decreased by 7.4 minutes and its case-mix adjusted RN time per resident day decreased by 0.2 minutes for each percentage point increase in its margin. In each of the 3 fiscal years, which we examined separately, the relationship between SNF nursing time and margins varied by ownership type. Table 2 shows our estimates for the change in a SNF's case-mix adjusted total nurse and RN time per resident day for each percentage point increase in its margin. For example, for fiscal year 2012, we estimated that if a for-profit SNF with a margin of 20 percent and a case- mix adjusted total nurse time of 4 hours per resident day increased its margin to 21 percent, holding all other variables constant, its total nurse time would fall to 3 hours and 49 minutes per resident day (a decrease of 11.0 minutes). The relationship between a SNF's total nurse time per resident day and its margin also differed slightly by chain affiliation. We estimated that the total nurse time per resident day decreased slightly more at SNFs that were part of chains than at those that were independent. For example, we estimated that for each percentage point increase in a SNF's margin, the case-mix adjusted total nurse time per resident day decreased by 6.9 minutes at chain-affiliated SNFs and by 4.3 minutes at independent SNFs in fiscal year 2014. For each of the 3 years we examined, a chain- affiliated SNF's margin did not have a statistically significant effect on its RN time per resident day. Although the effect of margins in our regression analyses was statistically significant, margins were not the strongest predictor of case-mix adjusted total nurse and RN time per resident day. Accounting for the state where each SNF was located was very important in explaining its nursing time. This could be attributable to variation across states in staffing requirements, Medicaid reimbursement rates, or other factors. Because of the strong effect of the state where each SNF was located, we needed to statistically control for a SNF's state to isolate the effects of a SNF's total nurse and RN time per resident day on its margin. In addition, we estimated that a SNF's proportion of Medicare days increased its total nurse and RN time per resident day. See appendix I for additional detail on the methods and results of our expenditure analyses. The collection of SNF expenditure data gives CMS the opportunity to provide information to the public on SNFs' relative expenditures. Data that are readily accessible to the public and validated for completeness and accuracy to ensure reliability can contribute to SNF data transparency. However, public stakeholders have experienced difficulty accessing the data--including locating and using the data--and CMS efforts to ensure data accessibility and reliability have been limited. To improve the accessibility and reliability of SNF expenditure data, we recommend the Acting Administrator of CMS take the following two actions: 1. Take steps to improve the accessibility of SNF expenditure data, making it easier for public stakeholders to locate and use the data. 2. Take steps to ensure the accuracy and completeness of SNF expenditure data. We provided a draft of this report to HHS for comment. In its written comments, HHS concurred with our recommendation to improve the accessibility of SNF expenditure data. HHS disagreed with our recommendation that it take steps to ensure the accuracy and completeness of the SNF expenditure data. HHS said that it has made a reasonable effort to ensure the accuracy of the expenditure data, that the data are used for general purposes, and that the amount of time and resources that may be required to verify the accuracy and completeness of the data could be substantial and might not create significant benefit to the agency or the public. However, during the course of our work, CMS told us that the agency conducts only "extremely limited" reviews of the expenditure data due to resource constraints. Moreover, we found that CMS uses the expenditure data to update overall SNF payment rates, in addition to more general purposes. Therefore, we continue to believe that CMS should take steps to ensure reliable expenditure data that are accurate and complete. HHS's comments on a draft of this report are reproduced in appendix II. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Health and Human Services, and the Acting CMS Administrator. 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 III. This appendix describes our methodology for examining (1) how skilled nursing facility (SNF) costs and margins vary by facility characteristics and (2) how SNF nurse staffing levels vary by facility characteristics and the relationship between SNF nurse staffing levels and margins. The appendix also provides further details of the results of our analyses. To examine how SNF costs and margins vary by facility characteristics, we developed cost categories, calculated the total costs for each category as a percentage of revenue, and made comparisons across SNF groups. We organized each SNF's costs into four categories: direct care, indirect care, capital-related assets, and administrative services. Officials from the Centers for Medicare & Medicaid Services (CMS) said the categories we used included the appropriate expenses listed on the cost reports. Table 3 provides a crosswalk between the cost categories we used and the cost centers from the cost report. We then calculated each SNF's costs as a percentage of revenue. We also computed each SNF's margin, reflecting the percentage of revenue each SNF retained. While SNFs may be part of larger nursing homes that operate multiple lines of business (such as hospices, ancillary services, and home health care services), we focused our analyses on the SNF line of business. We compared SNF costs and margins by ownership type and chain affiliation. To examine how SNF nurse staffing levels vary by facility characteristics and the relationship between SNF nurse staffing levels and margins, we performed statistical analyses to identify factors associated with each SNF's total nurse and registered nurse (RN) staffing levels. To measure nurse staffing levels, we calculated each SNF's total nurse and RN time per resident day. A SNF's total nurse time per resident day reflects the number of hours that RNs, licensed practical nurses (LPN), and certified nursing assistants (CNA) worked per resident day. We computed each SNF's total nurse and RN time per resident day using a complex formula. We first calculated a SNF's total paid hours for full-time and part-time RNs, LPNs, and CNAs who are both directly hired and under contract. Because the time needed for treating residents varies with their clinical conditions and treatments, we then adjusted each SNF's nursing time per resident day on the basis of its Medicare residents' health care needs. This process is known as case-mix adjustment. We developed our formula based largely on CMS's methodology for case-mix adjusting nurse staffing measures for Nursing Home Compare, the CMS website that contains summary measures of SNF quality data. CMS's approach is based on the distribution of a SNF's residents' assignments into one of 53 different payment groups, called resource utilization groups. Each group describes residents with similar therapy, nursing, and special care needs. CMS's model uses the estimated RN, LPN, and CNA minutes for each resource utilization group based on the results from the Staff Time Measurement Studies conducted in 1995 and 1997. For our analyses, we used a different source of data than what CMS uses for Nursing Home Compare. CMS obtains staffing data from Form CMS- 671 (Long Term Care Facility Application for Medicare and Medicaid) from the Certification and Survey Provider Enhanced Reports (CASPER) system and census data from Form CMS-672 (Resident Census and Conditions of Residents). CMS officials advised us against using the CASPER data. CMS has observed that the CASPER data, which are collected over a 2-week period at the time of a SNF's annual inspection survey, generally indicate higher RN staffing levels and lower LPN and CNA staffing levels compared with the Medicare cost reports. Table 4 shows CMS's analysis of the staffing levels using 2013 data from the Medicare cost reports and CASPER. Because of the available data in the cost reports, there were some limitations with our case-mix adjustment calculation. While the cost reports include data on the resource needs for Medicare residents, they do not capture data on the resource needs for non-Medicare residents. Accordingly, we estimated a SNF's resident case-mix based only on its Medicare residents' resource utilization groups. In addition, the cost reports obtain data on 13 additional resource utilization groups that CMS implemented in 2010 to reflect updated staff time measurement data. For our calculation, we could not use Medicare days attributable to these groups on the cost reports. Finally, because SNFs' staffing data on the cost reports were incomplete for fiscal year 2011 and were generally unavailable beyond fiscal year 2014 when we began our analyses, we limited our analyses to fiscal years 2012 through 2014. HoursAdjusted is the case-mix adjusted total nurse or RN hours per resident day. HoursReported is each SNF's number of reported total nurse or RN hours per resident day. HoursExpected is each SNF's number of expected total nurse or RN hours per resident day. HoursNational Average is the national average of reported total nurse or RN hours per resident day. We then used multiple linear regression analysis, a statistical procedure that allowed us to assess the relationship between a SNF's margin and its case-mix adjusted total nurse and RN time per resident day, controlling for other factors. The other factors in our models included a SNF's average hourly RN wage, average resident length of stay, chain affiliation, number of beds, number of competitors within 15 miles, ownership type, proportion of Medicare days, and urban or rural status. Our models also accounted for the state where each SNF was located. We performed separate regressions for all SNFs in fiscal years 2012, 2013, and 2014. We also performed regressions by ownership type and chain affiliation. Table 5 shows the results of our regressions for all SNFs where the dependent variable is the case-mix adjusted total nursing hours per resident day, and table 6 shows the results of our regressions for all SNFs where the dependent variable is the case-mix adjusted RN hours per resident day. The tables include regression coefficients and R2 statistics. Regression coefficients can be interpreted as the predicted change in nursing time per resident day for every unit change in the independent variable. In general, it is not meaningful to compare the size of these coefficients because our independent variables are on different scales. We used R statistics to estimate how much of the variation in the nursing time per resident day can be explained by all the independent variables in our models. Taken together, the independent variables explained between 27 percent and 31 percent of the variation in the case- mix adjusted total nursing hours per resident day and between 36 percent and 39 percent of the variation in the case-mix adjusted RN hours per resident day for fiscal years 2012 through 2014. Accounting for the state where each SNF was located was very important in explaining its nursing time per resident day. This could be attributable to variation across states in staffing requirements, Medicaid reimbursement rates, or other factors. In addition to the contact named above, Martin T. Gahart, Assistant Director; David Grossman, Analyst-in-Charge; Todd D. Anderson; and Jane Eyre made key contributions to this report. Also contributing were Elizabeth T. Morrison, Vikki Porter, Eric Wedum, and Jennifer Whitworth.
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Medicare paid $28.6 billion to SNFs for nearly 1.7 million beneficiaries in 2014. About 15,000 SNFs provide short-term skilled nursing and rehabilitative care after an acute care hospital stay. As of 2014, 70 percent of SNFs were for-profit, 24 percent were nonprofit, and 5 percent were government-operated. About three-fifths of the SNFs were affiliated with chains. The average SNF Medicare margin was 12.5 percent. Some researchers have questioned whether SNF margins come at the expense of patient care in the form of low nurse staffing levels. GAO was asked to provide information on how SNFs spend their Medicare and other revenues. GAO examined (1) the extent to which the expenditure data CMS collects from SNFs and provides to the public are accessible and reliable, (2) how SNF costs and margins vary by facility characteristics, and (3) how SNF nurse staffing levels vary by facility characteristics and the relationship between SNF nurse staffing levels and margins. GAO analyzed Medicare cost report data for fiscal years 2011 through 2014, the most recent years with complete data available. GAO also interviewed CMS officials, researchers, and beneficiary advocates. The Centers for Medicare & Medicaid Services (CMS)--the agency within the Department of Health and Human Services (HHS) that administers Medicare--collects and reports expenditure data from skilled nursing facilities (SNF), but it has not taken key steps to make the data readily accessible to public stakeholders or to ensure their reliability. SNFs are required to self-report their expenditures in annual financial cost reports, and CMS posts the raw data on its website. However, CMS has not provided the data in a readily accessible format and has not posted the data in a place that is easy to find on its website, according to public stakeholders and GAO's observations. In addition, CMS does little to ensure the accuracy and completeness of the data. Federal internal control standards suggest that agencies should make data accessible to the public and ensure data reliability. Until CMS takes steps to make reliable SNF expenditure data easier to use and locate, public stakeholders will have difficulty accessing and placing confidence in the only publicly available source of financial data for many SNFs. GAO found that, for each fiscal year from 2011 through 2014, direct and indirect care costs were lower as a percentage of revenue, on average, at for-profit SNFs compared with nonprofit and government SNFs. Direct and indirect care costs were similarly lower at chain SNFs compared with independent SNFs. In addition, the median margin, which measures revenue relative to costs, was higher for for-profit and chain SNFs than for other SNFs in each of the 4 years. The relationship between SNFs' nurse staffing levels (hours per resident day) and their margins varied by ownership type in each fiscal year from 2012 through 2014, the 3 years with complete staffing data. For-profit SNFs generally had lower nurse staffing ratios than did nonprofit and government SNFs. Examining each fiscal year separately, GAO estimated that a SNF's margin had a small, but statistically significant, effect on its case-mix adjusted (that is, adjusted for residents' health care needs) nurse staffing ratios. For example, for each percentage point increase in a for-profit SNF's margin in fiscal year 2014, GAO estimated that the SNF's total nurse staffing ratio (including registered nurses, licensed practical nurses, and certified nursing assistants) decreased by 4.1 minutes per resident day after controlling for other factors. However, in GAO's analyses, these other factors, such as geographic location, were more important predictors of a SNF's case-mix adjusted nurse staffing ratios. GAO recommends that CMS (1) improve public stakeholders' ability to locate and use SNF expenditure data and (2) ensure the accuracy and completeness of the data. HHS concurred with the first but not the second recommendation, citing resource considerations. GAO continues to believe that CMS should provide reliable SNF expenditure data.
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Veterans aged 65 or older are increasing both in number and in the percentage of the veteran population receiving VA health care services. More significantly, the number of veterans aged 75 and older, the heaviest users of nursing home care, is increasing rapidly. VA estimates that the number of veterans aged 75 and older will increase from about 2.6 million in 1995 to about 4.0 million in 2000. All veterans with a medical need for nursing home care are eligible to receive such care in VA nursing homes and community nursing homes under contract to VA. VA also pays a portion of the cost of care for veterans served in state veterans nursing homes. Because most veterans receive care financed through other government programs (Medicare or Medicaid), private insurance, or personal assets, however, these VA programs provide only a portion of the nursing home care that veterans receive. VA serves veterans essentially on a first-come, first-served basis up to the limits of VA's budget authority for nursing home care. VA is authorized to pay for care in community nursing homes for a period generally not longer than 6 months for nonservice-connected veterans and for an indefinite period for veterans with service-connected conditions. No maximum service period exists, and only higher income, nonservice-connected veterans must contribute to the cost of their care in VA nursing homes. State veterans homes establish their own admissions policy, and, although they receive per diem payments from VA, state homes generally rely on patient cost sharing to help cover expenses. VA operates 129 VA nursing homes (in 45 states), contracts with 3,766 community nursing homes (in all 50 states, the District of Columbia, and Puerto Rico), and pays a portion of the costs for veterans served in 80 state veterans homes (in 38 states). Obligations for VA and state veterans nursing homes have increased each year from 1985 through 1995; obligations for community nursing homes have fluctuated over the same period. Overall, VA reports that nursing home obligations have grown from about $710 million in 1985, serving 72,889 veterans, to $1.6 billion in 1995, serving 79,373 veterans as shown in table 1. To control construction of VA nursing homes and encourage placement of veterans in less costly community nursing homes, the Office of Management and Budget (OMB) established guidelines in 1987 for both the market share (16 percent) of the estimated demand by veterans for nursing home care and the distribution of veterans in the various types of facilities. The patient distribution goal is 30 percent in VA nursing homes, 40 percent in community homes, and 30 percent in state veterans homes. Management of nursing home resources in VA is changing with the reorganization of the VA health care system. The reorganization involves trimming unnecessary management layers, consolidating medical services, and using more community resources. Called the Veterans Integrated Service Network (VISN), the reorganized VA health care system will be administered and provided through 22 local network service areas and encompass the assessment, planning, and budgeting aspects of providing VA nursing home care in each service area. Implementation of the VISN will shift nursing home resource management decisions from individual VA medical centers to VISN directors. VA's transition to the VISN was in its early stages at the time of our review. The distribution of veterans in the three types of nursing homes differs greatly from VA's target of 30 percent in VA homes, 40 percent in community homes, and 30 percent in state homes. Figure 1 shows the distribution based on the average daily census during fiscal year 1995. Appendix I shows, by state, the number of nursing homes that VA uses and the average daily census by each type of facility in fiscal year 1995. The distribution pattern has also shifted considerably over the years. In fiscal year 1985, for example, about 40 percent of veterans (figure based on the average daily census) receiving VA-financed or -provided nursing home care were cared for in community nursing homes. Also, VA's average daily census in community nursing homes was over 3,000 patients greater in 1985 than in 1995. Figure 2 shows the average daily census in the three types of nursing homes from fiscal years 1985 through 1995. The distribution shift was the result of major reductions in expenditures for community nursing homes that occurred in the late 1980s and early 1990s. For example, in 1989 VA delegated community nursing home budget decisions to VA medical centers. Some medical center directors left their programs intact, while others used community nursing home funds for other medical center activities. Most community nursing home programs shrank considerably. According to a VA official, in fiscal year 1990, VA reversed its decision to delegate budget authority to medical centers because VA medical centers did not support the community nursing home program. VA's use of community nursing homes has not returned to pre-1989 levels, however. From fiscal years 1988 to 1993, the average number of community nursing homes under contract to each VA medical center decreased from 24 to 21, and the average number of veterans placed in community homes by each VA medical center decreased from 183 to 129. Community nursing home funds have also been used to meet VA budget emergencies and to fund VA-sponsored noninstitutional care programs. According to VA budget documents, in fiscal year 1992, $35 million of VA's community nursing home program budget was reprogrammed to meet the increased costs of special pay rates for physicians and dentists. According to a VA official, the reprogramming of these funds was cleared by OMB and VA appropriations committees. Also, in fiscal year 1993, VA's Homemaker and Day Care programs, alternatives to institutional care, began to share community nursing home budget resources. This action was also supported by the Congress through language in VA's appropriations bill designed to increase VA's use of long-term care alternatives. For fiscal year 1995, VA obligated $1.1 billion for VA nursing home operations, about $361 million for community nursing homes, and about $166 million for state veterans homes. According to VA-reported costs for fiscal year 1995, VA's daily patient cost was $213.17 for veterans in VA nursing homes, $118.12 for veterans in community nursing homes, and $35.37 for veterans in state veterans homes (where only a portion of costs are funded by VA). Actual costs are unknown, however, because VA data systems neither reflect all costs nor captured all costs in a consistent way to make accurate cost comparisons. We have reported that VA's cost accounting system distributes costs inconsistently and is generally not reliable as a source for precisely comparing VA program costs. We have also noted that VA cost reports are not subject to audit and rely on each medical center to determine the distribution of costs among different activities. VA budget and program officials we contacted recognize that cost reports do not provide useful, reliable cost information. Because decisions on staff allocation costs and, in some cases, workload are made at the facility level, data are inconsistent among facilities. For example, VA's cost data do not include the cost of all services provided to community nursing home patients by VA medical centers, such as radiology and laboratory services, clinical visits, and medications. In addition, VA's costs for transporting veterans between community nursing homes and VA medical centers for treatment are generally excluded from VA's cost data for community homes. The inconsistent distribution of costs among VA cost centers leads to both overallocation and underallocation of overhead and variable costs (such as laundry, linen, janitorial, and administrative services) to VA nursing home units. Information was not available to determine the overall effect of cost distribution inconsistencies on VA nursing home daily costs. Factors that contribute to cost differences between VA and community nursing homes include patient case mix differences and more intensive staffing patterns in VA homes than in community nursing homes. For example, VA's Nursing Home Cost Study issued in August 1996 reported that among patients sampled as of October 1, 1995, about 16 percent of VA nursing home patients were in a heavy care category requiring special rehabilitation services (thus requiring more care and higher costs) compared with 3 percent of community nursing home patients. Conversely, more community nursing home patients were in a less resource-demanding category--22 percent for community nursing home patients compared with 17 percent for VA nursing home patients. The study also noted that VA nursing homes have an overall higher level of staffing than community nursing homes (.69 patient care personnel per resident at VA facilities compared with .58 at community nursing homes) and that facilities have different types of staff. RNs make up 36 percent of the staff at VA nursing homes but only 12 percent at community nursing homes. Aides, on the other hand, make up 67 percent of the staff at community nursing homes but only 32 percent of the staff at VA facilities. In July 1995, VA began implementing a decision support system (DSS) at 38 hospitals. Current VA plans call for the deployment of DSS to all VA hospitals by fiscal year 1998. Such support systems in the private sector have proved to be an effective management tool for improving quality and cost- effectiveness, and VA expects DSS to do the same for its health care operations. DSS can compute the cost of services provided to each patient by combining patient-based information on services provided with financial information on the costs and revenue associated with those services. VA expects DSS to provide VA managers and health care providers with variance reports identifying areas for reducing costs and improving patient outcomes and clinical processes. In a September 1995 report on the implementation of DSS, we noted that VA had not developed a business strategy for effectively using DSS as a management tool. We also noted that VA had not yet developed business goals and associated plans to guide the organization, determine the proper location and use of resources, and provide a framework for using management tools such as DSS. VA is developing business plans that should be completed by December 1996. For example, one VISN work group charged with developing the network's long-term care business plan was directed by the VISN leadership to consider consolidating, contracting, or closing of all VA nursing homes in the service area. These options are being considered so that VA can effectively provide nursing home resources in future years to the aging veteran patient population. VA's use of community nursing home beds is affected by (1) a shortage of beds in some parts of the country, (2) veteran and family preferences to use VA nursing homes, and (3) VA's inability to compete with other purchasers of community nursing home services in some locations because of lower reimbursement rates. VA has several initiatives under way to improve its access to community nursing home beds by improving the competitiveness of its rates but needs better information on specific locations where rate adjustments would be appropriate. On the other hand, VA's use of state veterans nursing homes is limited because of the number of such beds available and because VA has little control over who gets admitted to these facilities. The availability of nursing home beds and occupancy rates are critical to VA's ability to place veterans in community nursing homes. According to a 1996 study by the Institute of Medicine (IOM), Nursing Staff in Hospitals and Nursing Homes, the demand for nursing home services continues to grow as the number of aged and chronically ill people increases. IOM reported that in most areas of the country, the demand for nursing home services has surpassed the supply of beds, especially in relation to the growth in the oldest of the elderly population. In 1990, the United States had approximately 32 million people aged 65 years or older. This number is projected to double by 2030. The number of elderly needing nursing home care is expected to triple from about 1.8 million in 1990 to about 5.3 million in 2030. The median occupancy rate for U.S. nursing facilities was about 93 percent in 1994, the most current year for which data were available. As demand for nursing home resources grows, VA's access to community nursing home beds varies by community. VA has identified seven geographic areas where it has problems securing community nursing home beds: California, the District of Columbia, Florida, New Hampshire, New York, South Carolina, and Virginia. In other parts of the country, though, VA does not appear to have such problems. According to our questionnaire respondents, for example, the availability of community nursing home beds in Oklahoma City, Oklahoma, and Kansas City, Missouri, exceeded the number of veterans needing beds. A VA planning official in Salt Lake City, Utah, also mentioned that this service area has always had a large number of community nursing home beds available. To make informed nursing home resource management decisions, VA needs reliable demand and capacity data. The VA Inspector General and we have criticized VA for consistently undercounting available community beds and not basing its nursing home construction or expansion projects on reliable data. VA has in fact overstated its nursing home construction needs. For example, we noted in August 1995 that VA's planned conversion of the former Orlando Naval Hospital to a nursing home and the construction of a new hospital and nursing home in Brevard County were not the most prudent and economical uses of its resources. Furthermore, we noted that VA could purchase care from community nursing homes to meet veterans' needs more conveniently and at a lower cost. The VA Inspector General noted in 1994 that regional planners had excluded suitable and available community nursing home beds and used questionable community data in needs assessments. Regional planners indicated that they lacked staff resources to validate community resource data or reasonably establish that the data were reliable or accurate. It is not yet clear how the VISN structure will address the need to improve the reliability of community resource data on available community nursing home beds. A May 1995 VA report, Evaluation of the Enhanced Prospective Payment System (EPPS) for VA Contract Nursing Homes, states that many longer stay patients were in a VA nursing home because they or their families refused to allow their admittance to a community facility. Veterans and their families were concerned about the limited VA benefit in community homes (6 months for nonservice-connected veterans) and the depletion of assets that occurs before a veteran's community nursing home care is converted to Medicaid. Also, many veterans tend to prefer to be housed with other veterans because community nursing homes lack the (mainly male- oriented) culture of VA or state veterans homes. VA studies suggest that VA's reimbursement rates may be too low in some areas, and as a result veterans' access to community nursing homes may be limited. VA has initiatives under way to enhance access to community nursing homes but needs better information to determine where reimbursement rates adversely affect veterans' access to these homes. VA pays facilities a fixed daily rate for nursing home services. This rate is intended to cover all necessary services, both routine daily services (room, board, and nursing services) and special and ancillary services (primary and specialty physician services, diagnostic tests, and equipment). The rate is based on each state's daily Medicaid rate for basic nursing home care, plus an additional 15 percent. VA medical centers may negotiate with community nursing homes to provide higher reimbursements for extra care cases (that is, costly special and ancillary services). Other payers, such as private insurers, Medicare, and Medicaid, generally do not reimburse community nursing homes on a daily-rate basis. The nursing home market generally reimburses on a unit-of-service basis. For example, the Medicaid program allows providers to bill for medical services, such as physician care and diagnostic tests, on a unit-of-service basis. In some communities, VA reimbursements are not competitive with other payers. Community nursing home administrators in the facilities we visited informed us that VA was not paying what was necessary to care for some veterans, particularly those patients with heavy care needs. For example, an administrator of a Salt Lake City home indicated that although VA's contract rate is adequate for most patients, it is inadequate for patients on intravenous or feeding tubes. Another administrator in Richmond, Virginia, indicated that although the nursing home has the capacity to admit additional veterans, it would turn away veterans requiring heavy care involving high treatment costs because VA's reimbursement is inadequate. Nursing home administrators and VA questionnaire respondents told us that veterans with behavioral problems, alcohol or drug dependencies, or conditions requiring the use of a ventilator were most likely to be refused admission to a community nursing home. Nursing home administrators said that they make trade-offs between serving veterans at potentially lower reimbursement rates and serving private pay, Medicare, and Medicaid patients whose ancillary service costs can be billed separately. The 1993 National Survey of VA Community Nursing Home Program Practices conducted by VA's Midwest Center for Health Services and Policy Research noted that only 29 percent of VA medical centers indicated that the Medicaid plus 15 percent reimbursement rate was adequate to cover community nursing home costs in their area. VA policy allows medical centers to negotiate reimbursement rates higher than the standard Medicaid plus 15 percent rate, and VA's May 1995 Evaluation of the Enhanced Prospective Payment System noted that 20 percent of community nursing homes were paid higher rates. Some VA medical centers do not pursue higher rates because negotiating contracts is burdensome and obtaining approval for such rates from the VA regional level sometimes takes 2 to 4 months. The study concluded that these increasingly difficult negotiations sometimes soured relations with community nursing homes. As a result of the study, VA changed its policy on community nursing home rate exceptions, allowing local VA medical center director approval, except for subacute care. In addition, VA is a small purchaser of nursing home care in most markets, providing little incentive for nursing homes to engage in lengthy negotiations. For example, in May 1995, VA's Management Decision and Research Center noted that no veterans were placed in one-quarter to one-third of the community nursing homes with which VA had contracts during fiscal years 1988 through 1994. The remaining homes under contract during that period had between 4.6 and 6.3 veterans placed per year on average. VA is trying to improve the competitiveness of its nursing home reimbursement rates through three initiatives: (1) multistate contracting, (2) a prospective payment system based on Medicare nursing home reimbursement rates, and (3) revisions to the standard community nursing home contract format. However, VA needs better information to identify specific locations where adjustments to reimbursement rates are needed to enhance access to community nursing home beds. In September 1995, VA issued a request for proposals for multistate contracts to provide nursing home services. Multistate contracting is intended to enhance VA's ability to access beds by easing the administrative requirements on community nursing homes and offering prospective providers a large volume of patients. VA plans to commit $34 million to these contracts or about 10 percent of the community nursing home program budget. The multistate contracts specifically guarantee access for veterans up to the amount specified in the contracts. VA awarded six multistate contracts to private corporations on September 1, 1996, and also contracted with a provider with 20 facilities in California. The new contracts will provide VA access to 1,101 nursing homes in 43 states, and VA believes the contracts offer administrative and other cost efficiencies. Each corporation will provide five levels of care based on a state-specific pricing structure designed to achieve cost savings over the life of the contract. Since 1991, VA has also been pilot testing a prospective payment system based on Medicare reimbursement rates. EPPS, implemented in 8 of VA's 164 medical centers with nursing homes or contracts with community nursing homes, provides three levels of reimbursement--superskilled, skilled, and intermediate-level care. Ancillary costs are also included in these rates, but speech, physical, and occupational therapies are reimbursed separately using rates established by VA's central office. A 1995 study by VA's Management Decision and Research Center estimated that the pilot system reimbursed nursing homes $3,402 more per patient than VA's normal reimbursement system. However, while data limitations made it inconclusive, the study suggested that these added costs were outweighed by savings to VA medical centers from moving patients from the hospital sooner to nursing homes, which provide a lower (and less expensive) level of care. VA will use the findings of the EPPS evaluation to collect information on nursing home market conditions and hospital utilization to determine whether special efforts are needed to become more competitive in community nursing home markets. VA medical centers may qualify to participate by meeting certain criteria based on cost, access, and administrative workload considerations. For example, medical centers will be allowed to participate if more than 50 percent of their community nursing home contracts require exceptions to the Medicaid plus 15 percent reimbursement rate. Other participation criteria include the inability to place more than 5 percent of patients who are considered appropriate for nursing home placement and a caseload that includes more than 50 percent of patients who need specialized care and require special negotiations before placement. In June 1995, VA changed its standard nursing home contract to provide for multiple reimbursement rates. These rates include the following categories of care: (1) reduced physical function, (2) basic, (3) heavy rehabilitation therapy, (4) special care, (5) clinically complex, (6) ventilator dependent, (7) human immunodeficiency virus/acquired immunodeficiency syndrome, and (8) Clinitron dependent. Rates are figured using the current Medicaid rate plus an amount to cover the use of additional supplies, services, and equipment associated with each category of care. Although these initiatives should improve VA's access to community nursing home beds, VA needs reliable information on the availability of community nursing home beds and the reasons for access problems in specific locations to make informed decisions about where adjustments to reimbursement rates are warranted. Without information on the reasons for access problems in specific locations, assertions of noncompetitive VA reimbursement rates could obscure medical center preferences for using VA nursing homes. Some of the information available is anecdotal and based on testimonial rather than quantitative evidence. For example, a 1993 VA Inspector General report on the EPPS pilots noted that two sites reported that the pilot rates were too high for their area, though the pilot sites had been selected because they had reported difficulty accessing community nursing home beds. The Inspector General noted that the higher reimbursement rates did not ensure placement of "heavy care" (costly) VA patients in exchange for the higher costs associated with the pilots. VA's access to state veterans homes is also limited. States establish admission policies, which vary from state to state. In some instances, admission criteria for state veterans homes are more restrictive than VA admission criteria. For example, some state homes require that veterans have service-connected disabilities or wartime military service. Other states allow admission of veterans' spouses and other nonveterans. Bed availability in state homes also helps determine VA's ability to use these facilities. For example, according to discussions we had with state nursing home admissions staff in fiscal year 1996, Massachusetts has a waiting list for skilled care bed admissions in its two state facilities; Colorado, however, has no waiting list for its four facilities and admits nonveterans to all four homes. VA and we have found differences in the quality of care provided by the various types of nursing homes. Through its monitoring efforts, VA works with homes to improve patient care. On the basis of our review of selected quality indicators, the homes we visited appeared to provide comprehensive and appropriate care to veterans. VA homes, however, generally had fewer quality-of-care issues than most of the community and state homes we saw. VA requires its medical centers to ensure that veterans receive quality care in any nursing facility in which they are placed. Specifically, on a monthly basis, VA medical centers must send an RN or social worker to visit veterans in community nursing homes to review their care and to provide a liaison between the community home and the VA medical center. An RN must visit patients at least every other month. Medical center staff also review state survey and certification data maintained for Medicare- and Medicaid-certified facilities. They also review Joint Commission on Accreditation of Healthcare Organizations (JCAHO) accreditations, when available, to assess community nursing homes' compliance with appropriate standards. In addition, VA medical centers conduct annual on-site evaluations of community facilities using a multidisciplinary team to review patient records, policy, and procedures and to check fire and safety provisions. VA annually inspects state veterans homes to certify their eligibility for per diem payments by meeting VA standards of care. VA inspections of state nursing homes are carried out by medical center staff and are similar to annual inspections of community nursing homes. If the medical center determines that care is inappropriate, it can suspend per diem payments for veterans placed in state homes. We visited 2 VA, 10 community, and 5 state veterans nursing homes, where we reviewed the care provided to 95 veterans. The patients were randomly selected for a representative sample at the VA and state veterans homes. We reviewed the total veteran population under VA contracts at each community home but did not review the care provided to nonveteran patients in these facilities. We used the 1995 HCFA Provider Certification Survey Procedures to assess the quality of care and the overall ability of the facility to meet patient care needs. Patient care in the two VA nursing homes we visited was comprehensive and generally met Medicare certification standards. One VA nursing home had achieved 100-percent participation in patient therapies. VA nursing homes are hospital based and therefore have greater access to rehabilitative and restorative services than other nursing homes. In addition, VA nursing homes were generally staffed by a higher number of RNs, gerontological and rehabilitation specialists, social workers, and physical therapists than community and state veterans homes, and all VA nursing homes are JCAHO accredited. Although care met quality standards, we found some quality-of-care issues at all 10 community nursing homes we visited. For example, we noted that veterans in some community homes were less likely to receive ongoing restorative therapies than in VA facilities. We also noted that community nursing homes used physical and chemical restraints more often than VA homes we visited. One facility was not certified for Medicare or Medicaid, and one rural facility had only recently qualified for Medicare certification by ensuring that at least one RN staffed the facility 8 hours every day. None of the community facilities we visited was JCAHO accredited. Although medical center staff did not always comply with monthly on-site monitoring requirements because of resource limitations, they generally visited community nursing home patients when problems were identified. At one location, medical center staff told us they were reluctant to criticize community nursing homes because bed availability was at a premium and they did not want to antagonize the homes. The staff at this medical center did perform monthly monitoring visits and sought to resolve patient care problems by educating facility staff and providing patient care consultations. According to our survey respondents, VA medical centers terminated 50 contracts with community nursing homes in fiscal year 1994 because of quality-of-care problems. No placements were made in an additional 67 contract facilities because of quality-of-care concerns during the same time frame. VA's study of EPPS also noted that some patients received insufficient medications and restorative or rehabilitative care in community nursing homes. The report cited one group of community nursing home providers who said distinct differences existed in the quality of care provided to private and Medicare patients compared with Medicaid and VA patients. Care provided in the state homes we visited generally met quality standards. One state home, however, had several quality-of-care issues. The home was not certified for Medicare or Medicaid or accredited by JCAHO. This home showed little evidence of planned daily activity and did little to protect the privacy of patients, whose care was provided in open wards without privacy curtains. We also observed heavy use of physical and chemical restraints at this facility. Although the VA medical center knew about this facility's problems and annual visits had detected long-standing problems, the medical center's infrequent attention to the facility's quality-of-care problems was not sufficient to effect corrective measures. The uneven distribution of nursing homes and differences in the extent to which VA reimbursement rates are competitive in local markets could reasonably lead to different responses among VA networks to meet the demand for cost-effective, high-quality nursing home services. However, without (1) accurate and complete information on nursing home costs, (2) better information on the availability of community nursing home beds, and (3) information on the competitiveness of VA reimbursement rates, VA has inadequate assurance that it is using the nursing home resources at its disposal to the best of its ability to serve veterans in need of such care. As VA implements the VISN structure, decisionmakers will need better cost- and care-based information on the nursing home services it provides or purchases. VA's implementation of multistate contracts and efforts to improve the competitiveness of its reimbursement rates should improve its access to community nursing home beds. VA's efforts to more accurately identify and report nursing home costs through DSS are incomplete. Also, VA needs better information on the availability of community nursing home beds and must identify locations where current rates are not competitive, especially in areas not covered by multistate contracts. As part of VA's ongoing efforts to improve nursing home resource management decisions, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to more accurately accumulate and report nursing home costs, assess the availability of community nursing home resources, and identify locations where current reimbursement rates are not competitive. On November 25, 1996, we met with the Assistant Chief Medical Director for Geriatrics and Extended Care and other VA officials to obtain their comments on a draft of this report. The VA officials stated that the report complements VA's efforts to review options for providing long-term care for veterans and concurred with our findings and recommendations. VA is currently rethinking its nursing home patient distribution goals for the three types of facilities and is also considering greater emphasis on alternatives to long-term care for veterans such as home and community health care, day care, and other noninstitutional care options. To this end, VA has established an Advisory Committee on the Future of VA Long-Term Care, which will make recommendations to VA's Under Secretary for Health on the scope and structure of VHA's long-term care services and the changes necessary to ensure that services for veterans are available and effective in future health care settings. Committee members will be selected on the basis of professional expertise in various components of long-term care and will represent constituencies such as veterans service organizations, nursing home corporations, and university-based academic communities. VA expects recommendations from the committee in 1-1/2 to 2 years. VA agreed that its Cost Distribution Report is inadequate, and although better information on costs and local resources is available from data collected in conjunction with the new multistate contracts, VA still expects that full implementation of DSS will improve data on costs and patient outcomes. In addition, VISN networks have been provided a new population-based, long-term care planning model that is being used to develop network business plans. VA noted that it has initiated efforts to improve collection of data on community nursing home patients to compare their characteristics (including case mix) with VA nursing home patients. A Patient Assessment Instrument, now used for VA nursing home patients, will be applied to community nursing home patients and is currently used for patients referred to multistate contract facilities. VA also offered several technical comments and clarifications on our draft report that we incorporated into the final report as appropriate. Copies of this report are being sent to the Secretary of Veterans Affairs, other congressional committees, and interested parties. Copies will be made available to others upon request. Please call me at (202) 512-7101 if you have any questions or need additional assistance. Other GAO contacts and staff acknowledgments to this report are listed in appendix II. Gina Guarascio, 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. 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Pursuant to a congressional request, GAO provided information on the Department of Veterans Affairs' (VA) nursing home programs, focusing on: (1) the distribution of veterans in VA, community, and state veterans nursing homes; (2) the costs to VA for VA, community, and state veterans nursing homes; (3) the factors affecting VA's use of community and state veterans nursing homes; and (4) whether VA, community, and state veterans homes provide comparable quality care. GAO found that: (1) the number of veterans receiving VA-financed or -provided nursing home care increased from 72,889 in 1985 to 79,373 in 1995, though the costs of these services increased from about $710 million to $1.6 billion in the same period; (2) among veterans currently receiving VA-financed or -provided nursing home care, 40 percent receive such care in VA nursing homes, 36 percent in state veterans nursing homes, and 24 percent in community nursing homes; (3) VA records for fiscal year 1995 indicate that VA's daily per patient cost was $213.17 for veterans in VA nursing homes, $118.12 for veterans in community nursing homes, and $35.37 for veterans in state veterans homes; (4) some of the cost differences are attributable to differing patient mix and staffing patterns among the facility types, but the precise cost differences cannot be determined because of weaknesses in VA's cost data; (5) several factors influence VA decisions on where to place nursing home patients; (6) VA's use of state veterans homes is limited by the number of such beds available and by some states' criteria for admitting veterans to these homes; (7) the VA nursing homes GAO visited appeared to provide more comprehensive care to veterans than most of the community and state veterans nursing homes GAO visited; (8) although the care provided in the community and state homes GAO visited generally met quality standards, GAO identified quality-of-care issues at both types of homes; and (9) although VA has initiated efforts to improve its data on the cost of providing and purchasing nursing home care, the availability of nursing home beds in local markets, and the adequacy of VA reimbursement rates to purchase quality nursing home care for veterans, better information is still needed for VA to make informed resource management decisions.
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Treatment options for individuals with ESRD include kidney transplants or maintenance dialysis. Kidney transplants are not a practical option on a wide scale, as suitable donated organs are scarce. Consequently, dialysis is the treatment used by most individuals with ESRD. Hemodialysis, the most common form of dialysis, is generally administered three times a week at facilities that provide these services. During hemodialysis, a machine pumps blood through an artificial kidney and returns the cleansed blood to the body. Other dialysis options include receiving hemodialysis at home and peritoneal dialysis. To have been eligible to receive the LVPA in 2011, a facility must have established that it met the CMS regulatory criteria that, during each of the 3 previous years, it (1) provided fewer than 4,000 total dialysis treatments and (2) had not opened, closed, or changed ownership. CMS guidance provided additional detail on the application of these criteria. To establish eligibility, a facility must provide an attestation statement to its designated Medicare contractor, which is responsible for verifying that the facility has met the eligibility criteria. Only after the facility has submitted its attestation and its designated Medicare contractor has verified that the facility meets the eligibility criteria will a facility begin to receive the LVPA for its Medicare-covered dialysis treatments provided to adult beneficiaries. CMS requires facilities to provide an attestation because some of the information the Medicare contractors need to assess a facility's eligibility--in particular, facilities' cost reports for the year preceding the payment year--may be unavailable to the Medicare contractors until several months after the payment year begins. In cases where the Medicare contractors could not make a final eligibility determination at the beginning of the payment year, they were to conditionally approve LVPA payments; then, once the necessary information becomes available, the Medicare contractors are required to reassess the facility's eligibility for the LVPA. If a Medicare contractor determines that a facility that received the LVPA was actually ineligible, the contractor is expected to recoup all LVPA payments made to that facility within 6 months of that determination. Many of the 326 facilities eligible for the 2011 LVPA were located near other facilities, indicating that they might not have been necessary for ensuring access to care. Certain facilities with relatively low volume that were not eligible for the LVPA had above-average costs and appeared to have been necessary for ensuring access to care. Moreover, the design of the LVPA provides facilities with an adverse incentive to restrict their service provision to avoid reaching the 4,000 treatment threshold. Many LVPA-eligible facilities in 2011 were located near other dialysis facilities, indicating that they might not have been necessary for ensuring access to care. While LVPA-eligible facilities were more isolated compared with all dialysis facilities (see fig. 1), nearly 30 percent of LVPA-eligible facilities were located within a mile of another facility, and more than 3 percent of LVPA-eligible facilities shared an address with another facility that was not eligible and was owned by the same company. In addition, more than half--approximately 54 percent--of LVPA-eligible facilities were 5 miles or less from another facility. These results indicate that the patients using many LVPA-eligible facilities may have had access to multiple facilities for receiving dialysis care, which suggests that the LVPA does not effectively target facilities that appear necessary for ensuring access to dialysis care. Many LVPA-eligible facilities were located near high-volume facilities, suggesting that these LVPA-eligible facilities may not have warranted a payment adjustment because they were located in areas with a population base sufficient to support high-volume facilities. Approximately 35 percent of the 326 LVPA-eligible facilities were located within 5 miles of a high-volume facility.94 percent were located in urban areas, compared with 51 percent of all LVPA-eligible facilities. Compared with all freestanding facilities in our cost analysis, freestanding LVPA-eligible facilities had substantially higher costs per dialysis treatment in 2011, but other freestanding facilities that provided a relatively low volume of treatments were ineligible for the LVPA, even though they were isolated and incurred above-average costs, because they exceeded the treatment threshold. The average cost per treatment for the 216 freestanding facilities that were LVPA-eligible was $272, compared with $235 for all freestanding facilities--a difference of approximately 16 percent.freestanding facilities that provided a relatively low volume of treatments, were isolated, and incurred above-average costs. For example, if the volume threshold was raised to 5,000 dialysis treatments, 203 additional freestanding facilities would have been eligible for the 2011 LVPA. Of these 203 facilities, 68 and 25 were located more than 15 miles and 25 miles, respectively, from another facility, indicating that these facilities likely were important for ensuring access to care. On average, costs per dialysis treatment for these two groups of isolated facilities exceeded the average for all freestanding facilities by approximately 9 percent each-- $21 and $22, respectively. However, the 2011 LVPA did not target other The design of the LVPA also raises concerns because it provides facilities with an adverse incentive to restrict their service provision to avoid reaching the 4,000 treatment threshold. Facilities that reach this threshold lose eligibility for the next 3 calendar years. For example, for a facility that provided 3,999 total treatments in 2010 and met all other eligibility criteria for the LVPA, providing an additional treatment would have caused the facility to lose eligibility for the LVPA for the next 3 calendar years, resulting in an estimated $390,000 in lost revenue from Medicare for 2011 through 2013. CMS has implemented an adjustment in another payment system that decreases as facility volume increases--an approach which, if applied to the LVPA, could diminish the incentive for providers to limit service provision by making the loss of potential revenue smaller for supplying additional services. In addition, such an adjustment--referred to as a tiered or phased-out adjustment--could more closely align the LVPA with the decline in cost per treatment that occurs as volume increases. For example, among freestanding facilities that met the other LVPA eligibility criteria, the average cost per treatment for facilities that would have qualified under a 3,000 treatment threshold was $290; the average cost per treatment for facilities that would have failed a 3,000 treatment threshold but qualified under a 4,000 treatment threshold was $263, and the average cost per treatment for facilities that would have failed a 4,000 treatment threshold but qualified under a 5,000 treatment threshold was $256. Under the adjustment, hospitals received increased payments per discharge if the hospital provided fewer than 1,600 discharges a year. The amount of the adjustment was as much as 25 percent for hospitals with fewer than 200 discharges and decreased linearly until it was phased out for hospitals with 1,600 or more discharges. Medicare overpaid an estimated $5.3 million for the LVPA to dialysis facilities that did not meet the eligibility requirements established by CMS and did not pay about $6.7 million to facilities eligible for the LVPA. The guidance that CMS issued for implementation of the regulatory requirements was sometimes unclear and not always available when needed, and the misunderstanding of LVPA eligibility likely was exacerbated because CMS conducted limited monitoring of the Medicare contractors' administration of LVPA payments. Medicare overpaid 83 dialysis facilities that were ineligible for the LVPA in 2011 by an estimated $5.3 million, which was nearly one-quarter of the approximately $22.7 million in LVPA payments made that year. (See fig. 2.) These facilities were ineligible because, on the basis of applicable data and methods specified by CMS in its guidance (and clarified through our interviews with CMS), they did not meet the regulatory requirements of having (1) provided under 4,000 dialysis treatments in each of the 3 years preceding the payment year and (2) not opened, closed, or had a change of ownership in the 3 years preceding the payment year. Medicare contractors are expected to recoup payments made in error within 6 months of detecting the error, but as of January 2013, CMS did not know whether any of these overpayments had been recouped. These overpayments were of two types: payments to dialysis facilities that were ineligible at the beginning of 2011 and payments to facilities that were potentially eligible given the data available at the beginning of 2011 but proved ineligible when all pertinent information became Most of these payments--about $4.8 million--were to available.73 facilities that were clearly ineligible at the beginning of the year because data available prior to 2011 showed that the facility did not meet one or more of the eligibility criteria. The remaining $0.5 million was paid to 10 facilities that met the eligibility criteria for 2008 and 2009, but when data on 2010 activity became available were shown not to have met the eligibility criteria for that year. In cases where Medicare contractors could not make a final eligibility determination at the beginning of the payment year, they were to conditionally approve LVPA payments, reassess eligibility when facilities' 2010 data became available, and, for facilities determined to be ineligible, recoup payments within 6 months of determining ineligibility. Furthermore, many eligible dialysis facilities did not receive any LVPA payments in 2011 and others received payments for only part of the year. These nonpayments amounted to about $6.7 million and affected 273 facilities. Seventy-nine eligible facilities did not receive payments for any treatments; these payments would have amounted to about $3.4 million. It is probable that these facilities did not claim the LVPA--that is, they did not attest to their eligibility, as required in regulations--although it is also possible that some attested to their eligibility and were incorrectly denied by their Medicare contractor. Another 194 facilities received some but not all payments for which they were eligible--in total accounting for another estimated $3.3 million in nonpayments. Thirty-two facilities did not start receiving LVPA payments until part way through the year, but then consistently received payments for all treatments for the remainder of the year. These are likely facilities that were late in attesting to their eligibility, resulting in LVPA nonpayments of about $0.9 million. For the remaining estimated $2.4 million in nonpayments to 162 facilities, the reason is less clear because there is no discernible pattern. For example, some facilities received payments for several months, did not receive payments for 1 or more subsequent months, and then started receiving payments again. Other facilities received payments for some but not all treatments within a given month for multiple months in a row. We cannot explain the cause of these payment inconsistencies, but the inconsistencies could suggest problems with the claims payment system. Many of the overpayments to ineligible facilities showed a similar lack of pattern, which also could suggest problems with the claims payment system. In 2011, CMS correctly paid the LVPA to 249 facilities for at least some of their treatments; these payments totaled an estimated $17.4 million. Fifty-five of these facilities received about $4.2 million in payments for all their treatments. CMS paid the remaining estimated $13.2 million to the 194 eligible facilities that received the LVPA for only some treatments. Although CMS provided opportunities for Medicare contractors and facilities to ask clarifying questions regarding its implementation of the requirements for LVPA eligibility, the guidance for implementing these requirements was sometimes unclear and not always available when needed. For example, the majority of the facilities that incorrectly received the LVPA--54 of 83--were hospital-affiliated facilities that failed the volume threshold. Eventually, CMS specified that Medicare contractors should combine the treatments of a hospital's affiliated dialysis facilities in determining whether the LVPA requirement for fewer than 4,000 treatments had been met. While this method of applying the regulatory requirement is logical because hospital-affiliated facilities do not file individual cost reports, CMS did not issue explicit guidance on this topic until July 2012. CMS guidance to Medicare contractors for determining whether a facility had met the LVPA requirement of not having opened, closed, or changed ownership during the 3 years preceding the payment year was neither clear nor timely. According to our interviews with CMS officials, the agency's intention was for contractors to verify that each of the facility's cost reports for the previous 3 years covered exactly 12 months; however the connection between the regulatory requirement and the duration of the cost-reporting periods has not been explicitly made in CMS guidance. (For example, an October 2010 internal technical direction letter stated that, in order to meet the LVPA eligibility verification requirements, Medicare contractors needed to confirm that fewer than 4,000 total treatments were provided for each of the 12-month cost-reporting periods--however, it was not clear which regulatory verification requirement(s) the sentence was implementing.) CMS officials explained that three cost-reporting periods of exactly 12 months (which need to be consecutive) are a time frame that would exhibit business practice patterns that demonstrate a facility is consistently low-volume and that, because cost reports correspond with the facility's fiscal year, using them provides a snapshot of a facility's financial ability to incur costs for furnishing renal dialysis. Furthermore, CMS officials noted that having three cost-reporting periods of exactly 12 months each was a reasonable method of assessing the regulatory requirement because, generally, if a facility opened, closed, or had a change in ownership (in which case the facility may receive a new provider number), this would cause a break in the cost-reporting period and thus lead a facility to have one or more cost reports that spanned fewer than 12 months. In July 2011, CMS issued public guidance clarifying that the relevant periods during which a facility had not opened, closed, or had a change in ownership were the three cost-reporting periods before the payment year and not the 3 calendar years before the payment year.helped clarify that the 12-month rule was sufficient for assessing that a facility had not opened, closed, or had a change in ownership, as of January 2013, no CMS guidance has been explicit on this topic, and no guidance has stated that each cost-reporting period must be exactly 12 months. Unclear and late guidance for determining whether a facility had opened, closed, or changed ownership led to misunderstanding about which facilities were eligible, and at least some of the misunderstanding persisted as of September 2012. For example, when we questioned a representative of a large dialysis organization in September 2012 about some of the organization's facilities that we found to have not received the 2011 LVPA despite being eligible, the representative still believed those facilities were ineligible because they had a change in ownership during the previous 3 calendar years. In fact, these facilities were still eligible for the 2011 LVPA because the change in ownership occurred after the end of the facilities' 2010 cost-reporting period and they therefore had 2008, 2009, and 2010 cost reports that each covered exactly 12 months. In addition, when we questioned the representative about some of the organization's facilities that we found to have incorrectly received the 2011 LVPA, the representative still believed those facilities met all the regulatory requirements and therefore had been eligible. However, because these facilities opened in December 2007 and complied with CMS's general requirement that cost reports not span less than a month, they had a 2008 cost report that spanned slightly more than 12 months. This made these facilities ineligible for the 2011 LVPA. When we shared this example with CMS, a CMS official stated that the agency had not considered the possibility that a facility could have a cost report spanning more than 12 months. Additionally, when we questioned a representative from a different large dialysis organization in September 2012 about some of that organization's facilities that we found to have incorrectly received the 2011 LVPA, the representative still believed that those facilities had been eligible because the changes in ownership for those facilities did not result in new provider numbers. However, these facilities were ineligible because the changes in ownership caused a break in the cost-reporting period and thus the facilities had at least one cost report that spanned fewer than 12 months. While CMS has continued to issue clarifying guidance and provide Medicare contractors and facilities with opportunities to ask clarifying questions, evidence shows that CMS's guidance for determining LVPA eligibility was not fully and correctly implemented. In particular, none of the estimated $5.3 million in 2011 overpayments had been recouped by June 2012, based on an analysis of claims, and CMS was not aware of any overpayments that had been recouped by January 2013. This suggests that many Medicare contractors either had not yet discovered the payments made in error or were not aware of their obligation to reassess facilities' eligibility once the cost report for the previous year became available and to recoup overpayments within 6 months of discovery. Another possible reason for overpayment or nonpayment of the LVPA is that some of the guidance was sent only to Medicare contractors and was not publicly available. Medicare contractors are responsible for ensuring that facilities receive any required information based on this guidance, and that function is particularly important for the LVPA because in order to receive the LVPA a facility must first attest to its eligibility, which it will do only if it believes it is eligible. We do not know the extent to which continued misunderstanding of LVPA eligibility stems from Medicare contractors' failure to share the relevant portions of this nonpublic guidance or from facilities' not understanding the guidance that they received. Much of the misunderstanding and resulting payment problems related to eligibility were exacerbated by CMS's limited monitoring of the Medicare contractors and its consequent limited knowledge about implementation of the LVPA. While CMS requested information about the 2011 LVPA from Medicare contractors in October 2011 and again in July 2012, as of January 2013, it had not yet verified whether the information it received was complete or in a usable form. In particular, CMS still did not know which facilities were eligible for the 2011 LVPA, which facilities had attested to being eligible for the adjustment, nor which facilities received the 2011 LVPA. CMS intended the LVPA to encourage small ESRD facilities to continue operating in areas where beneficiary access might be jeopardized if such facilities closed. However, as designed, the LVPA does not effectively achieve this goal because it does not target all relatively low-volume, high-cost facilities that are in areas where beneficiaries may lack other dialysis care options, and it targets some facilities that appeared unnecessary for ensuring access to dialysis, such as dialysis facilities located in close proximity to other facilities. In addition, facilities currently face a large loss in potential revenue if they reach the LVPA treatment threshold. This creates an adverse incentive for facilities to restrict their service provision to avoid reaching the treatment threshold. In addition to these concerns about more appropriately targeting the LVPA, we also found significant issues associated with its implementation, including frequent LVPA overpayments. These overpayments primarily stemmed from unclear and untimely CMS guidance and persisted because of CMS's insufficient monitoring of Medicare contractors. Without clear, timely guidance and stronger monitoring of Medicare contractors' implementation of the guidance, Medicare may continue to pay facilities that are not eligible for the LVPA and to not pay many facilities that are eligible. Although the amount of money involved was small--overpayments and nonpayments totaling about $12 million in 2011 for the $10.1 billion ESRD program--payment problems with the adjustment undermined its purpose, which is to encourage small ESRD facilities to continue operating in areas where beneficiary access might be jeopardized without them. To more effectively target facilities necessary for ensuring access to care, we recommend that the Administrator of CMS consider restricting the LVPA to low-volume facilities that are isolated. To reduce the incentive for facilities to restrict their service provision to avoid reaching the LVPA treatment threshold, we recommend that the Administrator of CMS consider revisions such as changing the LVPA to a tiered adjustment. To ensure that future LVPA payments are made only to eligible facilities and to rectify past overpayments, we recommend that the Administrator of CMS take the following four actions: require Medicare contractors to promptly recoup 2011 LVPA payments that were made in error; investigate any errors that contributed to eligible facilities not consistently receiving the 2011 LVPA and ensure that such errors are corrected; take steps to ensure that CMS regulations and guidance regarding the LVPA are clear, timely, and effectively disseminated to both dialysis facilities and Medicare contractors; and improve the timeliness and efficacy of CMS's monitoring regarding the extent to which Medicare contractors are determining LVPA eligibility correctly and promptly redetermining eligibility when all necessary data become available. We received written comments on a draft of this report from HHS, which are reprinted in appendix I. HHS agreed with our recommendations and stated it would explore refinements to the design of the LVPA and take actions to improve its implementation. HHS also provided technical comments, which we incorporated as appropriate. With regard to our recommendation that CMS consider restricting the LVPA to low-volume facilities that are isolated, HHS stated that CMS will explore potential refinements. HHS stated that other factors, in addition to geographic isolation, may contribute to an ESRD facility being low-volume and that the department had studied the costs of both rural and nonrural facilities and decided not to implement an adjustment on the basis of rural location. We did not analyze all the reasons facilities were low-volume, nor did we recommend a payment adjustment for rural facilities. However, we believe that providing increased payments to facilities in close proximity to one another may not be warranted. We also note that, while facilities certified on or after January 1, 2011, that apply for the LVPA must combine all of the treatments provided by facilities under common ownership within 25 miles to determine eligibility, this restriction does not ensure that only isolated facilities receive the LVPA. For example, two facilities not under common ownership could be located in close proximity and still receive the LVPA. In response to our recommendation to consider revisions such as changing the LVPA to a tiered adjustment, HHS stated that it would explore whether refinements to the LVPA are necessary. HHS stated that the incentive for facilities to limit dialysis services would exist regardless of where the decrease in payment occurred. We agree that such a change would not eliminate the incentive to limit dialysis services, but we believe it would reduce the incentive. HHS concurred with our recommendation about ensuring proper payments and rectifying past overpayments. HHS also listed specific actions it plans to take to implement the recommendation, including using multiple methods to communicate with Medicare contractors and ESRD facilities to deliver clear and timely guidance. We invited two organizations to provide oral comments on our draft report: the Kidney Care Council (KCC), which represents dialysis facility companies, and the National Renal Administrators Association (NRAA), which represents independent dialysis facilities. Representatives from these organizations expressed their appreciation for the opportunity to review the draft. Both KCC and NRAA noted that facilities within close proximity to another facility may still be necessary for ensuring access to dialysis care (for example, if the other facility is operating at capacity) or access to choice of dialysis modality (for example, if the other facility does not offer the same dialysis options). While these situations may occur, if CMS determines a single larger facility could provide appropriate services where two or more smaller facilities exist now, paying the LVPA to the existing smaller facilities may not be warranted. NRAA agreed with our finding that CMS guidance on LVPA eligibility was unclear and not transparent to facilities. Additionally, NRAA noted that CMS's guidance requiring that hospitals--but not large dialysis organizations--sum the treatments across all of their affiliated facilities when determining eligibility for the LVPA was inconsistent. We agree there is some inconsistency; however, it will be somewhat reduced starting in 2014 as CMS requires that facilities certified after January 1, 2011, sum their treatments across all facilities that are under common ownership and within 25 miles. NRAA also disagreed with the statement that hospital cost reports are the only source of information on total treatments provided by hospital-affiliated facilities. As we note in the report, CMS officials told us that cost reports are the only source of total treatments. Both KCC and NRAA requested more details on GAO's recommendations related to improving the design of the LVPA. Our recommendations--that CMS should (1) more effectively target facilities necessary for ensuring access to care by considering restricting the LVPA to low-volume facilities that are isolated and (2) reduce the incentive for facilities to restrict their service provision by considering revisions such as changing the LVPA to a tiered adjustment--outlined the factors CMS should consider in improving the LVPA. We did not specify details of the design because we believe CMS should have flexibility in how to more effectively target facilities necessary for ensuring access to care and reduce their incentive to restrict service provision. KCC urged GAO to recommend that CMS pay out LVPA payments that CMS failed to make. We believe facilities are best positioned to determine and pursue their own rights to appeal Medicare claims determinations. Technical comments from KCC and NRAA were incorporated in the draft as appropriate. We are sending copies of this report to the Secretary of Health and Human Services. The report will also be available at no charge on our website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. In addition to the individual named above, Phyllis Thorburn, Assistant Director; Todd D. Anderson; Alison Binkowski; William Black; George Bogart; Elizabeth T. Morrison; Brian O'Donnell; and Jennifer Whitworth made key contributions to this report.
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Medicare spent about $10.1 billion in 2011 on dialysis treatments and related items and services for about 365,000 beneficiaries with end-stage renal disease (ESRD). Most individuals with ESRD are eligible for Medicare. As required by the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA), CMS implemented the LVPA to compensate dialysis facilities that provided a low volume of dialysis treatments for the higher costs they incurred. MIPPA required GAO to study the LVPA; GAO examined (1) the extent to which the LVPA targeted low-volume, high-cost facilities that appeared necessary for ensuring access to care and (2) CMS's implementation of the LVPA, including the extent to which CMS paid the 2011 LVPA to facilities eligible to receive it. To do this work, GAO reviewed Medicare claims, facilities' annual reports of their costs, and data on dialysis facilities' location to identify and compare facilities that were eligible for the LVPA with those that received it. The low-volume payment adjustment (LVPA) did not effectively target low-volume facilities that had high costs and appeared necessary for ensuring access to care. Nearly 30 percent of LVPA-eligible facilities were located within 1 mile of another facility in 2011, and about 54 percent were within 5 miles, indicating these facilities might not have been necessary for ensuring access to care. Furthermore, in many cases, LVPA-eligible facilities were located near high-volume facilities. Among the freestanding facilities in GAO's analysis, LVPA-eligible facilities had substantially higher costs per dialysis treatment than the average facility ($272 compared with $235); however, so did other facilities that provided a relatively low volume of treatments (and were isolated) but were ineligible for the LVPA. The design of the LVPA gives facilities an adverse incentive to restrict service provision because facilities could lose a substantial amount of Medicare revenue over 3 years if they reach the treatment threshold. In another payment system, the Centers for Medicare & Medicaid Services (CMS) implemented a tiered adjustment that decreases as facility volume increases. Such an adjustment could diminish the incentive for dialysis facilities to limit service provision and also more closely align the LVPA with the decline in costs per treatment that occurs as volume increases. Medicare overpaid an estimated $5.3 million in 2011 to dialysis facilities that were ineligible for the LVPA and did not pay an estimated $6.7 million that same year to facilities that were eligible. The payment problems occurred primarily because the guidance issued by CMS on facility eligibility was sometimes not clear or timely and CMS's monitoring of the LVPA was limited. For example, the majority of the ineligible facilities that received the LVPA were hospital-affiliated facilities that failed the volume requirement. Although CMS gave the Medicare contractors guidance for determining how to count treatments when facilities are affiliated with hospitals, the agency did not issue that guidance until July 2012. CMS has conducted limited monitoring of the LVPA, which has left CMS with incomplete information about LVPA administration and payments. For example, CMS was unaware as of January 2013 whether its contractors had recouped erroneous 2011 LVPA payments. In addition, CMS had requested information from its contractors about the implementation of the 2011 LVPA, such as which facilities were eligible for or had received the LVPA, but had not yet verified whether the information it received was complete or in a usable form. Without complete information about the administration of this payment adjustment, CMS is not in a position to ensure that the LVPA is reaching low-volume facilities as intended or that erroneous payments to ineligible facilities are recouped. To more effectively target the LVPA and ensure LVPA payment accuracy, GAO recommends that the Administrator of CMS consider restricting payments to low-volume facilities that are isolated; consider changing the LVPA to a tiered adjustment; recoup 2011 LVPA payments that the Medicare contractors made in error; improve monitoring of those contractors; and improve the clarity and timeliness of guidance. The Department of Health and Human Services, which oversees CMS, agreed with GAO's recommendations.
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According to the Bureau, no accurate estimate exists of the total number of Americans living abroad. The Constitution and federal law give the Bureau discretion to decide whether to count American citizens living abroad. In prior censuses, the Bureau has generally included "federally affiliated" groups--members of the military and federal employees and their dependents--but has excluded private citizens residing abroad from all but the 1960 and 1970 Censuses. The 2000 Census, using administrative records, found 576,367 federally affiliated Americans residing overseas, including 226,363 military personnel, 30,576 civilian employees, and 319,428 dependents of both groups. In response to congressional direction and the concerns of various private organizations, the Census Bureau launched a research and evaluation program to assess the practicality of counting both private and federally affiliated U.S. citizens residing abroad. The key part of this effort, the enumeration, took place from February 2004 through July 2, 2004, in France, Kuwait, and Mexico. To promote the overseas census test the Bureau relied on third parties--American organizations and businesses in the three countries--to communicate to their members and/or customers that an overseas enumeration of Americans was taking place and to make available to U.S. citizens either the paper questionnaire or Web site address. Currently, the Bureau is processing and analyzing the overseas questionnaire data and plans to complete an evaluation of the test results in early 2005. The Bureau estimates that it will have spent approximately $7.8 million in fiscal years 2003 through 2005 to plan, conduct, and evaluate the 2004 test. The Bureau has requested additional funds for fiscal year 2005 to plan for further testing scheduled for 2006. The Bureau also plans to include overseas testing in the 2008 dress rehearsal if it were to receive the necessary funding. In May 2004 we reported on the design of the overseas enumeration test and concluded that because of various methodological limitations, the test results will only partially answer the Bureau's key research objectives concerning feasibility (as measured by such indicators as participation and number of valid returns), data quality, and cost. Further, we noted that the Bureau should not decide on its own whether or not to enumerate Americans overseas, and in fact would need congressional guidance on how to proceed. As shown in figure 1, the key decisions facing Congress in this regard include, in addition to the threshold question of whether American residing overseas should be counted, how the data should be used and whether to enumerate this population group as part of the decennial census. We also recommended that if further testing were to occur, that the Bureau resolve the shortcomings of the design of the 2004 test and better address the objectives of an overseas enumeration. As agreed with your offices, our objectives for this report were to assess (1) whether the Bureau implemented the test consistent with its design, and (2) the initial lessons learned from the test results and their implications for future overseas enumerations. To assess the first objective, we interviewed Bureau officials and compared the Bureau's test plans with what was actually done at the three test sites. We visited Paris, France, and Guadalajara, Mexico, to obtain the views of 12 private, civic, and other organizations on the implementation of the overseas census test, and/or to confirm at 36 organizations the availability of census material. In addition, to a more limited extent, we interviewed officials from third party organizations in Kuwait via the telephone or e-mail. We judgmentally selected these organizations because they had agreed to display census promotional materials and, in some cases, had also agreed to do one or more of the following activities: make available paper copies of the census questionnaire, publish information in a newsletter, post a link to a Web site, send outreach e-mail to members, and/or create speaking opportunities to discuss the census. The results of these visits are not necessarily representative of the larger universe of third-party organizations. To assess the implications of the test results on future overseas enumerations and the 2010 census, we obtained from Bureau officials preliminary results of the overseas census by test site and response mode as well as cost data. We also interviewed officials from the Bureau and third-party organizations to determine what lessons were learned from the test and the implications on future overseas enumeration efforts. The Bureau's design for the 2004 overseas enumeration test was generally implemented as planned and completed on schedule. The Bureau's design had four key components: the mode of response, the questionnaire designed specifically for Americans living overseas, three test sites, and an outreach and promotion program designed to communicate and educate Americans abroad that a test census was being conducted. Table 1 describes each of these components in greater detail. However, while the test was generally implemented as designed, our earlier report pointed out several methodological limitations with the design, such as not being able to calculate response rates because the universe of Americans is unknown or not being able to measure the quality of data because of the impracticality of developing an address list. As we discuss later in this report, it is these methodological limitations that impede the Bureau's ability to implement a successful overseas enumeration. Although the 2004 overseas enumeration test ended in early July 2004 and the Bureau has just begun evaluating the results, the response levels were poor, and very expensive to obtain on a per unit basis. The response level to the overseas enumeration suggests that the current approach to counting overseas Americans--a voluntary survey that relies heavily on marketing to get people to participate--by itself cannot secure a successful head count. Further, obtaining the additional resources needed to produce substantially better results may not be feasible, and still not yield data that are comparable in quality to the stateside enumeration. The 5,390 responses the Bureau received for this test were far below what the Bureau planned for when printing up materials and census forms. While the Bureau ordered 520,000 paper forms for three test sites, only 1,783 census forms were completed and returned. Of these, 35 were Spanish language forms that were made available in Mexico. The remaining 3,607 responses were completed via the Internet. Table 2 below shows the number of census questionnaires that the Bureau printed for each country and the number of responses they actually received in both the paper format and via the Internet. Because of the low response levels, in early April 2004, the Bureau reversed its decision to not use paid advertising and in May 2004 initiated a paid advertising campaign in France and Mexico. This included print and Internet ads in France and print and radio ads in Mexico. See figure 2 for examples of the ads used in the paid advertising campaign. A Bureau official told us the ad campaign for the 2004 overseas test cost about $206,000. This official said there were surplus funds available in the project budget to use for this purpose due to lower than expected processing and postage costs for the overseas test. While the Bureau saw some increase in the number of responses after the paid advertising campaign began, this official said the increase was slight. Not only were response levels low, they were extremely expensive to obtain on a unit basis--roughly $1,450 for each returned questionnaire, based on the $7.8 million the Bureau spent preparing for, implementing, and evaluating the 2004 overseas test. In contrast, the unit cost of the 2000 Census was about $56 per household. Although the two surveys are not directly comparable because the 2000 Census costs covered operations not used in the overseas test, the 2000 Census was still the most expensive census in our nation's history. The main reason for the high unit cost is the low return rate. However, significantly boosting participation levels may not be feasible. The Bureau's experience in the 2000 Census highlights the level of effort that was needed to raise public awareness about the census and get people to complete their forms. For the 2000 decennial, the Bureau spent $374 million on a comprehensive marketing, communications, and partnership effort. The campaign consisted of a five-part strategy conducted in three waves beginning in the fall of 1999 and continuing past Census Day (April 1, 2000). The effort helped secure a 72-percent return rate. Specific elements included television, radio, and other mass media advertising; promotions and special events; and a census-in-schools program. Thus, over a period of several months, the American public was on the receiving end of a steady drumbeat of advertising aimed at publicizing the census and motivating them to respond. The Bureau also filled 594 full-time partnership specialist positions. These individuals were responsible for mobilizing support for the census on a grassroots basis by working with governmental entities, private companies, and religious and social service groups, and other organizations. Replicating this level of effort on a worldwide basis would be impractical, and still would not produce a complete count. Indeed, even after the Bureau's aggressive marketing effort in 2000, it still had to follow-up with about 42 million households that did not return their census forms. Moreover, because there are no reliable figures on the number of Americans residing overseas, the Bureau would not have a good measure of the number of people that did not participate, or the overall quality of the data. The Bureau's experience in conducting the 2004 overseas test underscored the difficulties of administering a complex operation from thousands of miles away. Not surprisingly, as with any operation this complex, various challenges and unforeseen problems arose. While the Bureau was able to resolve them, its ability to do so should there be a full overseas enumeration as part of the 2010 Census, would be highly questionable as far more resources would be required. This was particularly evident in at least two areas: grappling with country-specific issues and overseeing the contractor responsible for raising public awareness of the census at the three test sites. The Bureau encountered a variety of implementation problems at each of the test sites. In some cases the problems were known in advance, in others, glitches developed at the last minute. Although such difficulties are to be expected given the magnitude of the Bureau's task, a key lesson learned from the test is that there would be no economy of scale in ramping up to a full enumeration of Americans abroad. In fact, just the opposite would be true. Because of the inevitability of country-specific problems, rather than conducting a single overseas count based on a standard set of rules and procedures (as is the case with the stateside census), the Bureau might end up administering what amounts to dozens of separate censuses--one for each of the countries it enumerates--each with its own set of procedures adapted to each country's unique requirements. The time and resources required to do this would likely be overwhelming and detract from the Bureau's stateside efforts. For example, during the overseas test, the Bureau found that French privacy laws restrict the collection of personal data such as race and ethnic information. However, these data are collected as part of the decennial census because they are key to implementing a number of civil rights laws such as the Voting Rights Act. Addressing France's privacy laws took a considerable amount of negotiation between the two countries, and was ultimately resolved after a formal agreement was developed. The Bureau issued and posted on its Web site an advisory that informed Americans living in France that it was not mandatory to respond to the questionnaire, the only recipient of the collected data is the Census Bureau, the data will be kept for one year, and the respondent has a right to access and correct the data collected. The Bureau was able to collect race and ethnic data--generally a prohibited practice without the respondents' permission--only after it received special approval from a French government agency. Initially, however, it looked as if the Bureau might have to redesign the census form if it wanted to use it in France. In Kuwait, delivery of the census materials was delayed by several weeks at the beginning of the test because they were accidentally addressed to the wrong contractor. Ultimately, the U.S. Embassy stepped-in to accept the boxes so that the enumeration could proceed. In Mexico, there was some initial confusion on the part of Mexican postal workers as to whether they could accept the postage-paid envelopes that the Bureau had provided to return the paper questionnaires for processing in the United States. Because of the small number of countries involved in the test, the Bureau was able to address the various problems it encountered. Still, the Bureau's experience indicates that it will be exceedingly difficult to identify and resolve in advance all the various laws, rules, societal factors, and a host of other potential glitches that could affect a full overseas enumeration. As noted previously, the Bureau hired a public relations firm to develop a communications strategy to inform and motivate respondents living in the test countries to complete the census. The firm's responsibilities included identifying private companies, religious institutions, service organizations, and other entities that have contact with Americans abroad and could thus help publicize the census test. Specific activities the organizations could perform included displaying promotional materials and paper versions of the census questionnaire, publishing information in a newsletter, and posting information on their Web sites. Although the public relations firm appeared to go to great lengths to enlist the participation of these various entities--soliciting the support of hundreds of organizations in the three countries--the test revealed the difficulties of adequately overseeing a contractor operating in multiple sites overseas. For example, the public relations firm's tracking system indicated that around 440 entities had agreed to perform one or more types of promotional activities. However, our on-site inspections of several of these organizations in Paris, France, and Guadalajara, Mexico, that had agreed to display the census materials and/or distribute the questionnaires, uncovered several glitches. Of the 36 organizations we visited that were supposed to be displaying promotional literature, we found the information was only available at 15. In those cases, as shown in figure 3, the materials were generally displayed in prominent locations, typically on a table with posters on a nearby wall. Five of these 15 organizations were also distributing the census questionnaire, but the forms were not readily accessible. However, at 21 sites we visited, we found various discrepancies between what the public relations firm indicated had occurred, and what actually took place. For example, while the firm's tracking system indicated that questionnaires would be available at a restaurant and an English-language bookstore in Guadalajara, none were available. In fact, the owner of the bookstore told us that no one from the Census Bureau or the public relations firm had contacted her about displaying materials for the overseas test. At the University of Guadalajara, although the tracking system indicated that an official had been contacted about, and agreed to help support the census test, that official told us no one had contacted him. As a result, when boxes of census materials were delivered to his school without any explanatory information, he did not know what to do with them, and had to telephone the U.S. Consulate in Guadalajara to figure out what they were for. Likewise, in Paris, we went to several locations where the tracking system indicated that census information would be available. None was. In fact, at some of these sites, not only was there no information about the census, but there was no indication that the organization we were looking for was at the address we had from the database. The results of the overseas test point to the difficulties of overseeing the contractor's performance. As census materials were made available at scores of locations across the three test countries, it would have been impractical for the Bureau to inspect each site. The difficulty of supervising contractors--and any field operation for that matter--would only be magnified in a global enumeration. The Bureau's experience in counting the nation's population for the 2000 and earlier censuses sheds light on some of the specific operations and other elements that together form the building blocks of a successful head count (see fig. 4). While performing these activities does not necessarily guarantee a cost- effective headcount, not performing them makes a quality count far less promising and puts the entire enterprise at risk. The current approach to counting overseas Americans lacks these building blocks, as most are infeasible to perform on an overseas population. Each is discussed in greater detail below. Mandatory participation: Under federal law, all persons residing in the United States regardless of citizenship status are required to respond to the decennial census. By contrast, the overseas enumeration test was conducted as a voluntary survey where participation was optional. The Bureau has found that response rates to mandatory surveys are higher than the response rates to voluntary surveys. This in turn yields more complete data and helps hold down costs. Early agreement on design: Both Congress and the Bureau need to agree on the fundamental design of an overseas census. Concurrence on the design helps ensure adequate planning, testing and funding levels. Conversely, the lack of an agreed-upon design raises the risk that basic design elements might change in the years ahead, while the opportunities to test those changes and integrate them with other operations will diminish. Under the Bureau's current plans, after the 2006 test, the Bureau would have just one more opportunity to test its prototype for an overseas enumeration--a dress rehearsal in 2008. Any design changes after 2008 would not be tested in a real-world environment. The design of the census is driven in large part by the purposes for which the data will be used. Currently, no decisions have been made on whether the overseas data will be used for purposes of congressional apportionment, redistricting, allocating federal funds, or other applications. Some applications, such as apportionment, would require precise population counts and a very rigorous design that parallels the stateside count. Other applications, however, could get by with less precision and thus, a less stringent approach. As we noted previously, Congress will need to decide whether or not to count overseas Americans, and how the results should be used. The basis for these determinations needs to be sound research on the cost, quality of data, and logistical feasibility of the range of options for counting this population group. Possibilities include counting Americans via a separate survey, administrative records such as passport and voter registration forms, and/or records maintained by other countries such as published census records and work permits. The Bureau's initial research has shown that each of these options has coverage, accuracy, and accessibility issues, and some might introduce systemic biases into the data. Far more extensive research would be needed to determine the feasibility of these or other potential approaches. Once Congress knows the tradeoffs of these various alternatives, it will be better positioned to provide the Bureau with the guidance it needs to go beyond research and conduct field tests of specific approaches. The Bureau can conduct the research, or it can contract it out. Indeed, the National Research Council of the National Academy of Sciences has conducted a number of studies on the decennial census, including a review of the 2000 Census and an examination of reengineering the 2010 Census. A complete and accurate address list: The cornerstone of a successful census is a quality address list. For the stateside census, the Bureau goes to great lengths to develop what is essentially an inventory of all known living quarters in the United States, including sending census workers to canvass every street in the nation to verify addresses. The Bureau uses this information to deliver questionnaires, follow up with nonrespondents, determine vacancies, and identify households the Bureau may have missed or counted more than once. Because it would be impractical to develop an accurate parallel address list for overseas Americans, these operations would be impossible and the quality of the data would suffer as a result. Ability to detect invalid returns: Ensuring the integrity of the census data requires the Bureau to have a mechanism to screen out invalid responses. Stateside, the Bureau does this by associating an identification number on the questionnaire to a specific address in the Bureau's address list, as well as by field verification. However, the Bureau's current approach to counting overseas Americans is unable to determine whether or not a respondent does in fact reside abroad. So long as a respondent provides certain pieces of information on the census questionnaire, it will be eligible for further processing. The Bureau is unable to confirm the point of origin for questionnaires completed on the Internet, and postmarks on a paper questionnaire only tell the location from which a form was mailed, not the place of residence of the respondent. The Bureau has acknowledged that ensuring such validity might be all but impossible for any reasonable level of effort and funding. Ability to follow up with non-respondents: Because participation in the decennial census is mandatory, the Bureau sends enumerators to those households that do not return their questionnaires. In cases where household members cannot be contacted or refuse to answer all or part of a census questionnaire, enumerators are to obtain data from neighbors, a building manager, or other nonhousehold member presumed to know about its residents. The Bureau also employs statistical techniques to impute data when it lacks complete information on a household. Thus, by the end of each decennial census, the Bureau has a fairly exhaustive count of everyone in the nation. As noted above, because the Bureau lacks an address list of overseas Americans, it is unable to follow up with nonrespondents or impute information on missing households. As a result, the Bureau will never be able to obtain a complete count of overseas Americans. Cost model for estimating needed resources: The Bureau uses a cost model and other baseline data to help it estimate the resources it needs to conduct the stateside census. Key assumptions such as response levels and workload are developed based on the Bureau's experience in counting people decade after decade. However, the Bureau has only a handful of data points with which to gauge the resources necessary for an overseas census, and the tests it plans on conducting will only be of limited value in modeling the costs of conducting a worldwide enumeration in 2010. The lack of baseline data could cause the Bureau to over- or underestimate the staffing, budget and other requirements of an overseas count. For example, this was evident during the 2004 overseas test when the Bureau estimated it would need around 100,000 Spanish- language questionnaires for the Mexican test site. As only 35 Spanish- language questionnaires were returned, it is now clear that the Bureau could have gotten by with printing far fewer questionnaires for Mexico. However, the dilemma for the Bureau is that its experience in the 2004 overseas test cannot be used to project the number of Spanish-language questionnaires it would need for Mexico or other Spanish-speaking countries in 2010. Similar problems would apply to efforts to enumerate other countries. Targeted and aggressive marketing campaign: The key to raising public awareness of the census is an intensive outreach and promotion campaign. As noted previously, the Bureau's marketing efforts for the 2000 Census were far-reaching, and consisted of more than 250 ads in 17 languages that were part of an effort to reach every household, including those in historically undercounted populations. Replicating this level of effort on a global scale would be both difficult and expensive, and the Bureau has no plans to do so. Field infrastructure to execute census and deal with problems: The Bureau had a vast network of 12 regional offices and 511 local census offices to implement various operations for the 2000 Census. This decentralized structure enabled the Bureau to carry out a number of activities to help ensure a more complete and accurate count, as well as deal with problems when they arose. Moreover, local census offices are an important source of intelligence on the various enumeration obstacles the Bureau faces on the ground. For example, during the 2000 Census, the Bureau called on them to identify hard-to-count population groups and other challenges, and to develop action plans to address them. The absence of a field infrastructure for an overseas census means that the Bureau would have to rely heavily on contractors to conduct the enumeration, and manage the entire enterprise from its headquarters in Suitland, Maryland. Ability to measure coverage and accuracy: Since 1980, the Bureau has measured the quality of the decennial census using statistical methods to estimate the magnitude of any errors. The Bureau reports these estimates by specific ethnic, racial, and other groups. For methodological reasons, similar estimates cannot be generated for an overseas census. As a result, the quality of the overseas count, and thus whether the numbers should be used for specific purposes, could not be accurately determined. The 2004 test of the feasibility of an overseas enumeration was an extremely valuable exercise in that it highlighted the numerous obstacles to a cost-effective count of Americans abroad as an integral part of the decennial census. Although more comprehensive results will not be available until the Bureau completes its evaluation of the test early next year, a key lesson learned is already clear: The current approach to counting this population group--a voluntary survey that largely relies on marketing to ensure a complete count--would be costly and yield poor results. The tools and resources the Bureau has on hand to enumerate overseas Americans are insufficient for overcoming the inherent obstacles to a complete count, and it is unlikely that any refinements to this basic design would produce substantially better results, and certainly not on a par suitable for purposes of congressional apportionment. What's more, the Bureau already faces the difficult task of carrying out a cost-effective stateside enumeration in 2010. Securing a successful count of Americans in Vienna, Virginia, is challenging enough; a complete count of Americans in Vienna, Austria--and in scores of other countries around the globe--would only add to the difficulties facing the Bureau as it looks toward the next national head count. As a result, we believe that any further tests or planning activities related to counting Americans overseas as part of the decennial census would be an imprudent use of the Bureau's limited resources. That said, to the extent that Congress desires better data on the number and characteristics of Americans abroad for various policy-making and other nonapportionment purposes that require less precision, such information does not necessarily need to be collected as part of the decennial census, and could, in fact, be acquired through a separate survey or other means. To help inform congressional decision making on this issue, including decisions on whether Americans should be counted and how the data should be used, it will be important for Congress to have the results of the Bureau's evaluation of the 2004 overseas census test. Equally important would be information on the cost, quality of data, and logistical feasibility of counting Americans abroad using alternatives to the decennial census. Once Congress knows the tradeoffs of these various alternatives, it would be better positioned to provide the Bureau with the direction it needs so that the Bureau could then develop and test an approach that meets congressional requirements at reasonable resource levels. Given the obstacles to a cost-effective count of overseas Americans as part of the decennial census and, more specifically, obtaining data that is of sufficient quality to be used for congressional apportionment, Congress may wish to consider eliminating funding for any additional research, planning, and development activities related to counting this population as part of the decennial headcount, including funding for tests planned in 2006 and 2008. However, funding for the evaluation of the 2004 test should continue as planned to help inform congressional decision making. Should Congress still desire better data on the number of overseas Americans, in lieu of the method tested in 2004, Congress might wish to consider authorizing and funding research on the feasibility of counting Americans abroad using alternatives to the decennial census. To facilitate congressional decision making, we recommend that the Secretary of Commerce ensure that the Bureau completes its evaluation of the 2004 overseas census test as planned. Further, to the extent that additional research is authorized and funded, the Bureau, in consultation with Congress, should explore the feasibility of counting overseas Americans using alternatives to the decennial census. Potential options include conducting a separate survey, examining how the design and archiving of various government agency administrative records might need to be refined to facilitate a more accurate count of overseas Americans, and exchanging data with other countries' statistical agencies and censuses, subject to applicable confidentiality and other provisions. Consideration should also be given to whether the Bureau should conduct this research on its own or whether it should be contracted out to the National Academy of Sciences. The Secretary of Commerce forwarded written comments from the U.S. Census Bureau on a draft of this report on August 5, 2004, which are reprinted in the appendix. The Bureau agreed with our conclusions and recommendations. Furthermore, the Bureau noted, "should Congress request and fund" further research on counting overseas Americans, it would be equipped to do that research itself. As agreed with your offices, unless you release its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time we will send copies to other interested congressional committees, the Secretary of Commerce, and the Director of the U.S. Census Bureau. Copies will be made available to others upon request. This report will also be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me on (202) 512-6806 or by e-mail at [email protected] or Robert Goldenkoff, Assistant Director, at (202) 512-2757 or [email protected]. Key contributors to this report were Ellen Grady, Lisa Pearson, and Timothy Wexler. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. 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The U.S. Census Bureau (Bureau) has typically counted overseas members of the military, federal civilian employees, and their dependents. However, it usually excluded private citizens residing abroad. In July 2004, the Bureau completed a test of the practicality of counting all overseas Americans. GAO was asked to assess (1) whether the Bureau implemented the test consistent with its design, and (2) the lessons learned from the test results. The Bureau generally implemented the overseas census test on schedule and consistent with its research design. Still, participation was poor, with just 5,390 questionnaires returned from the three test sites--France, Kuwait, and Mexico. Moreover, because of the low response levels, obtaining those questionnaires proved to be quite expensive--around $1,450 per response, which is far costlier on a unit basis than the 2000 Census. Although the two are not directly comparable because the 2000 Census included operations not used in the overseas test, the 2000 Census cost around $56 per household. Further, boosting the response rate globally might not be practical. On the domestic front, during the 2000 Census, the Bureau spent $374 million on a months-long publicity campaign that consisted of television and other advertising that helped yield a 72-percent return rate. Replicating this level of effort on a worldwide basis would be difficult, and still would not produce a complete count. Ensuring a smooth overseas count could also stretch the Bureau's resources. For example, at each test site the Bureau encountered various challenges that needed to be resolved such as French privacy laws. Moreover, managing a complex operation from thousands of miles away also proved difficult. The approach used to count the overseas population in the 2004 test--a voluntary survey that largely relies on marketing to secure a complete count, lacks the basic building blocks of a successful census. The Bureau has done some initial research on alternatives, but all require more extensive review. Given that the Bureau already faces the difficult task of securing a successful stateside count in 2010, having to simultaneously count Americans abroad would only add to the challenges facing the Bureau.
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The overall effectiveness of the Senate's computer controls is dependent on the controls implemented by (1) SCC, which operates the Senate mainframe computer, (2) system users, which include all Member offices and Senate Committees, and (3) the Office of Telecommunications, which maintains telecommunication equipment and networks that link system users to the SCC mainframe and to other users. In addition to processing financial systems, such as payroll and other disbursements, the SCC mainframe processes other important and confidential information, such as Senate personnel files, LEGIS--a text retrieval system for bills and other legislative information, and Capitol Police and other administrative files. System users operate about 260 local area networks (LANs) in the Washington, D.C., area and across the country that communicate with the mainframe and perform data processing functions for users. Overall, there are approximately 580 user accounts that allow access to one or more programs run by SCC. Our objective was to evaluate and test the general computer controls over the financial systems maintained and operated by the Senate Computer Center (SCC) that processed financial information for the Office of the Secretary of the Senate and the Office of the Sergeant at Arms and Doorkeeper. General computer controls, however, also affect the security and reliability of financial and nonfinancial operations processed by SCC for other Senate offices. Specifically, we evaluated controls intended to protect data, files, and programs from unauthorized access; prevent unauthorized changes to systems and applications software; provide segregation of duties among applications and systems programmers, computer operators, security administrators, and other data center personnel; ensure recovery of computer processing operations in case of a disaster or other unexpected interruption; and ensure adequate computer security administration. To evaluate these controls, we identified and reviewed SCC's information system general control policies and procedures. Through this review and discussions with SCC staff, including programming, operations, and security personnel, we determined how the general controls should work and the extent to which data center personnel considered them to be in place. We also reviewed the installation and implementation of SCC's systems and security software. Further, we tested and observed the operation of general controls over SCC information systems to determine whether they were in place, adequately designed, and operating effectively. Our tests included attempts to obtain access to sensitive data and programs, which were performed with the knowledge and cooperation of SCC officials. To assist in our evaluation and testing of general controls, we contracted with the public accounting firm of Deloitte & Touche LLP. We determined the scope of our contractor's audit work, monitored its progress, and reviewed the related work papers to ensure that the resulting findings were adequately supported. We performed our work at the Senate Computer Center in Washington, D.C., from April 1995 through July 1995 in accordance with generally accepted government auditing standards. During the course of our work, we met with SCC officials to discuss our work and they informed us of the steps they planned to take or had taken to address our findings. At the conclusion of our work, we provided a draft of this report to Senate officials who said that they concurred with our findings, conclusions, and recommendations. Two basic internal control objectives for any information system are to protect data from unauthorized changes and to prevent unauthorized disclosures of sensitive data. Without effective access controls, the reliability of a computer system's data cannot be maintained, sensitive data can be accessed and changed, and information can be inappropriately disclosed. SCC had computer security weaknesses that could result in unauthorized access to the system's data, files, and programs. These weaknesses included ineffective (1) implementation of SCC's access control software and (2) practices to authorize, monitor, and review user access. During the course of our work, SCC officials advised of actions they had taken or planned to take to address some of the weaknesses we identified. SCC has implemented CA-ACF2, a commercially available access control software package, to control its primary financial management system and certain batch processing. However, ACF2 was not implemented to control access to other mainframe programs, including parts of the payroll system, LEGIS, the Capitol Police system, and other administrative systems. While many programs have built-in security features, such features typically are not as comprehensive or stringent as those provided by ACF2. Common deficiencies in such programs include a lack of audit trails for user activity and few, if any, password management controls (for example, forced password changes and minimum character length passwords). By not implementing ACF2 over all its systems and programs, SCC has forfeited many of the control benefits provided by the software, and must maintain expertise in the security administration for each of these systems and programs. For example, at least one system not under ACF2 requires the use of a single shared password for access. Since all users share the same password, the system cannot provide an audit trail of a particular user's activity, thereby limiting user accountability. SCC officials advised us that they did not plan to implement ACF2 over other mainframe applications due to (1) indications that, for some programs, less rigorous security measures are preferred by user management to provide easier accessibility, (2) resource constraints, and (3) intentions to transition from the mainframe to a decentralized network environment. However, as the transition may not be completed for up to 5 years, we believe that it is important for SCC management to assess its ongoing risks of not implementing ACF2 completely and take appropriate actions. In addition, the implementation of ACF2 over the financial management system and batch processing is not fully effective. The technical options that SCC has implemented to control access to the information on its mainframe negate many of the control benefits that the software offers. For example, ACF2 was implemented to allow up to 20 security violations, such as attempts to access data for which the user is not authorized, to occur in a single job or session before it is canceled. Similarly, a user was permitted up to 500 invalid password attempts daily before ACF2 denied access. By allowing such a high number of violations and invalid password attempts to occur, SCC increased the risk of unauthorized access and improper use or disclosure of sensitive Senate data. SCC officials advised us that they have begun changes to these ACF2 control settings, such as reducing the limits on the number of security violations and invalid password attempts. Other password controls were weakened due to ineffective ACF2 implementation. While a user's identification (ID) typically follows a standard format that makes it easily deduced, passwords are used to authenticate the user and thus should be difficult to deduce, kept secret, and frequently changed. Most SCC users were only required to change their passwords every 180 days; some users were not required to change their passwords at all. In addition, SCC had not implemented a shorter password expiration period for users having special system or security privileges. Moreover, SCC's current security policies did not prevent users from reusing the same password indefinitely. The longer a user is allowed to use the same password, the greater the risk that an unauthorized user may discover and use another user's ID/password combination. SCC management advised us that it was reviewing password policies and had reduced the password change requirement to 90 days for some users and to 30 days for some special privileges and was investigating ways to restrict others. Organizations can reduce the risk that unauthorized changes or disclosures occur by (1) granting employees authority to read or modify only those programs and data that are necessary to perform their duties and (2) periodically reviewing this authority and modifying it to reflect changes in job responsibilities and terminations in employment. Having unused or unneeded user accounts increases the risk that an unauthorized user will discover and use such an account without prompt detection. In a sample of 38 SCC accounts, we found 3 assigned to individuals who had separated from Senate employment from 5 to 15 months earlier. We also found that 159, or over one quarter of the accounts, had not been used in more than 6 months. We noted that another 79 had never been used, of which 64 had existed for more than 120 days. Because initial passwords may be easily guessed, these inactive accounts present an increased risk that passwords will be compromised and unauthorized access allowed. We also identified 30 user IDs and passwords that were shared by staff in certain departments, even though these staff members have individual accounts. The use of shared IDs and passwords undermines the effectiveness of monitoring because individual accountability is lost and increases the risk of password compromise. In addition, SCC's implementation of ACF2 allowed for unnecessary access to sensitive data and programs. Both operations and programming personnel in SCC's Central Services Division had a level of access that was not necessary for performance of their regular job duties and could increase the risk of unauthorized disclosure or modification of sensitive data. For example, 11 applications programmers had the ability to change on-line payroll data, 11 could alter vendor information, and 2 could change financial data. Moreover, this level of access could not be monitored because no record, or log, of the access was created. We identified another area in which SCC could improve its access monitoring controls. Specifically, SCC did not implement session timeouts, which automatically log off a user's terminal after a specified period of inactivity, over all of its programs. Lack of session timeouts increases the risk of unauthorized access to unattended terminals. SCC management was reviewing its access authorization and monitoring procedures at the time of our review and had taken or planned to take several corrective actions. Specifically, SCC management indicated that the security administrator had begun to log and monitor user access to determine what programs and files are being used. This information will be used as a basis for removing access privileges where they are not used or needed. However, where unrestricted access is deemed necessary, management plans to log and monitor it. Also, SCC management advised us that inactive user IDs were being removed from the system. Finally, SCC management was reviewing shared user IDs and passwords and planned to reduce or eliminate them. In addition to access controls, a computer system typically has other important general controls to ensure the integrity and reliability of data. These general controls include policies, procedures, and control techniques to (1) prevent unauthorized changes to system software, (2) provide appropriate segregation of duties among computer personnel, and (3) ensure continuation of computer processing operations in case of an unexpected interruption. SCC had weaknesses in the general controls over each of these areas, although its management had made or planned to make improvements in several areas. The integrity of an information system depends upon management's clear understanding and documentation of the system. Formal processes for developing and maintaining software are important tools to assist management in ensuring that all changes to software meet user specifications, are appropriately reviewed and authorized, and include adequate security measures. SCC did not have a formal change control process to document management's authorization and approval of routine and emergency changes to systems software. Change control procedures for the major financial programs have not been formalized to ensure that only authorized changes are made to programs and data. Inadequate management of system software changes and maintenance, including the lack of documentation, also increased the risk that back-up and recovery procedures could not be effectively performed. Also, we found instances of (1) the unintended creation of access paths to computer resources and (2) situations in which SCC staff were unsure of the purpose of undocumented systems software functions. Both of these weaknesses increased the risk of security or reliability breaches. For example, the operating system contained the names of five programs that no longer existed, introducing the risk that an unauthorized program could be run under one of those program names to gain unauthorized access to programs and data files. SCC officials were reviewing software change and maintenance procedures and planned to formalize them. Also, SCC management advised us that unused program names have been eliminated. One fundamental technique for safeguarding programs and data is the appropriate segregation of duties and responsibilities of computer personnel to reduce the risk that errors or fraud will go undetected. At SCC, we found inadequate segregation of duties, particularly in the granting of powerful security privileges. SCC has explicitly assigned two systems programmers to assist in the security administration of the access control software. Under normal circumstances, back-up security staff should report to the security administrator and have no programming, operations, or librarian duties. Because these individuals have both systems and security administrator privileges associated with their user accounts, they can eliminate any audit trail of their activity in the system. SCC officials indicated that they were reviewing this issue and considering several steps to mitigate the risks of assigning dual responsibilities. In addition, SCC has assigned powerful ACF2 security functions to many user accounts for which these privileges represent a significant security exposure. For example, 49 accounts could bypass all ACF2 controls (including the creation of audit trails, known as logging), allowing the user full and virtually undetectable access to all files, programs, and other system resources. This level of authority should generally be limited to emergency IDs, which are activated with management approval on a temporary, as-needed basis to handle problems or emergencies. SCC officials advised us that they are assessing the granting of full access to such a large number of individuals and have begun to reduce or eliminate such access. In the interim, to mitigate the risks associated with unlogged access to sensitive files, they have changed their procedures to ensure that all updates to order entry and payroll files are logged. Further, controls over security administration could be improved if the data security administrator reported directly to the SCC Director to provide adequate authority and independence in security matters. Currently, the data security administrator reports to the assistant director of the Educational Services and Support Division. The data security administrator, therefore, had customer service responsibilities, which may not be compatible with the duties associated with systems security. SCC management was considering the role and organizational placement of the data security administrator at the conclusion of our work. An agency must ensure that it is adequately prepared to cope with a loss of operational capability due to an earthquake, fire, accident, sabotage, or any other operational disruption. A detailed, current, and tested disaster recovery plan is essential to ensure that the SCC information system can promptly restore operations and data, such as payroll processing and records, in the event of a disaster. Prior to its move to its current location in 1992, SCC had an arrangement with the Library of Congress to provide back-up operations on its mainframe in the event of an emergency. However, the two mainframes are no longer compatible, so the Library of Congress back-up site cannot be used. SCC has developed a back-up capability on its mainframe in the event a portion of the machine goes down. However, in the event that the entire SCC was incapacitated, back-up processing would not be readily available. SCC has advised us that the Sergeant at Arms has since contracted with a commercial vendor to provide off-site back-up processing facilities in the event of an emergency. Further, SCC management has advised us that it has begun to develop a disaster recovery plan. Once developed, it will be important that SCC implement and periodically test the plan at the back-up facility, identifying the objectives and expected results for use in evaluating test results. The Senate's lack of a comprehensive strategic plan for computer security administration contributed to the general control weaknesses in SCC operations. Such a plan would consider all Senate computer resources, and include SCC, the Office of Telecommunications, and users in a comprehensive policy for security awareness and administration. Development and implementation of a comprehensive strategic plan will become more important as SCC and its customers continue moving from an environment in which all major applications are processed on a mainframe to a decentralized network environment distributed throughout the Senate. In a distributed processing environment, an integrated security plan is crucial for coordinating control over multiple locations, numerous hardware and software installations, and numerous paths of communication. For example, given the large number of possible access sites throughout the Senate, external access is a significant area of exposure and should be considered in any overall security plan. Without a comprehensive strategy, duplication of some controls and omission of others are likely to occur, adversely affecting both efficiency and effectiveness. As part of our audits of receipts and disbursements, we evaluated assertions made by the Secretary of the Senate and the Sergeant at Arms and Doorkeeper that internal controls in place on September 30, 1994, were effective in safeguarding assets from material loss, assuring material compliance with relevant laws and regulations, and assuring that there were no material misstatements in the financial statements. We considered the effect of general computer control weaknesses and determined that other management controls mitigated their effect on the statements of disbursements, receipts, and financing sources for the two audited entities. Both of these offices use SCC resources to process financial information that is essential to their operations. The Senate Disbursing Office, a part of the Office of the Secretary, uses SCC to process payroll and personnel information and to maintain vendor information. The Senate Disbursing Office maintains its own accounting system, which is used to process other disbursements and report all Senate financial transactions. The Sergeant at Arms and Doorkeeper uses SCC to process its accounting and equipment inventory systems. The Senate Disbursing Office performs various control procedures to ensure that data are properly authorized and entered into the system, including comparison of system reports with supporting documents at various stages of processing. Also, the Senate Disbursing Office distributes monthly reports to the Secretary of the Senate and the Sergeant at Arms and Doorkeeper that list payroll and other disbursements made on their behalf. The offices then review the monthly reports for accuracy. Both the Secretary of the Senate and the Sergeant at Arms and Doorkeeper reconcile the nonpayroll information to their own independent records to ensure that disbursements are consistent with the approved requests for payment that they submitted. Any differences discovered by reviews or reconciliations are discussed with the Senate Disbursing Office and resolved. Finally, the Secretary of the Senate publishes a semiannual public report that summarizes payroll information by employee and details the individual disbursements of the entire Senate. The Senate's general computer control weaknesses could result in serious breaches in the security of its sensitive data and programs, such as those related to payroll and personnel. A comprehensive strategic plan that integrates and controls access and processing for all Senate files, programs, and data is crucial to ensuring that Senate computer resources are adequately safeguarded. As the Senate moves to a distributed processing environment, development and implementation of a comprehensive computer security plan will become even more important. To correct the existing weaknesses at the Senate Computer Center, we recommend that you direct the Sergeant at Arms and Doorkeeper to take the following actions. Develop and implement policies and procedures to limit access for the system's users to only those computer programs and data needed to perform their duties. Access controls should be improved by (1) effectively utilizing SCC's access control software, including assessing ongoing risks of incomplete implementation and taking appropriate control measures, (2) strengthening procedures to authorize, monitor, and review user access, and (3) implementing session timeout procedures. Develop and implement policies and procedures for controlling software changes, including requiring documentation for the purpose of the change, management review and approval, and independent testing. Provide for appropriate segregation of computer duties, including upgrading the position of data security administrator to allow for appropriate independence and authority. Develop, implement, and test a disaster recovery plan for all critical SCC operations. In addition, to improve Senatewide computer security, we recommend that you direct that the Senate develop and implement a comprehensive strategic plan that integrates and controls access and processing for all Senate files, programs, and data. We are sending copies of this report to the Sergeant at Arms and Doorkeeper of the U.S. Senate and to the Secretary of the Senate. Copies will be made available to others upon request. Please contact me at (202) 512-9489 if you or your staffs have any questions. Major contributors to this report are listed in appendix I. Shannon Cross Robert Dacey Francine Delvecchio Sharon Kittrell Crawford Thompson The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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Pursuant to a congressional request, GAO evaluated and tested the general computer controls that affect the overall security and effectiveness of the Senate Computer Center's (SCC) financial systems, focusing on whether those controls: (1) protect data, files, and programs from unauthorized access; (2) prevent unauthorized changes to systems and applications software; (3) provide segregation of duties among computer, security, and other SCC personnel; (4) ensure recovery of computer processing operations in case of unexpected interruption; and (5) ensure adequate computer security administration. GAO found that: (1) SCC general computer controls do not adequately protect sensitive data files and computer programs from unauthorized disclosure and modification; (2) SCC has not fully implemented its access control software to control access to other mainframe programs due to a preference for easier access, resource constraints, the planned transition to decentralized networks, conflicting technical options, and poor access monitoring capabilities; (3) SCC lacks formal software change control and documentation procedures; (4) SCC has not adequately segregated computer duties, particularly regarding security privileges; (5) although SCC is developing off-site disaster recovery and contingency capabilities, the Senate could be exposed to significant security risk as it moves toward a decentralized network environment because it does not have a comprehensive strategic plan for its computer resources; and (6) the two Senate offices responsible for Senate receipts and disbursements supplement SCC general computer management controls to ensure data integrity and authorization when reconciling disbursement information with independent records.
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Influenza is more severe than some viral respiratory infections, such as the common cold. During an annual influenza season, most people who contract influenza recover completely in 1 to 2 weeks, but some develop serious and potentially life-threatening medical complications, such as pneumonia. People aged 65 years and older, people of any age with chronic medical conditions, children younger than 2 years, and pregnant women are generally more likely than others to develop severe complications from influenza. In an average year in the United States, more than 36,000 individuals die and more than 200,000 are hospitalized from influenza and related complications. Pandemic influenza differs from annual influenza in several ways. According to the World Health Organization, pandemic influenza spreads to all parts of the world very quickly, usually in less than a year, and can sicken more than a quarter of the global population, including young, healthy individuals. Although health experts cannot predict with certainty which strain of influenza virus will be involved in the next pandemic, they warn that the avian influenza virus identified in the human cases in Asia, known as H5N1, could lead to a pandemic if it acquires the genetic ability, so far absent, to spread quickly from person to person. Vaccination is the primary method for preventing influenza and its complications. Produced in a complex process that involves growing viruses in millions of fertilized chicken eggs, influenza vaccine is administered each year to protect against particular influenza strains expected to be prevalent that year. Experience has shown that vaccine production generally takes 6 or more months after a virus strain has been identified; vaccines for certain influenza strains have been difficult to mass-produce. After vaccination for the annual influenza season, it takes about 2 weeks for the body to produce the antibodies that protect against infection. According to CDC recommendations, the optimal time for annual vaccination is October through November. Because the annual influenza season typically does not peak until January or February, however, in most years vaccination in December or later can still be beneficial. At present, two vaccine types are recommended for protection against influenza in the United States: an inactivated virus vaccine injected into muscle and a live virus vaccine administered as a nasal spray. The injectable vaccine--which represents the large majority of influenza vaccine administered in this country--can be used to immunize both healthy individuals and individuals at highest risk for severe complications, including those with chronic illness and those aged 65 years and older. The nasal spray vaccine, in contrast, is currently approved for use only among healthy individuals aged 5 to 49 years who are not pregnant. For the 2003-04 influenza season, two manufacturers--one with production facilities in the United States (sanofi pasteur) and one with production facilities in the United Kingdom (Chiron)--produced about 83 million doses of injectable vaccine, which represented about 96 percent of the U.S. vaccine supply. A third U.S. manufacturer (MedImmune) produced the nasal spray vaccine. For the 2004-05 influenza season, CDC and its Advisory Committee on Immunization Practices (ACIP) initially recommended vaccination for about 188 million people in designated priority groups, including roughly 85 million people at high risk for severe complications. On October 5, 2004, however, Chiron announced that it could not provide its expected production of 46-48 million doses--about half the expected U.S. influenza vaccine supply. Although vaccination is the primary strategy for protecting individuals who are at greatest risk of severe complications and death from influenza, antiviral drugs can also help to treat infection. If taken within 2 days of a person's becoming ill, these drugs can ease symptoms and reduce contagion. In the event of a pandemic, such drugs could lower the number of deaths until a pandemic influenza vaccine became available. Four antiviral drugs have been approved by the Food and Drug Administration (FDA) for treatment of influenza: amantadine, rimantadine, oseltamivir, and zanamivir. HHS has primary responsibility for coordinating the nation's response to public health emergencies. Within HHS, CDC is one of the agencies that protect the nation's health and safety. CDC's activities include efforts to prevent and control diseases and to respond to public health emergencies. CDC and ACIP recommend which population groups should be targeted for vaccination each year and, when vaccine supply allows, recommend that any person who wishes to decrease his or her risk of influenza be vaccinated. In addition, the National Vaccine Program Office is responsible for coordinating and ensuring collaboration among the many federal agencies involved in vaccine and immunization activities; the office also issued a draft national pandemic influenza preparedness plan in August 2004. Preparing for and responding to an influenza pandemic differ in several respects from preparing for and responding to an annual influenza season. For example, past influenza pandemics have affected healthy young adults who are not typically at high risk for severe influenza-related complications, so the groups given priority for early vaccination may differ from those given priority in an annual influenza season. In addition, according to CDC, a vaccine probably would not be available in the early stages of a pandemic. Shortages of vaccine would therefore be likely during a pandemic, potentially creating a situation more challenging than a shortage of vaccine for an annual influenza season. One lesson learned from the 2004-05 season that is relevant to a future vaccine shortage in either an annual influenza season or a pandemic is the importance of planning before a shortage occurs. At the time the influenza vaccine shortage became apparent, the nation lacked a contingency plan specifically designed to respond to a severe vaccine shortage. The absence of such a plan led to delays and uncertainty on the part of many state and local entities on how best to ensure access to vaccine during the shortage by individuals at high risk of severe complications and others in priority groups. Faced with the unanticipated shortfall, CDC redefined the priority groups it had recommended for vaccination and asked sanofi pasteur, the remaining manufacturer of injectable vaccine, to suspend distribution until the agency completed its assessment of the shortage's extent and developed a plan to distribute the manufacturer's remaining vaccine to providers serving individuals in the priority groups. Developing and implementing this distribution plan took time and led to delays in response and some confusion at state and local levels. Our work showed that several areas of planning are particularly important for enhancing preparedness before a similar situation occurs in the future, including defining the responsibilities of federal, state, and local officials; using emergency preparedness plans and emergency health directives; and facilitating the distribution and administration of vaccine. Clearly defining responsibilities of federal, state, and local officials can minimize confusion. During the 2004-05 vaccine shortage, even though CDC worked with states and localities to coordinate roles and responsibilities, problems occurred. For example, CDC worked with national professional associations to survey long-term-care providers throughout the country to determine if seniors had adequate access to vaccine. Maine and other states, however, also surveyed their long-term- care providers to make the same determination. This duplication of effort expended additional resources, burdened some long-term-care providers in the states, and created confusion. Emergency preparedness plans help coordinate local response. State and local health officials in several locations we visited reported that using existing emergency plans or incident command centers (the organizational systems set up specifically to handle the response to emergency situations) helped coordinate effective local responses to the vaccine shortage. For example, public health officials from Seattle-King County said that using the county's incident command system played a vital role in coordinating an effective and timely local response and in communicating a clear message to the public and providers. In addition, according to public health officials, emergency public health directives helped ensure access to vaccine by supporting providers in enforcing the CDC recommendations and in helping to prevent price gouging in certain states. Partnerships between the public and private sectors can facilitate distribution and administration of vaccine. In San Diego County, California, for example, local health officials worked with a coalition of partners in public health, private businesses, and nonprofit groups throughout the county. Other mechanisms facilitated administering the limited supply of influenza vaccine to those in high-risk or other priority groups. In Stearns County, Minnesota, for example, public health officials worked with private providers to implement a system of vaccination by appointment. Rather than standing in long lines for vaccination, individuals with appointments went to a clinic during a given time slot. Although an influenza pandemic may differ in some ways from an annual influenza season, experience during the 2004-05 shortage illustrated the importance of having contingency plans in place ahead of time to prevent delays when timing is critical. Some health officials indicated that, as a result of the experience with the influenza vaccine shortage, they were revising state and local preparedness plans or modifying command center protocols to prepare for future emergencies. For example, experiences during the 2004-05 influenza season led Maine state officials to recognize the need to speed completion of their pandemic influenza preparedness plan. Over the past 5 years, we have reported on the importance of planning to address critical issues such as how vaccine will be purchased and distributed; how population groups will be given priority for vaccination; and how federal resources should be deployed before the nation faces a pandemic. We have also urged HHS to complete its pandemic preparedness and response plan, which the department released in draft form in August 2004. This draft plan described options for vaccine purchase and distribution and provided planning guidance to state and local health departments. As we testified earlier, however, the draft plan lacked clear guidance on potential priority groups for vaccination in a pandemic, and key questions remained about the federal role in purchasing and distributing vaccine. The experience in 2004-05 also highlighted the importance of finalizing such planning details. On November 2, 2005, HHS released its pandemic influenza plan. We did not, however, have an opportunity to review the plan before issuing this statement to determine whether the plan addresses these critical issues. A second lesson from the experience of the 2004-05 vaccine shortage that is relevant to future vaccine shortages in either an annual influenza season or a pandemic is the importance of streamlined mechanisms to make vaccine available in an expedited manner. For example, HHS began efforts to purchase foreign vaccine that was licensed for use in other countries but not the United States shortly after learning in October 2004 that Chiron would not supply any vaccine. The purchase, however, took several months to complete, and so vaccine was not available to meet the fall 2004 demand; by the end of the season, this vaccine had not been used. In addition, recipients of this foreign vaccine could have been required to sign a consent form and follow up with a health care worker after vaccination--steps that, according to health officials we interviewed in several states, would be too cumbersome to administer. Some states' experience during the 2004-05 vaccine shortage also highlighted the importance of mechanisms to transfer available vaccine quickly and easily from one state to another; the lack of mechanisms to do so delayed redistribution to some states. During the 2004-05 shortage, some state health officials reported problems with their ability to purchase vaccine, both in paying for vaccine and in administering the transfer process. Minnesota, for example, tried to sell its available vaccine to other states seeking additional vaccine for their priority populations. According to federal and state health officials, however, certain states lacked the funding or flexibility under state law to purchase the vaccine when Minnesota offered it. As we have previously testified, establishing the funding sources, authority, or processes for quick public-sector purchases may be needed as part of pandemic preparedness. Recognizing the need for mechanisms to make vaccine available in a timely manner in the event of a pandemic, HHS has taken some action to address the fragility of the current influenza vaccine market. In its budget request for fiscal year 2006, CDC requested $30 million to enter into guaranteed-purchase contracts with vaccine manufacturers to help ensure vaccine supply. According to the agency, maintaining an abundant supply of annual influenza vaccine is critically important for improving the nation's preparedness for an influenza pandemic. HHS is also taking steps toward developing a supply of vaccine to protect against avian influenza strains that could be involved in a pandemic. Experience during the 2004-05 shortage also illustrated the critical role communication plays when demand for vaccine exceeds supply and information about future vaccine availability is uncertain, as could happen in a future annual influenza season or a pandemic. During the 2004-05 shortage, CDC communicated regularly through a variety of media as the situation evolved. State and local officials, however, identified several communication lessons for future seasons or if an influenza pandemic occurred: Consistency among federal, state, and local communications is critical for averting confusion. State health officials reported several cases where inconsistent messages created confusion. Health officials in California, for example, reported that local radio stations in the state were running two public service announcements simultaneously--one from CDC advising those aged 65 years and older to be vaccinated, and one from the state advising those aged 50 years and older to be vaccinated. Disseminating clear, updated information is especially important when responding to changing circumstances. Beginning in October 2004, CDC asked individuals who were not in a high-risk group or another priority group to forgo or defer vaccination; this message, however, did not include instructions to check back with their providers later in the season, when more vaccine had become available. According to CDC, an estimated 17.5 million individuals specifically deferred vaccination to save vaccine for those in priority groups; local health officials said that many did not return when vaccine became available. Using diverse media helps reach diverse audiences. During the 2004-05 influenza season, public health officials emphasized the value of a variety of communication methods--such as telephone hotlines, Web sites, and bilingual radio advertisements--to reach as many individuals as possible and to increase the effectiveness of local efforts to raise vaccination rates. In Seattle-King County, Washington, for example, health department officials reported that a telephone hotline was important because some seniors did not have Internet access. Public health officials in Miami-Dade County, Florida, said that bilingual radio advertisements promoting influenza vaccine for those in priority groups helped increase the effectiveness of local efforts to raise vaccination rates. Education can alert providers and the public to prevention alternatives. In the 2004-05 shortage, some of the nasal spray vaccine for healthy individuals went unused, in part because of fears that the vaccine was too new and untested or that the live virus in the nasal spray could be transmitted to others. Further, public health officials we interviewed said that education about all available forms of prevention, including the use of antiviral medications and good hygiene practices, can help reduce the spread of influenza. Experience during the 2004-05 influenza vaccine shortage highlights the need to prepare the nation for handling future shortages in either an annual influenza season or an influenza pandemic. In particular, that season's shortage emphasized the vital need for early planning, mechanisms to make vaccine available, and effective communication to ensure available vaccine is targeted to those who need it most. As our work over the past 5 years has noted, it is important for federal, state, and local governments to develop and communicate plans regarding critical issues--such as how vaccine will be purchased and distributed, which population groups are likely to have priority for vaccination, and what communication strategies are most effective--before we face another shortage of annual influenza vaccine or, worse, an influenza pandemic. For further information about this statement, please contact Marcia Crosse at (202) 512-7119 or [email protected]. Kim Yamane, Assistant Director; George Bogart; Ellen W. Chu; Nicholas Larson; Jennifer Major; and Terry Saiki made key contributions to this statement. Influenza Vaccine: Shortages in 2004-05 Season Underscore Need for Better Preparation. GAO-05-984. Washington, D.C.: September 30, 2005. Influenza Pandemic: Challenges in Preparedness and Response. GAO-05- 863T. Washington, D.C.: June 30, 2005. Influenza Pandemic: Challenges Remain in Preparedness. GAO-05-760T. Washington, D.C.: May 26, 2005. Flu Vaccine: Recent Supply Shortages Underscore Ongoing Challenges. GAO-05-177T. Washington, D.C.: November 18, 2004. Infectious Disease Preparedness: Federal Challenges in Responding to Influenza Outbreaks. GAO-04-1100T. Washington, D.C.: September 28, 2004. Public Health Preparedness: Response Capacity Improving, but Much Remains to Be Accomplished. GAO-04-458T. Washington, D.C.: February 12, 2004. Flu Vaccine: Steps Are Needed to Better Prepare for Possible Future Shortages. GAO-01-786T. Washington, D.C.: May 30, 2001. Flu Vaccine: Supply Problems Heighten Need to Ensure Access for High- Risk People. GAO-01-624. Washington, D.C.: May 15, 2001. Influenza Pandemic: Plan Needed for Federal and State Response. GAO- 01-4. Washington, D.C.: October 27, 2000. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Concern has been rising about the nation's preparedness to respond to vaccine shortages that could occur in future annual influenza seasons or during an influenza pandemic--a global influenza outbreak. Although the timing or extent of a future influenza pandemic cannot be predicted, studies suggest that its effect in the United States could be severe, and shortages of vaccine could occur. For the 2004-05 annual influenza season, the nation lost about half its expected influenza vaccine supply when one of two major manufacturers announced in October 2004 that it would not release any vaccine. GAO examined federal, state, and local actions taken in response to the shortage, including lessons learned. The nation's experience during the unexpected 2004-05 vaccine shortfall offers insights into some of the challenges that government entities will face in a pandemic. GAO was asked to provide a statement on lessons learned from the 2004-05 vaccine shortage and their relevance to planning and preparing for similar situations in the future, including an influenza pandemic. This statement is based on a GAO report, Influenza Vaccine: Shortages in 2004-05 Season Underscore Need for Better Preparation (GAO-05-984), and on previous GAO reports and testimonies about influenza vaccine supply and pandemic preparedness. A number of lessons emerged from federal, state, and local responses to the 2004-05 influenza vaccine shortage that carry implications for handling future vaccine shortages in either an annual influenza season or an influenza pandemic. First, limited contingency planning slows response. At the start of the 2004-05 influenza season, when the supply shortfall became apparent, the nation lacked a contingency plan specifically to address severe shortages. The absence of such a plan led to delays and uncertainties on the part of state and local public health entities on how best to ensure access to vaccine by individuals at high risk of severe influenza-related complications. Second, streamlined mechanisms to expedite vaccine availability are key to an effective response. During the 2004-05 shortage, for example, federal purchases of vaccine licensed for use in other countries but not the United States were not completed in time to meet peak demand. Some states' experience also highlighted the importance of mechanisms to transfer available vaccine quickly and easily from one state to another. Third, effective response requires clear and consistent communication. Consistency among federal, state, and local communications is critical for averting confusion. State and local health officials also emphasized the value of updated information when responding to changing circumstances, using diverse media to reach diverse audiences, and educating providers and the public about prevention alternatives. Over the past 5 years, GAO has urged the Department of Health and Human Services (HHS) to complete its plan to prepare for and respond to an influenza pandemic. GAO has reported on the importance of planning to address critical issues such as how vaccine will be purchased and distributed; how population groups will be given priority for vaccination; and how federal resources should be deployed before the nation faces a pandemic. On November 2, 2005, HHS released its pandemic influenza plan. GAO did not have the opportunity to review the plan before issuing this statement to determine the extent to which the plan addresses these critical issues.
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The LDA requires lobbyists to register with the Secretary of the Senate and the Clerk of the House and to file quarterly reports disclosing their lobbying activity. Lobbyists are required to file their registrations and reports electronically with the Secretary of the Senate and the Clerk of the House through a single entry point. Registrations and reports must be publicly available in downloadable, searchable databases from the Secretary of the Senate and the Clerk of the House. No specific statutory requirements exist for lobbyists to generate or maintain documentation in support of the information disclosed in the reports they file. However, guidance issued by the Secretary of the Senate and the Clerk of the House recommends that lobbyists retain copies of their filings and documentation supporting reported income and expenses for at least 6 years after they file their reports. The LDA requires that the Secretary of the Senate and the Clerk of the House provide guidance and assistance on the registration and reporting requirements and develop common standards, rules, and procedures for LDA compliance. The Secretary of the Senate and the Clerk of the House review the guidance semiannually. It was last reviewed December 15, 2014. The last revision was on February 15, 2013, to (among other issues) update the reporting thresholds for inflation. The guidance provides definitions of terms in the LDA, elaborates on the registration and reporting requirements, includes specific examples of different scenarios, and provides explanations of why certain scenarios prompt or do not prompt disclosure under the LDA. The Secretary of the Senate and Clerk of the House's Offices told us they continue to consider information we report on lobbying disclosure compliance when they periodically update the guidance. In addition, they told us they e-mail registered lobbyists quarterly on common compliance issues and reminders to file reports by the due dates. The LDA defines a lobbyist as an individual who is employed or retained by a client for compensation, who has made more than one lobbying contact (written or oral communication to a covered executive or legislative branch official made on behalf of a client), and whose lobbying activities represent at least 20 percent of the time that he or she spends on behalf of the client during the quarter. Lobbying firms are persons or entities that have one or more employees who lobby on behalf of a client other than that person or entity. Lobbying firms are required to register with the Secretary of the Senate and the Clerk of the House for each client if the firms receive or expect to receive over $3,000 in income from that client for lobbying activities. Lobbyists are also required to submit a quarterly report, also known as an LD-2 report (LD-2), for each registration filed. The LD-2s contain information that includes: the name of the lobbyist reporting on quarterly lobbying activities and the name of the client for whom the lobbyist lobbied; a list of individuals who acted as lobbyists on behalf of the client during the reporting period; whether any lobbyists served in covered positions in the executive or legislative branch in the previous 20 years; codes describing general issue areas, such as agriculture and education; a description of the specific lobbying issues; houses of Congress and federal agencies lobbied during the reporting reported income (or expenses for organizations with in-house lobbyists) related to lobbying activities during the quarter (rounded to the nearest $10,000). The LDA also requires lobbyists to report certain political contributions semiannually in the LD-203 report. These reports must be filed 30 days after the end of a semiannual period by each lobbying firm registered to lobby and by each individual listed as a lobbyist on a firm's lobbying report. The lobbyists or lobbying firms must list the name of each federal candidate or officeholder, leadership political action committee, or political party committee to which they made contributions equal to or exceeding $200 in the aggregate during the semiannual period; report contributions made to presidential library foundations and presidential inaugural committees; report funds contributed to pay the cost of an event to honor or recognize a covered official, funds paid to an entity named for or controlled by a covered official, and contributions to a person or entity in recognition of an official, or to pay the costs of a meeting or other event held by or in the name of a covered official; and certify that they have read and are familiar with the gift and travel rules of the Senate and House and that they have not provided, requested, or directed a gift or travel to a member, officer, or employee of Congress that would violate those rules. The Secretary of the Senate and the Clerk of the House, along with USAO are responsible for ensuring LDA compliance. The Secretary of the Senate and the Clerk of the House notify lobbyists or lobbying firms in writing that they are not complying with the LDA reporting. Subsequently, they refer those lobbyists who fail to provide an appropriate response to USAO. USAO researches these referrals and sends additional noncompliance notices to the lobbyists or lobbying firms, requesting that they file reports or terminate their registration. If USAO does not receive a response after 60 days, it decides whether to pursue a civil or criminal case against each noncompliant lobbyist. A civil case could lead to penalties up to $200,000 for each violation, while a criminal case--usually pursued if a lobbyist's noncompliance is found to be knowing and corrupt--could lead to a maximum of 5 years in prison. Generally, under the LDA, within 45 days of being employed or retained to make a lobbying contact on behalf of a client, the lobbyist must register by filing an LD-1 form with the Clerk of the House and the Secretary of the Senate. Thereafter, the lobbyist must file quarterly disclosure (LD-2) reports detailing the lobbying activities. Of the 2,950 new registrations we identified for the third and fourth quarters of 2013 and first and second quarters of 2014, we matched 2,659 of them (90 percent) to corresponding LD-2 reports filed within the same quarter as the registration. These results are consistent with the findings we have reported in prior reviews. We used the House lobbyists' disclosure database as the source of the reports and used an electronic matching algorithm that allows for misspellings and other minor inconsistencies between the registrations and reports. Figure 1 shows lobbyists filed disclosure reports as required for most new lobbying registrations from 2010 through 2014. For selected elements of lobbyists' LD-2 reports that can be generalized to the population of lobbying reports, unless otherwise noted, our findings have been consistent from year to year. We used tests that adjusted for multiple comparisons to assess the statistical significance of changes over time. Most lobbyists reporting $5,000 or more in income or expenses provided written documentation to varying degrees for the reporting elements in their disclosure reports. For this year's review, lobbyists for an estimated 93 percent of LD-2 reports provided written documentation for the income and expenses reported for the third and fourth quarters of 2013 and the first and second quarters of 2014. Figure 2 shows that for most LD-2 reports, lobbyists provided documentation for income and expenses for sampled reports from 2010 through 2014. Figure 3 shows that for some LD-2 reports, lobbyists rounded their income or expenses incorrectly. We identified 21 percent of reports as having rounding errors. We have found that rounding difficulties have been a recurring issue for LD-2 reports from 2010 through 2014.lobbyists who reported expenses told us that based on their reading of the LD-2 form they believed they were required to report the exact amount. While this is not consistent with the LDA or the guidance, this may be a source of some of the confusion regarding rounding errors. In 2014, 6 percent of lobbyists reported the exact amount of income or expenses. Lobbyists for an estimated 94 percent of LD-2 reports filed year-end 2013 reports for all lobbyists listed on the report as required. All but two lobbying firm filed LD-203s for the lobbying firm itself before we preformed our check. The firm that had not filed an LD-203 filed one as soon as we brought it to the firm's attention. The other firm did not respond to our request for the information about filing the LD-203. Figure 8 shows that lobbyists for most lobbying firms filed contribution reports as required in our sample from 2010 through 2014. All individual lobbyists and lobbying firms reporting lobbying activity are required to file LD-203 reports semiannually, even if they have no contributions to report, because they must certify compliance with the gift and travel rules. The LDA requires a lobbyist to disclose previously held covered positions when first registering as a lobbyist for a new client. This can be done either on the LD-1 or on the LD-2 quarterly filing when added as a new lobbyist. This year, we estimate that 14 percent of all LD-2 reports did not properly disclose one or more previously held covered positions as required. Figure 9 shows the extent to which lobbyists failed to properly disclose one or more covered positions as required from 2010 through 2014. Lobbyists amended 19 of the 100 LD- 2 disclosure reports in our original sample to make changes to previously reported information after we contacted them. Of the 19 reports, 10 were amended after we notified the lobbyists of our review, but before we met with them. An additional 9 of the 19 reports were amended after we met with the lobbyists to review their documentation. We consistently find a notable number of amended LD-2 reports in our sample each year following notification of our review. This suggests that sometimes our contact spurs lobbyists to more closely scrutinize their reports than they would have without our review. Table 1 lists reasons lobbying firms in our sample amended their LD-1 or LD-2 reports. As part of our review, we compared contributions listed on lobbyists' and lobbying firms' LD-203 reports against those political contributions reported in the FEC database to identify whether political contributions were omitted on LD-203 reports in our sample. The sample of LD-203 reports we reviewed contained 80 reports with contributions and 80 reports without contributions. We estimate that overall for 2014, lobbyists failed to disclose one or more reportable contributions on 4 percent of reports. Table 2 illustrates that from 2010 through 2014 most lobbyists disclosed FEC reportable contributions on their LD-203 reports as required. In 2014, nine LD-203 reports were amended in response to our review. As part of our review, 93 different lobbying firms were included in our 2014 sample of LD-2 disclosure reports. Consistent with prior reviews, most lobbying firms reported that they found it "very easy" or "somewhat easy" to comply with reporting requirements. Of the 93 different lobbying firms in our sample, 16 reported that the disclosure requirements were "very easy," 54 reported them "somewhat easy," and 13 reported them "somewhat difficult" or "very difficult". (See figure 10). Most lobbying firms we surveyed rated the definitions of terms used in LD-2 reporting as "very easy" or "somewhat easy" to understand with regard to meeting their reporting requirements. This is consistent with prior reviews. Figures 11 through 15 show what lobbyists reported as their ease of understanding the terms associated with LD-2 reporting requirements from 2010 through 2014. USAO officials stated that they continue to have sufficient personnel resources and authority under the LDA to enforce reporting requirements, including imposing civil or criminal penalties for noncompliance. Noncompliance refers to a lobbyist's or lobbying firm's failure to comply with the LDA. According to USAO officials, they have one contract paralegal specialist assigned full time, as well as five civil attorneys and one criminal attorney assigned part time for LDA compliance work. In addition, USAO officials stated that the USAO participates in a program that provides Special Assistant United States Attorneys (SAUSA) to the USAO. Some of the SAUSAs assist with LDA compliance by working with the Assistant United States Attorneys and contract paralegal specialist to contact referred lobbyists or lobbying firms who do not comply with the LDA. USAO officials stated that lobbyists resolve their noncompliance issues by filing LD-2s, LD-203s, LD-2 amendments, or by terminating their registration, depending on the issue. Resolving referrals can take anywhere from a few days to years, depending on the circumstances. During this time, USAO uses summary reports from its database to track the overall number of referrals that are pending or become compliant as a result of the lobbyist receiving an e-mail, phone call, or noncompliance letter. Referrals remain in the pending category until they are resolved. The category is divided into the following areas: "initial research for referral," "responded but not compliant," "no response /waiting for a response," "bad address," and "unable to locate." USAO focuses its enforcement efforts primarily on the responded but not compliant group. USAO attempts to review pending cases every 6 months, according to officials. Officials told us that after four unsuccessful attempts have been made, USAO confers with both the Secretary of the Senate and the Clerk of the House to determine whether further action should be taken. In some cases where the lobbying firm is repeatedly referred for not filling disclosure reports but does not appear to be actively lobbying, USAO suspends enforcement actions. USAO monitors these firms, including checking the lobbying disclosure databases maintained by the Secretary of the Senate and the Clerk of the House. If the lobbyist begins to lobby again, USAO will resume enforcement actions. As of February 26, 2015, USAO has received 2,308 referrals from both the Secretary of the Senate and the Clerk of the House for failure to comply with LD-2 reporting requirements cumulatively for filing years 2009 through 2014. Table 3 shows the number and status of the referrals received and the number of enforcement actions taken by USAO in its effort to bring lobbying firms into compliance. Enforcement actions include the number of letters, e-mails, and calls made by USAO. About 52 percent (1,196 of 2,308) of the total referrals received are now compliant because lobbying firms either filed their reports or terminated their registrations. In addition, some of the referrals were found to be compliant when USAO received the referral. Therefore no action was taken. This may occur when lobbying firms respond to the contact letters from the Secretary of the Senate and Clerk of the House after USAO has received the referrals. About 48 percent (1,101 of 2,308) of referrals are pending further action because USAO was unable to locate the lobbying firm, did not receive a response from the firm, or plans to conduct additional research to determine if it can locate the lobbying firm. The remaining 11 referrals did not require action or were suspended because the lobbyist or client was no longer in business or the lobbyist was deceased. LD-203 referrals consist of two types: LD-203(R) referrals represent lobbying firms that have failed to file LD-203 reports for their lobbying firm; and LD-203 referrals represent the lobbyists at the lobbying firm who have failed to file their individual LD-203 reports as required. As of February 26, 2015, USAO had received 1,551 LD-203(R) referrals and 2,745 LD-203 referrals from the Secretary of the Senate and Clerk of the House for lobbying firms and lobbyists for noncompliance with reporting requirements cumulatively for calendar years 2009 through 2014. LD-203 referrals may be more complicated than LD-2 referrals because both the lobbying firm and the individual lobbyists within the firm are each required to file a LD-203. However, according to USAO, lobbyists employed by a lobbying firm typically use the firm's contact information and not the lobbyists personal contact information. This makes it difficult to locate a lobbyist who may have left the firm. USAO reported that, while many firms have assisted it by providing contact information for lobbyists, they are not required to do so. According to officials, USAO has difficulty pursuing LD-203 referrals for lobbyists who have departed a firm without leaving forwarding contact information with the firm. While USAO utilizes web searches and online databases including LinkedIn, Lexis/Nexis, Glass Door, Facebook and the Sunlight Foundation websites to find these missing lobbyists, it is not always successful. When USAO is unable to locate lobbyists because it does not have forwarding contact information to find a lobbyist who has left a firm, USAO has no recourse to pursue enforcement action, according to officials. Table 4 shows the status of LD-203 (R) referrals received and the number of enforcement actions taken by USAO in its effort to bring lobbying firms into compliance. About 46 percent (714 of 1,551) of the lobbying firms referred by the Secretary of the Senate and Clerk of the House for noncompliance from 2009 through 2014 reporting periods are now considered compliant because firms either have filed their reports or have terminated their registrations. About 54 percent (836 of 1,551) of the referrals are pending further action. Table 5 shows that as of February 26, 2015, USAO had received 2,745 LD-203 referrals from the Secretary of the Senate and Clerk of the House for lobbyists who failed to comply with LD-203 reporting requirements for calendar years 2009 through 2014. It also shows the status of the referrals received and the number of enforcement actions taken by USAO in its effort to bring lobbyists into compliance. In addition, table 5 shows that 44 percent (1,211 of 2,745) of the lobbyists had come into compliance by filing their reports or are no longer registered as a lobbyist. About 56 percent (1,525 of 2,745) of the referrals are pending further action because USAO was unable to locate the lobbyist, did not receive a response from the lobbyist, or plans to conduct additional research to determine if it can locate the lobbyist. Table 6 shows that as of February 26, 2015, USAO had received LD-203 referrals from the Secretary of the Senate and Clerk of the House for 3,841 lobbyists who failed to comply with LD-203 reporting requirements for any filing year from 2009 through 2014. Table 6 shows the status of compliance for individual lobbyists listed on referrals to USAO. Table 6 shows that 48 percent (1,861 of 3,841 of the lobbyists had come into compliance by filing their reports or are no longer registered as a lobbyist. About 52 percent (1,980 of 3,841) of the referrals are pending action because USAO could not locate the lobbyists, did not receive a response from the lobbyists, or plans to conduct additional research to determine if it can locate the lobbyists. USAO officials said that many of the pending LD-203 referrals represent lobbyists who no longer lobby for the lobbying firms affiliated with the referrals, even though these lobbying firms may be listed on the lobbyist's LD-203 report. According to USAO officials, lobbyists who repeatedly fail to file reports are labeled chronic offenders and referred to one of the assigned attorneys for follow-up. According to officials, USAO monitors and reviews chronic offenders to determine appropriate enforcement actions, which may lead to settlements or other successful civil actions. However, instead of pursuing a civil penalty, USAO may decide to pursue other actions such as closing out referrals if the lobbyist appears to be inactive. According to USAO, in these cases, there would be no benefit in pursuing enforcement actions. USAO finalized a settlement in the amount of $30,000 for Alan Mauk & Alan Mauk Associates, Ltd to address failure to file for several years. According to officials USAO is close to finalizing a settlement with another firm for repeated failure to file. We provided a draft of this report to the Attorney General for review and comment. The Department of Justice provided a technical comment, which we incorporated into the draft as appropriate. We are sending copies of this report to the Attorney General, Secretary of the Senate, Clerk of the House of Representatives, and interested congressional committees and members. 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) 512-6806 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. Our objectives were to determine the extent to which lobbyists are able to demonstrate compliance with the Lobbying Disclosure Act of 1995 as amended (LDA) by providing documentation to support information contained on registrations and reports filed under the LDA; to identify challenges and potential improvements to compliance, if any; and to describe the resources and authorities available to the U.S. Attorney's Office for the District of Columbia (USAO), its role in enforcing LDA compliance, and the efforts it has made to improve enforcement of the LDA. We used information in the lobbying disclosure database maintained by the Clerk of the House of Representatives (Clerk of the House). To assess whether these disclosure data were sufficiently reliable for the purposes of this report, we reviewed relevant documentation and consulted with knowledgeable officials. Although registrations and reports are filed through a single web portal, each chamber subsequently receives copies of the data and follows different data-cleaning, processing, and editing procedures before storing the data in either individual files (in the House) or databases (in the Senate). Currently, there is no means of reconciling discrepancies between the two databases caused by the differences in data processing. For example, Senate staff told us during previous reviews they set aside a greater proportion of registration and report submissions than the House for manual review before entering the information into the database. As a result, the Senate database would be slightly less current than the House database on any given day pending review and clearance. House staff told us during previous reviews that they rely heavily on automated processing. In addition, while they manually review reports that do not perfectly match information on file for a given lobbyist or client, staff members will approve and upload such reports as originally filed by each lobbyist, even if the reports contain errors or discrepancies (such as a variant on how a name is spelled). Nevertheless, we do not have reasons to believe that the content of the Senate and House systems would vary substantially. For this review, we determined that House disclosure data were sufficiently reliable for identifying a sample of quarterly disclosure (LD-2) reports and for assessing whether newly filed lobbyists also filed required reports. We used the House database for sampling LD-2 reports from the third and fourth quarters of 2013 and the first and second quarters of 2014, as well as for sampling year-end 2013 and mid-year 2014 political contributions (LD-203) reports. We also used the database for matching quarterly registrations with filed reports. We did not evaluate the Offices of the Secretary of the Senate or the Clerk of the House, both of which have key roles in the lobbying disclosure process. However, we did consult with officials from each office. They provided us with general background information at our request. To assess the extent to which lobbyists could provide evidence of their compliance with reporting requirements, we examined a stratified random sample of 100 LD-2 reports from the third and fourth quarters of 2013 and the first and second quarters of 2014. We excluded reports with no lobbying activity or with income or expenses of less than $5,000 from our sampling frame. We drew our sample from 46,599 activity reports filed for the third and fourth quarters of 2013 and the first and second quarters of 2014 available in the public House database, as of our final download date for each quarter. Our sample of LD-2 reports was not designed to detect differences over time. However, we conducted tests of significance for changes from 2010 to 2014 for the generalizable elements of our review and found that results were generally consistent from year to year and there were few statistically significant changes after using a Bonferroni adjustment to account for multiple comparisons. These changes are identified in the report. While the results provide some confidence that apparent fluctuations in our results across years are likely attributable to sampling error, the inability to detect significant differences may also be related to the nature of our sample, which was relatively small and was designed only for cross-sectional analysis. A Bonferroni adjustment is a statistical adjustment designed to reduce the chance of making a type 1 inferential error, that is, concluding that a difference exists when it is instead an artifact of sampling error. The adjustment raises the threshold for concluding that any single difference is "statistically significant" so that overall the chance of making at least one type-1 error when making multiple comparisons does not exceed a specified level. population value for 95 percent of the samples that we could have drawn. The percentage estimates for LD-2 reports have a 95 percent confidence intervals of within plus or minus 12.1 percentage points or less of the estimate itself. We contacted all the lobbyists and lobbying firms in our sample and, using a structured web-based survey, asked them to confirm key elements of the LD-2 and whether they could provide documentation for key elements in their reports, including the amount of income reported for lobbying activities; the amount of expenses reported on lobbying activities; the names of those lobbyists listed in the report; the houses of Congress and federal agencies that they lobbied and the issue codes listed to describe their lobbying activity. After reviewing the survey results for completeness, we conducted interviews with the lobbyists and lobbying firms to review documentation they reported as having on their online survey for selected elements of their LD-2 report. Prior to each interview, we conducted a search to determine whether lobbyists properly disclosed their covered position as required by the LDA. We reviewed the lobbyists' previous work histories by searching lobbying firms' websites, LinkedIn, Leadership Directories, Legistorm, and Google. Prior to 2008, lobbyists were only required to disclose covered official positions held within 2 years of registering as a lobbyist for the client. The Honest Leadership and Open Government Act of 2007 amended that time frame to require disclosure of positions held 20 years before the date the lobbyists first lobbied on behalf of the client. Lobbyists are required to disclose previously held covered official positions either on the client registration (LD-1) or on an LD-2 report. Consequently, those who held covered official positions may have disclosed the information on the LD-1 or a LD-2 report filed prior to the report we examined as part of our random sample. Therefore, where we found evidence that a lobbyist previously held a covered official position, and it was not disclosed on the LD-2 report under review, we conducted an additional review of the publicly available Secretary of the Senate or Clerk of the House database to determine whether the lobbyist properly disclosed the covered official position on a prior report or LD-1. Finally, if a lobbyist appeared to hold a covered position that was not disclosed, we asked for an explanation at the interview with the lobbying firm to ensure that our research was accurate. In previous reports, we reported the lower bound of a 90 percent confidence interval to provide a minimum estimate of omitted covered positions and omitted contributions with a 95 percent confidence level. We did so to account for the possibility that our searches may have failed to identify all possible omitted covered positions and contributions. As we have developed our methodology over time, we are more confident in the comprehensiveness of our searches for these items. Accordingly, this report presents the estimated percentages for omitted contributions and omitted covered positions, rather than the minimum estimates. As a result, percentage estimates for these items will differ slightly from the minimum percentage estimates presented in prior reports. In addition to examining the content of the LD-2 reports, we confirmed whether the most recent LD-203 reports had been filed for each firm and lobbyist listed on the LD-2 reports in our random sample. Although this review represents a random selection of lobbyists and firms, it is not a direct probability sample of firms filing LD-2 reports or lobbyists listed on LD-2 reports. As such, we did not estimate the likelihood that LD-203 reports were appropriately filed for the population of firms or lobbyists listed on LD-2 reports. To determine if the LDA's requirement for lobbyists to file a report in the quarter of registration was met for the third and fourth quarters of 2013 and the first and second quarters of 2014, we used data filed with the Clerk of the House to match newly filed registrations with corresponding disclosure reports. Using an electronic matching algorithm that includes strict and loose text matching procedures, we identified matching disclosure reports for 2,659, or 90 percent, of the 2,950 newly filed registrations. We began by standardizing client and lobbyist names in both the report and registration files (including removing punctuation and standardizing words and abbreviations, such as "company" and "CO"). We then matched reports and registrations using the House identification number (which is linked to a unique lobbyist-client pair), as well as the names of the lobbyist and client. For reports we could not match by identification number and standardized name, we also attempted to match reports and registrations by client and lobbyist name, allowing for variations in the names to accommodate minor misspellings or typos. For these cases, we used professional judgment to determine whether cases with typos were sufficiently similar to consider as matches. We could not readily identify matches in the report database for the remaining registrations using electronic means. To assess the accuracy of the LD-203 reports, we analyzed stratified random samples of LD-203 reports from the 30,524 total LD-203 reports. The first sample contains 80 reports of the 9,787 reports with political contributions and the second contains 80 reports of the 20,737 reports listing no contributions. Each sample contains 40 reports from the year- end 2013 filing period and 40 reports from the midyear 2014 filing period. The samples from 2014 allow us to generalize estimates in this report to either the population of LD-203 reports with contributions or the reports without contributions to within a 95 percent confidence interval of plus or minus 9.5 percentage points or less. Although our sample of LD-203 reports was not designed to detect differences over time, we conducted tests of significance for changes from 2010 to 2014 and found no statistically significant differences after adjusting for multiple comparisons. While the results provide some confidence that apparent fluctuations in our results across years are likely attributable to sampling error, the inability to detect significant differences may also be related to the nature of our sample, which was relatively small and designed only for cross- sectional analysis. We analyzed the contents of the LD-203 reports and compared them to contribution data found in the publicly available Federal Elections Commission's (FEC) political contribution database. We consulted with staff at FEC responsible for administering the database. We determined that the data is sufficiently reliable for our purposes. We compared the FEC-reportable contributions reporting on the LD-203 reports with information in the FEC database. The verification process required text and pattern matching procedures so we used professional judgment when assessing whether an individual listed is the same individual filing an LD-203. For contributions reported in the FEC database and not on the LD-203 report, we asked the lobbyists or organizations to explain why the contribution was not listed on the LD-203 report or to provide documentation of those contributions. As with covered positions on LD-2 disclosure reports, we cannot be certain that our review identified all cases of FEC-reportable contributions that were inappropriately omitted from a lobbyist's LD-203 report. We did not estimate the percentage of other non-FEC political contributions that were omitted because they tend to constitute a small minority of all listed contributions and cannot be verified against an external source. To identify challenges to compliance, we used a structured web-based survey and obtained the views from 93 different lobbying firms included in our sample on any challenges to compliance. The number of different lobbying firms total 93 and is less than our sample of 100 reports because some lobbying firms had more than one LD-2 report included in our sample. We calculated our responses based on the number of different lobbying firms that we contacted rather than the number of interviews. Prior to our calculations, we removed the duplicate lobbying firms based on the most recent date of their responses. For those cases with the same response date, the decision rule was to keep the cases with the smallest assigned case identification number. To obtain their views, we asked them to rate their ease with complying with the LD-2 disclosure requirements using a scale, of "very easy," "somewhat easy," "somewhat difficult," or "very difficult." In addition, using the same scale we asked them to rate the ease of understanding the terms associated with LD-2 reporting requirements. To describe the resources and authorities available to the U.S. Attorney's Office for the District of Columbia (USAO) and its efforts to improve its enforcement of the LDA, we interviewed officials from USAO. We obtained information on the capabilities of the system officials established to track and report compliance trends and referrals, and other practices established to focus resources on enforcement of the LDA. USAO provided us with updated reports from the tracking system on the number and status of referrals and chronically noncompliant lobbyists and lobbying firms. The mandate does not require us to identify lobbyists who failed to register and report in accordance with the LDA requirements, or determine for those lobbyists who did register and report whether all lobbying activity or contributions were disclosed. We conducted this performance audit from June 2014 to March 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. The random sample of lobbying disclosure reports we selected was based on unique combinations of lobbyist and client names (see table 7). See table 8 for a list of the lobbyists and lobbying firms from our random sample of lobbying contributions reports with contributions. See table 9 for a list of the lobbyists and lobbying firms from our random sample of lobbying contribution reports without contributions. In addition to the contact named above, Bill Reinsberg (Assistant Director), Shirley Jones (Assistant General Counsel) and Katherine Wulff (analyst-in-charge) supervised the development of this report. Amy Bowser, Crystal Bernard, Kathleen Jones, Davis Judson, Stuart Kaufman, and Anna Maria Ortiz made key contributions to this report. Assisting with lobbyist file reviews were Dawn Bidne, Linda Collins, Joseph Fread, Ricky Harrison Jr, Shirley Hwang, Melissa King, Barbara Lancaster, Courtney Liesener, Heidi Nielson, Patricia Norris, Alan Rozzi, Karissa Schafer, Sarah Sheehan, Angela Smith, Natalie Swabb, and Nell Williams. Lobbying Disclosure: Observations on Lobbyists' Compliance with New Disclosure Requirements. GAO-08-1099. Washington, D.C: September 30, 2008. 2008 Lobbying Disclosure: Observations on Lobbyists' Compliance with Disclosure Requirements. GAO-09-487. Washington, D.C: April 1, 2009. 2009 Lobbying Disclosure: Observations on Lobbyists' Compliance with Disclosure Requirements. GAO-10-499. Washington, D.C: April 1, 2010. 2010 Lobbying Disclosure: Observations on Lobbyists' Compliance with Disclosure Requirements. GAO-11-452. Washington, D.C: April 1, 2011. 2011 Lobbying Disclosure: Observations on Lobbyists' Compliance with Disclosure Requirements. GAO-12-492. Washington, D.C: March 30, 2012. 2012 Lobbying Disclosure: Observations on Lobbyists' Compliance with Disclosure Requirements. GAO-13-437. Washington, D.C: April 1, 2013. 2013 Lobbying Disclosure: Observations on Lobbyists' Compliance with Disclosure Requirements. GAO-14-485. Washington, D.C: May 28, 2014.
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LDA requires lobbyists to file quarterly lobbying disclosure reports and semiannual reports on certain political contributions. The law also requires that GAO annually audit lobbyists' compliance with the LDA. GAO's objectives were to (1) audit the extent to which lobbyists can demonstrate compliance with disclosure requirements, (2) identify challenges to compliance that lobbyists report, and (3) describe the resources and authorities available to USAO in its role in enforcing LDA compliance, and the efforts USAO has made to improve enforcement. This is GAO's eighth report under the mandate. GAO reviewed a stratified random sample of 100 quarterly disclosure LD-2 reports filed for the third and fourth quarters of calendar year 2013 and the first and second quarters of calendar year 2014. GAO also reviewed two random samples totaling 160 LD-203 reports from year-end 2013 and midyear 2014. This methodology allowed GAO to generalize to the population of 46,599 disclosure reports with $5,000 or more in lobbying activity, and 30,524 reports of federal political campaign contributions. GAO also met with officials from USAO to obtain status updates on its efforts to focus resources on lobbyists who fail to comply. GAO provided a draft of this report to the Attorney General for review and comment. The Department of Justice provided a technical comment, which GAO incorporated as appropriate. For the 2014 reporting period, most lobbyists provided documentation for key elements of their disclosure reports to demonstrate compliance with the Lobbying Disclosure Act of 1995 as amended (LDA). For lobbying disclosure (LD-2) reports and political contributions (LD-203) reports filed during the third and fourth quarter of 2013 and the first and second quarter of 2014, GAO estimates that 90 percent of lobbyists filed initial LD-2 reports as required for new lobbying registrations (lobbyists are required to file LD-2 reports for the quarter in which they first register). 93 percent could provide documentation for income and expenses. However, 21 percent of these LD-2 reports were not properly rounded to the nearest $10,000 and 6 percent of those reports listed the exact amount. 94 percent filed year-end 2013 reports as required. 14 percent of all LD-2 reports did not properly disclose one or more previously held covered positions (certain positions in the executive and legislative branches) as required. 4 percent of all LD-203 reports omitted one or more reportable political contributions that were documented in the Federal Election Commission database. These findings are generally consistent with prior reports GAO issued for the 2010 through 2013 reporting periods and can be generalized to the population of disclosure reports. Over the past several years of reporting on lobbying disclosure, GAO has found that most lobbyists in the sample rated the terms associated with LD-2 reporting as "very easy" or "somewhat easy" to understand with regard to meeting their reporting requirements. However, some disclosure reports demonstrate compliance difficulties, such as failure to disclose covered positions or misreporting of income or expenses. In addition, lobbyists amended 19 of 100 original disclosure reports in GAO's sample, changing information previously reported. The U.S. Attorney's Office for the District of Columbia (USAO) stated it has sufficient resources and authority to enforce LD-2 and LD-203 compliance with LDA. It has one contract paralegal working full time and six attorneys working part time on LDA enforcement issues. USAO continued its efforts to follow up on referrals for noncompliance with lobbying disclosure requirements by contacting lobbyists by e-mail, telephone, and letter. Also, USAO has finalized a settlement with a lobbyist to resolve multiple instances of noncompliance and is in the process of finalizing another settlement.
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CARE Act base grants are distributed through a formula that includes HIV/AIDS case counts. Through its HIV/AIDS surveillance system, CDC receives case counts from states, the District of Columbia, and U.S. territories and associated jurisdictions. CDC provides these case counts to HRSA so that HRSA may determine CARE Act formula grant amounts. In fiscal year 2009, HRSA distributed approximately $410 million by formula under Part A of the CARE Act and about $1.1 billion by formula under Part B. Fifty-six metropolitan areas received Part A funds in fiscal year 2009. Twenty-four of the metropolitan areas were classified by HRSA as EMAs and 32 as TGAs. For fiscal years 2008 and 2009, the hold-harmless provision provided that an EMA receive at least 100 percent of the amount it had received as its base grant, including hold harmless funding, for fiscal year 2007. Part B of the CARE Act provides funds to all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, and 5 other territories and associated jurisdictions. Part B grants include grants for HIV/AIDS services that are awarded by formula, AIDS Drug Assistance Program (ADAP) grants that are awarded by formula, emerging community grants that are awarded by formula for HIV/AIDS services, Part B supplemental grants for HIV/AIDS services, and ADAP supplemental grants. RWTMA contained a hold-harmless provision that protects funding for Part B base grants and ADAP base grants. For fiscal years 2008 and 2009, a grantee's total Part B base and ADAP base grants would be at least 100 percent of the total of such grants in fiscal year 2007. One condition of an ADAP grant is that grantees use every means at their disposal to secure the best price available for all products on their formularies. Best prices are determined by the prices that can be obtained under the 340B drug pricing program. Generally, an ADAP purchasing drugs through the 340B program can use a direct purchasing option or rebate option. Under the 340B direct purchase option, ADAPs purchase drugs from drug manufacturers or through a third-party such as a drug purchasing agent. Using the 340B direct purchase option, ADAPs receive the 340B price discount up front. Under the rebate option, ADAPs typically contract with entities such as a pharmacy network or pharmacy benefits manager for purchase of covered drugs. ADAPs later request a rebate consistent with the section 340B price from the drug manufacturers. Due to RWTMA's requirement that CARE Act formula funding be determined by using name-based HIV/AIDS counts, grantees collecting HIV case counts by code must transition to such a reporting system. Although all grantees had name-based AIDS reporting systems, at the time of RWTMA seven grantees still used code-based HIV reporting systems, while 17 others had recently transitioned to a name-based HIV reporting system. It can take several years to transition to a name-based system because grantees must identify by name each case originally reported by code and then enter each case into the new, name-based reporting system. During the transition period from a code-based to a name-based system, a grantee can report its code-based HIV counts directly to HRSA and have these counts used to determine funding for fiscal years 2007 through 2009. However, in accordance with RWTMA, for each grantee relying on a code- based system, HRSA made a 5 percent reduction in the number of living HIV cases to adjust for potential duplicate reporting in systems that collect code-based case counts, thus reducing the award. RWTMA allowed the use of code-based HIV case counts through fiscal year 2009; it also provided that the status of a grantee under RWTMA for purposes of the transition period may not be considered after fiscal year 2009. Grantees that are transitioning to a name-based HIV reporting system determine when their name-based counts will be used by HRSA to calculate CARE Act formula funding. If the exemption permitting code-based reporting is not extended, it is likely that future fiscal year funding will be based exclusively on name-based counts. A grantee that had not completed the transition from code- to name-based case counts could face a reduction in funding because its name-based HIV reporting system could contain fewer cases than its code-based system. Once a grantee has transitioned to a name-based HIV reporting system, its system must be determined to be operational, as well as accurate and reliable, in order for a grantee's name-based case counts to be used for funding purposes. To be operational, CDC, in consultation with the grantee's HIV/AIDS surveillance program and epidemiologist, considers several factors, such as the grantee's process for ensuring HIV-positive individuals are only counted once and the number of providers and laboratories within the grantee's jurisdiction diagnosing and reporting HIV positive diagnoses to the grantee. The date CDC allows grantees to report name-based HIV cases to it is considered the date the reporting system becomes operational. Once the name-based HIV reporting system is declared operational, a grantee can determine that its reporting system is accurate and reliable (i.e., its case counts are complete), and can elect to have CDC send HRSA its name-based case counts to determine CARE Act formula funding. A grantee may declare its system to be accurate and reliable anytime after the system has been determined to be operational. However, regardless of the grantee's assessment, CDC considers a HIV reporting system to be accurate and reliable no later than 4 years after the grantee began collecting name-based HIV case counts. After a grantee determines that its system is accurate and reliable, or after the 4-year period, CDC transmits the HIV case counts to HRSA to be used in the funding formulas. RWTMA required HRSA to cancel funds from grantees' awards that are unobligated at the end of the grant year, recover funds that had been disbursed, and redistribute these funds to other grantees. These unobligated balance provisions apply to base and supplemental grant awards under Parts A and B. For 2007 grants, HRSA required grantees to estimate and report their unobligated balance to HRSA 60 days prior to the end of the grant year. Grantees were also required to submit a Financial Status Report (FSR) to HRSA 90 days after the grant year ends. Grantees must report their actual unobligated balance on the FSR and the unobligated balance can be updated by the grantee for up to 6 months after the FSR is due. Unobligated balances of grant awards are canceled (with disbursed funds recovered) and then redistributed to grantees who apply for them as additional amounts for supplemental grants under Part A and Part B in the next fiscal year after the unobligated funds were reported. For base grant funds, the impact of unobligated balances differs based on whether the unobligated amount is more than 2 percent of the grant. All unobligated base grant funds must be canceled and recovered by HRSA if the grantee has not been granted a carryover waiver. HRSA takes this step following receipt of the FSR. In addition to having unobligated funds canceled and recovered unless a carryover waiver is granted, grantees with unobligated Part A, Part B, and ADAP base grant funds in excess of 2 percent of the grant award incur a penalty--a corresponding reduction in grant funds for the first fiscal year beginning after the fiscal year in which the Secretary receives the FSR. Grantees are assessed the reduction even if they were granted a waiver. Because FSRs are submitted 90 days after the grant year ends, grants for the next year have already been made by the time HRSA has received the information necessary to determine which grantees have an unobligated balance greater than 2 percent. As a result, there is a 1 year lag time between when the unobligated balance occurs and when the penalty is assessed. For example, if a grantee had an unobligated balance of 3 percent in grant year 2007, the grantee's FSR would have been filed in grant year 2008, and the dollar amount of the 2007 unobligated balance would have been deducted from the grantee's award in grant year 2009. Figure 1 shows such a time line for 2007 Part B grant distribution and the unobligated balance provisions. In addition, grantees with unobligated balances of greater than 2 percent of Part A or Part B base grants are ineligible to receive supplemental grants for the year in which the reduction takes place. For Part A grantees this means that they are not eligible to receive Part A supplemental grants. For Part B base grantees this results in ineligibility to receive Part B supplemental grants. For Part B ADAP grantees, an unobligated balance of greater than 2 percent does not result in ineligibility for ADAP supplemental grants. Instead, ineligibility for the ADAP supplemental grant is based on a grantee not obligating at least 75 percent of its entire Part B grant award within 120 days. Table 1 lists the triggers and penalties for the unobligated balance provisions. Most Part B grantees were collecting name-based HIV case counts in their reporting systems as of December 31, 2007, but not all grantees had HRSA use these case counts to determine fiscal year 2009 CARE Act funding. For 47 of the 59 Part B grantees, HRSA used name-based HIV case counts, as provided by CDC, to determine CARE Act funding. The remaining 12 grantees had HRSA use their code-based HIV case counts to determine fiscal year 2009 CARE Act funding. Seven of the 12 grantees--California, the District of Columbia, Illinois, Maryland, Massachusetts, Oregon, and Rhode Island--were collecting name-based HIV case counts as of December 31, 2007, but submitted their code-based case counts to HRSA to determine CARE Act funding. Five of the 12 grantees--Hawaii, Vermont, the Federated States of Micronesia, Palau, and the Republic of the Marshall Islands--were not collecting name-based case counts as of December 31, 2007. Table 2 lists the 12 grantees for which code-based HIV case counts were used for fiscal year 2009 CARE Act formula funding, and the month and year that they began collecting name-based case counts. Each of these 12 grantees could require 4 years from the date they began collecting name-based HIV case counts for their name-based HIV reporting systems to be considered accurate and reliable. However, grantees can determine that their reporting systems are accurate and reliable in less than 4 years. Although 56 of the 59 Part B grantees are currently collecting name-based HIV case counts, some grantees could face a reduction in fiscal year 2010 funding if HRSA uses these counts to determine fiscal year 2010 funding. RWTMA allows grantees to submit code-based case counts to HRSA to determine funding for fiscal years 2007 through 2009; without an extension as part of the upcoming reauthorization, it is likely that HRSA would determine CARE Act funding for fiscal year 2010 using name-based case counts collected through December 2008. However, this could be problematic for some grantees. For example, as of December 2008, Vermont had only been collecting name-based case counts for 8 months. If Vermont's system is not considered to be accurate and reliable--which could take up to 4 years--but its December 2008 name-based case count is nevertheless used to determine fiscal year 2010 funding, Vermont may not actually receive funding commensurate with the number of HIV/AIDS cases in the state, which is the intended basis for the formula grant. Further, its funding may be a reduction from what it received for fiscal year 2009. CDC has provided assistance for grantees transitioning from a code-based to a name-based HIV reporting system. CDC has provided grantees with technical assistance materials, ongoing assistance via conference calls, and additional assistance upon request. According to CDC, the District of Columbia and Massachusetts were the only Part B grantees that requested additional assistance in transitioning to a name-based system. CDC and HRSA plan to meet with grantee officials from the Federated States of Micronesia, Palau, and the Republic of the Marshall Islands to discuss HIV reporting. Part A hold-harmless funding was more widely distributed among EMAs in fiscal year 2009 than in fiscal year 2004. A larger percentage of EMAs qualified for hold-harmless funding in fiscal year 2009 than in fiscal year 2004, the last year for which we reported this information. About 71 percent of EMAs received hold-harmless funding in fiscal year 2009, while 41 percent received hold-harmless funding in fiscal year 2004. Furthermore, the percentage of the total hold-harmless funding received by the EMA with the most hold-harmless funding was smaller in fiscal year 2009 than in fiscal year 2004. In fiscal year 2009, New York received 52.7 percent of the hold-harmless funding, while in fiscal year 2004, San Francisco received 91.6 percent of the hold-harmless funding. In addition to hold-harmless funding being more widely distributed in fiscal year 2009 than in fiscal year 2004, the total amount of hold-harmless funding provided to EMAs was larger in fiscal year 2009 than in fiscal year 2004. In fiscal year 2009, $24,836,500 in hold-harmless funding was distributed compared to $8,033,563 in fiscal year 2004. Table 3 lists the EMAs and their base grant and hold-harmless funding in fiscal years 2009 and 2004. The range of CARE Act funding differences among EMAs, as measured by funding per case, was smaller in 2009 than in 2004. In fiscal year 2009, EMA base funding per case ranged from $645 to $854, a range of $209. In fiscal year 2004, the funding per case ranged from $1,221 to $2,241, a range of $1,020. The smaller funding range resulted from San Francisco receiving less hold-harmless funding in fiscal year 2009 than in fiscal year 2004. In both years, San Francisco received the most hold-harmless funding per case. However, in fiscal year 2009, San Francisco received $208 in hold- harmless funding per case, while in fiscal year 2004 it received $1,020 in hold-harmless funding per case. Table 4 lists the 24 EMAs and their base grant and hold-harmless funding per case in fiscal years 2009 and 2004. Hold-harmless funding accounted for a larger percentage of San Francisco's total base funding than it did for any other EMA in fiscal years 2009 and 2004, but the percentage was smaller in fiscal year 2009 than in fiscal year 2004. In fiscal year 2004, hold-harmless funding accounted for approximately 46 percent of San Francisco's base grant while in fiscal year 2009 hold-harmless funding accounted for approximately 24 percent of San Francisco's base grant. Table 5 lists the 24 EMAs and their hold- harmless funding as a percent of their base grants in fiscal years 2009 and 2004. In some cases, hold-harmless funding in fiscal year 2009 accounted for a significant portion of a grantee's Part A base funding. For example, San Francisco, which received the most hold-harmless funding per HIV/AIDS case in fiscal year 2009, received a total of $14,672,553 in base funding. Of this amount, $3,571,649 or 24.3 percent was due to the hold-harmless provision. Because of its hold-harmless funding, San Francisco, which had 17,173 HIV/AIDS cases, received a base grant equivalent to what an EMA with approximately 22,713 HIV/AIDS cases (32 percent more) would have received without hold-harmless funding. A significant portion of the differences in funding per case between San Francisco and the other EMAs results from how the San Francisco case counts are determined. The San Francisco EMA continues to be the only metropolitan area whose formula funding is based on both living and deceased AIDS cases. In February 2006 and October 2007, we reported that the San Francisco EMA was the only EMA still receiving CARE Act formula funding based on the number of living and deceased cases in a metropolitan area. All other EMAs received formula funding based on an estimate of the number of living cases. We showed that the fiscal year 2004 CARE Act formula funding for the San Francisco EMA was determined in part with reference to its fiscal year 1995 funding, which was based on both living and deceased AIDS cases. Because the San Francisco EMA also received hold-harmless funding in fiscal years 2005, 2006, 2007, and 2009, its fiscal year 2009 CARE Act formula funding continues to be based, in part, on the number of deceased cases in the San Francisco EMA as of 1995. Hold-harmless funding for other EMAs does not trace back to 1995 or earlier, a period when CARE Act funding was based on cumulative counts of AIDS cases, both living and deceased. If there had been no hold-harmless provision in fiscal year 2009, most grantees would have received more funding in fiscal year 2009 than they did. Seventeen of the 24 EMAs would have received more funding if there had been no hold-harmless provision and if the $24.8 million that was used for hold-harmless funding had instead been distributed across all EMAs as supplemental grants, that is, in the same proportions as the supplemental grants. The funds used to meet the EMA hold-harmless requirement are deducted from the funds that would otherwise be available for supplemental grants before these grants are awarded. As a consequence, the pool of funds for supplemental grants is reduced by the amount of funding needed to meet the hold-harmless provision. Although 17 EMAs received hold-harmless funding in fiscal year 2009, only 7 (New York, San Francisco, San Juan, West Palm Beach, Newark, New Haven, and Nassau- Suffolk) received more funding because of the hold-harmless provision than they would have received through supplemental grants in the absence of the hold-harmless provision. Sixteen Part B grantees received reduced funding in grant year 2009 because they had unobligated balances over 2 percent in grant year 2007. Grantees we interviewed provided reasons why it is difficult to obligate all but 2 percent of their grant award. Grantees and HRSA said that drug rebates complicate grantees' efforts to obligate grant funds. Nine states and seven territories and associated jurisdictions were assessed penalties in grant year 2009 because they had unobligated balances over 2 percent in grant year 2007. Arizona, Arkansas, Colorado, Delaware, Idaho, Maine, Nebraska, Ohio, and Pennsylvania were all assessed penalties along with seven of the U.S. territories and associated jurisdictions (American Samoa, Commonwealth of the Northern Mariana Islands, the Federated States of Micronesia, Guam, Palau, the Republic of Marshall Islands, and the U.S. Virgin Islands). Table 6 shows the Part B grant year 2007 unobligated balances. No Part A grantees had unobligated balances over 2 percent. To establish if an unobligated balance penalty applied to a grantee's 2009 grant, HRSA summed the Part B base and ADAP base unobligated balances to determine if the total was more than 2 percent of the grantee's total award (Part B base and ADAP base) for grant year 2007. As the provisions were applied by HRSA, Part B grantees can incur a penalty in both their Part B base and ADAP base grants even if the unobligated balance for one of these grants is less than 2 percent as long as the sum of the Part B base and ADAP base balances is greater than 2 percent. HRSA assesses unobligated balance penalties based on the sum of the Part B base and ADAP base unobligated balances. For example, in grant year 2007 Maine had an unobligated balance of more than 2 percent in its ADAP base grant but less than 2 percent in its Part B base grant. The total unobligated funding was 2.4 percent. Because the total was above 2 percent, HRSA reduced both the Part B base and ADAP base grants in grant year 2009. While 16 Part B grantees incurred unobligated balance penalties, some incurred penalties in both their Part B base grants and ADAP base grants and others only had penalties in their Part B base grants because they did not have unobligated ADAP balances. In grant year 2009, six states and one territory were assessed penalties in both their Part B base and ADAP base grants. Because penalties apply to both base grants only when grantees have unobligated balances in both grants, three states and six territories and associated jurisdictions had penalties assessed only on their Part B base grants, because they did not have unobligated ADAP base balances. Part B base funding penalties ranged from $6,433 in Palau to $1,493,935 in Ohio. (See table 7.) ADAP base funding penalties ranged from $26,233 in Maine to $12,670,248 in Pennsylvania. (See table 8.) Pennsylvania's ADAP base grant penalty accounted for 84 percent of the total amount of penalties for unobligated ADAP funds levied on 2009 grants. In order to calculate the final Part B base and ADAP base grant awards, the penalty attributable to an unobligated balance is applied after other calculations are made, including hold harmless funding. If hold-harmless funds were added after the unobligated balance penalties were applied, hold-harmless funds would negate the effect of the unobligated balance penalties because they would increase funding. For example, Colorado had a preliminary 2009 Part B base grant award of $3,666,928. Under the hold-harmless provision in RWTMA, Colorado was guaranteed Part B base grant funding of $3,683,544. Application of the RWTMA unobligated balance provision reduced the amount of its Part B base grant award (after the addition of hold harmless funding) by $734,240, leaving Colorado with a final Part B base grant award of $3,099,404. In comparison, if hold- harmless funding had been added after the application of the unobligated balance penalty, Colorado would have received $3,683,544, the same as if it had incurred no unobligated balance penalty. Five of the 13 Part B grantees we interviewed had unobligated balances over 2 percent; these 5 grantees told us that they had varying reasons for their unobligated balances, some of which they said were beyond their control. For example, Arizona explained that it had an unobligated balance from its ADAP base grant, in part, because it had a dispute with a vendor it had contracted with to provide prescription drugs to clients. The vendor claimed that it had not been paid for services. According to state officials, to settle the dispute and comply with applicable state rules Arizona had to pay the vendor twice. When the vendor realized that it had been overpaid, it reimbursed Arizona in the amount of $670,000. Arizona received the reimbursement at the end of the grant year. Arizona was unable to spend this amount, leaving it with an unobligated balance of over 2 percent and a subsequent penalty. Grantees we interviewed, which included those that had unobligated balances of over 2 percent and those that did not, explained that they experienced difficulty obligating grant funds within the grant year. Three of the 13 Part B grantees we interviewed explained that they are currently dealing with economic factors such as state hiring freezes, spending caps, and furloughs of staff. One grantee explained that because of economic difficulties, his state has implemented new procedures as a means to limit state spending, including reclaiming state funding balances that are not spent quickly. Because of this new procedure, the grantee must allocate state funding, federal funding, and program income simultaneously, which he finds difficult. One grantee said the existence of the state hiring freeze has limited the amount of grant funding that could be obligated to fund staff positions. The grantee stated that the hiring freeze has been implemented as a means to limit state spending, but the state has imposed the hiring freeze on all programs, including those that receive federal funds. One Part B grantee explained that, while the grantee can to some extent control the contracts that are entered into and types of services that are provided, the grantee cannot control factors that affect the demand for program services. For example, the grantee cannot control the number of people who become infected; those who will lose their jobs and private health insurance and need to receive services supported with grant funds; and changes that occur with Medicaid and Medicare that can affect clients. Additionally, two grantees stated that because the grant awards can arrive after April 1, it can be helpful to carry over funds from the previous year's grant award so that they can award contracts, rather than delay them until HRSA awards grant funds. These grantees said that they would like to be able to carry over funds without risking a reduction in future funding. One grantee explained that because grant awards are based on a formula and can fluctuate from year to year, it is helpful for the grantee to have funding on hand to maintain consistent service levels even if formula funding is decreased without risking a penalty. Six grantees expressed concern that the level of oversight required to obligate all but 2 percent of their grants leaves them unable to deal with unpredictable situations, such as a contractor going out of business. Six of the 13 grantees we interviewed said that they consider the 2 percent threshold too low, and some suggested that a 5 percent threshold would be more reasonable. Two of these grantees told us that if grantees had to obligate all but 5 percent of their funding, they would have more room to manage their budgets. However, only 2 of the 16 Part B grantees that received penalties for unobligated balances had unobligated balances of less than 5 percent. According to information provided by HRSA, 7 of the 13 Part B grantees we interviewed received drug rebates. In addition, Delaware informed us that they also receive rebates. Four of the eight grantees that received rebates said that the requirement that they spend drug rebates before spending grant funds makes it more difficult for them to obligate all but 2 percent of their grant awards, even though drug rebates are not subject to the unobligated balance provisions. The 27 Part B grantees that exclusively use the federal 340B rebate option to purchase their ADAP drugs typically contract with pharmacy networks or pharmacy benefit managers for the purchase of covered drugs who then request rebates from the pharmaceutical companies in order to obtain the 340B drug price and pass these savings on to the grantee. Under RWTMA, drug rebates that grantees receive are not considered part of the grant award and are not subject to the unobligated balance provisions. However, federal regulations generally applicable to state and local government grantees require them to disburse rebates (along with program income and certain other amounts) before requesting additional cash payments. Accordingly, HRSA requires rebates to be spent before grantees obligate additional grant funds. Thus, grantees receiving drug rebates must prioritize spending these funds and several grantees said that this makes it more difficult to obligate grant funds in the grant year. While only three of the nine states that had a reduction in their ADAP base grants for grant year 2009 due to an unobligated balance received rebates, five of the eight grantees we interviewed that received rebates expressed concern about the requirement that drug rebate funds be spent before grant funds. One grantee explained that though it did not have an unobligated balance for grant year 2007, it took a great deal of effort to avoid one. Before RWTMA and the budget challenges in this state, this grantee saved state funds to spend at the end of the grant year so it could ensure that Part B funds were obligated and rebate funds were spent. However, because of state spending requirements put in place due to economic factors this state is currently facing, the grantee can no longer do this. In addition, spending rebates first can be difficult because rebate states often do not know when they will receive rebates; the state may send out requests every quarter, but may not receive the rebates until well into the next quarter or grant year. Rebate states may also not know the rebate amount beyond what they can estimate based on trends over the past year. Several grantees said that because of the variability of the rebate amounts and their timing, they could receive a large rebate check late in the year. They then could have unobligated balances of grant funds of greater than 2 percent at that time because they use the rebate amounts when they become available rather than grant funds. Pennsylvania had an unobligated ADAP base grant balance of $12,670,248 in grant year 2007, and state officials said that a large part of the reason was its ADAP drug rebates. In grant year 2007, Pennsylvania received $11 million in rebates. These rebate funds had to be spent before it could obligate its ADAP base funding for grant year 2007. According to Pennsylvania officials, the Pennsylvania grantee has an administrative structure that only allows it to spend its rebates on the purchase of drugs, limiting how it could spend its rebate funds. Other states we spoke to can use rebate funds to provide Part B medical services as well, providing them with greater flexibility in spending these funds. Pennsylvania officials told us that they also had an unobligated balance of its ADAP base grant of over $2.4 million in grant year 2008. The Pennsylvania state government is working to revise its current structure. HRSA sought to address the interaction between drug rebate funds and the RWTMA unobligated balance provisions by requesting from HHS permission to seek an exemption from the regulation for grantees from the Office of Management and Budget. HRSA told us that requiring ADAP rebate funds to be spent before grant funds increases the risk of unobligated balance penalties, and that the loss of grant funding and ineligibility for supplemental funding can pose difficulties for grantees. HRSA requested permission to seek an exemption from the otherwise applicable federal regulations for drug rebate states from HHS. HRSA believes the unobligated balance requirements were intended to ensure that federal funds are spent promptly, not to create a mechanism through which federal grants would be reduced. However, HRSA's request for permission to seek an exemption for drug rebate states was denied by HHS in November 2007. HHS stated that while federal regulations and the unobligated balance provisions create significant challenges for rebate states, the justification HRSA presented for the class deviation was "not compelling." HHS provided technical comments on a draft of the report, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Health and Human Services. The 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, please contact me at (202) 512- 7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may found on the last page of this report. Other staff who made major contributions to this report are listed in appendix I. In addition to the contact above, Thomas Conahan, Assistant Director; Robert Copeland, Assistant Director; Leonard Brown; Romonda McKinney Bumpus; Cathleen Hamann; Sarah Resavy; Rachel Svoboda; and Jennifer Whitworth made key contributions to this report.
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Funds are made available under the Ryan White Comprehensive AIDS Resources Emergency Act of 1990 (CARE Act) for individuals affected by HIV/AIDS. Part A provides for grants to metropolitan areas and Part B provides for grants to states and territories and associated jurisdictions for HIV/AIDS services and for AIDS Drug Assistance Programs (ADAP). The Ryan White HIV/AIDS Treatment Modernization Act of 2006 (RWTMA) reauthorized CARE Act programs for fiscal years 2007 through 2009. RWTMA requires name-based HIV case counts for determining CARE Act funding, but an exemption allows the use of code-based case counts through fiscal year 2009. RWTMA formulas include hold-harmless provisions that protect grantees' funding at specified levels. RWTMA also included provisions under which Part A and B grantees with unobligated balances over 2 percent at the end of the grant year incur a penalty in future funding. GAO was asked to examine CARE Act funding provisions. This report provides information on (1) how many Part B grantees collect and use name-based HIV case counts for CARE Act funding; (2) the distribution of Part A hold-harmless funding; and (3) reductions in Part B grantees' funding due to unobligated balance provisions. GAO reviewed agency documents and analyzed data on CARE Act funding. GAO interviewed 19 grantees chosen by geography, number of HIV/AIDS cases, and other criteria. GAO also interviewed federal government officials and other experts. Forty-seven of the total 59 Part B grantees had the Health Resources and Services Administration (HRSA) use their name-based HIV case counts to determine CARE Act formula funding for fiscal year 2009. The remaining 12 grantees had HRSA use their code-based HIV case counts to determine fiscal year 2009 CARE Act funding. If the exemption permitting code-based reporting is not extended, it is likely that future fiscal year funding will be based exclusively on name-based counts. Any Part B grantees who currently have name-based HIV reporting systems, but that had not been collecting name-based HIV case counts long enough to include all cases, could face a reduction in fiscal year 2010 funding. Part A hold-harmless funding was more widely distributed among eligible metropolitan areas (EMA) in fiscal year 2009 than in fiscal year 2004, the last year for which we reported this information. Seventy-one percent of EMAs received hold-harmless funding in fiscal year 2009, whereas 41 percent received hold-harmless funding in fiscal year 2004. In fiscal year 2009, $24,836,500 in hold-harmless funding was distributed compared to $8,033,563 in fiscal year 2004. However, the range of CARE Act hold-harmless funding among EMAs, as measured by funding per case, was smaller in 2009 than in 2004. In fiscal year 2009, EMAs received from $0 to $208 in hold-harmless funding per case. In fiscal year 2004, EMAs received between $0 and $1,020 in hold-harmless funding per case. The hold-harmless funding resulted in EMAs receiving formula funding ranging from $645 to $854 per case in fiscal year 2009 and from $1,221 to $2,241 per case in fiscal year 2004. Sixteen Part B grantees had reductions in their grant year 2009 funding due to their unobligated balances at the end of grant year 2007. Part B base grant penalties ranged from $6,433 in Palau to $1,493,935 in Ohio. ADAP base grant penalties ranged from $26,233 in Maine to $12,670,248 in Pennsylvania. Part B grantees with unobligated funds provided various reasons for these balances, and said that some of these reasons were beyond their control. Grantees and HRSA stated that a requirement to spend drug rebate funds before obligating federal funds makes it more difficult to avoid unobligated balances. Twenty- seven ADAPs purchase drugs exclusively through a federal drug discount program, under which they pay full price and receive a rebate at some point in the future. HRSA sought to address the interaction between drug rebate funds and the RWTMA unobligated balance provisions by requesting from the Department of Health and Human Services (HHS) permission to seek an exemption for grantees from the relevant regulations from the Office of Management and Budget. However, HHS denied this request, stating that the justification HRSA presented for requesting the exemption was "not compelling." HHS provided technical comments on a draft of this report, which GAO incorporated as appropriate.
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The federal real property portfolio is vast and diverse--totaling over 900,000 buildings and structures--including office buildings, warehouses, laboratories, hospitals, and family housing--worth hundreds of billions of dollars. The six largest federal property holders--DOD, GSA, the U.S. Postal Service, and the Departments of Veterans Affairs (VA), Energy, and the Interior--occupy 87.6 percent of the total square footage in federal buildings. Over all, the federal government owns approximately 83 percent of this space and leases or otherwise manages the rest; however, these proportions vary by agency. For example GSA, the central leasing agent for most agencies, now leases more space than it owns. After we designated federal real property as a high-risk area in 2003, the President signed Executive Order 13327 in February 2004, which established new federal property guidelines for 24 executive branch departments and agencies. Among other things, the executive order called for creating the interagency FRPC to develop guidance, collect best practices, and help agencies improve the management of their real property assets. DOD has undergone four BRAC rounds since 1988 and is currently implementing its fifth round. Generally, the purpose of prior BRAC rounds was to generate savings to apply to other priorities, reduce property deemed excess to needs, and realign DOD's workload and workforce to achieve efficiencies in property management. As a result of the prior BRAC rounds in 1988, 1991, 1993, and 1995, DOD reported th had reduced its domestic infrastructure, transferred hundreds of thousands of acres of unneeded property to other federal and nonfederal entities, and saved billions of dollars annually that could be applied to other higher priority defense needs. The 2005 BRAC round affected hundreds of locations across the country through 24 major closures, 24 major realignments, and 765 lesser actions, which also included terminating leases and consolidating various activities. Legislation authorizing the 2005 BRAC round maintained requirements establishe the three previous BRAC rounds that GAO provide a detailed analysis of DOD's recommendations and of the BRAC selection process. We submitted our report to Congress in July 2005 and testified before the BRAC Commission soon thereafter. Since that time, GAO has published annual reports on the progress, challenges, and costs and savings of the 2005 round, in addition to numerous reports on other aspects of implementing the 2005 BRAC round. When we designated federal real property management as high risk, we reported that the federal government faced a number of obstacles to effectively managing its real property. These included a lack of strategic focus on real property issues, a lack of reliable real property data, legal limitations, and stakeholder influences in real property decision making. In 2003, we reported that despite the magnitude and complexity of real- property-related problems, there had been no governmentwide strategic focus on real property issues. Not having a strategic focus can lead to ineffective decision making, such as choosing to rely too much on leasing for long-term government property needs. In 2008, we found that decisions to lease selected federal properties were not always driven by cost- effectiveness considerations. For example, we estimated that the decision to lease the Federal Bureau of Investigation's field office in Chicago, Illinois, instead of constructing a building the government would own, cost about $40 million more over 30 years. GSA officials noted that limited availability of upfront capital was one of the reasons that prevented ownership at that time. Federal budget scorekeeping rules require the full cost of construction to be recorded up front in the budget, whereas only the annual lease payments plus cancellation costs need to be recorded for operating leases. In April 2007 and January 2008, we recommended that the Office of Management and Budget (OMB) develop a strategy to reduce agencies' reliance on costly leasing where ownership would result in long- term savings. We noted that such a strategy could identify the conditions under which leasing is an acceptable alternative, include an analysis of real property budget scoring issues, and provide an assessment of viable alternatives. OMB concurred with this recommendation but has not yet developed a strategy to reduce agencies' reliance on leasing. In 2003, we found that a lack of reliable real property data compounded real property management problems. The governmentwide data maintained at that time were unreliable, out of date, and of limited value. In addition, certain key data that would be useful for budgeting and strategic management were not being maintained, such as data on space utilization, facility condition, historical significance, security, and age. We also found that some of the major real-property-holding agencies faced challenges developing reliable data on their real property assets. We noted that reliable governmentwide and agency-specific real property data are critical for addressing real property management challenges. For example, better data would help the government determine whether assets are being used efficiently, make investment decisions, and identify unneeded properties. In our February 2011 high-risk update, we noted that a third obstacle to consolidating federal properties is the legal requirements agencies must adhere to before disposing of a property, such as requirements for screening and environmental cleanup. Currently, before GSA can dispose of a property that a federal agency no longer needs, it is required to offer the property to other federal agencies. If other federal agencies do not have a need for the property, GSA must then make the property available to state and local governments and certain nonprofit organizations and institutions for public benefit uses such as homeless shelters, educational facilities, or fire or police training centers. As a result of this lengthy process, GSA's underutilized or excess properties may remain in an agency's possession for years and continue to accumulate maintenance and operations costs. Further complicating this issue is that different agencies have different authorities to enter into leases with public and private entities for the use of federal property, to sell real property, and to retain the proceeds from these transactions. For example, DOD has the authority to both enter into these leases and retain proceeds for the sale of properties, but the Department of Justice does not have the authority to do either. In addition, federal agencies are required by law to assess and pay for any environmental cleanup that may be needed before disposing of a property--a process that may require years of study and result in significant costs. In some cases, the cost of the environmental cleanup may exceed the costs of continuing to maintain the excess property in a shut-down status. We have also noted that the National Historic Preservation Act, as amended, requires agencies to manage historic properties under their control and jurisdiction and to consider the effects of their actions on historic preservation. Since properties more than 50 years old are eligible for historic designation and the average age of properties in GSA's portfolio is 46 years, this issue will soon become critically important to GSA. Local stakeholders--including local governments, business interests, private real estate interests, sector construction and leasing firms, historic preservation organizations, various advocacy groups for citizens that benefit from federal programs, and the public in general--often view federal facilities as the physical face of the federal government in their communities. The interests of these multiple and often competing stakeholders may not always align with the most efficient use of government resources and can complicate real property decisions. For example, as we first reported in 2007, VA officials noted that stakeholders and constituencies, such as historic building advocates or local communities that want to maintain their relationship with VA, often prevent the agency from disposing of properties. In 2003, we indicated that an independent commission or governmentwide task force might be necessary to help overcome stakeholder influences in real property decision making. The administration and real-property-holding agencies have made progress in a number of areas since we designated federal real property as high risk in 2003. Specifically, the federal government has taken steps toward strategically managing its real property and improving the reliability of its real property data. However, many problems related to unneeded property and leasing persist because the government has not addressed the underlying legal limitations and stakeholder influences which we identified. As part of the government's efforts to strategically manage its real property, the administration established FRPC--a group composed of the OMB Controller and the senior real property officers of landholding agencies--to support real property reform efforts. Through FRPC, the landholding agencies have also established asset management plans, standardized real property data reporting, and adopted various performance measures to track progress. The asset management plans are updated annually and help agencies take a more strategic approach to real property management by indicating how real property moves the agency's mission forward, outlining the agency's capital management plans, and describing how the agency plans to operate its facilities and dispose of unneeded real property, including listing current and future disposal plans. Although several FRPC member agencies said that the body no longer meets regularly, it remains a forum for agency coordination on real property issues and could serve a larger role in future real property management. In our February 2011 high-risk update, we reported that the federal government has also taken numerous steps since 2003 to improve the completeness and reliability of its real property data. FRPC, in conjunction with GSA, established the Federal Real Property Profile (FRPP) to meet a requirement in Executive Order 13327 for a single real property database that includes all real property under the control of executive branch agencies. FRPP contains asset-level information submitted annually by agencies on 25 high-level data elements, including four performance measures that enable agencies to track progress in achieving property management objectives. In response to our 2007 recommendation to improve the reliability of FRPP data, OMB required, and agencies implemented, data validation plans that include procedures to verify that the data are accurate and complete. Furthermore, GSA's Office of Governmentwide Policy (OGP), which administers the FRPP database, instituted a data validation process that precludes FRPP from accepting an agency's data until the data pass all established business rules and data checks. In our most recent analysis of the reliability of FRPP data, we found none of the basic problems we have previously found, such as missing data or inexplicably large changes between years. In addition, agencies continue to improve their real property data for their own purposes. From a governmentwide perspective, OGP has sufficient standards and processes in place for us to consider the 25 elements in FRPP as a database that is sufficiently reliable to describe the real property holdings of the federal government. Consequently, we removed the data element of real property management from the high-risk list this year. In 2007, we recommended that OMB, which is responsible for reviewing agencies' progress on federal real property management, assist agencies by developing an action plan to address the key problems associated with decisions related to unneeded real property, including stakeholder influences. OMB agreed with the recommendation but has yet to implement it. However, the administration's recently proposed legislative framework, CPRA, is somewhat responsive to this recommendation in that it addresses both legal limitations and stakeholder influences in real property decision making. According to the proposal, the purpose of CPRA would be, in part, to "streamline the current legal framework" and "facilitate the disposal of those unneeded civilian real properties that are currently subject to legal restrictions that prevent their disposal." The proposal itself, however, does not describe how this streamlining would be accomplished. To address stakeholder influences, CPRA would create an independent board to recommend federal properties for disposal or consolidation after receiving recommendations from civilian landholding agencies. Grouping all disposal and consolidation decisions into one list that Congress would vote on in its entirety could help to blunt local stakeholder influences at any individual site. In addition, CPRA could help to reduce the government's overreliance on leasing by recommending that the government consolidate operations from leased space to owned space where efficient. In our prior work on the BRAC process, we identified certain key elements underpinning the process, which may be applicable to the management of real property governmentwide. The BRAC process was designed to address certain challenges to closures or realignments, including stakeholder interests, thereby permitting DOD to dispose of installations or realign its missions to better use its facilities and generate savings. The 2005 BRAC round followed a historical analytical framework, carrying many elements of the process forward or building upon lessons learned from previous rounds. DOD also established a structured process for obtaining and analyzing data that provided a consistent basis for identifying and evaluating closure and realignment recommendations, and DOD used a logical, reasoned, and well-documented process. In addition, we have identified lessons learned from DOD's 1988, 1991, 1993, and 1995 rounds, and we have begun an effort to assess lessons learned from the 2005 BRAC round. DOD's 2005 BRAC Process DOD's 2005 BRAC process consisted of a series of legislatively-prescribed steps, as follows: DOD began to develop options for closure or realignment recommendations. The military departments developed service-specific installation closure and realignment options. In addition, the Office of the Secretary of Defense established seven joint cross-service teams, called joint cross-service groups, to develop options across common business- oriented functions, such as medical, supply storage, and administrative activities. These closure and realignment options were reviewed by DOD's Infrastructure Executive Council--a senior-level policy-making and oversight body for the entire process. Options approved by this council were submitted to the Secretary of Defense for his review and approval. DOD developed hundreds of closure or realignment options for further analysis which eventually led to DOD's submitting over 200 recommendations to the BRAC Commission for analysis and review. BRAC Commission performed an independent review of DOD's recommendations. After DOD selected its base closure and realignment recommendations, it submitted them to the BRAC Commission, which performed an independent review and analysis of DOD's recommendations. The Commission could approve, modify, reject, or add closure and realignment recommendations. Also, the BRAC Commission provided opportunities to interested parties, as well as community and congressional leaders, to provide testimony and express viewpoints. The Commission then voted on each individual closure or realignment recommendation, and those that were approved were included in the Commission's report to the President. In 2005, the BRAC Commission reported that it had rejected or modified about 14 percent of DOD's closure and realignment recommendations. President approved BRAC recommendations. After receiving the recommendations, the President was to review the recommendations of the Secretary of Defense and the Commission and prepare a report by September 23, 2005, containing his approval or disapproval of the Commission's recommendations as a whole. Had the President disapproved of the Commissions' recommendations, the Commission would have had until October 20, 2005, to submit a revised list of recommendations to the President for further consideration. If the President had not submitted a report to Congress of his approval of the Commissions recommendations by November 7, 2005, the BRAC process would have been terminated. The President submitted his report and approval of the 2005 Commission's recommendations on September 15, 2005. Congress allowed the recommendations to become binding. After the President transmitted his approval of the Commission's recommendations to Congress, the Secretary of Defense would have been prohibited from implementing the recommendations if Congress had passed a joint resolution of disapproval within 45 days of the date of the President's submission or the adjournment of Congress for the session, whichever was sooner. Since Congress did not pass such a resolution, the recommendations became binding in November 2005. Congress established clear time frames for implementation. The BRAC legislation required DOD to complete recommendations for closing or realigning bases made in the BRAC 2005 round within the 6-year time frame ending on September 15, 2011, 6 years from the date the President submitted his approval of the recommendations to Congress. In July 2010, in our most recent report on the implementation of the 2005 BRAC recommendations, we reported that many DOD locations are scheduled to complete actions to implement the recommendations within months of the deadline, leaving little or no margin for slippage to finish constructing buildings and to move or hire the needed personnel. In developing its recommendations for the BRAC Commission, DOD relied on certain elements, as follows: Establish goals for the BRAC process. Prior to the start of the 2005 BRAC round, the Secretary of Defense emphasized the importance of transforming the military to make it more efficient as part of the 2005 BRAC round. Other goals for the 2005 BRAC process included fostering jointness among the four military services, reducing excess infrastructure, and producing savings. Prior rounds were more about reducing excess infrastructure and producing savings. Develop criteria for evaluating closures and realignments. DOD initially proposed eight selection criteria, which were made available for public comments via the Federal Register. Ultimately, Congress enacted the eight final BRAC selection criteria. In authorizing the 2005 BRAC round, Congress specified that the following four selection criteria, known as the "military value criteria," were to be given priority in developing closure and realignment recommendations: current and future mission capabilities and the impact on operational readiness of the total force, availability and condition of land, facilities, and associated airspace at both the existing and the potential receiving locations, ability to accommodate a surge in the force and future total force requirements at both the existing and the potential receiving location to support operations and training, and costs of operations and personnel implications. In addition to military value, Congress specified that DOD was to apply the following "other criteria" in developing its recommendations: costs and savings associated with a recommendation, economic impact on local communities near the installations, ability of infrastructure to support forces, missions, and personnel, and environmental impact. Additionally, Congress required that the Secretary of Defense develop and submit to Congress a force structure plan that laid out the numbers, size, and composition of the units that comprise U.S. defense forces, for example, divisions, ships, and air wings, based on the Secretary's assessment of the probable national security threats for the 20-year period beginning in 2005, along with a comprehensive inventory of global military installations. In authorizing the 2005 BRAC round, Congress specified that the Secretary of Defense publish a list of recommendations for the closure and realignment of military installations inside the United States based on the force-structure plan and infrastructure inventory, and on the eight final selection criteria. Estimate costs and savings to implement closure and realignment recommendations. To address the cost and savings criteria, DOD developed and used the Cost of Base Realignment Actions model--known as COBRA--a quantitative tool that DOD has used since the 1988 BRAC round to provide consistency in potential cost, savings, and return-on- investment estimates for closure and realignment options. We reviewed the COBRA model as part of our review of the 2005 and prior BRAC rounds and found it to be a generally reasonable estimator for comparing potential costs and savings among alternatives. As with any model, the quality of the output is a direct function of the input data. Also, the COBRA model relies to a large extent on standard factors and averages and does not represent budget quality estimates that are developed once BRAC decisions are made and detailed implementation plans are developed. Nonetheless, the financial information provides important input into the selection process as decision makers weigh the financial implications--along with military value and other factors--in arriving at final decisions regarding the suitability of various closure and realignment options. However, based on our assessment of the 2005 BRAC round, actual costs and savings were different from estimates. As we reported in November 2009, BRAC one-time implementation costs have risen to almost $35 billion in fiscal year 2010 compared with DOD's initial estimate of $21 billion in 2005. Similarly, net annual recurring savings have dropped to $3.9 billion in fiscal year 2010 compared with the $4.2 billion DOD estimated in 2005. Establish a common analytical framework. To ensure that the selection criteria were consistently applied, the Office of the Secretary of Defense required the military services and the seven joint cross-service groups to first perform a capacity analysis of facilities and functions at specific locations prior to developing recommendations. The capacity analysis relied on data calls to hundreds of locations to obtain certified data to assess such factors as maximum potential capacity, current capacity, current usage, and excess capacity. Then, the military services and joint cross-service groups performed a military value analysis for the facilities and functions that included a facility's or function's current and future mission capabilities, physical condition, ability to accommodate future needs, and cost of operations. Establish an organizational structure. As previously mentioned, the Office of the Secretary of Defense emphasized the need for joint cross- service groups to analyze common business-oriented functions. For the 2005 round, as for the 1993 and 1995 rounds, these joint cross-service groups performed analyses and developed closure and realignment options in addition to those developed by the military departments. In contrast, our evaluation of DOD's 1995 round indicated that few cross- service recommendations were made, in part because of the lack of high- level leadership to encourage consolidations across the services' functions. In the 1995 round, the joint cross-service groups submitted options through the military departments for approval, resulting in few being approved. The number of approved recommendations that the joint cross-service groups developed significantly increased in the 2005 round. This was due, in part, to high-level leadership's ensuring that the options were approved not by the military services but rather by a DOD senior- level group. Also, one of these joint cross-service groups developed a number of recommendations to realign administrative-type functions out of leased space into DOD-owned facilities. Involve the audit community to better ensure data accuracy. The DOD Inspector General and military service audit agencies played key roles in identifying data limitations, fostering corrections, and improving the accuracy of the data used in the process. The oversight roles of the audit organizations, given their access to relevant information and officials as the process evolved, helped to improve the accuracy of the data used in the BRAC process and added an important aspect to the quality and integrity of the data used to develop closure and realignment recommendations. There are a number of important similarities and differences between BRAC and a civilian process as proposed in CPRA. As a similarity, both BRAC and CPRA employ the all-or-nothing approach to disposals and consolidations, meaning that once the final list is approved, it must be approved or rejected as a whole. This approach can help overcome stakeholders' interests. Another similarity may be the need for a phased approach. Through the five prior BRAC rounds, DOD has reduced its domestic infrastructure, transferred hundreds of thousands of acres of unneeded property to other federal and nonfederal entities, and saved funds for application to higher priority defense needs. Similarly, it may take several BRAC-like rounds to complete the disposals and consolidations of civilian real property owned and leased by many disparate agencies including GSA, VA, Interior, and the Department of Energy. On the other hand, an important difference in the two processes may be the role of the independent board. DOD has participated in the BRAC process by generating lists of bases to close and realign that the last four BRAC Commissions have then reviewed. On the civilian side, however, agencies would provide recommendations to the proposed civilian board, but the board would ultimately be responsible for developing the lists of disposals and consolidations. In closing, the government has made strides toward strategically managing its real property and improving its real property planning and data over the last 10 years, but those efforts have not yet led to sufficient reductions in excess property and overreliance on leasing. DOD's experiences with BRAC, including establishing criteria and a common analytical framework up front, could help this effort move forward. Chairman Denham, Ranking Member Norton, and Members of the Subcommittee, this concludes our prepared statement. We will be pleased to answer any questions that you may have at this time. For further information on this testimony, please contact David Wise at (202) 512-2834 or [email protected] regarding federal real property, or Brian Lepore at (202) 512-4523 or [email protected] regarding the Base Realignment and Closure process. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. In addition to the contacts named above, Keith Cunningham, Assistant Director; Laura Talbott, Assistant Director; Vijay Barnabas; Hilary Benedict; Jessica Bryant-Bertail; Elizabeth Eisenstadt; Sarah Farkas; Susan Michal-Smith; and Michael Willems made important contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The federal government holds more than 45,000 underutilized properties that cost nearly $1.7 billion annually to operate, yet significant obstacles impede efforts to close, consolidate, or find other uses for them. In January 2003, GAO designated federal real property management as a high-risk area, in part because of the number and cost of these properties. The Office of Management and Budget (OMB) is responsible for reviewing federal agencies' progress in real property management. In 2007, GAO recommended that OMB assist agencies by developing an action plan to address key obstacles associated with decisions related to unneeded real property, including stakeholder influence. The President's fiscal year 2012 budget proposed establishing a legislative framework for disposing of and consolidating civilian real property, referred to as a Civilian Property Realignment Act (CPRA), which may be designed to address stakeholder influences in real property decision making. This testimony identifies (1) obstacles to effectively managing federal real property, (2) actions designed to overcome those obstacles, including government actions and CPRA, and (3) key elements of the Department of Defense's (DOD) base realignment and closure (BRAC) process that are designed to help DOD close or realign installations and may be relevant for CPRA. To do this work, GAO reviewed GAO reports, other reports, and CPRA. In designating federal real property management as a high-risk issue in 2003, GAO found that the federal government faced a number of obstacles to effectively managing its real property. These included its lack of strategic focus on real property issues, a lack of reliable real property data, legal limitations, and stakeholder influence. That year, GAO reported that despite the magnitude and complexity of real-property-related problems, there was no governmentwide strategic focus on real property issues and that governmentwide data were unreliable and outdated. GAO also reported then that before disposing of excess property, the General Services Administration is legally required to follow a lengthy screening process, which includes offering the property to other federal agencies and other entities for public uses. Furthermore, stakeholders--including local governments, private real estate interests, and advocacy groups--may have different interests that do not always align with the most efficient use of government resources. Since 2003, the federal government has taken steps to address some of these obstacles and improve its real property management. For instance, the administration and real-property-holding agencies have improved their strategic management of real property by establishing an interagency Federal Real Property Council designed to enhance real property planning processes. The government has also implemented controls to improve the reliability of federal real property data. However, many problems related to unneeded property and leasing have persisted because legal limitations and stakeholder influences remain. GAO's 2007 recommendation that OMB develop an action plan is designed to address these problems. In addition, CPRA proposes an independent board to identify facilities for disposal and consolidation, which could streamline legal requirements and mitigate stakeholder influences. Congress authorized DOD to undergo five BRAC rounds to reduce excess property and realign DOD's workload to achieve efficiencies and savings in property management. The BRAC process, much like CPRA, was designed to address obstacles to closures or realignments, thus permitting DOD to close installations or realign its missions to better use its facilities and generate savings. GAO's prior work on the BRAC process identified certain key elements that may be applicable to managing civilian real property, such as establishing goals and an organizational structure, developing criteria and an analytical framework, using a model to estimate costs and savings, and involving the audit community to better ensure data accuracy. A key similarity between BRAC and CPRA is that both establish an independent board that reviews agency recommendations; a key difference is that the BRAC process created criteria for selecting installations for realignment while CPRA does not include specific criteria to be used to select properties for disposal or consolidation.
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In 1992 the National Commission on Severely Distressed Public Housing (the Commission) reported that approximately 86,000, or 6 percent, of the nation's public housing units were severely distressed--characterized by physical deterioration and uninhabitable living conditions, high levels of poverty, inadequate and fragmented services, institutional abandonment, and location in neighborhoods often as blighted as the public housing sites themselves. In response to the Commission's report, Congress established the Urban Revitalization Demonstration Program, more commonly known as HOPE VI, at HUD. The program awards grants to public housing authorities (PHA). The grants can fund, among other things, the demolition of distressed public housing, capital costs of major rehabilitation, new construction, and other physical improvements, and community and supportive service programs for residents, including those relocated as a result of revitalization efforts. Beginning in 1996 with the adoption of the Mixed-Finance Rule, PHAs were allowed to use public housing funds designated for capital improvements, including HOPE VI funds, to leverage other public and private investment to develop public housing units. Public funding can come from federal, state, and local sources. For example, HUD itself provides capital funding to housing agencies to help cover the costs of major repair and modernization of units. Private sources can include mortgage financing and financial or in- kind contributions from nonprofit organizations. HUD's requirements for HOPE VI revitalization grants are laid out in each fiscal year's notice of funding availability (NOFA) and grant agreement. NOFAs announce the availability of funds and contain application requirements, threshold requirements, rating factors, and the application selection process. Grant agreements, which change each fiscal year, are executed between each grantee and HUD and specify the activities, key deadlines, and documentation that grantees must meet or complete. NOFAs and grant agreements also contain guidance on resident involvement in the HOPE VI process. HUD encourages grantees to communicate, consult, and collaborate with affected residents and the broader community, but allows grantees the final decision-making authority. Grant applications are screened to determine whether they meet the eligibility and threshold requirements in the NOFA. A review panel (which may include the Deputy Assistant Secretary for Public Housing Investments, the Assistant Secretary for Public and Indian Housing, and other senior HUD staff) recommends the most highly rated applications for selection, subject to the amount available for funding. HUD's Office of Public Housing Investments, housed in the Office of Public and Indian Housing, manages the HOPE VI program. Grant managers within the Office of Public Housing Investments are primarily responsible for overseeing HOPE VI grants. They approve changes to the revitalization plan and coordinate the review of the community and supportive services plan that each grantee submits. In addition, grant managers track the status of grants by analyzing data on the following key activities: relocation of original residents, demolition of distressed units, new construction or rehabilitation, reoccupancy by some original residents, and occupancy of completed units. Public and Indian Housing staff located in HUD field offices also play a role in overseeing HOPE VI grants, including coordinating and reviewing construction inspections. Beginning in fiscal year 1999, HUD began to encourage HOPE VI revitalization grant applicants to form partnerships with local universities to evaluate the impact of their proposed HOPE VI revitalization plans. In 2003, Congress reauthorized the HOPE VI program and required us to report on the extent to which public housing for the elderly and non- elderly persons with disabilities was severely distressed. We subsequently reported that available data on the physical and social conditions of public housing are insufficient to precisely determine the extent to which developments occupied primarily by elderly persons and non-elderly persons with disabilities are severely distressed. Using HUD's data on public housing developments--buildings or groups of buildings---and their tenants, we identified 3,537 developments primarily occupied by elderly residents and non-elderly persons with disabilities. Data from HUD and other sources indicated that 76 (2 percent) of these 3,537 developments were potentially severely distressed. According to our analysis of HUD data for our November 2002 report, housing authorities expected to leverage an additional $1.85 in funds from other sources for every dollar received in HOPE VI revitalization grants awarded since the program's inception through fiscal year 2001. However, HUD considered the amount of leveraging to be slightly higher because it treated as "leveraged" both (1) HOPE VI grant funds competitively awarded for the demolition of public housing units and (2) other public housing capital funds that the housing authorities would receive even in the absence of the revitalization grants. Even when public housing funds were excluded from leveraged funds, our analysis of HUD data showed that projected leveraging had increased; for example, 1993 grantees expected to leverage an additional $0.58 for every HOPE VI grant dollar (excluding public housing funds), while 2001 grantees expected to leverage an additional $2.63 from other sources (excluding public housing funds). But, our analysis of HUD data through fiscal year 2001 also indicated that 79 percent of funds that PHAs had budgeted came from federal sources, when low-income housing tax credit funding was included. Finally, our analysis showed that although the majority of funds budgeted overall for supportive services were HOPE VI funds, the amount of non-HOPE VI funds budgeted for supportive services increased dramatically since the program's inception. Specifically, while 22 percent of the total funds that fiscal year 1997 grantees budgeted for supportive services were leveraged funds, 59 percent of the total that fiscal year 2001 grantees budgeted were leveraged funds. Although HUD had been required to report leveraging and cost information to the Congress annually since 1998, it had not done so at the time of our 2002 report. As required by law, this annual report is to include the cost of public housing units revitalized under the program and the amount and type of financial assistance provided under and in conjunction with the program. We recommended that the Secretary of Housing and Urban Development provide these annual reports to Congress and include in these annual reports, among other things, information on the amounts and sources of funding used at HOPE VI sites, including equity raised from low-income housing tax credits, and the total cost of developing public housing units at HOPE VI sites, including the costs of items subject to HUD's development cost limits and those not subject. In response to this recommendation, HUD issued annual reports to Congress for fiscal years 2002 through 2006 that include information on the amounts and sources of funding used at HOPE VI sites. In each of these reports, HUD included the amount of funds leveraged from low- income housing tax credits in its data on non-federal funds. Based on data reported in the 2006 annual report, since the program's inception HOPE VI grantees have cumulatively leveraged $1.28 per HOPE VI grant dollar expended. Currently, we have work underway examining, among other things, how and the extent to which leveraging occurs in several federal programs, including the HOPE VI program. Our May 2003 report found that a variety of factors diminished HUD's ability to oversee HOPE VI grants. In particular, the limited numbers of grant managers, a shortage of field office staff, and confusion about the role of field offices had diminished the agency's ability to oversee HOPE VI grants. Our site visits showed that HUD field staff was not systematically performing required annual reviews. For example, for revitalization grants awarded in 1996, some never received an annual review and no grant had had an annual review performed each year since the grant award. From our interviews with field office managers, we determined that there were two reasons why annual reviews were not performed. First, many of the field office managers we interviewed stated that they simply did not have enough staff to get more involved in overseeing HOPE VI grants. Second, some field offices did not seem to understand their role in HOPE VI oversight. For instance, one office thought that the annual reviews were primarily the responsibility of the grant managers. Others stated that they had not performed the reviews because construction had not yet started at the sites in their jurisdiction or because they did not think they had the authority to monitor grants. As a result of our findings, we recommended that HUD clarify the role of HUD field offices in HOPE VI oversight and ensure that the offices conducted required annual reviews. In response to this recommendation, HUD published new guidance in March 2004 that clarified the role of HUD field offices in HOPE VI oversight and the annual review requirements. According to the guidance, HUD field office responsibilities include conducting an annual risk assessment, which should consider such factors as missed deadlines and adverse publicity and should be used to determine whether an on-site review should be conducted and which areas of the HOPE VI grant should be reviewed. The published guidance included a risk assessment form and sample monitoring review reports. While HUD's action was responsive to our recommendation, we have not examined the extent to which it has corrected the problems we identified in our 2003 report. Our 2003 report also noted that the status of work at HOPE VI sites varied, and that the majority of grantees had missed one or more of three major deadlines specified in their grant agreements: the submission of a revitalization plan to HUD, the submission of a community and supportive services plan to HUD, and completion of construction. We made recommendations to HUD designed to ensure better compliance with grant agreements. More specifically: Of the 165 sites that received revitalization grants through fiscal year 2001, 15 had completed construction at the time of our review. Overall, at least some units had been constructed at 99 of the 165 sites, and 47 percent of all HOPE VI funds had been expended. In general, we found that the more recently awarded grants were progressing more quickly than earlier grants. For example, fiscal year 1993 grantees had taken an average of 31 months to start construction. In contrast, the fiscal year 2000 grantees started construction an average of 10 months after their grant agreement was executed. HUD cited several reasons that may explain this improvement, such as later grantees having more capacity than the earlier grantees, the applications submitted in later years being more fully developed to satisfy NOFA criteria, and HUD placing greater emphasis on reporting and accountability. To further improve its selection of HOPE VI grantees, we recommended that HUD continue to include past performance as an eligibility requirement in each year's NOFA--that is, to take into account how housing authorities had performed under any previous HOPE VI grant agreements. In response to this recommendation, HUD stated in its fiscal year 2004 NOFA that a HOPE VI application would not be rated or ranked, and would be ineligible for funding, if the applicant had an existing HOPE VI revitalization grant and (1) development was delinquent due to actions or inactions that were not beyond the control of the grantee and (2) the grantee was not making substantial progress towards eliminating the delinquency. According to the fiscal year 2006 NOFA, the ratings of applicants that received HOPE VI grants between 1993 and 2003 can be lowered for failure to achieve adequate progress. For at least 70 percent of the grants awarded through fiscal year 1999, grantees had not submitted their revitalization plans or community and supportive services plans to HUD on time. Moreover, the large majority of grantees had also missed their construction deadlines; in the case of 9 grants, no units had been constructed as of the end of December 2002. HUD had taken some steps to encourage adherence to its deadlines; for example, HUD began requiring applicants to provide a certification stating that they had either procured a developer for the first phase of development, or that they would act as their own developer. However, HUD did not have an official enforcement policy to deal with grantees that missed deadlines. As a result, we recommended that HUD develop a formal, written enforcement policy to hold public housing authorities accountable for the status of their grants. HUD agreed with this recommendation, and in December, 2003 notified several grantees that they were nearing deadlines and that failure to meet these deadlines could result in HUD placing the grant in default. According to the 2006 NOFA, HUD may withdraw funds from grantees that have not proceeded within a reasonable timeframe, as outlined in their program schedule. In our November 2003 report, we found that most residents at HOPE VI sites had been relocated to other public housing, or other subsidized housing, and that grantees expected that about half of the original residents would return to the revitalized sites. In our examination of sites that had received HOPE VI grants in 1996, we found that the housing authorities had involved public housing residents in the planning and implementation process to varying degrees. Further, HUD data and information obtained during our site visits suggested that the supportive services provided public housing residents yielded at least some positive outcomes. Finally, according to our analysis of census and other data, the neighborhoods in which 1996 HOPE VI sites are located had generally experienced positive improvements in educational attainment levels, average household income, and percentage of people in poverty, although we were unable to determine the extent to which the HOPE VI program contributed to these changes. According to HUD data, approximately 50 percent of the almost 49,000 residents that had been relocated as of June 30, 2003, had been relocated to other public housing; about 31 percent had used vouchers to rent housing in the private market; approximately 6 percent had been evicted; and about 14 percent had moved without giving notice or vacated for other reasons. However, because HUD did not require grantees to report the location of original residents until 2000, grantees had lost track of some original residents. Although grantees, overall, expected that 46 percent of all the residents that occupied the original sites would return to the revitalized sites, the percentage varied greatly from site to site. A variety of factors may have affected the expected return rates, such as the numbers and types of units to be built at the revitalized site and the criteria used to select the occupants of the new public housing units. We found that the extent to which the 1996 grantees involved residents in the HOPE VI process varied. Although all of the 1996 grantees held meetings to inform residents about revitalization plans and solicit their input, some of them took additional steps to involve residents in the HOPE VI process. For example, in Tucson, Arizona, the housing authority waited until the residents had voted their approval before submitting the revitalization plan for the Connie Chambers site to the city council. In other cases, litigation or the threat of litigation ensured resident involvement. For instance, under a settlement agreement, the Chicago Housing Authority's decisions regarding the revitalization of Henry Horner Homes were subject to the approval of the Horner Resident Committee. Overall, based on the information available at the time of our 2003 report, grantees had provided a variety of community and supportive services, including case management and direct services such as computer and job training programs. Grantees had also used funds set aside for community and supportive services to construct facilities where services were provided by other entities. Information we collected during our visits to the 1996 sites, as well as limited HUD data on all 165 grants awarded through fiscal year 2001, indicated that HOPE VI community and supportive services had achieved or contributed to positive outcomes. For example, 31 of 49 participants in a Housing Authority of Pittsburgh health worker training program had obtained employment, while 114 former project residents in Louisville, Kentucky had enrolled in homeowner counseling and 34 had purchased a home. According to our analysis of census and other data, the neighborhoods in which 1996 HOPE VI sites are located generally have experienced improvements in a number of indicators used to measure neighborhood change, such as educational attainment levels, average housing values, and percentage of people in poverty. For example, our analysis showed that in 18 of 20 HOPE VI neighborhoods, the percentage of the population with a high school diploma increased, in 13 neighborhoods average housing values increased, and in 14 neighborhoods the poverty rate decreased between 1990 and 2000. For a number of reasons--such as relying on 1990 and 2000 census data even though HOPE VI sites were at varying stages of completion--we could not determine the extent to which HOPE VI contributed to these changes. However, we found that several studies conducted by universities and private institutions also showed that the neighborhoods in which HOPE VI sites are located had experienced positive changes in income, employment, community investment, and crime indicators. For example, one study found that per capita income in eight selected HOPE VI neighborhoods increased an average of 71 percent, compared with 14.5 percent for the cities in which these sites are located, between 1989 and 1999. We also observed that the HOPE VI program also may influence changes in neighborhood indicators by demolishing older, distressed public housing alone. For example, in the 6 HOPE VI neighborhoods where the original public housing units were demolished, but no on-site units had been completed, measured educational attainment and income levels increased. 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. Individuals making key contributions to this testimony included Alison Gerry, John McGrail, Lisa Moore, Paul Schmidt, and Mijo Vodopic. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Since fiscal year 1992, the Department of Housing and Urban Development (HUD) has awarded more than $6 billion in HOPE VI program grants to public housing authorities to revitalize severely distressed public housing and provide supportive services to residents. HUD has encouraged housing authorities to use their HOPE VI grants to attract, or leverage, funding from other sources, including other federal, state, local, and private-sector sources. Projects funded with public and private funds are known as mixed-finance projects. This testimony is based primarily on three reports that GAO issued between November 2002 and November 2003, focusing on (1) the financing of HOPE VI projects, including the amounts of funds leveraged from non-HOPE VI sources; (2) HUD's oversight and administration of the program; and (3) the program's effects on public housing residents and neighborhoods surrounding HOPE VI sites. As requested, the statement summarizes the key findings from these reports, the recommendations GAO made to HUD for improving HOPE VI program management, and HUD's actions in response to the recommendations. In its November 2002 report, GAO found that housing authorities expected to leverage--for each HOPE VI dollar received--$1.85 in funds from other sources, and that the authorities projected generally increasing amounts of leveraged funds. GAO also found that even with the general increase in projected leveraging, 79 percent of the budgeted funds in mixed-finance projects that HUD had approved through fiscal year 2001 came from federal sources. GAO recommended that HUD provide the Congress with annual reports on the HOPE VI program, as required by statute, and provide data on the amounts and sources of funding used at HOPE VI sites. HUD has submitted these reports to Congress since fiscal year 2002. According to the 2006 report, HOPE VI grantees have cumulatively leveraged, from the program's inception through the second quarter of fiscal year 2006, $1.28 for every HOPE VI grant dollar expended. In its May 2003 report, GAO found that HUD's oversight of the HOPE VI program had been inconsistent for several reasons, including a shortage of grant managers and field office staff and confusion about the role of field offices. A lack of enforcement policies also hampered oversight; for example, HUD had no policy regarding when to declare a grantee in default of the grant agreement or apply sanctions. GAO made several recommendations designed to improve HUD's management of the program. HUD concurred with these recommendations and has taken actions in response, including publishing guidance outlining the oversight responsibility of field offices and notifying grantees that they would be in default of their grant agreement if they fail to meet key deadlines. In its November 2003 report, GAO found that most of the almost 49,000 residents that had been relocated as of June 2003 had moved to other public or subsidized housing; small percentages had been evicted, moved without giving notice, or vacated for other reasons. Grantees expected that about half of the original residents would return to the revitalized sites. Limited HUD data and information obtained during GAO's site visits suggested that the grantee-provided community and supportive services had yielded some positive outcomes, such as job training and homeownership. Finally, GAO's analysis of Census and other data showed that neighborhoods surrounding 20 HOPE VI sites (awarded grants in 1996) experienced improvements in several indicators used by researchers to measure neighborhood change, such as educational attainment levels, average household income, and percentage of people in poverty. However, for a number of reasons, GAO could not determine the extent to which the HOPE VI program was responsible for the changes.
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The Congress has long recognized the value of allowing laboratories to conduct a certain amount of discretionary research. The current LDRD program grew out of legislation enacted in 1977 that authorized the use of a reasonable amount of laboratory funds to conduct employee-suggested, research and development (R&D) projects selected at the discretion of the laboratory directors. DOE's implementation of its authority to conduct discretionary research evolved over the years. For example, in 1983, DOE Order 5000.1A formally established a discretionary R&D program called Exploratory Research and Development (ER&D); in 1992, DOE Order 5000.4A established the current LDRD program, which includes the previously defined ER&D program and other discretionary work, and further memorialized its long-standing policy of allowing its multi-program national laboratories the discretion to conduct self-initiated, independent R&D; and in 1997, DOE revised its LDRD program direction in DOE Order 413.2 providing clearer guidance on how LDRD funds may and may not be used. Each of DOE's nine multi-program national laboratories has an LDRD program. Funding for LDRD projects comes from existing program budgets. Historically, this has been accomplished by allowing each laboratory to assess its program's budgets at a set rate of up to 6 percent and accumulate that money into an overhead account for its LDRD program. DOE's field offices oversee each laboratory's LDRD program by approving the laboratory's spending plans and making sure that projects comply with guidelines. DOE also approves each laboratory's processes and procedures for selecting, reviewing, and tracking LDRD projects and requires annual reports from each laboratory. DOE conducts periodic reviews of the laboratories' management that encompass the LDRD program. DOE's nine multi-program laboratories have invested over $2 billion on LDRD projects since 1992, when the LDRD program was created. DOE's three large defense laboratories account for a majority of all LDRD spending. Most LDRD funding is invested in research supporting the laboratories' strategic plans and maintaining the skills and competencies necessary to carry out laboratory missions. In addition, laboratory managers told us they believe that LDRD projects help to attract new scientists and encourage others to explore cutting-edge science projects in order to maintain the "vitality" of the laboratories. The managers believe that LDRD projects also help to identify new mission areas consistent with DOE's overall mission. As shown in table 1, DOE's nine multi-program national laboratories have spent over $2 billion on LDRD projects since fiscal year 1992. DOE's three largest multi-program national laboratories--Lawrence Livermore in California, and Los Alamos and Sandia in New Mexico-- account for nearly three-quarters of all LDRD spending. These laboratories concentrate on national security issues and in recent years spent near the maximum amount authorized by the Congress for LDRD projects--no more than 6 percent of their budgets, except for fiscal year 2000 when the Congress limited the amount to 4 percent. By contrast, DOE's other laboratories generally spend less than 4 percent of their budgets on LDRD projects. (See table 2.) Each of the nine multi-program national laboratories established separate but similar LDRD categories of funding, using these as guides to selecting proposals. The number of categories ranged from one to five. In most laboratories, the largest category contained projects that aligned most closely with the laboratory's strategic missions, such as the principal missions of national security at the defense laboratories and fundamental science at the Lawrence Berkeley National Laboratory. These types of LDRD projects tended to be larger and were expected to have nearer-term results. The second largest category was generally directed at building scientists' skills and strengthening laboratory competencies. Generally, the laboratories target the smallest amount of funding to projects that are the highest risk and most cutting-edge as shown in the following examples: The Lawrence Livermore National Laboratory has three main categories of funding. Strategic Initiatives projects represent 27 percent of all LDRD funds, focus on research addressing national needs in support of the laboratory's strategic vision, and are larger multidisciplinary projects. Exploratory Research projects received 67 percent of the funds, support the strategic vision and competencies building of programs and directorates across the laboratory, and are smaller than the Strategic Initiatives projects. Laboratory-wide projects received about 6 percent of the funds, are designed to encourage creativity of individual scientists in the pursuit of innovative research, and are funded at a maximum of $180,000. A category of funding that receives less than 1 percent of the laboratory's LDRD funds-- Definition and Feasibility Study projects--provides the seeds for new research ideas and are usually funded for less than 6 months and $50,000. The Los Alamos National Laboratory has two categories of LDRD projects. Directed Research projects received about two-thirds of the funds, support the laboratory's strategic plan, are typically multidisciplinary, and generally cost $1 million or more. Exploratory Research projects received about one-third of LDRD funds, are usually smaller and the most innovative, and generally cost $250,000 or less. The Pacific Northwest National Laboratory has three categories for LDRD projects. Laboratory-level projects received about two-thirds of the laboratory's LDRD funds and are for projects that directly align with the laboratory's primary research areas, are generally multiyear and multidisciplinary, and cost from $100,000 to $250,000. Division- level projects received about one-third of the LDRD funds, are aimed at developing new ideas in a particular mission area, have intermediate and near-term mission relevance, and cost from $80,000 to $100,000. Level VI projects, which received a total of about $500,000 of the laboratory's LDRD budget, are intended to support highly innovative ideas, and typically cost less than $60,000 each. DOE and laboratory officials believe that the innovative nature of LDRD projects helps attract new scientists who can contribute to maintaining the vitality of the laboratories. Those officials focusing on national security issues believe that the LDRD program helps attract scientists who can eventually perform national security research work. They believe that because nuclear weapons science is not taught in colleges and must be taught within the defense laboratories, LDRD projects--and the scientists they attract--are vital for national security in the long term. For example, postdoctoral students represent a major source of future research staff at the laboratories, and most of them are hired to work on LDRD projects. Sixty-two percent of Sandia's postdoctoral staff hired between 1996 and 1999 worked on LDRD projects. DOE's Laboratory Operations Board, comprising internal managers and external consultants, reported, in January 2000, that LDRD programs are vital in recruiting and retaining the best scientific talent into the laboratories. According to the Board's report, from 1993 through 1998, 41 percent of LDRD-funded postdoctoral staff at Lawrence Livermore National Laboratory--a defense program laboratory--were subsequently hired by the laboratory. Officials from nondefense program laboratories also told us that LDRD projects are important for attracting and maintaining scientific talent in their laboratories. These laboratories, however, spend less on LDRD than defense program laboratories for a number of reasons, including that they conduct more basic science work as a primary mission within their regular programs. All of the randomly selected LDRD projects we reviewed at the five laboratories we visited met DOE's guidelines for selection. Additionally, DOE's and the laboratories' management controls were adequate to reasonably ensure that approved projects would likely meet DOE's project-selection guidelines. DOE's guidelines specify that LDRD projects must be in the forefront of science and technology and should include at least one of the following: Advanced study of hypotheses, concepts, or innovative approaches to scientific or technical problems. Experimentation and analyses directed toward "proof of principle" or early determination of the utility of new scientific ideas, technical concepts, or devices. Conception and preliminary technical analyses of experimental facilities or devices. In addition, DOE's guidelines generally require that LDRD projects should not last longer than 36 months, be supplemented by non-LDRD funds, be used to perform or supplement funding for DOE's program work, or be used to fund construction for scientific projects beyond the preliminary phase of the research. All LDRD projects we reviewed met DOE's guidelines. These projects were new projects that were proposed for fiscal year 2000 funding. Most of these projects tested or analyzed a new or untested concept and were consistent with the laboratory's strategic missions, as shown in the following examples: A Los Alamos project has a goal of advancing the state of fundamental simulation theory so that sophisticated simulation tools can be developed for use in decision-making in complex national security environments, such as critical national infrastructure analysis and military engagements. The project involves developing complex integrated simulation tools that will advance fundamental research in the areas of mathematical foundations of simulation, issues in implementing and computing for large simulations, statistical methods for simulation-based studies, and principles for simulation-based assisted reasoning. The project's results are primarily targeted to have relevance in mobile communications, regional population mobility and transportation infrastructure, electrical power distribution networks and markets, epidemiological impacts on populations, and threat identification and targeting in urban terrain. In the project's first year, among other things, demonstrations will focus on mobile telecommunications, transportation systems, and epidemiological impacts. The project is being done under Los Alamos' Directed Research category and supports the laboratory's strategic goals in threat reduction, high-performance computing, and modeling and simulation. The project was proposed for 3 years; $600,000 was approved for first-year funding. An Argonne National Laboratory project is designed to fabricate magnetic wires of 20 nanometers (a nanometer is one-billionth of a meter) down to atom scale and study their static and dynamic magnetic properties. This project complements Argonne's mission in the materials science area and could help define a new research direction for the laboratory. The ultimate goal is to create a new generation of miniaturization in electronics, including memories, transistors, logic elements, and sensors. The physical size of a magnetic system may affect its magnetic properties; this project proposes to study this phenomenon and make major inroads in understanding the fundamental issues of low-dimensional magnetic systems. These issues require a basic understanding of magnetic thin films and multilayers used in computing today as well as a deeper understanding of one- dimensional nanotechnology and synthesis of materials in this environment. The project managers plan to develop samples unprecedented in the study of lower-dimensional systems to better explore fundamental questions about the next-generation magnetism research. This project is being done under Argonne's category of funding for more innovative projects--the Director's Competitive Grants Program. The project was proposed for 2 years; $65,000 was approved for first-year funding. A Sandia National Laboratories project aims to develop new scientific tools for addressing the threat of biological terrorism, which is consistent with Sandia's national security mission. Currently, the ability to initially detect people exposed to a released agent relies on the outward appearance of symptoms, such as lethargy and fever. The goal of this proposed LDRD project is to show that earlier detection, based on cellular-level changes in the body through blood analysis, could be accomplished. The project also aims to develop techniques and models to detect and analyze infection without waiting for external symptoms. The results could reduce disease detection time from days to hours. The development of a rapid, highly sensitive screening mechanism would also have widespread application in the fight against other infectious diseases. This 9-month project costs $100,000 and falls under Sandia's Development Reserve category, which is used for urgent science and technology needs or technical work related to development of a new program. DOE and laboratory management controls were adequate to reasonably ensure that projects approved would likely meet DOE's project-selection guidelines. The key controls in place included using DOE's guidelines to control and conduct the project-selection process, using individuals in the review and selection process with the appropriate skills and knowledge to evaluate the proposed projects, substantially segregating duties among individuals to help ensure that no one individual is likely to control the project-selection decision in a way that will violate LDRD's guidelines, and ensuring appropriate DOE oversight and review of the results of the process. All laboratories used DOE's LDRD Order 413.2 as the primary guidance to review and select projects. Individuals involved in the review and selection of the projects had the requisite background and experience to provide credible review. Those individuals had wide-ranging scientific backgrounds--usually a Ph.D. in scientific research and practical experience in basic scientific research. When the subject matter of a project proposal was outside the knowledge base of the review team, the laboratories generally contracted with outside experts to provide reviews and recommendations on the merits of that proposal. In general, each laboratory established review panels comprising individuals from across the laboratory, which provided for diverse opinions to ensure that various points of view were brought to bear on the selection decision. In general, the review panels consisted of managers from directorates having knowledge in the project subject area, other subject matter experts, and managers from the LDRD program. Finally, DOE's field offices, which are responsible for overseeing each laboratory, annually review the laboratories' recommendations for projects to be funded and forward recommendations to headquarters for approval. While DOE's reviews of proposed projects have resulted in clarifications and minor revisions in the proposals' documentation, those reviews have rarely resulted in not funding proposed projects. All laboratories we reviewed have separate and somewhat different review and selection processes linked to their distinct categories of funding for LDRD projects, but key elements of these processes are very similar. For example, the laboratories we visited initiate their annual LDRD selection process by asking research staff to propose potential projects, called "calls for proposals." These calls ask for proposals that generally fit into a particular category of funding in the LDRD program. Reviewers for the individual categories of funding review those proposals and either reach consensus or vote outright on where each proposal should be ranked in terms of recommending it for funding. That recommendation is then generally given to the laboratory director, who selects the projects to be funded. The projects recommended for funding are given to DOE's field offices for review and comment and ultimately forwarded to DOE's headquarters for approval. The LDRD program could improve its performance reporting. Each laboratory issues an annual LDRD report that includes performance reporting, but those reports do not use a common set of performance indicators. Additionally, the reports present performance information in varying formats, making it difficult to focus on the most relevant performance information. Laboratory managers told us there is no consensus on which performance indicators to use when reporting the results of their LDRD projects, nor is there an agreed upon reporting format. While the reports describe the accomplishments of individual laboratories, taken together, the laboratories' reports do not provide aggregate performance information that DOE managers and the Congress could use to readily assess the overall value of the program. The different performance indicators reported in each of the laboratories' annual LDRD reports make it difficult to readily assess overall program performance for DOE's LDRD program. Table 3 provides a summary of the performance information included in the annual LDRD reports published by the nine multi-program national laboratories in our review and demonstrates the lack of uniformity in reporting the LDRD program's results across the laboratory complex. In general, the laboratories maintain more detailed performance information than they report in their annual reports, but laboratory officials do not agree on a set of performance indicators that should be reported on for the program. Some pointed out that there is a significant difference between different types of publications. Refereed publications, for example, must go through an expert review process before they can be published. Also, certain publications have higher levels of difficulty and achievement and, therefore, significance. The same issue surrounds the tabulation of awards as performance indicators. Likewise, symposia, as well as other potential measures, carry different degrees of significance. Many suggested that success stories are the best measures of a project's performance, particularly for basic research whose ultimate value may not be evident for a long time. Furthermore, they told us that projects viewed as unsuccessful with respect to their direct proposed goals might in fact have answered critical questions that paved the way for major breakthroughs in science. In addition, we found that differences in how performance information is presented in the laboratories' annual LDRD reports also make it more difficult to assess the overall value of the program. As indicated in table 3, we found that while some laboratories present performance information for individual projects, other laboratories present performance information in a summary fashion. Two contrasting performance-reporting styles can be found in Sandia National Laboratories' and Lawrence Livermore National Laboratory's annual LDRD reports. Sandia's report provides an appendix entitled "Project Performance Measures," which lists LDRD projects and catalogues outputs of the projects using 11 quantitative performance indicators and several qualitative indicators. In contrast, Lawrence Livermore's LDRD report provides an appendix listing publications resulting from individual LDRD projects and describes--in summary format rather than on a project-by-project basis--several other quantitative performance indicators, including patents, awards, and permanent staff hired. While the laboratories' annual LDRD reports describe the accomplishments of individual laboratories, taken together, the laboratories' reports do not provide aggregate performance information that DOE managers and the Congress could use to readily assess the overall value of the program. Aggregate, more-uniform performance reporting on the LDRD program could aid DOE managers, the Congress, and others in their oversight of the program. In general, LDRD project-selection and review processes in place at DOE's multi-program national laboratories are adequate to reasonably ensure compliance with DOE's project-selection guidelines. Our review of randomly selected LDRD projects at laboratories found that they met DOE's guidelines. However, our observations of the performance- reporting practices for the LDRD program lead us to conclude that performance reporting for the program could improve. By reporting aggregate, more-uniform performance information for the LDRD program as a whole, DOE managers and the Congress could more readily assess the overall value of the program. To improve the Congress's ability to make informed decisions on the value of the LDRD program, we recommend that the Secretary of Energy develop and annually report aggregate, more-uniform performance information for the LDRD program. This recommendation will require DOE's National Nuclear Security Administration and the Office of Science, which are both accountable for laboratory performance, to work together and develop performance indicators that can be used to demonstrate accomplishments across all the laboratories. We provided a draft of this report to DOE for review and comment. According to representatives of the Office of Science responsible for the LDRD program, DOE agreed with our findings, conclusions, and recommendation. DOE also provided a number of clarifying comments, which we incorporated, as appropriate, in this report. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days after the date of this letter. At that time, we will send copies to the Secretary of Energy and the Director, Office of Management and Budget. We will also make copies available to others on request. To determine how much the Department of Energy's (DOE) multi-program national laboratories have spent on Laboratory Directed Research and Development (LDRD) projects since 1992 (when the LDRD program was created), we reviewed program information, including annual reports, budgets and other financial information provided by DOE and laboratory officials for the nine DOE multi-program national laboratories. These laboratories are Argonne National Laboratory, Brookhaven National Laboratory, Idaho National Engineering and Environmental Laboratory, Lawrence Berkeley National Laboratory, Lawrence Livermore National Laboratory, Los Alamos National Laboratory, Oak Ridge National Laboratory, Pacific Northwest National Laboratory, and Sandia National Laboratories. Although DOE's Ames Laboratory has a LDRD program, we excluded it from our review because Ames is not a multi-program national laboratory. To determine if LDRD projects met DOE's selection guidelines, we reviewed the procedures and processes for selecting LDRD projects at all nine of DOE's multi-program national laboratories. We also tested the internal controls for project selection at five of those laboratories and the respective DOE offices responsible for oversight of the program, and randomly selected approved LDRD projects at those five laboratories. The five laboratories were Argonne National Laboratory, Lawrence Berkeley National Laboratory, Lawrence Livermore National Laboratory, Los Alamos National Laboratory, and Sandia National Laboratories. These laboratories include three of the largest multi-program national laboratories and represent 83 percent of DOE's LDRD expenditures for the period reviewed. We also interviewed DOE's field office officials responsible for the oversight of the program in the Albuquerque, Chicago, Idaho, and Oakland Operations offices. In addition, we interviewed officials responsible for the LDRD program in DOE's headquarters Office of Science, Office of Defense Programs, and Office of Environmental Management. To test the internal controls of the program, we evaluated the processes and procedures used to select LDRD projects. The internal control tests were designed to determine if adequate management control was built into the LDRD program to provide reasonable assurance that projects approved through the program comply with DOE's guidelines for the LDRD program. We performed the internal control tests by examining the processes and procedures to ensure that the (1) people involved in the selection of the LDRD projects used the same guidance and selection criteria, (2) individuals involved in the selection of the projects had the appropriate skills and knowledge to evaluate the proposed projects, (3) duties in the project-selection process were segregated substantially among individuals so that no one individual would be likely to control the project-selection decision in a way that would violate LDRD guidelines, and (4) DOE oversight activities were adequate. To accomplish this, we obtained from the respective DOE officials and laboratory management officials, documentation and interview information on guidance provided to the LDRD project review and selection personnel on how to select LDRD projects for funding at each laboratory. We then obtained documentation on the LDRD processes and procedures for reviewing and selecting projects for funding at each of the five laboratories. This information included documentation on how proposed projects originate to final selections or other dispositions. We obtained documentation and interview information on which individuals participate in each phase of the process, their roles, and their backgrounds. Using random number tables, we selected five projects from each of the five selected multi-program national laboratories' projects approved for funding for fiscal year 2000-- a total of 25 projects. Because each laboratory had more than one category of LDRD funding and to enable us to review projects within each of those categories, we randomly selected at least one project from each category of funding at each laboratory. We determined if each selected project met DOE's project-selection guidelines and, to complement our internal control tests, we examined the elements of the processes, qualifications of reviewers, segregation of duties, and DOE's oversight. For each of these projects, we reviewed the project proposal files, including documentation reflecting individual reviewers' recommendations on the disposition of each case. We also interviewed the scientists who proposed each project and the laboratory officials responsible for reviewing the projects for selection to better understand the technical nature of the research and how that research meets DOE's guidelines for LDRD projects. Interviews with selection officials also focused on determining if individuals involved in the selection of the projects had the appropriate skills and knowledge to evaluate the proposed projects and if the duties in the process were segregated so that no one individual would be likely to control the project-selection decision in a way that would violate LDRD's criteria. We also interviewed DOE officials in headquarters and the field offices involved in the oversight process through which the projects were selected. While we cannot project the results of our analysis of LDRD projects to the universe of those projects, our analysis provides a snapshot of how internal controls were being applied, and additional confidence, at the five selected laboratories, in the results of our internal control testing overall. To provide views on how the program might be improved, we relied on observations obtained throughout the course of our audit work. We provided a draft of this report to DOE for review and comment. According to representatives of the Office of Science responsible for the LDRD program, DOE agreed with our findings, conclusions, and recommendation. DOE also provided a number of clarifying comments, which we incorporated, as appropriate, in this report. Our review was performed from December 1999 through September 2001 in accordance with generally accepted government auditing standards.
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The Department of Energy (DOE) created the Laboratory Directed Research and Development (LDRD) program in fiscal year 1992. This program formalized a long-standing policy of giving its multi-program national laboratories discretion to conduct self-initiated, independent research and development (R&D). Since then, DOE's multi-program national laboratories have spent more than $2 billion on LDRD projects. DOE's three largest multi-program national laboratories account for nearly three-quarters of laboratory-wide LDRD spending. All LDRD projects GAO reviewed at the five laboratories met DOE's guidelines for selection. In addition, each of the five laboratories created the internal controls necessary to reasonably ensure compliance with DOE's guidelines. Each laboratory issues annual LDRD reports that contain performance indicators, such as the numbers of patents obtained, publications, copyrights, awards, and relevance of the research to DOE's missions. The reports present performance information in various formats, making it difficult to focus on the most relevant performance information.
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This background section describes (1) objectives, milestones, and management considerations in the B61-12 LEP and (2) DOE directives and NNSA policy letters and how they apply to programs such as the B61-12 LEP. The B61-12 consists of two major assemblies: the bomb assembly and the tail kit guidance assembly. NNSA manages the development and production of the bomb assembly and the Air Force manages the development and production of the tail kit assembly, among other activities, as follows: NNSA responsibilities and the bomb assembly. According to NNSA officials and documents, the bomb assembly will include reused, refurbished, and new nuclear and nonnuclear components. The design approach for the LEP maximizes reuse of existing nuclear and nonnuclear components and is intended to improve the safety and security of the weapon using proven technologies. NNSA manages the development and production of the bomb assembly under the direction of a federal program office and federal program manager located at Kirtland Air Force Base in Albuquerque, New Mexico, which is also the site of NNSA's Sandia National Laboratories. NNSA sites and laboratories involved in the LEP include Sandia National Laboratories, the design agency for nonnuclear components, a production agency for some components, and system- level integrator of the overall weapon design; Los Alamos National Laboratory, the design and production agency for the nuclear explosive package; the Kansas City National Security Campus, the Y- 12 National Security Complex, and the Savannah River Site, the production agencies for various new or refurbished weapon components; and the Pantex Plant, where some bomb components are produced and final assembly of the bombs takes place. In addition, Lawrence Livermore National Laboratory provides independent review of Los Alamos National Laboratory's work on nuclear components. As of September 2015, NNSA's expected costs for its share of the LEP work were approximately $7.3 billion. Air Force responsibilities and the tail kit assembly. According to Air Force officials and documents, the tail kit assembly will provide the B61-12 with a guided freefall capability that improves the accuracy of weapon delivery. The guided capability will enable the weapon to meet military requirements with a lower nuclear yield, allowing for the use of less special nuclear material. The B61-12 is designed to be compatible with existing dual-capable aircraft--the F-15, F-16, and PA-200--as well as the B-2 strategic bomber and planned future aircraft such as the F-35 fighter. The Air Force's responsibilities include integrating the B61-12 with its delivery aircraft and the operational flight program software. This software is being upgraded in the F-15 and B-2 delivery aircraft so that these aircraft can work with the B61-12's digital interface. The Air Force Nuclear Weapons Center at Kirtland Air Force Base manages technical integration, system qualification, and other LEP-related tasks required to certify and field the weapon as well as tail kit acquisition, as contracted to Boeing. As of September 2015, the Air Force's expected costs for its share of the LEP work were approximately $1.6 billion. Figure 1 shows the B61-12. The joint 6.X guidance describes key high-level joint tasks and deliverables for each phase of nuclear refurbishment activities such as an LEP. Specifically, the 6.X guidance lists key milestones, such as tests and cost estimates, that a nuclear weapon refurbishment activity must undertake before proceeding to subsequent steps of the Phase 6.X process (see fig. 2). NNSA and DOD implement the Phase 6.X process under a guidance document, Procedural Guideline for the Phase 6.X Process, which was issued in 2000 and is undergoing its first revision. This document describes the roles and functions of DOD, DOE, and NNSA in nuclear weapon refurbishment activities conducted through the Phase 6.X process. It also describes the roles and functions of two joint bodies that provide oversight and approval functions to LEPs and other nuclear weapons-related activities: the Nuclear Weapons Council and its Standing and Safety Committee. In addition, the Nuclear Weapons Council charters a Project Officers Group for each weapon system to provide a technical forum for weapon development and management activities. Each Project Officers Group is led by a project officer from either the Navy or Air Force, the two military services that maintain and operate nuclear weapons. Importantly, for more detailed requirements and guidance on program management matters, DOE and DOD each utilize their own agency-specific directives. In the B61-12 LEP's current phase--6.3, development engineering-- NNSA coordinates with the Air Force to conduct experiments, tests, and analyses to develop and validate the selected design option. Key steps that have not yet taken place in Phase 6.3 of the B61-12 LEP include formally developing a program cost baseline--a more mature cost estimate than is currently in use--and finalizing the design definition. Program officials told us they expect to issue the baseline cost report, which will formalize the program's cost baseline, and to approve the baseline design in the third quarter of fiscal year 2016. According to program officials, the LEP is on schedule to enter Phase 6.4 (production engineering) in the fourth quarter of fiscal year 2016. The B61-12 LEP is one of several LEPs or refurbishments that NNSA and DOD have plans to undertake or have already started. Other LEPs or refurbishments include the ongoing LEP for the W76 warhead, an alteration to the W88 warhead, and planned LEPs for the cruise missile and interoperable warheads. Some of these activities are or will be taking place concurrently, and several have had their completion dates revised over the years, as shown in table 1. In addition, NNSA plans to move important production operations into new or modified facilities during this time period. Because of overlapping LEPs and new infrastructure, NNSA and DOD officials told us that they recognize the need to continue to improve coordination and management of the nuclear security enterprise. Earned value management is a project management tool developed by DOD in the 1960s to help managers monitor project risks. Earned value management systems measure the value of work accomplished in a given period and compare the measured value with the planned value of work scheduled for that period and the actual cost of work accomplished. Earned value management's intended purpose is to integrate a project's cost, schedule, and technical efforts for management and provide reliable data to decision makers. DOE's Departmental Directives Program, defined and established through a DOE order, classifies directives into several types. These directive types include orders and guides, which the Departmental Directives Program describes as follows: Orders. Orders establish requirements and should include detailed instructions describing how requirements are to be implemented. Guides. Guides provide information on how to implement the requirements contained in orders. They are a nonmandatory means for complying with these requirements and cannot be made mandatory by reference in other DOE directives. The National Nuclear Security Administration Act, through which Congress established the NNSA, also gives the NNSA Administrator the authority to establish NNSA-specific policies, unless disapproved by the Secretary of Energy. NNSA does so through the issuance of policy letters. These policy letters take the form of NNSA policies, supplemental directives, and business operating procedures. DOE manages the B61-12 LEP as a program. The department makes distinctions between programs and projects and uses different directives to prescribe the management approach for each, as follows: Programs. According to NNSA officials, no DOE order exists that provides management requirements for program activities, such as LEPs. As we found previously in our November 2014 report on DOE and NNSA cost estimating practices, for example, DOE and NNSA programs were not required to meet any cost estimating best practices. NNSA officials stated at that time that NNSA cost estimating practices for programs were limited, decentralized, and inconsistent, and were not governed by a cost estimating policy or single set of NNSA requirements and guidance. According to these officials, each NNSA program office used different practices and procedures for the development of cost estimates that were included in the NNSA annual budget. Projects. NNSA's management of projects is governed by DOE Order 413.3B (DOE's project management order). The order applies to capital asset projects above a certain cost threshold. It provides management direction for NNSA and other DOE offices, with the goal of delivering projects within the original performance baseline that are fully capable of meeting mission performance and other requirements, such as environmental, safety, and health standards. The order specifies requirements that must be met, along with the documentation necessary, to move a project past major milestones. It provides requirements regarding cost estimating (and, in some cases, the preparation of an independent cost estimate), technology readiness assessments, independent project reviews, and the use of earned value management systems, among other requirements. As we have previously found, DOE's project management order applies to programs only in conjunction with a program's acquisition of capital assets. The B61-12 LEP's program managers have developed a management approach that was then used to inform a new NNSA policy that applies to NNSA defense program management. In addition, NNSA and DOD have identified some potential management challenges in the program; the new management approach and policy may help NNSA address these challenges, but it is too soon to evaluate the likelihood that they will adversely affect the program. The B61-12 LEP's program managers have developed, documented, and are using program management practices and tools for the LEP to help identify and avoid cost and schedule overruns and technical issues. As noted above, we have found in past reports that NNSA and DOD experienced program management challenges in LEPs, including the B61-12 LEP and the ongoing LEP for the W76 warhead. We made recommendations related to NNSA's budget assumptions, cost tracking methods, and risk management plans and continue to monitor NNSA's response. Since we issued those reports, the B61-12 LEP's program managers developed a management approach for the program that draws on DOE directives and other sources, including our Cost Guide. For example, we found in our November 2014 report on NNSA project and program management that the B61-12 LEP's managers used our Cost Guide, as well as direction under the Phase 6.X process and DOE's project management order and cost guide, to develop their approach for developing cost estimates. Several officials from both NNSA and DOD characterized the B61-12 LEP's overall program management approach as improved over the approaches used in previous LEPs. This approach includes the following practices and tools: Improved management capability and authority. The B61-12 LEP's program office has taken steps to improve management capability and authority. According to NNSA officials, the LEP successfully requested that the department enlarge its federal program office staff to provide more management capability. Specifically, the program office had 3 full-time equivalent (FTE) staff at the beginning of the program; as of October 2015, it has 8 FTEs, augmented by contractor staff of about 12 FTEs, according to program officials. Moreover, since 2014, the federal program manager said that he has successfully requested contingency and management reserve funds of $983 million over the life of the program--about 13.5 percent of NNSA's estimated $7.3 billion total project cost--which he has authority to use to help manage the effects of realized risks or changes in funding, such as a continuing resolution. An earned value management system. According to NNSA and DOD officials we interviewed, the B61-12 LEP is the first LEP to use earned value management, a tool that may help NNSA ensure that its work progresses on budget and on schedule. Each participating NNSA site is responsible for reporting earned value data monthly against the scope, schedule, and budget baselines established for each site's activities. According to NNSA officials involved with the LEP, earned value management identifies schedule variances as they happen so that the program is aware of any work that may be progressing more slowly than expected and could go on to affect key milestones. Integrated master schedules. According to NNSA officials we interviewed, the B61-12 LEP is also the first NNSA defense program to summarize details from site schedules into a summary NNSA Integrated Master Schedule (NIMS) for work at the participating NNSA sites. The B61-12 LEP also has developed a top-level schedule that all program participants use, the Joint Integrated Master Schedule (JIMS). In past LEPs, according to the officials we interviewed, NNSA did not fully reconcile and integrate its individual sites' schedules, which may have contributed to program delays and cost increases. The JIMS and other integrated master schedules are key tools in the B61-12 LEP's schedule and risk management strategy, according to officials we interviewed. Integrated cost estimates. An official from NNSA's Office of Cost Policy and Analysis told us that the B61-12 LEP is the first NNSA defense program to issue a cost estimate that integrates all participating sites' costs into a single program cost estimate. In past LEPs, according to the official, NNSA did not integrate its individual sites' cost estimates, which contributed to baseline costs being underestimated. Independent cost estimate. The official from NNSA's Office of Cost Policy and Analysis told us that the office annually prepares and publishes an independent cost estimate for the NNSA portion of the B61-12 LEP to help inform the cost estimate prepared by the B61-12 LEP program manager. This estimate is prepared without reference to the program manager's estimate and uses a different method. The estimate can then be compared to the program manager's estimate to further refine it as the program develops the formal baseline cost estimate known as the baseline cost report, one of the key steps preceding the transition to Phase 6.4. As we found in our November 2014 report on NNSA cost estimating practices, having an independent entity conduct an independent cost estimate and compare it to a project team's estimate provides an unbiased test of whether the project team's cost estimate is reasonable. Technology and manufacturing readiness assessments. According to B61-12 program officials, the B61-12 program management team uses NNSA business practices to assess technology and manufacturing readiness levels for the LEP. The officials told us that all weapon components are maturing as planned with respect to their technology or manufacturing readiness. Officials also told us that they were conservatively applying NNSA business practices and noted that some components that have been in use for years may be assessed at lower readiness levels to account for other design changes in the B61-12. In addition, NNSA is in the process of planning for a technology readiness review later in 2015 by a group of Sandia National Laboratories experts that are not otherwise part of the B61-12 LEP. We have found in previous work that such independent peer reviews can identify important technology issues. Peer review of the nuclear explosive package. Nuclear weapons designers at Lawrence Livermore National Laboratory, which is not otherwise involved in the LEP, provide peer review of the nuclear explosive package components being designed at Los Alamos National Laboratory--a practice in keeping with past LEPs. Since the United States ceased nuclear explosive testing in 1992, DOE and NNSA have relied on, among other things, national laboratory peer reviews to help ensure the continued safety, reliability, and effectiveness of U.S. nuclear weapons without explosive testing. According to the official in charge of the peer review, no significant issues with the nuclear explosive package have emerged in the peer review. About 4 years after the B61-12 LEP began, NNSA incorporated elements of the B61-12 LEP management approach into a new policy for defense program management. Specifically, in August 2014, NNSA issued its Defense Programs Program Execution Guide (Program Execution Guide) regarding program management practices in NNSA defense programs, including LEPs. It applies to all ongoing and planned LEPs, including the B61-12 LEP. NNSA officials told us that the B61-12 LEP's program management approach served as a model for many of the management practices and tools established in the Program Execution Guide. These practices include the use of earned value management systems, integrated master schedules, and risk management systems. NNSA officials told us that the name of the Program Execution Guide has created some confusion, and that it is not a DOE Guide--which provides nonmandatory means for meeting DOE requirements--but rather an NNSA policy letter. To allay the confusion, the officials told us, NNSA is in the process of renaming the document the Defense Programs Program Execution Instruction. As noted above, DOE does not have an order that provides requirements for the management of programs more generally; the Program Execution Guide applies only to those programs and projects managed by NNSA's Office of Defense Programs. In undertaking its new management approach, NNSA has taken steps to address some of our prior recommendations, including drawing on our Cost Guide, but the B61-12 LEP still faces potential challenges regarding program management. The LEP's new management approach, along with practices outlined in the Program Execution Guide, may help NNSA address these challenges, but it is too soon to evaluate how the challenges may affect the LEP. Potential challenges NNSA and DOD have identified include the following: Limited management capability and authority. According to an NNSA official, even with the increase in federal staff, NNSA needs two to three times more personnel in the federal program manager's office to ensure sufficient federal management and oversight. As noted above, the NNSA federal program office employs about 20 people--8 federal FTEs and about 12 FTE-equivalent contractors--to manage NNSA activities. In contrast, the Air Force office employs about 80 federal FTEs and contractors to manage Air Force activities. In addition, the November 2014 report of the Congressional Advisory Panel on the Governance of the Nuclear Security Enterprise raised issues about the sufficiency of NNSA program managers' authority. Specifically, the report states, "Although NNSA designates government program managers for each major program, their authorities have been very limited. Most importantly, they have lacked control over resources necessary to exercise needed leadership. In practice, they could more accurately be described as program coordinators than as program managers." Similarly, in our March 2009 report, we found that NNSA's program manager for the W76 LEP did not have sufficient authority over the construction or operation of a facility that was critical to the LEP, which played a role in resulting cost and schedule overruns. Untested earned value management. NNSA and DOD officials we interviewed noted that NNSA's earned value management system will be useful only insofar as good data are entered into the system and the system is used to inform program management. We have similarly noted in our Cost Guide that using earned value management represents a culture change and requires sustained management interest, as well as properly qualified and trained staff to validate and interpret earned value data. According to the officials we interviewed, the system is too new for them to determine conclusively whether the data are accurate and the earned value management system is being used effectively. The officials said that work to validate the data in the system is ongoing, with formal reviews to assess the quality of the system planned for 2016. Cost estimating requirements and practices that have not followed best practices. In our November 2014 report, we found that NNSA defense programs generally, and the B61-12 LEP specifically, were not required to follow cost estimating best practices. For example, in that report, we found that the B61-12 LEP's team- produced guidance for the program cost estimate did not stipulate that NNSA program managers or its contractors must follow any DOE or NNSA requirements or guidance to develop the B61-12 cost estimate. We recommended in the report that DOE revise its directives that apply to programs to require that DOE and NNSA and its contractors develop cost estimates in accordance with best practices. DOE agreed with this recommendation and, in June 2015, the Secretary of Energy issued a memorandum directing the heads of all department elements to use established methods and best practices, including practices identified in our Cost Guide, to develop, maintain, and document cost estimates for capital asset projects. We note that the memorandum pertains to departmental policy related to project management, not to program management. In the area of programs, NNSA officials described actions that it had begun taking to address our recommendation regarding cost estimating practices. We continue to monitor DOE's response to our recommendation. Guidance on technology readiness that has not followed best practices. An NNSA business practice requires technology readiness reviews for LEPs, but it does not specify technology readiness requirements for entering into first production--Phase 6.5 of the 6.X process. Best practices followed by other federal agencies suggest and our prior recommendations state that new technologies should reach TRL 7--the level at which a prototype is demonstrated in an operational environment, has been integrated with other key supporting subsystems, and is expected to have only minor design changes--at the start of construction. In our November 2010 report, we recommended that the Secretary of Energy evaluate where DOE's guidance for gauging the maturity of new technologies is inconsistent with best practices and, as appropriate, revise the guidance to be consistent with federal agency best practices. DOE generally agreed with our recommendation. Concerning projects, in his June 2015 memorandum, the Secretary of Energy directed that critical technologies should reach TRL 7 before major system projects-- those with a total cost of greater than $750 million--receive approval of their performance baselines. Concerning programs, NNSA officials told us they recently issued technology readiness assessment guidance that was not used in the B61-12 LEP but will be used in the W80-4 and Interoperable Warhead LEPs. The new management approach that the B61-12 LEP's program managers have implemented, along with the new Program Execution Guide, may help NNSA address the potential management challenges that NNSA officials and others have identified with previous LEPs, but it is too soon to determine whether this will be the case. NNSA and the Air Force have instituted a process to identify risks within the B61-12 LEP and develop plans to manage those risks. However, a constrained development and production schedule--driven by the aging of legacy B61 bombs and the need to start work on other LEPs, among other factors--could complicate risk management efforts. According to NNSA and Air Force officials, the B61-12 LEP risk analysis and management approach uses the program's integrated master schedules in conjunction with a risk register, the Active Risk Manager database. Specifically, the LEP's 48 product realization teams (PRT)--the groups of scientists, engineers, and subject-matter experts that perform the ground-level project work on B61-12 components and subassemblies--are responsible for identifying risks. Most risks are managed at the PRT level, but risks that have the potential to affect top- level schedule milestones or the program's ability to deliver a weapon that meets performance requirements are presented to joint review boards for inclusion in the Active Risk Manager database. These higher-level risks-- referred to as joint risks--are categorized according to the likelihood of their occurrence and the consequences should they occur. Joint risks with the highest likelihood and consequence are color coded as "red" risks, with successively lower-likelihood and -consequence risks labeled as "yellow" and "green," respectively. Program officials develop risk management steps for each joint risk, document and make time for these steps in both the Active Risk Manager database and the relevant integrated master schedules, and brief the Nuclear Weapons Council on the status of joint risks. Additionally, NNSA identifies and documents opportunities--program areas with the potential to realize saved time and cost. According to NNSA and Air Force officials, some of the joint risks identified through this process have already been successfully managed. For example, NNSA officials told us that they were able to avoid the risk of a shortage of a type of glass necessary for electrical connections by procuring the glass for the entire program in advance. NNSA estimates that avoiding this risk prevented a program delay that could have lasted for more than a year and increased program costs by more than $2 million. Other joint risks may affect later stages of the B61-12 LEP, so it is too soon to tell if plans to manage them will be effective. Joint risks in the "red" category (i.e., high risk) include risks related to the compatibility of the B61-12 with the still-developing F-35 aircraft, the risk of temperature- related component failures in certain flight environments, and schedule risks related to the hydrodynamic testing of certain changed nonnuclear components. In November 2015, the federal program manager for the LEP reported that these risks remain "red" but are "trending" in a positive direction. Based on our discussions with program officials and our review of NNSA and Air Force documentation, the steps necessary to manage these and other risks will occur over several years. Complicating efforts to manage future LEP risks--especially if risks are realized or new ones materialize--is a constrained development and production schedule. NNSA and DOD officials acknowledged the schedule's constraints, which they say are driven by factors including delays in starting the B61-12 LEP because of a lengthy design study, the effects of sequestration, and the need to complete work on the B61-12 LEP to enable NNSA to start work on planned future LEPs. In testimony given to the Strategic Forces Subcommittee of the Senate Committee on Armed Services in March 2015, the Nuclear Weapons Council characterized the B61-12 LEP's schedule as having "little, if any, margin left." DOD officials have testified before Congress that the B61-12 LEP must be completed on the current schedule to ensure that the aging of B61 legacy bombs does not affect the United States' ability to maintain its commitments to NATO, and DOE officials have testified that the LEP must be completed to ensure that DOE can effectively manage other ongoing and planned LEPs and stockpile stewardship activities. These activities are set to intensify in the coming years. For example, according to NNSA documents, NNSA plans to execute at least four LEPs per year simultaneously in fiscal years 2021 through 2025--along with several major construction projects, including efforts to modernize NNSA's uranium and plutonium capabilities. Figure 3 shows the schedules for NNSA's planned LEPs and major alterations. Given NNSA's past problems in executing LEPs, and a schedule with little room for delays, NNSA and Air Force may face challenges in the future in ensuring that risks are not realized and do not affect the program's schedule, its cost, or the performance of the B61-12. We will continue to assess the B61-12 LEP as it passes through later stages of the Phase 6.X process, in keeping with the Senate report provision that gave rise to this report. We are not making new recommendations in this report. We provided a draft of this report to DOE and DOD for review and comment. In its written comments, reproduced in appendix II, DOE generally agreed with our findings. DOD did not provide formal comments. Both agencies provided technical comments that we incorporated, as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Energy, the Secretary of Defense, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. This report assesses (1) the Department of Energy's (DOE) National Nuclear Security Administration's (NNSA) management approach for the B61-12 Life Extension Program (LEP) and (2) the extent to which NNSA and the Air Force are managing risks in the LEP. To assess NNSA's management approach for the B61-12 LEP, we reviewed the program-developed documents that establish cost and schedule goals and track the program's progress toward those goals. These documents included the program's Joint Integrated Project Plan, Joint Top-level Schedule, Master Schedule, and Selected Acquisition Reports. In addition, we reviewed other program-developed guidance documents that the program management team prepared for the B61-12 LEP. These included the Integrated Phase Gate Implementation Plan, Project Controls System Description, Systems Engineering Plan, Quality Plan, and Configuration Management Plan. We also reviewed the Procedural Guideline for the Phase 6.X Process, which describes the roles and functions of DOE, the Department of Defense (DOD), and the Nuclear Weapons Council in nuclear weapon refurbishment activities such as the B61-12 LEP. In addition, we examined DOE and DOD directives and NNSA policy letters to understand departmental requirements for the management of the LEP. For DOE, these included DOE Order 251.1C, Departmental Directives Program; DOE Order 413.3B, Program and Project Management for the Acquisition of Capital Assets; DOE Guide 413.3-4A, Technology Readiness Assessment Guide; and NNSA's Defense Programs Program Execution Guide. For DOD, these included DOD Instruction 5000.02, Operation of the Defense Acquisition System, and DOD Instruction 5030.55, DoD Procedures for Joint DoD-DOE Nuclear Weapons Life-Cycle Activities. For information on the management of the B61-12 LEP in the broader context of joint DOE-DOD stockpile stewardship activities, we also reviewed documents such as DOD's Nuclear Posture Review Report of 2010 and DOE's Stockpile Stewardship and Management Plan. To assess the extent to which NNSA and the Air Force are managing risks in the LEP, we reviewed the documents described above. In addition, we visited NNSA's Sandia National Laboratories and Los Alamos National Laboratory to view systems that track project activities, cost and schedule information, and the execution of risk management steps, as well as to meet program officials responsible for the design and production of the B61-12 and see some of the components under development. The systems we reviewed included the B61-12 LEP's Active Risk Manager database and the systems holding classified elements of project plans and schedules. For both objectives, in the course of our site visits to the laboratories named above, we interviewed federal officials and contractors involved with the B61-12 LEP. We also interviewed officials in NNSA offices responsible for providing guidance, oversight, and program review for the B61-12 LEP and other such defense programs. For criteria and context, we used the GAO Cost Estimating and Assessment Guide and our past reports on LEPs and NNSA cost estimating practices. Throughout our work, we coordinated with a team from DOE's Office of Inspector General, which is conducting its own review of the B61-12 LEP and plans to issue a classified report. We conducted this work from July 2014 to January 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Jonathan Gill (Assistant Director), Antoinette C. Capaccio, Penney Harwell Caramia, Pamela Davidson, Dan Feehan, Alex Galuten, Jennifer Gould, Rob Grace, Alison O'Neill, Tim Persons, Ron Schwenn, Sara Sullivan, and Kiki Theodoropoulos made key contributions to this report.
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Weapons in the U.S. nuclear stockpile are aging. NNSA and DOD undertake LEPs to refurbish or replace nuclear weapons' aging components. In 2010, they began an LEP to consolidate four versions of a legacy nuclear weapon, the B61 bomb, into a bomb called the B61-12 (see fig.). NNSA and DOD have stated they must complete this LEP by 2024 to uphold U.S. commitments to the North Atlantic Treaty Organization. As of September 2015, NNSA and DOD estimated that the B61-12 LEP would cost about $8.9 billion. Senate Report 113-44 included a provision for GAO to periodically assess the status of the B61-12 LEP. This report assesses (1) NNSA's management approach for the B61-12 LEP and (2) the extent to which NNSA and the Air Force are managing risks in the LEP. GAO reviewed project plans, schedules, management plans, and other documents and program data, and visited the two NNSA national laboratories--Sandia and Los Alamos--that serve as the design agencies for the LEP. The B61-12 life extension program's (LEP) managers have developed a management approach that officials from the Department of Energy's (DOE) National Nuclear Security Administration (NNSA) and the Department of Defense (DOD) regard as improved over the management approach used for past LEPs, which experienced schedule delays and cost overruns. Among other things, the B61-12 LEP is the first LEP to use earned value management, a tool that measures the planned versus actual value of work accomplished in a given period, which may help NNSA ensure that work progresses on budget and on schedule. It is also the first LEP to integrate the schedules and cost estimates for activities at all participating NNSA sites. NNSA used this new approach to inform its first Program Execution Guide for defense programs, issued in August 2014, which applies to all NNSA defense programs. NNSA's new management approach notwithstanding, the B61-12 LEP faces ongoing management challenges in some areas, including staff shortfalls and an earned value management system that has yet to be tested. The new management approach may help the LEP address these potential challenges, but it is too soon to determine whether this will be the case. To manage risks in the B61-12 LEP, NNSA and the Air Force use a risk management database and integrated schedules to categorize risks and incorporate risk management steps in the schedules. According to NNSA and Air Force officials, some risks have already been managed in this manner. For example, NNSA estimates that making a needed material procurement in advance prevented a potential delay of more than a year and a potential cost increase of more than $2 million. Remaining risks include the risk that components may fail in certain flight environments and risks related to testing of certain nonnuclear components. NNSA is also working to ensure future compatibility with the F-35 aircraft. NNSA and Air Force officials said they will not know for several years whether steps planned to manage these risks are adequate. A constrained development and production schedule--which DOE's and DOD's Nuclear Weapons Council characterized as having "little, if any, margin left"--complicates efforts to manage risks. Factors constraining the schedule include the aging of components in current versions of the B61, delays in starting the B61-12 LEP because of a lengthy design study, the effects of sequestration, and the need to complete the B61-12 LEP so that NNSA can begin other planned LEPs. GAO will continue to monitor these issues as it assesses the LEP in later stages. GAO is making no new recommendations but discusses the status of prior GAO recommendations in this report. In commenting on a draft of this report, DOE generally agreed with GAO's findings and provided technical comments that were incorporated, as appropriate. DOD provided technical comments that were also incorporated, as appropriate.
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Hepatitis C was first recognized as a unique disease in 1989. It is the most common chronic blood-borne infection in the United States and is a leading cause of chronic liver disease. The virus causes a chronic infection in 85 percent of cases. Hepatitis C, which is the leading indication for liver transplantation, can lead to liver cancer, cirrhosis (scarring of the liver), or end-stage liver disease. Most people infected with hepatitis C are relatively free of physical symptoms. While hepatitis C antibodies generally appear in the blood within 3 months of infection, it can take 15 years or longer for the infection to develop into cirrhosis. Blood tests to detect the hepatitis C antibody, which became available in 1992, have helped to virtually eliminate the risk of infection through blood transfusions and have helped curb the spread of the virus. Many individuals were already infected, however, and because many of them have no symptoms, they are unaware of their infection. Hepatitis C continues to be spread through blood exposure, such as inadvertent needle-stick injuries in health care workers and through the sharing of needles by intravenous drug abusers. Early detection of hepatitis C is important because undiagnosed persons miss opportunities to safeguard their health by unknowingly behaving in ways that could speed the progression of the disease. For example, alcohol use can hasten the onset of cirrhosis and liver failure in those infected with the hepatitis C virus. In addition, persons carrying the virus pose a public health threat because they can infect others. The Centers for Disease Control and Prevention estimates that nearly 4 million Americans are infected with the hepatitis C virus. Approximately 30,000 new infections occur annually. The prevalence of hepatitis C infection among veterans is unknown, but limited survey data suggest that hepatitis C has a higher prevalence among veterans who are currently using VA's health care system than among the general population because of veterans' higher frequency of risk factors. A 6 year study--1992-1998-- of veterans who received health care at the VA Palo Alto Health Care System in Northern California reported that hepatitis C infection was much more common among veterans within a very narrow age distribution--41 to 60 years of age--and intravenous drug use was the major risk factor. VA began a national study of the prevalence of hepatitis C in the veteran population in October 2001. Data collection for the study has been completed but results have not been approved for release. The prevalence of hepatitis C among veterans could have a significant impact on current and future VA health care resources, because hepatitis C accounts for over half of the liver transplants needed by VA patientscosting as much as $140,000 per transplantand the drug therapy to treat hepatitis C is costlyabout $13,000 for a 48-week treatment regimen. In the last few years, considerable research has been done concerning hepatitis C. The National Institutes of Health (NIH) held a consensus development conference on hepatitis C in 1997 to assess the methods used to diagnose, treat, and manage hepatitis C infections. In June 2002, NIH convened a second hepatitis C consensus development conference to review developments in management and treatment of the disease and identify directions for future research. This second panel concluded that substantial advances had been made in the effectiveness of drug therapy for chronic hepatitis C infection. VA's Public Health Strategic Healthcare Group is responsible for VA's hepatitis C program, which mandates universal screening of veterans to identify at-risk veterans when they visit VA facilities for routine medical care and testing of those with identified risk factors, or those who simply want to be tested. VA has developed guidelines intended to assist health care providers who screen, test, and counsel veterans for hepatitis C. Providers are to educate veterans about their risk of acquiring hepatitis C, notify veterans of hepatitis C test results, counsel those infected with the virus, help facilitate behavior changes to reduce veterans' risk of transmitting hepatitis C, and recommend a course of action. In January 2003, we reported that VA medical facilities varied considerably in the time that veterans must wait before physician specialists evaluate their medical conditions concerning hepatitis C treatment recommendations. To assess the effectiveness of VA's implementation of its universal screening and testing policy, VA included performance measures in the fiscal year 2002 network performance plan. Network performance measures are used by VA to hold managers accountable for the quality of health care provided to veterans. For fiscal year 2002, the national goal for testing veterans identified as at risk for hepatitis C was established at 55 percent based on preliminary performance results obtained by VA. To measure compliance with the hepatitis C performance measures, VA uses data collected monthly through its External Peer Review Program, a performance measurement process under which medical record reviewers collect data from a sample of veterans' computerized medical records. Development of VA's computerized medical record began in the mid-1990s when VA integrated a set of clinical applications that work together to provide clinicians with comprehensive medical information about the veterans they treat. Clinical information is readily accessible to health care providers at the point of care because the veteran's medical record is always available in VA's computer system. All VA medical facilities have computerized medical record systems. Clinical reminders are electronic alerts in veterans' computerized medical records that remind providers to address specific health issues. For example, a clinical reminder would alert the provider that a veteran needs to be screened for certain types of cancer or other disease risk factors, such as hepatitis C. In July 2000, VA required the installation of hepatitis C clinical reminder software in the computerized medical record at all facilities. This reminder alerted providers when they opened a veteran's computerized medical record that the veteran needed to be screened for hepatitis C. In fiscal year 2002, VA required medical facilities to install an enhanced version of the July 2000 clinical reminder. The enhanced version alerts the provider to at-risk veterans who need hepatitis C testing, is linked directly to the entry of laboratory orders for the test, and is satisfied once the hepatitis C test is ordered. Even though VA's fiscal year 2002 performance measurement results show that it tested 62 percent of veterans identified to be at risk for hepatitis C, exceeding its national goal of 55 percent, thousands of veterans in the sample who were identified as at risk were not tested. Moreover, the percentage of veterans identified as at risk who were tested varied widely among VA's 21 health care networks. Specifically, we found that VA identified in its performance measurement sample 8,501 veterans nationwide who had hepatitis C risk factors out of a sample of 40,489 veterans visiting VA medical facilities during fiscal year 2002. VA determined that tests were completed, in fiscal year 2002 or earlier, for 62 percent of the 8,501 veterans based on a review of each veteran's medical record through its performance measurement process. For the remaining 38 percent (3,269 veterans), VA did not complete hepatitis C tests when the veterans visited VA facilities. The percentage of identified at-risk veterans tested for hepatitis C ranged, as table 1 shows, from 45 to 80 percent for individual networks. Fourteen of VA's 21 health care networks exceeded VA's national testing performance goal of 55 percent, with 7 networks exceeding VA's national testing performance level of 62 percent. The remaining 7 networks that did not meet VA's national performance goal tested from 45 percent to 54 percent of at-risk veterans. VA's fiscal year 2002 testing rate for veterans identified as at risk for hepatitis C reflects tests performed in fiscal year 2002 and in prior fiscal years. Thus, a veteran who was identified as at risk and tested for hepatitis C in fiscal year 1998 and whose medical record was reviewed as part of the fiscal year 2002 sample would be counted as tested in VA's fiscal year 2002 performance measurement result. As a result of using this cumulative measurement, VA's fiscal year 2002 performance result for testing at-risk veterans who visited VA facilities in fiscal year 2002 and need hepatitis C tests is unknown. To determine if the testing rate is improving for veterans needing hepatitis C tests when they were seen at VA in fiscal year 2002, VA would also need to look at a subset of the sample of veterans currently included in its performance measure. For example, when we excluded veterans from the sample who were tested for hepatitis C prior to fiscal year 2002, and included in the performance measurement sample only those veterans who were seen by VA in fiscal year 2002 and needed to be tested for hepatitis C, we found Network 5 tested 38 percent of these veterans as compared to Network 5's cumulative performance measurement result of 60 percent. We identified three factors that impeded the process used by our case study network, VA's Network 5 (Baltimore), for testing veterans identified as at risk for hepatitis C. The factors were tests not being ordered by the provider, ordered tests not being completed, and providers being unaware that needed tests had not been ordered or completed. More than two- thirds of the time, veterans identified as at risk were not tested because providers did not order the test, a crucial step in the process. The remainder of these untested veterans had tests ordered by providers, but the actual laboratory testing process was not completed. Moreover, veterans in need of hepatitis C testing had not been tested because providers did not always recognize during subsequent clinic visits that the hepatitis C testing process had not been completed. These factors are similar to those we identified and reported in our testimony in June 2001. Primary care providers and clinicians in Network 5's three facilities offered two reasons that hepatitis C tests were not ordered for over two- thirds of the veterans identified as at risk but not tested for hepatitis C in the Network 5 fiscal year 2002 performance measurement sample. First, facilities lacked a method for clear communication between nurses who identified veterans' risk factors and providers who ordered hepatitis C tests. For example, in two facilities, nurses identified veterans' need for testing but providers were not alerted through a reminder in the computerized medical record to order a hepatitis C test. In one of these facilities, because nursing staff were at times delayed in entering a note in the computerized medical record after screening a veteran for hepatitis C risk factors, the provider was unaware of the need to order a test for a veteran identified as at risk. The three network facilities have changed their practices for ordering tests, and as of late 2002, nursing staff in each of the facilities are ordering hepatitis C tests for at-risk veterans. The second reason for tests not being ordered, which was offered by a clinician in another one of the three Network 5 facilities, was that nursing staff did not properly complete the ordering procedure in the computer. Although nurses identified at-risk veterans using the hepatitis C screening clinical reminder in the medical record, they sometimes overlooked the chance the reminder gave them to place a test order. To correct this, nursing staff were retrained on the proper use of the reminder. For the remaining 30 percent of untested veterans in Network 5, tests were not completed for veterans who visited laboratories to have blood drawn after hepatitis C tests were ordered. One reason that laboratory staff did not obtain blood samples for tests was because more than two-thirds of the veterans' test orders had expired by the time they visited the laboratory. VA medical facilities consider an ordered test to be expired or inactive if the veteran's visit to the laboratory falls outside the number of days designated by the facility. For example, at two Network 5 facilities, laboratory staff considered a test order to be expired or inactive if the date of the order was more than 30 days before or after the veteran visited the laboratory. If the veteran's hepatitis C test was ordered and the veteran visited the laboratory to have the test completed 31 days later, the test would not be completed because the order would have exceeded the 30- day period and would have expired. Providers can also select future dates as effective dates. If the provider had designated a future date for the order and the veteran visited the laboratory within 30 days of that future date, the order would be considered active. Another reason for incomplete tests was that laboratory staff overlooked some active test orders when veterans visited the laboratory. VA facility officials told us that laboratory staff could miss test orders, given the many test orders some veterans have in their computerized medical records. The computer package used by laboratory staff to identify active test orders differs from the computer package used by providers to order tests. The laboratory package does not allow staff to easily identify all active test orders for a specific veteran by creating a summary of active test orders. According to a laboratory supervisor at one facility, the process for identifying active test orders is cumbersome because staff must scroll back and forth through a list of orders to find active laboratory test orders. Further complicating the identification of active orders for laboratory staff, veterans may have multiple laboratory test orders submitted on different dates from several providers. As a result, when the veteran visits the laboratory to have tests completed, instead of having a summary of active test orders, staff must scroll through a daily list of ordered testsin two facilities up to 60 days of ordersto identify the laboratory tests that need to be completed. Network and facility officials are aware of, but have not successfully addressed, this problem. VA plans to upgrade the computer package used by laboratory staff during fiscal year 2005. Hepatitis C tests that were not ordered or completed sometimes went undetected for long periods in Network 5, even though veterans often made multiple visits to primary care providers after their hepatitis C risk factors were identified. Our review of medical records showed that nearly two-thirds of the at-risk veterans in Network 5's performance measurement sample who did not have ordered or completed hepatitis C tests had risk factors identified primarily in fiscal years 2002 and 2001. All veterans identified as at risk but who did not have hepatitis C test orders visited VA primary care providers at least once after having a risk factor identified during a previous primary care visit, including nearly 70 percent who visited more than three times. Further, almost all of the at- risk veterans who had hepatitis C tests ordered but not completed returned for follow-up visits for medical care. Even when the first follow- up visits were made to the same providers who originally identified these veterans as being at risk for hepatitis C, providers did not recognize that hepatitis C tests had not been ordered or completed. Providers did not follow up by checking for hepatitis C test results in the computerized medical records of these veterans. Most of these veterans subsequently visited the laboratory to have blood drawn for other tests and, therefore, could have had the hepatitis C test completed if the providers had recognized that test results were not available and reordered the hepatitis C tests. Steps intended to improve the testing rate of veterans identified as at risk for hepatitis C have been taken in three of VA's 21 health care networks. VA network and facility officials in the three networks we reviewed-- Network 5 (Baltimore), Network 2 (Albany), and Network 9 (Nashville)-- identified similar factors that impede hepatitis C testing and most often focused on getting tests ordered immediately following risk factor identification. Officials in two networks modified VA's required hepatitis C testing clinical reminder, which is satisfied when a hepatitis C test is ordered, to continue to alert the provider until a hepatitis C test result is in the medical record. Officials at two facilitiesone in Network 5 and the other in Network 9created a safety net for veterans at risk for hepatitis C who remain untested by developing a method that looks back through computerized medical records to identify these veterans. The method has been adopted in all six facilities in Network 9; the other two facilities in Network 5 have not adopted it. VA network and facility managers in two networks we reviewed Networks 2 and 9instituted networkwide changes intended to improve the ordering of hepatitis C tests for veterans identified as at risk. Facility officials recognized that VA's enhanced clinical reminder that facilities were required to install by the end of fiscal year 2002 only alerted providers to veterans without ordered hepatitis C tests and did not alert providers to veterans with ordered but incomplete tests. These two networks independently changed this reminder to improve compliance with the testing of veterans at risk for hepatitis C. In both networks, the clinical reminder was modified to continue to alert the provider, even after a hepatitis C test was ordered. Thus, if the laboratory has not completed the order, the reminder is intended to act as a backup system to alert the provider that a hepatitis C test still needs to be completed. Providers continue to receive alerts until a hepatitis C test result is placed in the medical record, ensuring that providers are aware that a hepatitis C test might need to be reordered. The new clinical reminder was implemented in Network 2 in January 2002, and Network 9 piloted the reminder at one facility and then implemented it in all six network facilities in November 2002. Officials at two facilities in our review searched all records in their facilities' computerized medical record systems and found several thousand untested veterans identified as at risk for hepatitis C. The process, referred to as a "look back," involves searching all medical records to identify veterans who have risk factors for hepatitis C but have not been tested either because the providers did not order the tests or ordered tests were not completed. The look back serves as a safety net for these veterans. The network or facility can perform the look back with any chosen frequency and over any period of time. The population searched in a look back includes all veteran users of the VA facility and is more inclusive than the population that is sampled monthly in VA's performance measurement process. As a result of a look back, one facility manager in Network 5 identified 2,000 veterans who had hepatitis C risk factors identified since January 2001 but had not been tested as of August 2002. Facility staff began contacting the identified veterans in October 2002 to offer them the opportunity to be tested. Although officials in the other two Network 5 facilities have the technical capability to identify and contact all untested veterans determined to be at risk for hepatitis C, they have not done so. An official at one facility not currently conducting look back searches stated that the facility would need support from those with computer expertise to conduct a look back search. A facility manager in Network 9 identified, through a look back, more than 1,500 veterans who had identified risk factors for hepatitis C but were not tested from January 2001 to September 2002. The manager in this facility began identifying untested, at-risk veterans in late March 2003 and providers subsequently began contacting these veterans to arrange testing opportunities. Other Network 9 facility managers have also begun to identify untested, at-risk veterans. Given that two facilities in our review have identified over 3,000 at-risk veterans in need of testing through look back searches, it is likely that similar situations exist at other VA facilities. Although VA met its goal for fiscal year 2002, thousands of veterans at risk for hepatitis C remained untested. Problems persisted with obtaining and completing hepatitis C test orders. As a result, many veterans identified as at risk did not know if they have hepatitis C. These undiagnosed veterans risk unknowingly transmitting the disease as well as potentially developing complications resulting from delayed treatment. Some networks and facilities have upgraded VA's required hepatitis C clinical reminder to continue to alert providers until a hepatitis C test result is present in the medical record. Such a system appears to have merit, but neither the networks nor VA has evaluated its effectiveness. Network and facility managers would benefit from knowing, in addition to the cumulative results, current fiscal year performance results for hepatitis C testing to determine the effectiveness of actions taken to improve hepatitis C testing rates. Some facilities have compensated for weaknesses in hepatitis C test ordering and completion processes by conducting look backs through computerized medical record systems to identify all at-risk veterans in need of testing. If all facilities were to conduct look back searches, potentially thousands more untested, at-risk veterans would be identified. To improve VA's testing of veterans identified as at risk of hepatitis C infection, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to determine the effectiveness of actions taken by networks and facilities to improve the hepatitis C testing rates for veterans and, where actions have been successful, consider applying these improvements systemwide and provide local managers with information on current fiscal year performance results using a subset of the performance measurement sample of veterans in order for them to determine the effectiveness of actions taken to improve hepatitis C testing processes. In commenting on a draft of this report VA concurred with our recommendations. VA said its agreement with the report's findings was somewhat qualified because it was based on fiscal year 2002 performance measurement results. VA stated that the use of fiscal year 2002 results does not accurately reflect the significant improvement in VA's hepatitis C testing performanceup from 62 percent in fiscal year 2002 to 86 percent in fiscal year 2003, results that became available recently. VA, however, did not include its fiscal year 2003 hepatitis C testing performance results by individual network, and as a result, we do not know if the wide variation in network results, which we found in fiscal year 2002, still exists in fiscal year 2003. We incorporated updated performance information provided by VA where appropriate. VA did report that it has, as part of its fiscal year 2003 hepatitis C performance measurement system, provided local facility managers with a tool to assess real-time performance in addition to cumulative performance. Because this tool was not available at the time we conducted our audit work, we were unable to assess its effectiveness. VA's written comments are reprinted in appendix II. We are sending copies of this report to the Secretary of Veterans Affairs and other interested parties. We also will make copies available to others upon request. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me at (202) 512-7101. Another contact and key contributors are listed in appendix III. To follow up on the Department of Veterans Affairs' (VA) implementation of performance measures for hepatitis C we (1) reviewed VA's fiscal year 2002 performance measurement results of testing veterans it identified as at risk for hepatitis C, (2) identified factors that impede VA's efforts to test veterans for hepatitis C in one VA health care network, and (3) identified actions taken by VA networks and medical facilities intended to improve the testing rate of veterans identified as at risk for hepatitis C. We reviewed VA's fiscal year 2002 hepatitis C testing performance results, the most recently available data at the time we conducted our work, for a sample of 8,501 veterans identified as at risk and compared VA's national and network results for fiscal year 2002 against VA's performance goal for hepatitis C testing. The sample of veterans identified as at risk for hepatitis C was selected from VA's performance measurement process--also referred to as the External Peer Review Process--that is based on data abstracted from medical records by a contractor. In addition, we looked at one VA health care network's testing rate for at-risk veterans visiting its clinics in fiscal year 2002. To test the reliability of VA's hepatitis C performance measurement data, we reviewed 288 medical records in Network 5 (Baltimore) and compared the results against the contractor's results for the same medical records and found that VA's data were sufficiently reliable for our purposes. To augment our understanding of VA's performance measurement process for hepatitis C testing, we reviewed VA documents and interviewed officials in VA's Office of Quality and Performance and Public Health Strategic Health Care Group. To identify the factors that impede VA's efforts to test veterans for hepatitis C, we conducted a case study of the three medical facilities located in VA's Network 5Martinsburg, West Virginia; Washington, D.C.; and the VA Maryland Health Care System. We chose Network 5 for our case study because its hepatitis C testing performance, at 60 percent, was comparable to VA's national performance of 62 percent. As part of the case study of Network 5, we reviewed medical records for all 288 veterans identified as at risk for hepatitis C who were included in that network's sample for VA's fiscal year 2002 performance measurement process. Of the 288 veterans identified as at risk who needed hepatitis C testing, VA's performance results found that 115 veterans in VA's Network 5 were untested. We reviewed the medical records for these 115 veterans and found hepatitis C testing results or indications that the veterans refused testing in 21 cases. Eleven veterans had hepatitis C tests performed subsequent to VA's fiscal year 2002 performance measurement data collection. Hepatitis C test results or test refusals for 10 veterans were overlooked during VA's data collection. As such, we consider hepatitis C testing opportunities to have been missed for 94 veterans. On the basis of our medical record review, we determined if the provider ordered a hepatitis C test and, if the test was ordered, why the test was not completed. For example, if a hepatitis C test had been ordered but a test result was not available in the computerized medical record, we determined whether the veteran visited the laboratory after the test was ordered. If the veteran had visited the laboratory, we determined if the test order was active at the time of the visit and was overlooked by laboratory staff. Based on interviews with providers, we identified the reason why hepatitis C tests were not ordered. We also analyzed medical records to determine how many times veterans with identified risk factors and no hepatitis C test orders returned for primary care visits. To determine actions taken by networks and medical facilities intended to improve the testing rate of veterans identified as at risk for hepatitis C, we expanded our review beyond Network 5 to include Network 2 and Network 9. We reviewed network and facility documents and conducted interviews with network quality managers and medical facility staff-- primary care providers, nurses, quality managers, laboratory chiefs and supervisors, and information management staff. Our review was conducted from April 2002 through November 2003 in accordance with generally accepted government auditing standards. In addition to the contact named above, Carl S. Barden, Irene J. Barnett, Martha A. Fisher, Daniel M. Montinez, and Paul R. Reynolds made key contributions to this report. VA Health Care: Improvements Needed in Hepatitis C Disease Management Practices. GAO-03-136. Washington, D.C.: January 31, 2003. Major Management Challenges and Program Risks: Department of Veterans Affairs. GAO-03-110. Washington, D.C.: January 2003. Veterans' Health Care: Standards and Accountability Could Improve Hepatitis C Screening and Testing Performance. GAO-01-807T. Washington, D.C.: June 14, 2001. Veterans' Health Care: Observations on VA's Assessment of Hepatitis C Budgeting and Funding. GAO-01-661T. Washington, D.C.: April 25, 2001.
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Hepatitis C is a chronic disease caused by a blood-borne virus that can lead to potentially fatal liverrelated conditions. In 2001, GAO reported that the VA missed opportunities to test about 50 percent of veterans identified as at risk for hepatitis C. GAO was asked to (1) review VA's fiscal year 2002 performance measurement results in testing veterans at risk for hepatitis C, (2) identify factors that impede VA's efforts to test veterans for hepatitis C, and (3) identify actions taken by VA networks and medical facilities to improve the testing rate of veterans at risk for hepatitis C. GAO reviewed VA's fiscal year 2002 hepatitis C performance results and compared them against VA's national performance goals, interviewed headquarters and field officials in three networks, and conducted a case study in one network. VA's performance measurement result shows that it tested, in fiscal year 2002 or earlier, 5,232 (62 percent) of the 8,501 veterans identified as at risk for hepatitis C in VA's performance measurement sample, exceeding its fiscal year 2002 national goal of 55 percent. Thousands of veterans (about one-third) of those identified as at risk for hepatitis C infection in VA's performance measurement sample were not tested. VA's hepatitis C testing result is a cumulative measure of performance over time and does not only reflect current fiscal year performance. GAO found Network 5 (Baltimore) tested 38 percent of veterans in fiscal year 2002 as compared to Network 5's cumulative performance result of 60 percent. In its case study of Network 5, which was one of the networks to exceed VA's fiscal year 2002 performance goal, GAO identified several factors that impeded the hepatitis C testing process. These factors were tests not being ordered by the provider, ordered tests not being completed, and providers being unaware that needed tests had not been ordered or completed. For more than two-thirds of the veterans identified as at risk but not tested for hepatitis C, the testing process failed because hepatitis C tests were not ordered, mostly due to poor communication between clinicians. For the remaining veterans, the testing process was not completed because orders had expired by the time veterans visited the laboratory or test orders were overlooked because laboratory staff had to scroll back and forth through daily lists, a cumbersome process, to identify active orders. Moreover, during subsequent primary care visits by these untested veterans, providers often did not recognize that hepatitis C tests had not been ordered nor had their results been obtained. Consequently, undiagnosed veterans risk unknowingly transmitting the disease as well as potential complications resulting from delayed treatment. The three networks GAO looked at--5 (Baltimore), 2 (Albany), and 9 (Nashville)--have taken steps intended to improve the testing rate of veterans identified as at risk for hepatitis C. To do this, in two networks officials modified clinical reminders in the computerized medical record to alert providers that for ordered hepatitis C tests, results were unavailable. Officials at two facilities developed a "look back" method to search computerized medical records to identify all at-risk veterans who had not yet been tested and identified approximately 3,500 untested veterans. The look back serves as a safety net for veterans identified as at risk for hepatitis C who have not been tested. The modified clinical reminder and look back method of searching medical records appear promising, but neither the networks nor VA has evaluated their effectiveness.
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US-VISIT is a governmentwide program intended to enhance the security of U.S. citizens and visitors, facilitate legitimate travel and trade, ensure the integrity of the U.S. immigration system, and protect the privacy of our visitors. To achieve its goals, US-VISIT is to collect, maintain, and share information on certain foreign nationals who enter and exit the United States; detect fraudulent travel documents, verify traveler identity, and determine traveler admissibility through the use of biometrics; facilitate information sharing and coordination within the immigration and border management community; and identify foreign nationals who (1) have overstayed or violated the terms of their admission; (2) may be eligible to receive, extend, or adjust their immigration status; or (3) should be apprehended or detained by law enforcement officials. The scope of the program includes the pre-entry, entry, status, and exit of hundreds of millions of foreign national travelers who enter and leave the United States at over 300 air, sea, and land POEs. The US-VISIT program office is responsible for managing the acquisition, deployment, operation, and sustainment of US-VISIT systems in support of such DHS agencies as Customs and Border Protection (CBP) and Immigration and Customs Enforcement (ICE). As of March 31, 2007, the program director reports to the Under Secretary for the National Protection and Programs Directorate. In 2003, DHS planned to deliver US-VISIT capability in 4 increments: Increment 1 (air and sea entry and exit), Increment 2 (land entry and exit), Increment 3 (land entry and exit), and Increment 4, which was to define, design, build, and implement a more strategic program capability. Since then the scope of the first three increments has changed. The current scope is Increment 1 (air and sea entry), Increment 2 (air, sea, and land entry), and Increment 3 (land entry). Increment 4 is still intended to define, design, build, and implement a more strategic program capability, which program officials stated will consist of a series of incremental releases or mission capability enhancements that will support business outcomes. In Increments 1 through 3, the program has built interfaces among existing ("legacy") systems, enhanced the capabilities of these systems, and deployed these capabilities to air, sea, and land POEs. These first three increments have been largely pursued through existing system contracts and task orders. Increment 4 strategic system enhancements are being pursued through a systems integration contract awarded to Accenture and its partners in May 2004. Through fiscal year 2007, about $1.7 billion has been appropriated for US-VISIT. According to the Department of Homeland Security Appropriations Act, 2007, DHS may not obligate $200 million of the $362.494 million appropriated for US-VISIT in fiscal year 2007 until DHS provides the Senate and House Committees with a plan for expenditure that meets several criteria. The department has requested $462 million in fiscal year 2008 for the program. As of January 31, 2007, program officials stated that about $1.3 billion has been obligated for US-VISIT activities. A biometrically enabled US-VISIT entry capability is operating at most POEs. On January 5, 2004, the program office deployed and began operating most aspects of its planned biometric entry capability at 115 airports and 14 seaports for certain foreign nationals, including those from visa waiver countries. As of December 2006, the program office also deployed and began operating this entry capability in the secondary inspection areas of 154 of 170 land POEs. According to program officials, 14 of the remaining 16 POEs have no operational need to deploy US-VISIT because visitors subject to US-VISIT are, by regulation, not authorized to enter into the United States at these locations. The other two POEs do not have the necessary transmission lines to operate US-VISIT, and thus they process visitors manually. According to DHS, these entry capabilities have produced results. For example, as of June 15, 2007, it had more than 7,600 biometric hits in primary entry resulting in more than 1,500 people having adverse actions, such as denial of entry, taken against them. Further, about 14,000 leads were referred to ICE's immigration enforcement unit, resulting in 315 arrests. Another potential consequence is the deterrent effect of having an operational entry capability. Although deterrence is difficult to demonstrate, officials have cited it as a byproduct of having a publicized capability at the border to screen entry on the basis of identity verification and matching against watch lists of known and suspected terrorists. Over the last few years, DHS has devoted considerable time and resources towards establishing an operational exit capability at air, sea, and land POEs. For example, between 2003 and 2006, DHS reports allocating about $250 million for exit-related efforts. Notwithstanding this considerable investment of time and resources, DHS still does not have an operational exit capability. Our prior reports have raised a number of concerns about DHS's management of US-VISIT's exit efforts. As we and others have reported, the absence of a biometric exit capability raises questions about what meaningful US-VISIT data are available to DHS components, such as ICE. Without this exit capability, DHS cannot ensure the integrity of the immigration system by identifying and removing those people who have overstayed their original period of admission--a stated goal of US-VISIT. Further, ICE's efforts to ensure the integrity of the immigration system could be degraded if it continues to spend its limited resources on investigating potential visa violators who have already left the country. Between January 2004 and May 2007, the program office conducted various exit pilots at one air and one sea POE without fully deploying a biometric exit capability. Throughout this period, we have reported on the limitations in how these pilot activities were planned, defined, and justified. For example, we reported in September 2003, prior to the pilots being deployed, that DHS had not economically justified the initial US-VISIT increment (which was to include an exit capability at air and sea POEs) on the basis of benefits, costs, and risks. As a result, we recommended that DHS determine whether proposed incremental capabilities would produce value commensurate with program costs and risks. We later reported in May 2004 that DHS had not deployed a biometric exit capability to the 80 air and 14 sea POEs as part of Increment 1 deployment in December 2003, as it had originally intended. Instead, as we mention above, the pilot exit capability was deployed to only one air and one sea POE on January 5, 2004. In February 2005, we reported that the program office had not adequately planned for evaluating its exit pilot at air and sea POEs because the pilot's evaluation scope and time line were compressed, and thus would not provide the program office with sufficient information to adequately assess the pilots and permit the selection of the best exit solution for deployment. Accordingly, we recommended that the program office reassess its plans for deploying an exit capability to ensure that the scope of the pilot provided an adequate evaluation of alternatives. A year later in February 2006, we reported that the program office had extended the pilot from 5 to 11 POEs (nine airports and two seaports) and the time frame by an additional 7 months. Notwithstanding the expanded scope and time frame, the exit pilots were not sufficiently evaluated. In particular, on average only about 24 percent of those travelers subject to US-VISIT actually complied with the exit processing steps. The evaluation report attributed this, in part, to the fact that compliance during the pilot was voluntary, and that to achieve the desired compliance rate, the exit solution would need an enforcement mechanism, such as not allowing persons to reenter the United States if they do not comply with the exit process. Despite this limitation, as of February 2006, program officials had not conducted any formal evaluation of enforcement mechanisms or their possible effect on compliance or cost, and according to the then Acting Program Director, no such evaluation would be done. Nonetheless, DHS continued to operate the exit pilots. In February 2006, we also reported that while DHS had analyzed the cost, benefits, and risks for its air and sea exit capability, the analyses did not demonstrate that the program was producing or would produce mission value commensurate with expected costs and benefits, and the costs upon which the analyses were based were not reliable. A year later, we reported that DHS had not adequately defined and justified its past investment in its air and sea exit pilots and its land exit demonstration projects, and still did not have either an operational exit capability or a viable exit solution to deploy. We further noted that exit-related program documentation did not adequately define what work was to be done or what these efforts would accomplish, did not describe measurable outcomes from the pilot or demonstration efforts, and did not indicate the related cost, schedule, and capability commitments that would be met. We recommended that planned expenditures be limited for exit pilots and demonstration projects until such investments were economically justified and until each investment had a well-defined evaluation plan. In its comments on our report, DHS agreed with our recommendation. In January 2004, DHS committed to delivering a biometric exit capability by December 2005; however, we reported that program officials concluded in January 2005 that a biometric land exit capability could not be implemented without having a major impact on land POE facilities. According to these officials, the only proven technology available to biometrically verify individuals upon exit at land POEs would necessitate mirroring the entry processes, which the program reported was "an infeasible alternative for numerous reasons, including but not limited to, the additional staffing demands, new infrastructure requirements, and potential trade and commerce impacts." In light of these constraints, the program office tested radio frequency identification (RFID) technology as a means of recording visitors as they exit at land POEs. However, this technology was not biometrics-based. Moreover, testing and analysis at five land POEs at the northern and southern borders identified numerous performance and reliability problems, such as the failure of RFID readers to detect a majority of travelers' tags during testing. According to program officials, no technology or device currently exists to biometrically verify persons exiting the country that would not have a major impact on land POE facilities. They added that technological advances over the next 5 to 10 years will make it possible to biometrically verify persons exiting the country without major changes to facility infrastructure and without requiring those exiting to stop and/or exit their vehicles. In November 2006, during the course of our work on, among other things, the justification for ongoing land exit demonstration projects, DHS terminated these projects. In our view, the decision was warranted because DHS had not adequately defined and justified its investment in its pilots and demonstration projects. As noted earlier, we recommended in February 2007, that planned expenditures be limited for exit pilots and demonstration projects until such investments are economically justified and until each investment has a well-defined evaluation plan. DHS agreed with our recommendation. According to relevant federal guidance, the decision to invest in a system or system component should be based on a clear definition of what capabilities, involving what stakeholders, will be delivered according to what schedule and at what cost. Moreover, such investment decisions should be based on reasonable assurance that a proposed program will produce mission value commensurate with expected costs and risks. As noted earlier, DHS funding plans have collectively allocated about $250 million to a number of exit efforts through 2006, but without having adequately defined or economically justified them. Now, in 2007, it risks repeating these same mistakes as it embarks on yet another attempt to implement a means by which to biometrically track certain foreign nationals exiting the United States, first at airports, and then at seaports, with land exit capabilities being deferred to an unspecified future time. Based on the department's latest available documentation, it intends to spend $27.3 million ($7.3 million in fiscal year 2007 funding and $20 million in fiscal year 2006 carryover funding) on air and sea exit capabilities. However, it has not produced either the plans or the analyses that adequately define and justify how it intends to invest these funds. Rather, it has only generally described near-term deployment plans for biometric exit capabilities at air and sea POEs, and acknowledged that a near-term biometric solution for land POEs is not possible. More specifically, the US-VISIT fiscal year 2007 expenditure plan states that DHS will begin the process of planning and designing an air and sea exit solution during fiscal year 2007, focusing initially on air exit and then emulating these technology and operational experiences in completing the sea exit solution. According to this plan, air exit efforts will begin during the third quarter of fiscal year 2007, which ends in 2 days. However, US-VISIT program officials told us as recently as three weeks ago that this deadline will not be met. Moreover, no exit program plans are available that define what will be done, by what entities, and at what cost to define, acquire, deliver, deploy, and operate this capability, including plans describing expected system capabilities, defining measurable outcomes (benefits and results), identifying key stakeholder (e.g., airlines) roles/responsibilities and buy-in, and coordinating and aligning with related programs. Further, there is no analysis available comparing the life cycle costs of the air exit solution to its expected benefits and risks. The only additional information available to date is what the department characterized as a high-level schedule for air exit that we obtained on June 11, 2007. This schedule shows that business requirements and a concept of operations are to be completed by September 3, 2007; a cost-benefit analysis is to be completed by October 1, 2007; testing is to be completed by October 1, 2008; and the exit solution is to be fully deployed in 2 years (June 2009). However, the schedule does not include the underlying details supporting the timelines for such areas of activity as system design, system development, and system testing. According to program officials, more detailed schedules exist but were not provided to us because the schedules had not yet been approved by DHS. Further, while the expenditure plan states that DHS plans to integrate the air exit solution with the commercial airlines' existing check-in processes and to integrate US-VISIT's efforts with CBP's pre-departure Advance Passenger Information System and the Transportation Security Administration's (TSA's) Secure Flight, the program office did not provide any documentation that describes what has been done with regard to these plans or what is planned relative to engaging with and obtaining buy-in from the airlines. Nevertheless, DHS plans to issue a proposed regulation requiring airlines to participate in this effort by December 17, 2007. With regard to land exit, the future is even more unclear. According to the fiscal year 2007 expenditure plan, the department has concluded that a biometric land exit capability is not practical in the short term because of the costly expansion of existing exit capacity, including physical infrastructure, land acquisition, and staffing. As a result, DHS states an intention to begin matching entry and exit records using biographic information in instances where no current collection exists today, such as in the case of individuals who do not submit their Form I-94 upon departure. According to DHS, it has also initiated discussions with its Canadian counterparts about the potential for them to collect biographical exit data at entry into Canada. Such a solution could include data sharing between the two countries and would require significant discussions on specific data elements and the means of collection and sharing, including technical, policy, and legal issues associated with this approach. However, DHS has yet to provide us with any documentation that specifies what data elements would be collected or what technical, policy, and legal issues would need to be addressed. Further, according to DHS, it has not yet determined a time frame or any cost estimates for the initiation of such a non-biometric land exit solution. --------------------------------------------------------------- In closing, we would like to emphasize the mission importance of a cost effective, biometrically enabled exit capability, and that delivering such a capability requires effective planning and justification, and rigorous and disciplined system acquisition management. To date, these activities have not occurred for DHS's exit efforts. If this does not change, there is no reason to expect that DHS's newly launched efforts to deliver an air and sea exit solution will produce results different from its past efforts--namely, no operational exit solution despite many years and hundreds of millions of dollars of investment. More importantly, the continued absence of an exit capability will hinder DHS's ability to effectively and efficiently perform its border security and immigration enforcement mission. Hence, it is important that DHS approach its latest attempt to deploy its exit capabilities in the kind of rigorous and disciplined fashion that we have previously recommended. Madam Chairwoman, this concludes our statement. We would be happy to answer any questions that you or members of the subcommittee may have at this time. If you should have any questions about this testimony, please contact Randolph C. Hite at (202) 512-3439 or [email protected], or Richard M. Stana at (202) 512-8777 or [email protected]. Other major contributors include Deborah Davis, Kory Godfrey, Daniel Gordon, David Hinchman, Kaelin Kuhn, John Mortin, and Amos Tevelow. 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 (DHS) has spent and continues to invest hundreds of millions of dollars each year in its U.S. Visitor and Immigrant Status Indicator Technology (US-VISIT) program to collect, maintain, and share information on selected foreign nationals who enter and exit the United States at over 300 air, sea, and land ports of entry (POEs). The program uses biometric identifiers (digital finger scans and photographs) to screen people against watch lists and to verify that a visitor is the person who was issued a visa or other travel document. GAO's testimony addresses the status of US-VISIT entry and exit capabilities and DHS's management of past and future exit efforts. In developing its testimony, GAO drew from eight prior reports on US-VISIT as well as ongoing work for the committee. After investing about $1.3 billion over 4 years, DHS has delivered essentially one-half of US-VISIT, meaning that biometrically enabled entry capabilities are operating at almost 300 air, sea, and land POEs but comparable exit capabilities are not. To the department's credit, operational entry capabilities have reportedly produced results, including more than 1,500 people having adverse actions, such as denial of entry, taken against them. However, DHS still does not have the other half of US-VISIT (an operational exit capability) despite the fact that its funding plans have allocated about one-quarter of a billion dollars since 2003 to exit-related efforts. During this time, GAO has continued to cite weaknesses in how DHS is managing US-VISIT in general, and the exit side of US-VISIT in particular, and has made numerous recommendations aimed at better ensuring that the program delivers clearly defined and adequately justified capabilities and benefits on time and within budget. The prospects for successfully delivering an operational exit solution are as uncertain today as they were 4 years ago. The department's latest available documentation indicates that little has changed in how DHS is approaching its definition and justification of future US-VISIT exit efforts. Specifically, DHS has indicated that it intends to spend $27.3 million ($7.3 million in fiscal year 2007 funding and $20 million in fiscal year 2006 carryover funding) on air and sea exit capabilities. However, it has not produced either plans or analyses that adequately define and justify how it intends to invest these funds. Rather, it has only described in general terms near-term deployment plans for biometric exit capabilities at air and sea POEs, and acknowledged that a near-term biometric solution for land POEs is not possible. Beyond this high-level schedule, no other exit program plans are available that define what will be done by what entities and at what cost. In the absence of more detailed plans and justification governing its exit intentions, it is unlikely that the department's latest efforts to deliver near-term air and sea exit capabilities will produce results different from the past. Therefore, the prospects for having operational exit capabilities continue to be unclear. Moreover, the longer the department goes without exit capabilities, the more its ability to effectively and efficiently perform its border security and immigration enforcement missions will suffer. Among other things, this means that DHS cannot ensure the integrity of the immigration system by identifying and removing those people who have overstayed their original period of admission, which is a stated goal of US-VISIT. Further, DHS immigration and customs enforcement entities will continue to spend limited resources on investigating potential visa violators who have already left the country.
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In the past, we have suggested four broad principles or criteria for a budget process. A process should provide information about the long-term impact of decisions, both macro--linking fiscal policy to the long-term economic outlook--and micro--providing recognition of the long-term spending implications of government commitments; provide information and be structured to focus on important macro trade- offs--e.g., between investment and consumption; provide information necessary to make informed trade-offs between missions (or national needs) and between the different policy tools of government (such as tax provisions, grants, and credit programs); and be enforceable, provide for control and accountability, and be transparent, using clear, consistent definitions. The lack of adherence to the original BEA spending constraints in recent years, the nearing expiration of BEA, and the projection of continued and large surpluses in the coming years suggest that now may be an opportune time to think about the direction and purpose of our nation's fiscal policy. In a time of actual and projected surpluses, the goal of zero deficit no longer applies. Rather, discussion shifts toward how to allocate surpluses among debt reduction, spending increases, and tax cuts. Only then can limits on subcategories of spending be set. Will the entire social security surplus be "saved"? What about the Medicare Part A surplus? In our work on other countries that also have faced the challenge of setting fiscal policy in times of surplus, we found that as part of a broad fiscal policy framework some countries adopted fiscal targets such as debt-to-gross domestic product (GDP) ratios to serve as guides for decision-making. Complicating the discussion on formulating fiscal policy in a time of surplus is the fact that the long-term picture is not so good. Despite current projections that show surpluses continuing over the 10-year budget window, our long-term budget simulations show a resumption of significant deficits emerging after the anticipated demographic tidal wave of population aging hits. These demographic trends serve to emphasize the importance of the first principle cited above--the need to bring a long- term perspective to bear on budget debates. Keeping in mind these principles and concerns, a number of alternatives appear promising. There is a broad consensus among observers and analysts who focus on the budget both that BEA has constrained spending and that continuation of some restraint is necessary even with the advent of actual and projected surpluses. Discussions on the future of the budget process have primarily focused on revamping the current budget process rather than establishing a new one from scratch. Where discussion has moved beyond a general call for continued restraint to specific control devices, the ones most frequently discussed are (1) extending the discretionary spending caps, (2) extending the PAYGO mechanism, and (3) creating a trigger device or a set of rules specifically designed to deal with the uncertainty of budget projections. A new budget process framework could encompass any or all of these instruments. BEA distinguished between spending controlled by the appropriations process--"discretionary spending"--and that which flowed directly from authorizing legislation provisions of law--"direct spending," sometimes called "mandatory." Caps were placed on discretionary spending--and the Congress' compliance with the caps was relatively easy to measure because discretionary spending totals flow directly from legislative actions (i.e., appropriations laws). There is broad consensus that, although the caps have been adjusted, they have served to constrain appropriations. This consensus combined with the belief that some restraints should be continued has led many to propose that some form of cap structure be continued as a way of limiting discretionary appropriations. However, the actions in the last 2 years have also led many to note that caps can only work if they are realistic; while caps may be seen as tighter than some would like, they are not likely to bind if they are seen as totally unreasonable given current conditions. Further, some have proposed that any extension of BEA-type caps be limited to caps on budget authority. Outlays are controlled by and flow from budget authority--although at different rates depending on the nature of the programs. Some argue that the existence of both budget authority and outlay caps has encouraged provisions such as "delayed obligations" to be adopted not for programmatic reasons but as a way of juggling the two caps. The existence of two caps may also skew authority from rapid spendout to slower spendout programs, thus pushing more outlays to the future and creating problems in complying with outlay caps in later years. Extending only the budget authority cap would eliminate the incentive for such actions and focus decisions on that which the Congress is intended to control--budget authority, which itself controls outlays. This would be consistent with the original design of BEA. Eliminating the outlay cap would raise several issues--chief among them being how to address the control of transportation programs for which no budget authority cap currently exists, and the use of advance appropriations to skirt budget authority caps. However, agreements about these issues could be reached--this is not a case where implementation difficulties need derail an idea. For example, the fiscal year 2002 budget proposes a revision to the scorekeeping rule on advance appropriations so that generally they would be scored in the year of enactment. If the Budget Committees and CBO agree, this change could eliminate the practice of using advance appropriations to skirt the caps. The obvious advantage to focusing decisions on budget authority rather than outlays is that the Congress would not spend its time trying to control that which by design is the result of its budget authority decisions--the timing of outlays. There are other issues in the design of any new caps. For example, for how long should caps be established? What categories should be established within or in lieu of an overall cap? While the original BEA envisioned three categories (Defense, International Affairs, and Domestic), over time categories were combined and new categories were created. At one time or another caps for Nondefense, Violent Crime Reduction, Highways, Mass Transit, and Conservation spending existed--many with different expiration dates. Should these caps be ceilings, or should they-- as is the case for Highways and Conservation--provide for "guaranteed" levels of funding? The selection of categories--and the design of the applicable caps--is not trivial. Categories define the range of what is permissible. By design they limit trade-offs and so constrain both the Congress and the President. Because caps are phrased in specific dollar amounts, it is important to address the question of when and for what reasons the caps should be adjusted. This is critical for making the caps realistic. For example, without some provision for emergencies, no caps can be successful. At the same time, there appears to be some connection between how realistic the caps are and how flexible the definition of emergency is. As discussed in last year's compliance report, the amount and range of spending considered "emergency" has grown in recent years. There have been a number of approaches suggested to balance the need to respond to emergencies and the desire to avoid making the "emergency" label an easy way to raise caps. In the budget resolution for fiscal year 2001 [H. Con. Res. 290], the Congress said it would limit emergencies to items meeting five criteria: (1) necessary, essential, or vital (not merely useful or beneficial), (2) sudden, quickly coming into being, and not building up over time, (3) an urgent, pressing, and compelling need requiring immediate action, (4) unforeseen, unpredictable, and unanticipated, and (5) not permanent, temporary in nature. The resolution further required any proposal for emergency spending that did not meet all the criteria to be accompanied by a statement of justification explaining why the requirement should be accorded emergency status. The fact that this provision was ignored during debates on fiscal year 2001 appropriations bills emphasizes that no procedural hurdle can succeed without the will of the Congress. Others have proposed providing for more emergency spending--either in the form of a reserve or in a greater appropriation for the Federal Emergency Management Agency (FEMA)--under any caps. If such an approach were to be taken, the amounts for either the reserve or the FEMA disaster relief account would need to be included when determining the level of the caps. Some have proposed using a 5- or 10- year rolling average of disaster/emergency spending as the appropriate reserve amount. Adjustments to the caps would be limited to spending over and above that reserve or appropriated level for extraordinary circumstances. Alternatively, with additional up-front appropriations or a reserve, emergency spending adjustments could be disallowed. Even with this kind of provision only the commitment of the Congress and the President can make any limit on cap adjustments for emergencies work. States have used this reserve concept for emergencies, and their experiences indicate that criteria for using emergency reserve funds may be useful in controlling emergency spending. Agreements over the use of the reserve would also need to be achieved at the federal level. This discussion is not exhaustive. Other issues would come up in extending BEA. Previously, we have reported on two issues--the scoring of operating leases and the expansion of user fees as offsets to discretionary spending; because I think they need to be considered, let me touch on them briefly. We have previously reported that existing scoring rules favor leasing when compared to the cost of various other methods of acquiring assets.Currently, for asset purchases, budget authority for the entire acquisition cost must be recorded in the budget up front, in the year that the asset acquisition is approved. In contrast, the scorekeeping rules for operating leases often require that only the current year's lease costs be recognized and recorded in the budget. This makes the operating lease appear less costly from an annual budgetary perspective, and uses up less budget authority under the cap. Alternative scorekeeping rules could recognize that many operating leases are used for long-term needs and should be treated on the same basis as purchases. This would entail scoring up front the present value of lease payments covering the same period used to analyze ownership options. The caps could be adjusted appropriately to accommodate this change. Many believe that one unfortunate side effect of the structure of the BEA has been an incentive to create revenues that can be categorized as "user fees" and so offset discretionary spending--rather than be counted on the PAYGO scorecard. The 1967 President's Commission on Budget Concepts recommended that receipts from activities that were essentially governmental in nature, including regulation and general taxation, be reported as receipts, and that receipts from business-type activities "offset to the expenditures to which they relate." However, these distinctions have been blurred in practice. Ambiguous classifications combined with budget rules that make certain designs most advantageous has led to a situation in which there is pressure to treat fees from the public as offsets to appropriations under BEA caps, regardless of whether the underlying federal activity is business or governmental in nature. Consideration should be given to whether it is possible to come up with and apply consistent standards--especially if the discretionary caps are to be redesigned. The administration has stated that it plans to monitor and review the classification of user fees and other types of collections. The PAYGO requirement prevented legislation that lowered revenue, created new mandatory programs, or otherwise prevented direct spending from increasing the deficit unless offset by other legislative actions. As long as the unified budget was in deficit, the provisions of PAYGO--and its application--were clear. The shift to surplus raised questions about whether the prohibition on increasing the deficit also applied to reducing the surplus. Although the Congress and the executive branch have both concluded that PAYGO does apply in such a situation, any extension should eliminate potential ambiguity in the future. This year, the administration has proposed--albeit implicitly--special treatment for a tax cut. The budget states that the President's tax plan and Medicare reforms are fully financed by the surplus and that any other spending or tax legislation would need to be offset by reductions in spending or increases in receipts. It is possible that in a time of budget surplus, the Congress might wish to modify PAYGO to permit increased direct spending or lower revenues as long as debt held by the public is planned to be reduced by some set percentage or dollar amount. Such a provision might prevent PAYGO from becoming as unrealistic as overly tight caps on discretionary spending. However, the design of such a provision would be important--how would a debt reduction requirement be specified? How would it be measured? What should be the relationship between the amount of debt reduction required and the amount of surplus reduction (i.e., tax cut or direct spending increase) permitted? What, if any, relationship should there be between this calculation and the discretionary caps? While PAYGO constrained the creation or legislative expansion of direct spending programs and tax cuts, it accepted the existing provisions of law as given. It was not designed to trigger--and it did not trigger--any examination of "the base." Cost increases in existing mandatory programs are exempt from control under PAYGO and could be ignored. However, constraining changes that increase the cost of entitlements and mandatories is not enough. Our long-term budget simulations show that as more and more of the baby boom generation retires, spending for Social Security, Medicare, and Medicaid will demand correspondingly larger shares of federal revenues. The growth in these programs will increasingly restrict budgetary flexibility. Even if the Social Security surpluses are saved and used for debt reduction, unified deficits are projected to emerge in about two decades, and by 2030 Social Security, Medicare, and Medicaid would require more than three-fourths of federal revenues. Previously we suggested some sort of "lookback" procedure to prompt a reexamination of "the base." Under such a process, the Congress could specify spending targets for PAYGO programs for several years. The President could be required to report in his budget whether these targets either had been exceeded in the prior year or were likely to be exceeded in the current or budget years. He could then be required to recommend whether any or all of this overage should be recouped--and if so, to propose a way to do so. The Congress could be required to act on the President's proposal. While the current budget process contains a similar point of order against worsening the financial condition of the Social Security trust funds, it would be possible to link "tripwires" or triggers to measures related to overall budgetary flexibility or to specific program measures. For example, if the Congress were concerned about declining budgetary flexibility, it could design a tripwire tied to the share of the budget devoted to mandatory spending or to the share devoted to a major program. Other variations of this type of tripwire approach have been suggested. The 1999 Breaux-Frist proposal (S. 1895) for structural and substantive changes to Medicare financing contained a new concept for measuring "programmatic insolvency" and required congressional approval of additional financing if that point was reached. Other specified actions could be coupled with reaching a tripwire, such as requiring the Congress or the President to propose alternatives to address reforms or, by using the congressional budget process, requiring the Congress to deal with unanticipated cost growth beyond a specified tripwire by establishing a point of order against a budget resolution with a spending path exceeding the specified amount. One example of a threshold might be the percentage of GDP devoted to Medicare. The President would be brought into the process as it progressed because changes to deal with the cost growth would require enactment of a law. In previous reports we have argued that the nation's economic future depends in large part upon today's budget and investment decisions. In fact, in recent years there has been increased recognition of the long-term costs of Social Security and Medicare. While these are the largest and most important long-term commitments-- and the ones that drive the long-term outlook--they are not the only ones in the budget. Even those programs too small to drive the long-term outlook affect future budgetary flexibility. For the Congress, the President, and the public to make informed decisions about these other programs, it is important to understand their long-term cost implications. While the budget was not designed to and does not provide complete information on long-term cost implications stemming from some of the government's commitments when they are made, progress can be made on this front. The enactment of the Federal Credit Reform Act in 1990 represented a step toward improving both the recognition of long-term costs and the ability to compare different policy tools. With this law, the Congress and the executive branch changed budgeting for loan and loan guarantee programs. Prior to the Credit Reform Act, loan guarantees looked "free" in the budget. Direct loans looked like grant programs because the budget ignored loan repayments. The shift to accrual budgeting for subsidy costs permitted comparison of the costs of credit programs both to each other and to spending programs in the budget. Information should be more easily available to the Congress and the President about the long-term cost implications both of existing programs and new proposals. In 1997 we reported that the current cash-based budget generally provides incomplete information on the costs of federal insurance programs. The ultimate costs to the federal government may not be apparent up front because of time lags between the extension of the insurance, the receipt of premiums, and the payment of claims. While there are significant estimation and implementation challenges, accrual- based budgeting has the potential to improve budgetary information and incentives for these programs by providing more accurate and timely recognition of the government's costs and improving the information and incentives for managing insurance costs. This concept was proposed in the Comprehensive Budget Process and Reform Act of 1999 (H.R. 853), which would have shifted budgetary treatment of federal insurance programs from a cash basis to an accrual basis. There are other commitments for which the cash- and obligation-based budget does not adequately represent the extent of the federal government's commitment. These include employee pension programs, retiree health programs, and environmental cleanup costs. While there are various analytical and implementation challenges to including these costs in budget totals, more could be done to provide information on the long- term cost implications of these programs to the Congress, the President, and the interested public. At the request of this Committee, we are continuing to address this issue. As the budgeting horizon expands, so does the certainty of error. Few forecasters would suggest that 10-year projections are anything but that-- projections of what the world would look like if it continued on a line from today. And long-term simulations are useful to provide insight as to direction and order of magnitude of certain trends--not as forecasts. Nevertheless, budgeting requires forecasts and projections. Baseline projections are necessary for measuring and comparing proposed changes. Former Congressional Budget Office (CBO) Director Rudy Penner suggested that 5-year and 10-year projections are useful for and should be used for different purposes: 5-year projections for indicating the overall fiscal health of the nation, and 10-year projections for scorekeeping and preventing gaming of the timing of costs. No 10-year projection is likely to be entirely correct; the question confronting fiscal policymakers is how to deal with the risk that a projection is materially wrong. This year some commentators and Members of the Congress have suggested dealing with this risk by using triggers. Triggers were part of both Gramm-Rudman-Hollings (GRH) and BEA. The GRH triggers were tied to deficit results and generally regarded as a failure--they were evaded or, when deficits continued to exceed the targets, the targets were changed. BEA triggers have been tied to congressional action rather than to deficit results; sequesters have rarely been triggered--and those were very small. This year the discussion of triggers has been tied specifically to the tax debate and to whether the size of the tax cut in future years should be linked to budget results in those years. There could be several variations on this trigger: actual surplus results, actual revenue results (this with the intent of avoiding a situation in which spending increases can derail a tax cut), and actual debt results. There is little consensus on the effectiveness of any triggers. Although the debate about triggers has been tied to the tax debate in 2001, there is no inherent reason to limit the discussion to taxes. Some might wish to consider triggers that would cause decisionmakers to make proposals to address fiscal results that exceed some specific target, such as debt or spending as a share of GDP. Former CBO Director Robert Reischauer suggested another way of dealing with the fact that forecasts/projections become less certain the further they go into the future. Under his proposal, a declining percentage of any projected surplus would be available--either for tax cuts or for spending increases. Specifically, 80 percent of the surplus would be available to legislators in years 1 and 2, 70 percent in years 3 and 4, 60 percent in years 5 and 6, until reaching the 40-percent level in years 9 and 10. The consequence of not adhering to these limits would be an across-the-board sequester. When a new Congress convenes, it would be given a new budget allowance to spend based on a new set of surplus projections. Others have suggested that mechanisms such as a joint budget resolution and/or an automatic continuing resolution could avert the year-end disruption caused by an inability to reach agreement on funding the government. Biennial budgeting is also sometimes suggested as a better way to budget and to provide agencies more certainty in funding over 2 years. Let me turn now to these ideas. Since agreement on overall budget targets can set the context for a productive budget debate, some have suggested that requiring the President's signature on budget resolutions would facilitate the debate within such a framework. Proposals to replace the Concurrent Resolution with a Joint Resolution should be considered in the light of what the budget resolution represents. Prior to the 1974 act only the President had a budget--that is, a comprehensive statement of the level of revenues and spending and the allocation of that spending across "national needs" or federal mission areas. Requiring the President to sign the budget resolution means it would not be a statement of congressional priorities. Would such a change reduce the Congress' ability to develop its own budget and so represent a shift of power from the Congress to the President? Whose hand would it strengthen? If it is really to reduce later disagreement, would it merely take much longer to get a budget resolution than it does today? It could be argued that under BEA the President and the Congress have--at times--reached politically binding agreements without a joint budget resolution. The periodic experience of government "shutdowns"--or partial shutdowns when appropriations bills have not been enacted has led to proposals for an automatic continuing resolution. The automatic continuing resolution, however, is an idea for which the details are critically important. Depending on the detailed structure of such a continuing resolution, the incentive for policymakers--some in the Congress and the President--to negotiate seriously and reach agreement may be lessened. What about someone for whom the "default position" specified in the automatic continuing resolution is preferable than the apparent likely outcome? If the goal of the automatic continuing resolution is to provide a little more time for resolving issues, it could be designed to permit the incurrence of obligations to avoid a funding gap, but not the outlay of funds to liquidate the new obligations. This would allow agencies to continue operations for a period while the Congress completes appropriations actions. Finally, you asked me to discuss proposals for biennial budgeting. Some have suggested that changing the appropriations cycle from annual to biennial could (1) provide more focused time for congressional oversight of programs, (2) shift the allocation of agency officials' time from the preparation of budgets to improved financial management and analysis of program effectiveness, and (3) enhance agencies' abilities to manage their operations by providing more certainty in funding over 2 years. Given the regularity with which proposals for biennial budgeting are made, I believe that at least some will consider the upcoming necessity to decide whether to extend BEA as an opportunity to again propose biennial budgeting. Whether a biennial cycle offers the benefits sought will depend heavily on the ability of the Congress and the President to reach agreement on how to respond to uncertainties inherent in a longer forecasting period, for there will always be uncertainties. How often will the Congress and the President feel the need to reopen the budget and/or change funding levels? Budgeting always involves forecasting, which in itself is uncertain, and the longer the period of the forecast, the greater the uncertainty. Our work has shown that increased difficulty in forecasting was one of the primary reasons states gave for shifting from biennial to annual cycles. The budget is highly sensitive to the economy. Economic changes during a biennium would most likely prompt the Congress to revisit its decisions and reopen budget agreements. Among the issues that would need to be worked out if the Congress moves to a biennial budget cycle are how to update the CBO forecast and baseline against which legislative action is scored and how to deal with unexpected events. The baseline is important because CBO scores legislation based on the economic assumptions in effect at the time of the budget resolution. Even under an annual system there are years when this practice presents problems: in 1990 the economic slowdown was evident during the year, but consistent practice meant that bills reported in compliance with reconciliation instructions were scored based on the assumptions in the budget resolution rather than updated assumptions. If budget resolutions were biennial, this problem of outdated assumptions would be greater--some sort of update in the "off- year" likely would be necessary. In any consideration of a biennial budget, it is important to recognize that even with annual budgets, the Congress already has provided agencies with multiyear funding to permit improved planning and management. As you know, it is not necessary to change the frequency of decisions in order to change the length of time funds are available. Nearly two-thirds of the budget is for mandatory programs and entitlements on which decisions are not made annually. Even the remaining portion that is on an annual appropriations cycle is not composed entirely of 1-year appropriations that expire on September 30 of each year. The Congress routinely provides multiyear or no-year appropriations when it seems to make sense to do so. Thus, to the extent that biennial budgeting is proposed as a way to ease a budget execution problem, the Congress has shown itself willing and able to meet that need under the current annual cycle. If BEA is extended in conjunction with biennial budgeting, a whole host of technical issues needs to be considered. Would biennial budgeting change the timing of the BEA-required sequestration report? How would sequestrations be applied to the 2 years in the biennium and when would they occur? For example, if annual caps are continued and are exceeded in the second year of the biennium, when would the Presidential Order causing the sequestration be issued? Would the sequestration affect both years of the biennium? Would forecasts and baselines be updated during the biennium? These are just of few of the many questions that would need to be resolved. Regardless of the potential benefits, the decision on biennial budgeting will depend on how the Congress chooses to exercise its constitutional authority over appropriations and its oversight functions. We have long advocated regular and rigorous congressional oversight of federal programs. Annual enacted appropriations have long been a basic means of exerting and enforcing congressional policy. Oversight has often been conducted in the context of agency requests for funds. A 2-year appropriation cycle would change--and could lessen--congressional influence over program and spending matters since the process would afford fewer scheduled opportunities to affect agency programs and budget. Biennial budgeting would bring neither the end of congressional control nor the guarantee of improved oversight. It would require a change in the nature of that control. If the Congress decides to proceed with a change to a biennial budget cycle--including a biennial appropriations cycle-- careful thought will need to be given to implementation issues. To affect decision-making, the fiscal goals sought through a budget process must be accepted as legitimate. For many years the goal of "zero deficit"--or the norm of budget balance--was accepted as the right goal for the budget process. In the absence of the zero deficit goal, policymakers need an overall framework upon which a process and any targets can be based. Goals may be framed in terms of debt reduction or surpluses to be saved. In any case, compliance with budget process rules, in both form and spirit, is more likely if end goals, interim targets, and enforcement boundaries are both accepted and realistic. Enforcement is more successful when it is tied to actions controlled by the Congress and the President. Both the BEA spending caps and the PAYGO enforcement rules were designed to hold the Congress and the President accountable for the costs of the laws enacted each session--not for costs that could be attributed to economic changes or other factors. Today, the Congress and the President face a different budgetary situation than in the past few decades. The current budget challenge is not to achieve a balanced unified budget. Rather, budgeting today is done in the context of projections for continued and growing surpluses followed over the longer term by demography-driven deficits. What process will enable policymakers to deal with the near term without ignoring the long term? At the same time, the challenges for any budget process are the same: What process will enable policymakers to make informed decisions about both fiscal policy and the allocation of resources within the budget? Extending the current BEA without setting realistic caps and addressing existing mandatory programs is unlikely to be successful for the long term. The original BEA employed limited actions in aiming for a balanced budget. It left untouched those programs--direct spending and tax legislation--already in existence. Going forward with new challenges, we believe that a new process that prompts the Congress to exercise more foresight in dealing with long-term issues is needed. The budget process appropriate for the early 21st century will have to exist as part of a broader framework for thinking about near- and long-term fiscal goals.
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This testimony discusses the budget process established by the Budget Enforcement Act, which will expire in fiscal year 2002. Because the goal of achieving zero deficits has been achieved, the focus of the budget process has shifted to to the allocation of surpluses among debt reduction, spending increases, and tax cuts. The budget process should be designed to avoid what has been described as the year-end "train wreck." A year-end "train wreck" results from a failure to reach agreement--or at least a compromise acceptable to all parties--earlier in the year. Although it is possible that early agreement on some broad parameters could facilitate a smoother process, it is not clear that such an agreement will always prevent gridlock--it may just come earlier. Two ideas that have been proposed to avert the year-end disruption caused by an inability to reach agreement on funding the government include joint budget resolutions and biennial budgeting. In discussing alternatives for improving the budget process, there is a broad consensus among observers and budget analysts that the spending constraints established by the act are necessary even with the advent of actual and projected surpluses. Such constraints include (1) extending the discretionary spending caps, (2) extending the pay-as-you-go mechanism, and (3) creating a trigger device or set of rules specifically designed to deal with the uncertainty of budget projections.
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It is estimated that DOD employs more than 400 different tester types. This equipment is used to diagnose problems in aircraft avionics and weapon system components so that the component can be repaired and replaced on the aircraft or put into the supply system for future use. For example, testers may be used to diagnose problems with aircraft radars, guidance and control systems, or weapon systems. According to DOD, the department spent over $50 billion in its acquisition and support of ATE from 1980 through 1992, and the procurement was characterized by the proliferation of testers designed to support a specific weapon system or component. These testers are quickly becoming obsolete and more difficult and costly to maintain because they may no longer be in production and parts may not be readily available. Over the years, various studies have criticized the continued proliferation of unique ATE and highlighted the need for the development and acquisition of testers that can be used to test more than one system or component. In September 1993, the House Appropriations Committee recommended that the Secretary of Defense develop a DOD-wide policy requiring ATE commonality among the services, along with a formal implementation mechanism with sufficient authority, staffing, and funding to ensure compliance. In 1994, DOD established a policy stating that managers of DOD programs should select families of testers or commercial off-the-shelf components to meet all ATE acquisition needs and that the introduction of unique testers should be minimized. DOD designated the Navy at that time as its Executive Agent to oversee policy implementation in all services, and identified a goal of reducing life-cycle costs and providing greater ATE commonality and interoperability. Additional DOD guidance published in 1996 and 1997 required that all ATE acquisitions be part of the approved families of testers or commercial off-the-shelf. DOD faces major challenges with aging and increasingly obsolete ATE. These problems include the high costs of maintaining and replacing ATE and the declining availability of spare parts for the aging testers. In addition, several DOD organizations, including the Navy Inspector General, have suggested that aging and obsolete ATE may adversely affect aviation readiness. Departmentwide estimates of funds needed for ATE modernization and acquisition are not readily available. However, according to Air Force and Navy ATE managers, most of the services' ATE is obsolete and will need to be upgraded or replaced over the next several years. Our study confirmed that replacement and modernization costs would be substantial. The Navy, for example, spent about $1.5 billion from fiscal years 1990 through 2002 for the acquisition of its primary family of testers and plans to spend an additional $430 million through fiscal year 2007. Additionally, the Navy estimates that it plans to spend $584 million through fiscal year 2007 to adapt existing test program sets necessary to perform specific tests of the various aircraft components supported by this family of testers. The Navy also anticipates spending an additional $584 million to develop program test sets for new weapon system requirements. Information on the Air Force's spending for ATE modernization is somewhat sketchy, as limited data are available centrally for individual weapon systems. According to a recent study done for the Air Force, the service has not developed a plan that allows modernization funding requirements to be determined. However, estimates are available for selected systems. The F-15 fighter program office, for example, is spending approximately $325 million on just one tester that will be fielded in 2004. It also plans to upgrade its electronic warfare tester, which is one of seven primary testers for the aircraft, at a cost of over $40 million. A 2002 study of B-52 bomber ATE identified obsolescence issues associated with six of the aircraft's seven major testers that will require more than $140 million in the near future. Similarly, the upgrade of a unique B-1 bomber tester is expected to exceed $15 million, even though the Air Force is considering replacing this tester and has already begun planning the acquisition. The latest estimate for the new tester is $190 million. Current ATE estimates for the F/A-22, which is still under development, are not available. However, estimates made early in the development phase exceeded $1.5 billion. ATE is becoming increasingly out-of-date and more difficult to support. And, according to service officials, using this outdated equipment to perform required tests in a timely manner is becoming increasingly challenging. Although the services could not quantify the extent that tester problems affect readiness, service officials noted that without adequate test equipment to diagnose problems, components cannot be repaired in a timely manner and the mission capability of military aircraft can be adversely affected. In August 2000, the Navy Inspector General identified shortfalls in ATE as having a negative impact on naval aviation and, in particular, on the availability of repaired components. During the same time frame, a Navy operational advisory group, recognizing the importance of ATE in maintaining readiness, ranked support equipment, including ATE, as one of its top 20 readiness issues. We have issued several reports in the recent past addressing the shortage of spare parts--a potential result of ATE problems. In addition, according to DOD readiness reports, only 28 percent of Air Force, Navy, and Marine Corps key aircraft models met their readiness goals in fiscal year 2002. Although difficulties in meeting these goals are caused by a complex combination of interrelated logistical and operational factors, the shortage of spare parts was a major cause. ATE plays a significant role in the supply of available spares, since this equipment affects both how many parts are taken out of service for repair and how quickly they are repaired and returned. We reported that maintenance and repair facilities routinely work around spare parts shortages by removing a working part from one aircraft to replace a nonworking part in another aircraft, a practice called "cannibalization." And, although the services do not record increases in cannibalizations that are caused by ATE problems, the services use cannibalization as a routine maintenance practice when testers are not available or not working properly. In July 2001, we reported that as a result of ATE not working properly, unfilled requisitions were adversely affecting the mission capability of F-14 aircraft. In another case, more than 1,200 Air Force B-1 bomber components were backlogged and could not be repaired because of the same reason. Although we were unable to measure specific reductions in the readiness of F-14 and B-1 aircraft as a result of this problem, mission capable rates for the B-1 in fiscal years 1998-2002 averaged approximately 55 percent, compared with the goal of 67 percent, while mission capable rates for the F-14D, during the same period, averaged 67 percent, compared with a goal of 71 percent. Additionally, the Air Force's 2002 B-52 study concluded that six of the seven major testers used to test B-52 components need to be modified or replaced or the availability of the aircraft will be adversely affected as early as 2006. Air Force officials believe that similar problems will continue unless the service undertakes a major ATE modernization or replacement program. Since the early 1990s, DOD policies have addressed the need for commonality in ATE acquisition and modernization. Although the services have been making some progress, efforts to comply with these policies have been slow. For example, although the Navy has developed a single family of testers to work on many of its aircraft components, after 11 years, the replacement of its obsolete testers aboard aircraft carriers and shore maintenance facilities has not been completed. In addition, strategic planning for the modernization of automatic test equipment at Navy depots has only recently been initiated. Historically, the Air Force has not had a service-level ATE standardization policy and has essentially pursued unique ATE solutions for each weapon system. Since individual aircraft program offices have been doing their own planning for modernization, the Air Force has given little consideration to having common ATE or testers that are interoperable with those of other services. Planning for the Air Force's latest aircraft acquisition, the F/A-22, calls for the development of automatic test equipment that will be unique to that aircraft. In August 2002, the Air Force initiated a planning effort to determine its long-term servicewide ATE modernization needs. According to Navy reports, obsolete ATE results in higher backlogs and increased flying hour costs, and adversely affects aircraft readiness. The Navy recognized years ago, and prior to the establishment of DOD's 1994 ATE standardization policy, that its ATE was becoming obsolete. In the 1980s the Navy embarked upon an ATE standardization program to replace 25 of its testers with one standard ATE family, the Consolidated Automated Support System (CASS), to minimize unique types of testers. The Navy designed CASS to be used at maintenance activities both ashore and afloat. In 1991, the Navy began to produce CASS for the general purpose testing of equipment such as radios, radars, and electro-optics. (See fig. 2.) CASS's replacement of 25 types of obsolete testers, in support of 2,458 weapon system components, was scheduled for completion by fiscal year 2000. However, according to Navy officials, because of budget cuts that caused delays in developing the test program sets, only 4 of the 25 have been completely replaced by CASS, and 8 test sets have been partially replaced. Navy officials told us that the completion schedule has slipped to fiscal year 2008 for aircraft carriers and shore maintenance facilities and could be much longer for aviation depots. The Navy reports that the replacement of these testers with CASS stations, when complete, will reduce the number of test-related enlisted occupational specialties from 32 to 4, thus reducing training requirements. In addition, CASS will reduce the requirement for test equipment operators aboard each aircraft carrier from 105 to 54, and at the same time reduce space requirements for testers from 2,700 to 1,900 square feet. Spare parts needed to repair testers will be reduced from 30,000 to 3,800. According to Navy officials, however, the revised completion schedule will not allow for the timely replacement of aging ATE, and these delays will adversely affect aircraft readiness. In addition to schedule slippage, the original CASS equipment was fielded about 10 years ago, uses 15-year-old technology and, according to Navy ATE program managers, is in need of an upgrade. Accordingly, by 2006, the first production units will have reached the point where wear and obsolete components will drive supporting costs to unacceptable levels and create a need for replacement and modernization. The Navy has begun modernization planning for CASS, including upgrades through fiscal year 2014. Integrating CASS into Navy depots may further delay ATE commonality within the service. For example, a 2001 Navy report, addressing total ATE ownership costs, noted that the depots have not maximized the use of CASS because of the limited availability of capital investment funds. In addition, at one depot we found some reluctance to use CASS. This depot had four CASS stations that had never been used--two were delivered in 1999 and installed in December 2000 and February 2001, while two others delivered in 2000 were still in crates. Depot officials said that they had elected not to put the equipment on-line, as they wanted to avoid paying for overhead and maintenance, especially without the workload to justify their use. They also noted that the development of the test program sets needed to use the CASS has been slow, thereby slowing the fielding of the equipment. The Navy has only recently begun a servicewide planning effort to modernize its depot-level testers and determine how best to integrate CASS into its depot maintenance strategy. Unlike the Navy, the Air Force has not made commonality a priority but has pursued unique ATE solutions for each weapon system. In addition, it has only recently initiated efforts to collect information on ATE in its inventory, including the equipment's condition and its need for modernization or replacement. Because the Air Force has not made concerted efforts to use one system to service multiple aircraft platforms, it has not taken advantage of efficiencies and potential savings such as those expected by the Navy as a result of CASS. Although the Air Force is developing plans to modernize its ATE, and although its policy is to consider developing common testers, it does not yet have an overall plan to guide its modernization efforts and has made limited progress in this area. Furthermore, it does not have a process in place to ensure that commonality is given adequate consideration in its ATE acquisition and modernization. The Air Force has been primarily upgrading--rather than replacing--aging ATE; leaving ATE management up to individual program managers. In most cases, it relies on contractors to provide support for ATE, leaving it vulnerable to contractors who may decide to stop supporting testers when maintaining them is no longer profitable. In early 2001, the Air Force organized the Warner Robins Air Logistics Center Automatic Test System Division to work with program offices on ATE issues. The Division has recently initiated efforts to establish a database of all contractors that are capable of supporting existing ATE to help identify emerging supportability issues. Although the office is responsible for fostering the adoption and use of common families of testers, it has no final decision-making authority regarding ATE modernizations and no control over funding decisions on these matters. Division officials told us that they work with individual project offices to encourage them to use common ATE, but individual project offices make the final decisions. In our opinion, leaving these ATE decisions to the individual Air Force project offices has led to some questionable and unnecessary expenditures. For example: The Air Force will spend approximately $325 million to replace a tester for the F-15 with one that has been under development for almost 10 years and is already obsolete. The new tester, called the Electronic System Test Set, is not expected to be fielded until 2004. However, this electronic tester already needs an upgrade that will cost more than $24 million. Because the new tester will not be able to perform all the required tests, the Air Force will have to keep the old tester too. The Air Force is spending over $15 million for an interim modernization of its intermediate automatic test equipment for its B-1 aircraft while, at the same time, a new tester is being developed. If the Air Force had taken the necessary steps to replace this obsolete tester in a timely manner, these duplicative costs could likely have been avoided, and overall ATE modernization costs reduced. According to an Air Force official, the program office should have begun the acquisition of a replacement tester several years ago, but funding was not available. The service is now considering acquiring a replacement tester estimated to cost $190 million. The Air Force's Warner Robins Air Logistics Center Automatic Test System Division is developing a strategic plan that is expected to serve as a management plan for meeting long-term ATE needs. The Division plans to develop a baseline of its current tester capabilities, address supportability and sustainability issues, and determine whether tester failures adversely affect the availability of aircraft weapon systems. In addition, it will evaluate replacement and modernization alternatives, taking into account life-cycle costs and the potential for developing common testers. The plan's implementation is expected to take years to complete. While most of our work focused on ATE for the current aircraft inventory, we also wanted to see how the services were approaching development of testers for two new aircraft, the Joint Strike Fighter and the F/A-22. We found that very different approaches are being taken in the development of ATE for these two aircraft. The JSF, for example, will have a single tester, made up almost entirely of commercial components, which will test all components on the aircraft. The F/A-22 project office has no assurance that commonality is being considered in its tester development or that DOD's policy to minimize unique ATE development is being followed. The JSF originated in the early 1990s through the restructuring and integration of several tactical aircraft and technology initiatives already under way. The goal was to use the latest technology in a common family of aircraft to meet the future strike requirements of the services and U.S. allies. The JSF support strategy is built upon a single tester to be used by the Air Force, Navy, and Marine Corps, as well as by foreign partners, to test all avionics and weapon systems on the aircraft. The JSF tester, referred to as the LM-STAR, is made up almost entirely of commercially available components, contributing to readily available spares and less complicated upgrades. It will be used during development and after the aircraft is fielded. Vendors participating in the development of avionics and weapon system components for the aircraft are required to produce these components so that their testing can be done by the LM-STAR. A total of $99 million has been allocated for the purchase and support of 88 of these testers during the development phase. While a final decision has not been made on whether maintenance support for the aircraft will be provided by the contractor or at a military facility, the system project office is taking steps to ensure that this tester can be used regardless of where maintenance is accomplished. By contrast, Air Force F/A-22 program officials told us that they have not made a decision as to what testers will be used to support this new aircraft, which began development in 1991. The project office has not ensured that all components for the F/A-22 can be tested with a single tester. Project officials told us that the F/A-22 is a very complex aircraft and that opportunities to take advantage of common equipment will be limited. Yet, the same contractor that is developing the F/A-22 is also involved in the JSF, which is also very advanced and complex and which uses a common family of testers. While current projections of ATE costs are not available, estimates made early in the F/A-22 development phase exceeded $1.5 billion. In 1993, the House Appropriations Committee recommended that a DOD-wide policy be adopted requiring that the introduction of unique ATE be minimized and that DOD establish an oversight system with sufficient authority, staffing, and funding to ensure compliance. DOD established a policy requiring the services to minimize unique types of testers to reduce redundant investments and lessen long-term costs, leveraging its investments in testers across the entire DOD establishment. In 1994, DOD appointed the Navy as its Executive Agent for ATE to oversee the implementation of this policy. As part of the tasking, the Executive Agent for ATE was directed to establish a process so that programs proposing not to use the DOD-designated standard of ATE families would have to request a waiver. In accordance with the direction provided by DOD, the Executive Agent established a waiver process. According to data provided by the Executive Agent, since its inception, 30 requests for waivers were submitted for their review. Our analysis indicated that 15 of these requests resulted in waivers or concurrence. The remaining requests were never finalized, were returned to the originating office for further action, or were determined not to require waivers. According to Executive Agent officials, the Executive Agent makes recommendations concerning the waiver requests, but it does not have the authority to disapprove them. Executive Agent officials told us however, that they have no assurance that all tester acquisitions and modifications are identified or that all required waivers are requested. As a result, they may not be aware of all ATE modifications or acquisitions or they may not be made aware of such until the process is already under way and it is too late to affect any change. For example, the Air Force did not request a waiver for a $77 million modification to ATE supporting the low altitude navigation and targeting infrared for night (LANTIRN). LANTIRN is a pod system that supports the F-15, F-16, and F-14 aircraft in low-level navigation and lazing targets. In its technical comments on our draft report, however, Air Force officials indicated that owing to the nature of the LANTIRN modification, a DOD waiver was not required. We continue to believe, however, that the Executive Agent should be notified of tester modifications of this magnitude. In addition to having no assurance that all tester acquisitions and modifications are identified, Executive Agent officials told us they do not have the necessary enforcement authority or resources to effectively implement the waiver process even when they know of the planned acquisition or modification. For example, Executive Agent officials held several discussions with F/A-22 program officials, early in the development phase, concerning the use of common testers; however, there was no evidence of the Executive Agent's involvement in F/A-22 ATE development since November 1994. Executive Agent officials do not know whether common testers are being considered. As DOD's Executive Agent for ATE, the Navy has achieved some success in encouraging the development of common testers and in dealing with technical issues affecting all services. In September 1998, the Executive Agent for ATE reported that DOD had avoided $284 million in costs by implementing DOD's policy and cited one example in which the Army and the Navy achieved savings of $80 million by jointly developing an electro-optics test capability. Navy officials also told us that they believe ATE planning for the Joint Strike Fighter, which calls for vendors to use standardized test equipment or equipment having commercially available components, can also be considered an accomplishment. In addition, the Executive Agent established integrated process teams to research technical issues dealing with tester commonality, such as efforts to develop open systems architecture. In this regard, DOD provided funds to the Executive Agent during fiscal years 1995 to 1998 for its research and development efforts. Currently, the Navy is leading a joint service technology project aimed at demonstrating that the most advance technologies can be combined into a single tester. The Executive Agent also implemented a process whereby ATE modernization and acquisitions would be reviewed for compliance with DOD policy, and developed the ATE Selection Process Guide and the ATE Master Plan to aid the services in complying with DOD's ATE policies. ATE officials, responsible for oversight of ATE, noted that their role is essential; however, its current placement in one service (the Navy) makes it difficult to ensure other services comply with DOD guidance. A report recently prepared by a joint service working group noted continuing problems in the implementation of DOD policy, including ATE obsolescence, delays in modernization efforts, a lack of ATE interoperability among the services, upgrading difficulties, rising support costs, proliferation of equipment that is difficult to support, and systems that are not easily deployed. The services have made limited progress in achieving DOD's commonality goals for ATE, as established in the early 1990s. The department does not have a joint service forum or body that can oversee the total scope of ATE acquisition and modernization and better promote ATE commonality and the sharing of information and technology across platforms and services. DOD does not have sufficient information concerning the magnitude of the services' modernization efforts or a departmentwide approach to accomplish ATE modernization in the most cost-effective manner. Without such an approach, the department faces a very expensive and time-consuming ATE modernization effort, with the continued proliferation of unique testers. It will also have no assurance that resources are allocated in the most effective manner to exploit commonality and commercially available technology and products. A single entity within DOD--rather than in one service--may be in the best position to provide overarching oversight and coordination between the services in planning for the modernization of ATE. We believe that high-level management commitment within DOD and all the services will be needed to achieve a cultural change that fosters the development of common ATE. We recommend that the Secretary of Defense reemphasize the policy that common ATE be developed to the maximum extent possible. We also recommend that the Secretary reconsider whether placing its Executive Agent for ATE in the Navy--or any single service--is the most effective way to implement the policy. Wherever the Executive Agent is placed organizationally, we recommend that the Secretary give it authority and resources to include representatives from all of the services, with a scope to include the oversight of ATE acquisition and modifications for all weapon systems; establish a mechanism to ensure that all ATE acquisitions and modernizations are identified in an early enough stage to be able to provide a comprehensive look at commonality and interoperability and to ensure a coordinated effort between service entities; direct the services to draw up modernization plans for its review so it can identify opportunities to maximize commonality and technology sharing between and within the services; and continue efforts to research technical issues dealing with tester commonality such as the development of open system architecture and other joint service applications. The Department of Defense provided written comments on a draft of this report, which are reprinted in their entirety in appendix II. The department also provided technical comments which we have incorporated, as appropriate, into the report. DOD concurred with our recommendations and agreed that it should reemphasize the policy that common automatic test equipment be developed to the maximum extent possible. DOD indicated that it would propose that an ATE acquisition policy statement be included in the next issuance of DOD Instruction 5000.2, "Operation of the Defense Acquisition System," April 5, 2002. DOD also agreed to reconsider whether the placement of its Executive Agent in the Navy--or any single service--is the most effective way to implement its ATE policy. The department further concurred that an Executive Agent for ATE should have the authority and resources to direct the services to draw up modernization plans for its review to maximize commonality, interoperability, and technology sharing between the services. In this regard, DOD agreed that there should be a mechanism to ensure all automatic test equipment acquisitions and modernizations are identified in an early enough stage in order to have a coordinated effort among service entities. Finally, DOD agreed that the Executive Agent for ATE should include representatives from all services. DOD intends to use its authority recently published in DOD Directive 5100.88, "DOD Executive Agent," September 3, 2002, to reconsider the placement of the Executive Agent and to provide it with sufficient authority, resources, and mechanisms to carry out its responsibilities. In addition, DOD intends to include the funding for the Executive Agent as part of the Planning, Programming, Budgeting and Execution process and to identify such funding separately so that it is visible within the DOD budget. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this report. At that time, we will send copies of this report to interested congressional committees; the Secretaries of Defense, the Navy, the Air Force, and the Army; the Commandant, U.S. Marine Corps; and the Director, Office of Management and Budget. We will also make copies available to other interested parties on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov/. If you or your staff have any questions about the report, please contact me at (757) 552-8100. Key contributors to this assignment were Ken Knouse, William Meredith, Harry Taylor, Hugh Brady, and Stefano Petrucci. We reviewed and analyzed available reports, briefings, documents, and records and interviewed officials at the Office of the Secretary of Defense and at Air Force and Navy headquarters organizations, Washington, D.C.; the Naval Air Systems Command located at Patuxent River, Maryland; Air Force Material Command and system program offices located at Wright-Patterson Air Force Base, Ohio; Warner Robins Air Logistics Center, Georgia; the North Island Naval Aviation Depot, California; the Navy's Aviation Intermediate Maintenance Department, Oceana Master Jet Base, Virginia; and the intermediate maintenance department aboard an aircraft carrier based in San Diego, California. The Army was not included in the scope of this study because our focus was primarily on fixed-wing aircraft and because of the Army's efforts to standardize its automatic test equipment (ATE) around a single family of testers, a situation similar to that of the Navy's. To identify the problems that Air Force and Navy aviation (including Marine Corps) is facing with regard to ATE, we interviewed personnel responsible for policies and oversight, obtained applicable regulations and other guidance, and analyzed data provided by the services on various testers. We provided a proforma for the Air Force's and Navy's use in documenting their inventory of ATE, identifying obsolete testers, and providing estimates of modernization and replacement time frames and cost. The Navy's data on ATE were provided by the central office that manages common test equipment--PMA-260, within the Naval Air Systems Command, and the Air Force's Automatic Test System Division at Warner Robins Air Logistics Center. We also discussed obsolescence issues and ATE problems with the managers of shore-based, aircraft carrier, and depot maintenance activities. We reviewed and analyzed our prior reports and ongoing efforts, and reports of other organizations to provide a historical and contextual framework for evaluating ATE policies and issues, for documenting readiness rates of selected aircraft, and documenting the processes put in place by the Department of Defense (DOD) to oversee the services' efforts to acquire and modernize ATE. To determine how successful DOD and the services have been in addressing the proliferation of unique testers, we held discussions with the responsible offices within each service and DOD, analyzed regulations and guidance, and reviewed studies and other documentation. We focused our work concerning this objective at the Navy office designated as DOD's Executive Agent for Automatic Test Equipment--PMA-260 within the Naval Air Systems Command--and the Air Force's Automatic Test System Division at Warner Robins Air Logistics Center. At these offices, which have responsibility for ATE acquisition or sustainment, modernization, and oversight, we held discussions with responsible officials, obtained documentation regarding responsibilities and decisions, and reviewed files for specific ATE acquisition and modernization programs. We also obtained information from individual system program offices, for selected aircraft, located at Wright-Patterson Air Force Base and selected Navy and Air Force depots and intermediate maintenance facilities. Because we found that Air Force testers are generally unique to specific aircraft, we selected the F-15, B-1B, and B-2 for more detailed analysis, as these are considered to be front-line aircraft depended upon heavily by the Air Force to accomplish its mission. We also obtained information on ATE acquisition for two fighter aircraft currently under development: the Joint Strike Fighter and the F/A-22. We performed our review from January 2002 through March 2003 in accordance with generally accepted government auditing standards. Defense Inventory: Better Reporting on Spare Parts Spending Will Enhance Congressional Oversight. GAO-03-18. Washington, D.C.: October 24, 2002. Defense Inventory: Improved Industrial Base Assessments for Army War Reserve Spares Could Save Money. GAO-02-650. Washington, D.C.: July 12, 2002. Defense Inventory: Trends in Services' Spare Parts Purchased from the Defense Logistics Agency. GAO-02-452. Washington, D.C.: April 30, 2002. Defense Logistics: Opportunities to Improve the Army's and Navy's Decision-Making Process for Weapons Systems Support. GAO-02-306. Washington, D.C.: February 28, 2002. Military Aircraft: Services Need Strategies to Reduce Cannibalizations. GAO-02-86. Washington, D.C.: November 21, 2001. Defense Logistics: Actions Needed to Overcome Capability Gaps in the Public Depot System. GAO-02-105. Washington, D.C.: October 12, 2001. Defense Logistics: Air Force Lacks Data to Assess Contractor Logistics Support Approaches. GAO-01-618. Washington, D.C.: September 7, 2001. Defense Inventory: Navy Spare Parts Quality Deficiency Reporting Program Needs Improvement. GAO-01-923. Washington, D.C.: August 16, 2001. Army Inventory: Parts Shortages Are Impacting Operations and Maintenance Effectiveness. GAO-01-772. Washington, D.C.: July 31, 2001. Navy Inventory: Parts Shortages Are Impacting Operations and Maintenance Effectiveness. GAO-01-771. Washington, D.C.: July 31, 2001. Air Force Inventory: Parts Shortages Are Impacting Operations and Maintenance Effectiveness. GAO-01-587. Washington, D.C.: June 27, 2001. Defense Inventory: Information on the Use of Spare Parts Funding Is Lacking. GAO-01-472. Washington, D.C.: June 11, 2001. Defense Inventory: Approach for Deciding Whether to Retain or Dispose of Items Needs Improvement. GAO-01-475. Washington, D.C.: May 25, 2001. Military Aircraft: Cannibalizations Adversely Affect Personnel and Maintenance. GAO-01-93T. Washington, D.C.: May 22, 2001. Defense Inventory: Army War Reserve Spare Parts Requirements Are Uncertain. GAO-01-425. Washington, D.C.: May 10, 2001.
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The services have billions of dollars worth of outdated and obsolete automatic test equipment (ATE) used to test components on military aircraft or weapon systems. Department of Defense (DOD) policy advocates the development and acquisition of test equipment that can be used on multiple types of weapon systems and aircraft and used interchangeably between the services. At the request of the Subcommittee's Chairman, GAO examined the problems that the Air Force, Navy, and Marine Corps are facing with this aging equipment and their efforts to comply with DOD policy. DOD and the services face growing concerns regarding obsolete automatic test equipment, given the high costs of modernizing or replacing it and its potential effect on aircraft readiness. The Navy and Air Force, for example, estimate that they will spend billions of dollars to modernize or replace this equipment, much of which was acquired in the 1970s and 1980s. In the meantime, the aging testers are becoming increasingly out of date and more difficult to support. When the testers do not work properly, maintenance can suffer and readiness can be adversely affected. Since 1994, DOD policy has advocated the acquisition of test equipment that can be used on multiple weapon systems and aircraft and can be used interchangeably between the services; progress in this regard has been slow. For example, although the Navy set out in 1991 to replace 25 major tester types with one standard tester by 2000, budget cuts and delays in developing software have resulted in delays in completing the replacement of these obsolete testers until 2008. The Air Force has only recently initiated a test equipment modernization plan. However, little evidence suggests that consideration is being given to the acquisition of equipment that would have common utility for more than one weapon system as DOD policy advocates. For procurement of new weapon systems, the Air Force is giving little consideration to the use of a common tester, while a common tester is planned for use as the primary tester for the Joint Strike Fighter. Although DOD tasked the Navy as its Executive Agent for automatic test equipment in 1994, the agent has made only limited progress in achieving compliance across all the services with DOD policy advocating the development of common systems. While the Executive Agent can point to some successes in individual systems, its officials acknowledged that the organization does not have sufficient authority or resources to fully implement the policy and achieve the maximum commonality possible.
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Over the past 7 years, DOD has increasingly used the SRB program to address retention shortfalls. The program's budget has grown from $308 million in fiscal year 1997 to an estimated $734 million in fiscal year 2003--a 138 percent increase after the effect of inflation was held constant (see fig. 1). The budget is estimated to grow to $803 million in fiscal year 2005, with most of the projected growth resulting from increases in the Air Force SRB program budget. Our 2002 report noted that in fiscal year 2001 the Air Force extended reenlistment bonuses to 80 percent of its specialties. In recent years, Congress has appropriated less money than the services have requested for the SRB program. Based on our work, in fiscal 2003 Congress appropriated $32 million less than DOD requested. Congressional committees proposed further SRB budget reductions during their reviews of DOD's fiscal year 2004 budget request. The House Appropriations Committee proposed a $44.6-million reduction; the Senate Appropriations Committee, a $22-million reduction; and the Senate Armed Services Committee, a $46-million reduction. The Senate Armed Services Committee additionally noted concerns about proposed SRB program budget increases at a time when overall retention rates are robust and the benefits of military service are increasing overall. DOD appealed these proposed reductions, noting that "the effects of an improving economy and the waning emotional patriotic high of the decisive victory in Operation Iraqi Freedom will combine to increase pressures on both the recruiting and retention programs." For fiscal year 2004, Congress appropriated $697 million for the SRB program, which was a reduction of $38.6 million from the amount DOD requested. Despite increased use of the SRB program, DOD has cited continued retention problems in specialized occupations such as air traffic controller, linguist, and information technology specialist. A more favorable picture is present with regard to overall retention. All of the services reported that they met overall retention goals for fiscal year 2002 and, with the exception of the Air Force missing its retention goal for second term airmen, expect to meet overall retention goals in fiscal year 2003. Further bolstering these retention expectations are recent survey results showing improvements in servicemembers' attitudes toward remaining in the military. For example, the 2002 DOD-wide status of forces survey found that the career intent of military personnel had improved between 1999 and 2002, rising from 50 to 58 percent. The survey results showed that retention attitudes were particularly better for junior enlisted (up 11 percent) and junior officers (up 13 percent). In addition, the 2002 Air Force-wide quality of life survey found that 66 percent of enlisted personnel reported they would make the Air Force a career, which is an increase from 58 percent, reported in 1997. According to DOD officials, the effects of more recent events such as extended deployments and other higher operations tempo issues could change servicemembers' attitudes toward remaining in the military. Congressionally approved reforms in basic pay implemented during the last 3 years were intended in part to address retention problems, particularly with mid-grade enlisted personnel. In the 2002 Quadrennial Review of Military Compensation, DOD attributed the increased use of SRBs in the late 1990s to a growing pay discrepancy between civilians and the mid-career enlisted force. For that period, the review noted an increased use of bonuses for personnel with 10 to 14 years of service. DOD noted that while bonuses are a very important compensation tool, their use is intended for specific purposes and for relatively short periods of time. According to that review, bonuses are appropriate for use within particular skill categories, not as a tool for resolving military and civilian pay differentials across an entire segment of the force. The report noted that widespread pay differentials should be remedied through pay table restructuring. Pay table restructuring began in fiscal year 2001, and additional military pay adjustments have been approved in subsequent budgets. DOD's May 2003 report did not thoroughly address four of the five congressional concerns about effective and efficient management of the SRB program. First, the report indirectly addressed SRB program effectiveness and efficiency by discussing bonuses as a general military retention tool instead of the effectiveness and efficiency of the program in targeting bonuses to improve retention in selected critical occupations. Second, DOD did not permit us to review the draft guidance, but--based on DOD's comments on our 2002 SRB report, excerpts of draft criteria contained in DOD's mandated report, and our discussions with DOD officials--the replacement guidance could expand the SRB program by giving the services more flexibility in designating occupations as critical and either eliminate or weaken the requirement for annual SRB program reviews. Third, OSD did not outline steps to match program execution to appropriated funding as the mandate required; instead, OSD reiterated the need for program-execution flexibility. Fourth, OSD's evaluation of the services' administration of their SRBs program was limited, relied largely on service-provided descriptions, and did not use consistent procedures and metrics. Finally, as required by the fifth concern in the mandate, DOD identified the most salient advantages and disadvantages resulting from paying SRBs as lump sums. DOD's report did not directly discuss how effectively and efficiently each service is currently using the SRB program to address retention problems in critical occupations. Although the mandate noted, "a reassessment of the program is warranted to ensure it is being managed efficiently," DOD's response to concern one did not provide sufficient detail to document the effective and efficient use of the program in awarding SRBs. In response to one of the other four congressional concerns, DOD stated that the "intent of retention bonuses is to influence personnel inventories in specific situations in which less costly methods have proven inadequate or impractical." The report did not, however, document what methods had been used previously or the cost-effectiveness of those methods in achieving desired retention levels. Also absent from the report was a discussion of how key factors influence the current use of SRBs. Examples of key factors include the effects of changes in the basic pay, overall retention rates, and civilian unemployment. For example: Despite increasing basic pay to address the discrepancy between military and civilian pay noted in the 2002 Quadrennial Review of Military Compensation, the budgets for the SRB program are projected to grow to $803 million in fiscal year 2005. In comments received on our preliminary observations briefing, DOD officials noted that our use of constant 2004 dollars in our budget trend analysis did not fully account for the effects of the basic pay changes that exceeded the inflation level and thus increased the size of individual bonuses. At the same time, future SRB program budgets do not show decreases that might be expected as these pay table changes address overall military-civilian pay discrepancies and problems identified within various pay grades. The report did not address the extent to which recent higher levels of overall retention offer opportunities for reducing the number of occupations eligible for SRBs or the bonus amounts awarded for reenlistment. DOD officials have noted that all of the services met or exceeded their aggregate retention goals in fiscal year 2002 and that strong overall retention is expected to continue. However, they cited retention shortfalls in some occupational specialties as areas of concern. Although a generally positive aggregate retention climate might present DOD with opportunities to curtail use of its SRB program, the report did not discuss under what conditions reductions in the program might or might not be appropriate at this time. Despite noting a relationship between civilian unemployment rates and military retention, DOD's report did not indicate whether civilian unemployment--which is at a 9-year high--might result in the need for fewer SRBs being offered and possibly at lower bonus levels. One study cited in DOD's report noted that there is a relationship between higher unemployment rates and improved overall military retention. In part of its answer to concern three, DOD noted that changes in the economy and labor market drive changes in actual reenlistment rates. Just as periods of relatively lower civilian unemployment might suggest the need for greater use of the SRB program, periods of relatively higher unemployment might conversely suggest less need for SRBs. Despite civilian unemployment being at its highest rate in several years, the SRB program budget is projected to increase in fiscal year 2005. Instead of directly addressing program effectiveness and efficiency, the 2003 report discussed the general benefits of using bonuses to retain military personnel. DOD's report cited numerous studies that demonstrated or postulated this effect. However, findings from some studies may not be readily generalized to the way that the SRB program is currently managed or to the economic conditions that currently exist. More specifically, some studies used outdated retention data obtained in the mid-1970s or were performed in a very different retention environment (e.g., the increase in force size during the 1980s and the large draw-down of military forces in the 1990s). Even given our concerns about some of the findings, we believe DOD presented sufficient support for its conclusion that bonuses can be effective in promoting retention. A largely unaddressed, but more pertinent issue is how effectively and efficiently DOD applied this tool to improve retention in critical occupations under recent and current economic conditions. DOD did not permit us to review the draft guidance that will replace the current DOD directive and the DOD instruction canceled in 1996. Our findings for this concern are based on DOD's comments on our 2002 SRB report, excerpts of draft criteria contained in DOD's mandated report, and our discussions with DOD officials. Changes to the guidance could lower the threshold required for designating occupations as critical and may eliminate or weaken the requirement for formal annual reviews of the SRB program. DOD's planned changes to the replacement guidance could provide the services with greater flexibility for designating a specialty as critical but could weaken the controls for targeting the specialties receiving SRBs by lowering the threshold required for making such a designation. The canceled 1996 instruction required the services to consider five criteria before designating a specialty critical and making it eligible for SRBs, but DOD's 2003 report stated that the revised program instruction would require occupations to meet a lower threshold--meeting "at least" one of five criteria. For the period since 1996 when the instruction was canceled, our 2002 report found that, in some cases, the services had already been using only one of the five criteria to designate occupations for inclusion in the program. This allowed the services to define broadly what constituted a critical occupation and included more occupations than would have likely qualified if all five criteria had been considered. DOD's planned changes could also eliminate or weaken the requirement for formal annual reviews of the SRB program and thereby weaken the ability of Congress and DOD to monitor the program and ensure that it targets only critical specialties. To implement the SRB program, DOD Directive 1304.21 assigns specific responsibilities for administering the program to the OSD and to the service Secretaries. According to this directive, the Assistant Secretary of Defense for Force Management Policy, under the Under Secretary of Defense for Personnel and Readiness, is responsible for annually reviewing and evaluating the services' enlisted personnel bonus programs in conjunction with the annual budget cycle. These reviews are to include an assessment of the criteria used for designating critical military specialties. As a result of these reviews, the OSD is to make the revisions needed to attain specific policy objectives. Our 2002 report found that DOD had not conducted any of the required annual program reviews since 1991. In its response to our 2002 SRB report, DOD stated that it plans to eliminate those requirements from the replacement guidance. More recently, a DOD official stated that the new guidance will require periodic reviews, but neither the frequency nor the details of how these reviews would be conducted was explained. In its report to Congress, DOD maintained that much of the SRB program oversight takes place during ongoing internal service program budget reviews. In contrast, we concluded in our 2002 report that those program budget reviews were limited in scope and did not provide the detailed evaluation needed to ensure the program was being implemented as intended. A more in-depth discussion of the current limited oversight is provided when we discuss DOD's response to the fourth concern. In contrast to the previously mentioned changes, DOD's report noted some steps that we believe could strengthen controls on the SRB program. According to the report, the new SRB program instruction will (1) require the services to establish parameters to define "critical shortages" and (2) base those requirements on factors such as the potential impact of a shortage on mission accomplishment. In addition, DOD has recently established a working group that has been tasked with developing a "common understanding and definition of critical skills." Previously, we found that DOD had not clearly defined the criteria the services were to use in designating critical occupations since the SRB program instruction was canceled in 1996. Contrary to the mandate, DOD's 2003 report did not outline steps that it will take to match program execution with appropriated funding. Instead, DOD stated that the services need execution flexibility and have operated consistent with the law and within the overall Military Personnel appropriation. Our trend analysis in current year dollars showed that the services spent a combined total of $259 million more than Congress appropriated for the SRB program in fiscal years 1999-2002. DOD's use of this flexibility has resulted in the services overspending their SRB budgets by as much as $111 million in a single year--fiscal year 2001. More recently, two of the services stayed within their appropriated budgets. In fiscal year 2002, the Air Force and Marine Corps spent, respectively, $26 million and $4 million less than their fiscal year 2002 SRB appropriation. However, the Army and Navy exceeded their appropriated SRB budgets by $38 million and $21 million, respectively. DOD noted that the services can reallocate funds within the Military Personnel appropriation without seeking congressional authority. In the report, DOD did not agree with the congressional concern that program expenditures needed to match funding levels appropriated specifically for the SRB program. Rather, DOD maintained that monies were available from other parts of the Military Personnel appropriation if a service needed additional SRB funding in a fiscal year. DOD's response noted that budget submission timelines require reenlistment forecasts up to 2 years prior to execution and that intervening changes in the economy and labor market can add uncertainty and drive changes in actual reenlistment rates. Using the services in-year, or current estimates--created during the year of program execution--we found that the services had exceeded their fiscal year 1999-2002 estimates for the number of expected SRB reenlistments by a combined total of 32,466 personnel. Furthermore, our current trend analysis on their budget justifications showed that for the Army and Navy, reallocation or reprogramming of funds had become a reoccurring pattern of activity. In our 2002 report, we concluded that better OSD program oversight and management would have required the services to justify their need to exceed appropriations during fiscal years 1997-2001. DOD's limited evaluation of the services' SRB programs relied primarily on program descriptions provided by the services. The report presented different issues for each service and used inconsistent procedures and metrics to reach conclusions about each service's program administration effectiveness and efficiency. Absent was a discussion of key performance indicators, the means used to verify and validate the measured values, and other characteristics such as those GAO identified in its report assessing agency annual performance plans. The absence of a consistent, explicit methodology made it difficult to determine (1) best practices that might be applied from one service to another and (2) other insights that could result in each service more effectively and efficiently administering its SRB program. Although OSD assembled a multi-service panel to discuss the evaluation, DOD's response consisted largely of program descriptions that the services supplied. Each service made statements about the effectiveness of its program but provided insufficient documentation to support those statements. OSD conducted its last comprehensive review of the SRB program in 1991. As noted earlier in our assessment of DOD's response to the second concern, DOD stated that it intends to eliminate the requirement to perform detailed annual program reviews when its replacement program directive is issued. In introductory comments to the 2003 report, DOD stated that the SRB program is evaluated annually within the context of three Planning, Programming, and Budgeting System activities. In our 2002 report, we found that those reviews, conducted by the DOD Comptroller and the Office of Management and Budget (OMB), and the testimony provided to Congress were limited. When the services prepare budget submissions for the SRB program, they discuss the small sample of occupations included in their justification books. As we noted in our 2002 report, the DOD Comptroller stated that the budget submissions are not detailed programmatic evaluations. DOD's 2003 report also cited OMB reviews as part of an evaluation of the programs. During the preparation of our 2002 report, OMB officials told us that their reviews were limited and did not constitute a detailed assessment of the services' programs. DOD's 2003 report stated that the services' out-year budgets were carefully reviewed during congressional testimony. It is our view that congressional testimony does not represent a detailed programmatic review of a program this complex. For example, in March 11, 2003, DOD's testimony before the Military Personnel Subcommittee of the Senate Armed Services Committee included very limited statements about the SRB program. DOD's report listed some positive steps that the services have proposed to administer the SRB program more effectively and efficiently. For example, the Navy and Army are validating and improving the models used to manage their SRB programs, and the Air Force has created a new bonus review board to keep its leaders apprised of how the SRB program is functioning. At the time of our review, the services were just starting to implement these steps to improve their programs, and there was no data to determine how effective and efficient these efforts are. DOD identified the most salient advantages and disadvantages resulting from implementing a lump sum payment method for paying retention bonuses. We generally concur with DOD's observations about the positive and negative aspects of using lump sum bonuses. DOD's report cited a 1985 GAO study that found lump sum payments had three main advantages: more cost-effective, better visibility to Congress, and more adaptable to budget cuts than paying bonuses incrementally. The 2003 DOD report cited another important consideration in awarding bonuses in lump sum payments. Because enlisted personnel prefer "up-front" payments and are willing to receive less money initially than more money offered in the future, we believe that the federal government could reenlist more personnel for the same amount of money if bonuses were paid in a lump sum. DOD cited several disadvantages to using a lump sum payment option. For example, there are significant up-front costs associated with paying both lump sum SRB payments in the implementation year and completing the anniversary payments for SRBs awarded previously. The first year of change would require the largest budget increase, and each subsequent transition year would become less costly. The implementation of a lump sum SRB program could become cost neutral over the long term if bonuses paid in a lump sum eliminated the need for equal amounts of anniversary payments in succeeding years. It could even save money if sufficient reenlistees were attracted with less money because up-front compensation--even if less--is more attractive than compensation promised in the future. DOD's report addressed other potential disadvantages of using a lump sum payment method. These include the possibility that a recipient will fail to stay in the military for the full reenlistment period after receiving a bonus and the problem associated with recouping all or part of bonus amounts from personnel who do not complete their obligated term of service. Despite these disadvantages, our 1985 report stated our support for the use of lump sum retention bonuses. The Marine Corps began using the lump sum payment option for its SRB program in fiscal year 2001 and is the only service currently using this payment method. In February 2004, the Marine Corps expects to have preliminary results from an evaluation of its use of lump sum payments. Although not required by the mandate to do so, DOD and the services could have made the response to concern five more informative for Congress by identifying alternative strategies for implementing the lump sum option and estimating the costs of each strategy for each service. For example, one strategy might be to phase in the lump sum payment option. Phasing in lump sum payments could provide DOD with increased program administration flexibility and decreased budgetary problems caused by switching from installment payments in a single year. Overall, our analysis of DOD's May 2003 congressionally mandated report on the SRB program showed that DOD's report did not provide sufficient information to enable Congress to determine whether the program is being managed effectively and efficiently. With one exception, DOD's report did not thoroughly address congressional concerns about the effective and efficient management of the SRB program. Of DOD's responses to the five congressional concerns, three were incomplete or nonresponsive--those regarding program effectiveness and efficiency in correcting retention shortfalls in critical occupations, DOD actions to match program execution with appropriations, and DOD's evaluation of the services' program administration. A fourth response--regarding replacement program guidance--did not provide information essential for us to make an independent determination as to the response's adequacy. DOD directly and fully addressed one of mandated concerns--the advantages and disadvantages of lump sum bonus payments. Although the SRB program is expected to grow to over $800 million in fiscal year 2005, the report did not address factors that may have reduced the services' retention concerns and could reduce SRB program cost. Underlying many of these shortcomings is a lack of empirically based information caused by DOD's limited reviews of the SRB and inconsistent use of evaluation procedures and metrics. DOD's possible elimination of the requirement for a detailed annual review and continued reliance on service-specific procedures and metrics could further weaken Congress's ability to monitor the SRB program. To assist Congress in its efforts to monitor the management of the SRB program and to ensure that DOD is effectively and efficiently targeting retention bonuses to critical occupations, we recommend that the Secretary of Defense direct the Office of the Under Secretary of Defense for Personnel and Readiness to (1) retain the requirement for an annual review of the SRB program and (2) develop a consistent set of methodologically sound procedures and metrics for reviewing the effectiveness and efficiency of all aspects of each service's SRB program administration. In written comments on a draft of this report, DOD concurred with our recommendations. DOD further stated that, with regard to our recommendation to develop review procedures and metrics, it would (1) conduct research to develop meaningful metrics for reviewing the effectiveness and efficiency of all aspects of each service's administration of the SRB program and (2) implement those metrics so that they are consistent with DOD's Human Resource Strategy Plan. DOD's comments are reprinted in their entirety in appendix II. We are sending copies of this report to the Secretary of Defense. We will also make copies available to appropriate congressional committees and to other interested parties on request. In addition, the report will be available at no charge at the GAO Web site at http://www.gao.gov. If you or your staff have questions about this report, please call me at (202) 512-5559. Key staff members contributing to this report were Jack E. Edwards, Kurt A. Burgeson, Nancy L. Benco, and M. Jane Hunt. We reviewed the Department of Defense's (DOD) May 2003 congressionally mandated report and documents used in the preparation of that report. That information was supplemented with prior Selective Reenlistment Bonus (SRB) program guidance, budget request documentation, and other information gathered during our 2002 review of the SRB program. To assess the adequacy and accuracy of the information contained in DOD's report, we obtained and reviewed documentation used by the Office of the Secretary of Defense (OSD) to support its responses. For example, we reviewed the eight studies cited in DOD's response to concern one in the mandate. In addition, we reviewed information provided by each of the services, as well as past GAO and DOD reports on the SRB program. We compared findings from these past reports to DOD's mandated responses to assess the validity of what was presented. We updated the program budget analysis from our 2002 review using budget data contained in DOD's Military Personnel budget justification books prepared for Congress. We sought to review updated SRB program guidance, but DOD indicated that these pre-decisional documents would not be released until the final versions had been approved. We met with DOD officials to update information obtained during our 2002 review of the SRB program. Interviews were primarily conducted with officials in the Office of the Under Secretary of Defense for Personnel and Readiness because these officials were the primary authors of DOD's report. We also met with personnel responsible for administering the services' SRB programs. We obtained updated retention data contained in prepared statements used by DOD during congressional hearings. We also reviewed the results of DOD's 2002 status of forces survey and the Air Force's 2002 quality of life survey. We conducted our review from June through September 2003 in accordance with generally accepted government auditing standards.
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The Department of Defense (DOD) uses the Selective Reenlistment Bonus (SRB) program to reenlist military personnel in critical specialties. In fiscal years 1997-2003, the program budget rose 138 percent, from $308 million to $734 million. In fiscal year 2003, the House Appropriations Committee directed the Secretary of Defense to reassess program efficiency and report on five concerns: (1) how effective the program is in correcting retention shortfalls in critical occupations, (2) how replacement guidance will ensure targeting critical specialties that impact readiness, (3) how DOD will match program execution with appropriated funding, (4) how well the services' processes for administering the program work, and (5) advantages and disadvantages of paying bonuses in lump sum payments. The committee also directed GAO to review and assess DOD's report. Despite congressional concerns about the SRB program, DOD's May 2003 report stated that the program is managed carefully, bonuses are offered sparingly, and the services need flexibility in administering the program. However, DOD's responses did not thoroughly address four of the five SRB program concerns contained in the mandate. As a result, Congress does not have sufficient information to determine if the program is being managed effectively or efficiently. DOD has not issued replacement program guidance and did not allow us to review the guidance that has been drafted. DOD's report focused primarily on criteria for designating occupations as critical, but the report did not address an important change--the potential elimination of the requirement for conducting annual program reviews. In response to our 2002 report, DOD stated that this requirement would be eliminated from future program guidance. DOD recently told us that the new guidance will require periodic reviews, but neither the frequency nor the details of how these reviews would be conducted was explained. DOD conducted a limited evaluation to address the congressional concern about how well the services are administering their programs. The response consisted largely of program descriptions provided by the services. Among other things, DOD did not use a consistent set of procedures and metrics to evaluate each of the services' programs. Consequently, it is difficult to identify best practices, or to gain other insights into ways in which the effectiveness and efficiency of the services' programs could be improved. DOD thoroughly addressed the congressional concern pertaining to the advantages and disadvantages of paying SRBs as lump sums.
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The Crime Awareness and Campus Security Act of 1990 and its implementing regulations require colleges, as a condition for participating in federal financial aid programs authorized under title IV of the Higher Education Act of 1965, as amended, to publish and distribute an annual security report that includes statements about campus law enforcement policies, security education and crime prevention programs, alcohol and drug policies, sexual assault education and prevention programs, procedures for reporting sexual assaults, procedures explaining how reports of sexual assaults will be dealt with, and annual statistics on crime incidents. The law also requires colleges to provide timely warning to the campus community about crimes that are considered to represent a threat to other students and employees. The law requires the collection of data on campus crime, distinct from state or local data, and that information on the incidence of campus crime and of colleges' security policies and procedures be available. The statistical reporting provision requires colleges to annually compile and report to the campus community statistics on reported crimes, such as murder and robbery, and on arrests for such crimes as liquor law violations. As the agency administering title IV programs, the Department of Education is responsible for issuing guidance to implement the law, monitoring colleges' compliance with its requirements, and issuing two reports: a compilation of exemplary campus security practices and a report to the Congress on campus crime statistics. Procedures for monitoring compliance with title IV requirements include program reviews of selected colleges, annual independent audits of all colleges participating in title IV, and compliance reviews in response to complaints received. According to a 1996 publication of the Student Press Law Center, 11 states have laws requiring schools to compile and release statistics on campus crime. Two bills--H.R. 2416 and S. 2065--introduced in the 104th Congress would have required more detailed and current campus security records to be made accessible to the public. Although a hearing was held in the House, no further action was taken before the session's end. Had the bills been enacted, they would have applied to colleges with police or security departments and required the colleges, in addition to reporting annual crime statistics, to maintain open-to-the-public, easily understood daily logs that chronologically recorded all crimes against persons or property reported to college campus or security departments. The bills were modeled after a law that has been in effect in Tennessee since 1994. Department implementation of the Crime Awareness and Campus Security Act's reporting requirements has included issuing regulations; disseminating policy guidance to colleges; providing technical assistance to colleges and outreach to campus law enforcement organizations; and, to a limited extent, checking whether colleges have prepared crime statistics reports and what procedures they have used for disseminating the reports. However, because of resource constraints, the Department has only recently expanded its monitoring efforts by initiating program reviews that specifically address compliance with the act's reporting requirements. Moreover, the Department was late in issuing a required report to the Congress. Following enactment of the law in 1990, the Department issued various policy guidance documents on campus security to help colleges meet the law's requirements, as summarized in table 1. Most of the guidance was issued as Department letters. Final implementing regulations took effect in July 1994. The Department supplemented its policy guidance with technical assistance provided upon request by its Customer Support Branch. To help colleges achieve compliance, the Department emphasizes providing such assistance, rather than imposing sanctions. Under Department policy, the Secretary imposes sanctions only if a college flagrantly or intentionally violates the regulations or fails to take corrective action when required to do so. Available sanctions include fines or limitation, suspension, or termination of participation in federal financial aid programs. Department officials told us that although the Department and independent auditors had identified violations at 63 colleges since the law's enactment, as of January 1997, the Department had not imposed sanctions against any college found in noncompliance with campus security requirements. Although the Department began issuing guidance to colleges on complying with the law in 1991, guidance for monitoring program compliance came much more slowly. The Department did not issue its first program review guidance specifically addressing campus security until September 1996. Until this recent incorporation of campus security in program review guidance, the Department's program reviewers had not emphasized monitoring campus security reports in their title IV reviews, focusing instead on compliance with other provisions of title IV. Although most of the nearly 2,800 title IV program reviews conducted between September 1992 and May 1996 found noncompliance with some title IV program requirements, only 24 of these reviews identified campus security violations. Department officials told us that monitoring had generally been limited to checking whether colleges published a campus security report and had procedures for its distribution. Since no review guidance for monitoring campus security was available until September 1996, it is unlikely that the reviewers checked whether the reports contained all the required information or whether information was accurate. Under the new monitoring guidance, program reviewers must check a college's crime report for all required information and should attempt to evaluate the procedures used to collect crime data. The accuracy of crime statistics need not be verified unless it becomes apparent from a complaint or some other source that the security report may be incomplete or inaccurate. In such cases, the Department is to take appropriate action to ensure compliance, including more thoroughly examining the statistics and, if warranted, taking formal administrative action. As of January 1997, the Department had received five complaints of noncompliance: one precipitated an in-depth campus security compliance review; the other four complaints are still being investigated. Even with the new guidance, however, program review officials told us that staff are still having some difficulty monitoring compliance. Reasons for the difficulty include reviewers' limited experience in dealing with law enforcement matters, uncertainties about how to interpret certain definitions of reportable crimes, and differences among campuses that make evaluation difficult under a single set of program review guidelines. In the case of urban campuses, for example, reviewers may have difficulty in determining which facilities are campus related. The difficulties involving definitions and differences among colleges are discussed in more detail later in this report. The Department has yet to issue guidance for independent auditors who conduct federally required annual audits of all colleges participating in title IV programs. The Department's June 1995 independent audit guide does not provide guidance to auditors on checking for campus security compliance. As of August 1996, only six audits had documented noncompliance on security matters since the act took effect, and a Department official said that most auditors participating in training sessions held in regional Inspector General offices were unaware of campus security reporting requirements, further suggesting that auditors may not be routinely scrutinizing campus security reports. The Department plans to issue an updated audit guide that will explicitly refer to campus security compliance and instruct auditors to ensure that campus security reports are prepared and distributed according to federal requirements. A Department official responsible for writing the audit guide expects it to be issued some time in 1997. Although the Department issued a required report on exemplary campus security practices in September 1994, the Department was more than 1 year late in issuing a report on campus crime statistics to the Congress. The law required the Department to review campus crime statistics and issue a report to the Congress by September 1, 1995. Citing limited resources to perform such a review, the Department postponed issuing the report until February 1997. As the basis for the report, the Department conducted a national survey on campus crime and security. A representative sample of 1,500 colleges was surveyed to establish baseline information on crime statistics by such attributes as type of school (such as 4-year public or 2-year private), nature of the campus (such as urban or rural and residential or commuter), and types of public safety employees providing campus security. Having compiled and reported the survey results, the Department plans to evaluate whether additional actions are needed at the federal level. Our review of selected colleges' campus security reports and our interviews with selected campus officials indicate that colleges are having difficulty applying some of the law's reporting requirements. As a result, colleges are not reporting data uniformly. Of the 25 reports we reviewed, only 2 provided information in all the prescribed categories. Table 2 summarizes the principal problems colleges are having. Campus law enforcement officials differ as to whether their reported statistics must include crimes reported to them by other campus authorities without information identifying the persons involved in the reported incidents. For example, according to comments the Department received during rulemaking, students are sometimes more comfortable reporting incidents--particularly sex-related offenses--through academic rather than law enforcement channels. The Family Educational Rights and Privacy Act (FERPA) generally prohibits the disclosure of education records or information from education records, which originally included personally identifiable details on crime incidents. As a result of a 1992 amendment to FERPA, however, reports of incidents maintained by campus law enforcement officials for law enforcement purposes are not now classified as education information and, therefore, may be disclosed. Even incidents reported to campus authorities other than law enforcement officials may be included in the campus crime statistics as long as information identifying the persons involved is not disclosed. But reporting such incidents in the statistics is not required under a Department interpretation of the Crime Awareness and Campus Security Act. According to that interpretation, colleges may exclude from their statistics those incidents that campus law enforcement officials cannot validate because, for example, the parties' names were not disclosed. The fact that the incidents need not be reported is reflected by variations in campus security reports, as some reports excluded information from non-law-enforcement sources for which no personally identifiable information was provided. Our review of 25 reports prepared by colleges showed that some of the data may have been incomplete or incompatible because of differences in safety officials' access to information, insistence on verifiable data, or both. Six reports showed direct and varied attempts to address these differences--for example, by supplementing required crime categories with explanatory subcategories, adding a column showing incidents reported to other officials, or adding footnotes. When we asked campus law enforcement officials at the 25 colleges how they treated such cases, we found an even greater variation in their responses than in the reports. For example, nine said their numbers included incidents reported to campus officials who were not law enforcement officials without any notation to that effect, and four said their numbers excluded incidents they could not verify. Some were concerned about reporting incidents for which no details were provided because, without details on specific cases, they were unable to verify that a crime had occurred, had been properly classified, or had been counted only once--if, for example, a crime had been reported to more than one office. At some colleges, security officials do not receive even unverifiable statistics from counselors: Officials at five colleges said counselors are not required to or generally do not report incidents to them, and the general counsel of one state's higher education organization concurred in that interpretation. Although colleges' statistical reports included most of the prescribed criminal reporting categories, reporting officials appeared to have difficulty principally with two categories: sex offenses and murder. In 60 percent of the reports we reviewed, colleges had difficulty complying with the reporting requirement for sex-related offenses. Colleges are required to report statistics on sexual offenses; they are not required to distinguish between forcible and nonforcible offenses. Of the reports we reviewed, 15 incorrectly categorized offenses. For example, several colleges listed incidents as "rape" or "attempted rape," both of which are less inclusive than the term "forcible sexual offense." We also noted a discrepancy in how colleges reported the number of murders. Seven of the reports we reviewed labeled incidents resulting in death as homicides, but the law requires the term "murders." According to the Uniform Crime Reporting Handbook, homicide can also include killings that result from negligence, whereas murder refers to willful killings. Because homicide is not as specific a term, the use of this broader category could obscure the actual number of murders. The Department's regulations for the Crime Awareness and Campus Security Act require colleges to report statistics on murders, forcible rapes, and aggravated assaults that manifest evidence of prejudice based on race, religion, sexual orientation, or ethnicity, as defined in the Hate Crimes Statistics Act. However, of the reports we reviewed, only five included this information. Eleven of the 16 officials we asked about the omission told us they were unaware of the requirement, which was not mentioned in the Department's letters explaining the statistical reporting requirements. Another two said they lacked direction on how to report these crimes. Although the Crime Awareness and Campus Security Act requires that crime statistics include on-campus occurrences reported to local police, our interviews with college officials and review of their statistical reports suggest that colleges vary in their inclusion of incidents reported to local police. Of the 25 reports we reviewed, 1 specifically stated that it did not include incidents reported to local police, and a second stated that it included such incidents when available. In contrast, six reports indicated that incidents reported to local police were included. According to a law enforcement official we contacted and our analysis of a Department program review, reporting such incidents can be difficult. For example, record systems of some local police departments do not lend themselves to converting the incidents to the categories required for campus security reports. Moreover, identifying incidents at college-related facilities can be a problem when a campus is dispersed throughout a large urban area. For three crime categories--liquor, drug, and weapons possession violations--the law requires statistics on the number of arrests, rather than on the number of reported crimes. For these categories, uniformity of statistics can be affected to some degree by school policies and type of authority of the campus security department. For example, one campus security report we reviewed contained a footnote to the effect that liquor-law violations were frequently adjudicated through campus judicial procedures and, therefore, would not be included in the arrest statistics. Three law enforcement officials told us that offenses are less likely to result in arrests on campuses that do not have security departments with the power to make arrests. We identified eight states that require public access to campus police or security department records on reported crimes: California, Massachusetts, Minnesota, Oklahoma, Pennsylvania, Tennessee, Virginia, and West Virginia. In all but Minnesota, the laws in general apply to all institutions of higher education, public and private. Minnesota's law applies only to public colleges. Three of the eight states (Massachusetts, Pennsylvania, and Tennessee) have laws specifically requiring campus safety authorities to maintain daily logs open to public inspection. The remaining five, while not prescribing the log format, require disclosure of information similar to that required to be kept in the logs. Certain provisions are common to a number of these state laws. For example, they generally contain a provision exempting disclosure that is otherwise prohibited by law. Many prohibit publication of the names of victims or of victims of sex-related crimes. Many also include some type of provision protecting witnesses, informants, or information that might jeopardize an ongoing investigation. Several law enforcement officials emphasized to us the importance of including such a provision. The laws also differ in a number of other respects, such as the following: California, Pennsylvania, and Oklahoma specifically provide for penalties for noncompliance; the other states do not specify penalties. Only California includes a specific reference to occurrences involving hate; in fact, California's law requires inclusion of noncriminal hate-related incidents. For more information on the eight laws, see appendix II. We also agreed to determine whether any legal challenges had been raised to state open campus crime log laws and whether the effectiveness of such laws had been studied. We did not find any reported cases challenging these laws or any studies of their positive or negative effects. In addition, according to the Student Press Law Center's Covering Campus Crime: A Handbook for Journalists, all 50 states have open records or "sunshine" laws, most of which require public institutions' records to be open to the public unless they are specifically exempted. Generally, public colleges are covered by those laws. For example, Colorado's open records law declares that it is public policy that all state records be open for inspection, including all writings made, maintained, or kept by the state or any agency or institution--which would include state colleges. These laws generally provide that if records are kept, they must be open; the laws are not intended to impose a new recordkeeping requirement. The consistency and completeness of campus crime reporting envisioned under the act have been difficult to attain for two primary reasons. First, the differing characteristics of colleges--such as their location in an urban or other setting or the extent to which complaints may be handled through campus governance rather than through police channels--affect the colleges' ability to provide a complete and consistent picture of incidents that occur on their campuses. Second, some confusion exists about reporting requirements, particularly about how certain categories of crimes are to be classified. The Department originally relied mostly on its regulations, letters to colleges, and technical assistance to implement the Crime Awareness and Campus Security Act. Its continued efforts in providing technical assistance to school officials, as well as its recent issuance of monitoring guidance to Department officials and its current work to update audit guidelines for independent auditors, may achieve more consistent reporting and compliance with the law by colleges. For example, these efforts may improve consistency in categories used and type of crimes reported. However, inherent differences among colleges will be a long-term obstacle to achieving comparable, comprehensive campus crime statistics. Although a federal open crime log law could offer more timely access to information on campus crime and a means of verifying the accuracy of schools' statistical reports, such logs would continue to reflect the inherent differences among colleges apparent in the summary statistics currently required by the act. For example, such logs might not include off-campus incidents or, without an amendment to FERPA, incidents that students report through non-law-enforcement channels. On February 12, 1997, the Department of Education provided comments on a draft of this report (see app. III). The Department generally agreed with our basic conclusions and provided us a number of technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Education, appropriate congressional committees, and other interested parties. Please call me at (202) 512-7014 or Joseph J. Eglin, Jr., Assistant Director, at (202) 512-7009 if you or your staff have any questions about this report. Other staff who contributed to this report are listed in appendix IV. To determine the actions the Department of Education has taken to implement and monitor compliance with the Crime Awareness and Campus Security Act, we interviewed officials at the Department's headquarters and regional offices and analyzed pertinent regulations, policy guidance, and other documents. To identify difficulties colleges were having in complying with the act, we interviewed officials at 27 colleges selected from a judgmental sample of colleges from the following four groups. Members of the International Association of Campus Law Enforcement Administrators (IACLEA)--Ten Colleges. Our initial college law enforcement contact was the Director of Police at the University of Delaware, also a past president of IACLEA and a recognized authority on the Crime Awareness and Campus Security Act. He provided us with the names of chief law enforcement officials at eight IACLEA member colleges, one in each of the eight states with open campus police log laws. These officials, in turn, referred us to two additional member colleges. Non-IACLEA Members in States With Open Log Laws--Eight Colleges. Using a list of non-IACLEA colleges provided by IACLEA, we selected six 4-year and two 2-year colleges representing all eight states with open log laws and spoke to their heads of campus security. All eight colleges had an enrollment exceeding 1,000 students. Colleges in States Without Open Log Laws--Seven Colleges. From a universe of colleges representing all states, we randomly selected colleges, with enrollments exceeding 1,000 students, that participated in title IV programs from the Department's Integrated Postsecondary Education Data System, stratified by type of college (such as 4-year private or 2-year public) and geographic region. The chiefs of campus security at these seven colleges composed the third group of officials interviewed. Colleges Involved in Complaints About Crime Statistics--Two Colleges. We included two other colleges for information on complaints regarding crime statistics. We included the first of these because a complaint had been lodged against that college. We included the second college because it was subject to the same state crime reporting system as another college--the only one that has undergone an in-depth Department review as a result of a crime statistic complaint. In addition, we asked the campus security officials interviewed to send us a copy of their most recent campus security statistics. We received statistical reports from 25 colleges and evaluated them to determine the extent to which the reports conformed to crime reporting requirements prescribed in the act. We did not trace the numbers to source documents to check their accuracy or completeness. We also searched the literature and reported case law to determine whether any studies had been done on the effects of or legal challenges to state open log laws. We analyzed state statutes and spoke with representatives of campus safety and other interest groups as well as faculty specializing in criminal justice. We performed our work between June 1996 and January 1997 in accordance with generally accepted government auditing standards. Names and addresses of arrested persons and charges against them Exempts from disclosure incidents involving certain types of handicapped persons, which are to be separately maintained (continued) Public and private campuses (under the state's Campus Security Act, private colleges' police departments are public agencies for the limited purpose of crime enforcement) Records must be open, if kept; the intent is not to impose a new recordkeeping requirement (continued) Names and addresses of persons arrested Information specifically not required unless otherwise provided by law: names of persons reporting, victims, witnesses, or uncharged suspects or other information related to investigation (continued) Identification required is not specified. Information may be withheld upon certification of need to protect the investigation, but in no event after the arrest. The following staff made significant contributions to this report: Meeta Sharma, Senior Evaluator; Stanley G. Stenersen, Senior Evaluator; and Roger J. Thomas, 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 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 progress made under the Crime Awareness and Campus Security Act, focusing on: (1) how the Department of Education has implemented and monitored compliance with the act; (2) the kinds of problems, if any, colleges are having in complying with the act; and (3) the requirements of state laws related to public access to police records on reported crimes on campuses. GAO noted that: (1) although colleges are having difficulty complying with the act, the Department only recently began a systematic effort to monitor compliance; (2) starting in 1991, the Department of Education issued policy guidance to colleges for implementing the law's crime reporting requirements; (3) since that time, the Department has also provided technical assistance to individual colleges upon request; (4) although the Department began issuing implementing guidance to colleges less than 1 year after the law was passed, the Department has only recently begun to develop procedures for its program reviewers and auditors that systematically address monitoring compliance with these requirements; (5) moreover, citing resource limitations, the Department delayed preparing a report on campus crime statistics for which the law prescribed a September 1995 issuance date; (6) the Department issued the report in February 1997; (7) at the campus level, colleges are finding it difficult to consistently interpret and apply some of the law's reporting requirements; (8) for example, GAO's analysis showed considerable variation in colleges' practices for deciding which incidents to include in their reports and what categories to use in classifying certain crimes; (9) areas of difficulty included deciding how to include incidents reported to campus officials other than law enforcement officers, interpreting federal requirements for reporting sexual offenses, and reporting data on hate crimes; (10) federal legislation proposed in the 104th Congress would have augmented available information on campus crime by requiring that campus police records be open to the campus community; (11) similar laws exist in eight states; (12) three laws contain a specific requirement that colleges maintain daily logs; (13) most laws protect the identity of victims and informants from disclosure and ensure that any information that might jeopardize an ongoing investigation also remains confidential; (14) the state laws vary in many details, such as whether identification of juvenile offenders is required and whether noncompliance by the college can result in penalties; and (15) these laws differ from the 1990 act in requiring year-round access to campus police reports rather than annual summary statistics.
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The Chesapeake Bay is the largest of the nation's estuaries, measuring nearly 200 miles long and 35 miles wide at its widest point. Roughly half of the bay's water comes from the Atlantic Ocean, and the other half is freshwater that drains from the land and enters the bay through the many rivers and streams in its watershed basin. As shown in figure 1, the bay's watershed covers 64,000 square miles and spans parts of six states-- Delaware, Maryland, New York, Pennsylvania, Virginia, and West Virginia--and the District of Columbia. Over time, the bay's ecosystem has deteriorated. The bay's "dead zones"-- where too little oxygen is available to support fish and shellfish--have increased, and many species of fish and shellfish have experienced major declines in population. The decline in the bay's living resources has been cause for a great deal of public and political attention. Responding to public outcry, on December 9, 1983, representatives of Maryland, Pennsylvania, and Virginia; the District of Columbia; EPA; and the Chesapeake Bay Commission signed the first Chesapeake Bay agreement. Their agreement established the Chesapeake Executive Council and resulted in the Chesapeake Bay Program--a partnership that directs and conducts the restoration of the bay. The signatories to the agreement reaffirmed their commitment to restore the bay in 1987 and again in 1992. The partners signed the most current agreement, Chesapeake 2000, on June 28, 2000. Chesapeake 2000--identified by the Bay Program as its strategic plan--sets out an agenda and goals to guide the restoration efforts through 2010 and beyond. In Chesapeake 2000, the signatories agreed to 102 commitments--including management actions, such as assessing the trends of particular species, as well as actions that directly affect the health of the bay. These commitments are organized under the following five broad restoration goals: Protecting and restoring living resources--14 commitments to restore, enhance, and protect the finfish, shellfish and other living resources, their habitats and ecological relationships to sustain all fisheries and provide for a balanced ecosystem; Protecting and restoring vital habitats--18 commitments to preserve, protect, and restore those habitats and natural areas that are vital to the survival and diversity of the living resources of the bay and its rivers; Protecting and restoring water quality--19 commitments to achieve and maintain the water quality necessary to support the aquatic living resources of the bay and its tributaries and to protect human health; Sound land use--28 commitments to develop, promote, and achieve sound land use practices that protect and restore watershed resources and water quality, maintain reduced pollutant inputs to the bay and its tributaries, and restore and preserve aquatic living resources; and Stewardship and community engagement--23 commitments to promote individual stewardship and assist individuals, community- based organizations, businesses, local governments, and schools to undertake initiatives to achieve the goals and commitments of the agreement. As the only federal signatory to the Chesapeake Bay agreements, EPA is responsible for spearheading the federal effort within the Bay Program through its Chesapeake Bay Program Office. Among other things, the Chesapeake Bay Program Office is to develop and make available information about the environmental quality and living resources of the Chesapeake Bay ecosystem; help the signatories to the Chesapeake Bay agreement develop and implement specific plans to carry out their responsibilities; and coordinate EPA's actions with those of other appropriate entities to develop strategies to improve the water quality and living resources in the Chesapeake Bay ecosystem. In October 2005, we found that the Bay Program had established 101 measures to assess progress toward meeting some restoration commitments and provide information to guide management decisions. For example, the Bay Program had developed measures for determining trends in individual fish and shellfish populations, such as crabs, oysters, and rockfish. The Bay Program also had a measure to estimate vehicle emissions and compare them to vehicle miles traveled to help establish reduction goals for contaminants found in these emissions. While the Bay Program had established these 101 measures, we also found that it had not developed an approach that would allow it to translate these individual measures into an overall assessment of the progress made in achieving the five broad restoration goals. For example, although the Bay Program had developed measures for determining trends in individual fish and shellfish populations, it had not yet devised a way to integrate those measures to assess the overall progress made in achieving its Living Resource Protection and Restoration goal. According to an expert panel of nationally recognized ecosystem assessment and restoration experts convened by GAO, in a complex ecosystem restoration project like the Chesapeake Bay, overall progress should be assessed by using an integrated approach. This approach should combine measures that provide information on individual species or pollutants into a few broader- scale measures that can be used to assess key ecosystem attributes, such as biological conditions. According to an official from the Chesapeake Bay Program Office, the signatories to the Chesapeake Bay agreement had discussed the need for an integrated approach for several years, but until recently it was generally not believed that, given limited resources, the program could develop an approach that was scientifically defensible. The program began an effort in November 2004 to develop, among other things, a framework for organizing the program's measures and a structure for how the redesign work should be accomplished. In our 2005 report, we recommended that the Chesapeake Bay Program Office complete its efforts to develop and implement such an integrated approach. In response to our recommendation, a Bay Program task force identified 13 key indicators for measuring the health of the bay and categorized these indicators into 3 indices of bay health. With the development of these indices, the Bay Program should be in a better position to assess whether restoration efforts have improved the health of the bay. These indices will also help the Bay Program determine whether changes are needed to its planned restoration activities. The task force also identified 20 key indicators for measuring the progress of restoration efforts and categorized these indicators into 5 indices of restoration efforts. According to the Bay Program, these indices are now being used to assess and report on the overall progress made in restoring the bay's health and in implementing restoration efforts. The Bay Program has linked these restoration effort indices to the overall restoration goals and this should help the program better evaluate the progress it has made toward meeting the overall goals. In 2005, we determined that the Bay Program's primary mechanism for reporting on the health status of the bay--the State of the Chesapeake Bay report--did not effectively communicate the current health status of the bay. This was because it mirrored the shortcomings in the program's measures by focusing on the status of individual species or pollutants instead of providing information on a core set of ecosystem characteristics. For example, the 2002 and 2004 State of the Chesapeake Bay reports provided data on oysters, crab, rockfish, and bay grasses, but the reports did not provide an overall assessment of the current status of living resources in the bay or the health of the bay. Instead, data were reported for each species individually. The 2004 State of the Chesapeake Bay report included a graphic that depicted oyster harvest levels at historic lows, with a mostly decreasing trend over time, and a rockfish graphic that showed a generally increasing population trend over time. However, the report did not provide contextual information that explained how these measures were interrelated or what the diverging trends meant about the overall health of the bay. The experts we consulted agreed that the 2004 report was visually pleasing but lacked a clear, overall picture of the bay's health and told us that the public would probably not be able to easily and accurately assess the current condition of the bay from the information reported. We also found that the credibility of the State of the Chesapeake Bay reports had been undermined by two key factors. First, the Bay Program had commingled data from three sources when reporting on the health of the bay. Specifically, the reports mixed actual monitoring information on the bay's health status with results from a predictive model and the progress made in implementing specific management actions, such as acres of wetlands restored. The latter two results did little to inform readers about the current health status of the bay and tended to downplay the bay's actual condition. Second, the Bay Program had not established an independent review process to ensure that its reports were accurate and credible. The officials who managed and were responsible for the restoration effort also analyzed, interpreted, and reported the data to the public. We believe this lack of independence in reporting led to the Bay Program's projecting a rosier view of the health of the bay than may have been warranted. Our expert panelists also told us that an independent review panel--to either review the bay's health reports before issuance or to analyze and report on the health status independently of the Bay Program--would significantly improve the credibility of the program's reports. In 2005, we recommended that the Chesapeake Bay Program Office revise its reporting approach to improve the effectiveness and credibility of its reports by (1) including an assessment of the key ecological attributes that reflect the bay's current health conditions, (2) reporting separately on the health of the bay and on the progress made in implementing management actions, and (3) establishing an independent and objective reporting process. In response to our recommendation that reports should include an ecological assessment of the health of the bay, the Bay Program has developed and used a set of 13 indicators of bay health to report on the key ecological attributes representing the health of the bay. In response to our recommendation that the program should separately report on the health of the bay and management actions, the Bay Program has developed an annual reporting process that distinguishes between ecosystem health and restoration effort indicators in its annual report entitled Chesapeake Bay Health and Restoration Assessment. The most recent report, entitled Chesapeake Bay 2007 Health and Restoration Assessment, is divided into four chapters: chapter one is an assessment of ecosystem health, chapter two describes factors impacting bay and watershed health, chapter three is an assessment of restoration efforts, and chapter four provides a summary of local water quality assessments. We believe that the new report format is a more effective communications framework and clearly distinguishes between the health of the bay and management actions being taken. In response to our recommendation to establish an independent and objective reporting process, the Bay Program has charged its Scientific and Technical Advisory Committee with responsibility for assuring the scientific integrity of the data, indicators, and indices used in the Bay Program's publications. In addition, the Bay Program instituted a separate reporting process on the bay's health by the University of Maryland Center for Environmental Science. This report, which is released on the same day as the Bay Program's release of the Chesapeake Bay Health and Restoration Assessment, provides an assessment of the bay's health in a report card format. While we recognize that the changes are an improvement over the reporting process that was in place in 2005, we remain concerned about the lack of independence in the process. Although members of the Scientific and Technical Advisory Committee are not managing the day-to-day program activities, this committee is a standing committee of the Bay Program and provides input and guidance to the Bay Program on how to develop measures to restore and protect the Chesapeake Bay. In addition, we do not believe that the report card prepared by the University of Maryland Center for Environmental Science is as independent as the Bay Program believes, because several members of the Scientific and Technical Advisory Committee are also employees of the University of Maryland Center for Environmental Science. We therefore continue to believe that establishing a more independent reporting process would enhance the credibility and objectivity of the Bay Program's reports. From fiscal years 1995 through 2004, we reported that 11 key federal agencies; the states of Maryland, Pennsylvania, and Virginia; and the District of Columbia provided almost $3.7 billion in direct funding to restore the bay. Federal agencies provided a total of approximately $972 million in direct funding, while the states and the District of Columbia provided approximately $2.7 billion in direct funding for the restoration effort over the 10-year period. Of the federal agencies, the Department of Defense's U.S. Army Corps of Engineers provided the greatest amount of direct funding--$293.5 million. Of the states, Maryland provided the greatest amount of direct funding--more than $1.8 billion--which is over $1.1 billion more than any other state. Typically, the states provided about 75 percent of the direct funding for restoration, and the funding has generally increased over the 10-year period. As figure 2 shows, the largest percentage of direct funding--approximately 47 percent--went to water quality protection and restoration. Sound land use ($1.1 billion) Water quality protection and restoration ($1.7 billion) We also reported that 10 of the key federal agencies, Pennsylvania, and the District of Columbia provided about $1.9 billion in additional funding from fiscal years 1995 through 2004 for activities that indirectly affect bay restoration. These activities were conducted as part of broader agency efforts and/or would continue without the restoration effort. Federal agencies provided approximately $935 million in indirect funding, while Pennsylvania and the District of Columbia together provided approximately $991 million in indirect funding for the restoration effort over the 10-year period. Of the federal agencies, the U.S. Department of Agriculture provided the greatest amount of indirect funding--$496.5 million--primarily through its Natural Resources Conservation Service. Of the states, Pennsylvania provided the greatest amount of indirect funding--$863.8 million. As with direct funding, indirect funding for the restoration effort had also generally increased over fiscal years 1995 through 2004. As figure 3 shows, the largest percentage of indirect funding--approximately 44 percent--went to water quality protection and restoration. Despite the almost $3.7 billion in direct funding and more than $1.9 billion in indirect funding that had been provided to restore the bay, the Chesapeake Bay Commission estimated in a January 2003 report that the restoration effort faced a funding gap of nearly $13 billion to achieve the goals outlined in Chesapeake 2000 by 2010. Subsequently, in an October 2004 report, the Chesapeake Bay Watershed Blue Ribbon Finance Panel estimated that the restoration effort is grossly underfunded and recommended that a regional financing authority be created with an initial capitalization of $15 billion, of which $12 billion would come from the federal government. Although we did not recommend that the Bay Program consider developing a formal process for collecting and aggregating information on the amount of funding provided by the various restoration partners, the program has developed a database to capture this information. Recognizing the need to centrally and consistently account for the activities and funding sources of all Bay Program partners, the program created a Web-based form to collect information on the amount and source of funding being used and planned for restoration activities. Currently, the Bay Program has collected funding data for 2007 through 2009. However, according to the Bay Program, only the 2007 data-- totaling $1.1 billion--represents a comprehensive, quality data set, and the program has plans to improve this database by having additional partners provide data and increasing the scope and quality of the information. In our 2005 report we found that although Chesapeake 2000 provides the current vision and overall strategic goals for the restoration effort, along with short- and long-term commitments, the Bay Program lacked a comprehensive, coordinated implementation strategy that could provide a road map for accomplishing the goals outlined in the agreement. In 2003, the Bay Program recognized that it could not effectively manage all 102 commitments outlined in Chesapeake 2000 and adopted 10 keystone commitments as a management strategy to focus the partners' efforts. To achieve these 10 keystone commitments, the Bay Program had developed numerous planning documents. However, we found that these planning documents were not always consistent with each other. For example, the program developed a strategy for restoring 25,000 acres of wetlands by 2010. Subsequently, each state within the bay watershed and the District of Columbia developed tributary strategies that described actions for restoring over 200,000 acres of wetlands--far exceeding the 25,000 acres that the Bay Program had developed strategies for restoring. While we recognize that partners should have the freedom to develop higher targets than established by the Bay Program, we were concerned that having such varying targets could cause confusion, not only for the partners, but for other stakeholders about what actions are really needed to restore the bay, and such varying targets appeared to contradict the effort's guiding strategy of taking a cooperative approach to achieving the restoration goals. We also found that the Bay Program partners had devoted a significant amount of their limited resources to developing strategies that were either not being used by the Bay Program or were believed to be unachievable within the 2010 time frame. For example, the program invested significant resources to develop a detailed toxics work plan for achieving the toxics commitments in Chesapeake 2000. Even though the Bay Program had not been able to implement this work plan because personnel and funding had been unavailable, program officials told us that the plan was being revised. It was therefore unclear to us why the program was investing additional resources to revise a plan for which the necessary implementation resources were not available, and which was also not one of the 10 keystone commitments. According to a Bay Program official, strategies are often developed without knowing what level of resources will be available to implement them. While the program knows how much each partner has agreed to provide for the upcoming year, the amount of funding that partners will provide in the future is not always known. Without knowing what funding will be available, the Bay Program has been limited in its ability to target and direct funding toward those restoration activities that will be the most cost effective and beneficial. As a result of these findings in 2005, we recommended that the Bay Program (1) develop a comprehensive, coordinated implementation strategy and (2) better target limited resources to the most effective and realistic work plans. In response to our recommendation to develop a comprehensive and coordinated implementation strategy, the Bay Program has developed a strategic framework to unify existing planning documents and articulate how the partnership will pursue its goals. According to the Bay Program, this framework is intended to provide the partners with a common understanding of the partnership's agenda of work, a single framework for all bay protection and restoration work, and, through the development of realistic annual targets, a uniform set of measures to evaluate the partners' progress in improving the bay. However, while this framework provides broad strategies for meeting the Bay Program's goals, it does not identify the activities that will be implemented to meet the goals, resources needed to implement the activities, or the partner(s) who will be responsible for funding and implementing the activities. Therefore, we continue to believe that additional work is needed before the strategy that the Bay Program has developed can be considered a comprehensive, coordinated implementation strategy that can move the restoration effort forward in a more strategic and well-coordinated manner. In response to our recommendation that the program target resources to the most cost-effective strategies, according to the Bay Program, in addition to the strategic framework described above, it has developed annual targets that it believes are more realistic and likely to be an activity integration plan system to identify and catalogue partners' current and planned implementation activities and corresponding resources; and program progress dashboards, which provide high-level summaries of key information, such as status of progress, summaries of actions and funding, and a brief summary of the challenges and actions needed to expedite progress. According to the Bay Program, it has also adopted an adaptive management process, which will allow it to modify the restoration strategy in response to testing, monitoring, and evaluating applied strategies and incorporating new knowledge, and thereby, better inform partners' actions, emphasis, and future priorities. Bay Program officials told us that these actions have started to have the intended effects of promoting enhanced coordination among the partners, encouraging partners to review and improve their progress in protecting and restoring the bay, increasing the transparency of the Bay Program's operations, and improving the accountability of the Bay Program and its partners for meeting the bay health and restoration goals. We believe these actions are positive steps toward responding to our recommendation and improving the management and coordination of the Bay Program. In addition, the Bay Program partners have established a funding priority framework that lists priorities for agriculture, wastewater treatment, and land management activities. While these priorities can be used to help achieve some of the annual targets established by the program, other annual targets--such as those for underwater bay grasses and oysters--do not have priorities associated with them. We believe that a clear set of priorities linked to the annual targets can help the partners focus the limited resources available to those activities that provide the greatest benefit to the health of the bay. In closing, Madam Chairwoman, it is well recognized that restoring the Chesapeake Bay is a massive, difficult, and complex undertaking. Our October 2005 report documented how the success of the program had been undermined by the lack of (1) an integrated approach to measure overall progress; (2) independent and credible reporting mechanisms; and (3) coordinated implementation strategies. These deficiencies had resulted in a situation in which the Bay Program could not present a clear and accurate picture of what the restoration effort had achieved, could not effectively articulate what strategies would best further the broad restoration goals, and could not identify how to set priorities for using limited resources. Since our report was issued, the Bay Program, with encouragement from Congress, has taken our recommendations seriously and has taken steps to implement them. The Bay Program has made important progress, and we believe that these initial steps will enable better management of the restoration effort. However, additional actions are still needed to ensure that the restoration effort is moving forward in the most cost-effective manner. Madam Chairwoman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact Anu Mittal at (202) 512- 3841 or [email protected]. Other individuals making significant contributions to this testimony were Sherry McDonald, Assistant Director, and Barbara Patterson. 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The Chesapeake Bay Program (Bay Program) was created in 1983 when Maryland, Pennsylvania, Virginia, the District of Columbia, the Chesapeake Bay Commission, and the Environmental Protection Agency (EPA) agreed to establish a partnership to restore the Bay. The partnership's most recent agreement, Chesapeake 2000, sets out five broad goals to guide the restoration effort through 2010. This testimony summarizes the findings of an October 2005 GAO report (GAO-06-96) on (1) the extent to which measures for assessing restoration progress had been established, (2) the extent to which program reports clearly and accurately described the bay's health, (3) how much funding was provided for the effort for fiscal years 1995 to 2004, and (4) how effectively the effort was being coordinated and managed. It also summarizes actions taken by the program in response to GAO's recommendations. GAO reviewed the program's 2008 report to Congress and discussed recent actions with program officials. In 2005, GAO found that the Bay Program had over 100 measures to assess progress toward meeting some restoration commitments and guide program management. However, the program had not developed an integrated approach that would translate these individual measures into an assessment of progress toward achieving the restoration goals outlined in Chesapeake 2000. For example, while the program had appropriate measures to track crab, oyster, and rockfish populations, it did not have an approach for integrating the results of these measures to assess progress toward its goal of protecting and restoring the bay's living resources. In response to GAO's recommendation, the Bay Program has integrated key measures into 3 indices of bay health and 5 indices of restoration progress. In 2005, the reports used by the Bay Program did not provide effective and credible information on the health status of the bay. Instead, these reports focused on individual trends for certain living resources and pollutants, and did not effectively communicate the overall health status of the bay. These reports were also not credible because actual monitoring data had been commingled with the results of program actions and a predictive model, and the latter two tended to downplay the deteriorated conditions of the bay. Moreover, the reports lacked independence, which led to rosier projections of the bay's health than may have been warranted. In response to GAO's recommendations, the Bay Program developed a new report format and has tried to enhance the independence of the reporting process. However, the new process does not adequately address GAO's concerns about independence. From fiscal years 1995 through 2004, the restoration effort received about $3.7 billion in direct funding from 11 key federal agencies; the states of Maryland, Pennsylvania, and Virginia; and the District of Columbia. These funds were used for activities that supported water quality protection and restoration, sound land use, vital habitat protection and restoration, living resources protection and restoration, and stewardship and community engagement. During this period, the restoration effort also received an additional $1.9 billion in funding from federal and state programs for activities that indirectly contribute to the restoration effort. In 2005, the Bay Program did not have a comprehensive, coordinated implementation strategy to help target limited resources to those activities that would best achieve the goals outlined in Chesapeake 2000. The program was focusing on 10 key commitments and had developed numerous planning documents, but some of these documents were inconsistent with each other or were perceived as unachievable by the partners. In response to GAO's recommendations, the Bay Program has taken several actions, such as developing a strategic framework to unify planning documents and identify how it will pursue its goals. While these actions are positive steps, additional actions are needed before the program has the comprehensive, coordinated implementation strategy recommended by GAO.
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CMS administers the Medicare program with the assistance of about 50 claims administration contractors. As part of their duties, contractors deny claims that are the responsibility of other insurers. In addition, they are required to recover mistaken payments that were made before it could be determined that the beneficiary had other insurance--such as an EGHP, an automobile or other liability insurance plan, workers' compensation, or other types of coverage. To ensure that contractors adequately perform these tasks, CMS periodically monitors and evaluates their performance. Contractors are required to record recovery information pertaining to EGHP debt cases in the MPaRTS database. MPaRTS tracks the status of each EGHP case and provides CMS with information on the amount of mistaken payments identified, the amount demanded to be repaid, the amount recovered, and whether the case is currently open or closed. Although CMS does not have a database for tracking liability and workers' compensation cases that is comparable to MPaRTS, CMS requires contractors to submit quarterly accounts receivable reports for these and other types of cases. These reports show the aggregate amount of outstanding debt, but do not provide detail at the individual case level. To prevent mistaken MSP payments, Medicare claims administration contractors match beneficiaries' health care claims against information contained in Medicare's Common Working File (CWF)--a repository of claims and beneficiary enrollment data--to determine whether Medicare is the primary or secondary payer. Claims are paid if the CWF indicates that Medicare is the primary payer. However, the CWF may not always contain accurate information. The MSP status of some beneficiaries is sometimes in a state of flux--for example, a retired beneficiary may return to the workforce and receive coverage under an EGHP for 6 months, and then leave that job. This information may not be recorded in a timely manner, leading to mistaken payments. In addition, the CWF can also contain inaccurate information if beneficiaries do not notify CMS of their insurance status when they become eligible for Medicare or if they provide incorrect insurance information. Furthermore, although the CWF is periodically updated with new insurance information, there is a lag between the time beneficiaries obtain coverage and when CMS learns of this coverage. In the interim, contractors may mistakenly pay beneficiaries' claims. To identify mistaken MSP payments when an EGHP is the primary payer, claims administration contractors use information provided by CMS and the Coordination of Benefits Contractor (COBC). The COBC is a specialized contractor that does not process Medicare claims. Instead, the COBC is charged with developing information on beneficiaries who may have other primary health insurance through a process known as the data match. The purpose of the data match is to identify beneficiaries or their spouses who are employed and thus may be covered by an EGHP. To facilitate data matching, the Social Security Administration sends the Internal Revenue Service a list containing the Social Security numbers of Medicare beneficiaries. The Internal Revenue Service then matches the list against beneficiary income tax return data and sends the results to the COBC for further analysis. For example, if tax records show that an employer paid a beneficiary at least $10,000 during the previous year, the COBC would contact the beneficiary's employer to determine whether he was covered by that employer's group health plan. CMS compares information developed by the COBC to the national claims history file, the most comprehensive source of paid claims information. This comparison allows CMS to determine whether Medicare may have mistakenly paid claims on behalf of the beneficiary. If the mistakenly paid claims total at least $1,000, CMS assigns the case to the claims administration contractor that processed and paid the claims. Upon receipt of the EGHP debt case, claims administration contractors have 60 days to perform certain tasks to determine whether an attempt should be made to recover the debt. The contractor must first verify that the information being used as a basis for recovering the debt is correct and that it has not already recouped the mistaken payments. If the case passes this initial validation process, the contractor will initiate recovery by sending a demand letter to the beneficiary's employer and insurance company or third-party administrator, requesting payment within 60 days. If there is no response to the demand letter within 60 days, interest begins to accrue on the debt. Contractors then send a second letter explaining that if a response or payment is not received within another 60 days, the matter will be referred to the Department of the Treasury for collection. Responses to these letters can include repayment with interest or an explanation as to why the employer and associated health insurer are not responsible for the debt. This explanation may include documentation indicating that the employee retired and thus discontinued health coverage or never obtained coverage through the employer. The procedures followed by contractors to recover mistaken payments from liability insurers and workers' compensation plans differ from those used when the primary payer of an MSP debt is an EGHP. In a liability or workers' compensation case, mistaken payments made on behalf of a beneficiary are not related to a period of insurance coverage, but to a particular incident--for example, an automobile accident or workplace injury. The task of the contractor in such cases is to identify all paid medical claims related to the incident and to inform the beneficiary or the beneficiary's attorney of the responsibility to repay Medicare in the event that they receive an insurance settlement for their medical expenses. Because beneficiaries may require protracted medical treatment for their injuries, it may take several years before the total amount of payments related to the injury is known. In the interim, a contractor may repeatedly review the beneficiary's claims history to determine whether Medicare has paid new claims related to the injury. We previously reported that CMS maintained a substantial backlog of uncollected debt in fiscal year 2000. Although the Debt Collection Improvement Act of 1996 required that agencies refer debt delinquent for more than 180 days to the Department of the Treasury, CMS still had not fully implemented this requirement. Prior to 2000, CMS did not instruct claims administration contractors to refer delinquent EGHP cases to the Department of the Treasury for collection. As a result, CMS maintained a substantial backlog of older cases that remained open, but inactive, for many years. CMS's administration of the Medicare program will undergo significant changes over the next several years as the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) is implemented. MMA provides CMS with increased flexibility in contracting with new entities to assist it in operating the Medicare program. While CMS has relied primarily on the claims administration contractors to perform most of the key business functions of the program, the new law authorizes CMS to enlist a variety of contractors to perform these tasks. For example, CMS could use new contractors to process and pay claims and to perform financial management and payment safeguard activities. CMS is just beginning to develop plans to implement MMA's contracting reform provisions. Phase-in of the amendments to contracting reform takes effect on October 1, 2005. The competitive bidding of all contracts is required for contract periods that begin on or after October 1, 2011. The agency expects to issue its implementation plan for contracting by October 1, 2004. Since fiscal year 2000, the cost-effectiveness of EGHP recovery activities has significantly declined. The decline in cost-effectiveness occurred because the volume of EGHP debt cases significantly decreased--in fiscal year 2003, almost half of the contractors were assigned fewer than 50 cases--while, at the same time, the cost to CMS for maintaining debt collection capabilities at all claims administration contractors increased slightly. Moreover, CMS funded eight contractors who were not assigned any EGHP debt cases. The recovery process is also constrained by procedures that prevent contractors from maximizing their recoveries of mistaken payments. Because contractors have access only to claims that they have paid, they cannot identify, and thus collect, mistaken payments made by other contractors. In addition to these structural problems, we found that in 3 of the last 4 years CMS did not transmit a substantial number of EGHP cases to the claims administration contractors, resulting in missed recoveries. EGHP recovery activities are no longer cost-effective. To measure cost- effectiveness, we compared the amount that CMS spent on contractor recovery activities for a given fiscal year with the amount recovered from all cases that were opened during the same year--regardless of when the funds were recovered. While Medicare recovered about $2.49 for each dollar it spent on EGHP recovery activities in fiscal year 2000, this ratio declined to $1.80 in 2001. Although there are no comparable data for fiscal year 2002 because CMS did not open any new EGHP cases that year, thus allowing contractors time to reduce their backlog of old cases, the decline in cost-effectiveness continued in fiscal year 2003 when CMS resumed opening new EGHP cases. In that year, Medicare lost money on EGHP recovery activities, recovering only 38 cents for every dollar spent. (See table 1.) The lack of cost-effectiveness of the EGHP recovery process resulted partly from a declining workload, which limited the potential for recovery. The number of new MSP EGHP debt cases has decreased by more than 80 percent in recent years, from 49,240 cases in fiscal year 2000 to 7,634 cases in fiscal year 2003. CMS officials told us that improvements in identifying beneficiaries with other insurance before a claim is paid have reduced the number of mistakenly paid MSP claims. Consequently, according to CMS officials, this has lessened the need to recover these payments via the EGHP recoveries. These officials also projected that the number of EGHP cases assigned to contractors could continue to decline. Not only have the number of EGHP cases declined since fiscal year 2000, but the complexity of these cases and the resources required to process many of them have also decreased. Since fiscal year 2000, the claims administration contractors closed more than half of the cases during their initial computer screening process. That is, they often found that the mistaken payments totaled less than $1,000, another insurer voluntarily paid the claims, or the COBC updated the CWF to show that the beneficiary did not have other primary coverage, such as an employer- sponsored group health plan, during the time the services were delivered. In such instances, contractors are not required to correspond with employers and insurers. It is only a relatively smaller number of cases-- those that pass the initial screening process--that require significant contractor resources to send demand letters, process the responses, and archive file materials. As shown in figure 1, of the 49,240 EGHP cases processed by contractors in fiscal year 2000, 20,487--about 42 percent-- were resource-intensive cases that entailed sending a demand letter. In contrast, only 1,276 cases--about 17 percent--involved a demand letter in fiscal year 2003. CMS's payments to contractors for recovery activities have not reflected the sharp decline in the number of EGHP debt cases that occurred in fiscal year 2003. For example, in fiscal year 2000, the three contractors with the largest workloads received a combined budget of less than $1 million and processed 7,708 EGHP cases. The workload of those three contractors was larger than the entire fiscal year 2003 workload, for which CMS spent almost $10 million on contractors' EGHP debt recovery activities. This disparity between workload and budget in fiscal year 2003 is even more apparent at the individual contractor level. As shown in table 2, 8 of the 51 claims administration contractors processed 400 or more EGHP cases--representing about 52 percent of the total EGHP workload of 7,634 cases. However, almost half of the contractors were assigned fewer than 50 cases. Despite their small combined workload--4 percent of all EGHP cases in fiscal year 2003--CMS allocated to these contractors more than a quarter of its EGHP budget, about $2.5 million, to support EGHP and certain other recovery activities. Moreover, CMS funded 8 contractors that were not assigned any EGHP debt cases. CMS's budget process does not efficiently match funding for contractor recovery activities to contractors' actual workloads. CMS pays each contractor to maintain an infrastructure to support the recovery of EGHP debt, regardless of the number of cases the contractor processes during the year. In order to process EGHP cases forwarded to them by CMS, the claims administration contractors maintain an infrastructure that results in costs such as wages, equipment, and records. Typically, this includes a staff of MSP examiners who review EGHP cases, contact other potential insurers, evaluate explanations from insurers as to why the MSP debt may not be valid, make referrals to the Department of the Treasury when a debt is not paid within 180 days, and archive case files. Each contractor must also maintain screening software to identify and exclude EGHP debt cases that do not meet the $1,000 threshold. As a result, some contractors may receive funding for their infrastructures even though they process few or no cases during the year, as occurred in fiscal year 2003. In comparison to other MSP activities performed by contractors--such as maintaining computer programs that automatically identify and deny MSP claims--EGHP recoveries are expensive to conduct and no longer provide a return on investment. In fiscal year 2003, the return on investment for all types of MSP activities combined was 48 to 1. That is, Medicare contractors spent an estimated $95.6 million for all MSP activities and produced identifiable savings of approximately $4.6 billion, resulting in $48 saved for every dollar spent. We found that several system limitations create barriers to recovering mistaken payments and reduce program savings. Some mistakenly paid claims may be missed because beneficiaries received medical services in more than one state, and thus had their claims processed by more than one contractor. Because contractors have access only to claims records that they process, they are unable to identify claims processed by other contractors. In addition, beneficiaries whose total MSP claims exceed $1,000, but are split among two or more contractors, may not have all of their mistaken payments recovered if the payments made by any single contractor total less than the $1,000 threshold. Although CMS officials could not quantify the effect of these constraints on recoveries, they told us that they believe that these limitations have significantly reduced MSP savings. For example, a beneficiary who lives in the Midwest but spends the winter in the South and receives health care services in both locations will have claims processed by different contractors. If mistaken payments for $2,000 were made for services the beneficiary received during the year--for example, $1,200 in one location and $800 in the other--only the contractor with payments exceeding the threshold would pursue a recovery. Therefore, although the primary payer would be responsible for the entire $2,000 in services, Medicare would attempt to recover only a portion of the amount owed. A similar inefficiency occurs when beneficiaries receive inpatient services covered by Part A of Medicare and physician services covered by Part B. Different contractors typically process Part A and Part B claims, but they are not required to coordinate EGHP recoveries with one another. This lack of coordination also results in missed savings opportunities when neither the Part A nor Part B claims individually meet the $1,000 threshold. Even if both the Part A and Part B claims exceed this threshold, greater administrative costs are incurred by both CMS and private employers, as two different contractors attempt to recoup payments from the same payer. Finally, the success of the current system depends on CMS distributing EGHP cases to the claims administration contractor that processed the mistaken payments. Our review of EGHP debt cases revealed that, during fiscal years 2000, 2001, and 2003, CMS neglected to transmit 2,364 cases to the contractors, representing more than $28 million in potential mistaken payments. CMS officials told us that the accurate referral of EGHP cases has grown more difficult in recent years as some contractors have left the Medicare program and other contractors subsequently assumed their existing workload. They explained that they suspected that these EGHP cases were overlooked when one contractor processing claims for beneficiaries in several states left the program and the related cases were never assigned to the replacement contractors. As a result, no recovery action was ever initiated for these cases. By using the percentage of potential mistaken payments that are typically recovered--7 percent--we estimate that CMS's failure to transmit these cases to contractors for potential recovery cost the Medicare program approximately $2 million. We were unable to fully evaluate the effectiveness of the EGHP debt recovery efforts of the claims administration contractors we visited because three of the four contractors were unable to produce all of the case files we requested. Although the files we examined indicated that these contractors were appropriately managing their EGHP workload, the volume of unavailable files precluded us from reaching an overall conclusion on their performance. CMS's recent contractor performance evaluations found similar records management deficiencies and raised additional questions about contractors' effectiveness. We found it difficult to thoroughly assess the performance of all of the contractors we visited. At each contractor, we randomly selected a sample of cases to review. The number selected varied by contractor and totaled 644 cases for all contractors combined. However, 78 case files could not be located. Although one contractor was able to produce the files and supporting documentation for all the cases we requested, the other three contractors poorly managed their records and were unable to provide all of the files and supporting documentation we had requested in advance of our visits. The percentage of missing cases at these contractors ranged from 4 to 24 percent. Because these files were not available, we were unable to fully assess whether the contractors made sufficient efforts to collect MSP debt. For example, without supporting documentation for those cases, we could not conclusively determine that the contractors had followed all the appropriate recovery procedures. Of the 566 cases available for review, we found that contractor files were complete and contained appropriate documentation to support the contractor's decision to close each case without making a recovery. We reviewed two types of cases: those that were closed during the initial screening process after the contractor determined that the $1,000 threshold was not met, and those that were closed after the contractor sent a demand letter to the employer requesting payment. Together, these two types of cases constituted about 65 percent of the EGHP workload during fiscal years 2000 and 2001. For cases that were closed because they did not meet the $1,000 threshold, contractors provided us with adequate supporting documentation showing that the involved claims totaled less than this amount. Other cases were properly closed because the employers provided valid reasons as to why they were not responsible for the MSP debt. For example, if a beneficiary had retired and was not covered by the employer's insurance at the time the claims were submitted, contractor case files contained correspondence from the employer documenting this fact. In about a third of the MSP cases we selected for review, the private side of the contractor's business sold insurance to the employer that was initially identified as having responsibility for MSP debt. Although this situation creates a potential conflict of interest for the contractor because it must collect funds from its private business side, we did not find evidence that contractors closed such cases inappropriately or treated them differently from others. Our review also found that one contractor made errors entering information into CMS's MPaRTS system, which tracks the status of EGHP cases. Although such errors do not mean that the contractor had inappropriately processed cases, they make it difficult for CMS to monitor the cases' status. The tracking system uses different codes to describe the status of MSP cases. For example, there is a code to indicate that the case was closed after a demand letter was sent, and another to indicate that the case was closed because the $1,000 recovery threshold was not met. This contractor did not correctly apply these two codes and miscoded about 18 percent of the cases we reviewed. CMS's recent contractor performance evaluations of MSP recovery activities support our finding of poor records management. CMS evaluated the MSP activities of 12 contractors in fiscal year 2001 and another 12 contractors in fiscal year 2002. During these evaluations, CMS reviewed EGHP case files from contractors. These evaluations are based on a relatively small number of case files--10 to 20--and therefore do not provide in-depth assessments of contractors' performance. However, the evaluations conducted in 2001 and 2002 highlighted contractor performance problems similar to those we identified. That is, CMS found that several contractors, which included some that were not part of our review, had missing case files and entered inaccurate information into the CMS tracking database. For example, during a review of one contractor, CMS requested 20 EGHP case files, but the contractor was able to locate only 12 files. In addition, CMS found tracking-system coding errors--in 2001, 5 of the 12 contractors reviewed did not use the correct status code when entering information into the CMS computer system that tracks the status of EGHP cases. CMS evaluations identified additional problems in fiscal years 2001 and 2002, suggesting other weaknesses in contractors' MSP recovery activities, as illustrated by the following examples: Staffing problems. One contractor discontinued processing data match cases for 3 months when the sole staff member performing this task took an extended leave of absence. At another contractor, CMS determined that the number of staff assigned to MSP recoveries was insufficient to process the contractor's large workload. CMS also noted that a contractor had recently changed the educational requirements for MSP staff. Because most of the current staff did not possess a college degree as required by the contractor's revised standard, the contractor retained an almost entirely new MSP staff. The new staff told CMS reviewers that their training was inadequate to prepare them for processing the workload. Delays in processing correspondence. In examining documentation at one contractor, CMS reviewers identified a significant backlog of correspondence. According to CMS's estimate, there were over 2,400 pieces of mail awaiting action--including checks and correspondence from employers, insurers, and other contractors. The oldest correspondence awaiting action was more than 2 years old--well beyond CMS's requirement that contractors match incoming mail with established cases and respond to such correspondence within 45 days. Failure to appropriately document case determinations. At one contractor, CMS reviewers found several case files where the contractor did not document whether the action was necessary. For example, the contractor closed a case and indicated that a full recovery was made; however, the file did not show that a check was received from either an employer or insurer. At another contractor, CMS reviewers examined cases that were inappropriately closed without recovery because the contractor had not promptly notified the EGHP of the debt, as required. In this instance, CMS found that once the contractor recognized its own untimeliness, it erred again by closing these cases without confirming that the health plan's time limit for accepting claims had, in fact, expired. Inadequate security measures. Because the recovery process partially relies on Internal Revenue Service tax information, contractors are required to take certain precautions to prevent unauthorized access. At one contractor, CMS found that the workstation of the person responsible for processing the EGHP workload was situated next to the workstations of staff who did not have authorization to access restricted tax information. Reviewers found that files were stored in unlocked file cabinets and that sensitive printed materials were left in plain view in a general work area, rendering the information easily accessible to anyone in the facility. Recognizing the need to improve the coordination of its MSP recovery efforts, CMS contracted for the development of a new recovery system-- the Recovery Management and Accounting System (ReMAS)--in 1998. The purpose of ReMAS is to improve the identification, tracking, and recovery of mistaken payments. ReMAS was designed to enhance the MSP recovery process by automating some tasks performed manually and by reducing the time required to collect MSP debt. As of May 2004, CMS has deployed the liability insurance and workers' compensation component of ReMAS to nine contractors. ReMAS is designed to receive and evaluate leads from CWF electronically, a function that is now performed in separate steps by CMS staff and individual claims administration contractors. These leads consist of information suggesting that a beneficiary has other coverage that should be primary. CMS officials claim that ReMAS will streamline other functions as well. For example, when new information on a beneficiary's MSP status is added to CWF, ReMAS is expected to determine, on a daily basis, whether mistaken payments were made on his or her behalf. Currently, the contractors review the occurrence of mistaken payments at varying intervals ranging from quarterly to semiannually. Once ReMAS determines that Medicare has paid claims that were the primary responsibility of another insurer, it will generate a case that can be assigned to any contractor for recovery. It will no longer be necessary for the contractor that processed the mistakenly paid claims to perform recovery activities. CMS officials told us that they believe that ReMAS will have several advantages over the current process. First, efficiencies gained through ReMAS would enable contractors to pursue MSP debt that involves amounts less than the current $1,000 threshold, resulting in additional recoveries. Second, ReMAS could facilitate the consolidation of MSP debt recovery efforts among a handful of contractors, as each contractor would have access to all paid claims. CMS officials indicated that ReMAS would enable them to reduce administrative costs, provide contractors with a more consistent and predictable workload, and simplify contractor oversight activities. (See app. II for more information comparing ReMAS to the present recovery system). Although CMS has spent $7 million on the development of this system, which has now spanned 6 years, ReMAS's implementation is progressing slowly. It remains in the early implementation stages--testing on EGHP cases started in June 2004. Several critical tasks related to ReMAS's implementation have taken several years to complete. To date, only the initial software testing and validation for the liability and workers' compensation components have been completed. CMS's initial plans for implementing ReMAS have focused on recovering liability insurance and workers' compensation debt. Thus far, 17 contractors have received training in the use of ReMAS. CMS officials told us that as of May 2004, the liability and workers' compensation components of ReMAS have been deployed to nine contractors. The remaining contractors that process MSP liability cases are scheduled to implement ReMAS by October 2004. ReMAS also has the potential to recover mistaken payments associated with EGHPs--currently handled through the data match process. CMS recently expanded the scope of ReMAS to include employer-sponsored group health plans, but details related to incorporating EGHP cases in the system are unclear. Unlike liability and workers' compensation cases, which are related to specific accidents or injuries, EGHP cases are based on a beneficiary's dates of employer-sponsored coverage. This distinction requires enhancements to the ReMAS system, to ensure that it can address and process this key difference. According to CMS's timetable, preliminary tasks such as computer testing, validation, and documentation of the EGHP component of ReMAS will be completed in September 2004. While CMS expects to pilot test the EGHP component with two contractors in October 2004, it has not specified when it will implement ReMAS for EGHP cases at all contractors. As Medicare's primary steward, CMS should make a concerted effort to recoup funds owed the program. However, recovery efforts should be planned and executed with cost-effectiveness in mind. CMS's efforts to recover MSP debt from cases that involve EGHPs were cost-effective as recently as a few years ago, but CMS is now operating a recovery system that is losing money. Although funding for contractors' EGHP debt recovery activities has slightly increased since fiscal year 2000, contractor workloads have decreased by 80 percent. In addition, funding for these activities is not always related to contractors' workloads--in fiscal year 2003, almost half of the contractors received fewer than 50 cases to process while 8 of these, which had a collective budget of more than $1.8 million, received no cases at all. As recently as fiscal year 2000, three contractors collectively processed a workload that exceeded the entire EGHP workload of all contractors in fiscal year 2003, suggesting that consolidation of debt recovery activities among a smaller number of contractors is feasible. The current system, with over 50 contractors involved in EGHP recovery activities, is cumbersome to administer, and poor record-keeping makes it difficult to determine whether contractors are doing all they can to recover debt. One of the keys to improving the cost-effectiveness of MSP debt recoveries may rest with CMS's new ReMAS system. Plans to expand the scope of ReMAS to recover debt associated with employer-sponsored group health plans could ultimately address current operational weaknesses, such as an inefficient distribution of workload and limited coordination among contractors. Now that CMS has been given new authority to contract with a variety of entities to assist it with managing the Medicare program, it should take advantage of ReMAS's capability to consolidate debt recovery efforts with a smaller number of contractors and thereby improve the efficiency of the program. We recommend that the administrator of CMS: develop detailed plans and time frames for expanding ReMAS to include EGHP cases, and expedite implementation of the EGHP component of ReMAS and improve the efficiency of MSP payment recovery activities by consolidating the EGHP workload under a smaller number of contractors and ensuring that contractor budgets for EGHP recovery activities more closely reflect their actual workloads. In written comments on a draft of this report, CMS agreed with our recommendations. CMS said it recognizes the importance of improving the cost-effectiveness of its debt collection process and has taken steps to expedite implementation of the EGHP component of ReMAS. CMS stated that operational efficiencies gained through the implementation of ReMAS make it feasible to consolidate recovery activities. CMS's comments are reprinted in appendix III. CMS also provided us with technical comments, which we incorporated as appropriate. As agreed with your office, unless you announce its contents earlier, we plan no further distribution of this report until 30 days after its issuance. At that time, we will send copies to the Administrator of CMS and other interested parties. We will then make copies available to others upon request. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me at (312) 220-7600. An additional GAO contact and other staff who made contributions to this report are listed in appendix IV. To assess the cost-effectiveness of the current system for recovering Medicare Secondary Payer (MSP) debt, we analyzed information from two CMS databases--the Contractor Administrative-Budget and Financial Management (CAFM) system and the Mistaken Payment and Recovery Tracking System (MPaRTS). CAFM provided information on CMS's budgets for contractors and MPaRTS provided information on the number of potential MSP recovery cases processed by contractors and the amount of savings from recovery activities. To evaluate contractor performance in recovering MSP debt, we focused on cases that involved beneficiaries and their spouses who may have been employed and covered by an employer-sponsored group health plan (EGHP). These cases consisted of potentially mistakenly paid claims for services a beneficiary appeared to have received while covered by an EGHP. We selected 4 geographically dispersed contractors that processed a high volume of EGHP debt cases--all 4 were among the top 10 contractors that processed the highest number of such cases in 2000 and 2001. At each contractor, we randomly selected a sample of cases that were opened in 2000 and 2001 for review--the number of cases selected at each contractor varied, ranging from 136 to 207. Of the 644 cases selected, 566 were available for review. Contractors were unable to provide documentation for 78 cases. Because contractors close the majority of cases without making recoveries, we specifically focused on such cases in order to determine whether contractors made sufficient effort to recover MSP debt and followed appropriate procedures. Our inspection of these files consisted of reviewing contractor adherence to CMS's detailed procedures for steps taken during the recovery process and the sufficiency of the contractor's documentation for closing data match cases without recovering funds or referring cases to the Department of the Treasury for collection. All four of the Medicare contractors we examined sold private health insurance. Because of the possibility that the private side of their businesses could have been responsible for reimbursing Medicare for MSP debt, our examination included an assessment of whether this potential conflict of interest affected contractors' actions in collecting this debt. Using insurer information available from MPaRTS and contractor case files, we identified cases that involved the contractor's private health insurance business and compared them to the other cases. Our analysis found little difference between the two types of cases in terms of missing documentation--12.0 percent of cases that involved the contractor's private side health insurance business were not documented, compared with 12.1 for the other cases. To assess CMS efforts to oversee and improve MSP debt recovery, we reviewed program guidelines and memoranda and interviewed officials from CMS and Medicare contractors. To identify contractor performance problems, we also examined the results of CMS's fiscal years 2001 and 2002 contractor performance evaluations pertaining to contractors' MSP operations. Although we did not validate CMS's CAFM and MPaRTs information, CMS has procedures in place to ensure the accuracy of these databases. The MPaRTs database, which tracks MSP debt recoveries from EGHPs, contains internal logic checks that prevent contractors from incorrectly entering certain types of information. In addition, CMS periodically reviews MPaRTs records as part of its contractor performance evaluations. CAFM is a financial management system established to enable CMS to control the national budget for the Medicare contractors. It contains a small number of system checks that ensure that expenditure information provided by contractors is totaled correctly. The reliability of the data is ensured through independent audits. In addition, CMS personnel also review the data throughout the year. To identify the agency's efforts to enhance the MSP process, we reviewed documents and interviewed CMS officials on CMS's planned Recovery, Management and Accounting System (ReMAS), a new CMS system for MSP debt recovery activities that is under development. We conducted our work from December 2002 through July 2004 in accordance with generally accepted government auditing standards. The following table highlights differences between the way MSP case development, validation, and recovery are implemented under the present data match recovery system and how they will be implemented under ReMAS. Major contributors to this report were Richard M. Lipinski, Barbara Mulliken, Enchelle Bolden, Shaunessye Curry, and Kevin Milne.
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Last year, employer-sponsored group health plans (EGHP) were responsible for most of the nearly $183 million in outstanding Medicare secondary payer (MSP) debt. MSP debts arise when Medicare inadvertently pays for services that are subsequently determined to be the financial responsibility of another. The Centers for Medicare & Medicaid Services (CMS) administers Medicare with the assistance of about 50 contractors that, as part of their duties, are required to recover MSP debt. GAO was asked to determine whether Medicare contractors are appropriately recovering MSP debt. GAO (1) assessed the cost-effectiveness of the current debt recovery system and (2) identified CMS's plans to enhance the recovery process. GAO analyzed workload and budget information and assessed plans to develop a new debt recovery system--the Recovery Management and Accounting System (ReMAS). Medicare's system for recovering MSP debt from EGHPs is no longer cost-effective, with CMS recovering only 38 cents for every dollar it spent on recovery activities in fiscal year 2003. This is largely due to workload and budgetary factors. While the number of new debt cases referred to contractors has declined by more than 80 percent since fiscal year 2000, CMS's budget for contractor recovery activities has remained relatively unchanged. As a result, contractors were funded at a level that exceeded their workload. Almost half of the contractors that CMS funded to process the 7,634 cases associated with the fiscal year 2003 workload were assigned fewer than 50 cases--and eight were not assigned any. The current system is also constrained by procedures that prevent contractors from maximizing recoveries. For example, CMS has instructed contractors not to pursue cases in which the amount of mistaken payments made on behalf of the same beneficiary is less than $1,000. In addition, CMS neglected to transmit more than 2,000 cases to the contractors--which depend on these transmittals to initiate recoveries--during fiscal years 2000, 2001, and 2003. CMS is developing a new recovery system--ReMAS--to enhance the MSP recovery process. This system has the potential to help increase savings, provide CMS with greater flexibility in distributing the workload, and simplify the collection of MSP debt. ReMAS is designed to identify relevant mistaken payments and will generate a case that can be assigned to any contractor for recovery--not only the contractor that processed the mistakenly paid claims. However, ReMAS has been under development for over 6 years and is currently only being used for liability and workers' compensation recoveries by a fraction of the contractors. Pilot testing of ReMAS on EGHP cases will not begin until October 2004.
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The purpose of the HUBZone program, established by the HUBZone Act of 1997, is to stimulate economic development in economically distressed communities (HUBZones) by providing federal contracting preferences to eligible small businesses. The types of areas in which HUBZones may be located are defined by law and consist of census tracts, nonmetropolitan counties, Indian reservations, redesignated areas (that is, census tracts or nonmetropolitan counties that no longer meet the criteria but remain eligible until after the release of the first results from the 2010 census or 3 years after they ceased being qualified), and base closure areas. To be certified to participate in the HUBZone program, a firm must meet the following four criteria: must be small by SBA size standards; must be at least 51 percent owned and controlled by U.S. citizens; principal office--the location where the greatest number of employees perform their work--must be located in a HUBZone; and at least 35 percent of the full-time (or full-time equivalent) employees must reside in a HUBZone. The Veterans Benefits Act of 2003, which established the service-disabled veteran-owned small business program, permits contracting officers to award set-aside and sole-source contracts to any small business concern owned and controlled by one or more service-disabled veterans. Veteran means a person who served in the active military services, and who was discharged or released under conditions other than dishonorable. Service- disabled means that the disability was incurred or aggravated in the line of duty in active service. A firm also must qualify as a small business under the North American Industry Classification System (NAICS) industry-size standards. A firm must meet several initial eligibility requirements to qualify for the 8(a) program (a process known as certification), and then meet other requirements to continue participation. A concern meets the basic requirements for admission to the program if it is a small business that is unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of good character and U.S. citizens, and demonstrates the potential for success. Our work involving 80 economic development programs at four agencies--Commerce, HUD, SBA, and USDA--indicates that the design of each of these fragmented programs appears to overlap with that of at least one other program in terms of the economic development activities that they are authorized to fund. For example, as shown in table 1, the four agencies administer a total of 54 programs that can fund "entrepreneurial efforts," which include helping businesses to develop business plans and identify funding sources. SBA accounts for 19 of these 54 programs, and it administers programs contained in six of the nine economic activities. (The 19 SBA programs are listed in the table in appendix I.) Our prior work going back more than 10 years also identified potential overlap and fragmentation in economic development programs. Among other things, we found that legislative or regulatory restrictions that target funding on the basis of characteristics such as geography, income levels, and population density (rural or urban) differentiated many programs. While some of the 80 programs we assessed fund several of the nine economic development activities, almost 60 percent (46 of 80) fund only one or two activities. These smaller, narrowly scoped programs appear to be the most likely to overlap because many can only fund the same, limited types of activities. For example, narrowly scoped programs comprise 21 of 54 programs that can fund entrepreneurial efforts. Moreover, most of the 21 programs target similar geographic areas. To address issues arising from potential overlap and fragmentation in economic development programs, we previously have identified collaborative practices agencies should consider using to maximize the performance and results of federal programs that share common outcomes. These practices include leveraging physical and administrative resources, establishing compatible policies and procedures, monitoring collaboration, and reinforcing agency accountability for collaborative efforts through strategic or annual performance plans. Preliminary findings from our ongoing work show that Commerce, HUD, SBA, and USDA appear to have taken actions to implement some of the collaborative practices, such as defining and articulating common outcomes, for some of their related programs. However, the four agencies have offered little evidence so far that they have taken steps to develop compatible policies or procedures with other federal agencies or searched for opportunities to leverage physical and administrative resources with their federal partners. Moreover, we found that most of the collaborative efforts performed by program staff on the front line that we have been able to assess to date have occurred only on a case-by-case basis. As a result, the agencies do not appear to be consistently monitoring or evaluating these collaborative efforts in a way that allows them to identify areas for improvement. We reported in September 2008 that the main causes for limited agency collaboration include few incentives to collaborate and lack of a guide on which agencies could rely for consistent and effective collaboration. In that same report, we recommended that SBA and USDA take steps to adopt a formal approach to encourage further collaboration. To date, the two agencies have entered into a memorandum of understanding and USDA has recently taken some action to monitor the collaborative efforts of its field office staff. In failing to find ways to collaborate more, agencies may miss opportunities to leverage each other's unique strengths to more effectively promote economic development and efficiently use taxpayer dollars set aside for that purpose. In addition, a lack of information on program outcomes has been a long- standing concern. This information is needed to determine if potential overlap and fragmentation has resulted in ineffective or inefficient programs. More specifically: Commerce's Economic Development Administration (EDA), which administers eight of the programs we reviewed, continues to rely on a potentially incomplete set of variables and self-reported data to assess the effectiveness of its grants. This incomplete set of variables may lead to inaccurate claims about program results, such as the number of jobs created. Moreover, in only limited instances have EDA staff requested documentation or conducted site visits to validate the self-reported data provided by grantees. We first reported on this issue in March 1999 and issued a subsequent report in October 2005. In response to a recommendation we made in 2005, EDA issued revised operational guidance in December 2006 that included a new methodology that regional offices were to use to calculate estimated jobs and private-sector investment attributable to EDA projects. However, during our recently- completed review we found that the agency still primarily relies on grantee self-reported data and conducts a limited number of site visits to assess the accuracy of the data. While acknowledging these findings, EDA officials stated that they do employ other verification and validation methods in lieu of site visits. These methods include reviews to ensure the data are consistent with regional trends and statistical tests to identify outliers and anomalies. SBA has not yet developed outcome measures that directly link to the mission of its HUBZone program, or implemented its plans to evaluate the program based on variables tied to program goals. We reported in June 2008 that while SBA tracks a few performance measures, such as the number of small businesses approved to participate in the program, the measures do not directly link to the program's mission. Therefore, we recommended that the agency further develop measures and implement plans to assess the effectiveness of the program. While SBA continues to agree that evaluating the outcomes of the HUBZone program is important, to date the agency has not yet committed resources for such an evaluation. The USDA's Office of Rural Development, which administers 31 of the programs we reviewed, has yet to implement the USDA Inspector General's (IG) 2003 recommendation on ensuring that data exist to measure the accomplishments of one of its largest rural business programs--the Business and Industry loan program, which cost approximately $53 million to administer in fiscal year 2010. USDA officials stated that they have recently taken steps to address the IG's recommendation, including requiring staff to record actual jobs created rather than estimated jobs created. However, an IG official stated that these actions are too recent to determine whether they will fully address the recommendation. Without quality data on program outcomes, these agencies lack key information that could help them better manage their programs. In addition, such information would enable congressional decision makers and others to make decisions to better realign resources, if necessary, and identify opportunities for consolidating or eliminating some programs. Building on our past work, we are in the planning phase of a new, more in- depth review that will focus on a subset of these 80 programs, including a number of SBA programs. We plan to evaluate how funds are used, identify additional opportunities for collaboration, determine and apply criteria for program consolidation, and assess how program performance is measured. More generally, as the nation rises to meet the current fiscal challenges, we will continue to assist Congress and federal agencies in identifying actions needed to reduce duplication, overlap, and fragmentation; achieve cost savings; and enhance revenues. As part of current planning for our future annual reports, we are continuing to look at additional federal programs and activities to identify further instances of duplication, overlap, and fragmentation as well as other opportunities to reduce the cost of government operations and increase revenues to the government. We will be using an approach to ensure governmentwide coverage through our efforts by the time we issue of our third report in fiscal year 2013. We plan to expand our work to more comprehensively examine areas where a mix of federal approaches is used, such as tax expenditures, direct spending, and federal loan programs. Likewise, we will continue to monitor developments in the areas we have already identified. Issues of duplication, overlap, and fragmentation will also be addressed in our routine audit work during the year as appropriate and summarized in our annual reports. As GAO has reported, three small business programs have had varying degrees of internal control weaknesses that affected program oversight. For example, in a June 2008 report, GAO determined that SBA's mechanisms for certifying and monitoring firms in the HUBZone program gave limited assurance that only eligible firms participated. In our June 2008 report on the HUBZone program, we found that (1) SBA's mechanisms for certifying and monitoring firms provided limited assurance that only eligible firms participated in the program and (2) the agency had not evaluated the effectiveness of the program. Specifically, for certification and recertification, firms self-reported information on their applications and SBA requested documentation or conducted site visits of firms to validate the self-reported data in limited instances. Our analysis of the 125 applications submitted in September 2007 showed that SBA requested supporting documentation for 36 percent of the applications and conducted one site visit. To address these deficiencies, we recommended that SBA develop and implement guidance to more consistently obtain supporting documentation upon application and conduct more frequent site visits to help ensure that firms applying for certification were eligible. SBA has made some progress in better ensuring that participating firms are eligible for the HUBZone program. According to agency officials, SBA conducted 911 site visits to certified firms in fiscal year 2009 and made 1,142 site visits in fiscal year 2010. In March 2010, SBA issued a guide for analysts to use when reviewing applications to help ensure a standardized and more efficient review of applications. The guidance provides examples of the types of documentation that SBA staff should collect from applicants and also offers tips for identifying fraudulent claims and documents. We also reported that SBA had not followed its policy of recertifying firms (the process through which SBA can monitor firms' continued eligibility) every 3 years and as a result had a backlog of more than 4,600 firms that had gone unmonitored for more than 3 years. We recommended that the agency eliminate the backlog and take the necessary steps to better ensure recertifications were completed in a more timely fashion. In September 2008, SBA eliminated the backlog by hiring more staff. The agency recently provided us with a flow chart that describes the most recent steps they had taken to recertify firms in a timely manner and the resources that they planned to dedicate to this effort. Finally, as discussed previously, we found that SBA had not implemented plans to assess the effectiveness of the HUBZone program and recommended that SBA develop performance measures and implement plans to do so. In August 2008, SBA issued a notice of methodology in the Federal Register for measuring the impact of the HUBZone program. However, the proposed methodology was not well developed. For example, it did not incorporate expert input or a previous study conducted by SBA's Office of Advocacy. We do not believe that this effort was useful for addressing our recommendation. While SBA continues to agree that evaluating program outcomes is important, to date the agency has not yet committed resources for such an evaluation. In May 2010, we reported that VA had made limited progress in implementing an effective verification program. The 2006 Act requires that VA give priority to veteran-owned and service-disabled veteran-owned small businesses when awarding contracts to small businesses and provides for the use of sole-source and set-aside contracts to achieve contracting goals VA must establish under the Act. The Act also requires VA to maintain a database of veteran-owned and service-disabled veteran- owned small businesses and verify the ownership, control, and veteran or service-disabled status of businesses in the database. The database would be available to other federal agencies. Furthermore, businesses conducting contract work for VA must be listed in the database to receive contracting preferences for veteran-owned and service-disabled veteran- owned small businesses. This verification requirement is unique to VA. For other federal agencies, the service-disabled veteran-owned small business program is a self-certification program and therefore is susceptible to misrepresentation (that is, ineligible firms participating in the program). While the 2006 Act requires VA to use the veteran preferences authorities to award contracts only to verified businesses, VA's regulation did not require that this take place until January 1, 2012. Since our May 2010 report, Congress passed the Veterans Small Business Verification Act requiring VA to accelerate its time frame for verifying all businesses in its mandated database. VA has set a target date of July 31, 2011, to do so. In fiscal year 2009, 25 percent of the contracts awarded using veteran preference authorities went to verified businesses. At the time of our report, VA had verified about 2,900 businesses--approximately 14 percent of businesses in its database of veteran-owned and service-disabled veteran-owned small businesses. Among the weaknesses we identified in VA's verification program were files missing required information and explanations of how staff determined that control and ownership requirements had been met. VA's procedures call for site visits to further investigate the ownership and control of higher-risk businesses, but the agency had a large and growing backlog of businesses awaiting site visits. Furthermore, VA contracting officers awarded contracts to businesses that were denied after the verification process. Finally, although site visit reports indicate a high rate of misrepresentation, VA had not developed guidance for referring cases of misrepresentation for investigation and enforcement action. Such businesses would be subject to debarment under the 2006 Act. To help address the requirement to maintain a database of verified businesses, we recommended that VA develop and implement a plan for a more thorough and effective verification program. More specifically, we recommended that the plan address actions and milestone dates for improving the program, including updating data systems to reduce manual data entry and adding guidance on how to maintain appropriate documentation, on when to request documentation from business owners or third parties, and on how to conduct an assessment that addresses each eligibility requirement. We also recommended that VA conduct timely site visits at businesses identified as higher risk and take actions based on site visit findings, including prompt cancellation of verified status. According to VA officials, they have taken a number of actions to address our recommendations. For example, VA officials told us they had awarded contracts to help expedite the processing of applications, including conducting site visits and reviewing documentation supplied by applicants. As of March 29, 2011, they said that 607 site visits had been conducted and 195 of the applicants visited (32 percent) did not meet the control requirement. Also, VA officials reported a queue of 6,431 active applications pending verification and said they had acquired the capability to process 500 applications per week and expected to have processed about 15,000 applications by July 31, 2011. Furthermore, VA officials told us that as part of their implementation of the requirements of the Veterans Small Business Verification Act, all applicants are now required to submit specified documents establishing their eligibility with respect to ownership and control before a verification decision can be made. VA officials told us they were in the process of testing a new case management system that will reduce the manual input of data, which they plan to implement by June 1, 2011. VA's development of an effective verification program could provide an important tool for SBA's oversight of the governmentwide contracting program for service-disabled veteran- owned small businesses. That is, VA's database could serve as a resource for federal agencies to use when assessing whether a firm is actually service-disabled veteran-owned. We reported in March 2010 that while SBA relies primarily on its annual reviews of 8(a) firms to help ensure the continued eligibility of firms in the program, we observed inconsistencies and weaknesses in annual review procedures related to determinations of continued eligibility. For example, SBA did not consistently notify or graduate 8(a) firms that exceeded industry averages for economic success or graduate firms that exceeded the net worth threshold of $750,000 (see table 2). We noted that the lack of specific criteria in the current regulations and procedures may have contributed to the inconsistencies that we observed and that SBA had taken steps to clarify some, but not all, of these requirements in a proposed rule change. We also reported that SBA's program offices did not maintain comprehensive data on or have a system in place to track complaints about the eligibility of firms in the 8(a) program. District staff were not aware of the types and frequency of complaints across the agency. As a result, SBA staff lacked information that could be used to help identify issues relating to program integrity and help improve the effectiveness of SBA oversight. Although complaint data are not a primary mechanism to ensure program eligibility, continuous monitoring is a key component in detecting and deterring fraud. We recommended that SBA provide more guidance to help ensure that staff more consistently follow annual review procedures and more fully utilize third-party complaints to identify potentially ineligible firms. According to SBA officials, they have taken some actions to address these recommendations. For example, SBA officials told us that in August 2010 they had provided staff with a new guide for conducting annual reviews of the continuing eligibility of firms in the 8(a) program. Additionally, SBA officials said they were providing training to staff on the recently published revisions to regulations governing the 8(a) program. These revisions provided more clarification on factors that determine economic disadvantage (such as total assets, gross income, retirement accounts) for continuing eligibility in the program. SBA officials also said that they have been incorporating changes into their Web site that will allow third parties to submit complaints about potentially ineligible firms in the 8(a) program. Chair Landrieu, Ranking Member Snowe, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information on this testimony, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this testimony include Paige Smith, Assistant Director; Tania Calhoun; Andy Finkel; Janet Fong; Triana McNeil; Harry Medina; Barbara Roesmann; Kathryn Supinski; and Bill Woods. Table 3 lists the 80 economic development programs and provides information about their funding, when available. Using the Catalog of Federal Domestic Assistance and other agency documents, we identified 80 federal programs administered by the four agencies listed below--the Departments of Commerce (Commerce), Housing and Urban Development (HUD), and Agriculture (USDA) and the Small Business Administration (SBA)--that could fund economic development activities. We did not include tax credit programs aimed at economic development in this review.
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Economic development programs-- administered efficiently and effectively--can contribute to the well-being of the economy at the least cost to taxpayers. Such programs can encompass small business development and contracting. To encourage such contracting, Congress created programs--such as the Historically Underutilized Business Zone (HUBZone), service-disabled veteran-owned small business, and 8(a) Business Development programs--that give contracting preferences to some types of small businesses: in economically distressed communities; to those owned by service-disabled veterans; and to those with eligible socially and economically disadvantaged owners. This testimony addresses (1) potential duplication in economic development programs and (2) internal controls weaknesses in three small business programs. This testimony is based on related GAO work from 2008 to the present and updates it as noted. GAO examined programs at the Departments of Commerce, Housing and Urban Development, and Agriculture and the Small Business Administration (SBA) to assess program overlap, collaboration, and measures of effectiveness (GAO-11-477R). GAO also reviewed data from SBA and the Department of Veterans Affairs (VA) and conducted site visits. The reports identified opportunities to increase program efficiencies and made recommendations to improve internal controls and develop outcome-oriented measures. Results of GAO's work on 80 economic development programs at the four agencies indicate that the design of each appears to overlap with that of at least one other in terms of the economic development activities they can fund. For example, the agencies administer 54 programs that fund "entrepreneurial efforts," which include business development. SBA has 19 such economic development programs. To address issues arising from potential overlap and fragmentation, GAO relied on previously identified collaborative practices agencies should consider using to maximize performance and results. GAO found that agencies' collaborative efforts were not comprehensive but conducted on a case-by case basis. Further, the agencies generally have not measured outcomes. For instance, SBA has not yet developed outcome measures that directly link to the mission of its HUBZone program. In 2005 and 2008, GAO made recommendations to Commerce and SBA, respectively, aimed at improving the data and methods they rely on to measure the outcomes of some of their economic development programs. Generating key information on outcomes (that measure effectiveness) could help agencies better manage programs. Such information also would enable decision makers to better identify opportunities to realign resources, and if necessary, consolidate or eliminate some programs. As GAO has reported, three small business programs have had varying degrees of internal control weaknesses that affected program oversight. First, in a June 2008 report, GAO determined that SBA's mechanisms for certifying and monitoring firms in the HUBZone program gave limited assurance that only eligible firms participated. For certification and recertification (of initial and continued eligibility), SBA requested documentation or conducted site visits to validate self-reported data in limited instances. In response to GAO's recommendations, SBA has issued guidance requiring supporting documentation upon application and conducted site visits to certified firms. Second, in a May 2010 report, GAO reported that VA has faced challenges in effectively responding to a 2006 statutory mandate to verify the eligibility of small businesses owned by service-disabled or other veterans. Although such businesses self-certify their contracting eligibility, VA (unique among federal agencies) must maintain a database of these firms, verify their status, and only give contracting preferences to verified firms. GAO reported that VA had verified only about 14 percent of firms in its database. Since GAO recommended that VA develop a plan for a more effective verification program, VA stated that it has taken steps to improve its verification process, including awarding contracts to expedite the processing of applications. And finally, in a March 2010 report, GAO found that while SBA conducts annual reviews of 8(a) firms to help ensure continued eligibility, GAO found that key controls needed to be strengthened. GAO's review of a sample of 8(a) firms identified an estimated 55 percent in which SBA staff failed to complete required procedures to assess eligibility criteria. In response to GAO's recommendation that SBA provide more guidance to staff on annual review procedures, SBA stated that it issued a new guide in August 2010.
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The Federal Reserve System is involved in many facets of wholesale and retail payment systems in the United States, including providing wire transfers of funds and securities; providing for the net settlement of check clearing arrangements, automated clearinghouse (ACH) networks, and other types of payment systems; clearing checks and ACH payments; and regulating certain financial institutions and overseeing certain payment systems. Responding in part to a breakdown of the check-collection system in the early 1900s, Congress established the Federal Reserve System as an active participant in the payment system in 1913. The Federal Reserve Act directs the Federal Reserve System to provide currency in the quantities demanded by the public and authorizes the Federal Reserve System to establish a nationwide check clearing system, which has resulted in the Federal Reserve System's becoming a major provider of check clearing services. Congress modified the Federal Reserve System's role in the payment system through the Monetary Control Act of 1980 (MCA). One purpose of the MCA is to promote an efficient nationwide payment system by encouraging competition between the Federal Reserve System and private- sector providers of payment services. The MCA requires the Federal Reserve System to charge fees for its payment services, which are to be set to recover, over the long run, all direct and indirect costs of providing the services. Before the MCA, the Federal Reserve System provided payment services to its member banks for no explicit charge. The MCA expanded access to Federal Reserve System services, allowing the Federal Reserve System to offer services to all depository institutions, not just member banks. Congress again expanded the role of the Federal Reserve in the payment system in 1987 when it enacted the Expedited Funds Availability Act.This act expanded the Federal Reserve Board's authority to regulate certain aspects of check payments that are not processed by the Federal Reserve System. Through specific regulatory authority and its general authority as the central bank, the Federal Reserve plays an important role in the oversight of the nation's payment systems. The Federal Reserve Board has outlined its policy regarding the oversight of private-sector clearance and settlement systems in its Policy Statement on Payment Systems Risk. The second part of this policy incorporates risk management principles for such systems. The Federal Reserve System competes with the private sector in providing wholesale payment services. Wholesale payment systems are designed to clear and settle time-critical and predominantly large-value payments.The two major wholesale payment systems in the United States are the Fedwire funds transfer system, owned and operated by the Federal Reserve System, and the Clearing House Interbank Payments System (CHIPS), which is owned and operated by the Clearing House Service Company LLC, a subsidiary of the New York Clearing House Association LLC (NYCHA) for use by the participant owners of the Clearing House Interbank Payments Company LLC (CHIPCo). Fedwire is a real-time gross settlement (RTGS) system through which transactions are cleared and settled individually on a continuous basis throughout the day. CHIPS began operations in 1970 as a replacement for paper-based payments clearing arrangements. Since January 22, 2001, CHIPS has operated as a real-time settlement system. Payment orders sent over CHIPS are either simultaneously debited/credited to participants' available balances or have been netted and set off with other payment orders and the resulting balance is debited/credited against participants' available balances throughout the day. The transfer of balances into CHIPS and payments out occur via Fedwire. The Federal Reserve System oversees CHIPS' compliance with its Policy Statement on Payment Systems Risk. The size and aggregate levels of wholesale transactions necessitate timely and reliable settlement to avoid the risk that settlement failures would pose to the financial system. Although wholesale payments constitute less than 0.1 percent of the total number of transactions of noncash payments, they represent 80 percent of the total value of these payments. Moreover, in 1999, the value of payment flows through the two major wholesale systems in the United States, Fedwire and CHIPS, was approximately 69 times the U.S. gross domestic product in that year. The Federal Reserve System also competes with the private sector in providing retail payment services. For example, the Federal Reserve System provides ACH and check clearing services. ACH systems are an important mechanism for high-volume, moderate to low-value, recurring payments, such as direct deposit of payrolls; automatic payment of utility, mortgage, or other bills; and other business- and government-related payments. The Federal Reserve System also competes with private-sector providers of check clearing services. To do this, the Federal Reserve operates a nationwide check clearing service with 45 check processing sites located across the United States. The Federal Reserve System's market share of payment services as of year- end 1999 is represented in table 1. During forums held by the Federal Reserve System's Committee on the Federal Reserve System in the Payments Mechanism, held in May and June, 1997, committee members and Federal Reserve staff met with representatives from over 450 payment system participants, including banks of all sizes, clearing houses and third-party service providers, consumers, retailers, and academics. Although a few large banks and clearing houses thought the Federal Reserve System should exit the check collection and ACH businesses, the overwhelming majority of forum participants opposed Federal Reserve System withdrawal. Participants were concerned that the Federal Reserve System's exit could cause disruptions in the payment system. The Core Principles illustrates how the central banks see their roles in pursuing their objective of smoothly functioning payment systems.Further, the Core Principles outlines central banks' roles in promoting the safety and efficiency of systemically important payment systems that they or others operate. The laws of the countries we studied support this aspect of the Core Principles. These countries charge their central banks with broad responsibility for ensuring the smooth operation and stability of payments systems. In their basic role as banks, central banks generally are charged with acting as a correspondent bank for other institutions, providing accounts, and carrying out interbank settlements. Nonetheless, countries' laws vary regarding the specific roles a central bank should play in the payment system. Central banks in the G-10 countries and Australia have endorsed the Core Principles, which sets forth 10 basic principles that should guide the design and operation of systemically important payment systems in all countries as well as four responsibilities of the central bank in applying the Core Principles. (The principles and responsibilities are presented in app. II.) The overarching public policy objectives for the Core Principles are safety and efficiency in systemically important payment systems. Although the Core Principles generally is considered to apply to wholesale payment systems, some payments industry officials said that some payment systems that process retail payments could reasonably be considered systemically important because of the cumulative size and volume of the payments they handle. Providing for the safety of payment systems is mostly a matter of mitigating the risks inherent to the systems. These risks are listed and defined in table 2. Core Principle IV seeks to mitigate settlement risk by endorsing prompt final settlement, preferably during the day but, minimally, at the end of the day. The two major types of wholesale payment settlement systems are RTGS and multilateral netting systems. Recently, several hybrid systems have also been developed. (These two major types of systems are described further in app. III.) In general, multilateral netting systems offer greater liquidity because gross receipts and deliveries are netted to a single position at the end of the day. An institution can make payments during the day as long as its receipts cover the payments by the end of the day. However, multilateral netting systems without proper risk controls can lead to significant systemic risk. Because transactions are processed throughout the day, but not settled until the end of the day, the inability of a member to settle a net debit position could have large unexpected liquidity effects on other system participants or the economy more broadly. RTGS systems rely on immediate and final settlement of transactions, and these systems have much less exposure to systemic risk that could result from a settlement failure. Without a system for the provision of adequate intraday credit, these systems cause potential liquidity constraints because they require that funds or credit be available at the time that a payer initiates a transaction. Efficiency in payment systems can be characterized as both operational and economic. Operational efficiency involves providing a required level and quality of payment services for minimum cost. Cost reductions beyond a certain point may result in slower, lower quality service. This creates trade-offs among speed, risk, and cost. Going beyond operational efficiency, economic efficiency refers to (1) pricing that, in the long run, covers all of the costs incurred and (2) charging those prices in a way that does not inappropriately influence the choice of a method of payment. The Core Principles sets forth four responsibilities of the central bank in applying the core principles, two of which address oversight functions. The first is that the central bank should ensure that the systemically important systems it operates comply with the Core Principles, and the second is that the central bank should oversee compliance with the Core Principles by systems it does not operate, and it should have the ability to carry out this oversight. Therefore, the Core Principles affirms the importance of central banks' oversight responsibility for their countries' systemically important payment systems, including those that they do not own or operate. The laws of most of the countries we studied give the central bank broad responsibility for ensuring that payment systems operate smoothly. In addition, in their basic role as banks, central banks are generally charged with providing accounts to certain financial institutions and effecting interbank settlement. While some countries are specifically charged with providing additional payment services or regulating private payment systems, others are not. Similarly, regulatory and oversight authority is not always specified in laws but is obtained through historical development and the broader mission of the central bank. The European Central Bank (ECB) is the central bank for the countries that have adopted the euro. In conjunction with the euro area countries' national central banks, the ECB oversees payment systems for the euro area and operates the Trans-European Automated Real-time Gross settlement Express Transfer (TARGET) system, the primary payment system for euro payments.The ECB's powers and responsibilities are similar to those of national central banks. We therefore analyzed the ECB along with countries' national central banks. In developing TARGET, the ECB set out strict rules regarding the national central banks' provision of payment services, requiring each central bank to provide a RTGS system, which serves as a local component of TARGET. The laws of Canada, France, Japan, and the United Kingdom cast the central bank as a monitoring entity having general powers to ensure that payment systems do not pose systemic risk. The central banks in those countries are not specifically charged with providing particular payment clearing services. However, as a matter of practice, the central bank in France, which plans to discontinue its check clearing service in 2002, will continue to operate services related to check fraud. Although Australia's law recognizes a limited role for the Reserve Bank of Australia to act as a service provider, the Reserve Bank of Australia's primary purpose regarding payments systems is to serve as an oversight and regulatory mechanism designed to control risk to promote the overall efficiency of Australia's financial system. German law authorizes the Bundesbank to furnish payments services, and the Bundesbank performs retail payment functions, including check processing, credit transfers, checks, and direct debits as well as owning and operating RTGSplus, which is an RTGS hybrid system for wholesale payments. The central banks we studied have general authority to take actions to protect against systemic risk. In some cases, the banks are to serve a particular regulatory function. For example, under Canadian law, the central bank decides upon the qualifications of payment systems determined by the central bank to pose systemic risk. However, except for Germany, Australia, and the United States, the laws of the countries we reviewed generally do not contemplate that the central bank is to regulate the provision of payment services for purposes unrelated to systemic risk. All of the central banks we studied provide settlement for wholesale payment systems. Moreover, these central banks participated in the design and development of, and have oversight over, wholesale payment systems. Most central banks play a role in providing these wholesale payment services. However, as demonstrated by the central banks we studied, central bank involvement in wholesale payment systems varies. Some central banks have full ownership and operational involvement in the payment system; others have little operational involvement beyond settlement services. Other central banks participate in partnerships. In some cases, the central bank is a major provider or perhaps the only provider of wholesale payment services. The Federal Reserve System, as previously noted, is a major provider of wholesale payment services. Each of the central banks we reviewed has participated in the design and development of its country's wholesale payment system. For example, the Bundesbank collaborated in developing the RTGSplus system. The Bank of France played a major role in the development of France's systems. The Bank of England cooperated with the Clearing House Automated Payment System (CHAPS) in the development of a new system, NewCHAPS; the Bank of Canada assisted in the design and development of the Large Value Transfer System. In the G-10 countries, the first automated RTGS system was Fedwire in the United States, which is owned and operated by the Federal Reserve System. Although there are some net settlement systems for wholesale payments today, many countries are transitioning to RTGS systems. In Europe, various decisions over the past 5 to 10 years have encouraged current and potential euro area countries to develop national RTGS systems. The trend toward RTGS systems extends beyond Europe's boundaries, as countries worldwide are adopting RTGS systems. Central banks we studied played various roles in providing and overseeing wholesale payment services. All central banks provide key settlement services for wholesale payment systems. Some central banks own and operate wholesale payment systems that include clearance and settlement while others only provide oversight and settlement, leaving clearance and other processing activities to other parties. There is no clear pattern in the roles played by central banks in clearing wholesale payments. In addition to the United States, two of the central banks we studied, the Bundesbank and the Bank of France, have full ownership of their respective wholesale payment systems. The Bundesbank owns and operates the RTGSplus system, which was developed with the input of the German banking industry. The Bundesbank has full control over the practices of the system for large-value payments. The Bank of France owns and manages Transferts Banque de France, which is a RTGS system that is one of the two wholesale payment systems in France. The Bank of France is also a joint owner of the company that owns and operates France's other wholesale payment system, which is a hybrid, real-time net settlement system. Although the Bank of France is only a partial owner of this system, it can exert considerable influence over it by virtue of its ownership role in the controlling company. The Bank of England is a member and shareholder of CHAPS Inc., which operates England's sterling and euro RTGS systems. Although the Bank of England does not own or manage any payment clearing system, CHAPS payments settle by transferring funds among participating institutions' Bank of England accounts. The Bank of England is the settlement bank for both the CHAPS Sterling and CHAPS Euro. The Bank of Canada has a more limited operational role in its system. The Bank of Canada entrusts the ownership and operation of the Large Value Transfer System (LVTS) to the Canadian Payments Association, which the Bank of Canada chairs. The Bank of Canada expressly guarantees settlement of LVTS in the event of the simultaneous default of more than one participant, and losses exceed available participant collateral. This guarantee is likened to "catastrophic insurance with a very large deductible," with the latter being the collateral provided by the participants. Although the extent of central bank oversight over retail payment operations varies, central banks generally consider retail payments as an important component of the payment system. As such, central banks have some responsibility for promoting well-functioning retail payment systems. The operational role of the central bank in retail payment clearing varies considerably among the countries we studied. The basic structure of retail payment systems depends largely on the structure of the underlying financial system and on the historical evolution of payment processes. Factors that influence central bank involvement in retail payment systems include the history and structure of the country's payment system and banking industry. While we identified several factors that influenced the involvement of a central bank in its country's retail payment system, these factors interact uniquely and occur to varying degrees in the systems we studied. Retail payments are generally lower in value and urgency from the perspective of the financial system than wholesale payments, but retail payments occur more frequently. They typically include consumer and commercial payments for goods and services. Noncash retail payment instruments are generally categorized as paper-based (most commonly checks) or electronic (most commonly credit cards, credit transfer, debit cards, and direct debits). These payment instruments are further described in table 3. Central banks provide settlement for retail payments, but commercial banks also settle retail payments. Where the central bank provides settlement, it does so for "direct participants"--that is, institutions having settlement accounts at the central bank. Settlement of payments at the central bank sometimes requires tiering arrangements. Under these arrangements, "direct participants" settle payments through their accounts at the central bank, with indirect participants' settling accounts with a direct participant with whom they have a settlement arrangement. Such is the case with the Bank of England, which acts as a banker to the settlement banks that are direct members of the United Kingdom's primary payment clearing association. Settlement of retail payments may also occur through settlement agents, third-party arrangements, or correspondent accounts that institutions hold with each other for bilateral settlement. Although many central banks work to ensure that their retail payment systems are well-functioning, their approaches diverge. Some central banks play a prominent regulatory and operational role in retail payments and see these roles as keys to fostering well-functioning retail systems, while others assume more limited roles. Whatever the level of involvement in oversight or operations, most central banks consider retail payments as important components of the payment system and therefore assume some responsibility in promoting well-functioning retail payment systems. A number of structural factors influence the central bank's role in retail payments. For example, the involvement of the central bank in check clearing can vary. In countries with a concentrated banking industry, on-us check clearing will occur with higher frequency. On-us checks are checks that are deposited at the same bank on which they are drawn, so that no third party, including the central bank, is required for clearing or settlement. For example, Canada has few banks, heavy check use, and little central bank involvement in clearing retail payments. On the other hand, the United States has a large number of banks and its central bank is heavily involved in providing check clearing services. If a country has many smaller banks, such as savings, rural, and cooperative banks, there will be more need for some kind of retail clearance system, thereby creating greater potential need for central bank involvement. Identifying the extent to which payment preferences influence central bank involvement in clearing payments is difficult. Some have suggested that central banks in countries that rely heavily on paper-based instruments are more involved in clearing retail payments, and that central banks of countries that are more reliant on electronic payments provide fewer clearing services. Central banks involved in check clearing include those in Germany, France, and the United States. France and the United States rely heavily on checks for retail payments. In contrast, the Bundesbank is heavily involved in clearing a variety of retail payment instruments, but Germany is not particularly reliant on checks as a means of payment. The physical size of a country determines the distances that payment instructions might have to travel between the paying and the drawing banks. This has particular relevance in countries that rely heavily on paper- based instruments such as checks, which might have to be physically moved great distances to be processed. For example, this is the case in the United States, which is much larger than any European country. The United States currently has approximately 19,000 depository institutions. Canada, on the other hand, has far fewer financial institutions but is also physically large and uses checks extensively. Private- sector correspondent banks clear many checks and compete with the central bank. The central bank, however, is perceived as a reliable and neutral intermediary to clear payments and provide settlement on a large scale for a diverse set of institutions. Table 4 shows the relative importance of noncash payment instruments in selected countries. A central bank's role in the retail payment system reflects historical events and developments that have shaped retail payment systems in a particular country over many years. For example, the GIRO system serves as a primary retail payment in many European countries. The GIRO system was originally developed by the European Postal agencies, rather than by banks. Historically, European banking systems were largely decentralized and in most cases highly regulated. Therefore, in the absence of an efficient payment system for retail payments developed by the banking industry, payers in most European countries turned to national institutions, such as the postal service, which offered credit transfers (so-called GIRO payments) through a nationwide network of branches. Commercial banks subsequently began to offer GIRO services. As a result of these events, many European countries have well-developed systems that do not rely on central bank clearing for credit transfers. These systems were originally established by the public sector to respond to needs that were not being met by the private sector. Similarly, as previously noted, the Federal Reserve System was established to respond to events that pointed to the lack of a private remedy to market problems. We received comments on a draft of this report from the Board of Governors of the Federal Reserve System. These comments are reprinted in appendix IV. Board staff also provided technical comments and corrections that we incorporated as appropriate. We are sending copies of this report to the chairman of the House Subcommittee on Domestic Monetary Policy, Technology, and Economic Growth; the chairman of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of Atlanta, and the president of the Federal Reserve Bank of New York. We will make copies available to others on request. Please contact me or James McDermott, Assistant Director, at (202) 512-8678 if you or your staff have any questions concerning this report. Other key contributors to this report are James Angell, Thomas Conahan, Tonita W. Gillich, Lindsay Huot, and Desiree Whipple. The objectives of this report are to (1) identify internationally recognized objectives for payment systems and central bank involvement in those systems, (2) describe the roles of central banks in the wholesale payment systems of other major industrialized countries and the key factors that influence those roles, and (3) describe the roles of central banks in the retail payment systems of other major industrialized countries and the key factors that influence those roles. In analyzing the roles of other central banks in payment systems, we focused on countries with relatively modern, industrialized economies. These countries included Australia, Canada, France, Germany, Japan, the United Kingdom, and the United States. To identify widely held public policy objectives for payment systems, we reviewed Core Principles for Systemically Important Payment Systems, which was developed by the Committee on Payment and Settlement Systems (CPSS), of the Bank for International Settlements. The CPSS established the Task Force on Payment System Principles and Practices in May 1998 to consider what principles should govern the design and operation of payment systems in all countries. The task force sought to develop an international consensus on such principles. The task force included representatives not only from G-10 central banks and the European Central Bank but also from 11 other national central banks of countries in different stages of economic development from all over the world and representatives from the International Monetary Fund and the World Bank. The task force also consulted groups of central banks in Africa, the Americas, Asia, the Pacific Rim, and Europe. We also reviewed materials available on the Web sites of the central banks we studied; these sites often included mission statements, basic data, and authorizing statutes. We reviewed a variety of legal analyses and commentaries to analyze those statutes. Where we make statements regarding to central banks' authorizing statutes, they are based on these sources rather than on our original legal analysis. To describe the roles of central banks in the wholesale and retail payment systems of other major industrialized countries and the key factors that influence those roles, we reviewed materials available on central bank Web sites as well as other articles and publications from various central banks. We reviewed publications available from the Bank for International Settlements, and also the European Central Bank's Blue Book: Payment and Securities Settlement Systems in the European Union. We also reviewed numerous articles and commentaries on the roles of central banks as well as discussions of recent reform efforts. To enhance our understanding of these materials, we interviewed Federal Reserve officials, members of trade associations, and officials from private-sector payment providers. We conducted our work in Washington, D.C., and New York, N.Y., between June 2001 and January 2002 in accordance with generally accepted government auditing standards. The core principles for systemically important payments systems (core principles) are shown in table 5. The responsibilities of the central bank in applying the core principles are as follows: The central bank should define clearly its payments objectives and should disclose publicly its role and major policies with respect to systemically important payments systems. The central bank should ensure that the systems it operates comply with the core principles. The central bank should oversee compliance with the core principles by systems it does not operate and should have the ability to carry out this oversight. The central bank, in promoting payment system safety and efficiency through the core principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities. Different forms of settlement for wholesale payments result in different risks. Various wholesale payment systems in major industrialized countries use similar means to transmit and process wholesale payments. However, they sometimes use different rules for settling those transactions. In general, wholesale payments are sent over separate, secure, interbank electronic wire transfer networks and are settled on the books of a central bank. That is, settlement is carried out by exchange of funds held in banks' reserve accounts at a central bank. However, various wholesale payment systems use different rules for settling these large-value payments. Some systems operate as real-time gross settlement (RTGS) systems, which continuously clear payment messages that are settled by transfer of central bank funds from paying banks to receiving banks. Other systems use net settlement rules, wherein the value of all payments due to and due from each bank in the network is calculated on a net basis before settlement. Each form of settling wholesale payments presents different risks to participants. Recently, some hybrid systems have been developed, building on the strengths and minimizing the risks associated with pure RTGS or netting systems. RTGS systems are gross settlement systems in which both processing and settlement of funds transfer instructions take place continuously, or in real time, on a transaction by transaction basis. RTGS systems settle funds transfers without netting debits against credits and provide final settlement in real time, rather than periodically at prespecified times. In most RTGS systems, the central bank, in addition to being the settlement agent, can grant intraday credit to help the liquidity needed for the smooth operation of these systems. Participants typically can make payments throughout the day and only have to repay any outstanding intraday credit by the end of the day. Because RTGS systems provide immediate finality of gross settlements, there is no systemic risk--that is, the risk that the failure to settle by one possibly insolvent participant would lead to settlement failures of other solvent participants due to unexpected liquidity shortfalls. However, as the entity guaranteeing the finality of each payment, the central bank faces credit risk created by the possible failure of a participant who uses intraday credit. In the absence of collateral for such overdrafts, the central bank assumes some amount of credit risk until the overdrafts are eliminated at the end of the day. In recent years, central banks have taken steps to more directly manage intraday credit, including collaterization requirements, caps on intraday credit, and charging interest on intraday overdrafts. Fedwire was established in 1918 as a telegraphic system and was the first RTGS system among the G-10 countries. Presently, account tallies are maintained minute-by-minute. The Federal Reserve Banks generally allow financially healthy institutions the use of daylight overdrafts up to a set multiple of their capital and may impose certain additional requirements, including collateral. In 1994, the Federal Reserve System began assessing a fee for the provision of this daylight liquidity. Other central banks have only recently adopted RTGS systems and have established a variety of intraday credit policies, such as intraday repurchase agreements, collateralized daylight overdrafts, and other policies. Other networks operate under net settlement rules. Under these rules, the value of all payments due to and due from each bank in the network is calculated on a net basis bilaterally or multilaterally. This occurs at some set interval--usually the end of each business day--or, in some newly developed systems, continuously throughout the day. Banks ending the day in a net debit position transfer reserves to the net creditors, typically using a settlement account at the central bank. Net settlement systems, with delayed or end of business day settlement, enhance liquidity in the payment system because such systems potentially allow payers to initiate a transaction without having the funds immediately on hand, but available pending final settlement. However, this can increase the most serious risk in netting systems, which is systemic risk. Recognizing that systemic risk is inherent in netting systems, central banks of the G-10 countries formulated minimum standards for netting schemes in the Lamfalussy Standards. The standards stress the legal basis for netting and the need for multilateral netting schemes to have adequate procedures for the management of credit and liquidity risks. Although netting arrangements generally reduce the need for central bank funds, they also expose the participants to credit risks as they implicitly extend large volumes of payment-related intraday credit to one another. This credit represents the willingness of participants to accept or send payment messages on the assumption that the sender will cover any net debit obligations at settlement. The settlement of payments, by the delivery of reserves at periodic, usually daily, intervals is therefore an important test of the solvency and liquidity of the participants. In recent years, central banks in countries using net settlement rules have taken steps to reduce credit risks in these systems as part of overall programs to reduce systemic risks. 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. 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The central banks of major industrialized countries have agreed on common policy objectives and presented them in the Core Principles for Systematically Important Payment Systems. Intended to help promote safer and more efficient payment systems worldwide, the Core Principles outline specific policy recommendations for systematically important payment systems and describe the responsibilities of the central banks. All of the central banks GAO studied seek to ensure that their wholesale payment systems operate smoothly and minimize systemic risk. All of the central banks provide settlement services for their countries' wholesale payment systems. Some central banks also provide wholesale clearing services. Other central banks own the system but have little operational involvement in clearing, while others participate in partnerships with the private sector. All of the central banks GAO studied provide settlement for some retail payment systems. Some, but not all, central banks exercise regulatory authority over retail payment systems in their countries. Central banks also tend to have less operational involvement in countries where there is a relatively concentrated banking industry. In some cases, laws governing payments and the structure of the financial services industry direct the involvement of central banks in retail payment systems.
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To determine which federal government programs and functions should be designated high risk, we use our guidance document, Determining Performance and Accountability Challenges and High Risks.consider qualitative factors, such as whether the risk involves public health or safety, service delivery, national security, national defense, economic growth, or privacy or citizens' rights; or could result in significantly impaired service, program failure, injury or loss of life, or significantly reduced economy, efficiency, or effectiveness. We also consider the exposure to loss in monetary or other quantitative terms. At a minimum, $1 billion must be at risk, in areas such as the value of major assets being impaired; revenue sources not being realized; major agency assets being lost, stolen, damaged, wasted, or underutilized; potential for, or evidence of, improper payments; and presence of contingencies or potential liabilities. Before making a high- risk designation, we also consider corrective measures planned or under way to resolve a material control weakness and the status and effectiveness of these actions. Since 1990, more than one-third of the areas previously designated as high risk have been removed from the High Risk List because sufficient progress was made in addressing the problems identified. Nonetheless, 11 issues have been on the High Risk List since the 1990s and 6 of these were on our original list of 14 areas in 1990. Our experience with the high-risk series over the past 25 years has shown that the key elements needed to make progress in high-risk areas are top-level attention by the administration and agency leaders grounded in the five criteria for removal from the High Risk List, as well as any needed congressional action. The five criteria for removal are Leadership Commitment. Demonstrated strong commitment and top leadership support. Capacity. Agency has the capacity (i.e., people and resources) to resolve the risk(s). Action Plan. A corrective action plan exists that defines the root cause, identifies solutions, and provides for substantially completing corrective measures, including steps necessary to implement solutions we recommended. Monitoring. A program has been instituted to monitor and independently validate the effectiveness and sustainability of corrective measures. Demonstrated Progress. Ability to demonstrate progress in implementing corrective measures and in resolving the high-risk area. These five criteria form a road map for efforts to improve and ultimately address high-risk issues. Addressing some of the criteria leads to progress, while satisfying all of the criteria is central to removal from the list. Figure 1 shows the five criteria for removal as a designated high-risk area and examples of actions taken by agencies in response. In designating VA as a high-risk area, we categorized our concerns about VA's ability to ensure the timeliness, cost-effectiveness, quality, and safety of veterans' health care, into five broad areas: (1) ambiguous policies and inconsistent processes, (2) inadequate oversight and accountability, (3) information technology challenges, (4) inadequate training for VA staff, and (5) unclear resource needs and allocation priorities. We have made numerous recommendations that aim to address weaknesses in VA's management and oversight of its health care system. Although VA has taken actions to address some of them, more than 100 recommendations have yet to be fully resolved, including recommendations related to the following five broad areas of concern: Ambiguous policies and inconsistent processes. Ambiguous VA policies lead to inconsistency in the way VA facilities carry out processes at the local level. In numerous reports, we have found that this ambiguity and inconsistency may pose risks for veterans' access to VA health care, or for the quality and safety of VA health care they receive. For example, in December 2012, we found that unclear policies led staff at VA facilities to inaccurately record the required dates for appointments and to inconsistently track new patients waiting for outpatient medical appointments at VA facilities. These practices may have delayed the scheduling of veterans' outpatient medical appointments and may have increased veterans' wait times for accessing care at VA facilities. In some cases, we found that staff members were manipulating medical appointment dates to conform to VA's timeliness guidelines, which likely contributed further to the inaccuracy of VA's wait-times data for outpatient medical appointments. Without accurate data, VA lacks assurance that veterans are receiving timely access to needed health care. In our November 2014 report, we found that VA policies lacked clear direction for how staff at VA facilities should document information about veteran suicides as part of VA's behavioral health autopsy program (BHAP). The BHAP is a national initiative to collect demographic, clinical, and other information about veterans who have died by suicide and use it to improve the department's suicide prevention efforts. In a review of a sample of BHAP records from five VA facilities, we found that more than half of the records had incomplete or inaccurate information. The lack of reliable data limited the department's opportunities to learn from past veteran suicides and ultimately diminished VA's efforts to improve its suicide prevention activities. We have also identified gaps in VA policies related to facilities' response to adverse events--clinical incidents that may pose the risk of injury to a patient as the result of a medical intervention or the lack of an appropriate intervention, such as a missed or delayed diagnosis, rather than due to the patient's underlying medical condition. Specifically, we found that VA policies were unclear as to how focused professional practice evaluations (FPPE) should be documented, particularly what information should be included. An FPPE is a time-limited evaluation during which a VA facility assesses a provider's professional competence when a question arises regarding the provider's ability to provide safe, quality patient care. In our December 2013 report, we found that gaps in VA's FPPE policy may have hindered VA facilities' ability to appropriately document the evaluation of a provider's skills, support any actions initiated, and track provider-specific incidents over time. Inadequate oversight and accountability. We also have found weaknesses in VA's ability to hold its health care facilities accountable and ensure that identified problems are resolved in a timely and appropriate manner. Specifically, we have found that (1) certain aspects of VA facilities' implementation of VA policies are not routinely assessed by the department; (2) VA's oversight activities are not always sufficiently focused on its facilities' compliance with applicable requirements; and (3) VA's oversight efforts are often impeded by its reliance on facilities' self-reported data, which lack independent validation and are often inaccurate or incomplete. In a July 2013 report, for example, we found that VA needed to take action to improve the administration of its provider performance pay and award systems. In that report, we found that VA had not reviewed performance goals set by its facilities for providers and, as a result, concluded that VA did not have reasonable assurance that the goals created a clear link between performance pay and providers' performance in caring for veterans. At four VA facilities included in our review, performance pay goals covered a range of areas, such as clinical competence, research, teaching, patient satisfaction, and administration. Providers who were eligible for performance pay received it at all four of the facilities we reviewed, despite at least one provider in each facility having personnel actions taken against them related to clinical performance in the same year. Such personnel actions resulted from issues including failing to read mammograms and other complex images competently, practicing without a current license, and leaving residents unsupervised during surgery. In March 2014, we found that VA lacked sufficient oversight mechanisms to ensure that its facilities were complying with applicable requirements and not inappropriately denying claims for non-VA care. Specifically, the March 2014 report cited noncompliance with applicable requirements for processing non-VA emergency care claims for a sample we reviewed. The noncompliance at four VA facilities led to the inappropriate denial of about 20 percent of the claims we reviewed and the failure to notify almost 65 percent of veterans whose claims we reviewed that their claims had been denied. We found VA's field assistance visits, one of the department's primary methods for monitoring facilities' compliance with applicable requirements, to be lacking. In these annual on-site reviews at a sample of VA facilities, VA officials were to examine the financial, clinical, administrative, and organizational functions of staff responsible for processing claims for non-VA care; however, we found that these visits did not examine all practices that could lead VA facilities to inappropriately deny claims. Further, although VA itself recommended that managers at its facilities audit samples of processed claims to determine whether staff processed claims appropriately, the department did not require VA facilities to conduct such audits, and none of the four VA facilities we visited were doing so. In a September 2014 report and in three previous testimonies for congressional hearings, we identified weaknesses in VA's oversight of veterans' access to outpatient specialty care appointments in its facilities. VA officials told us they use data reported by VA facilities to monitor how the facilities are performing in meeting VA's guideline of completing specialty care consults--requests from VA providers for evaluation or management of a patient for a specific clinical concern, or for a specialty procedure, such as a colonoscopy--within 90 days. We found cases where staff had incorrectly closed a consult even though care had not been provided, and found that VA does not routinely audit consults to assess whether its facilities are appropriately managing them and accurately documenting actions taken to resolve them. Instead, we found that VA relied largely on facilities' self-certification that they were doing so. Information technology challenges. In recent reports, we also have identified limitations in the capacity of VA's existing information technology (IT) systems. Of particular concern is the outdated, inefficient nature of certain systems, along with a lack of system interoperability--the ability to exchange information--which presents risks to the timeliness, quality, and safety of VA health care. For example, we have reported on VA's failed attempts to modernize its outpatient appointment scheduling system, which is about 30 years old. Among the problems cited by VA staff responsible for scheduling appointments are that the system requires them to use commands requiring many keystrokes and that it does not allow them to view multiple screens at once. Schedulers must open and close multiple screens to check a provider's or a clinic's full availability when scheduling a medical appointment, which is time-consuming and can lead to errors. VA undertook an initiative to replace its scheduling system in 2000 but terminated the project after spending $127 million over 9 years, due to weaknesses in project management and a lack of effective oversight. The department has since renewed its efforts to replace its appointment scheduling system, including launching a contest for commercial software developers to propose solutions, but VA has not yet purchased or implemented a new system. In 2014, we found that interoperability challenges and the inability to electronically share data across facilities led VA to suspend the development of a system that would have allowed it to electronically store and retrieve information about surgical implants (including tissue products) and the veterans who receive them nationwide. Having this capability would be particularly important in the event that a manufacturer or the Food and Drug Administration (FDA) recalled a medical device or tissue product because of safety concerns. In the absence of a centralized system, at the time of our report VA clinicians tracked information about implanted items using stand-alone systems or spreadsheets that were not shared across VA facilities, which made it difficult for VA to quickly determine which patients may have received an implant that was subject to a safety recall. Further, as we have reported for more than a decade, VA and the Department of Defense (DOD) lack electronic health record systems that permit the efficient electronic exchange of patient health information as military servicemembers transition from DOD to VA health care systems. The two departments have engaged in a series of initiatives intended to achieve electronic health record interoperability, but accomplishment of this goal has been continuously delayed and has yet to be realized. The ongoing lack of electronic health record interoperability limits VA clinicians' ability to readily access information from DOD records, potentially impeding their ability to make the most informed decisions on treatment options, and possibly putting veterans' health at risk. One location where the delays in integrating VA's and DOD's electronic health records systems have been particularly burdensome for clinicians is at the Captain James A. Lovell Federal Health Care Center (FHCC) in North Chicago, the first planned fully integrated federal health care center for use by both VA and DOD beneficiaries. We found in June 2012 that due to interoperability issues, the FHCC was employing five dedicated, full-time pharmacists and one pharmacy technician to conduct manual checks of patients' VA and DOD health records to reconcile allergy information and identify possible interactions between drugs prescribed in VA and DOD systems. Inadequate training for VA staff. In a number of reports, we have identified gaps in VA training that could put the quality and safety of veterans' health at risk. In other cases, we have found that VA's training requirements can be particularly burdensome to complete, particularly for VA staff who are involved in direct patient care. In a November 2014 report that examined VA's monitoring of veterans with major depressive disorder (MDD) and whether those who are prescribed an antidepressant receive recommended care, we determined that VA data may underestimate the prevalence of MDD among veterans and that a lack of training for VA clinicians on diagnostic coding may contribute to the problem. In a review of medical record documentation for a sample of veterans, we found that VA clinicians had not always appropriately coded encounters with veterans they diagnosed as having MDD, instead using a less specific diagnostic code for "depression not otherwise specified." VA's data on the number of veterans with MDD are based on the diagnostic codes associated with patient encounters; therefore, coding accuracy is critical to assessing VA's performance in ensuring that veterans with MDD receive recommended treatments, as well as measuring health outcomes for these veterans. In a May 2011 report, we found that training for staff responsible for cleaning and reprocessing reusable medical equipment (RME), such as endoscopes and some surgical instruments, was lacking. Specifically, VA had not specified the types of RME for which training was required; in addition, VA provided conflicting guidance to facilities on how to develop this training. Without appropriate training on reprocessing, we found that VA staff may not be reprocessing RME correctly, posing patient safety risks. In our October 2014 report on VA's implementation of a new, nationally standardized nurse staffing methodology, staff from selected VA facilities responsible for developing nurse staffing plans told us that VA's individual, computer-based training on the methodology was time-consuming to complete and difficult to understand. These staff members said they had difficulty finding the time to complete it while also carrying out their patient care responsibilities. Many suggested that their understanding of the material would have been greatly improved with an instructor-led, group training course where they would have an opportunity to ask questions. Unclear resource needs and allocation priorities. In many of our reports, we have found gaps in the availability of data required by VA to efficiently identify resource needs and to ensure that resources are effectively allocated across the VA health care system. For example, in October 2014, we found that VA facilities lacked adequate data for developing and executing nurse staffing plans at their facilities. Staffing plans are intended to help VA facilities identify appropriate nurse staffing levels and skill mixes needed to support high-quality patient care in the different care settings throughout each VA facility, and are used to determine whether their existing nurse workforce sufficiently meets the clinical needs of each unit, or whether facilities need to hire additional staff. At selected VA facilities, staff members responsible for developing and executing the nurse staffing plans told us that they needed to use multiple sources to collect and compile the data--in some cases manually. They described the process as time-consuming, potentially error-prone, and requiring data expertise they did not always have. In a May 2013 report, we found that VA lacked critical data needed to compare the cost-effectiveness of non-VA medical care to that of care delivered at VA facilities. Specifically, VA lacks a data system to group medical care delivered by non-VA providers by episode of care--all care provided to a veteran during a single office visit or inpatient stay. As a result, VA cannot efficiently assess whether utilizing non-VA providers is more cost-effective than augmenting its own capacity in areas with high non-VA health care utilization. In a September 2014 report, we identified concerns with VA's management of its pilot dialysis program, which had been implemented in four VA-operated clinics. Specifically, we found that, five years into the pilot, VA had not set a timetable for the completion of its dialysis pilot or documented how it would determine whether the pilot was successful, including improving the quality of care and achieving cost savings. We also found that VA data on the quality of care and treatment costs were limited due to the delayed opening of two of the four pilot locations. Veterans who receive dialysis are one of VA's most costly populations to serve, but VA has limited capacity to deliver dialysis in its own facilities, and instead refers most veterans to non-VA providers for this treatment. VA began developing its dialysis pilot program in 2009 to address the increasing number of veterans needing dialysis and the rising costs of providing this care through non-VA providers. VA has taken actions to address some of the recommendations we have made related to VA health care; however, there are currently more than 100 that have yet to be fully resolved, including recommendations related to the five broad areas of concern highlighted above. For example, to ensure that its facilities are carrying out processes at the local level more consistently--such as scheduling veterans' medical appointments--VA needs to clarify its existing policies. VA also needs to strengthen oversight and accountability across its facilities by conducting more systematic, independent assessments of processes carried out at the local level, including how VA facilities are resolving specialty care consults and processing claims for non-VA care. We also have recommended that VA work with DOD to address the administrative burdens created by the lack of interoperability between their two IT systems. A number of our recommendations aim to improve training for staff at VA facilities, to address issues such as how staff are cleaning, disinfecting, and sterilizing reusable medical equipment, and to more clearly align training on VA's new nurse staffing methodology with the needs of staff responsible for developing nurse staffing plans. Finally, we have recommended that VA improve its methods for identifying VA facilities' resource needs and for analyzing the cost-effectiveness of VA health care. The recently enacted Veterans Access, Choice, and Accountability Act included a number of provisions intended to help VA address systemic weaknesses. For example, the law requires VA to contract with an independent entity to (1) assess its capacity to meet the needs of veterans who use the VA health care system, given their current and projected demographics, (2) examine VA's clinical staffing levels and productivity, and (3) review VA's IT strategies and business processes, among other things. The new law also establishes a 15-member commission, to be appointed primarily by bipartisan congressional leadership, which will examine how best to organize the VA health care system, locate health care resources, and deliver health care to veterans. It is critical for VA leaders to act on the findings of this independent contractor and congressional commission, as well as on those of VA's Office of the Inspector General, GAO, and others, and to fully commit themselves to developing long-term solutions that mitigate risks to the timeliness, cost-effectiveness, quality, and safety of the VA health care system. It is also critical that Congress maintain its focus on oversight of VA health care. In the spring and summer of 2014, congressional committees held more than 20 hearings to address identified weaknesses in the VA health care system. Sustained congressional attention to these issues will help ensure that VA continues to make progress in improving the delivery of health care services to veterans. We plan to continue monitoring VA's efforts to improve the timeliness, cost-effectiveness, quality, and safety of veterans' health care. To this end, we have ongoing work focusing on topics such as veterans' access to primary care and mental health services; primary care productivity; nurse recruitment and retention; monitoring and oversight of VA spending on training programs for health care professionals; mechanisms VA uses to monitor quality of care; and VA and DOD investments in Centers of Excellence--which are intended to produce better health outcomes for veterans and service members. An assessment of the status of VA health care's high-risk designation will be done during our next update in 2017. Chairman Isakson, Ranking Member Blumenthal and Members of the Committee, this concludes my statement. I would be pleased to respond to any questions you may have. For further information about this statement, please contact Debra A. Draper at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Key contributors to this statement were Jennie Apter, Jacquelyn Hamilton, and Alexis C. MacDonald. VA Health Care: Improvements Needed in Monitoring Antidepressant Use for Major Depressive Disorder and in Increasing Accuracy of Suicide Data. GAO-15-55. Washington, D.C.: November 12, 2014. VA Health Care: Actions Needed to Ensure Adequate and Qualified Nurse Staffing. GAO-15-61. Washington, D.C.: October 16, 2014. VA Health Care: Management and Oversight of Consult Process Need Improvement to Help Ensure Veterans Receive Timely Outpatient Specialty Care. GAO-14-808. Washington, D.C.: September 30, 2014. VA Dialysis Pilot: Documentation of Plans for Concluding the Pilot Needed to Improve Transparency and Accountability. GAO-14-646. Washington, D.C.: September 2, 2014. Veterans' Health Care: Oversight of Tissue Product Safety. GAO-14-463T. Washington, D.C.: April 2, 2014. VA Health Care: Actions Needed to Improve Administration and Oversight of Veterans' Millennium Act Emergency Care Benefit. GAO-14-175. Washington, D.C.: March 6, 2014. Electronic Health Records: VA and DOD Need to Support Cost and Schedule Claims, Develop Interoperability Plans, and Improve Collaboration. GAO-14-302. Washington, D.C.: February 27, 2014. VA Surgical Implants: Purchase Requirements Were Not Always Followed at Selected Medical Centers and Oversight Needs Improvement. GAO-14-146. Washington, D.C.: January 13, 2014. VA Health Care: Improvements Needed in Processes Used to Address Providers' Actions That Contribute to Adverse Events. GAO-14-55. Washington, D.C.: December 3, 2013. VA Health Care: Actions Needed to Improve Administration of the Provider Performance Pay and Award Systems. GAO-13-536. Washington, D.C.: July 24, 2013. VA Health Care: Management and Oversight of Fee Basis Care Need Improvement. GAO-13-441. Washington, D.C.: May 31, 2013. VA Health Care: Reliability of Reported Outpatient Medical Appointment Wait Times and Scheduling Oversight Need Improvement. GAO-13-130. Washington, D.C.: December 21, 2012. VA/DOD Federal Health Care Center: Costly Information Technology Delays Continue and Evaluation Plan Lacking. GAO-12-669. Washington, D.C.: June 26, 2012. VA Health Care: Weaknesses in Policies and Oversight Governing Medical Supplies and Equipment Pose Risks to Veterans' Safety. GAO-11-391. Washington, D.C.: May 3, 2011. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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VA operates one of the largest health care delivery systems in the nation, including 150 medical centers and more than 800 community-based outpatient clinics. Enrollment in the VA health care system has grown significantly, increasing from 6.8 to 8.9 million veterans between fiscal years 2002 and 2013. Over this same period, Congress has provided steady increases in VA's health care budget, increasing from $23.0 billion to $55.5 billion. Risks to the timeliness, cost-effectiveness, quality, and safety of veterans' health care, along with other persistent weaknesses GAO and others have identified in recent years, raised serious concerns about VA's management and oversight of its health care system. Based on these concerns, GAO designated VA health care a high-risk area and added it to GAO's High Risk List in 2015. Since 1990, GAO has regularly updated the list of government operations that it has identified as high risk due to their vulnerability to fraud, waste, abuse, and mismanagement or the need for transformation to address economy, efficiency, or effectiveness challenges. This statement addresses (1) the criteria for the addition to and removal from the High Risk List, (2) specific areas of concern identified in VA health care that led to its high-risk designation; and (3) actions needed to address the VA health care high-risk area. To determine which federal government programs and functions should be designated high risk, GAO considers a number of factors. For example, it assesses whether the risk involves public health or safety, service delivery, national security, national defense, economic growth, or privacy or citizens' rights, or whether the risk could result in significantly impaired service, program failure, injury or loss of life, or significantly reduced economy, efficiency, or effectiveness. There are five criteria for removal from the High Risk List: leadership commitment, capacity (people and resources needed to resolve the risk), development of an action plan, monitoring, and demonstrated progress in resolving the risk. In designating the health care system of the Department of Veterans Affairs (VA) as a high-risk area, GAO categorized its concerns about VA's ability to ensure the timeliness, cost-effectiveness, quality, and safety of veterans' health care, into five broad areas: 1. Ambiguous policies and inconsistent processes. GAO found ambiguous VA policies lead to inconsistency in the way its facilities carry out processes at the local level, which may pose risks for veterans' access to VA health care, or for the quality and safety of VA health care. 2. Inadequate oversight and accountability. GAO found weaknesses in VA's ability to hold its health care facilities accountable and ensure that identified problems are resolved in a timely and appropriate manner. 3. Information technology challenges. Of particular concern is the outdated, inefficient nature of certain systems, along with a lack of system interoperability. 4. Inadequate training for VA staff. GAO has identified gaps in VA training that could put the quality and safety of veterans' health at risk or training requirements that were particularly burdensome to complete. 5. Unclear resource needs and allocation priorities. GAO has found gaps in the availability of data required by VA to efficiently identify resource needs and to ensure that resources are effectively allocated across the VA health care system. VA has taken actions to address some of the recommendations GAO has made related to VA health care, including those related to the five broad areas of concern highlighted above; however, there are currently more than 100 that have yet to be fully resolved. For example, to ensure that processes are being carried out more consistently at the local level--such as scheduling veterans' medical appointments--VA needs to clarify its existing policies, as well as strengthen its oversight and accountability across its facilities. The Veterans Access, Choice, and Accountability Act of 2014 included a number of provisions intended to help VA address systemic weaknesses in its health care system. Effective implementation, coupled with sustained congressional attention to these issues, will help ensure that VA continues to make progress in improving the delivery of health care services to veterans. GAO plans to continue monitoring VA's efforts to improve veterans' health care. An assessment of the status of VA health care's high-risk designation will be done during GAO's next update in 2017.
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IRS engages in hundreds of data-sharing arrangements with state revenue, human services, and law enforcement agencies for tax compliance and other purposes. In a small portion of IRS's federal-state data-sharing arrangements, states require federal tax compliance to qualify for a state business license. In some instances, state licensing agencies require compliance with both federal and state tax obligations, and requirements can vary among states. These arrangements can vary by industry; by type of taxes required for compliance, such as employment taxes or income taxes; and even by the type of documentation required to prove compliance. For example, in some states the businesses may self-certify that they are in compliance with taxes, and in others businesses must provide documentation from IRS or the state revenue agency that they are in compliance with tax requirements. IRS and California's DLSE are engaged in an arrangement that requires compliance with federal employment taxes to operate a business in any one of three industries in California. An individual applying for a new business license or a renewal of his/her business license to operate a farm labor contracting, garment manufacturing, or car washing and polishing business must first prove full compliance with federal employment taxes by filing all required federal employment tax returns and resolving all outstanding federal employment taxes through full payment or appeal. Each business license applicant in the three industries requiring federal tax compliance must submit a state business license application and a signed IRS Form 8821, Tax Information Authorization, allowing IRS to disclose the applicant's tax information to DLSE. IRS tax examiners in Ogden, Utah, review the tax information in IRS's Integrated Data Retrieval System (IDRS) to check the employment tax status of the applicant. If the applicant is compliant, IRS provides DLSE and the applicant with a statement that the applicant has met all filing and payment requirements. If the applicant has an outstanding employment tax liability, has not filed a federal employment tax return, or both, the tax examiner prompts the system to generate a noncompliance letter, which is sent to the applicant. Applicants with outstanding tax liability can pay the amounts due or contact the IRS tax examiners for more information or to make arrangements for payment. IRS officials told us that IRS Ogden does not collect employment taxes from business applicants directly. Noncompliant business applicants may pay federal employment taxes they owe at local IRS offices or mail their payments to IRS. Ogden officials are notified by e- mail or phone when business applicants have paid the employment taxes identified in the noncompliance letter. IRS informs DLSE that an applicant has paid all employment taxes, is currently working with a revenue officer to pay all balances due, or is otherwise compliant. After notification, DLSE will issue the applicant's business license. DLSE officials told us that for purposes of business licensing, California business applicants in the three industries have resolved their taxes if they have (1) paid their tax liability, (2) entered into installment agreements, or (3) completed offers in compromise with IRS. If an applicant's tax case is in bankruptcy, California's DLSE makes the decision on whether to issue the business license. If an applicant does not resolve his/her tax liability within 90 days of applying, IRS staff in Ogden send the cases to the IRS Agricultural Team in Fresno, where tax examiners open the case and do investigative work on collecting the balance due. See figure 1 on how data sharing between IRS and California operates. Section 6103 of the Internal Revenue Code (I.R.C.) prohibits the disclosure of tax returns and return information by IRS employees; other federal employees, state employees, or both; and certain others having access to the information except in specifically enumerated circumstances. Data sharing between IRS and California DLSE is authorized by a subsection of I.R.C. SS 6103. Specifically, section 6103(c) authorizes IRS to disclose the return information of a taxpayer to any other person at the taxpayer's request. State licensing entities that wish to review federal tax information or have IRS attest to tax compliance before issuing the license would need to require the applicant to provide a written request to IRS authorizing release of the information to the licensing entity. The data-sharing arrangement between IRS Ogden and California DLSE can be a valuable tool for improving compliance among certain businesses. According to IRS officials, this type of data-sharing arrangement has mutual benefits for IRS, by increasing filing and payment compliance with federal employment taxes, and for states, by minimizing concerns about the success of the business and its compliance with unemployment requirements. IRS officials noted that growth in this data- sharing arrangement can generate many compliance benefits with a relatively minimal resource allocation. According to a California DLSE official, this data-sharing arrangement is beneficial because it helps to ensure that businesses are competent and responsible and pay their taxes. The amount of revenue in federal employment taxes collected through this data-sharing arrangement appears to outweigh the cost of operating the data-sharing arrangement. Thousands of California businesses apply for a business license each year in order to operate a business in the three industries previously mentioned, and must provide documentation to DLSE to show that they are in compliance with federal employment taxes. Many of these businesses were not in compliance with employment taxes during the time of our analysis and, therefore, had to file tax returns or pay employment taxes to rectify their compliance status. According to the IRS Ogden database on business applicants, 7,194 businesses applied for a business license in the three industries one or more times from calendar years 2006 through 2008 and requested that IRS provide California with information on their compliance with federal employment taxes. About 24 percent of businesses (i.e., 1,726 of the 7,194 that applied) had to file employment tax returns or pay or otherwise resolve overdue taxes to come into compliance with federal employment taxes. IRS staff in Ogden use spreadsheets to track the number of federal tax returns filed by noncompliant California business license applicants and the amounts IRS collected from these businesses that are attributable to the data-sharing arrangement. The spreadsheets show that businesses not in compliance with federal employment taxes when they applied for California business licenses filed hundreds of tax returns in calendar years 2006 and 2007 and IRS collected millions in federal employment taxes. California businesses filed 441 employment tax returns to come into compliance to qualify for California business licenses and IRS collected nearly $7.4 million in employment taxes, according to IRS Ogden spreadsheets. IRS Ogden officials told us that the nearly $7.4 million in employment taxes collected represents the amount business applicants paid after receiving noncompliance letters related to their DLSE business license applications. Table 1 shows the number of tax returns filed and the amount IRS collected from these applicants during calendar years 2006 and 2007. Even though IRS did not track all of the costs it incurred for operating the data-sharing arrangement, IRS officials noted that the arrangement resulted in high revenues relative to costs. In order to get some perspective on how this data-sharing arrangement compares with other IRS enforcement efforts, we developed an estimate of the costs of the arrangement using cost categories provided and confirmed by IRS officials. The cost categories we considered included personnel costs and nonpersonnel costs, such as computers, telephones, and fax machines. We estimated that IRS incurred about $331,348 to operate the data-sharing arrangement in calendar years 2006 and 2007. Our cost estimate included personnel costs of about $202,125 in pay and about $61,042 in benefits for one General Schedule (GS) 5 clerk and two GS 7 tax examiners. We also included about $10,197 for three computers, $1,237 for one dedicated printer, $313 for one fax machine with a dedicated line and two dedicated phone lines with voice mail boxes, and approximately $56,435 for supplies, facilities, utilities, and supervision. These costs may be somewhat overstated because, for instance, we used approximate purchase costs for equipment and did not spread those costs over the useful life of the equipment or other uses of the equipment. Using our estimate, the ROI for this data-sharing arrangement is 22:1. IRS has not tracked the cost data needed to do a study comparing the ROI of the IRS Ogden/DLSE enforcement activity with those of other current enforcement activities to determine how the IRS Ogden/DLSE data-sharing arrangement ROI compares with those of IRS's other enforcement activities. However, IRS has developed ROI estimates for five new direct revenue-producing enforcement initiatives it proposed in its fiscal year 2009 budget submission. IRS estimates that the average ROI for these activities at full performance (at the end of their second year of implementation) will be 7.1:1. IRS projects the highest ROI for one of the five new initiatives (expanded document matching) at 11.4:1. IRS officials told us that IRS calculates the ROI each year for the revenue-producing initiatives included in the President's budget request. They also said that these ROI calculations are based on historical information in the Enforcement Revenue Information System and the annually updated unit cost rates used in budget formulation. We did not verify the accuracy of the data IRS provided or its estimate of the revenues and costs of its five new enforcement activities, including the estimated ROI of these activities. We identified the 2,017 businesses that applied for business licenses in calendar year 2006 only, and found that 315 of these businesses had unpaid assessments at the time of applying and that tax compliance improved for these 315 businesses. We identified the businesses that applied for a California business license in 2006 only so that we could follow the tax compliance of this set of specific businesses over time. We matched data of California business license applicants for calendar year 2006 from the IRS Ogden Access database with IRS's Unpaid Assessments file at two points in time--for the week of September 18, 2006, and the week of August 18, 2008. Our analysis of California business license applicants matched against the IRS Unpaid Assessments file database showed that 315 businesses owed employment taxes as of September 18, 2006, and by August 18, 2008, 165 of those businesses had resolved or lowered their unpaid assessment debt. The 165 businesses resolved or lowered their 2006 unpaid assessments in either calendar year 2007 or 2008. Our analysis also revealed that 150 businesses had not resolved or reduced unpaid assessment debt by August 18, 2008. Table 2 shows business license applicants with unpaid assessments as of September 18, 2006, and businesses that resolved/did not resolve their debt by August 18, 2008. The 165 businesses resolved or lowered their unpaid assessments by nearly $2 million--$1,925,162--from the weeks of September 18, 2006, through August 18, 2008. The 115 business license applicants that completely resolved their debt before August 18, 2008, resolved nearly $800,000 in unpaid tax assessments in calendar years 2007 and 2008. These applicants, in total, had a nearly $800,000 tax liability as of September 18, 2006, but the unpaid assessments file showed no tax liability for them as of the week of September 18, 2008. Fifty additional businesses lowered their tax assessments from the weeks of August 18, 2006, through September 18, 2008, by $1,135,216. However, the 165 businesses may have resolved more than $1,925,162 because these taxpayers may have had additional taxes assessed after the week of September 18, 2006, and may have resolved them before the week of August 18, 2008. Our analysis compares unpaid assessments at two points in time since the data file we used did not allow us to track weekly changes in the businesses' unpaid assessments. Table 3 shows the amount of unpaid tax assessments as of the week of September 18, 2006, and as of the week of August 18, 2008, and the amount of unpaid employment tax assessments resolved by the 165 businesses. All but 1 of the 350 businesses that had unpaid assessments when they applied for business licenses in calendar year 2006 were small businesses. The remaining business was a medium or large business. According to IRS, "small businesses" includes businesses with assets of less than $10 million. The IRS Ogden/California DLSE data-sharing arrangement can be a valuable compliance tool because the requirement to renew business licenses annually provides a motivation to resolve tax debts timely. The arrangement may help flag unpaid tax assessments when they are recent and have a greater likelihood of collection. Our previous work found that the age of the unpaid assessment is an indicator of the extent to which the outstanding amounts owed are likely to be collected. This work showed that the older an unpaid assessment the lower the probability it will be paid. In another report, we found that the IRS records we examined showed that 70 percent of all unpaid payroll taxes--estimated at $58 billion as of September 30, 2007--were owed by businesses with more than a year (4 tax quarters) of unpaid federal payroll taxes. Over a quarter of unpaid federal payroll taxes were owed by businesses that accumulated tax debt for more than 3 years (12 tax quarters). One reason why older debts may not be collected is that they lead to large and increasing amounts of accrued interest and penalties. The requirement that annual business license renewals depend on resolving unpaid employment tax assessments may help businesses avoid the pyramiding of interest and penalties. The ROI for these enforcement activities can vary depending on factors such as the efficiency of operating the data-sharing arrangements and whether the data-sharing arrangements experience higher collections in the early years of operation. For example, an IRS official suggested that there may be a way to more efficiently operate this type of data-sharing arrangement and thereby obtain a higher ROI. Applying an automated filter to isolate business applicants with no taxes due, IRS staff would only need to manually review data on businesses with balances due or that have not filed required returns, and fewer IRS staff may be needed to operate the data-sharing arrangement. An IRS official in Ogden told us that the taxes collected by the IRS Ogden/California DLSE data-sharing arrangement about 10 years ago were substantially higher because there was very little compliance when the data-sharing arrangement first started. This official recalled that when the program was transferred to Ogden the numbers of noncompliant applicants were at least three or four times higher than they are now. In this official's view, consistency in enforcing the business tax compliance requirement of the three industries has steadily improved compliance and has resulted in fewer business applicants that are noncompliant with their employment tax obligations when they apply for business licenses. Given that our analysis indicates that the California business licensing requirement likely has a higher ROI than the direct revenue-producing enforcement initiatives IRS proposed in its 2009 Congressional budget submission, a fuller examination is warranted. A more complete evaluation could address some potential factors that could reduce or increase the ROI we calculated. For example, it could evaluate whether IRS had taken other enforcement actions against the California businesses at the same time as they were applying for licenses. If IRS had sent collection notices to the businesses or taken other enforcement action at or close to the time the businesses went through the licensing reviews, the resolution of their debts might be attributable to those enforcement actions. A more complete evaluation could also compare the results of this enforcement approach to the results for similar businesses that were not subject to the business licensing requirement. Such an analysis could help demonstrate how well the business licensing requirement fares compared to the "normal" enforcement actions that would be taken by IRS with similarly situated businesses. A more complete evaluation could take into account the resolution of debts that may have been incurred before a business applied for a license. Since the affected businesses know they must resolve their employment tax debts in order to receive business licenses, some may pay or otherwise resolve their debts in anticipation of the licensing review by IRS. Any such advance payments or resolutions could be included. Similarly, although our tracing of businesses' compliance from calendar years 2006 to 2008 shows improvement in the resolution of many firms' debt, a more complete evaluation could compare their improvement to similarly situated businesses that were not subject to the licensing requirement. Such a comparison would help show whether this continued improvement in the delinquent debts was better than what could have occurred absent the licensing requirement. During the period we reviewed, Ogden staff responsible for the business licensing reviews discarded older operational data when they were no longer needed for their purposes. Further, a few months of data were lost even before they would have normally been discarded. Although these data may not be needed to administer the program, they are needed to support a more complete review of the program's ROI. We contacted revenue officials in every state and the District of Columbia to ask whether their states have business licensing requirements and, if so, whether they require demonstration of state tax compliance before business licenses are granted. Of the 47 states and the District of Columbia that responded, 20 revenue officials told us that the states require demonstration of compliance with one or more state taxes for businesses to qualify for state business licenses, and these requirements exist for one or more industries. Based on these responses, the tax compliance requirement is typically limited to a few industries, requires compliance with selected taxes, and varies on the amount of documentation required to show compliance with tax requirements. Table 4 summarizes responses on the number of states that require businesses to be tax compliant to qualify for state business licenses in one or more industries as of April 6, 2009. Of the 19 states and the District of Columbia that require business applicants to be compliant with state taxes, only the District of Columbia requires applicants in all industries to be state tax compliant to qualify for business licenses. Nineteen states require business license applicants in one or more industries to be state tax compliant to qualify for business licenses. Most of the states that responded do not require compliance with three types of taxes, employment, income, or sales and use, except for the District of Columbia, which requires compliance with all three types of taxes. Of the 19 states that identified compliance with state taxes to qualify for a state business license, 15 identified the specific type of tax or taxes being reviewed. Seven states require compliance with their employment taxes, 8 states require compliance with state sales and use taxes, and 10 states require compliance with state income taxes. State requirements also vary in the amount and kind of documentation required to prove compliance with tax requirements. For example, Rhode Island allows businesses to self-certify that they are in compliance with state tax requirements. Pennsylvania requires licensing agencies to request verification of state tax compliance from the state tax agency when a business owner applies for or renews a license. IRS maintains information on data-sharing arrangements that include requirements for federal tax compliance to qualify businesses for state business licenses. According to an IRS document, 13 data-sharing arrangements exist that require compliance with federal taxes to qualify for state business licenses. For example, the State of Oregon requires farm/forest labor contractors comply with federal and state taxes to qualify for state business licenses. Each farm/forest labor contractor applicant must submit IRS Form 8821 with the application. In addition, applicants can be denied licenses if state and federal taxes are owed. Similarly, the State of Connecticut requires applicants for gaming licenses to be compliant with federal and state income taxes to qualify for business licenses. Applicants for gaming licenses must submit complete copies of their most recent federal and state income tax returns and certify that there are no outstanding tax delinquencies or unresolved disputes. While most states told us that they do not track tax collections and program costs associated with these data-sharing arrangements, those revenue officials that provided comments and participate in data-sharing arrangements requiring state tax compliance told us that the state arrangements improve state tax collections and promote voluntary compliance. For example, a revenue official said that data sharing is used as another tool to collect outstanding taxes due the state. This official also said that the data-sharing arrangement has been very effective in furthering the state's tax collection efforts. He added that without a license, a business cannot operate. Another state revenue official told us that the individual or business must keep all state tax obligations current in order to prevent the denial or revocation of the applicable license. In this official's view, this causes the affected individuals or businesses to be less likely to have delinquent returns and outstanding tax bills that are not on payment agreements. Our analysis shows that 19 states and the District of Columbia allow the taxpayer to obtain a business license if the taxpayer sets up a payment agreement with the state's revenue agency. IRS staff in Ogden told us that requiring tax compliance makes the businesses think about the consequences of not being tax compliant. They added that the data-sharing arrangement itself becomes a deterrent after a while, since businesses, for which IRS is checking compliance, learn that they cannot get licenses without being compliant. While some state revenue officials see benefit in requiring tax compliance to qualify for a business license, they recognize certain challenges their agencies face from linking state business licensing with tax compliance. One of the challenges is coordination between state agencies. For example, a revenue official said that obtaining key information from state agencies, such as tax identification numbers and licensee names, and acting on her agency's request to suspend the licenses are ongoing challenges. A 2008 state study noted that agency coordination is crucial to the success of any tax clearance program. In order for the program to be effective, each agency must be prepared to share information with other agencies and to act on information received from other agencies. Finally, states also face technical issues with linking tax compliance with business licensing. For example, a revenue official said that her state does not have electronic linking between its Division of Alcoholic Beverages and Tobacco and the Department of Revenue for verification of applicant sales and use tax information. This official also said that the challenge would be to link their present licensing computer system with the Department of Revenue system. Another official said that her agency's computer programs vary, are outdated, and are not integrated. Some challenges identified by states likely would be especially important for any expansion of requirements for federal tax compliance to obtain state business licenses. For example, some of the revenue officials we contacted identified legal issues relating to data sharing. A state revenue official said that various licensing statutes do not permit the revocation or threat of action against a licensee due to tax noncompliance. An additional revenue official said that with limited resources, implementing the legal requirement to review licenses is difficult. The potential to increase data-sharing opportunities between IRS and state business licensing entities exists, but pinpointing the exact number of opportunities is difficult. According to the Small Business Administration, business licensing requirements vary from state to state. For example, a state "business license" is the main document required for tax purposes and conducting other basic business functions. However, some states have separate licensing requirements based on the product sold, such as licenses to sell liquor, lottery tickets, gasoline, or firearms. Ultimately, it is up to each state to determine what industries, occupations, and professions must be licensed and the licensure requirements that applicants must meet. Some states and some business types may represent more of an immediate opportunity for establishing arrangements that require federal tax compliance to qualify for state business licenses. States that currently require compliance with state taxes for selected business license applicants may be more amenable to requiring federal tax compliance than states that do not even require state tax compliance since they already recognize tax compliance as important for the businesses. For example, North Carolina, Texas, and Missouri have a requirement for tax compliance with state taxes for retail sales businesses. These states do not require compliance with federal taxes. In addition, states that currently require compliance with federal employment taxes may be amenable to extending the requirement to include federal income taxes. For example, California's DLSE requires applicants for the three industries requiring licensing to be compliant with federal employment taxes only. California's garment manufacturing, farm labor contracting, and car washing and polishing license applicants have no requirement to be in compliance with federal income taxes to qualify for business licenses. Increasing data sharing between IRS and state governments to help reduce the tax gap can be beneficial to IRS when such data-sharing arrangements demonstrate firm compliance value. Data-sharing arrangements requiring tax compliance among business license applicants show real potential to be a valuable tool to improve tax compliance among certain businesses. Our estimated ROI of the data-sharing arrangement between IRS Ogden and California DLSE suggests that requiring tax compliance to qualify for state business licenses can be a cost-effective way of collecting tax debt. In fact, the data-sharing arrangement's estimated ROI is higher than the estimated ROI for the new direct revenue-producing tax enforcement initiatives in IRS's fiscal year 2009 budget submission. However, a more complete evaluation could take into account all the factors that could affect ROI. To be in a better position to evaluate these data-sharing arrangements, IRS needs to ensure that program data are retained. We recommend that the Commissioner of Internal Revenue take the following three actions: Collect and retain the cost and revenue data needed to develop ROI estimates for programs requiring businesses to demonstrate federal tax compliance to obtain state business licenses. Evaluate the ROI of existing arrangements where states require federal tax compliance to qualify for state business licenses to determine whether the ROI of these programs is sufficient to merit their expansion. To the extent that existing data-sharing arrangements have a sufficiently high ROI, coordinate with states to expand requirements to comply with federal taxes to qualify for state business licenses and monitor the ROI of these expansions to gauge their success. On behalf of the Commissioner of Internal Revenue, the Deputy Commissioner for Services and Enforcement provided written comments on a draft of this report in a June 8, 2009, letter. The Deputy Commissioner agreed with our recommendations. IRS plans to gather appropriate data to develop ROI estimates for this program, evaluate the results to determine whether these programs merit expansion, and if so, work with states to expand the programs. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 from the report date. At that time, we will send copies to the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. 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. Our objectives were to analyze (1) the extent to which requiring a demonstration of federal tax compliance to qualify for a state business license has the potential to improve federal tax compliance and (2) what opportunities exist for increasing arrangements that require federal tax compliance to qualify for state business licensing. This report focuses on data-sharing arrangements that require compliance with federal or state tax obligations to qualify for state business licensing. We did not include licensing requirements at the local level or licensing for professions or occupations. To provide background on data-sharing arrangements that require compliance with tax obligations to qualify for state business licensing, we reviewed relevant Internal Revenue Service (IRS) and California Department of Industrial Relations, Division of Labor Standards Enforcement (DLSE) documents and interviewed IRS and California officials. We also reviewed laws and regulations related to taxpayer disclosure. To determine the extent to which requiring a demonstration of federal tax compliance to qualify for a state business license has the potential to improve federal tax compliance, we used the IRS and State of California data-sharing arrangement as a case study. To determine the potential for improving federal tax compliance, we estimated the return on investment (ROI) for the IRS Ogden/California DLSE data-sharing arrangement. To determine the amount collected, we used IRS Ogden/California DLSE spreadsheets that record the number of federal tax returns filed by applicants for business licenses in the three industries and the amount IRS collected from businesses that were notified by IRS that they were not in compliance with federal employment taxes covering calendar year 2006 and 8 months in calendar year 2007. Spreadsheet data for calendar year 2007 excluded 4 months. Ogden misplaced data for July and August, and data for November and December were not available when we obtained the data in November 2007. We also reviewed agency agreements and memoranda, regulations, and reports covering the data-sharing arrangement between IRS and California DLSE and interviewed IRS and California officials about the value of the data-sharing arrangement to IRS and the state. To determine the cost of operating this data-sharing arrangement, we estimated the costs of collecting the amounts owed by noncompliant businesses using actual cost categories provided by IRS Ogden officials. We used the guidance for preparing agency budgets in Executive Office of the President, Office of Management and Budget, Circular A-11, Preparation, Submission, and Execution of the Budget, and our Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs, GAO-09-3SP (Washington, D.C.: March 2009). We estimated personnel costs using the Office of Personnel Management Salary Table 2009-RUS, for the locality pay area "of rest of U.S.," effective January 2009, for General Schedule (GS) 5 and 7 personnel at step 5. We used step 5 to capture the midpoint of the GS 5 and 7 grade levels so as not to bias pay in the direction of a low or high estimate. We estimated the cost of benefits for these employees using the Department of Labor's Bureau of Labor Statistics 30.2 percent average compensation cost for calendar year 2008. We estimated the cost of fax machines and printers by averaging the costs for these items as shown on the Web sites for federal government customers of two leading manufacturers of these products. We shared our estimates with IRS officials to obtain concurrence with our estimates of nonpersonnel costs. We did not analyze the taxes IRS may collect or the costs it may incur after the noncompliant cases leave Ogden. We then compared the ROI ratio for this data-sharing arrangement to IRS's estimates for five revenue-producing enforcement initiatives in the IRS fiscal year 2009 budget submission. The Ogden Service Center sends information on the taxpayers that have unpaid assessments 90 days after Ogden first receives their application materials to the Fresno Service Center for collection. To determine whether California businesses remained in compliance over time, we matched data on California business applicants from an Access database maintained by IRS Ogden with taxpayers in IRS's Business Master File Unpaid Assessments file. We selected the businesses that according to the Access database, applied for California DLSE business licenses in calendar year 2006 only--that is, applied in calendar year 2006 and did not reapply in calendar year 2007 or in the 10 months in 2008 for which we have IRS Ogden DLSE Access database data. The Access database contained January 2006 through October 2007 data on business license applicants in the three covered industries. For our analysis, we matched records of the California businesses that we selected from the Access database because they applied in calendar year 2006 only with IRS's Unpaid Assessments file as of the weeks of September 18, 2006, and August 18, 2008; identified the number of businesses with unpaid assessments and the amounts of their tax debt as of the week of September 18, 2006; and identified the applicants for business licenses in 2006 only that had resolved their unpaid assessments as of August 18, 2008, and the amounts of their tax debt they resolved. Our analysis compares unpaid assessments at two points in time since the data file we used did not allow us to track weekly changes in the businesses' unpaid assessments. We could not follow the tax compliance of earlier applicants into the present because IRS Ogden purged data from the Access database for calendar years earlier than 2006. Unpaid assessments in this report include the total tax assessment plus interest and penalties where these exist. To determine what opportunities exist for increasing data sharing for arrangements that require federal tax compliance to qualify for state business licensing, we (1) analyzed and summarized which states and the District of Columbia have data-sharing arrangements that require state tax compliance to qualify for state business licensing, which states do not have such arrangements, and which states do not require businesses to obtain business licenses on the state level; (2) contacted revenue officials in 50 states and the District of Columbia via e-mail with structured questions about the extent to which their states engage in data-sharing arrangements that require demonstration of tax compliance before business licenses are granted; and (3) sent a follow-up e-mail to 21 state revenue officials who confirmed that their states require applicants to be compliant with state taxes to qualify for business licenses, by requesting information on the amount of taxes collected, the costs associated with operating the data-sharing arrangements, and benefits of these data- sharing relationships to the states. Three states did not respond to our structured questions about the extent to which their states engage in data- sharing arrangements that require demonstration of tax compliance before businesses qualify for business licenses. We also (1) summarized IRS information on existing data-sharing arrangements between IRS and state agencies that require compliance with federal taxes to qualify for state business licensing, (2) interviewed IRS officials to determine which states have state licensing requiring federal tax compliance, and (3) reviewed IRS documentation on data-sharing arrangements between IRS and state agencies that require businesses to demonstrate federal tax compliance to qualify for state business licensing. Our review was subject to some limitations. We did not verify the accuracy of the data IRS provided or its estimate of the revenues and costs of its five new enforcement activities, including the estimated ROI of these activities. IRS Ogden's Access database on California business applicants did not contain data prior to calendar year 2006 because IRS Ogden purged these historical data. While data from previous years would be useful for evaluating the data-sharing arrangement, we believe that the Ogden records that were available were sufficient to attain an understanding of the potential value of this arrangement as a compliance tool. The IRS Ogden spreadsheet used to track the number of federal tax returns filed by noncompliant California business license applicants and the amount IRS collected from these businesses attributable to the data- sharing arrangement did not contain data for the months of July, August, November, and December 2007. We acknowledge that data for the entire calendar year of 2007 would affect the number of tax returns filed and the amount IRS collected from applicants during those months. Our estimate of the cost of IRS and California's data-sharing arrangement may be somewhat overstated because, for instance, we used approximate purchase costs for equipment and did not spread those costs over the useful life of the equipment or other uses of the equipment and used calendar year 2009 costs. Additionally, our analysis did not address some other potential factors that could reduce, or increase, the ROI we calculated. We did not verify the responses from the states about tax compliance to qualify for state business licenses. We recognize that the state revenue officials may not be knowledgeable about all of their states' requirements for tax compliance to qualify for business licenses, but they are a credible source of information about state tax compliance to qualify for state business licenses. We conducted this performance audit from June 2007 through June 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Signora J. May, Assistant Director; Amy R. Bowser; Jennifer K. Echard; Amy C. Friedlander; Arthur L. James, Jr.; Stuart M. Kaufman; Edward J. Nannenhorn; Lou V. B. Smith; Jessica Thomsen; and James J. Ungvarsky made key contributions to this report.
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The California Department of Industrial Relations, Division of Labor Standards Enforcement (DLSE), requires applicants for California business licenses in three industries--farm labor contracting, garment manufacturing, and car washing and polishing--to be in compliance with federal employment tax obligations to qualify. Based on questions about whether the Internal Revenue Service (IRS) is fully using data from state and local governments to reduce the tax gap, GAO was asked to analyze (1) the extent to which requiring a demonstration of federal tax compliance to qualify for a state business license has the potential to improve federal tax compliance and (2) what opportunities exist for increasing arrangements that require federal tax compliance to qualify for state business licensing. To address these objectives, GAO analyzed IRS administrative and tax data. GAO identified California as a case study. GAO interviewed IRS and state officials and contacted revenue officials in the 50 states and the District of Columbia. The California requirement that three types of businesses be in compliance with federal employment taxes to obtain a state business license shows promise as a valuable tool for improving federal tax compliance. According to data from IRS, of 7,194 businesses that applied for a California business license one or more times from calendar years 2006 through 2008 about 24 percent had to file employment tax returns or pay overdue taxes to come into compliance with federal employment taxes. California businesses filed 441 employment tax returns and IRS collected nearly $7.4 million in current dollars in employment taxes in calendar year 2006 and in 8 months of calendar year 2007. GAO estimated that IRS incurred about $331,348 to operate the data-sharing arrangement for this period. Using this cost estimate, the ROI for this arrangement is 22:1. IRS has not tracked the cost data needed to compare the ROI of the IRS-DLSE enforcement activity with other current enforcement activities. However, IRS's highest estimated ROI among five new direct revenue-producing enforcement initiatives proposed in its fiscal year 2009 budget was 11.4:1. Tax compliance among businesses after they applied for state business licenses showed continued improvement. GAO identified 2,017 businesses that applied for business licenses in calendar year 2006 only and found that 315 of these businesses had unpaid assessments as of September 18, 2006. By August 18, 2008, 165 of these businesses had resolved or lowered their unpaid assessment debt by $1,925,162. All but 1 of the 350 businesses that had unpaid assessments when they applied for business licenses in calendar year 2006 were small businesses. GAO's analysis, although showing a promising ROI, did not take into account certain factors, such as whether other tax collection activities were in process for the businesses that applied for licenses. Many opportunities exist to require federal tax compliance to qualify for state business licenses. GAO contacted revenue officials in every state and the District of Columbia to ask whether their states require tax compliance for business licenses. For the 48 respondents, 20 revenue officials said that their states require compliance with state taxes to obtain a state business license, and that these requirements exist for one or more industries. Twenty said that their states do not have such a requirement; 8 said that their states have no business license requirement at the state level. According to IRS, arrangements exist with 13 states that require compliance with one or more federal taxes to qualify for a state business license. Varying licensing requirements from state to state and lack of uniformity among states in categorizing a license as a "business license" make pinpointing the exact number of opportunities difficult. States that currently require compliance with state taxes for selected business license applicants may represent more of an immediate opportunity for establishing arrangements that require federal tax compliance to qualify for a state business license since they already see tax compliance as important for the businesses. Some challenges, such as a lack of current legal authority in some states to link businesses to tax compliance, would need to be addressed if requiring federal tax compliance for state business licenses is to be expanded.
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Recruitment and retention of adequate numbers of qualified workers are major concerns for many health care providers today. While current data on supply and demand for many categories of health workers are limited, available evidence suggests emerging shortages in some fields, for example, among nurses and nurse aides. Many providers are reporting rising vacancy and turnover rates for these worker categories. In addition, difficult working conditions and dissatisfaction with wages have contributed to rising levels of dissatisfaction among many nurses and nurse aides. These concerns are likely to increase in the future as demographic pressures associated with an aging population are expected to both increase demand for health services and limit the pool of available workers such as nurses and nurse aides. As the baby boom generation ages, the population of persons age 65 and older is expected to double between 2000 and 2030, while the number of women age 25 to 54, who have traditionally formed the core of the nursing workforce, will remain virtually unchanged. As a result, the nation may face a caregiver shortage of different dimensions from those of the past. Nurses and nurse aides are by far the two largest categories of health care workers, followed by physicians and pharmacists. While current workforce data are not adequate to determine the magnitude of any imbalance between supply and demand with any degree of precision, evidence suggests emerging shortages of nurses and nurse aides to fill vacant positions in hospitals, nursing homes, and other health care settings. Hospitals and other providers throughout the country have reported increasing difficulty in recruiting health care workers, with national vacancy rates in hospitals as high as 21 percent for pharmacists in 2001. Rising turnover rates in some fields such as nursing and pharmacy are another challenge facing providers and are suggestive of growing dissatisfaction with wages, working environments, or both. There is no consensus on the optimal number and ratio of health professionals necessary to meet the population's health care needs. Both demand and supply of health workers are influenced by many factors. For example, with respect to registered nurses (RN), demand not only depends on the care needs of the population, but also on how providers-- hospitals, nursing homes, clinics, and others--decide to use nurses in delivering care. Providers have changed staffing patterns in the past, employing fewer or more nurses relative to other workers at various times. National data are not adequate to describe the nature and extent of nurse workforce shortages nor are data sufficiently sensitive or current to allow a comparison of the adequacy of nurse workforce size across states, specialties, or provider types. With respect to pharmacists, there are also limited data available for assessing the adequacy of supply, a situation that has led to contradictory claims of a surplus of pharmacists a few years ago and a shortage at the present time. While several factors point to growing demand for pharmacy services such as the increasing number of prescriptions being filled, a greater number of pharmacy sites, and longer hours of operation, these pressures may be moderated by expanding access to alternative dispensing models such as Internet and mail-order delivery services. Recent studies suggest that hospitals and other health care providers in many areas of the country are experiencing increasing difficulty recruiting health care workers. A recent 2001 national survey by the American Hospital Association reported an 11 percent vacancy rate for RNs, 18 percent for radiology technicians, and 21 percent for pharmacists. Half of all hospitals reported more difficulty in recruiting pharmacists than in the previous year, and three-quarters reported greater difficulty in recruiting RNs. Urban hospitals reported slightly more difficulty in recruiting RNs than rural hospitals. However, rural hospitals reported higher vacancy rates for several other types of employees. Rural hospitals reported a 29 percent vacancy rate for pharmacists and 21 percent for radiology technologists compared to 15 percent and 16 percent respectively among urban hospitals. A recent survey in Maryland conducted by the Association of Maryland Hospitals and Health Systems reported a statewide average RN vacancy rate for hospitals of 14.7 percent in 2000, up from 3.3 percent in 1997. The Association reported that the last time vacancy rates were at this level was during the late 1980s, during the last reported nurse shortage. Also in 2000, Maryland hospitals reported a 12.4 percent vacancy rate for pharmacists, a 13.6 percent rate for laboratory technicians, and 21.0 percent for nuclear medicine technologists. These same hospitals reported taking 60 days to fill a vacant RN position in 2000 and 54 days to fill a pharmacy vacancy in 1999. Several recent analyses illustrate concerns over the supply of nurse aides. In a 2000 study of the nurse aide workforce in Pennsylvania, staff shortages were reported by three-fourths of nursing homes and more than half of all home health care agencies. Over half (53 percent) of private nursing homes and 46 percent of certified home health care agencies reported staff vacancy rates higher than 10 percent. Nineteen percent of nursing homes and 25 percent of home health care agencies reported vacancy rates exceeding 20 percent. A recent survey of providers in Vermont found high vacancy rates for nurse aides, particularly in hospitals and nursing homes; as of June 2000, the vacancy rate for nurse aides in nursing homes was 16 percent, in hospitals 15 percent, and in home health care 8 percent. In a recent survey of states, officials from 42 of the 48 states responding reported that nurse aide recruitment and retention were currently major workforce issues in their states. More than two-thirds of these states (30 of 42) reported that they were actively engaged in efforts to address these issues. Rising turnover rates in many fields are another challenge facing providers and suggest growing dissatisfaction with wages, working environments, or both. According to a recent national hospital survey, rising rates of turnover have been experienced, particularly in nursing and pharmacy departments. Turnover among nursing staff rose from 11.7 percent in 1998 to 26.2 percent in 2000. Among pharmacy staff, turnover rose from 14.6 percent to 21.3 percent over the same period. Nursing home and home health care industry surveys indicate that nurse turnover is an issue for them as well. In 1997, an American Health Care Association (AHCA) survey of 13 nursing home chains identified a 51-percent turnover rate for RNs and licensed practical nurses (LPN). A 2000 national survey of home health care agencies reported a 21-percent turnover rate for RNs. Many providers also are reporting problems with retention of nurse aide staff. Annual turnover rates among aides working in nursing homes are reported to be from about 40 percent to more than 100 percent. In 1998, a survey sponsored by AHCA of 12 nursing home chains found 94-percent turnover among nurse aides. A more recent national study of home health care agencies identified a 28 percent turnover rate among aides in 2000, up from 19 percent in 1994. High rates of turnover may lead to higher provider costs and quality of care problems. Direct provider costs of turnover include recruitment, selection, and training of new staff, overtime, and use of temporary agency staff to fill gaps. Indirect costs associated with turnover include an initial reduction in the efficiency of new staff and a decrease staff morale and group productivity. In nursing homes, for example, high turnover can disrupt the continuity of patient care--that is, aides may lack experience and knowledge of individual residents or clients. When turnover leads to staff shortages, nursing home residents may suffer harm because there remain fewer staff to care for the same number of residents. Job dissatisfaction has been identified as a major factor contributing to the current problems providers report in recruiting and retaining nurses and nurse aides. Among nurses, inadequate staffing, heavy workloads, and the increased use of overtime are frequently cited as key areas of job dissatisfaction. A recent Federation of Nurses and Health Professionals (FNHP) survey found that half of the currently employed RNs surveyed had considered leaving the patient-care field for reasons other than retirement over the past 2 years; of those who considered leaving, 18 percent wanted higher wages, but 56 percent wanted a less stressful and less physically demanding job. Other surveys indicate that while increased wages might encourage nurses to stay at their jobs, money is not generally cited as the primary reason for job dissatisfaction. The FNHP survey found that 55 percent of currently employed RNs were either just somewhat or not satisfied with their facility's staffing levels, while 43 percent indicated that increased staffing would do the most to improve their jobs. For nurse aides, low wages, few benefits, and difficult working conditions are linked to high turnover. Our analysis of national wage and employment data from the Bureau of Labor Statistics (BLS) indicates that, on average, nurse aides receive lower wages and have fewer benefits than workers generally. In 1999, the national average hourly wage for aides working in nursing homes was $8.29, compared to $9.22 for service workers and $15.29 for all workers. For aides working in home health care agencies, the average hourly wage was $8.67, and for aides working in hospitals, $8.94. Aides working in nursing homes and home health care are more than twice as likely as other workers to be receiving food stamps and Medicaid benefits, and they are much more likely to lack health insurance. One- fourth of aides in nursing homes and one-third of aides in home health care are uninsured compared to 16 percent of all workers. In addition, other studies have found that the physical demands of nurse aide work and other aspects of the environment contribute to retention problems. Nurse aide jobs are physically demanding, often requiring moving patients in and out of bed, long hours of standing and walking, and dealing with patients or residents who may be disoriented or uncooperative. Concern about emerging shortages may increase as the demand for health care services is expected to grow dramatically with the continued aging of the population. In most job categories, health care employment is expected to grow much faster than overall employment, which BLS projects will increase by 14.4 percent from 1998 to 2008. As shown in Table 1, total employment for personal and home care aides is expected to grow by 58 percent, with 567,000 new workers needed to meet the increased demand and replace those who leave the field. Employment of physical therapists is expected to grow by 34 percent, and employment of RNs is projected to grow by almost 22 percent, with 794,000 new RNs expected to be needed by 2008. Demographic pressures will continue to exert significant pressure on both the supply and demand for nurses and nurse aides. A more serious shortage of nurses and nurse aides is expected in the future, as pressures are exerted on both supply and demand. The future demand for these workers is expected to increase dramatically when the baby boomers reach their 60s, 70s, and beyond. Between 2000 and 2030, the population age 65 years and older will double. During that same period the number of women age 25 to 54, who have traditionally formed the core of the nurse and nurse aide workforce, is expected to remain relatively unchanged. Unless more young people choose to go into the nursing profession, the workforce will continue to age. By 2010, approximately 40 percent of nurses will likely be older than 50 years. By 2020, the total number of full time equivalent RNs is projected to have fallen 20 percent below HRSA's projections of the number of RNs that will be required to meet demand at that time. In addition to concerns about the overall supply of health care professionals, the distribution of available providers is an ongoing public health concern. Many Americans live in areas--including isolated rural areas or inner city neighborhoods--that lack a sufficient number of health care providers. The National Health Service Corps (NHSC) is one safety- net program that directly places primary care physicians and other health professionals in these medically needy areas. The NHSC offers scholarships and educational loan repayments for health care professionals who, in turn, agree to serve in communities that have a shortage of them. Since its establishment in 1970, the NHSC has placed thousands of physicians, nurse practitioners, dentists, and other health care providers in communities that report chronic shortages of health professionals. At the end of fiscal year 2000, the NHSC had 2,376 providers serving in shortage areas. Since the NHSC was last reauthorized in 1990, funding for its scholarship and loan repayment programs has increased nearly 8-fold, from about $11 million in 1990 to around $84 million in 2001. Some have proposed expanding the NHSC or developing similar programs to include additional health care disciplines, such as nurses, pharmacists, and medical laboratory personnel. In considering such possibilities, HHS and the Congress may want to consider our work that has identified several ways in which the NHSC could be improved. These include how the NHSC identifies the need for providers and how it measures that need, how the NHSC placements are coordinated with other programs and with its own placements, and which financing mechanism--scholarships or loan repayments--is a better approach to attract providers to those areas. Over the past 6 years, we have identified numerous problems with the way HHS decides whether an area is a health professional shortage area (HPSA), a designation required for a NHSC placement. In addition to identifying problems with the timeliness and quality of the data used, we found that HHS' current approach does not count some providers already working in the shortage area. For example, it does not count nonphysicians providing primary care, such as nurse practitioners, and it does not count NHSC providers already practicing there. As a result, the current HPSA system tends to overstate the need for more providers, leading us to question the system's ability to assist HHS in identifying the universe of need and in prioritizing areas. Recognizing the flaws in the current system, HHS has been working on ways to improve the designation of HPSAs, but the problems have not yet been resolved. After studying the changes needed to improve the HPSA system for nearly a decade, HHS published a proposed rule in the Federal Register in September 1998. The proposed rule generated a large volume of comments and a high level of concern about its potential impact. In June 1999, HHS announced that it would conduct further analyses before proceeding. HHS continues to work on a revised shortage area designation methodology; however, as of July 2001, it did not have a firm date for publishing the proposed new regulations. The controversy surrounding proposed modifications to the HPSA designation system may be due, in large part, to its use by other programs. Originally, it was only used to identify an area as one that could request a provider from the NHSC. Today many federal and state programs-- including efforts unaffiliated with HHS--use the HPSA designation in considering program eligibility. These areas want to get and retain the HPSA designation in order to be eligible for such other programs as the Rural Health Clinic program or a 10 percent bonus on Medicare payments for physicians and other providers. The NHSC needs to coordinate its placements with other efforts to attract physicians to needy areas. There are not enough providers to fill all of the vacancies approved for NHSC providers. As a result, underserved communities are frequently turning to another method of obtaining physicians--attracting non-U.S. citizens who have just completed their graduate medical education in the United States. These physicians generally enter the United States under an exchange visitor program, and their visas, called J-1 visas, require them to leave the country when their medical training is done. However, the requirement to leave can be waived if a federal agency or state requests it. A waiver is usually accompanied by a requirement that the physician practice for a specified period in an underserved area. In fiscal year 1999, nearly 40 states requested such waivers. They are joined by several federal agencies--particularly the Department of Agriculture, which wants physicians to practice in rural areas, and the Appalachian Regional Commission, which wants to fill physician needs in Appalachia. Waiver placements have become so numerous that they have outnumbered the placements of NHSC physicians. In September 1999, over 2,000 physicians had waivers and were practicing in or contracted to practice in underserved areas, compared with 1,356 NHSC physicians. In 1999, the number of waiver physicians was large enough to satisfy over one-fourth of the physicians needed to eliminate HPSA designations nationwide. Our follow-up work in 2001 with the federal agencies requesting the waivers and 10 states indicates that these waivers are still frequently used to attract physicians to underserved areas. Although coordinating NHSC placements and waiver placements has the obvious advantage of addressing the needs of as many underserved locations as possible, this coordination has not occurred. In fact, this sizeable domestic placement effort--using waiver physicians to address medical underservice--is rudderless. Even among those states and agencies using the waiver approach, no federal agency has responsibility for ensuring that placement efforts are coordinated. The Administration has recently stated that HHS will enhance coordination between the NHSC and the use of waiver physicians; however HHS does not have a system to take waiver physician placements into account in determining where to put NHSC physicians. While some informal coordination may occur, it remains a fragmented effort with no overall program accountability. As a result, some areas have ended up with more than enough physicians to remove their shortage designations, while needs in other areas have gone unfilled. As the Congress considers reauthorizing the NHSC, it also has the opportunity to address these issues. We believe that the prospects for coordination would be enhanced through congressional direction in two areas. The first is whether waivers should be included as part of an overall federal strategy for addressing underservice. This should include determining the size of the waiver program and establishing how it should be coordinated with other federal programs. The second--applicable if the Congress decides that waivers should be a part of the federal strategy--is designating leadership responsibility for managing the use of waivers as a distinct program. While congressional action could foster a coordinated federal strategy for placement of J-1 waiver physicians, our work has also shown that congressional action could help ensure that NHSC providers assist as many needy areas as possible. We previously reported that at least 22 percent of shortage areas receiving NHSC providers in 1993 received more NHSC providers than needed to lift their provider-to-population ratio to the point at which their HPSA designation could be removed, while 65 percent of shortage areas with NHSC-approved vacancies did not receive any providers at all. Of these latter locations, 143 had unsuccessfully requested a NHSC provider for 3 years or more. In response to our recommendations, the NHSC has subsequently made improvements in its procedures and has substantially cut the number of HPSAs not receiving providers. However, these procedures still allow some HPSAs to receive more than enough providers to remove their shortage designation while others go without. NHSC officials have said that in making placements, they need to weigh not only assisting as many shortage areas as possible, but also factors-- such as referral networks, office space, and salary and benefit packages-- that can affect the chance that a provider might stay beyond the period of obligated service. Since the practice sites on the NHSC vacancy list had to meet NHSC requirements, including requirements for referral networks and salary and benefits packages, such factors should not be an issue for those practice locations. And while we agree that retention is a laudable goal, the impact of the NHSC's current practice is unknown, since the NHSC does not routinely track how long NHSC providers are retained at their sites after completing their service obligations. The Congress may want to consider clarifying the extent to which the program should try to meet the minimum needs of as many shortage areas as possible, and the extent to which additional placements should be allowed in an effort to encourage provider retention. Another issue that is fundamental to attracting health care professionals to the NHSC is the allocation of funds between scholarships and educational loan repayments. Under the NHSC scholarship program, students are recruited before or during their health professions training--generally several years before they begin their service obligation. By contrast, under the NHSC loan repayment program, providers are recruited at the time or after they complete their training. The scholarship program provides a set amount of aid per year while in school, while the loan repayment program repays a set amount of student debt for each year of service provided. Under the Public Health Service Act, at least 40 percent of the available funding must be for scholarships. We looked at which financing mechanism works better and found that, for several reasons, the loan repayment program is the better approach in most situations. The loan repayment program costs less. On average, each year of service by a physician under the scholarship program costs the federal government over $43,000 compared with less than $25,000 under loan repayment. A major reason for the difference is the time value of money. Because 7 or more years can elapse between the time that a physician receives a scholarship and the time that the physician begins to practice in an underserved area, the federal government is making an investment for a commitment for service in the future. In the loan repayment program, however, the federal government does not pay until after the service has begun. The difference in average cost per year of service could increase in the future as a result of a recent change in tax law. Loan repayment recipients are more likely to complete their service obligations. This is not surprising when one considers that scholarship recipients enter into their contracts up to 7 or more years before beginning their service obligation, during which time their professional interests and personal circumstances may change. Twelve percent of scholarship recipients between 1980 and 1999 breached their contract to serve,compared to about 3 percent of loan repayment recipients since that program began. Loan repayment recipients are more likely to continue practicing in the underserved community after completing their obligation. How long providers remain at their sites after fulfilling their obligation is not fully clear, because the NHSC does not have a long-term tracking system in place. However, we analyzed data for calendar years 1991 through 1993 and found that 48 percent of loan repayment recipients were still at the same site 1 year after fulfilling their obligation, compared to 27 percent for scholarship recipients. Again, this is not surprising. Because loan repayment recipients do not commit to service until after they have completed training, they are more likely to know what they want to do and where they want to live or practice at the time they make the commitment. These reasons support applying a higher percentage of NHSC funding to loan repayment. The Congress may want to consider eliminating the current requirement that scholarships receive at least 40 percent of the funding. Besides being generally more cost-effective, the loan repayment program allows the NHSC to respond more quickly to changing needs. If demand suddenly increases for a certain type of health professional, the NHSC can recruit graduates right away through loan repayments. By contrast, giving a scholarship means waiting for years for the person to graduate. This is not to say that scholarships should be eliminated. One reason to keep them is that they can potentially do a better job of putting people in sites with the greatest need because scholarship recipients have less latitude in where they can fulfill their service obligation. However, our work indicates that this advantage has not been realized in practice. For NHSC providers beginning practice in 1993-1994, we found no significant difference between scholarship and loan payment recipients in the priority that NHSC assigned to their service locations. This suggests that the scholarship program should be tightened so that it focuses on those areas with critical needs that cannot be met through loan repayment. In this regard, the Congress may want to consider reducing the number of sites that scholarship recipients can choose from, so that the focus of scholarships is clearly on the neediest sites. While placing greater restrictions on service locations could potentially reduce interest in the scholarship program, the program currently has more than six applicants for every scholarship--suggesting that the interest level is high enough to allow for some tightening in the program's conditions. If that approach should fail, additional incentives to get providers to the neediest areas might need to be explored. Providers' current difficulty recruiting and retaining health care professionals such as nurses and others could worsen as demand for these workers increases in the future. Current high levels of job dissatisfaction among nurses and nurse aides may also play a crucial role in determining the extent of current and future nursing shortages. Efforts undertaken to improve the workplace environment may both reduce the likelihood of nurses and nurse aides leaving the field and encourage more young people to enter the nursing profession. Nonetheless, demographic forces will continue to widen the gap between the number of people needing care and the nursing staff available to provide care. As a result, the nation will face a caregiver shortage of different dimensions from shortages of the past. More detailed data are needed, however, to delineate the extent and nature of nurse and nurse aide shortages to assist in planning and targeting corrective efforts. Regarding the NHSC, addressing needed program improvements would be beneficial. In particular, better coordination of NHSC placements with waivers for J-1 visa physicians could help more needy areas. In addition, addressing shortfalls in HHS systems for identifying underservice is long overdue. We believe HHS needs to gather more consistent and reliable information on the changing needs for services in underserved communities. Until then, determining whether federal resources are appropriately targeted to communities of greatest need and measuring their impact will remain problematic. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or members of the Subcommittee may have. For further information regarding this testimony, please call Janet Heinrich, Director, Health Care--Public Health Issues, at (202) 512-7119 or Frank Pasquier, Assistant Director, Health Care, at (206) 287-4861. Other individuals who made key contributions to this testimony include Eric Anderson and Kim Yamane.
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This testimony discusses (1) the shortage of healthcare workers and (2) the lessons learned by the National Health Service Corps (NHSC) in addressing these shortages. GAO found that problems in recruiting and retaining health care professionals could worsen as demand for these workers increases. High levels of job dissatisfaction among nurses and nurses aides may also play a crucial role in current and future nursing shortages. Efforts to improve the workplace environment may both reduce the likelihood of nurses and nurse aides leaving the field and encourage more young people to enter the nursing profession. Nonetheless, demographic forces will continue to widen the gap between the number of people needing care and the nursing staff available. As a result, the nation will face a caregiver shortage very different from shortages of the past. More detailed data are needed, however, to delineate the extent and nature of nurse and nurse aide shortages to assist in planning and targeting corrective efforts. Better coordination of NHSC placements, with waivers for foreign U.S.-educated physicians, could help more needy areas. In addition, addressing shortfalls in the Department of Health and Human Services (HHS) systems for identifying underservice is long overdue. HHS needs to gather more consistent and reliable information on the changing needs for services in underserved communities. Until then, it will remain difficult to determine whether federal resources are appropriately targeted to communities of greatest need and to measure their impact.
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Medicare covers items such as hospital beds, wheelchairs, and blood glucose monitors under its DME benefit because they are specifically included in the Medicare statute's definition of DME. Other items are covered under the Medicare DME benefit based on CMS's interpretation of the statute, which does not elaborate on the meaning of "durable." By regulation, CMS has defined DME as equipment that (1) can withstand repeated use; (2) has an expected lifetime of at least 3 years; (3) is used primarily to serve a medical purpose; (4) is not generally useful in the absence of an illness or injury; and (5) is appropriate for use in the home. Most Medicare beneficiaries enroll in Medicare Part B, which provides coverage for DME if the devices are medically necessary and prescribed by a physician. Medicare beneficiaries typically obtain DME from suppliers, who then submit claims for payment to Medicare on behalf of beneficiaries. CMS contracts with DME MACs to process these claims and ensure proper administration of the DME benefit. Medicare uses three different processes to set the amount it pays for DME. First, the payment amounts for some types of DME are set in a fee schedule that is based on the average charges Medicare allowed during a 12-month period ending June 30, 1987, subject to national floors and ceilings. These historical fee schedule amounts have been updated in some years by a measure of price inflation and a measure of economy- wide productivity. Second, the payments for some DME are set through a competitive bidding program. In that program, qualified DME suppliers with the lowest bids are competitively selected to furnish certain DME product categories to Medicare beneficiaries in designated competitive bidding areas. Third, when CMS classifies a new device on the market as DME, CMS may set the price using the price of a comparable item. If there is no comparable item, then CMS may set the price using the gap- fill methodology. This method takes supplier price lists for the new item and applies a deflation factor to calculate the base-year price--the price for the 12-month period ending June 30, 1987, on which the original fee schedule was based. To then calculate the payment amount, CMS takes the median deflated price and increases it to the current date using the update factors that were applied to the original fee schedule. Similar to the fee schedule, the final price is subject to floors and ceilings. Typically, when a Medicare beneficiary receives DME in conjunction with home health care, the devices are covered, and payments are made, under the DME benefit. However, prior to January 2017, the home health benefit covered disposable negative pressure wound therapy that may substitute for DME as part of the bundled rate CMS pays home health agencies--a single rate for providing treatment and certain related items or services during a 60-day care episode. Beginning in January 2017, the Consolidated Appropriations Act, 2016, unbundled certain disposable negative pressure wound therapy devices that may substitute for DME under the Medicare home health benefit. The act provides for a separate payment for disposable negative pressure wound therapy-- meaning it is not part of the bundled payment amount--and sets the reimbursement rate for disposable negative pressure wound therapy equal to the rate used in an outpatient setting, where the device is covered. Furthermore, the act provides separate payment for the disposable negative pressure wound therapy only to beneficiaries who are receiving home health services. We identified a limited number of disposable medical devices that could potentially substitute for DME, based on our literature review and interviews with industry stakeholders. These devices do not necessarily represent a complete list of available disposable devices. Specifically, we identified eight devices that could potentially substitute for DME. These devices fall into existing DME categories used by Medicare--infusion pumps, including insulin pumps; blood glucose monitors; sleep apnea devices; and nebulizers. These disposable DME substitutes vary in life expectancy. For example, some of the substitutes are intended to last a day, while others a year or two. A few of the disposable DME substitutes we identified have been on the market for more than a decade; a couple have become available more recently, in the past 3 to 5 years. We also identified a disposable DME substitute that is currently in development. Infusion pumps. These devices deliver fluids, including medication, into a patient's body in a controlled manner. In general, a trained technician programs this device, using built-in software, to deliver fluids at specific rates through disposable tubing connected from the device to the patient via a needle. We identified two examples of disposable devices that could potentially substitute for DME--the ambulatory infusion pump and the elastomeric pump. The disposable ambulatory infusion pump has the same characteristics as the DME version, such as being able to deliver fluid at a controlled rate and using a disposable infusion set that is discarded after a single use. However, unlike the durable infusion pump, the ambulatory infusion pump has a life expectancy of 1 year. The disposable elastomeric pump is a single-use device that utilizes a stretchable balloon reservoir that relies on the pressure from the elastic walls of the balloon to deliver a single dose of medication before being discarded. (See fig. 1.) Insulin pumps. These devices are infusion pumps specifically used to deliver insulin to patients with diabetes. The DME version of an insulin pump consists of an insulin reservoir and a pumping mechanism that controls the release of insulin to the patient via a disposable infusion set. We identified two potential disposable substitutes--a completely disposable insulin pump and an insulin pump with both disposable and durable components. The completely disposable insulin pump consists of an adhesive patch containing an insulin reservoir and needle. This patch is attached to the patient's skin, and a needle is inserted into the skin when a button is pressed, allowing insulin to be delivered throughout the day. This type of insulin pump is intended to last for 24 hours and then be discarded. The other device we identified has both disposable and durable components. This device's disposable component contains the insulin reservoir, pumping mechanism, and a transmitter sensor in an adhesive patch that is intended to last for 3 days. Its durable component, which is expected to last for 4 years, includes a remote controller that transmits instructions programmed by the patient to the sensor in the patch, which in turn controls the release of insulin via the pumping mechanism. (See fig. 2.) Blood glucose monitor. These devices measure the blood glucose levels in patients. For patients with diabetes, this device provides them with information indicating when an insulin injection is needed. For the DME version of this device, a patient pricks his or her finger, touches the test strip to the blood, and waits for the durable monitor to display a reading on the patient's blood glucose level. We identified one type of DME substitute. This disposable substitute includes a vial of 50 test strips with a small monitor on the lid. The entire unit is discarded when all of the test strips have been used. (See fig. 3.) Sleep apnea devices. Called continuous positive airway pressure (CPAP) machines, these devices use mild air pressure to keep a patient's breathing airways open. The DME version of this machine includes a mask or other device that fits over the patient's nose, and sometimes over the mouth. Straps hold the mask in position and a tube is connected to the machine's motor, which blows air into the tube. We identified one potential disposable DME substitute on the market and another in development. The first is a disposable valve that fits into a patient's nose with no mask or associated machine. It is intended to last for one night and then be discarded. The second device is a disposable micro-CPAP still under development. It involves a device that fits into a patient's nostrils and is intended to last 8 hours and then be discarded. According to the manufacturer, the time limit of 8 hours is linked to the battery life of the device. (See fig. 4.) Nebulizers. These devices allow a patient to receive a drug via inhalation. Nebulizers change liquid medicine into fine droplets (in aerosol or mist form) that are inhaled through a mouthpiece or mask and used to treat conditions, such as asthma. Disposable nebulizers are generally smaller than the DME versions and may last for a year. (See fig. 5.) Over half of the 21 stakeholders we spoke with--including representatives from device manufacturers discussing their specific devices, Medicare beneficiary advocate groups, providers, and insurers-- commented on the multiple benefits of substituting DME with disposable devices. The benefits can be categorized into three areas: (1) patient preference and/or improved quality of life, (2) better health outcomes, and (3) potential cost-savings. Specifically, 12 of the 21 stakeholders mentioned patient preference and/or improved quality of life as a benefit of using disposable substitutes. They said that disposable devices are, for example, often lighter and quieter than durable devices. Thus, in some cases, the substitutes may allow patients more freedom of movement and be more discreet. For example, the disposable insulin pumps do not require users to take additional supplies if they leave the house. Further, several stakeholders said that disposable devices are easier to use, such as the elastomeric pump, which one stakeholder explained had fewer opportunities for error. Additionally, 9 of the 21 stakeholders we spoke with said these devices can result in better health outcomes due, in part, to better compliance. For example, one stakeholder for a company that manufactures a disposable DME substitute to treat sleep apnea said the company specifically targeted its device to non-compliant users of the durable CPAP machine. This stakeholder said that while the durable CPAP machine is still considered the "gold standard" for treating obstructive sleep apnea, a significant proportion of patients do not comply with treatment over time. In addition, a representative for a company that manufactures a disposable insulin pump said that some patients are able to reduce the amount of insulin they need after using this device because of increased compliance. This representative explained that because the insulin is being delivered at a more continuous, consistent rate due to better compliance, users are making more efficient use of their insulin injections. Twelve of the 21 stakeholders we spoke with noted different ways that disposable devices may result in potential cost-savings for the Medicare program and beneficiaries than their DME counterparts in some cases. For example, for patients that have acute conditions, such as those needing a course of antibiotics, it could be more financially prudent for Medicare and the beneficiary to use multiple elastomeric pumps for several days to administer the medication rather than pay for a durable pump, which is usually paid for on a monthly basis under Medicare. Also, four stakeholders said that disposable DME substitutes may generate potential savings because they do not have the cleaning and maintenance costs associated with DME, which can be reused. Further, one study we reviewed noted that nurses using elastomeric pumps reported a reduced workload for maintenance and education. Table 1 shows examples of the potential cost-savings associated with using disposable DME substitutes compared to their DME counterparts, as noted by manufacturers of disposable DME substitutes. Despite the potential benefits of disposable substitutes, stakeholders also noted limitations to using these devices regarding health outcomes and potential cost-savings. For example, stakeholders and officials from both DME MACs said there are few studies comparing the effectiveness of disposable substitutes with their DME counterpart. Additionally, stakeholders noted that DME might be more appropriate than disposable DME substitutes in some cases, such as when dosing of medication needs to be precise. For example, two stakeholders said that the elastomeric infusion pump might not be appropriate when the rate of medication delivery needs to be specific, such as with some chemotherapy treatments or for patients with chronic conditions that require long-term treatment. Regarding potential cost-savings, four stakeholders noted that potential cost-savings might not be obtained for all disposable DME substitutes. For example, for patients with chronic conditions that require use of DME for extended periods, it might be more cost-effective to use a durable device rather than disposable substitutes that would need to be replaced regularly. Stakeholders we spoke with--including representatives from device manufacturers, Medicare beneficiary advocate groups, providers, and insurers--cited several market incentives for developing potential disposable DME substitutes. For example, 12 of the 21 stakeholders noted that there is an international market for disposable devices, an increasing demand for some types of devices resulting from a growing patient population, a general movement resulting from advancing technology, and that some disposable devices can be sold as a "cash product": that is, the product could be sold at relatively low cost without insurance coverage. However, over half of the stakeholders we interviewed said lack of insurance coverage for disposable DME substitutes--particularly Medicare--was a disincentive to developing such products. Specifically, 13 of the 21 stakeholders cited lack of insurance coverage as a disincentive to developing disposable DME substitutes, including representatives from all of the manufacturer organizations and two-thirds of the manufacturers we interviewed. Further, 9 of these 13 stakeholders--including 4 out of 9 manufacturers--specifically cited lack of Medicare benefit coverage as a barrier, with 2 of these 4 manufacturers noting that disposable substitutes do not meet CMS's 3- year minimum lifetime requirement to be categorized as DME. Eight of the 13 stakeholders also said that lack of Medicare coverage decreased their chances for obtaining benefit coverage from Medicaid and insurers, which often follow Medicare payment policy. Based on our analysis of interviews with these stakeholders, we found limited coverage for the potential disposable substitutes we identified. Specifically, according to the manufacturers we spoke with, the disposable elastomeric infusion pump is covered by Medicaid in some states and is covered by some health insurance plans; the completely disposable insulin pump is covered by Medicare under Part D by some plans, some Medicaid, and other insurance programs, including TRICARE; the insulin pump with disposable and durable components has Medicaid coverage in some states and extensive insurance coverage;and the disposable sleep apnea device has some coverage via insurance and other programs, including the Department of Veterans Affairs. In addition, manufacturers noted that neither the disposable ambulatory infusion pump nor the completely disposable blood glucose monitor is covered by Medicare, Medicaid, or other insurance programs. Stakeholders also raised concerns about how CMS determines whether a device with disposable components meets the definition of DME. As technology has advanced, manufacturers have developed potential substitutes for DME with both durable and disposable components. However, according to CMS officials, in order for a device to be covered by Medicare, the agency must determine that the medically necessary function of the device is performed by a durable component, not a disposable one. Two of the stakeholders we spoke with expressed concerns about CMS's approach to making durability determinations-- and thus benefit coverage determinations--based on whether the durable or disposable component performs the medically necessary function. They said CMS should make such decisions based on the whole device and not its individual parts. If the durable component is essential to the device, then that should be sufficient. CMS has made benefit coverage determinations for at least two devices with disposable and durable components. The first device is a specific continuous glucose monitor, which CMS classified as DME. This device includes an adhesive patch containing a disposable sensor and a wireless transmitter that sends information to a durable electronic receiver that displays a patient's blood glucose level accurately enough for a patient to make treatment decisions. CMS determined that for this device, the medically necessary function performed is the displaying of the blood glucose level, and therefore this particular continuous glucose monitor could be classified as DME. The second device involves one of the disposable insulin pumps we identified. This particular device includes an adhesive patch containing an insulin reservoir, pumping mechanism, and a transmitter sensor that delivers insulin after receiving instructions transmitted from a programmable durable electronic device. According to the manufacturer of this device, although the durable component meets CMS's 3-year minimum lifetime requirement, CMS determined that for this device, the medically necessary function is the pumping mechanism that delivers insulin. Therefore, because the pumping mechanism is disposable, CMS determined that this insulin pump is not considered DME. Furthermore, 6 of the 21 stakeholders we spoke with noted that technology is advancing in the area of medical device development. Five of these stakeholders specifically cited CMS's definition of DME as a disincentive to technological innovation, such as the development of disposable substitutes. As advancing technology results in changes to the functionality of devices, including the development of disposable substitutes, CMS will likely have to consider how its benefit coverage policies will apply to them. CMS has already faced issues accommodating new technology related to smartphone applications; for example, the continuous glucose monitor we described above, which CMS classified as DME, sends information to a durable electronic receiver that displays a patient's blood glucose level. Alternatively, this information can be displayed using a smartphone application; however, officials from one DME MAC that we spoke with said the receiver would not be covered by Medicare if information was obtained from the smartphone. CMS officials explained that the smartphone application is not considered DME because the smartphone itself is not primarily and customarily used to serve a medical purpose and is useful to an individual in the absence of illness or injury and therefore is not considered a medical device, although it may be used to track medical information. As technology advances, manufacturers may continue to incorporate these advances into devices that have the potential to substitute for DME, and more disposable devices may be developed in the future. Federal internal control standards state that management should identify, analyze, and respond to change, including anticipating and planning for significant changes using a forward-looking process. CMS has already begun facing issues related to advancing technology, such as making policy determinations for devices with both durable and disposable components based on the functionality of different parts of the device. However, Medicare currently does not cover most potential disposable DME substitutes because they do not meet Medicare's definition of "durable," which CMS has interpreted to mean withstanding repeated use and having an expected minimum lifetime of 3 years, among other things. Further, CMS officials told us that the agency continues to regard this interpretation of the Medicare statute as appropriate and has not considered the possibility of reexamining it in order to accommodate disposable substitutes. Without such consideration for Medicare coverage, CMS and other insurers that follow Medicare payment policy may not be taking advantage of the possible benefits of these devices. If Medicare coverage were expanded to include disposable DME substitutes, CMS would need to consider issues related to benefit category designation. We identified three possible options that CMS could consider as benefit categories for expanding coverage: (1) using the DME benefit, (2) using the home health benefit, or (3) establishing a new benefit. (See table 2.) Under each scenario, CMS would need to consider its authority to provide for such expanded coverage. In addition, CMS would need to evaluate potential payment methodologies for reimbursement, taking into consideration its responsibility to be a prudent purchaser of medical care. Although we identify several possibilities in this report, this is not intended to be an exhaustive list of potential benefit categories and payment methodologies to be considered if Medicare coverage were expanded to disposable DME substitutes. Because the disposable DME substitutes we identified generally treat the same conditions as some DME items, consideration could be given to expanding eligibility for the DME benefit to cover similar disposable items. Although the CMS regulation interpreting the statutory definition of DME includes a requirement that such equipment can withstand repeated use and have a life expectancy of at least 3 years, CMS officials acknowledged their authority to promulgate rules amending the regulation to potentially shorten the minimum lifetime expectancy. However, it is uncertain whether CMS could reasonably interpret "durable" in such a way that allows for coverage of all of the disposable DME substitutes we identified--many of which are intended for single or short-term use. Thus, providing Medicare coverage to all of these disposable DME substitutes would likely require congressional action. Some stakeholders also noted that using the DME benefit would require several coverage decisions to be made, either through CMS's national coverage determination process or through the local process conducted by the DME MACs. For example, one decision point three stakeholders noted is whether Medicare would cover a disposable DME substitute as a potential replacement for its durable counterpart in all cases or only under certain circumstances. Another consideration mentioned by another three stakeholders is whether there would be limits to the benefit, such as whether Medicare would cover a disposable DME substitute only for a certain number of months. Limiting coverage in such a way could encourage the use of disposable DME substitutes for acute conditions over chronic conditions. Three stakeholders suggested that some disposable DME substitutes, such as in the case of elastomeric infusion pumps, are more likely to result in cost-savings as compared to their durable counterparts when used to treat acute conditions. However, limiting coverage of disposable DME substitutes to a certain length of time could impede beneficiary access to their preferred medical equipment. We identified two approaches CMS could consider within the DME benefit for setting reimbursement rates for disposable DME substitutes. Specifically, payments for disposable DME substitutes could be based on the payment rates of their DME counterparts, or they could be treated separately, making use of the typical procedures for establishing payment rates for new DME. For the first approach, CMS could set the reimbursement rate for a disposable DME substitute at the same price as the DME counterpart, or--recognizing that disposable devices may be less costly than DME--at a reduced percentage of the rate for the DME counterpart. However, we have previously reported that the historical charges on which the fee schedule rates are based are outdated and do not reflect current costs. As a result, the reimbursement rates increase costs to both the federal government and Medicare beneficiaries. In addition, four stakeholders raised concerns about this type of "one-size- fits-all" approach to disposable DME substitutes. For example, one stakeholder noted that disposable DME substitutes could vary widely in cost, quality, and the length of time a beneficiary requires the device. The cost of certain disposable DME substitutes may not be similar to the cost of their DME counterparts. Therefore, basing the rates for all disposable devices on the DME rates might result in significant over- or underpayments. Using the second approach, separate payment rates could be established for disposable DME substitutes using one of the two existing DME payment methodologies: the fee schedule based on historical charges or the competitive bidding program. Setting payment rates via the historical fee schedule would likely entail using the gap-fill method because the disposable DME substitutes we identified did not exist at the time the historical charges for most DME were set. In this case, the gap-fill method would rely on taking current supplier prices and resetting them to the 12-month period ending June 30, 1987, used in the original fee schedule by a deflation factor based on the consumer price index for all urban consumers, followed by re-inflating the price using an inflation factor limited to the years in which a DME inflation update was provided. One stakeholder expressed concern regarding the gap-fill method, though, stating that the process results in pricing that does not accurately represent market prices. In addition, as with the fee schedule amounts for DME, the payments for disposable DME substitutes could become outdated over time and increase costs to both the federal government and Medicare beneficiaries. A competitive bidding program that would reflect market prices could be established for disposable DME substitutes, as CMS has done for certain DME items. We previously found that, among other things, the competitive bidding method has generally led to reduced payments for those DME included in the program. We have also previously reported that CMS's monitoring of the competitive bidding program indicated that beneficiary DME access and satisfaction had not been affected, but noted some stakeholders' concerns, such as difficulty locating a contract supplier. Disposable DME substitutes could potentially be covered under Medicare's home health benefit. There is precedent for such coverage: disposable negative pressure wound therapy devices are covered under the home health benefit. Previously, they were covered as part of the bundled rate, but the Consolidated Appropriations Act, 2016, required certain disposable negative pressure wound therapy devices to be paid separately under Medicare home health services. Coverage under the home health benefit could potentially be expanded to include other types of disposable DME substitutes that we identified. However, coverage under this benefit would only be applicable in cases where a beneficiary is receiving Medicare home health services, which excludes beneficiaries who are not homebound and do not have a need for skilled care. Furthermore, because disposable DME substitutes are not among the existing covered services for home health, covering these disposable devices under this benefit would likely require legislation. We identified two options for setting payment rates within the home health benefit: as a separate payment or as part of bundled payments. Under the home health benefit, a separate payment amount could be set for disposable DME substitutes. For the disposable negative pressure wound therapy device, Congress established a separate payment amount equal to the amount paid under the outpatient payment system. However, according to manufacturers we spoke with, the disposable DME substitutes we identified are not currently covered under the outpatient benefit, and therefore no such rates exist for Congress to do the same for these devices. Additionally, we have previously found that generous separate payments can incentivize a specific medical practice even if it is not always entirely warranted. For example, we found that the separate payments for injectable drugs used in treating end-stage renal disease exceeded the costs of acquiring them and provided an incentive to use more of the drugs than necessary. Alternatively, disposable DME substitutes could be included in the home health bundle. CMS sets the bundled payment's national average base amount as the amount that would be paid for a typical home health patient residing in an average market. Including disposable DME substitutes in the bundle might subsequently mean recalculating the base rate. However, as one stakeholder noted, including disposable DME substitutes in the bundle would mean they are treated differently than their DME counterparts, which are paid for as separate payments under the DME benefit for beneficiaries receiving home health services. Literature and two of our stakeholder interviews noted that bundled payment can incentivize using the device that the provider has determined to be more cost-effective, but if DME and disposable DME substitutes were paid differently, providers might not have an incentive to choose the more cost- effective device. A new benefit category could be established to specifically cover the disposable DME substitutes we identified, or--more broadly--to cover a category of disposable devices that could potentially substitute for DME, including those not yet on the market. Only Congress has the authority to create new Medicare benefit categories. If Congress created such a benefit, it could establish a new payment methodology, use one of the payment methodologies discussed in this report, or use an existing payment methodology we have not discussed here. For example, one stakeholder suggested emulating a payment mechanism established under the Protecting Access to Medicare Act of 2014 for clinical laboratory tests: beginning in 2018, the Medicare rate would reflect private payer rates for these tests. Regardless of the methodology established, the rate would ideally be set to account for the costs of relatively efficient providers of the devices, and provide sufficient access to the devices for beneficiaries. Some disposable medical devices may have the potential to substitute for DME and may offer advantages in some cases, such as cost-savings and better health outcomes. While a few of these disposable DME substitutes have been on the market for several years, a couple we identified are more recent. As technology advances, more manufacturers could develop new disposable devices, and stakeholders we interviewed identified incentives to do so, such as a growing patient population. However, Medicare currently does not cover most disposable DME substitutes because they do not meet Medicare's definition of durability. CMS officials stated that they continue to regard this definition as appropriate and have not considered the possibility of extending DME coverage to these substitutes. As we noted, there may be ways to cover disposable DME substitutes other than with the DME benefit and its associated payment methodologies, such as the home health benefit. According to federal internal control standards, management should anticipate and plan for significant changes using a forward-looking process. Without considering whether disposable DME substitutes should be covered by Medicare, CMS and other insurers that follow Medicare payment policy may not recognize advances in technology that may provide potential cost-savings and better health outcomes. We recommend that the Administrator of CMS evaluate the possible costs and savings of using disposable devices that could potentially substitute for DME, including options for benefit categories and payment methodologies that could be used to cover these substitutes, and, if appropriate, seek legislative authority to cover these devices. We provided a draft of this report to HHS for comment. HHS's written comments are reproduced in appendix II. HHS also provided technical comments, which we incorporated as appropriate. In its written comments, although HHS did not state whether it agreed or disagreed with the recommendation, the agency stated that it is premature to conduct the study we recommended of the possible costs and savings of using disposable devices that could potentially substitute for DME. HHS emphasized that only Congress has the authority to create new benefit categories and payment systems for potential disposable DME substitutes and that additional information is needed on whether disposable devices are appropriate clinical substitutes before conducting an analysis of possible costs and savings. We agree, and our report states, that CMS may lack the authority to interpret "durable" in a way that allows for coverage of all the disposable DME substitutes we identified and that congressional action may be required for Medicare to cover some of these devices. However, without conducting a study to identify the potential costs and benefits of covering such devices, CMS will lack the necessary clinical and cost information to determine if it would be beneficial to reassess current statutory and regulatory coverage rules. In other instances, CMS has used the national and local coverage determination processes to establish clinically based policies related to DME. Moreover, CMS--which oversees the implementation of complex Medicare payment rules--is uniquely positioned to consider the extent to which coverage of any clinically appropriate substitutes would benefit the federal government and beneficiaries. For these reasons, we disagree with HHS that an evaluation of potential disposable DME substitutes is premature. As we state in the report, management should anticipate and plan for significant changes using a forward-looking process, according to federal internal control standards. The study we recommended is such a forward-looking process. Unless it is undertaken, neither HHS nor Congress will have the information it needs to reassess whether the current statutory and regulatory framework makes good clinical and fiscal sense. We are sending copies of this report to the appropriate congressional committees, 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. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. In addition to the contact named above, Martin T. Gahart, Assistant Director; Hannah Marston Minter, Analyst-in-Charge; George Bogart; Ricky Harrison; Gay Hee Lee; Elizabeth T. Morrison; and Alison Smith made key contributions to this report.
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In 2015, Medicare spent $6.7 billion for DME. CMS's definition of DME generally precludes potential disposable DME substitutes from coverage. Congress included a provision in law for GAO to review the potential role of disposable medical devices as substitutes for DME. This report examines (1) potential disposable DME substitutes and their possible benefits and limitations; (2) the incentives and disincentives stakeholders identified for developing these substitutes, including the possible influence of health insurance coverage; and (3) issues related to benefit category designation--including legal authority and potential payment methodologies--if Medicare coverage were expanded to include disposable DME substitutes. GAO reviewed agency documents and literature on disposable DME substitutes and Medicare payment policy; interviewed CMS officials; and interviewed various stakeholders, including representatives of device manufacturers, beneficiary advocates, health care providers, and insurers, for their perspectives. While disposable medical devices are generally not covered by Medicare, GAO identified eight that could potentially substitute for durable medical equipment (DME) items that are covered. These disposable DME substitutes fall into existing Medicare DME categories--infusion pumps, including insulin pumps; blood glucose monitors; sleep apnea devices; and nebulizers. Stakeholders GAO interviewed identified multiple benefits of using disposable substitutes, such as better health outcomes and potential cost-savings. However, they also cited factors that limit their use, including that these substitutes may not lead to cost-savings in all cases. Stakeholders identified several market incentives, such as a growing demand, as reasons to develop disposable DME substitutes, but mostly cited lack of coverage by Medicare as a disincentive to development. Disposable DME substitutes are generally precluded from Medicare coverage under the DME benefit because they do not meet the Centers for Medicare & Medicaid Services' (CMS) regulatory definition of "durable"--able to withstand repeated use, with an expected lifetime of at least 3 years. Stakeholders noted this also decreases their chances of obtaining coverage from other insurers, which may follow Medicare payment policy. Some stakeholders noted that CMS's DME definition is a disincentive to technological innovation, and the agency has already faced challenges making coverage decisions with some devices. According to federal internal control standards, management should anticipate and plan for significant changes using a forward-looking process, but CMS officials said the agency has not considered the possibility of reexamining its definition. As a result, the agency may not be taking advantage of the potential benefits of these devices. If Medicare coverage were expanded to include disposable DME substitutes, CMS would need to consider issues related to benefit category designation. GAO identified three possible options for covering disposable DME substitutes: an expansion of the current DME benefit, an expansion of the current home health benefit, or establishment of a new benefit category. The table lists the options GAO identified, which are not exhaustive. CMS would also need to consider its authority to provide for expanded coverage and evaluate potential reimbursement options. GAO recommends that CMS, within the Department of Health and Human Services (HHS), evaluate the possible costs and savings of using disposable devices as substitutes for DME, and, if appropriate, seek legislative authority to cover them. HHS stated that such an evaluation was premature. However, GAO continues to believe an evaluation is needed to help HHS anticipate and plan for significant changes using a forward-looking process.
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NAGPRA requires federal agencies to (1) identify their Native American human remains, funerary objects, sacred objects, and objects of cultural patrimony, (2) try and determine if a cultural affiliation exists with a present day Indian tribe or Native Hawaiian organization, and (3) generally repatriate the culturally affiliated items to the applicable Indian tribe(s) or Native Hawaiian organization(s) under the terms and conditions prescribed in the act. NAGPRA covers five types of Native American cultural items (see table 1). NAGPRA's requirements for federal agencies, museums, and the Secretary of the Interior, particularly the ones most relevant to their historical collections, which were the focus of our July 2010 report, include the following: Compile an inventory and establish cultural affiliation. Section 5 of NAGPRA requires that each federal agency and museum compile an inventory of any holdings or collections of Native American human remains and associated funerary objects that are in its possession or control. The act requires that the inventories be completed no later than 5 years after its enactment--by November 16, 1995--and in consultation with tribal government officials, Native Hawaiian organization officials, and traditional religious leaders. In the inventory, agencies and museums are required to establish geographic and cultural affiliation to the extent possible based on information in their possession. Cultural affiliation denotes a relationship of shared group identity which can be reasonably traced historically or prehistorically between a present day Indian tribe or Native Hawaiian organization and an identifiable earlier group. Affiliating NAGPRA items with a present day Indian tribe or Native Hawaiian organization is the key to deciding to whom the human remains and objects should be repatriated. If a cultural affiliation can be made, the act requires that the agency or museum notify the affected Indian tribes or Native Hawaiian organizations no later than 6 months after the completion of the inventory. The agency or museum was also required to provide a copy of each notice--known as a notice of inventory completion--to the Secretary of the Interior for publication in the Federal Register. The items for which no cultural affiliation can be made are referred to as culturally unidentifiable. Compile a summary of other NAGPRA items. Section 6 of NAGPRA requires that each federal agency and museum prepare a written summary of any holdings or collections of Native American unassociated funerary objects, sacred objects, or objects of cultural patrimony in its possession or control, based on the available information in their possession. The act requires that the summaries be completed no later than 3 years after its enactment--by November 16, 1993. Preparation of the summaries was to be followed by federal agency consultation with tribal government officials, Native Hawaiian organization officials, and traditional religious leaders. After a valid claim is received by an agency or museum, and if the other terms and conditions in the act are met, a notice of intent to repatriate must be published in the Federal Register before any item identified in a summary can be repatriated. Repatriate culturally affiliated human remains and objects. Section 7 of NAGPRA and its implementing regulations generally require that, upon the request of an Indian tribe or Native Hawaiian organization, all culturally affiliated NAGPRA items be returned to the applicable Indian tribe or Native Hawaiian organization expeditiously--but no sooner than 30 days after the applicable notice is published in the Federal Register--if the terms and conditions prescribed in the act are met. NAGPRA assigns certain duties to the Secretary of the Interior, which are carried out by the National NAGPRA Program Office (National NAGPRA) within NPS. In accordance with NAGPRA's implementing regulations, National NAGPRA has developed a list of Indian tribes and Native Hawaiian organizations for the purposes of carrying out the act. The list is comprised of federally recognized tribes, Native Hawaiian organizations, and, at various points in the last 20 years, corporations established pursuant to the Alaska Native Claims Settlement Act (ANCSA). Since the enactment of two recognition laws in 1994, BIA has regularly published a comprehensive list of recognized tribes--commonly referred to as the list of federally recognized tribes--that federal agencies are supposed to use to identify federally recognized tribes. The recognition of Alaska Native entities eligible for the special programs and services provided by the United States to Indians because of their status as Indians has been controversial. Since a 1993 legal opinion by the Solicitor of the Department of the Interior, BIA's list of federally recognized tribes has not included any ANCSA group, regional, urban, and village corporations. Finally, NAGPRA requires the establishment of a committee to monitor and review the implementation of inventory, identification and repatriation activities under the act. Among other things, the Review Committee is responsible for, upon request, reviewing and making findings related to the identity or cultural affiliation of cultural items or the return of such items and facilitating the resolution of any disputes among Indian tribes, Native Hawaiian organizations, and federal agencies or museum relating to the return of such items. We refer to these findings, recommendations and facilitation of disputes that do not involve culturally unidentifiable human remains simply as disputes; the Review Committee also makes recommendations regarding the disposition of culturally unidentifiable human remains. The NAGPRA Review Committee was established in 1991. The NMAI Act sections 11 and 13 generally require the Smithsonian to (1) inventory the Indian and Native Hawaiian human remains and funerary objects in its possession or control, (2) identify the origins of the Indian and Native Hawaiian human remains and funerary objects using the "best available scientific and historical documentation," and (3) upon request repatriate them to lineal descendants or culturally affiliated Indian tribes and Native Hawaiian organizations. As originally written, the act did not set a deadline for the completion of these tasks, but amendments in 1996 added a June 1, 1998, deadline for the completion of inventories. The 1996 amendments also require the Smithsonian to prepare summaries for unassociated funerary objects, sacred objects, and objects of cultural patrimony by December 31, 1996. The NMAI Act uses the same definitions as NAGPRA for unassociated funerary objects, sacred objects, and objects of cultural patrimony, but the NMAI Act does not define human remains and it does not use the term associated funerary objects. Instead, the NMAI Act requires Indian funerary objects--which it defines as objects that, as part of the death rite or ceremony of a culture, are intentionally placed with individual human remains, either at the time of death or later--to be included in inventories and unassociated funerary objects to be included in summaries. The Smithsonian has identified two museums that hold collections subject to the NMAI Act: the National Museum of the American Indian and the National Museum of Natural History. Final repatriation decisions for the American Indian Museum are made by its Board of Trustees and the Secretary of the Smithsonian has delegated responsibility for making final repatriation decisions for the Natural History Museum to the Smithsonian's Under Secretary for Science. According to Smithsonian officials, when new collections are acquired, the Smithsonian assigns an identification number--referred to as a catalog number--to each item or set of items at the time of the acquisition or, in some cases, many years later. A single catalog number may include one or more human bones, bone fragments, or objects, and it may include the remains of one or more individuals. All of this information is stored in the museums' electronic catalog system, which is partly based on historical paper card catalogs. Generally, each catalog number in the electronic catalog system includes basic information on the item or set of items, such as a brief description of the item, where the item was collected, and when it was taken into the museum's collection. Since the NMAI Act was enacted, the Smithsonian has identified approximately 19,780 catalog numbers that potentially include Indian human remains (about 19,150 within the Natural History Museum collections and about 630 within the American Indian Museum collections). Finally, like NAGPRA, the NMAI Act requires the establishment of a committee to monitor and review the inventory, identification, and return of Indian human remains and cultural objects. The Smithsonian Review Committee was established in 1990 for this purpose. As we reported in July 2010, federal agencies have not yet fully complied with all of the requirements of NAGPRA. Specifically, we found that while the eight key federal agencies generally prepared their summaries and inventories on time, they had not fully complied with other NAGPRA requirements. In addition, we found that while the NAGPRA Review Committee had conducted a number of activities to fulfill its responsibilities under NAGPRA, its recommendations have had mixed success. Furthermore, while National NAGPRA has taken several actions to implement the act's requirements, in some cases it has not effectively carried out its responsibilities. Finally, although the key agencies have repatriated many NAGPRA items, repatriation activity has generally not been tracked or reported governmentwide. The eight key federal agencies we reviewed in our July 2010 report generally prepared their summaries and inventories by the statutory deadlines, but the amount of work put into identifying their NAGPRA items and the quality of the documents prepared varied widely. Of these eight agencies, the Corps, the Forest Service, and NPS did the most extensive work to identify their NAGPRA items, and therefore they had the highest confidence level that they had identified all of them and included them in the summaries and inventories that they prepared. In contrast, relative to these agencies, we determined that BLM, BOR, and FWS were moderately successful in identifying their NAGPRA items and including them in their summaries and inventories, and BIA and TVA had done the least amount of work. As a result, these five agencies had less confidence that they had identified all of their NAGPRA items and included them in summaries and inventories. In addition, not all of the culturally affiliated human remains and associated funerary objects had been published in a Federal Register notice as required. For example, at the time of our report, BOR had culturally affiliated 76 human remains but had not published them in a Federal Register notice. All of the agencies acknowledged that they still have additional work to do and some had not fully complied with NAGPRA's requirement to publish notices of inventory completion for all of their culturally affiliated human remains and associated funerary objects in the Federal Register. As a result of these findings, we recommended the agencies develop and provide to Congress a needs assessment listing specific actions, resources, and time needed to complete the inventories and summaries required by NAGPRA. We further recommended that the agencies develop a timetable for the expeditious publication in the Federal Register of notices of inventory completion for all remaining Native American human remains and associated funerary objects that have been culturally affiliated in inventories. The Departments of Agriculture and the Interior and TVA agreed with our recommendations. For example, Interior stated that this effort is under way in most of its bureaus and that it is committed to completing the process. It added that one of the greatest challenges to completing summaries and inventories of all NAGPRA items is locating collections and acquiring information from the facilities where the collections are stored. We found that the NAGPRA Review Committee, to fulfill its responsibilities under NAGPRA, had monitored federal agency and museum compliance, made recommendations to improve implementation, and assisted the Secretary in the development of regulations. As we reported, the committee's recommendations to facilitate the resolution of disposition requests involving culturally unidentifiable human remains have generally been implemented (52 of 61 requests has been fully implemented). In disposition requests, parties generally agreed in advance to their preferred manner of disposition and, in accordance with the regulations, came to the committee to complete the process and obtain a final recommendation from the Secretary. In contrast to the amicable nature of disposition requests, disputes are generally contentious, and we found that the NAGPRA Review Committee's recommendations have had a low implementation rate. Specifically, of the 12 disputes that we reviewed, the committee's recommendations were fully implemented for 1 dispute, partially implemented in 3 others, not implemented for 5, and the status of 3 cases is unknown. Moreover, we found that some actions recommended by the committee exceeded NAGPRA's scope, such as recommending repatriation of culturally unidentifiable human remains to non-federally recognized Indian groups. However, we found that the committee, National NAGPRA, and Interior officials had since taken steps to address this issue. We reported that National NAGPRA had taken several actions to help the Secretary carry out responsibilities under NAGPRA. For example, National NAGPRA had published federal agency and museum notices in the Federal Register; increasing this number in recent years, while reducing the backlog of notices awaiting publication. Furthermore, it had administered a NAGPRA grants program that from fiscal years 1994 through 2009 resulted in 628 grants awarded to Indian tribes, Native Hawaiian organizations, and museums totaling $33 million. It had also administered the nomination process for NAGPRA Review Committee members. Overall, we found that most of the actions performed by National NAGPRA were consistent with the act, but we identified concerns with a few actions. Specifically, National NAGPRA had developed a list of Indian tribes for the purposes of carrying out NAGPRA, but at various points in the last 20 years the list had not been consistent with BIA's policy or an Interior Solicitor legal opinion analyzing the status of Alaska Native villages as Indian tribes. As a result, we recommended that National NAGPRA, in conjunction with Interior's Office of the Solicitor, reassess whether ANCSA corporations should be considered as eligible entities for the purposes of carrying out NAGPRA. Interior agreed with this recommendation and, after our report was issued, Interior's Office of the Solicitor issued a memorandum in March 2011 stating that NAGPRA clearly does not include Alaska regional and village corporations within its definition of Indian tribes and that the legislative history confirms that this was an intentional omission on the part of Congress. The memorandum also states that while the National NAGPRA Program's list of Indian tribes for purposes of NAGPRA must not include ANCSA regional and village corporations, National NAGPRA is currently bound by its regulatory definition of Indian tribe that contradicts the statutory definition by including ANCSA corporations. Because of this, the Solicitor suggests that the regulatory definition be changed as soon as feasible, followed by a corresponding change in the list. We also found that National NAGPRA did not always properly screen nominations for the NAGPRA Review Committee and, in 2004, 2005, and 2006, inappropriately recruited nominees for the committee, in one case recommending the nominee to the Secretary for appointment. As a result, we recommended that the Secretary of the Interior direct National NAGPRA to strictly adhere to the nomination process prescribed in the act and, working with Interior's Office of the Solicitor as appropriate, ensure that all NAGPRA Review Committee nominations are properly screened to confirm that the nominees and nominating entities meet statutory requirements. Interior agreed with this recommendation, stating that the committee nomination procedures were revised in 2008 to ensure full transparency and that it will ask the Solicitor's Office to review these procedures. In July 2010 we reported that while agencies are required to permanently document their repatriation activities, they are not required to compile and report that information to anyone. Of the federal agencies that have published notices of inventory completion, we determined that only three have tracked and compiled agencywide data on their repatriations--the Forest Service, NPS, and the Corps. These three agencies, however, along with other federal agencies that have published notices of inventory completion, do not regularly report comprehensive data on their repatriations to National NAGPRA, the NAGPRA Review Committee, or Congress. Through data provided by these three agencies, along with our survey of other federal agencies, we found that federal agencies had repatriated a total of 55 percent of human remains and 68 percent of associated funerary objects that had been published in notices of inventory completion as of September 30, 2009. Agency officials identified several reasons why some human remains and associated funerary objects had not been repatriated, including the lack of repatriation requests from culturally affiliated entities, repatriation requests from disputing parties, a lack of reburial sites, and a lack of financial resources to complete the repatriation. Federal agencies had also published 78 notices of intent to repatriate that covered 34,234 unassociated funerary objects, sacred objects, or objects of cultural patrimony. Due to a lack of governmentwide reporting, we recommended the Secretaries of Agriculture, Defense, and the Interior and the Chief Executive Officer of the Tennessee Valley Authority direct their cultural resource management programs to report their repatriation data to National NAGPRA on a regular basis, but no less than annually, for each notice of inventory completion they have or will publish. Furthermore, we recommended that National NAGPRA make this information readily available to Indian tribes and Native Hawaiian organizations and that the NAGPRA Review Committee publish the information in its annual report to Congress. The Departments of Agriculture and the Interior and TVA agreed with this recommendation, and Interior stated that its agencies will work toward completing an annual report beginning in 2011. In our May 2011 report we found that the Smithsonian Institution still had much work remaining with regard to the repatriation activities required by the NMAI Act. Specifically, we found that while the American Indian and Natural History Museums generally prepared summaries and inventories within the statutory deadlines the process that the Smithsonian relies on is lengthy and resource intensive. Consequently, after more than 2 decades, the museums have offered to repatriate the Indian human remains in only about one-third of the catalog numbers identified as possibly including such remains since the act was passed. In addition, we found that the Smithsonian established a Review Committee to meet the statutory requirements, but limited its oversight of repatriation activities. Finally, we found that while the Smithsonian has repatriated most of the human remains and many of the objects that it has offered for repatriation, it has no policy on how to address items that are culturally unidentifiable. We found that while the American Indian and Natural History Museums had generally prepared summaries and inventories within the deadlines established in the NMAI Act, their inventories and the process they used to prepare them have raised questions about their compliance with some of the act's statutory requirements. The first question was the extent to which the museums prepared their inventories in consultation and cooperation with traditional Indian religious leaders and government officials of Indian tribes, as required by the NMAI Act. Section 11 of the act directs the Secretary of the Smithsonian, in consultation and cooperation with traditional Indian religious leaders and government officials of Indian tribes, to inventory the Indian human remains and funerary objects in the possession or control of the Smithsonian and, using the best available scientific and historical documentation, identify the origins of such remains and objects. However, the Smithsonian generally began the consultation process with Indian tribes after the inventories from both museums were distributed. The Smithsonian maintains that it is in full compliance with the statutory requirements for preparing inventories and that section 11 does not require that consultation occur prior to the inventory being completed. The second question is the extent to which the Natural History Museum's inventories--which were finalized after the 1996 amendments--identified geographic and cultural affiliations to the extent practicable based on available information held by the Smithsonian, as required by the amendments. The museum's inventories generally identified geographic and cultural affiliations only where such information was readily available in the museum's electronic catalog. However, the Smithsonian states that it does not interpret section 11 as necessarily requiring that the inventory and identification process to occur simultaneously, and therefore it has adopted a two-step process to fulfill section 11's requirements. The legislative history of the 1996 amendments provides little clear guidance concerning the meaning of section 11. However, we also found that the two-step process that the Smithsonian has adopted is a lengthy and resource-intensive one and that, at the pace that the Smithsonian is applying this process, it will take several more decades to complete this effort. As a result of the identification and inventory process the Smithsonian is using, since the passage of the NMAI Act in 1989 through December 2010, the Smithsonian estimates that it has offered to repatriate approximately one-third of the estimated 19,780 catalog numbers identified as possibly including Indian human remains. The American Indian Museum had offered to repatriate human remains in about 40 percent (about 250) of its estimated 630 catalog numbers. The Natural History Museum had offered to repatriate human remains in about 25 percent (about 5,040) of its estimated 19,150 catalog numbers containing Indian human remains. In some cases, through this process, the Smithsonian did not offer to repatriate human remains and objects because it determined that they could not be culturally affiliated with a tribe. The congressional committee reports accompanying the 1989 act indicate that the Smithsonian estimated that the identification and inventory of Indian human remains as well as notification of affected tribes and return of the remains and funerary objects would take 5 years. However, more than 21 years later, these efforts are still under way. In light of this slow progress, we suggested that Congress may wish to consider ways to expedite the Smithsonian's repatriation process including, but not limited to, directing the Smithsonian to make cultural affiliation determinations as efficiently and effectively as possible. In May 2011, we reported that the Smithsonian Review Committee had conducted numerous activities to implement the special committee provisions in the NMAI Act, but its oversight and reporting activities have been limited. For example, we found that contrary to the NMAI Act, the committee does not monitor and review the American Indian Museum's inventory, identification, and repatriation activities, although it does monitor and review the Natural History Museum's inventory, identification, and repatriation activities. Although the law does not limit the applicability of the Smithsonian Review Committee to the Natural History Museum, the Secretary established a committee to meet this requirement in 1990 that oversees only the Natural History Museum's repatriation activities and is housed within that museum. Although the Smithsonian believes Congress intended to limit the committee's jurisdiction to the Natural History Museum, the statutory language and its legislative history do not support that view. The Smithsonian provided several reasons to support this contention but, as we reported in May 2011, these reasons are unpersuasive. Therefore, we recommended that the Smithsonian's Board of Regents direct the Secretary of the Smithsonian to expand the Smithsonian Review Committee's jurisdiction to include the American Indian Museum, as required by the NMAI Act, to improve oversight of Smithsonian repatriation activities. With this expanded role for the committee, we further recommended that the Board of Regents and the Secretary should consider where the most appropriate location for the Smithsonian Review Committee should be within the Smithsonian's organizational structure. The Smithsonian agreed with this recommendation, stating that the advisory nature of the committee could be expanded to include consultation with the American Indian Museum. In our May 2011 report, we also found that neither the Smithsonian nor the Smithsonian Review Committee submits reports to Congress on the progress of repatriation activities at the Smithsonian. Although section 12 of the NMAI Act requires the Secretary, at the conclusion of the work of the committee, to so certify by report to Congress, there is no annual reporting requirement similar to the one required for the NAGPRA Review Committee. As we stated earlier, in 1989, it was estimated that the Smithsonian Review Committee would conclude its work in about 5 years and cease to exist at the end of fiscal year 1995. Yet the committee's monitoring and review of repatriation activities at the Natural History Museum has been ongoing since the committee was established in 1990. As a result, we recommended that the Board of Regents, through the Secretary, direct the Smithsonian Review Committee to report annually to Congress on the Smithsonian's implementation of its repatriation requirements in the NMAI Act. The Smithsonian agreed with this recommendation, stating that it will submit, on a voluntary basis, annual reports to Congress. The Smithsonian further stated that although the format and presentation are matters to be discussed internally, it intends to use the National NAGPRA report as a guide and framework for its discussion and report. Finally, during our review of the Smithsonian Review Committee activities we determined that no independent administrative appeals process exists to challenge the Smithsonian's cultural affiliation and repatriation decisions, in the event of a dispute. As a result, we recommended that the Board of Regents establish an independent administrative appeals process for Indian tribes and Native Hawaiian organizations to appeal decisions to either the Board of Regents or another entity that can make binding decisions for the Smithsonian Institution to provide tribes with an opportunity to appeal cultural affiliation and repatriation decisions made by the Secretary and the American Indian Museum's Board of Trustees. The Smithsonian agreed with this recommendation, stating that it will review its dispute resolution procedures, with the understanding that the goal is to ensure that claimants have proper avenues to seek redress from Smithsonian repatriation decisions, including a process for the review of final management determinations. In May 2011 we reported that the Smithsonian estimates that, of the items it has offered for repatriation, as of December 31, 2010, it has repatriated about three-quarters (4,330 out of 5,980) of the Indian human remains, about half (99,550 out of 212,220) of the funerary objects, and nearly all (1,140 out of 1,240) sacred objects and objects of cultural patrimony. Some items have not been repatriated for a variety of reasons, including tribes' lack of resources, cultural beliefs, and tribal government issues. In addition, we found that, in the inventory and identification process, the Smithsonian determined that some human remains and funerary objects were culturally unidentifiable. In some of those cases it did not offer to repatriate the items and it does not have a policy on how to undertake the ultimate disposition of such items. Specifically, our report found that according to Natural History Museum officials about 340 human remains and about 310 funerary objects are culturally unidentifiable. The NMAI Act does not discuss how the Smithsonian should handle human remains and objects that cannot be culturally affiliated, and neither museum's repatriation policies describe how they will handle such items. In contrast, a recent NAGPRA regulation that took effect in May 2010 requires, among other things, federal agencies and museums to consult with federally recognized Indian tribes and Native Hawaiian organizations from whose tribal or aboriginal lands the remains were removed before offering to transfer control of the culturally unidentifiable human remains. Although Smithsonian officials told us that the Smithsonian generally looks to NAGPRA and the NAGPRA regulations as a guide to its repatriation process, where appropriate, in a May 2010 letter commenting on the NAGPRA regulation on disposition of culturally unidentifiable remains, the Directors of the American Indian and Natural History Museums cited overall disagreement with the regulation, suggesting that it "favors speed and efficiency in making these dispositions at the expense of accuracy." Nevertheless, in our May 2011 report, we recommended that the Smithsonian's Board of Regents direct the Secretary and the American Indian Museum's Board of Trustees to develop policies for the Natural History and American Indian Museums for the handling of items in their collections that cannot be culturally affiliated to provide for a clear and transparent repatriation process. The Smithsonian agreed with this recommendation, stating that both the American Indian and Natural History Museums, in the interests of transparency, are committed to developing policies in this regard and that such policies will give guidance to Native communities and the public as to how the Smithsonian will handle and treat such remains. In conclusion, Chairman Akaka, Vice Chairman Barrasso, and Members of the Committee, our two studies clearly show that while federal agencies and the Smithsonian have made progress in identifying and repatriating thousands of Indian human remains and objects, after 2 decades of effort, much work still remains to be done to address the goals of both NAGPRA and the NMAI Act. In this context, we believe that it is imperative for the agencies to implement our recommendations to ensure that the requirements of both acts are met and that the processes they employ to fulfill the requirements are both efficient and effective. This concludes my prepared statement. I would be pleased to answer any questions that you may have at this time. For further information about this testimony, please contact Anu K. Mittal at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Jeffery D. Malcolm, Assistant Director; Mark Keenan; and Jeanette Soares also made key contributions to this statement. In addition, Allison Bawden, Pamela Davidson, Emily Hanawalt, Cheryl Harris, Catherine Hurley, Rich Johnson, Sandra Kerr, Jill Lacey, Anita Lee, Ruben Montes de Oca, David Schneider, John Scott, Ben Shouse, and Maria Soriano also made key contributions to the reports on which this statement is based. 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 Museum of the American Indian Act of 1989 (NMAI Act), as amended in 1996, generally requires the Smithsonian Institution to inventory and identify the origins of its Indian and Native Hawaiian human remains and objects placed with them (funerary objects) and repatriate them to culturally affiliated Indian tribes upon request. According to the Smithsonian, two of its museums--the American Indian and the Natural History Museums--have items that are subject to the NMAI Act. The Native American Graves Protection and Repatriation Act (NAGPRA), enacted in 1990, includes similar requirements for federal agencies and museums. The National NAGPRA office, within the Department of the Interior's National Park Service, facilitates the governmentwide implementation of NAGPRA. Each act requires the establishment of a committee to monitor and review repatriation activities. GAO's testimony is based on its July 2010 report on NAGPRA implementation (GAO-10-768) and its May 2011 report on Smithsonian repatriation (GAO-11-515). The testimony focuses on the extent to which key federal agencies have complied with NAGPRA's requirements and the extent to which the Smithsonian has fulfilled its repatriation requirements. GAO found that almost 20 years after NAGPRA was enacted, eight key federal agencies with significant historical collections--Interior's Bureau of Indian Affairs (BIA), Bureau of Land Management, Bureau of Reclamation, U.S. Fish and Wildlife Service and National Park Service; Agriculture's U.S. Forest Service; the U.S. Army Corps of Engineers; and the Tennessee Valley Authority--have not fully complied with the requirements of the act. All of the agencies acknowledged that they still have additional work to do and some have not fully complied with NAGPRA's requirement to publish notices of inventory completion for all of their culturally affiliated human remains and associated funerary objects in the Federal Register. In addition, GAO found two areas of concern with the National NAGPRA office's activities. First, National NAGPRA had developed a list of Indian tribes for the purposes of carrying out NAGPRA that was inconsistent with BIA's official list of federally recognized tribes and an Interior legal opinion. Second, National NAGPRA did not always screen nominations for NAGPRA Review Committee positions properly. GAO found that repatriations were generally not tracked or reported governmentwide. However, based on GAO's compilation of federal agencies' repatriation data, through September 30, 2009, federal agencies had repatriated 55 percent of the human remains and 68 percent of the associated funerary objects that had been published in notices of inventory completion. The relevant agencies agreed with the recommendations in both reports and GAO is making no new recommendations at this time.
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The Exon-Florio amendment to the Defense Production Act, enacted in 1988, authorized the President to investigate the impact of foreign acquisitions of U.S. companies on national security and to suspend or prohibit acquisitions that might threaten national security. The President delegated the investigative authority to the Committee on Foreign Investment in the United States, an interagency group established in 1975 to monitor and coordinate U.S. policy on foreign investment in the United States. In 1991, the Treasury Department, as chair of the Committee, issued regulations to implement Exon-Florio. The law and regulations establish a four-step process for reviewing foreign acquisitions of U.S. companies: (1) voluntary notice by the companies; (2) a 30-day review to determine whether the acquisition could pose a threat to national security; (3) a 45- day investigation to determine whether those concerns require a recommendation to the President for possible action; and (4) a presidential decision to permit, suspend, or prohibit the acquisition. In most cases, the Committee completes its review within the initial 30 days because there are no national security concerns or concerns have been addressed, or the companies and the government agree on measures to mitigate identified security concerns. In cases where the Committee is unable to complete its review within 30 days, the Committee may initiate a 45-day investigation or allow companies to withdraw their notifications. The Committee generally grants requests to withdraw. When the Committee concludes a 45-day investigation, it is required to submit a report to the President containing recommendations. If Committee members cannot agree on a recommendation, the regulations require that the report to the President include the differing views of all Committee members. The President has 15 days to decide whether to prohibit or suspend the proposed acquisition, order divestiture of a completed acquisition, or take no action. While neither the statute nor the implementing regulation defines "national security," the statute provides the following factors to be considered in determining a threat to national security: Domestic production needed for projected national defense requirements. The capability and capacity of domestic industries to meet national defense requirements, including the availability of human resources, products, technology, materials, and other supplies and services. The control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the United States to meet national security requirements. The potential effects of the proposed or pending transaction on sales of military goods, equipment, or technology to any country identified under applicable law as (a) supporting terrorism or (b) a country of concern for missile proliferation or the proliferation of chemical and biological weapons. The potential effects of the proposed or pending transaction on U.S. international technological leadership in areas affecting national security. Lack of agreement among Committee members on what defines a threat to national security and what criteria should be used to initiate an investigation may be limiting the Committee's analyses of proposed and completed foreign acquisitions. From 1997 through 2004, the Committee received a total of 470 notices of proposed or completed acquisitions, yet it initiated only 8 investigations. Some Committee member agencies, including Treasury, apply a more traditional and narrow definition of what constitutes a threat to national security--that is, (1) the U.S. company possesses export-controlled technologies or items; (2) the company has classified contracts and critical technologies; or (3) there is specific derogatory intelligence on the foreign company. Other members, including the departments of Defense and Justice, argue that acquisitions should be analyzed in broader terms. According to officials from these departments, vulnerabilities can result from foreign control of critical infrastructure, such as control of or access to information traveling on networks. Vulnerabilities can also result from foreign control of critical inputs to defense systems or a decrease in the number of innovative small businesses researching and developing new defense-related technologies. While these vulnerabilities may not pose an immediate threat to national security, they may create the potential for longer term harm to U.S. national security interests by reducing U.S. technological leadership in defense systems. For example, in reviewing a 2001 acquisition of a U.S. company, the departments of Defense and Commerce raised several concerns about foreign ownership of sensitive but unclassified technology, including the possibility of this sensitive technology being transferred to countries of concern or losing U.S. government access to the technology. However, Treasury argued that these concerns were not national security concerns because they did not involve classified contracts, the foreign company's country of origin was a U.S. ally, or there was no specific negative intelligence about the company's actions in the United States. In one proposed acquisition that we reviewed, disagreement over the definition of national security resulted in an enforcement provision being removed from an agreement between the foreign company and the Departments of Defense and Homeland Security. Defense had raised concerns about the security of its supply of specialized integrated circuits, which are used in a variety of defense technologies that the Defense Science Board had identified as essential to our national defense-- technologies found in unmanned aerial vehicles, the Joint Tactical Radio System, and cryptography and other communications protection devices. However, Treasury and other Committee members argued that the security of supply issue was an industrial policy concern and, therefore, was outside the scope of Exon-Florio's authority. As a result of removing the provision, the President's authority to require divestiture under Exon- Florio has been eliminated as a remedy in the event of noncompliance. Committee members also disagree on the criteria that should be applied to determine whether a proposed or completed acquisition should be investigated. While Exon-Florio provides that the "President or the President's designee may make an investigation to determine the effects on national security" of acquisitions that could result in foreign control of a U.S. company, it does not provide specific guidance for the appropriate criteria for initiating an investigation of an acquisition. Currently, Treasury, as Committee Chair, applies essentially the same criteria established in the law for the President to suspend or prohibit a transaction, or order divestiture: (1) there is credible evidence that the foreign controlling interest may take action to threaten national security and (2) no laws other than the International Emergency Economic Powers Act are appropriate or adequate to protect national security. However, the Defense, Justice, and Homeland Security departments have argued that applying these criteria at this point in the process is inappropriate because the purpose of an investigation is to determine whether or not a credible threat exists. Notes from a policy-level discussion of one particular case further corroborated these differing views. Committee guidelines require member agencies to inform the Committee of national security concerns by the 23rd day of a 30-day review--further compressing the limited time allowed by legislation to determine whether a proposed or completed foreign acquisition poses a threat to national security. According to one Treasury official, the information is needed a week early to meet the legislated 30-day requirement. While most reviews are completed in the legislatively required 30 days, some Committee members have found that completing a review within such short time frames can be difficult--particularly in complex cases. One Defense official said that without advance notice of the acquisition, time frames are too short to complete analyses and provide input for the Defense Department's position. Another official said that to meet the 23-day deadline, analysts have only 3 to 10 days to analyze the acquisition. In one instance, Homeland Security was unable to provide input within the 23-day time frame. If a review cannot be completed within 30 days and more time is needed to determine whether a problem exists or identify actions that would mitigate concerns, the Committee can initiate a 45-day investigation of the acquisition or allow companies to withdraw their notifications and refile at a later date. According to Treasury officials, the Committee's interest is to ensure that the implementation of Exon-Florio does not undermine U.S. open investment policy. Concerned that public knowledge of investigations could devalue companies' stock, erode confidence of foreign investors, and ultimately chill foreign investment in the United States, the Committee has generally allowed and often encouraged companies to withdraw their notifications rather than initiate an investigation. While an acquisition is pending, companies that have withdrawn their notification have an incentive to resolve any outstanding issues and refile as soon as possible. However, if an acquisition has been concluded, there is less incentive to resolve issues and refile, extending the time during which any concerns remain unresolved. Between 1997 and 2004, companies involved in 18 acquisitions have withdrawn their notification and refiled 19 times. In two cases, the companies had already concluded the acquisition and did not refile until 9 months to 1 year. Consequently, the concerns raised by Defense and Commerce about potential export control issues in these cases remained unresolved for as much as a year-- further increasing the risk that a foreign acquisition of a U.S. company would pose a threat to national security. We identified two cases in which companies that had concluded an acquisition before filing with the Committee withdrew their notification. In each case, the company has yet to refile. In one case, the company filed with the Committee more than a year after completing the acquisition. The Committee allowed it to withdraw the notification to provide more time to answer the Committee's questions and provide assurances concerning export control matters. The company refiled, and was permitted to withdraw a second time because there were still unresolved issues. Four years have passed since the second withdrawal. In the second case, the company--which filed with the Committee more than 6 months after completing its acquisition--was also allowed to withdraw its notification. That was more than 2 years ago. In enacting Exon-Florio, the Congress, while recognizing the need for confidentiality, indicated a desire for insight into the process by requiring the President to report to the Congress on any transaction that the President prohibited. In response to concerns about the lack of transparency in the Committee's process, the Congress passed the Byrd Amendment to Exon-Florio in 1992, requiring a report to the Congress if the President makes any decision regarding a proposed foreign acquisition. In 1992, another amendment also directed the President to report every 4 years on whether there is credible evidence of a coordinated strategy by one or more countries to acquire U.S. companies involved in research, development, or production of critical technologies for which the United States is a leading producer, and whether there are industrial espionage activities directed or assisted by foreign governments against private U.S. companies aimed at obtaining commercial secrets related to critical technologies. While the Byrd Amendment expanded required reporting on Committee actions, few reports have been submitted to the Congress because withdrawing and refiling notices to restart the clock limits the number of cases that result in a presidential decision. Since 1997, only two cases-- both involving telecommunications systems--resulted in a presidential decision and a subsequent report to the Congress. Infrequent reporting of Committee deliberations on specific cases provides little insight into the Committee's process to identify concerns raised during investigations and determine the extent to which the Committee has reached consensus on a case. Further, despite the 1992 requirement for a report on foreign acquisition strategies every 4 years, there has been only one report--in 1994. In conclusion, in recognition of the benefits of open investment, Exon- Florio comes into play only as a last resort. However, since that is its role, effective application in support of recognizing and mitigating national security risks remains critical. While Exon-Florio provides the Committee on Foreign Investment in the United States the latitude to address new emerging threats, the more traditional interpretation of what constitutes a threat to national security fails to fully consider the factors currently embodied in the law. Further, the practical requirement to complete reviews within 23 days to meet the 30-day legislative requirement, along with the reluctance to proceed to an investigation, limits agencies' abilities to complete in-depth analyses. However, the alternative--allowing companies to withdraw and refile their notifications--increases the risk that the Committee, and the Congress, will lose visibility over foreign acquisitions of U.S. companies. Our report lays out several matters for congressional consideration to (1) help resolve the differing views as to the extent of coverage of Exon- Florio, (2) address the need for additional time, and (3) increase insight and oversight of the process. Further, we are suggesting that, when withdrawal is allowed for a transaction that has been completed, the Committee establish interim protections where specific concerns have been raised, specific time frames for refiling, and a process for tracking any actions being taken during a withdrawal period. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or other Members of the Committee may have. - - - - - For information about this testimony, please contact Katherine V. Schinasi, Managing Director, Acquisition and Sourcing Management, at (202) 512-4841 or [email protected]. Other individuals making key contributions to this product include Thomas J. Denomme, Allison Bawden, Gregory K. Harmon, Paula J. Haurilesko, John Van Schaik, Karen Sloan, and Michael Zola. Our understanding of the Committee on Foreign Investment in the United States' process is based on our current work and builds on our review of the process and our discussions with agency officials for our 2002 report. For our current review, and to expand our understanding of the Committee's process for reviewing foreign acquisitions of U.S. companies, we met with officials from the Department of Commerce, the Department of Defense, the Department of Homeland Security, the Department of Justice, and the Department of the Treasury. For prior reviews we also collected data from and discussed the issues with representatives of the Department of State, the Council of Economic Advisors, the Office of Science and Technology, and the U.S. Trade Representative. Further, we conducted case studies of nine acquisitions that were filed with the Committee between June 28, 1995, and December 31, 2004. These case studies included reviewing files containing company submissions, correspondence between the Committee and the companies' representatives, email traffic between member agencies, and minutes of policy-level meetings attended by at various times all 12 Committee members. We selected acquisitions based on recommendations by Committee member agencies and the following criteria: (1) the Committee permitted the companies to withdraw the notification; (2) the Committee or member agencies concluded agreements to mitigate national security concerns; (3) the foreign company had been involved in a prior acquisition notified to the Committee; or (4) GAO had reviewed the acquisition for its 2002 report. We did not attempt to validate the conclusions reached by the Committee on any of the cases we reviewed. We also discussed our draft report from our current review with officials from the Department of State and the U.S. Trade Representative's office to obtain their views on our findings. To determine whether the weaknesses in provisions to assist agencies in monitoring agreements that GAO had identified in its 2002 report had been addressed, we analyzed agreements concluded under the Committee's authority between 2003 and 2005. We conducted our review from April 2004 through July 2005 in accordance with generally accepted government auditing standards. Office of International Investment: Coordinates policies toward foreign investments in the United States and U.S. investments abroad. International Trade Administration: Coordinates issues concerning trade promotion, international commercial policy, market access, and trade law enforcement. Defense Technology Security Administration: Administers the development and implementation of Defense technology security policies on international transfers of defense-related goods, services, and technologies. Bureau of Economic and Business Affairs: Formulates and implements policy regarding foreign economic matters, including trade and international finance and development. Criminal Division: Develops, enforces, and supervises the application of all federal criminal laws, except for those assigned to other Justice Department divisions. Information Analysis and Infrastructure Protection: Identifies and assesses current and future threats to the homeland, maps those threats against vulnerabilities, issues warnings, and takes preventative and protective action. Performs analyses and appraisals of the national economy for the purpose of providing policy recommendations to the President. Directs all trade negotiations of and formulates trade policy for the United States. Evaluates, formulates, and coordinates management procedures and program objectives within and among federal departments and agencies, and controls administration of the federal budget. Coordinates the economic policy-making process and provides economic policy advice to the President. Advises and assists the President in integrating all aspects of national security policy as it affects the United States. Provides scientific, engineering and technological analyses for the President for federal policies, plans, and programs. 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 1988 Exon-Florio amendment to the Defense Production Act authorizes the President to suspend or prohibit foreign acquisitions of U.S. companies that may harm national security, an action the President has taken only once. Implementing Exon-Florio can pose a significant challenge because of the need to weigh security concerns against U.S. open investment policy--which requires equal treatment of foreign and domestic investors. Exon-Florio's investigative authority was delegated to the Committee on Foreign Investment in the United States (Committee)--an interagency committee established in 1975 to monitor and coordinate U.S. policy on foreign investments. In September 2002, GAO reported on weaknesses in the Committee's implementation of Exon-Florio. This review further examined the Committee's implementation of Exon-Florio. Several aspects of the process for implementing Exon-Florio could be enhanced thereby strengthening the law's effectiveness. First, in light of differing views among Committee members about the scope of Exon-Florio--specifically, what defines a threat to national security, we have suggested that Congress should consider amending Exon-Florio to more clearly emphasize the factors that should be considered in determining potential harm to national security. Second, to provide additional time for analyzing transactions when necessary, while avoiding the perceived negative connotation of investigation on foreign investment in the United States we have suggested that the Congress eliminate the distinction between the 30-day review and the 45-day investigation and make the entire 75-day period available for review. Third, the Committee's current approach to provide additional time for analysis or to resolve concerns while avoiding the potential negative impacts of an investigation on foreign investment in the United Stated is to encourage companies to withdraw their notifications of proposed or completed acquisitions and refile them at a later date. Since 1997, companies involved in 18 acquisitions have been allowed to withdraw their notification to refile at a later time. The new filing is considered a new case and restarts the 30-day clock. While withdrawing and refiling provides additional time while minimizing the risk of chilling foreign investment, withdrawal may also heighten the risk to national security in transactions where there are concerns and the acquisition has been completed or is likely to be completed during the withdrawal period. We are therefore suggesting that the Congress consider requiring the Committee Chair to (1) establish interim protections where specific concerns have been raised, (2) specify time frames for refiling, and (3) establish a process for tracking any actions being taken during the withdrawal period. Finally, to provide more transparency and facilitate congressional oversight, we are suggesting that the Congress may want to revisit the criterion for reporting circumstances surrounding cases to the Congress. Currently, the criterion is a presidential decision. However, there have only been two such decisions since 1997 and thus only two reports to Congress.
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The acquisition function plays a critical role in helping federal agencies fulfill their missions. Other transaction authority provides the ability to acquire cutting-edge science and technology, in part through attracting entities that typically have not pursued government contracts because of the cost and impact of complying with government procurement requirements. This authority, when used selectively, is a tool intended to help the Science and Technology Directorate leverage commercial technology to reduce the cost of homeland security items and systems. Other transaction agreements are distinct from procurement contracts, grants, or cooperative agreements because of the flexibilities that they offer to both awardees and the government. For example, they allow the federal government and awardees flexibility in negotiating intellectual property and data rights, which stipulate each party's rights to technology developed under the agreements. The flexibility of other transaction agreements is an important characteristic to attract nontraditional contractors. We previously reported, however, that because these agreements do not have a standard structure based on regulatory guidelines, they can be challenging to create and administer. The Homeland Security Act of 2002 originally authorized DHS to carry out a 5-year pilot program to exercise other transaction authority. in 2007, other transaction authority has been extended annually through appropriations legislation. The Homeland Security Act of 2002 authorizes DHS to enter into an other transaction agreement that advances the development, testing, and evaluation of critical supports basic, applied, and advanced research and development; technologies; and carries out prototype projects. Pub. L. No. 107-296, SS 831(a). business arrangements or structures that would not be feasible or appropriate under a procurement contract. Other transaction agreements for research do not require the involvement of a nontraditional contractor. One Science and Technology Directorate program funded other transaction agreements to promote homeland security by advancing the development and testing of rapid biological detectors. This "detect-to- protect" system would monitor a facility and detect the presence of biological agents in time to provide sufficient warning to facility occupants to limit their exposure (see left image in fig. 1). A different Science and Technology Directorate program used an other transaction agreement to develop and test a new high-voltage transformer that helps provide power during the recovery time following blackouts or outages resulting from severe natural disasters or terrorist attacks (see right image in fig. 1). The period of performance for other transaction agreements varies and may last longer than a traditional FAR contract. Other transaction agreements are generally structured in successive phases, so each project may have several phases. At the end of a phase, the awardees submit a statement of work and technical and cost proposals for the next phase. Continuation between phases may be based on an independent technical evaluation and is not guaranteed. Unlike FAR contracts, which are generally limited to a length of 5 years, an other transaction agreement may continue as long as funding is available and work is required under a phase. As a result, other transaction agreements can vary in length, from 3 months to over 7 years, as shown in figure 2. Further, the funding for other transaction agreements may grow over time. For example, in one other transaction agreement, the Science and Technology Directorate obligated $200,000 in the first phase with an 8- month period of performance. This agreement has been in existence for almost 7 years with at least $5.3 million obligated on it. Another two agreements were funded for $2 million at the time of award, but at completion, each other transaction agreement had obligations of approximately $100 million. The use of other transaction authority by the Science and Technology Directorate has declined since its peak in fiscal years 2005 and 2006. From fiscal year 2004 through fiscal year 2011, the Science and Technology Directorate entered into 58 other transaction agreements, totaling $583 million in obligations. Fourteen agreements remained active in fiscal year 2011 and the directorate has not entered into a new other transaction agreement since fiscal year 2010. The Science and Technology Directorate's use of other transaction authority has declined since 2005 when it entered into 28 new agreements. Total obligations also have declined since peaking at $151 million in 2006 (see fig. 3). DHS officials offered reasons for the decline in use of other transaction authority. DHS acquisition officials told us that recently they have noted a decrease in the number of nontraditional contractors submitting proposals to use other transaction agreements while the use of FAR contracts has increased. Further, one official explained that as DHS's requirements have changed over time, the requirements have targeted different industries. Finally, DHS officials have been uncertain about renewal of other transaction authority. For example, in fiscal year 2011, there was a gap in DHS's other transaction authority because the continuing resolution did not extend the authority until April 2011. DHS officials explained that they were unsure if DHS had the authority to enter into new agreements or modify existing agreements under continuing resolutions. However, while use has declined, DHS officials said the flexibility provided by other transaction authority to conduct business with nontraditional contractors is still important to the directorate's research needs. For example, one program manager explained that without other transaction authority, DHS would be required to go through a traditional contractor to reach a nontraditional contractor, and this could affect the Science and Technology Directorate's ability to directly obtain the necessary technology. DHS has made some progress in addressing challenges and the related recommendations we previously made regarding its use of other transaction agreements (see fig. 4). DHS has faced challenges overseeing its use of other transaction authority and establishing safeguards in the following five areas: 1. developing guidance for the use of audit provisions,2. updating policies related to documentation of lessons learned, 3. identifying workforce training requirements, and 4. conducting a workforce assessment, 5. collecting relevant data on other transaction agreements. GAO-05-136. GAO-05-136. GAO-08-1088. GAO-08-1088. Based on our review of all 27 available DHS agreement files, we found three gaps in the collection and reporting of information on its use of other transaction authority: (1) DHS does not consistently document the rationale for entering into an other transaction agreement in an agreement analysis document, despite DHS guidance to do so; (2) discrepancies between DHS's data sources result in an incomplete picture of other transaction agreements activity, including an inaccurate annual report to Congress; and (3) DHS does not track the circumstances that permit the use of other transaction authority, such as the involvement of a nontraditional contractor, through the phases of an other transaction agreement. Involving nontraditional contractors is one of the benefits of having other transaction authority, yet without knowing how many are involved or for how long, DHS is not in a position to measure the benefits of using the special acquisition authority. While DHS's guidance requires it to document the rationale for using other transaction authority, DHS does not do this consistently. One of the following three conditions must be met to use an other transaction agreement for prototypes: (1) there is at least one nontraditional government contractor participating to a significant extent, (2) at least one-third of the total cost of a prototype project is to be paid out of funds provided by parties to the transaction other than the federal government, or (3) the DHS Chief Procurement Officer determines, in writing, that exceptional circumstances justify the use of a transaction that provides for innovative business arrangements or structures that would not be feasible or appropriate under a procurement contract. Since 2005, DHS other transaction guidance requires that this rationale be documented in an agreement analysis that should be maintained in the other transaction agreement file. We found that the agreement analysis is not consistently documented in the files. In our review of 11 other transaction for prototype agreement files, we found inconsistent documentation of the agreement analysis--7 other transaction agreement files contained an agreement analysis document for the initial award and 4 did not contain an agreement analysis document. These 4 other transaction agreement files that do not contain any agreement analysis documentation were awarded recently, from 2007 to 2009. DHS other transaction agreement officers said they rely on the agreement analysis to learn the background on agreements they have inherited from previous other transaction agreement officers. Given the high turnover of acquisition staff, the agreement analysis document is an important tool to capture information about the rationale for use of other transaction authority. Recent annual reports to Congress on other transaction activity have been incomplete. DHS is required to provide an annual report to Congress detailing the projects for which other transaction authority was used, the rationale for its use, the funds spent using the authority, the outcome of each project, and the results of any audits of such projects. We previously reported that DHS's June 30, 2008 report to Congress did not include 14 agreements from the reporting period.current analysis of DHS's fiscal year 2010 congressional report and other transaction agreement files, we found that DHS did not report three agreements that received funding totaling over $3.2 million in obligations, Based on our or 22 percent of other transaction obligations for the year. In addition, DHS does not include information on open agreements that did not involve the exercise of an option or the award of a new phase during the reporting period. While this information is not expressly required by the legislation, without it DHS is not providing a complete picture of the use of its authority. Based on our file review, we found the following other transaction agreements which were not reported in DHS's 2009 and 2010 annual congressional reports (see fig. 5). For example, one open other transaction agreement, which was not reported in the fiscal year 2009 annual report, included a payment schedule with four dates during fiscal year 2009 totaling about $10 million. Without accurate information about the universe of other transaction agreements, Congress may be unable to oversee DHS's use of its other transaction authority. Further, we found that DHS does not track information to measure the benefits of other transaction authority, which include reaching nontraditional contractors. DHS's guidance states that the government team, which includes acquisition and program officials, should establish and track metrics that measure the value or benefits directly attributable to the use of other transaction authority. But DHS officials told us they have not established metrics. In addition, DHS does not collect information at each phase of an other transaction agreement to determine if the original circumstances permitting the use of other transaction authority still exist. Specifically, DHS does not track the involvement of a nontraditional contractor throughout the various phases of the other transaction agreement. Based on our file review, we identified 11 other transaction agreements that cited the significant contribution of a subawardee nontraditional contractor as the circumstance permitting the use of other transaction authority. However, we found that six of these agreement files did not include documentation to demonstrate that the subawardee nontraditional contractor was involved during one or more phases of the agreement. For example, one nontraditional contractor was involved as a subawardee for 14 months, but the other transaction agreement lasted 40 months. While circumstances frequently change when conducting research or prototype development, the Science and Technology Directorate does not have visibility into the impact of these changes over time. In contrast, the Department of Defense (DOD) has determined that tracking information about participants, which includes nontraditional contractors, is important to managing its other transaction authority. In its guidance, DOD requires defense agencies and military departments to report significant changes to key participants involved in the agreement. This information is used to track the number of nontraditional contractors involved in other transaction agreements, which DOD officials use to measure the benefit of its other transaction authority. Even with the recently reduced use of other transaction authority, the Science and Technology Directorate continues to identify this as an important tool that provides the flexibilities needed to develop critical technologies. However, while other transaction agreements may carry the benefit of reaching nontraditional contractors to develop and test innovative homeland security technology, they also carry the risk of reduced accountability and transparency because they are exempt from federal procurement regulations. While DHS has responded to our prior recommendations, it still faces challenges addressing our recommendation to develop a mechanism to collect and track relevant data. Without consistent information on the universe of other transaction agreements, DHS continues to report inaccurate or incomplete information on the use of its other transaction authority in its annual report to Congress. This may undermine Congress's ability to obtain a full picture on the use of this special acquisition authority. DHS has taken steps by updating its guidance to require documentation of lessons learned; however, the guidance is not being implemented. In particular, we found that DHS does not document lessons learned from completed other transaction agreements nor has it consistently documented the agreement analysis, as required by guidance. Other transaction agreements may be in place for an extended time period and obligate a significant amount of funds, yet DHS does not have full information on other transaction activity at each phase of the award. Involving nontraditional contractors is one of the circumstances permitting the use of other transaction authority, yet without knowing how many are involved or for how long, DHS is not in a position to determine whether the continued use of the other transaction authority is still the best approach through the life of the agreement. If other transaction authority is made permanent, it is important for DHS to have complete information to understand and track its use of other transaction authority over time. To promote the efficient and effective use by DHS of its other transaction authority to meet its mission needs, we recommend that the Secretary of Homeland Security direct the Under Secretary for Management to take the following three actions: Establish an action plan with specific time frames for fully implementing the prior GAO recommendation to establish a mechanism to collect and track relevant data on other transaction agreements, including the role of the nontraditional contractor, and systematically assess the data and report to Congress. Establish an action plan with specific time frames to help ensure full implementation of DHS other transaction guidance, regarding documentation of lessons learned and documentation of the agreement analysis. Establish a policy to review and document the circumstances permitting the use of other transaction authority at each new phase, throughout the life of the agreement, to determine if the continued use of an other transaction agreement is appropriate. We provided a draft of this report to DHS for comment. In written comments, DHS agreed with our recommendations and described actions under way or planned to address them. DHS also provided technical comments, which we have incorporated into the report as appropriate. DHS's comments are reprinted in appendix III. We are sending copies of this report to interested congressional committees and the Secretary of Homeland Security. 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 IV. The objectives for this report were to review (1) the Department of Homeland Security's (DHS) Science and Technology Directorate's use of other transaction authority, (2) the extent to which DHS has addressed challenges we previously identified with its use of the authority, and (3) the information DHS collects and reports on the use of other transaction authority. To review the Science and Technology Directorate's use of other transaction authority, we analyzed data provided by DHS's Office of Procurement Operations Science and Technology Acquisitions Division on all other transaction agreements it has entered into since 2004. These data included agreement award date, agreement end date, annual obligations, and information on nontraditional contractors' roles as prime awardees or subawardees. DHS officials compiled these data from DHS's procurement system, annual reports to Congress on other transaction authority, and hard copy agreement files. To understand reasons for its trends in use of other transaction authority, we interviewed Science and Technology Directorate program officials and DHS acquisition officials. To determine the extent to which DHS has addressed challenges with its use of other transaction authority, we drew upon prior GAO reports on DHS's use of other transaction authority, reviewed DHS other transaction agreement policies and procedures, conducted interviews with DHS officials, and reviewed other transaction agreement files that were active on or after April 1, 2008, through September 2011. To determine the steps taken to encourage the use of audit provisions, we reviewed DHS's May 2008 guidance and its October 2009 updated guidance, Other Transactions for Research and Prototype Projects Guide. We identified and reviewed 4 other transaction agreements that were awarded after May 2008 to determine if DHS has included audit provisions as encouraged by the guidance. To determine the steps taken by DHS to document lessons learned, we identified DHS's policy to document lessons learned in the October 2009 guidance, reviewed the files of 10 agreements that ended after October 2009, and interviewed acquisition and program officials to determine if they had participated in lessons learned discussions or documented lessons learned, as described in the guidance. To determine the steps taken by DHS to identify and implement workforce training requirements, we reviewed DHS's Management Directive 0771.1, Procurement Operating Procedure 311, and the associated June 2011 cancellation; we obtained acquisition official training certifications; and interviewed program staff to determine if they had attended training. We also reviewed training materials to determine if other transaction authority was covered in the contract officer technical representative training attended by program officials. To identify steps taken by DHS to conduct a workforce analysis to determine if it has the appropriate number of agreement officers to execute other transaction authority, we interviewed DHS officials and requested workforce assessments addressing DHS's acquisition workforce. To determine whether DHS collects relevant data on other transaction authority, we analyzed information that DHS collected from its review of the hard copy files, its procurement system, and annual reports to Congress on other transaction authority. To assess the information DHS collects and reports on its use of other transaction authority, we obtained an initial list of agreements from DHS's Office of Procurement Operations Science and Technology Acquisitions Division; reviewed annual reports to Congress on other transaction authority; and interviewed program, acquisition, and general counsel officials. We also contacted officials at the Department of Defense to understand its policies and procedures to manage its other transaction authority. We identified 28 agreements that were active on or after April 1, 2008, through September 30, 2011. We conducted an in-depth file review for 27 of these 28 agreements; DHS was unable to locate one agreement file prior to the date we drafted this report. To determine the accuracy of DHS's annual report to Congress, we reviewed the requirements for the report and compared the information included in these reports to the requirements and information from the other transaction agreement files. To identify information documenting the circumstances permitting the use of other transaction authority, such as information collected on nontraditional contractors, we looked at several documents in the agreement files. Specifically, we reviewed preaward documentation, such as awardee proposals, determination and findings, and agreement analysis documents, and postaward documentation, such as the signed other transaction agreement, all modifications, and statements of work. We interviewed program, acquisition, and general counsel officials to determine the process for verifying a nontraditional contractor's status and significant contribution. In analyzing DHS's agreements, we did not independently verify a contractor's reported status as a nontraditional contractor. We conducted this performance audit from August 2011 through May 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. Table 1 presents the information in figure 4 in a noninteractive format. In addition to the contact named above, Penny Berrier, Assistant Director; Kristin Van Wychen; Beth Reed Fritts; Anne McDonough-Hughes; John Krump; Kenneth Patton; Mary Quinlan; Roxanna Sun; Robert Swierczek; Keo Vongvanith; and Rebecca Wilson made key contributions to this report.
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When DHS was created in 2002, Congress granted it special acquisition authority to use "other transaction" agreements, which are special vehicles used for research and development or prototype projects. Unlike conventional contracts, other transaction agreements offer flexibilities to reach entities that traditionally have not done business with the government. They have risks, however, because they are exempt from the Federal Acquisition Regulation and other requirements. The Homeland Security Act of 2002 required GAO to report on the use of other transactions by DHS. In 2004 and 2008, GAO reported on challenges DHS faced. This report covers (1) the DHS Science and Technology Directorate's use of other transactions, (2) DHS's progress in addressing challenges, and (3) the information collected on the use of the authority and reported to Congress. GAO examined all 27 available other transaction agreement files, reviewed DHS's other transaction policies and procedures, and interviewed cognizant officials. In the last 8 years, the Department of Homeland Security's (DHS) Science and Technology Directorate has used its special acquisition authority to enter into 58 "other transaction" agreements. Use of the authority has declined since 2005. DHS officials said the decline is due to uncertainty about the agency's continuing authority to enter into these agreements, among other things. DHS has made progress in addressing challenges and prior GAO recommendations related to its use of other transaction agreements in five areas. GAO's analysis of DHS's files and reports to Congress found gaps in the collection and reporting of information on other transactions. Specifically: DHS does not consistently document the rationale for entering into an other transaction agreement in the agreement analysis document, although DHS guidance requires it to do so. Recent annual reports to Congress did not contain information on all other transaction agreements. DHS does not collect information on the circumstances that permit the use of other transaction authority throughout the life of the agreement. Without complete information about the universe of other transaction agreements, neither Congress nor DHS can have full visibility into the use of this authority. GAO recommends that DHS (1) develop an action plan with specific time frames for fully implementing GAO's prior recommendation on data collection and congressional reporting, (2) ensure full implementation of its guidance regarding documentation, and (3) establish a policy for reviewing the circumstances that permit the use of other transaction authority throughout the life of the agreement. DHS agreed with these recommendations.
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Traditionally, financing the construction of public schools has been a function of local government. Until the 1940s, only 12 states provided any financial assistance for school construction. State participation increased during the baby boom of the 1950s, when local communities needed classrooms and states had surplus revenues. Even with such increases, however, localities were mainly responsible for school facilities construction. Beginning in the 1970s, litigation in many states highlighted disparities in school districts' ability to raise money for public education. Court decisions resulted in many states increasing funding levels and playing a larger role in lessening financial disparities between rich and poor districts. Although these decisions have pertained mainly to the state's role in providing for instruction rather than to a focus on buildings, the past 20 years have seen a general increase in state involvement with facilities-related matters. By 1991, state funding for school facilities totaled more than $3 billion or about 20 percent of all funds used for public school construction. Increasingly, the physical condition of school buildings has become a concern in school finance litigation. In 1994, for example, the Arizona Supreme Court found the state's school funding system unconstitutional on the basis of disparities in the condition of its schools. Also, court challenges in Texas and Ohio have focused on inequities in districts' abilities to make capital expenditures and the importance of suitable facilities for a constitutionally acceptable education system. School finance experts expect disparities in facilities to be a continued aspect of litigation. Meanwhile, states face pressure from other rising budget expenditures, such as for health care and prisons. Forty-eight states reported participating in at least one of the three areas of state involvement in school facilities that we identified. State involvement ranged from participation in all three areas to participation in just one or none of the areas. (State-by-state involvement as reported by SEAs is summarized in app. II, table II.1.) In all, 40 states reported providing ongoing facilities funding, 44 states reported participating in technical assistance or compliance 23 states reported collecting and maintaining information about the condition of school facilities. (See fig. 1.) We characterized 13 states as having comprehensive facilities programs: Alabama, Alaska, Florida, Georgia, Hawaii, Kentucky, Maryland, Massachusetts, Minnesota, North Carolina, Ohio, South Carolina, and West Virginia. Our review of state programs addressed the extent of state involvement and did not evaluate program effectiveness. We considered programs comprehensive if they had a facilities program framework in place that provided ongoing funding, conducted a variety of technical assistance and compliance review activities, maintained current information on the condition of school buildings statewide, and had one or more FTE staff working on facilities matters. Although a total of 19 SEAs reported activities in all three areas, for some states the level of activity reported in at least one of these areas was limited in some way. For example, Pennsylvania participated in all three areas, including collecting information on the condition of facilities; however, officials reported that the information was updated only when a LEA applied for project funding. Since the interval between these updates may be as much as 20 years, the information maintained by the state may be out of date. Kentucky is an example of a state we characterized as having a comprehensive program. A facilities official reported that the SEA Division of Facilities Management provided guidance to LEAs in implementing locally developed 4-year facility plans that included detailed information on the condition of school buildings. Eight professional staff and three support staff provided the LEAs with information and guidance throughout the planning, budgeting, and building of school facilities. Staff also reviewed building plans for compliance with education specifications. The state had three funding assistance programs and reported providing about $66 million in state financial assistance for facilities in state fiscal year 1994--mostly through a $100 per student capital outlay allotment paid as part of the state foundation funding. The SEA reviewed all major LEA construction and renovation projects, whether or not state funding was used. Another 21 states reported activities in two of the three areas. Most of them provided funding and technical assistance and compliance review but did not collect and maintain information on the condition of school facilities. For example, an Indiana official reported that the state provided funding through three programs, and the SEA staff reviewed architectural plans for compliance with state education administrative codes and advised local officials on funding and other processes related to facilities planning and construction. Eight states reported participation in just one area. For example, an Illinois official reported that while the state did not have an ongoing funding program or collect condition data, the SEA facilities staff did provide technical assistance and compliance review for certain locally funded projects to correct life/safety code violations. Along with the variation among states in facilities activities and level of involvement, we also found differences in state views and traditions on the extent of the state role in providing facilities assistance. Several states reported many years of providing funding, illustrating the view that states have a role in school facilities assistance. Officials in other states expressed the view that school facilities matters are the responsibility of the local districts. A total of 40 states reported providing ongoing financial assistance to local districts for the construction of public elementary and secondary schools.Collectively, these states reported providing an estimated $3.5 billion in grants and loans for school facilities construction in state fiscal year 1994. Ten states reported no regular, ongoing programs to assist districts with construction costs, although some of these had recently provided one-time appropriations for facilities or considered proposals for funding school construction. While most states reported providing financial assistance for school construction, funding levels varied widely. On a per pupil basis, state funding provided in fiscal year 1994 ranged from a high of $2,254 per student in Alaska to a low of $6 per student in Montana (see table 2). The median amount of assistance provided per student was about $104. With the exception of Hawaii and Alaska, which provided full or nearly full state support for school construction, all states provided less than $300 per student. Eight states--Arkansas, Indiana, Michigan, Minnesota, North Dakota, Ohio, Utah, and Virginia--reported providing at least some portion of their assistance in the form of loans to districts. The following descriptions of funding programs in three states provide more context for the amount of state aid provided for school facilities. Florida has eight programs to aid school facilities: Florida has provided financial assistance for school facilities construction since 1947. Its eight funding programs for facilities assistance are funded from gross receipts from utility taxes and motor vehicle licensing tax revenues. Two programs are based on district enrollment growth relative to enrollment growth statewide; a third program provides funding for maintenance based on the square footage and age of a district's buildings plus building replacement costs. The remaining programs target projects such as joint-use facilities, vocational-technical centers, and projects to assist districts using modified school calendars. One program targets funding to districts with limited ability to raise local revenues for facilities. In New Hampshire, facilities aid is linked to LEA consolidation: New Hampshire reimburses local districts for a percentage of their construction debt. The state contribution ranges from 30 to 55 percent and favors districts that have consolidated. Districts can receive an extra 20 percent for portions of projects attributable to the construction of kindergartens. (New Hampshire is the only state without mandatory kindergarten.) The state reimburses districts over a minimum of 5 years or the longest period of time required by the funding instruments used by the district. In Kansas, facilities aid is based on district wealth: Kansas began providing funding to local districts for school facilities in state fiscal year 1993. Depending on the assessed valuation per pupil of the school district, the state program provides aid ranging from none to a high of around 50 percent for less wealthy districts. No cap exists on the total amount of assistance the state provides. Funding is provided as an entitlement to school districts; the state pays its share of local debt service for all districts passing bond measures. Not only do funding levels vary among states in any 1 year, but construction funding can vary dramatically within states from year to year, making it difficult to capture the complete picture of state support in one snapshot. Some states supplement their regular construction funding programs from time to time with additional monies for school facilities construction. For example, a state official in New Jersey reported that in fiscal year 1993 the state made a one-time appropriation of $250 million to address health and life/safety needs in schools in addition to the regular facilities funding provided that year. In several states where we obtained data for multiple years, construction funding reported by officials increased or decreased more than 50 percent between fiscal years 1993 and 1994. These fluctuations can reflect such circumstances as changes in school construction needs or in the availability of state funding. Putting the amount of state assistance for school construction--about $3.5 billion nationwide in state fiscal year 1994--in context of total facilities expenditures is difficult because of limited data on local spending, a major part of those expenditures. When we asked state officials for this information, many reported that they did not have or collect this data. Preliminary data from the Bureau of the Census show that, counting revenues from all sources, total expenditures for school construction and purchases of land and existing buildings and improvements to buildings were about $15.7 billion for the 1991-92 school year. When we asked states whether they had any information about unmet needs for construction funding, officials from several states noted instances of facilities needs outstripping available state resources. For example, a state official in Alaska reported that in fiscal year 1994 local districts submitted requests for funding totaling $880 million for a grant program that received an appropriation of $171 million. Similarly, a state official from Wyoming noted that district requests for funding totaled $42 million in fiscal year 1995, although the state had only $13.5 million available. In contrast, officials from two states commented that they had no backlog in requests for funding. States reported using a variety of mechanisms to allocate funding for facilities, and many reported having multiple programs. Some programs provided assistance to districts requesting aid for specific construction projects; others provided each district with a fixed amount of funding per student or a proportion of available funding based on such factors as a district's facility needs relative to facility needs statewide. Delaware exemplifies how programs can vary within a state. An official reported three funding programs: one focused on major capital projects that provides funds on a project-by-project basis accounting for district ability to pay, a second program for scheduled maintenance and repairs that distributes available funding to districts on the basis of enrollment and requires a local match, and a third program for unscheduled repairs that uses a flat rate formula including factors of building age and enrollment. While states reported using various ways to distribute funds, we found common features among the programs: Most states reported prioritizing funding toward districts with less ability to pay. While states reported using a variety of ways to prioritize which districts receive funding and how much they receive, most reported considering district ability to pay in awarding some portion of assistance. Of the 40 states providing construction funding, 34 reported programs that gave some weight to ability to pay, either through eligibility criteria, allocation formulas, or prioritization criteria. For example, Montana has restricted its debt service subsidy program to districts whose taxable property wealth per pupil was less than the statewide average. Maryland reported providing districts with a percentage of approved project costs that ranged from 50 to 80 percent, depending on ability to pay. States varied, however, in the degree to which they considered district wealth. For example, officials in North Carolina reported four funding programs, one of which targeted assistance to poorer districts with critical facility needs. In New York, all construction funding has been provided through one program that considered district wealth in providing a percentage of approved project costs. In addition to ability to pay, other funding prioritization factors that state officials reported using included enrollment growth and facility overcrowding, physical condition of buildings, and whether districts had consolidated. Most states reported providing aid as grants rather than loans. Only 8 of the 40 states reported providing any assistance for school facilities in the form of loans to local districts. Most states reported providing facilities funding through state budget appropriations. A total of 29 of the 40 states reported providing at least a portion of construction funding through state budget appropriations. Another often used source of funding was state bonds. A few states also reported using special revenue sources dedicated to school construction. For example, Wyoming reported using mineral royalties from school-owned lands to support its capital construction grant program. Most states reported providing no assistance for preventive or routine maintenance through their construction funding programs. Officials typically described state programs as providing assistance for the construction and renovation of school buildings. While many states also reported funding major maintenance projects, such as roof replacements, most said they did not provide assistance for routine or preventive maintenance. Forty-four states reported providing technical assistance to LEAs for facilities or reviewing facilities projects for compliance with state requirements. (See app. II, table II.2.) Although technical assistance and compliance review activities tended to be similar among states, the level of involvement varied considerably as did the number of staff devoted to the efforts. As we conducted our study, we also found that agencies other than the SEA had at least some responsibility for school facilities. However, pursuing information about activities in these other agencies was beyond the scope of this study, and we focused mainly on the activities and staffing levels at the SEAs. A total of 44 states reported providing technical assistance to LEAs--specifically, information or guidance on facilities regulations, planning, construction, or maintenance. Technical assistance was typically furnished by phone, through publications and manuals, at meetings between SEA and LEA representatives, or through workshops and formal training. The assistance in some states was limited to answering a few LEA questions and in others it also included guidance on needs assessments and long-range plans; building design; hazardous materials; engineering, legal, and architectural matters; among other subjects. We found considerable variance in the levels of technical assistance provided. Some states provided a limited level of technical assistance. For example, Montana's SEA reported providing information--but not training--on regulations, requirements, and other facility guidelines. Oregon reported providing guidance only on asbestos removal regulations and processes, including sponsoring a yearly training class. Other SEAs were more involved in technical assistance activities. For example, a Maryland SEA official reported that its facilities staff spent a large portion of their time in the field working with local committees to plan and design school buildings. They conferred with architects on school design; presented training for school board officials, engineers, architects, and school custodial staff; and provided a variety of facilities issues publications to LEAs. A total of 37 states also reported compliance review activities relative to building and fire codes, state education specifications, or other state regulations. Compliance review activities were fairly standard among states, consisting primarily of reviewing project architectural plans to ensure that they conform to regulations and requirements. Over two-thirds of the 50 states reported overseeing compliance with education specifications or other state regulations associated with facilities, while nearly one-third reported reviewing plans for building or fire code compliance. Although states' compliance review activities were fairly standard, their levels of involvement varied. For example, Ohio officials reported that the facilities unit reviewed architectural plans for conformance with education standards but did little compliance enforcement. In contrast, Connecticut officials reported that the SEA facilities unit reviewed plans for compliance with several codes, including state building, life safety, and health codes, as well as federal health, safety, and accessibility requirements. Approval of the facilities unit was required for a project to receive state aid. Of the 44 states providing technical assistance or compliance review, a total of 28 reported SEA staffs with fewer than six FTE employees involved in facilities-related work--including 12 states with one FTE or fewer (see fig. 2). SEA facilities staffing levels in the 44 states ranged from .02 to 72 FTEs. (See app. II, table II.2.) Officials reported that facilities staff expertise may include finance, education specifications, building codes, and plans checking. Some reported architects, engineers, or attorneys on staff. In many states, SEA officials told us that other state agencies were involved to at least some extent in school facilities activities--in particular, compliance activities. For example, most states reported that the State Fire Marshal had school facilities responsibilities, often related to code compliance or building inspection. Other state agencies frequently mentioned by officials as having facilities responsibilities included departments of health, labor, and environment. In three states--California, Hawaii, and Maryland--major facilities responsibilities were shared among the SEA and other agencies. For example, in California, staff in two divisions of the Department of General Services as well as the SEA played major roles. Finally, in two states--South Dakota and West Virginia--the major school facilities activities were handled outside the SEA. For example, in South Dakota, all facilities responsibility was transferred to the State Fire Marshal's Office by legislation passed in 1994. Facility staffing levels are changing in some states. Several SEAs reported proposed or enacted reductions in facilities staff or facilities responsibilities. For example, in Maine, since a 1991 recession, facilities unit FTEs have been reduced from three to one professional staff as part of a general reduction in the size of the SEA. More recently, Florida has reduced its facilities unit staffing by 75 percent and New York by 25 percent for fiscal year 1996. On the other hand, two SEAs reported that they hope to increase their facilities units by one or two staff. Fewer states reported collecting and maintaining current information on the condition of school buildings compared with the number of states providing financial or technical assistance and compliance review for facilities. We considered states to collect such data if the information documented the condition of individual schools and was collected or at least updated in the last 5 years. A total of 23 states reported maintaining information on the condition of school buildings (see fig. 3). Of these, 15 states reported collecting facility condition data on a regular, ongoing basis, updating their information annually or every few years. The remaining eight states reported conducting a one-time study of the condition of their facilities sometime in the last 5 years. Seventeen states reported maintaining other types of information on their facilities that was not specifically related to building condition. In many cases this information was an inventory of school buildings, which often included such data as the number of buildings, their age and size, and building use. Other types of facility information that states collected included data on the total appraised value of school facilities and building architectural plans. Nearly all states collecting information on the condition of school buildings reported maintaining other facilities data as well. Ten states reported that they maintained no information on school facilities or did so on an extremely limited basis, such as retaining current application materials and financial records or reports on the general adequacy of facilities resulting from standard school accreditation reviews. For example, in Connecticut, the official we interviewed reported that the state collected only the information and plans necessary for the projects under review at any given time. (For a delineation of the facilities information collected by individual states, see app. II.) For the 23 states collecting some type of data on the condition of facilities, the comprehensiveness of the information and the frequency of data collection varied. Some states reported using professional architects or state-trained staff to conduct assessments of the condition-specific components of the building structure, such as walls and roofs, or building systems, such as plumbing and heating. Often these labor-intensive studies were conducted as one-time efforts or were updated once every several years. Other states reported relying on districts to report an overall rating for the condition of their buildings. For example, in Alabama, districts must complete an annual building inventory survey that includes one item to rate the overall condition of buildings on a four-point scale from "excellent" to "should be razed." When we asked state officials about any changes they would like to make to their information gathering systems, almost one-third said they would like to collect additional information. Several expressed interest in developing an inventory of their school buildings or updating their present inventories. Many states were also interested in starting to gather building condition information or updating condition information collected earlier. In addition to gathering more data, officials in many states expressed an interest in automating more of the information they collect. For example, officials in several states hoped to make data collection from local districts more interactive using computers. Two state officials expressed interest in computerizing architectural plans. On the other hand, officials in several states believed their current level of data collection was sufficient. In six states that collected relatively little facilities data, officials said they did not want to gather any additional information, and a few said the information they had was adequate for the scope of their state's program. For example, in Rhode Island, the state aid specialist said that as long as the state program remains locally oriented they require no further data. Officials in a few states said that they would have to increase their staff to collect or analyze more information and did not want to do this. Although local governments have traditionally been responsible for facilities construction, renovation, and major maintenance, most SEAs have established a state presence in school facilities matters using a variety of approaches. However, states' levels of involvement varied: about one-fourth of them had programs that included ongoing funding assistance, a variety of technical assistance and compliance review activities, and data collection on the condition of facilities; 10 states were involved in one or none of the activities. Further, officials reported differing viewpoints and traditions on state involvement in facilities matters. Such variations in approach and philosophy among states illustrate the lack of consensus on the most appropriate and effective state role. Today, state involvement in school facilities remains in flux. Because the physical condition of school buildings has become a concern in school finance equity litigation, experts expect disparities in facilities to be a continuing and pressing issue. States will likely be looked to for ways to lessen these disparities. State governments, however, face pressure from other rapidly rising budget expenditures--such as health care--that compete for the same limited funds. The Department of Education reviewed a draft of this report and had no comments. In addition, we provided state-specific information to state officials for verification and incorporated their comments in the text as appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to appropriate House and Senate Committees and all members, the Secretary of Education, and other interested parties. Please contact me on (202) 512-7014 or my assistant director, Eleanor L. Johnson, on (202) 512-7209 if you or your staff have any questions. Major contributors to this report are listed in appendix III. To determine the extent to which states provided funding and technical assistance and compliance review for school facilities and maintained information on the condition of school buildings, we conducted telephone interviews with state officials responsible for school facilities in all 50 states. In nearly all cases, we spoke with staff at the state education agency (SEA) responsible for school facilities. In a few states, we also spoke with officials located in other state agencies extensively involved in school facilities. Where necessary, for clarification, we conducted follow-up telephone interviews. We supplemented this information with supporting documentation provided by state officials. All data were self-reported by state officials, and we did not verify their accuracy. We conducted our work between October 1994 and September 1995 in accordance with generally accepted government auditing standards. The focus of our study was state fiscal year 1994. Typically, this covered the period from July 1, 1993, to June 30, 1994. We learned of changes in state programs that occurred after this time during follow-up interviews with state officials and included these when they suggested trends in changing levels of state involvement. States' involvement in providing assistance for school facilities ranged widely (see table II.1). To illustrate, profiles of assistance provided in three states--Georgia, Maine, and Colorado--are presented following table II.1. (continued) Colorado requires that each local education agency (LEA) set aside $202 per pupil of the state and local basic aid funding to be used for long-range capital needs such as new facilities, major renovations, land, school buses, or risk management purposes such as liability insurance or workers compensation. The funding cannot be used for debt service. The Colorado state education agency (SEA) has no staff assigned to facilities activities, and technical assistance is limited to answering a few questions during the year. Colorado does not routinely collect information on facilities; an official told us that measuring the condition of schools is considered a local issue. The Maine School Construction Program provided LEAs with about $43.5 million in state fiscal year 1994 to pay debt service on capital construction bonds through the state's foundation funding. The amount received is based in part on the assessed valuation per student and on project priority criteria such as overcrowding. A staff of three in the Division of School Business Services spend part of their time overseeing the facilities funding program and providing information and assistance to LEAs throughout the funding and construction processes. The division works with LEAs on compliance with state education program guidelines and coordinates project review and approval among other agencies, such as the State Fire Marshal and the Bureau of General Services. The SEA does not currently gather information about the condition of buildings but hopes to conduct a survey of LEAs to gather descriptive information on their facilities. The Georgia Department of Education provides facilities assistance to LEAs through a system of annual entitlements based on district needs, including enrollment increases. LEAs may permit their entitlements to accrue over time, which allows each school system to undertake significant projects rather than make minor repairs year after year. LEAs must submit to the state a 5-year comprehensive facilities plan validated by an outside survey team and provide from 10 to 25 percent of the project costs. The SEA Facilities Services Section has field consultants who provide assistance to their assigned LEAs and an architect who reviews all architectural project plans for compliance with state requirements. Georgia provided about $151 million to LEAs for facilities in state fiscal year 1994. Levels of compliance review and technical assistance varied widely among states. (See table II.2). Profiles of three states that exemplify this variance--New York, Washington, and Wisconsin--follow table II.2. Full-time equivalents (FTE) A, B, C A, B, C A, B, C A, B, C A, B, C A, B, C A, B, C A, B, C A, B, C A, B, C A, B, C (continued) Full-time equivalents (FTE) A. Technical assistance includes providing information or guidance to LEAs on funding or construction issues using one or more of a variety of activities, including telephone consultations or site visits, attending district meetings, presenting training to district staff or those working on school construction projects, or publishing informational documents for district use. B. Compliance review for building or fire codes includes reviewing architectural plans for conformance with building, mechanical, electrical, or related structural and life/safety codes. C. Compliance review for education specifications or other state regulations includes reviewing architectural plans or other documents for conformance with state education specifications such as for the size and use of school building space. It also includes reviewing documents for conformance with other state requirements, such as the use of women- or minority-owned companies, or wages paid to school construction workers. New York's SEA staff present workshops and publish newsletter articles on regulations and facilities planning as well as architectural, engineering, and legal issues. They also provide information to about 100 telephone callers per day. Staff review architectural plans for compliance with the building code and education specifications. They assess the need for projects, approve sites, enforce the state environmental review act, determine eligibility for state building aid and petroleum overcharge funds, issue building permits, and approve leases. The SEA oversees a fire inspection program that enforces building and fire codes for existing buildings through annual inspections conducted by LEA-hired inspectors. Staff certify completed projects for occupancy, provide on-call assistance for environmental hazard problems and are implementing a requirement for LEA comprehensive 5-year capital plans. Washington's SEA school facilities section staff provide information to local school districts on health and safety issues and ensure that state-assisted school construction projects comply with state law. The section provides assistance to school districts and other state and federal agencies by acting as an information clearinghouse. Wisconsin's SEA staff provide assistance interpreting the building code and health and safety regulations--usually by telephone or sending documents by mail. The staff present occasional on-site workshops, referrals to other agencies, and assistance with LEA facilities plans. Nearly half of the states maintained information on the condition of school facilities. Some collected it on an ongoing basis, while others had done a recent, one-time study. Most states maintained information on facilities other than condition. Only 10 states maintained extremely limited or no information on facilities. Table II.3 describes the extent of facilities information maintained by each state. Maintains no information or only extremely limited information (continued) R. Jerry Aiken, Computer Specialist (Programmer/Analyst) D. Catherine Baltzell, Supervisory Social Science Analyst Sandra L. Baxter, Senior Evaluator Tamara A. Lumpkin, Evaluator Stanley H. Stenersen, Senior Evaluator Virginia A. Vanderlinde, Evaluator Dianne L. Whitman, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO examined the role of states in supporting school facilities improvements, focusing on: (1) state funding and technical assistance to local school districts; and (2) the extent to which states collect information on school building conditions. GAO found that: (1) most states have a role in school facilities construction, renovation, and maintenance, and 13 states have established comprehensive facilities programs; (2) states provided $3.5 billion for school facilities construction during fiscal year 1994; (3) state financial assistance for school facility construction ranged from $6 per student to more than $2,000 per student; (4) the number of staff devoted to providing facilities guidance and oversight varied, with most states having fewer than 6 full-time equivalent staff; (5) twenty-three states collected data on the condition of school buildings in their area, seventeen states collected data on building inventories, and 10 states collected no data on school facilities; and (6) some state officials believe that school facilities matters are primarily a local responsibility.
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A comprehensive reassessment of agencies' roles and responsibilities is central to any congressional and executive branch strategy that seeks to bring about a government that is not only smaller but also more efficient and effective. GPRA provides a legislatively based mechanism for Congress and the executive branch to jointly engage in that reassessment. In crafting GPRA, Congress recognized the vital role that consultations with stakeholders should have in defining agencies' missions and establishing their goals. Therefore, GPRA requires agencies to consult with Congress and other stakeholders in the preparation of their strategic plans. These consultations are an important opportunity for Congress and the executive branch to work together in reassessing and clarifying the missions of federal agencies and the outcomes of agencies' programs. Many federal agencies today are the product of years of accumulated responsibilities and roles as new social and economic problems have arisen. While adding the particular roles and responsibilities may have made sense at the time, the cumulative effect has been to create a government in which all too frequently individual agencies lack clear missions and goals and related agencies' efforts are not complementary. Moreover, legislative mandates may be unclear and Congress, the executive branch, and other stakeholders may not agree on the goals an agency and its programs should be trying to achieve, the strategies for achieving those goals, and the ways to measure their success. For example, we reported that the Environmental Protection Agency (EPA), had not been able to target its resources as efficiently as possible to address the nation's highest environmental priorities because it did not have an overarching legislative mission and its environmental responsibilities had not been integrated. As a result of these problems, EPA could not ensure that its efforts were directed at addressing the environmental problems that posed the greatest risk to the health of the U.S. population or the environment. To respond to these shortcomings, EPA is beginning to sharpen its mission and goals through its National Environmental Goals Project, a long-range planning and goal-setting initiative that, as part of EPA's efforts under GPRA, is seeking to develop a set of measurable, stakeholder-validated goals for improving the nation's environmental quality. The situation at EPA is by no means unique. Our work has shown that the effectiveness of other agencies, such as the Department of Energy and the Economic Development Administration, also has been hampered by the absence of clear missions and strategic goals. and limit the overall effectiveness of the federal effort. For example, the $20 billion appropriated for employment assistance and training activities in fiscal year 1995 covered 163 programs that were spread over 15 agencies. Our work showed that these programs were badly fragmented and in need of a major overhaul. Moreover, in reviewing 62 programs that provided employment assistance and training to the economically disadvantaged, we found that most programs lacked very basic information needed to manage. Fewer than 50 percent of the programs collected data on whether program participants obtained jobs after they received services, and only 26 percent collected data on wages that participants earned. Both houses of Congress in recent months have undertaken actions to address the serious shortcomings in the federal government's employment assistance and training programs, although agreement has not been reached on the best approach to consolidation. In another example, we identified 8 agencies that are administering 17 different programs assisting rural areas in constructing, expanding, or repairing water and wastewater facilities. These overlapping programs often delayed rural construction projects because of differences in the federal agencies' timetables for grants and loans. Also, the programs experienced increased project costs because rural governments had to participate in several essentially similar federal grant and loan programs with differing requirements and processes. We found that, because of the number and complexity of programs available, many rural areas needed to use a consultant to apply for and administer federal grants or loans. The examples I have cited today of agencies with unclear missions and other agencies that are duplicating each other's efforts are not isolated cases. Our work that has looked at agencies' spending patterns has identified other federal agencies whose missions deserve careful review to ensure against inappropriate duplication of effort. As I noted in an appearance before the Senate Committee on Governmental Affairs last May, in large measure, problems arising from unclear agency missions and goals and overlap and fragmentation among programs can best be solved through an integrated approach to federal efforts. Such an approach looks across the activities of individual programs to the overall goals that the federal government is trying to achieve. The GPRA requirement that agencies consult with Congress in developing their strategic plans presents an important opportunity for congressional committees and the executive branch to work together to address the problem of agencies whose missions are not well-defined, whose goals are unclear or nonexistent, and whose programs are not properly targeted. Such consultations will be helpful to Congress in modifying agencies' missions, setting better priorities, and restructuring or terminating programs. The agencies' consultations with Congress on strategic plans will begin in earnest in the coming weeks and months. The Office of Management and Budget's (OMB) guidance to agencies on GPRA requirements for strategic planning said that agencies would be asked to provide OMB with selected parts of their strategic plans this year. Some departments, such as the Department of the Treasury, are scheduling meetings on their strategic plans with the appropriate authorization, appropriation, and oversight committees. As congressional committees work with agencies on developing their strategic plans, they should ask each agency to clearly articulate its mission and strategic goals and to show how program efforts are linked to the agency's mission and goals. Making this linkage would help agencies and Congress identify program efforts that may be neither mission-related nor contribute to an agencies' desired outcomes. It would also help Congress to identify agencies whose efforts are not coordinated. As strategic planning efforts proceed, Congress eventually could ask OMB to identify programs with similar or conflicting goals. As was to be expected during the initial efforts of such a challenging management reform effort, the integration of GPRA into program operations in pilot agencies has been uneven. This integration is important because Congress intended that outcome-oriented strategic plans would serve as the starting points for agencies' goal-setting and performance measurement efforts. Ultimately, performance information is to be used to inform an array of congressional and executive branch decisions, such as those concerning allocating scarce resources among competing priorities. To help accomplish this integration, GPRA requires that beginning with fiscal year 1999, all agencies are to develop annual performance plans that provide a direct linkage between long-term strategic goals and what program managers are doing on a day-to-day basis to achieve those goals. These plans are to be submitted to OMB with the agencies' budget submissions and are expected to be useful in formulating the president's budget. Congress can play a decisive role in the implementation of GPRA by insisting that performance goals and information be used to drive day-to-day activities in the agencies. Consistent congressional interest at authorization, appropriation, budget, and oversight hearings on the status of an agency's GPRA efforts, performance measures, and uses of performance information to make decisions, will send an unmistakable message to agencies that Congress expects GPRA to be thoroughly implemented. Chairman Clinger and the Committee on Government Reform and Oversight took an important first step last year when they recommended that House committees conduct oversight to help ensure that GPRA and the CFO Act are being aggressively implemented. They also recommended that House committees use the financial and program information required by these acts in overseeing agencies within their jurisdiction. A further important step toward sharpening agencies' focus on outcomes would be for congressional committees of jurisdiction to hold comprehensive oversight hearings--annually or at least once during each Congress--using a wide range of program and financial information. Agencies' program performance information that can be generated under GPRA and the audited financial statements that are being developed to comply with the Government Management Reform Act (GMRA) should serve as the basis for these hearings. GMRA expanded to all 24 CFO Act agencies the requirement for the preparation and audit of financial statements for their entire operations, beginning with those for fiscal year 1996. Also, consistent with GMRA, OMB is working with six agencies to pilot the development of consolidated accountability reports. By integrating the separate reporting requirements of GPRA, the CFO Act, and other specified acts, the accountability reports are intended to show the degree to which an agency met its goals, at what cost, and whether the agency was well run. I have endorsed the concept of an integrated accountability report and was pleased to learn that OMB plans to develop guidance, which is to be based on the experiences of the initial six pilots, for other agencies that may wish to produce such reports for fiscal year 1996. I believe that by asking agencies the following or similar questions, Congress will both lay the groundwork for communicating to agencies the importance it places on successful implementation of GPRA and obtain important information on the status of agencies' GPRA efforts. The experiences of many of the leading states and foreign countries that have implemented management reform efforts similar to GPRA suggest that striving to measure outcomes will be one of the most challenging and time-consuming aspects of GPRA. Nevertheless, measuring outcomes is a critical aspect of GPRA, particularly for informing the decisions of congressional and high-level executive branch decisionmakers as they allocate resources and determine the need for and the efficiency and effectiveness of specific programs. As expected at this stage of GPRA's implementation, we are finding that many agencies are having difficulty in making the transition to a focus on outcomes. For example, to meet the goals in its current GPRA performance plan, the Small Business Administration (SBA) monitors its activities and records accomplishments largely on the basis of outputs, such as an increased number of Business Information Centers. Such information is important to SBA in managing and tracking its activities. However, to realize the full potential of outcome-oriented management, SBA needs to take the next step of assessing, for example, the difference the additional Centers make, if any, to the success of small businesses. SBA also needs to assess whether the Centers and the services they provide are the most cost-effective way to achieve SBA's goals. Similarly, the goals in the Occupational Health and Safety Administration's (OSHA) GPRA performance plan are not being used to set the direction for OSHA and the measurable outcomes it needs to pursue. For example, one of OSHA's goals is to "focus resources on achieving workplace hazard abatement through strong enforcement and innovative incentive programs." Focusing resources may help OSHA meet its mission, but this represents a strategy rather than a measurable goal. Officials leading OSHA's performance measurement efforts recognize that OSHA's goals are not sufficiently outcome-oriented and that OSHA needs to make significant progress in this area to provide a better link between its efforts and the establishment of safer and healthier workplaces. We also are finding instances where pilot agencies could better ensure that their GPRA performance goals include all of their major mission areas and responsibilities. It is important that agencies supply information on all of their mission areas in order to provide congressional and executive branch decisionmakers with a complete picture of the agency's overall efforts and effectiveness. For example, the Bureau of Engraving and Printing's GPRA performance plans contain a goal for the efficient production of stamps and currency. However, these performance plans do not address an area that the Bureau cites as an important part of its mission--security. The Bureau has primary responsibility for designing and printing U.S. currency, which includes incorporating security features into the currency to combat counterfeiting. The importance of security issues has been growing recently because of heightened concern over currency counterfeiting. Foreign counterfeiters especially are becoming very sophisticated and are producing very high-quality counterfeit notes, some of which are more difficult to detect than previous counterfeits. The value of an agency's performance information arises from the use of that information to improve the efficiency and effectiveness of program efforts. By using performance information, an agency can set more ambitious goals in areas where goals are being met and identify actions needed to meet those goals that have not been achieved. information in cases where goals are not met. In the pilot reports we reviewed, 109 of the 286 annual performance goals, or about 38 percent, were reported as not met. GPRA requires that agencies explain why goals were not met and provide plans and schedules for achieving those goals. However, for the 109 unmet goals we examined, the pilot reports explained the reason the goal was not met in only 41 of these cases. Overall, the pilot reports described actions that pilots were taking to achieve the goal for 27, or fewer than 25 percent, of the unmet goals. Moreover, none of the reports included plans and schedules for achieving unmet goals. Discussions of how performance information is being used are important because GPRA performance reports are to be one of Congress' major accountability documents. As such, these reports are to help Congress assess agencies' progress in meeting goals and determine whether planned actions will be sufficient to achieve unmet goals, or, alternatively, whether the goals should be modified. As you are aware, I have long been concerned about the state of the federal government's basic financial and information management systems and the knowledge, skills, and abilities of the staff responsible for those systems. Simply put, GPRA cannot be fully successful unless and until these systems are able to provide decisionmakers with the program cost and performance information needed to make decisions. Because these financial systems are old and do not meet users' needs, they have become the single greatest barrier to timely and meaningful financial reporting. Self-assessments by the 24 CFO Act agencies showed that most agency systems are not capable of readily producing annual financial statements and do not comply with current system standards. The CFO Council has designated financial management systems as its number one priority. organizations and said that such training was critical to the success of their reform efforts. We are concerned that most federal agencies have not made progress in developing plans to provide this essential training in the creative and low-cost ways that the current budget environment demands. I fully appreciate that, in this environment, maintaining existing budgets devoted to management systems and training is a formidable challenge. However, continued--and in some cases, augmented--investment in these areas is important to ensure that managers have the information and skills needed to run downsized federal organizations efficiently. In passing GPRA, Congress recognized that, in exchange for shifting the focus of accountability to outcomes, managers must be given the authority and flexibility to achieve those outcomes. GPRA therefore includes provisions to allow agencies to seek relief from certain administrative procedural requirements and controls. Agencies' efforts to focus on achieving results are leading a number of them to recognize the need to change their core business processes to better support the goals they are trying to achieve. For example, the U.S. Army Corps of Engineers' Civil Works Directorate, Operation and Maintenance program, changed its core processes by means of several initiatives, including decentralizing its organizational structure and delegating decisionmaking authority to project managers in the field. In exchange for this delegated decisionmaking, managers at the Corps of Engineers increasingly are being held accountable for achieving results. The Corps has estimated that, by changing its core processes, it has saved about $6 million annually including 175 staff years. critical to continuing the momentum needed to ensure the aggressive implementation of GPRA. This concludes my prepared statement. I would be pleased to respond to any questions. GPRA Performance Reports (GAO/GGD-96-66R, Feb. 14, 1996). Office of Management and Budget: Changes Resulting From the OMB 2000 Reorganization (GAO/GGD/AIMD-96-50, Dec. 29, 1995). Transforming the Civil Service: Building The Workforce of The Future, Results Of A GAO-Sponsored Symposium (GAO/GGD-96-35, Dec. 20, 1995). Financial Management: Continued Momentum Essential to Achieve CFO Act Goals (GAO/T-AIMD-96-10, Dec. 14, 1995). Block Grants: Issues in Designing Accountability Provisions (GAO/AIMD-95-226, Sept. 1, 1995). Financial Management: Momentum Must Be Sustained to Achieve the Reform Goals of the Chief Financial Officers Act (GAO/T-AIMD-95-204, July 25, 1995). Managing for Results: Status of the Government Performance and Results Act (GAO/T-GGD-95-193, June 27, 1995). Managing for Results: Critical Actions for Measuring Performance (GAO/T-GGD/AIMD-95-187, June 20, 1995). Managing for Results: The Department of Justice's Initial Efforts to Implement GPRA (GAO/GGD-95-167FS, June 20, 1995). Government Restructuring: Identifying Potential Duplication in Federal Missions and Approaches (GAO/T-AIMD-95-161, June 7, 1995). Government Reorganization: Issues and Principles (GAO/T-GGD/AIMD-95-166, May 17, 1995). Managing for Results: Steps for Strengthening Federal Management (GAO/T-GGD/AIMD-95-158, May 9, 1995). Managing for Results: Experiences Abroad Suggest Insights for Federal Management Reforms (GAO/GGD-95-120, May 2, 1995). Government Reform: Goal-Setting and Performance (GAO/AIMD/GGD-95-130R, Mar. 27, 1995). Block Grants: Characteristics, Experience, and Lessons Learned (GAO/HEHS-95-74, Feb. 9, 1995). Program Evaluation: Improving the Flow of Information to the Congress (GAO/PEMD-95-1, Jan. 30, 1995). Managing for Results: State Experiences Provide Insights for Federal Management Reforms (GAO/GGD-95-22, Dec. 21, 1994). Reengineering Organizations: Results of a GAO Symposium (GAO/NSIAD-95-34, Dec. 13, 1994). Management Reform: Implementation of the National Performance Review's Recommendations (GAO/OCG-95-1, Dec. 5, 1994). Management Reforms: Examples of Public and Private Innovations to Improve Service Delivery (GAO/AIMD/GGD-94-90BR, Feb. 11, 1994). Performance Budgeting: State Experiences and Implications for the Federal Government (GAO/AFMD-93-41, Feb. 17, 1993). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed: (1) the Government Performance and Results Act's (GPRA) potential contributions to congressional and executive branch decisionmaking; and (2) Congress' role in implementing GPRA. GAO noted that: (1) more federal agencies are recognizing the benefits of focusing on outcomes rather than activities to improve their programs' efficiency and effectiveness; (2) agencies cannot quickly and easily shift their focus because outcomes can be difficult to define and measure and major changes in services and processes may be required; (3) strong and sustained congressional attention is needed to ensure GPRA success; (4) GPRA provides a mechanism for reassessing agencies' missions and focusing programs while downsizing and increasing efficiency; (5) unclear goals and missions have hampered the targeting of program resources and caused overlaps and duplications; (6) Congress needs to hold periodic comprehensive oversight hearings and to gather information on measuring outcomes and determine how GPRA performance goals and information drive agencies' daily operations, how agencies use performance information to improve their effectiveness, agencies' progress in improving their financial and information systems and staff training and recruitment, and how agencies are aligning their core business processes to support mission-related outcomes.
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In 1972, the Congress established the Construction Grants Program to provide grants to help local governments construct wastewater treatment facilities. These federal grants provided most of the funding for these projects; the remainder was provided by the local government constructing the project. In 1987, the Congress began to phase out that program and authorized the creation of state revolving funds (SRF), which provide loans to local governments and others. The states are required to match SRF capitalization grants at a rate of at least one state dollar for every five federal dollars. The states have the option of increasing the amount of SRF funds available to lend by issuing bonds guaranteed by the money in the SRFs. According to a national survey, as of June 30, 1995 (the latest data available), the states collectively had $18.9 billion in their SRF accounts; over one-half of this amount (approximately $11 billion) was provided by federal capitalization grants. (App. I provides additional information on funding sources for the nine SRFs.) For the most part, the Congress gave the states flexibility to develop SRF loan assistance programs that meet their particular needs. However, the states must ensure that the projects funded with loans issued up to the amount of the federal capitalization grants meet two types of federal requirements. The first type of requirement includes those requirements contained in the various statutes that apply generally to federal grant programs. These requirements--also called "cross-cutting" authorities--promote national policy goals, such as equal employment opportunity and participation by minority-owned businesses. The second type of requirement applies various provisions that applied to the Construction Grants Program (known as title II requirements, because that program was authorized by title II of the Federal Water Pollution Control Act Amendments of 1972). These requirements include compliance with the federal prevailing-wage requirement. The title II requirements apply only to those projects wholly or partially built before fiscal year 1995 with funds made directly available by federal capitalization grants. The transfer of federal funds to SRFs begins when the Congress appropriates funds annually to the Environmental Protection Agency (EPA). EPA then allots capitalization grants to the individual states, generally according to percentages specified in the Clean Water Act. To receive its allotment, a state has up to 2 years to apply for its capitalization grant. In order to apply, a state must, among other things, propose a list of potential projects to solve water quality problems and receive public comments on that list. After completing the list and receiving its capitalization grant, a state generally has 2 years to receive payments of the grant amount (via increases in its letter of credit). After each such increase, a state has up to 1 year to enter into binding commitments to fund specific projects. Next, a binding commitment is typically converted into a loan agreement. The overall amount of funds lent by the nine states increased between 1995 and 1996, from $3.3 billion to $4.0 billion. The amount lent by each state also increased. During the same time period, seven states increased their percentage of funds lent, and two states maintained or decreased their percentage of funds lent. As figure 1 shows, all nine states increased the amount of funds they lent between 1995 and 1996. Six states increased their amount by 15 to 29 percent. For example, Pennsylvania increased the amount lent by 17 percent, from $267 million to $311 million. The other three states increased their amount of funds lent by 30 percent or more. The largest change--95 percent--was in Arizona, which increased from $50 million to $99 million. As figure 2 shows, seven of the nine states increased their percentage of funds lent between 1995 and 1996. Three states increased their percentage by 17 percentage points or more. Four other states increased their percentage by 2 to 9 percentage points. Finally, one state's percentage stayed the same, and another state's percentage declined by 2 percentage points. Among the nine states, the percentage of funds lent at the end of 1996 ranged from 60 to 99 percent. Specifically, five states lent 80 percent or more of their available funds, another three states lent 70 to 79 percent, and the final state lent 60 percent. (App. II provides details on the amount and percentage of funds lent, by state.) Officials in eight of the nine states cited one or more factors at the federal level as affecting the amounts and percentages of funds they lent. In seven states, officials said that uncertainty about the reauthorization of the SRF program discouraged some potential borrowers. Also, in seven states, officials cited a concern about compliance with federal requirements, including possible increases in project costs because of a federal prevailing-wage requirement. Finally, in three states, officials identified other reasons, such as federal restrictions on the use of SRF funds. Officials in seven of the nine states said that the lack of reauthorization of the Clean Water Act limited their success in lending funds. Among other things, the lack of reauthorization made it difficult to assure the communities applying for loans that SRF funds would be available to finance their projects and created uncertainty among communities about the terms of their loans. Officials from the seven states generally agreed that the amount and timing of federal funding became more uncertain after the SRF program's authorization expired at the end of September 1994. These officials said that prior to 1994, they used the amounts in the authorizing legislation to help determine how much money they would have to lend each year. According to these officials, these amounts also helped reassure the communities that federal funding would be available for projects. These officials said that the uncertainty created by the lack of reauthorization made it difficult for the states to schedule projects and assure the communities applying for loans that construction money would be available when needed. In addition, Pennsylvania officials said that the lack of reauthorization caused some communities to delay accepting SRF loans because they hoped for more favorable loan terms after the act was reauthorized. Specifically, the Congress has considered a proposal to extend the maximum term for an SRF loan, in certain cases, from 20 years to as much as 40 years and to provide lower interest rates. The state officials said that the communities were interested in both longer repayment periods and lower interest rates. According to a Pennsylvania official, several communities in the state had a loan approved by the state but had not formally accepted the loan. In three cases, local officials told us that they were delaying further action pending the act's reauthorization; the total dollar value of such loans was about $15 million. The Pennsylvania official told us that small, low-income communities in particular would benefit from the proposal to lengthen the repayment period. For example, in March 1995 Pennsylvania approved a $3 million loan for Burrell Township, which has approximately 3,000 people. However, as of October 1996, the community had not accepted the loan on the chance that a reauthorized act would provide for a longer loan term and thus lower annual repayments. Officials in seven of the nine states said that compliance with the federal requirements made financing projects with SRF funds less attractive and, in some cases, caused communities to turn down SRF loans. In particular, five states raised concerns that a federal prevailing-wage requirement could make SRF-financed projects more expensive to construct than projects constructed with other funds. While the title II requirements--which include the federal prevailing-wage requirement--ceased to apply to new projects after October 1, 1994, state officials said they were concerned that these requirements would be reinstated in the reauthorization act. For example, an Arizona official said that the prevailing-wage requirement could inflate a project's costs from 5 to 25 percent. A Louisiana official said that the community of East Baton Rouge Parish withdrew its 1990 SRF loan application for a project to serve about 120,000 people when it discovered that the prevailing-wage requirement would increase the cost of labor for the project by more than $1.1 million--31 percent. Louisiana officials said that before the prevailing-wage requirement expired, the state had experienced difficulties in making loans largely because local officials perceived the requirement as increasing the costs of projects. The officials said that Louisiana's lending rate increased in part because the wage requirement expired. The state's lending rate was 44 percent at the end of 1994, before the requirement expired; 62 percent at the end of 1995; and 79 percent at the end of 1996. EPA officials said they were aware that many states had a concern about the prevailing-wage requirement. They noted, however, that the requirement expired at the end of September 1994 and that the continued application of the requirement would be a state's management decision. They also noted that, even before the requirement expired, it applied only to projects funded with federal capitalization grants (as opposed to projects funded solely with state matching or borrowed funds, for example). Moreover, they noted that some states have chosen to continue requiring projects to comply with the requirement, even though they are no longer required to do so; however, they said, both Arizona and Louisiana no longer apply the requirement to the projects they fund. Officials from three states identified other factors at the federal level that constrained lending. These included the awarding of federal funds directly for selected communities and federal restrictions on the use of SRF funds. Maryland and Pennsylvania officials said that the earmarking of federal funds--not from the SRF program--for specific communities raised the expectation in other communities that if they waited long enough, they might also receive funds directly. This expectation reduced these communities' incentive to apply for an SRF loan. For example, a Maryland official said that state SRF lending was limited by a congressional decision to provide federal funds directly for a project in Baltimore, which SRF officials had expected to finance. He said that the City of Baltimore turned down the SRF loan because it received $80 million in federal grant funds for the project in 1993 and 1994. The state official said that it took time to find other communities to borrow the money that was originally set aside for the Baltimore project. The state increased its percentage of funds lent from 61 percent at the end of 1995 to 70 percent at the end of 1996. Officials from Missouri said that certain federal restrictions on the use of SRF funds limit the amount of loans they can make. For example, a state official cited restrictions on financing the costs of acquiring land. Under the Clean Water Act, SRF loans cannot be made to purchase land unless the land itself is an integral part of the waste treatment processes. Thus, wetlands used to filter wastewater as part of the treatment process are an eligible expense under the act. However, other lands, such as the land upon which a treatment plant would be built, are not eligible. According to the official, because purchasing land for a wastewater treatment facility represents a large portion of the facility's cost but is ineligible for SRF financing, some communities are discouraged from seeking SRF loans. In Pennsylvania and Arizona, the amount of funds lent was limited by decisions on how to manage the loan fund. These decisions related to how to use SRF funds in Pennsylvania and how to publicize the program in Arizona. Pennsylvania established a state-funded program, independent of the SRF, in March 1988 to help communities finance wastewater and other projects. In the early years of the SRF program, Pennsylvania officials decided to finance about $248 million in wastewater projects with these state funds rather than wait for SRF funding to become available, according to state officials. Also according to these officials, the state decided to fund these projects as soon as possible with state funds to reduce public health risks. For example, about $30 million was awarded to the City of Johnstown to upgrade an existing treatment plant and thereby prevent raw sewage overflows and inadequately treated wastewater from being discharged into surface waters. According to a state official, Pennsylvania's percentage of funds lent would have been higher if the state had chosen to fund these $248 million in projects with SRF funds. In that case, he said, Pennsylvania's total amount of funds lent through the end of 1996 would have been $558 million, instead of $310 million, and the state would have lent all available funds, instead of 60 percent of these funds. Likewise, in Arizona, the state's decisions limited the amount of funds lent. According to a state official, efforts to inform local government officials about the SRF program and interest them in participating were not effective in the program's early years. This difficulty was compounded by restrictive provisions of state law that further limited the amount of SRF funds lent.The state official said that the outreach effort was refocused in 1995. He also noted that the approval of changes in state laws in 1995 and 1996 helped create a more positive atmosphere for outreach, even before the changes took effect. Arizona's percentage of funds lent was 55 percent at the end of 1995 and 81 percent at the end of 1996. We provided copies of a draft of this report to EPA for its review and comment. On December 11, 1996, we met with EPA officials, including the Chief of the State Revolving Fund Branch in the Office of Wastewater Management, who noted that the report was generally accurate and well researched. In addition to suggesting clarifications in certain places, which we have incorporated where appropriate, EPA asked that we make it clear that the prevailing-wage requirement expired at the end of September 1994 and that any continued application would result from the states' decisions to retain the requirement. We have added language in the report to clarify this point. Subsequent to our meeting, EPA provided us with written comments on this report, which are reproduced in appendix IV. We used a questionnaire and follow-up discussions to collect information on SRF activities and finances from program officials from the nine states. We selected these states to provide diversity in terms of SRF program size and complexity and other factors, such as geography. However, the conditions in these states are not necessarily representative of the conditions in all 51 SRFs. We also interviewed EPA headquarters and regional officials who are responsible for the SRF program. We did not attempt to independently verify the information collected from EPA or the states. Appendix III provides additional information on how we calculated the states' percentages of funds lent. We conducted our review from March through December 1996 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce this report's contents earlier, we plan no further distribution of the report until 30 days after the date of this letter. At that time, we will send copies of the report to the appropriate congressional committees and the Administrator of EPA. We will also make copies available to others upon request. Please call me at (202) 512-6111 if you or your staff have any questions. Major contributors to this report are listed in appendix V. Under the Clean Water State Revolving Fund (SRF) Program, the states use funds from six primary sources to make loans for wastewater treatment and related projects. These are state matching funds, borrowed funds, unused funds from the Construction Grants Program, repayments of loans, and earnings on invested funds. All nine states received federal grants and provided state matching funds. These two sources generally accounted for most of the money in the nine states' revolving funds. Four of the nine states borrowed money for their revolving funds. Five states transferred unused funds from the old Construction Grants Program. All nine states received some loan repayments. Finally, eight states had investment earnings on loan repayments. Table I.1 shows the amount and sources of funding for the nine states we reviewed through each state's fiscal year 1996. The amount of funds lent increased overall in every state from 1995 to 1996, as shown in the table below. In addition, the percentage of funds lent generally stayed the same or increased during that period. (App. III explains the basis for GAO's calculation of the percentage of funds lent by state.) Amount of funds lent (thousands of dollars) To determine the percentage of funds lent by each state as of the end of 1995 and 1996, we divided the total amount of funds lent by the total funds available to lend, both as of the end of the year. We defined the total funds available as including the following six components: federal SRF grants, state matching funds, funds obtained through leveraging, transfers of unused funds from the Construction Grants Program, loan repayments, and investment earnings. We obtained information on loans made and funds available from each state through a questionnaire and follow-up contacts. In addition, we compared the states' data on the amount of federal SRF grants with the data we obtained from the Environmental Protection Agency (EPA). Our methodology was based on the approach used by the Ohio Water Development Authority in conducting annual SRF surveys during 1992 through 1995. In addition, we discussed our methodology with officials from EPA, the Ohio authority, and the nine states, who generally agreed with our approach. However, state officials raised two concerns about this methodology. First, a Missouri official suggested that loan repayments should not be counted as part of available funds because they do not represent "new" money; rather, repayments represent a recouping of funds previously lent. He said that including repayments would result in double counting and thus overstate the amount of funds the states had available. We chose to include repayments because of the revolving nature of the state funds. Just as any loans made from repayments would be included in the total of funds lent, any repayments need to be included in funds available to provide a complete and consistent accounting of the funds available. If the repayments were excluded from the total amounts of funds available to lend, Missouri's percentage would be 91 percent; according to our methodology, Missouri's percentage was 80 percent. Second, an Arizona official contended that we should not have counted the state's full federal grants as being available to lend. The state did not accept its full federal grants for 2 years. According to his calculation, if the percentage of funds lent were based on the amount that Arizona actually received (rather than the amount it could have received), the state's percentage of funds lent would have been 99 percent in 1995, rather than 55 percent. In our calculations, we used the full amount of federal grants that were available to the state because the state's decisions resulted in Arizona's not accepting its full federal grants. Richard P. Johnson, Attorney-Adviser 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 selected states' use of their revolving funds, focusing on the: (1) amount of funds lent and the percentage of available funds lent, as of the end of each state's fiscal year (FY) 1996; and (2) factors at the federal and state levels that constrained the amount and percentage of funds lent. GAO found that: (1) the nine states GAO surveyed increased the total amount of funds they lent from $3.3 billion in 1995 to $4.0 billion in 1996; (2) six states achieved an increase of between 15 and 29 percent, and the other three states achieved an increase of 30 percent or more; (3) seven of the nine states increased the percentage of available funds they lent, and of these seven, three states increased this proportion by 17 percentage points or more; (4) the percentage of funds lent as of the end of 1996 varied substantially among the nine states; (5) five states had lent 80 percent or more of their available funds, three states had lent between 70 and 79 percent, and one state had lent 60 percent; (6) in eight of the nine states, officials identified the expiration of the authorizing legislation, as well as federal requirements, as affecting the amount and percentage of funds lent; (7) officials in seven states said that other federal requirements, such as a prevailing-wage provision, discouraged some communities from seeking loans; (8) in two states, officials said that the decisions made by the state programs constrained lending; (9) program managers in one state decided to finance certain wastewater projects from state funds rather than from the revolving fund, thereby limiting both the amount and the percentage of funds lent from the revolving fund; and (10) in the other state, efforts to publicize the program to local officials were not effective in the early years of the program.
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FBCB2 will be the principal digital command and control system for the Army at the brigade level and below and will constitute the third major component of the Army's Battle Command System. Currently, the Battle Command System comprises the (1) Global Command and Control System-Army located at strategic and theater levels, which interoperates with other theater, joint, and multinational command and control systems, and with Army systems at the corps and levels below and (2) Army Tactical Command and Control System, which meets the command and control needs from corps to battalion. When fielded, FBCB2 is expected to provide enhanced situational awareness to the lowest tactical level--the individual soldier--and a seamless flow of command and control information across the battle space. To accomplish these objectives, FBCB2 will be composed of a computer that can display a variety of information, including a common picture of the battlefield overlaid with graphical depictions (known as icons) of friendly and enemy forces; software that automatically integrates Global Positioning System data, military intelligence data, combat identification data, and platform data (such as the status of fuel and ammunition); and interfaces to communications systems. Battlefield data will be communicated to and received from users of FBCB2 through a "Tactical Internet." This is a radio network comprising the Enhanced Position Location Reporting System (EPLRS) and the Single Channel Ground and Airborne Radio System (SINCGARS). By connecting platforms through this Tactical Internet, data needed for battlefield situational awareness and command and control decisions can be made available to commanders at all levels of the Army's Battle Command System. To explore the FBCB2 concept, the Army acquired and installed sufficient quantities of equipment to field a brigade-size experimental force in June 1996. This experimental force then used FBCB2 prototype equipment in an Advanced Warfighting Experiment, which culminated in March 1997 during a 2-week deployment against an opposing force at the National Training Center, Fort Irwin, California. Results from the Advanced Warfighting Experiment were considered sufficiently positive that the Army conducted an FBCB2 milestone I/II review in July 1997. FBCB2 was conditionally approved for entry into the engineering and manufacturing development acquisition phase (acquisition milestone II) pending completion of certain essential action items, including the final Operational Requirements Document and the Test and Evaluation Master Plan. The program is expected to incur life-cycle costs of about $3 billion (in then-year dollars) by fiscal year 2012. DOD Regulation 5000.2R offers a general model for management of the acquisition process for programs such as FBCB2. This regulation states that managers shall structure a program to ensure a logical progression through a series of phases designed to reduce risk, ensure affordability, and provide adequate information for decision-making. At the start of a program, consideration is given to program size, complexity, and risk and a determination is made regarding acquisition category. More costly, complex, and risky systems are generally accorded more oversight. The determination made at program initiation is reexamined at each milestone in light of then-current program conditions. The regulation describes the differences among acquisition categories and places them in one of three categories: I, II, or III. In general, the milestone decision authority for category I programs is at a higher level than category II or III programs. In addition, category I programs generally require that more information--such as an Analysis of Alternatives and a Cost Analysis Improvement Group review--be available for decision-making. Category I programs are defined as programs estimated by the Under Secretary of Defense for Acquisition and Technology to require eventual expenditure for research, development, test, and evaluation of more than $355 million (fiscal year 1996 constant dollars) or procurement of more than $2.1 billion (fiscal year 1996 constant dollars). Category II programs have lower dollar classification thresholds than category I programs; for example, the research, development, test, and evaluation dollar threshold for an acquisition category II program is $140 million (fiscal year 1996 constant dollars). Category III programs are defined as those which do not meet the criteria for category I or II programs. FBCB2 is currently classified as a category II acquisition program. FBCB2 is currently designated a category II acquisition on the basis of the Army's estimate of research, development, test, and evaluation costs. As a result, oversight is provided within the Army. We believe that the program should be a category I acquisition on the basis of (1) significance of the program; (2) estimated research, development, test, and evaluation costs; and (3) high schedule risk. The Army acknowledges that the program schedule involves high risk. Throughout the next decade and beyond, the Army plans to modernize its forces through an overarching initiative called Force XXI. Components of the Force XXI initiative are Army XXI, which extends to about the year 2010, and the Army After Next, which is looking beyond the year 2010. Included within the modernization objectives of Army XXI is the integration of information technologies to acquire, exchange, and employ timely information throughout the battle space. In general, integrated situational awareness and command and control information technologies available to Army commanders currently extend through the Army Tactical Command and Control System to tactical operations centers at the brigade and battalion levels. By extending the integration of information technologies to the thousands of soldiers operating outside the tactical operations centers, the Army expects to increase the lethality, survivability, and operational tempo of its forces. FBCB2 is the critical link needed to extend the information to those soldiers. On August 1, 1997, the Deputy Chief of Staff for Operations and Plans announced that the first digitized division would be the 4th Infantry Division and that, at a minimum, fielded equipment would include the Army Training and Doctrine Command's list of priority one systems and associated equipment. The Training and Doctrine Command has identified 15 priority one systems. They primarily consist of command, control, and communications systems, including FBCB2. It is considered a critical element within the Army's digitization effort because of the contribution it makes to achieving the required capabilities for the digitized battlefield. Approved by the Joint Requirements Oversight Council of the Joint Chiefs of Staff in January 1995, these capabilities are integrated battle command from platoon to corps, relevant common picture of the battle space at each level, smaller units that are more lethal and survivable, more responsive logistics within and between theaters, and joint interoperability at appropriate levels. It is unlikely that all of the required capabilities of the digitized battlefield can be achieved without FBCB2. However, despite this critical role, the Army has not designated FBCB2 as a category I acquisition--a designation it has given to the other major systems in the Army's Battle Command System. The significance of this program has also been noted by the Office of the Secretary of Defense, Operational Test and Evaluation Office, which in October 1997 recommended that FBCB2 be elevated to an acquisition category I-D status on the basis of the program's "significant and far-reaching impact." That office placed FBCB2 on the same level as the Army's Maneuver Control System, which is also an acquisition category I-D program. The Maneuver Control System is a key component of the Army's Tactical Command and Control System that provides automated critical battlefield assistance to commanders and their battle staff at the corps-to-battalion level. The Army's cost estimate for research, development, test, and evaluation activities, adjusted to fiscal year 1996 constant dollars, is $265.4 million. This estimate covers the period from fiscal year 1997 through fiscal year 2004. However, we believe the Army's estimate is understated in that other research, development, test, and evaluation costs should be added. As shown in table 1, these costs raise the research, development, test, and evaluation cost estimate above the category I threshold of $355 million. We discussed these figures with Army program officials, and they agreed with $7.2 million of our additional costs, which included partial amounts from the Warfighter Rapid Acquisition Program related to the FBCB2 computer--$2 million of the fiscal year 1997 ($1.4 million) and 1998 ($0.6 million)--and a $5.2-million difference between what was included in the life-cycle cost estimate ($47 million) and the actual budget request ($52.5 million) converted to 1996 constant dollars. Army officials disagreed with the addition of remaining cost categories amounting to $113.1 million on the basis that (1) Army policies and procedures require them to include only those funds obligated by the program office after the establishment of a formal acquisition program; (2) FBCB2-related funds obligated by other program managers, such as the Abrams and Bradley managers, should be excluded; and (3) costs directly related to test and evaluation activities for acquisition category II, like FBCB2, are identified in the Army's Operational Test and Evaluation Command's Support of Operational Testing program element. Our assessment of the Army's arguments follows. The Army Digitization Program provided $47.6 million for FBCB2 research, development, test, and evaluation activities through fiscal year 1996. The funds used were to buy FBCB2 prototype hardware and software used in the Advanced Warfighting Experiment at the National Training Center. Army officials stated that these funds were obligated prior to the establishment of the FBCB2 acquisition program and thus should not be included in this cost estimate. We found that the Army had included these funds in its total life-cycle cost estimate and, while the source of the funds was the digitization program element, the explanation to the Congress in appropriate descriptive summaries shows the funds were needed for activities related to the development of FBCB2 hardware and software. Therefore, we believe these funds should be included in the derivation of the FBCB2 research, development, test, and evaluation cost estimate. Our analysis shows that $2.8 million in fiscal year 1997 funding and $1.9 million in fiscal year 1998 funding were specified for FBCB2 platform (shown as Applique in table 1) integration activities and obligated by Abrams and Bradley program managers. Army officials stated that a new Army regulation requires that all platform-related costs be identified as part of the total platform cost and that these funds were given to and obligated by the Abrams and Bradley program offices. However, the Army obtained these funds from the Warfighter Rapid Acquisition Program on the basis that they would be used to provide an improved design that was not part of the original FBCB2 budget. Additionally, when requesting these funds, the Army stated that, without this funding, FBCB2 would be at risk of not meeting its fiscal year 2000 deadline. In our opinion, since these funds were specifically requested, used, and obligated for FBCB2, they should be considered part of the total research, development, test, and evaluation cost estimate. Our analysis also shows that $7.8 million in fiscal year 1997 and $7.7 million in fiscal year 1998 were requested to complete system engineering and integration work on the Tactical Internet. According to Army officials, these funds were obligated by program managers for Tactical Radio Command Systems and Warfighter Information Network-Terrestrial and, since they were not controlled or obligated by the FBCB2 program manager, should not be included in the estimate. We believe these funds should be included as part of the FBCB2 research, development, test, and evaluation cost because the Army justified its need for these funds on the basis that they would be used to correct known shortcomings and make the Tactical Internet compatible with the evolution of the FBCB2 software development effort. In describing the critical nature of the funding, the Army concluded that without the Tactical Internet there would be no FBCB2. We also found that interface funding is specifically characterized in the fiscal year 1999 Army descriptive summary for the Digitization Program element as needed to complete integration, procure prototypes, and initiate testing of FBCB2 in the M1A1 Abrams, the M1A2 Abrams with system enhancements, and the M2A2 Bradley Operation Desert Storm configurations. Therefore, we believe these funds are more appropriately categorized as FBCB2-related rather than research, development, test, and evaluation activities unique to the Abrams or Bradley platforms. According to Army policy, test and evaluation costs associated with a category I program are included in the program element. Since we believe FBCB2 should be classified as a category I acquisition, we included $8.5 million in fiscal year 1998 for the FBCB2 Limited User Test, $15.4 million in fiscal year 1999 for the FBCB2 Initial Operational Test and Evaluation, and $7.5 million in fiscal year 2000 for the FBCB2 Initial Operational Test and Evaluation. We were unable to determine the estimated costs for Force Development Test and Evaluation. Had we been able to do so, these costs would also be included in our estimate. Our belief that FBCB2 is justifiably a category I acquisition on the basis of cost is shared by an office in the Under Secretary of Defense for Acquisition and Technology. In November 1997, the Director, Test, System Engineering, and Evaluation, recommended that FBCB2 be designated a category I-D program because of "significant integration risks with other major systems and the potential dollar thresholds involved." The Director noted that cost estimates do not include communications and integration costs that potentially will drive the program above category II thresholds. We believe examples of these types of costs discussed in this report are communication costs associated with the Tactical Internet and integration costs associated with the Abrams and Bradley platforms. Army program management officials expressed concern about a category I-D designation for the FBCB2 program because it would require the insertion of formal oversight review milestones, with their consequent resource demands, into an already risky schedule. However, our recent discussions with these officials disclosed that issues of cost estimates and acquisition category are still being explored. For example, a comprehensive Army cost estimate, currently being developed with help of the Cost Analysis Improvement Group, is expected to be available by September 1998. According to these officials, the FBCB2 Overarching Integrated Product Team is trying to reach a consensus on a recommendation regarding the appropriate amount of oversight required for the program. That recommendation may await the outcome of the Army's cost estimate effort currently being developed. To achieve the Army's end of fiscal year 2000 schedule, the FBCB2 program will need to pass a series of tests, including two operational tests. Additionally, new versions of two weapon systems participating in the FBCB2 operational tests will be concluding their own testing just prior to the start of FBCB2 operational testing. The Army acknowledges that the program schedule involves high risk. However, despite this acknowledged schedule risk, the Army is moving ahead with its highly compressed schedule without specifically addressing the implications of not fielding an adequately developed system by the end of fiscal year 2000. In its effort to move the program rapidly along to meet the year 2000 implementation deadline, the Army is making decisions that may prove troublesome later in the acquisition. In this regard, we found that the development of critical acquisition documentation and plans are experiencing significant delays. For example, in July 1997 the Army made the decision to move FBCB2 to acquisition milestone II (Engineering and Manufacturing Development) contingent on completion of the Operational Requirements Document and the Test and Evaluation Master Plan by November 1, 1997. In November 1997, these actions had not been completed and the new expected approval date for these documents slipped to March 1998. Our discussions with Army officials now indicate that these documents are not expected to be complete and approved by the Joint Requirements Oversight Council until July 1998. This means that the Army is currently relying on a December 1997 Training and Doctrine Command-approved Operational Requirements Document as the basis for the program until it is replaced by the Joint Requirements Oversight Council-approved Operational Requirements Document. Therefore, the requirements process is expected to conclude only 1 month prior to the start of the first FBCB2 operational test--Limited User Test--in August 1998. Further, to meet the Army's fiscal year 2000 schedule, the FBCB2 program will need to successfully complete a series of tests, including two operational tests. Each test requires different versions of software for each of the two hardware components--the computer and the communications interface unit. The second operational test also requires that FBCB2 software be successfully integrated into the new digitized versions of the Abrams tank and the Bradley Fighting Vehicle. The new versions of these platforms will be concluding their own independent operational test and evaluations--to demonstrate the capability of the platforms as weapon systems--just prior to the start of the FBCB2 Initial Operational Test and Evaluation. These scheduled activities are shown in figure 1. As shown in figure 1, between now and the planned fielding in fiscal year 2000, FBCB2 will undergo two field tests, two operational tests, and one force development test. Throughout the test period, four different versions of software for the computer and communications interface unit will be used, with a fifth version actually fielded to the first digitized division. In an effort to reduce risk, the Army will be employing "spiral software builds" throughout the test period. According to program officials, spiral software builds increasingly integrate the data from other systems, such as the Army Tactical Command and Control System, into the FBCB2 system. Each version is expected to add new functionality into the previous versions, thus building upon the existing baseline. A field test is currently being conducted prior to the start of the Limited User Test and another will be held in 1999 prior to the Force Development Test and Evaluation. The main objectives of these field tests are to determine FBCB2 readiness for the Limited User Test and the Force Development Test and Evaluation and to make necessary modifications to the FBCB2 software. The first operational test will be the Limited User Test scheduled for the last quarter of fiscal year 1998. Its main objective is to test new hardware and software developed since the conclusion of the Task Force XXI Advanced Warfighting Experiment. The new version of the FBCB2 computer is called "Applique +." One limitation of the test is that only "appliqued platforms"--the Abrams M1A1D and the Bradley M2A2 Operation Desert Storm configurations--will be used. No newer digitized platforms, such as the Abrams M1A2 or the Bradley M2A3 configurations (which require FBCB2 embedded battle command software only), will be used. The Force Development Test and Evaluation is scheduled for the last quarter of fiscal year 1999. The purpose of the test is to evaluate the tactics, techniques, and procedures established for two digitized brigades of the 4th Infantry Division. At this point, it is not clear which configurations of weapon platforms will participate in this test. The second operational test is the Initial Operational Test and Evaluation for FBCB2 and is scheduled for the first quarter of fiscal year 2000. The testing is intended to demonstrate that the FBCB2 system is operationally effective, suitable, and survivable, and the results will be used to support the FBCB2 production decision. While it is expected that some Abrams and Bradley configurations using the FBCB2 embedded battle command software will be available for this test, the latest draft version of the FBCB2 Test and Evaluation Master Plan acknowledges that not all embedded FBCB2 platforms (for example, Land Warrior, Paladin, Crusader, and selected aviation platforms) are expected to be available to participate in the test. The majority of these platforms are still in development and cannot be tested until follow-on operational test and evaluation events. In addition to the various software versions, the Army will be introducing new versions of two radios into the test events--an Advanced SINCGARS System Improvement Program radio and the EPLRS Very High Speed Integrated Circuit radio. Although the development of these radios has been closely coordinated with the demands of the Tactical Internet and FBCB2, they remain separately managed and funded programs. Synchronizing the radios' schedule with FBCB2's aggressive schedule remains a challenge. Overlaying the introduction of new hardware, software, and radios will be new doctrine, tactics, techniques, and procedures associated with using these new capabilities. We believe that the introduction of so many new and diverse elements--hardware, software, radios, doctrine, tactics, techniques, and procedures--over the 18-month period of testing, coupled with the Army's expectation that the first division will be equipped by the end of fiscal year 2000, results in a highly complex and aggressive FBCB2 schedule. Both the Army Digitization Office and FBCB2 program office officials acknowledge that the aggressive schedules to mature and integrate multiple systems pose a high risk for successful program completion. In our opinion, risk is further heightened because there is no apparent risk mitigation strategy addressing the implications of the Army's not meeting the goal of having a functional digitized division by the end of fiscal year 2000. Compounding the FBCB2 schedule risk is the test schedule for the only two weapon platforms scheduled to be involved in FBCB2 initial operational testing. The M1A2 Abrams with system enhancements and the M2A3 Bradley will be undergoing their own independent operational testing during the FBCB2 engineering and manufacturing development phase. Specifically: The M1A2 Abrams tank with system enhancements is scheduled for a follow-on operational test and evaluation April-July 1999. As a risk mitigation measure, an early version of the FBCB2 embedded battle command software, version 1.02b, will be used to evaluate the interface between FBCB2 and the platform software. Command and control functionality will not be tested until the FBCB2 Initial Operational Test and Evaluation in October 1999. The M2A3 Bradley Fighting Vehicle is also scheduled for an Initial Operational Test and Evaluation April-July 1999. The Bradley test will not use any FBCB2 software. As with the Abrams, command and control functionality will not be tested until the FBCB2 Initial Operational Test and Evaluation in October 1999. For FBCB2 operational testing, both Abrams and Bradley platforms will use embedded battle command software version 3.1. Officials from both the Abrams and Bradley offices highlighted the development of the interface between their intravehicle digitized systems and the FBCB2 software as a concern. According to these officials, the newer versions of the Abrams and the Bradley are already digitized in that they have an on-board data processing capability, including mission-critical software. These officials were uncertain about the impact of introducing the FBCB2 software into the platforms. Training and fielding concerns were also expressed by these officials. Abrams officials further noted that their experiences indicate that crews need about 12 months to practice with new software versions before they become proficient. Under the current test schedule, crews would have only 3 months to become proficient before the FBCB2 Initial Operational Test and Evaluation. Since the FBCB2 program has only recently entered engineering and manufacturing development and is scheduled to undergo about 18 months of testing, no operational evaluations are yet available for analysis. However, a prototype of the system participated in the Task Force XXI Advanced Warfighting Experiment, which concluded in March 1997. The experimental results were analyzed by the Army's Operational Test and Evaluation Command and DOD's Director, Operational Test and Evaluation. The Army's Operational Test and Evaluation Command's comprehensive Live Experiment Assessment Report offered various assessments of the FBCB2 prototype. The report candidly discussed poor message completion rates, difficulty with message formats, and the limitations of the experimental hardware and software. The report also acknowledged that potential exists for future improvements. The report offered the following recommendations for the continued development and maturity of the FBCB2 system: (1) continuing to experiment with Applique/FBCB2 using other interface devices, evolving to a voice activated, hands-free system; (2) determining the most critical/useful functions and eliminate noncritical functions; (3) improving vehicle hardware integration; and (4) continuing to develop and mature the Applique Combat Service Support functions. The Director, Operational Test and Evaluation, through the Institute for Defense Analyses, assessed and evaluated the battlefield digitization aspects of the Task Force XXI Advanced Warfighting Experiment in order to achieve early operational insights before the beginning of formal operational testing. Specific systems observed were the Applique and the Tactical Internet. The oversight effort was conducted in partnership with the Army's Operational Test and Evaluation Command, in recognition of the unique nature of the experiment (as distinct from an operational test). The Director's report also identified a lack of (1) adequate digital connectivity; (2) maturity of the Applique and the Tactical Internet; (3) adequate tactics, techniques, and procedures for operations with digital equipment; and (4) tactical skills resulting from inadequate unit collective training. The report recommended continued oversight and evaluation of the upcoming operational tests of FBCB2. Army program officials currently assess the program's technical risk as medium. Even though FBCB2 is one of the Army's top priorities and a key component of the systems needed to field the first digitized division, the Army has not designated the program as a category I acquisition. The Army believes that the program does not meet the required dollar threshold for a category I acquisition on the basis of total research, development, test, and evaluation costs. Program management officials have also expressed concern that the additional review and data collection requirements associated with a category I designation would delay the program. They contend that such a delay would prevent them from achieving the goal of fielding the first digitized division by the end of fiscal year 2000. In our opinion, the significance of the program; its estimated research, development, test, and evaluation cost; and the high schedule risk are compelling reasons for greater oversight. Accordingly, we believe elevating the program to a category I designation would help ensure that adequate management information is developed and provided to decisionmakers to reduce risk, ensure affordability, and better achieve the objectives of DOD Regulation 5000.2R. Therefore, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition and Technology to consider our analysis of the FBCB2 program and make a determination of whether it should be appropriately characterized as an acquisition category I-D on the basis of its significance to the Army's battlefield digitization goal, the costs we discuss in this report, schedule risk, the new Army cost estimate expected to be available by the end of this fiscal year, and the benefits of prudent oversight and analyze, regardless of eventual category designation, the risks and likely immediate benefits associated with equipping a division with an FBCB2 capability by the end of fiscal year 2000 and provide guidance to Army acquisition executives on managing those risks. In commenting on a draft of this report, DOD did not agree nor disagree with our recommendations. In its response, DOD made two points. First, DOD indicated that Overarching Integrated Product Teams--chaired by high level DOD officials--are addressing the issues discussed in our report and that a decision would be made on acquisition level categorization by the fourth quarter of fiscal year 1998. Second, DOD stated that risk management efforts and digitization benefits are continuing to be discussed. DOD described illustrative risk mitigation activities developed by Army officials and reiterated its support of the Army's digitization efforts. While it appears that the FBCB2 acquisition category issue will be resolved by the end of this fiscal year, we remain concerned about the cost, schedule, and performance risks associated with equipping a division by the end of fiscal year 2000 and the implications of not fielding an adequately developed system by that deadline. We continue to believe that this program should be designated an acquisition category 1-D and that departmental guidance should be provided to the Army on managing the risks of not meeting such a short-term mandated deadline. DOD's comments are reprinted in their entirety in appendix I, along with our evaluation. In addition, DOD provided technical comments that have been incorporated, as appropriate, in the report. To evaluate the significance of the FBCB2 program, we reviewed the objectives of the Army XXI and Army After Next initiatives, the priority of FBCB2 within the Army's digitization programs, system comparability with other Army command and control programs, and an assessment of FBCB2's significance prepared by the Office of the Secretary of Defense's Operational Test and Evaluation Office. We also analyzed early Army actions to maintain the system's schedule for equipping the first digitized division. To evaluate program cost estimates, we reviewed the Army's life-cycle cost estimate; converted research, development, test, and evaluation estimates to fiscal year 1996 dollars; compared the fiscal year 1999 FBCB2 budget request with amounts contained in the life-cycle cost estimate; analyzed the fiscal year 1997 and 1998 amounts appropriated to the Army for FBCB2-related Force XXI Initiatives; and developed estimates of costs incurred by Abrams and Bradley program managers for FBCB2-related activities and test and evaluation costs funded outside the FBCB2 program element. We also analyzed early program cost experiences, particularly the reprogramming action requested for the fiscal year 1998 FBCB2 unfunded requirement. To evaluate the feasibility of the Army's fielding schedule, we analyzed the events within the FBCB2 schedule; discussed the events with appropriate officials, including representatives of the Abrams and Bradley program offices; and obtained assessments of the risks associated with fielding an FBCB2 capability to an Army division by the end of fiscal year 2000. In reviewing experimental performance results of the FBCB2 prototype at the Task Force XXI Advanced Warfighting Experiment, we considered the Army's Operational Test and Evaluation Command's Live Experiment Assessment Report and the Director, Operational Test and Evaluation, briefing on early operational insights. In addition, in March 1997, prior to the request for this work, we attended the Force XXI Advanced Warfighting Experiment at Fort Irwin and accompanied representatives of the Operational Test and Evaluation Command to observe and obtain first hand knowledge of the performance of FBCB2 and other initiatives being tested. We also attended after action sessions in which activities carried out during the exercise were evaluated by top commanders. In the course of our work, we also interviewed program officials and examined program management and budget documents, draft system requirements, draft test plans, acquisition plans, and other program documentation. We performed work primarily at the Army Digitization Office, Arlington, Virginia, and the Army Communications and Electronics Command, Fort Monmouth, New Jersey. We also gathered data from the Army Tank Automotive and Armaments Command, Warren, Michigan; Director, Operational Test and Evaluation, Arlington, Virginia; Director, Test, Systems Engineering, and Evaluation, Arlington, Virginia; Army Operational Test and Evaluation Command, Alexandria, Virginia; and the Division XXI Advanced Warfighting Experiment, Fort Hood, Texas. Because the FBCB2 Operational Requirements Document is not yet final, we were unable to review an approved version of program requirements. We performed our review from September 1997 to April 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to other appropriate congressional committees; the Director, Office of Management and Budget; the Secretaries of Defense, the Army, the Navy, and the Air Force; and the Commandant of the Marine Corps. Copies will also be made available to others upon request. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. The major contributors to this report were Charles F. Rey, Robert J. Dziekiewicz, and Paul G. Williams. The following are GAO's comments on the Department of Defense's (DOD) letter dated June 5, 1998. 1. DOD commented that through Integrated Product Team meetings the issues such as program significance, cost, and schedule risk--discussed in our report--are being addressed. Although DOD did not elaborate on how the teams were addressing the issues of significance or schedule risk, it did acknowledge that the Office of the Secretary of Defense's Cost Analysis Improvement Group is currently working with the Army's Cost and Economic Analysis Center to validate the Force XXI Battle Command, Brigade and Below (FBCB2) program costs. This effort is expected to be completed by the fourth quarter of fiscal year 1998. In our opinion, the results of this analysis, as well as the information we have presented on program significance and schedule risk, should be considered in developing the actions taken in response to our recommendation. 2. DOD commented that the spiral software development, the series of tests that have started or are scheduled to be conducted prior to the October 1999 Initial Operational Test and Evaluation, and guidance from the Overarching Integrated Product Team all provide some degree of risk management. We continue to believe these actions do not constitute an adequate risk mitigation strategy for the reasons discussed in the body of our report and summarized as follows Even with the guidance of the Overarching Integration Product Team, the fact that so many system development tests are being compressed to meet a 18-month schedule because of the mandated fiscal year 2000 deadline is, in our view, a high risk approach to successful system development. The spiral software development model discussed by DOD will not guarantee success. Even with users involved during the frequent tests, it is unlikely that there is enough time between tests for DOD to adequately correct discovered deficiencies and implement other desired changes. Further, DOD states that a working group is planned to evolve this spiral development concept for software in the spirit of acquisition streamlining. We believe that the time for evolving this concept, as it relates to FBCB2, is past, and concentrated effort must be focused on successfully completing the scheduled tests and containing escalating costs. DOD is proceeding with FBCB2 development on the basis of an Operational Requirements Document and a Test and Evaluation Master Plan, which are still in the process of being reviewed for approval by the Joint Requirements Oversight Council. This, in our opinion, is another impediment to adequate risk mitigation because DOD is attempting to develop a system that may or may not be addressing appropriate requirements. We still believe that the discussion in our report on these issues supports the need for DOD and the Army to follow the more formal approach to risk mitigation planning as required by DOD Regulation 5000.2R for acquisition I programs. 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 Army's acquisition plans for the Force XXI Battle Command, Brigade and Below (FBCB2) program, focusing on the: (1) program's significance to the Army's battlefield digitization goal; (2) Army's derivation of cost estimates; and (3) feasibility of the Army's fielding schedule. GAO noted that: (1) on the basis of the Army's estimate of FBCB2 research, development, test and evaluation costs, the program has been classified as a category II acquisition--one that does not require systematic oversight by the Under Secretary of Defense for Acquisition and Technology; (2) GAO believes that because of the FBCB2's significance, cost, and schedule risk, the FBCB2 should be classified as a category I acquisition and receive a higher level of oversight; (3) although FBCB2 is critical to the Army's digitization plan--the system ties the upper level command and control systems to the digital battlefield--FBCB2 is the only major system in the Army's Battle Command System that has not been designated category I; (4) the system's potential to provide thousands of soldiers with the ability to send and receive clear and consistent battlefield information in almost real time demonstrates the system's significance as a linchpin of the digital battlefield; (5) this significance is confirmed by the Army's own designation of FBCB2 as one of the highest priority command and control systems and the Army's plan to equip a division with a FBCB2 capability by the end of fiscal year (FY) 2000; (6) GAO's analysis indicates that there are additional research, development, test, and evaluation costs that, when included, increase the dollar significance of this program to a category I acquisition level; (7) the FBCB2 program faces a significant schedule risk in meeting the FY 2000 mandate for fielding the first digitized division; (8) however, despite this acknowledged schedule risk, the Army is moving ahead with its highly compressed schedule with no apparent risk management strategy specifically addressing alternatives and the implications of not fielding an adequately developed system by the end of FY 2000; (9) because the FBCB2 program has only recently entered engineering and manufacturing development, no operational evaluations are yet available for analysis; (10) however, the 1997 Task Force XXI Advanced Warfighting Experiment employed a prototype FBCB2; (11) two independent organizations, the Army's Operational Test and Evaluation Command and the Office of the Secretary of Defense, Operational Test and Evaluation Office, assessed FBCB2 results and found a number of problems; (12) these included poor message completion, limitations related to the experimental hardware and software, a lack of adequate digital connectivity, immaturity of the Applique--the Army's name for FBCB2 computer--and the Tactical Internet, and inadequate training; and (13) Army officials currently assess the program's technical risk as medium.
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JSF is a joint, multinational acquisition program for the Air Force, Navy, Marine Corps, and eight cooperative international partners. The program began in November 1996 with a 5-year competition between Lockheed Martin and Boeing to determine the most capable and affordable preliminary aircraft design. Lockheed Martin won the competition, and the program entered system development and demonstration in October 2001. The program's objective is to develop and deploy a technically superior and affordable fleet of aircraft that support the warfighter in performing a wide range of missions in a variety of theaters. The single-seat, single- engine aircraft is being designed to be self-sufficient or part of a multisystem and multiservice operation, and to rapidly transition between air-to-surface and air-to-air missions while still airborne. To achieve its mission, JSF will incorporate low observable technologies, defensive avionics, advanced onboard and offboard sensor fusion, internal and external weapons, and advanced prognostic maintenance capability. According to DOD, these technologies represent a quantum leap over legacy tactical aircraft capabilities. At the same time, the JSF aircraft design includes three variants: a conventional take-off and landing variant for the Air Force; an aircraft carrier-suitable variant for the Navy; and a short take-off and vertical landing variant for the Marine Corps and the United Kingdom. JSF is intended to replace a substantial number of aging fighter and attack aircraft in DOD's current inventory. In 2003 the JSF program system integration efforts and a preliminary design review revealed significant airframe weight problems that affected the aircraft's ability to meet key performance requirements. Software development and integration also posed a significant development challenge. The program's inability to meet its ambitious goals resulted in the Department's failing to deliver on the business case that justified initial investment in JSF. As a result, purchase quantities have been reduced, total program costs have increased, and delivery of the initial aircraft has been delayed. These changes have effectively reduced DOD's buying power for its investment as it will now be buying fewer aircraft for a greater financial investment. It is too late for the program to meet these initial promises. To its credit, in fiscal year 2004, DOD rebaselined the program extending development by 18 months and adding resources to address problems discovered during systems integration and the preliminary design review. Program officials also delayed the critical design reviews, first flights of development aircraft, and the low-rate initial production decision to allow more time to mitigate design risk and gather more knowledge before continuing to make major investments. Table 1 shows the evolution of cost and delivery estimates from the start of the program up to the latest official program information as of December 2005. Since establishing a new program baseline in fiscal year 2004, JSF program costs have risen and key events have been delayed. JSF program costs have increased by $31.6 billion since the program's decision to rebaseline in fiscal year 2004. This includes a $19.8 billion increase in costs since our report last year in March 2006. The program has experienced delays in several key events including delays in the start of the flight test program, manufacturing and delivery of the first development aircraft, and delays in the testing of critical missions systems. These delays reduce the amount of time available for completing flight testing and development activities. The program projects that it will meet its key performance requirements except for one dealing with the warfighter's ability to fully interoperate with other platforms. Projections are based largely on engineering analysis, modeling, and laboratory testing, and a 7-year test program to demonstrate performance just started in December 2006. JSF program cost estimates have increased by $31.6 billion since the program's decision to rebaseline in fiscal year 2004. During this period, estimates in some cost areas grew by $48 billion but were offset by $16.4 billion due to quantity changes and the proposed termination of an alternate engine program. According to the program, the cost estimate is still mostly based on cost estimating relationships--like cost per pound-- not actual costs and, therefore, is subject to change as the program captures the actual costs to manufacture the aircraft. Also, the official program estimate is based on the program's December 31, 2005, Selected Acquisition Report delivered to Congress in April 2006. We could not review the most recent estimated costs of the JSF program. This information is being used by the Office of the Secretary of Defense in preparing its fiscal year 2008 budget request as well as for the program's Selected Acquisition Report dated December 31, 2006, expected to be delivered to the Congress in early April 2007. Although the most recent estimates were not available for this review, we expect that, unless program content is changed, future cost estimates will be higher based on the history of similar acquisition programs and the risks that remain in the program. Table 2 shows the changes to the program's costs since the rebaseline in fiscal year 2004. Since our last report, the program estimated a $19.8 billion net increase in its total program costs. The majority of the cost growth, over 95 percent, was for procurement. According to the program office, several factors led to an increase in the procurement cost estimate. The most significant increases include: $10.3 billion--result of design and manufacturing changes to large bulkheads in the wing section of the aircraft, need for 6 times more aluminum and almost 4 times more titanium than originally estimated. At the same time, titanium costs almost doubled. $3.5 billion--result of reduced manufacturing efficiency because of plans to build a certain number of wings at a new subcontractor. $5.5 billion--result of changing the business relationship of the prime and two major subcontractors. $4.4 billion--result of projected higher support costs. $14.7 billion--result of changing assumptions for estimating labor rates and inflation. The increases in procurement costs were offset by two main factors. First, the cost estimate reflects production efficiency benefits of $9.2 billion from producing 508 international partner aircraft that were not included in previous estimates. Secondly, the program reduced procurement costs by $5.1 billion as a result of the proposed elimination of the alternate engine program. According to the program office, it expected savings from manufacturing efficiencies by having one engine contractor producing a larger quantity of engines. Program officials stated that they have had difficulty quantifying cost savings that might accrue from competing engine buys between contractors. For now Congress has reinstated the alternate engine program and has required further analysis from DOD and others on the costs of the program. The program also reported that development costs decreased by $1.2 billion. The reduction in development costs was due almost entirely to the removal of the remaining estimated costs to complete the alternate engine's development. Again, Congress has since reinstated funding for the alternate engine program. The net effect of the JSF program cost increases is that DOD will pay more per aircraft than expected when the program was rebaselined. The average procurement unit costs have increased from $82 million to almost $95 million and the program acquisition unit costs has increased from $100 million to over $112 million. Since the JSF program was rebaselined, it has experienced delays in several key development activities but without corresponding changes to the end of development. Holding firm to these dates forces the program to find ways to complete development activities in less time, especially if problems are discovered in the remaining 6 years of development. The program office is evaluating different ways to reduce the risk of this compression by being more efficient in its flight test activities. The first JSF flight was scheduled for August 2006 but did not occur until mid December 2006--about 4 months later than expected. According to the program office, the first flight was successful but was shortened because of a problem with instrumentation on the aircraft. Although the first aircraft will be able to demonstrate some performance--limited flying qualities, propulsion, and vehicle subsystems--it is not a production representative aircraft with fully functioning critical mission systems or the design changes from the rebaselined program that reduced airframe weight. The first flight of a production representative aircraft has been delayed 8 months to May 2008. This aircraft will be a short take-off and vertical landing variant and will incorporate the design changes from the rebaselined program. According to the latest program information, the first fully integrated, capable JSF is scheduled to begin testing in the early 2012 time frame, a delay of several months. The first flight of a JSF with limited mission capability has been delayed 9 months. The estimate for first flight of a production representative conventional take-off variant has been delayed 11 months to January 2009 and the first flight of a carrier variant has been delayed by as much as 4 months to May 2009. The flying test bed, also critical to reducing risk in the flight test program, has been delayed about 14 months to late 2007. This aircraft is a modified Boeing 737 that will be equipped with the sensors and mission system software and hardware. The test bed will allow the program to test aircraft mission systems such as target tracking and detection, electronic warfare, and communications. Figure 2 shows schedule delays and the compression in the development schedule. The program has completed manufacturing of its first development aircraft and manufacturing data indicates that the program did not meet its planned labor hour goals. Manufacturing data on subsequent development aircraft that have begun manufacturing indicate these aircraft are not currently meeting their planned manufacturing efficiencies either. According to contractor data as of November 2006, the first development aircraft had required 35 percent or 65,113 more labor hours than expected. The program encountered most of the inefficiencies in the mate and delivery phase and with the fabrication of the center fuselage and wing. Figure 3 shows the planned hours versus the actual hours needed for completing the first test aircraft. When the first aircraft began manufacturing, the program had released about 20 percent of the engineering drawings needed for building the aircraft. This led to a backlog of drawings, negatively impacting the availability of parts needed for efficient manufacturing operations. To compensate for delays and parts shortages for production, components of the aircraft were manufactured out of sequence and at different manufacturing workstations than planned. For example, the wing section was mated to the center fuselage before work on the wing was completed. The wing was only 46 percent complete and still required more than 18,500 hours of work. Because this remaining work was completed at a different workstation than was planned, contractor officials stated that major tooling--such as a stand that supports the wing structure upright to allow workers to install wiring and other parts--was not available for use. As a result, workers were required to lie on the ground or bend under or over the wing structure to complete the wing assembly, significantly increasing the number of hours needed to complete this effort. According to Defense Contract Management Agency, out-of-station work performed on the wing required an additional 46 percent more hours than planned. Late delivery of parts and late qualification of subsystems were the major drivers to the mate and delivery inefficiencies, more than doubling the hours needed to complete this activity. Lockheed Martin, the prime contractor, appears to be focused on developing an efficient and effective manufacturing process for the JSF, but it is still very early in that process. The development aircraft now in manufacturing are not currently meeting their planned efficiencies. As with the first test aircraft, the program does not expect to manufacture the development aircraft in the planned manufacturing sequence. The program expects to move some wing fabrication activities to final assembly and do both fabrication and final assembly concurrently. Early development aircraft are already experiencing inefficiencies and delays. As of December 2006, wing manufacturing data for one of these aircraft shows the program had completed less than 50 percent of the activities expected at this time while requiring 41 percent more hours than planned. According to the contractor and program officials, these inefficiencies are largely due to late delivery of the wing bulkheads because of a change in their manufacturing process. The Defense Contract Management Agency has rated manufacturing as high risk, stating that the primary cause of risk is the late delivery of parts to properly support the manufacturing work flow. It projects further delays to schedule, increased costs, and subsequent out- of-sequence work. An early indicator of design stability is the completion of design drawings at the critical design review. In February 2006, the program held its critical design review for production representative conventional and short take- off and vertical landing aircraft. At that time, the program had completed 47 percent of the short take-off aircraft design and 3 percent of the conventional aircraft design. Our previous best practices work suggests that completion of 90 percent of a product's engineering drawings provides tangible evidence that the design is stable. As with the first aircraft, the program has experienced late releases of engineering drawings, which has delayed the delivery of critical parts from suppliers to manufacturing for the building of the initial aircraft. For example, based on program data as of October 2006, more than one-third of the drawings needed to complete these two variants are expected to be released late to manufacturing. Although the first aircraft encountered manufacturing inefficiencies, the JSF Program and the contractor have pointed to some successes in this initial manufacturing effort. For example, they have stated the mate of the major sections of the aircraft was more efficient than in past aircraft programs because of the state-of-the-art tools used to design the aircraft and develop the manufacturing process. Likewise, they have indicated that they have experienced fewer defects in this first aircraft than experienced on legacy aircraft. We would agree that the contractor has made progress in demonstrating the use of several large tools and fabrication processes in building the first test aircraft. However, a key factor in developing an efficient and effective manufacturing process is a mature aircraft design. Major design modifications can cause substantial and costly changes in the manufacturing process. For example, since the first aircraft entered production, the manufacturing process has had to be altered due to redesigning required to resolve weight and performance problems. According to Defense Contract Management Agency officials, some tools already bought and in place were either no longer useful or being used less efficiently. New tools had to be procured and the manufacturing process had to change. The Defense Contract Management Agency noted that these additional tooling costs were about $156 million. Contractor officials stated that the current manufacturing capacity is sufficient to produce about 24 aircraft per year. Given that only one aircraft has been built and essentially all of the flight and static and durability testing remains to be done there is still significant risk that the JSF design for each of the three variants will incur more changes as more design knowledge is gained. Currently, the JSF program estimates that by the time the development program ends the aircraft design will meet all but one of its key performance parameters. The performance estimates to date are based on engineering analyses, computer models, and laboratory tests. Key performance parameters are defined as the minimum attributes or characteristics considered most essential for an effective military capability--for the JSF there are eight parameters. The program office estimates that seven of the eight key performance parameters are being met. The aircraft is currently not meeting its full interoperability performance parameter due to a requirement for beyond-line-of-sight communications. Meeting the full interoperability required is currently dependent on other capabilities being developed outside the JSF program. Most ground and flight tests will have to be completed before all the key performance estimates are confirmed. At this time, the program has completed less than 1 percent of the flight test program and no structural or durability tests have been started. According to the program's test and evaluation master plan, the key performance parameters will be verified during testing from 2010 to 2013. Table 3 shows the program's estimate for each key performance parameter. The JSF program's acquisition strategy includes significant challenges to achieve projected cost and schedule goals. The program has begun procurement but not yet demonstrated that the aircraft design is mature, can be manufactured efficiently, and delivered on time. The flight test program has just begun, and there is always risk of problems surfacing and causing further delays. The degree of concurrency between development and production in the JSF program's acquisition strategy still includes significant risks for cost and schedule overruns or late delivery of promised capabilities to the warfighter. The program also faces uncertainties with the amount of funding that will be available to support the program's plan. Other DOD review and oversight organizations have also expressed concern over the level of risk in the program and the resulting costs that will be incurred to complete this acquisition program. The program has planned a 7-year flight test program that includes over 11,000 hours of testing and over 6,000 flights. This is 75 percent more than the F-22A's flight test program and more than double the F/A-18E/F testing efforts. As of this report, the flight test program was only beginning with essentially all critical flight testing remaining to confirm that the aircraft will indeed deliver the required performance. Figure 4 shows the planned flight tests by major test categories. The JSF variants possess significant similarities--all designed to have low observable airframe characteristics, fly at supersonic speeds, shoot air-to- air missiles, and drop bombs on target--but each variant has unique performance goals to support the services' different operational concepts and environments. Test officials acknowledge that each variant will require separate flight testing to demonstrate that it will fly as intended. About two-thirds of the flight tests are planned for demonstrating the performance of each aircraft design. The other one-third of the flight tests are expected to confirm shipboard operations, mission systems, survivability, and armament. Manufacturing and technical problems can delay the completion of a flight test program, increase the number of flight test hours needed to verify that the system will work as intended, and affect scheduled delivery to the warfighter. Under the current testing schedule, the JSF program plans to manufacture and deliver 15 flight test aircraft and 7 ground test articles in 5 years--an aggressive schedule when compared with other programs with fewer variables. For example, the F-22A program took almost 8 years to manufacture and deliver nine flight test aircraft and two ground test articles of a single aircraft design. When the B-2 program began flight testing in July 1989, it estimated that the flight test program would last approximately 4.5 years and require about 3,600 flight test hours. When the test program ended in 1997, the flight test hours had grown to 5,000 hours, or by 40 percent, over an 8-year period. Program officials cited several causes, including difficulties in manufacturing test aircraft and correcting deficiencies from problems discovered during testing. The F-22A encountered similar delays increasing a planned 4-year flight test program to about 8 years, affecting the program's ability to conduct operational testing and move into production on schedule. As discussed earlier, current JSF schedules are already showing that delivery of early test aircraft will be later than the planned delivery date. The flight test program will also hinge on the delivering aircraft with the expected capabilities. JSF's expected capabilities are largely dependent on software that supports vehicle and mission systems. The program plans to develop over 22 million lines of code--more than 6 times the lines of code needed for the F-22A--in five blocks. The first block is nearly complete and the last block is scheduled for completion in late 2011. The program has completed less than 40 percent of the software needed for the system's full functionality. Most of the completed software is designed to operate the aircraft's flying capabilities, while much of the remaining software development includes software needed for mission capability, including weapons integration and the fusion of information from onboard sensors and sources off the aircraft. Past programs have encountered difficulties in developing software, which delayed flight test schedules. JSF program officials acknowledged that the software effort will become particularly challenging during 2007 and 2008 when all five software blocks will be in development at the same time. The concurrency between development and production in DOD's acquisition strategy for JSF did not substantially change as a result of the program's rebaseline in fiscal year 2004. Therefore, the program is entering low-rate initial production without demonstrating through flight testing that (1) the aircraft's flying qualities function within the parameters of the flight envelope--that is, the set limits for altitude, speed, and angles of attack; (2) the aircraft design is reliable; or (3) a fully integrated and capable aircraft system can perform as intended. Starting production before ensuring design maturity through flight testing significantly increases the risk because of the of costly design changes that will push the program over budget and behind schedule. Failure to capture key design knowledge before producing aircraft in quantity can lead to problems that eventually cascade and become magnified through the product development and production phases. Figure 5 is a notional illustration showing the impacts that can result from a highly concurrent acquisition strategy to one with less concurrency and that captures key design and manufacturing data before production begins. While some concurrency may be beneficial to efficiently transition from the development stage of a program to production, the JSF is currently planned to be significantly more concurrent than the F-22A program that failed to deliver the warfighting capability on time and at predicted costs. Table 4 provides a more detailed comparison between the JSF and F-22A development programs and the accomplishments and requirements before starting production in each program. As a result of the risk associated with highly concurrent development and production, the JSF program plans to place initial production orders on cost reimbursement contracts. Cost reimbursement contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. Such contracts are used when costs cannot be estimated with sufficient accuracy to use any type of fixed price contract. Cost reimbursement contracts place a substantial risk on the buyer--in this case DOD--because the contractor's responsibility for the cost risks of performance has been minimized or reduced. As knowledge is gained over time, the program office intended to shift the contract type to one where more cost risk is placed on the contractor. However, DOD materials supporting the President's fiscal year 2008 budget show that all low rate production orders will be placed on cost reimbursement contracts. To execute its current plan, the JSF program must obtain unprecedented levels of annual funding--on average over $12.6 billion annually in acquisition funds over the next 2 decades. Regardless of likely increases in program costs, the sizeable continued investment in JSF--estimated at roughly $252 billion over 20 years--must be viewed within the context of the fiscal imbalance facing the nation within the next 10 years. The JSF program will have to compete with many other large defense programs, such as the Army's Future Combat System and the Missile Defense Agency's ballistic missile defense system, for funding during this same time frame. There are also important competing priorities external to DOD's budget. Fully funding specific programs or activities will undoubtedly create shortfalls in others. Funding challenges will be even greater if the program fails to achieve current cost and schedule estimates for the revised program baseline. The consequences of an even modest cost increase or schedule delay on a program this size is dramatic. For example, since the program rebaseline in fiscal year 2004, the estimated annual funding requirements have increased every year from 2012 to 2027 by at least $1 billion and in some cases by $3 to $7 billion. These funding increases would be enough to fund several major programs' activities. Figure 6 shows growth in estimated annual funding requirements from December 2003 to December 2005. Due to affordability pressures, DOD is beginning to reduce procurement budgets and annual quantities. The just-released fiscal year 2008 defense budget shows declining procurement quantities for the first years of production. To meet future constrained acquisition budgets, Air Force and Navy officials and planning documents suggest a decrease in maximum annual buy quantities from 160 shown in the current program of record to about 115 per year, a 28 percent decrease. While this will reduce annual funding requirements, it will also stretch the procurement program at least 7 years to 2034, assuming buy quantities are deferred rather than eliminated. DOD's military service operational test organizations, the Cost Analysis and Improvement Group (CAIG), and the Defense Contract Management Agency (DCMA) have expressed concerns over the level of risk and estimated costs of the program. These oversight and testing organizations highlight some of the program risks and the challenges the JSF program must overcome to avoid further slips in schedule and more cost growth. A February 2006 operational assessment of the JSF program by Air Force, Navy and United Kingdom operational test officials noted several areas of risk. According to the test report, several of these issues, if not adequately addressed, are likely to pose substantial or severe operational impact to the JSF's mission capabilities. Key concerns raised in the report include the following: Software development and testing schedules are success-oriented and have little margin to accommodate delays. Developmental flight test schedule provides little capability to respond to unforeseen problems and still meet scheduled start of operational testing. This threatens to slip operational testing and initial operational capability. Predicted maintenance times for propulsion system support, integrated combat turn, and gun removal and installation do not meet requirements. Design requirements to preserve volume, power, and cooling for future growth are in jeopardy and will limit capability to meet future requirements. Certain technical challenges in the aircraft or its subsystem design that could impact operational capability. In a follow-up discussion on the report, test officials stated that these concerns were still current and they had not been informed by the program office of planned actions to address them. The December 2006 Annual Report of DOD's Director, Operational Test and Evaluation recommended that the JSF program follow up on these issues. The CAIG has expressed concerns about the reality of estimated program costs. Its preliminary cost estimate in 2005 was substantially higher than the program office estimate. The CAIG cited costs associated with mission systems, system test, engines, and commonality as drivers in the difference between its estimate and that of the program office. According to discussions in 2006 with CAIG officials, they still have concerns and continue to expect program costs to be much higher than the program office's current estimate. The CAIG is not required to submit its next formal independent cost estimate until the preparations for Milestone C, which for the JSF program is full-rate production. For major defense acquisition programs, this milestone generally should occur before low- rate initial production. Milestone C is scheduled for late 2013. DCMA's concerns focus on the prime contractor's ability to achieve its cost and schedule estimates. DCMA, responsible for monitoring the prime contractor's development and procurement activities, found that delays in aircraft deliveries and critical technical review milestones put at risk the contractor's ability to meet the current schedule. DCMA also identified manufacturing operations as a high-risk area highlighting issues with parts delivery, raw material availability, and subcontractor performance. Finally, it raised concerns with contractor cost growth stating that the contractor has shown continuing and steady increases since development started, even after the contract's target price was increased by $6 billion as part of the program's rebaseline. As of November 2006, DCMA projects that the contractor's current estimated development costs will increase by about $1 billion. The JSF is entering its 6th year of a 12-year development program and is also entering production. The development team has achieved first flight and has overcome major design problems found earlier in development. In addition, the department counts on this aircraft to bear the brunt of its recapitalization plans. Therefore, we believe the program is critical to the department's future plans and is viable, given progress made to date. However, the current acquisition strategy still reflects very significant risk that both development and procurement costs will increase and aircraft will take longer to deliver to the warfighter than currently planned. Even as the JSF program enters the mid point of its development, it continues to encounter significant cost overruns and schedule delays because the program has continued to move forward into procurement before it has knowledge that the aircraft's design and manufacturing processes are stable. Although some of the additional costs were predictable, other costs, especially those resulting from rework, represent waste the Department can ill afford. Flight testing began just a few months before the decision to begin low- rate initial production. The challenges and risks facing the program are only expected to increase as the program begins to ramp up its production capabilities while completing design integration, software design, and testing. DOD's approval to enter low-rate initial production this year committed the program to this high risk strategy. If the program is unable to mitigate risks, its only options will be to reduce program requirements or delay when the program achieves initial operational capability. We see two ways this risk can be reduced: (1) reducing the number of aircraft for procurement before testing demonstrates their performance capabilities, thereby reducing the potential for costly changes to the aircraft and manufacturing processes or (2) reexamining the required capabilities for initial variants with an eye toward bringing them up to higher capability in the future. Last year Congress reduced funding for the first two low-rate production lots of aircraft thereby slowing the ramp up of production. This was a positive first step in lowering risk during the early years of testing. However, a significant amount of ground and flight tests remains over the next 6 years. All three variants need to demonstrate their flight performance. The carrier variant will be the last of the three variants to be delivered to the flight test program. It is now scheduled to start flight testing in May 2009 and has nearly 900 flight tests planned to demonstrate its flight performance. If the program executes its plan for a steep ramp up in production before proving the basic flying qualities of each aircraft variant, the likelihood of costly changes to its significant investment in production will remain high. To improve chances of a successful outcome, we are recommending that the Secretary of Defense limit annual low-rate initial production quantities to no more than 24 aircraft per year, the current manufacturing capacity, until each variant's basic flying qualities have been demonstrated in flight testing now scheduled in the 2010 time frame. DOD provided us with written comments on a draft of this report. The comments appear in appendix II. DOD non-concurred with our recommendation stating that the current JSF acquisition strategy provides an effective balance of technical risk, financial constraints, and operational needs of the services. However, we believe DOD's actions to reduce aircraft quantities in the fiscal year 2008 President's Budget are in line with our recommendation to limit production to current manufacturing capacity until each variant's flying qualities have been demonstrated in flight testing. In the 2008 budget, DOD reduced the number of production aircraft it plans to buy during the flight test program by about 35 percent as compared to its previous plan for the JSF. Under this new plan DOD does not substantially increase its buy quantities of production aircraft until 2011. We continue to believe that limiting production quantities until the design is demonstrated would reduce the overlap in production and development while still allowing the efficient transition from development to production. It would also make cost and schedule more predictable and lessen the risk to DOD's production investment. The JSF program is still only in its sixth year of a 12-year development program with significant challenges remaining such as completing the design, software development, and flight testing. As such, there is continued risk that testing will not go as planned and demonstrating the aircraft's capability could be delayed beyond the current plan. Therefore, we maintain our recommendation and will continue to monitor the progress in the test program and the resulting dynamics between development and production. We are sending copies of this report to the Secretary of Defense; the Secretaries of the Air Force, Army, and Navy; and the Director of the Office of Management and Budget. We will also provide copies to others on request. In addition, the report will be made 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. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other staff making key contributions to this report were Michael Hazard, Assistant Director; Lily Chin; Matthew Lea; Gary Middleton; Daniel Novillo; Karen Sloan; Brian Smith, Adam Vodraska; and Joe Zamoyta. To determine the status of the Joint Strike Fighter (JSF) program's cost, schedule, and performance, we compared current program estimates against estimates established after the program rebaselined in fiscal year 2004. Current official program cost estimates are based on the program's December 31, 2005, Selected Acquisition Report to Congress. At the time of our review, the Office of the Secretary of Defense was still preparing its new cost estimate to be included in the program's Selected Acquisition Report dated December 31, 2006, expected to be delivered to the Congress in April 2007. Because the new official cost estimate for the JSF program will not be available until after this report is issued we are unable to make informed judgments on those estimated costs. It should be noted that after our 2006 report was issued on March 15, 2006, DOD released its December 2005 Selected Acquisition Report, which showed an increase of over $19 billion in total estimated JSF program costs. We identified changes in the program's cost, schedule, and performance since the program rebaseline and analyzed relevant information to determine the primary causes of those changes. We reviewed JSF management reports, acquisition plans, test plans, risk assessments, cost reports, independent program assessments, and program status briefings. We interviewed officials from the DOD acquisition program management office and prime contractor to gain their perspectives on the performance of the program. To identify the challenges the program will face in the future, we compared the programs plans and results to date with future plans to complete development. We analyzed design and manufacturing data from the program office and the prime contractor to evaluate performance and trends. We reviewed program risk reports, earned value management data, and manufacturing data to identify uncertainties and risks to completing the program within the new targets established by the program rebaseline. We analyzed test program and software data to understand the readiness and availability of development aircraft for the test program. We also obtained information on past DOD programs from Selected Acquisition Reports and prior work conducted by GAO over the past two decades. We interviewed officials and reviewed reports from several DOD independent oversight organizations to gain their perspectives on risk in the program. To assess the likely impacts of concurrently developing and manufacturing JSF aircraft we compared the program's plans and results to date against best practice standards for applying knowledge to support major program investment decisions. The best practice standards are based on a GAO body of work that encompasses 10 years and visits to over 25 major commercial companies. Our work has shown that valuable lessons can be learned from the commercial sector and can be applied to the development of weapons systems. We identified gaps in product knowledge at the production decision, reasons for these gaps, and the risks to the program. We also examined the F-22A program's acquisition approach. We interviewed officials from the DOD acquisition program management office and prime contractor to gain their perspectives on program risks and their approaches to managing risks. In performing our work, we obtained information and interviewed officials from the JSF Joint Program Office, Arlington, Virginia; F-22A Program Office, Wright-Patterson Air Force Base, Ohio; Lockheed Martin Aeronautics, Fort Worth, Texas; Defense Contract Management Agency, Fort Worth, Texas; and offices of the Director, Operational Test and Evaluation, and Acquisition, Technology and Logistics, Program Analysis and Evaluation-Cost Analysis Improvement Group, which are part of the Office of Secretary of Defense in Washington, D.C. We performed our work from June of 2006 to March of 2007 in accordance with generally accepted government auditing standards.
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The Joint Strike Fighter (JSF) program--a multinational acquisition program for the Air Force, Navy, Marine Corps, and eight cooperative international partners--is the Department of Defense's (DOD) most expensive aircraft acquisition program. DOD currently estimates it will spend $623 billion to develop, procure, and operate and support the JSF fleet. The JSF aircraft, which includes a variant design for each of the services, represents 90 percent of the remaining planned investment for DOD's major tactical aircraft programs. In fiscal year 2004, the JSF program was rebaselined to address technical challenges, cost increases, and schedule overruns. This report--the third mandated by Congress--describes the program's progress in meeting cost, schedule, and performance goals since rebaselining and identifies various challenges the program will likely face in meeting these goals in the future. The JSF program has delivered and flown the first development aircraft. However, cost and schedule goals established in the fiscal year 2004 rebaselined program have not been met. Total JSF program acquisition costs (through 2027) have increased by $31.6 billion and now DOD will pay 12 percent more per aircraft than expected in 2004. The program has also experienced delays in several key events, including the start of the flight test program, delivery of the first production representative development aircraft, and testing of critical missions systems. Delays in the delivery of initial development aircraft were driven by incomplete engineering drawings, changes in design, manufacturing inefficiencies, and parts shortages. Despite these delays, the program still plans to complete development in 2013, compressing the amount of time available for flight testing and development activities. Also, the program projects it will meet all but one key performance requirement--line of sight communications--that is currently dependent on other capabilities being developed outside the JSF program. Accurately predicting JSF costs and schedule and ensuring sufficient funding will likely be key challenges facing the program in the future. JSF continues to pursue a risky acquisition strategy that concurrently develops and produces aircraft. While some concurrency may be beneficial to efficiently transition from development to production, the degree of overlap is significant on this program. Any changes in design and manufacturing that require modifications to delivered aircraft or to tooling and manufacturing processes would result in increased costs and delays in getting capabilities to the warfighter. Low-rate initial production will begin this year with almost the entire 7-year flight test program remaining to confirm the aircraft design. Confidence that investment decisions will deliver expected capability within cost and schedule goals increases as testing proves the JSF will work as expected. The JSF program also faces funding uncertainties as it will demand unprecedented funding over the next 2 decades--more than $12.6 billion a year on average through 2027.
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OPA establishes a "polluter pays" system that places the primary burden of liability for the costs of spills on the party responsible for the spill in return for financial limitations on that liability. Under this system, the responsible party assumes, up to a specified limit, the burden of paying for spill costs--which can include both removal costs (cleaning up the spill) and damage claims (restoring the environment and payment of compensation to parties that were economically harmed by the spill). Above the specified limit, the responsible party generally is no longer financially liable. Responsible parties are liable without limit, however, if the oil discharge is the result of gross negligence or willful misconduct, or a violation of federal operation, safety, and construction regulations. OPA's "polluter pays" system is intended to provide a deterrent for responsible parties who could potentially spill oil by requiring that they assume the burden of responding to the spill, restoring natural resources, and compensating those damaged by the spill, up to the specified limit of liability. (See table 1 for the limits of liability for vessels and offshore facilities.) In general, liability limits under the OPA depend on the kind of vessel or facility from which a spill comes. For an offshore facility, liability is limited to all removal costs plus $75 million. For tank vessels, liability limits are based on the vessel's tonnage and hull type. In both cases, certain circumstances, such as gross negligence, eliminate the caps on liability altogether. According to the Coast Guard, the leaking well in the current spill is an offshore facility. As noted earlier, pursuant to OPA, the liability limit for offshore facilities is all removal costs plus $75 million for damage claims. The Coast Guard also notes that liability for any spill on or above the surface of the water in this case would be between $65 million and $75 million. The range derives from a statutory division of liability for mobile offshore drilling units. For spills on or above the surface of the water, mobile offshore drilling units are treated first as tank vessels up to the limit of liability for tank vessels and then as offshore facilities. For example, if an offshore facility's limit of liability is $75 million (not counting removal costs, for which there is unlimited liability for offshore facilities) and a spill resulted in $100 million in costs, the responsible party has to pay up to $75 million in damage claims--leaving $25 million in costs beyond the limit of liability. Under OPA, the authorized limit on federal expenditures for a response to a single spill is currently set at $1 billion, and natural resource damage assessments and claims may not exceed $500 million. OPA requires that responsible parties must demonstrate their ability to pay for oil spill response up to statutorily specified limits. Specifically, by statute, with few exceptions, offshore facilities that are used for exploring for, drilling for, producing, or transporting oil from facilities engaged in oil exploration, drilling, or production are required to have a certificate of financial responsibility that demonstrates their ability to pay for oil spill response up to statutorily specified limits. If the responsible party denies a claim or does not settle it within 90 days, a claimant may commence action in court against the responsible party, or present the claim to the NPFC. OPA also provides that the Fund can be used to pay for oil spill removal costs and damages when those responsible do not pay or cannot be located. This may occur when the source of the spill and, therefore, the responsible party is unknown, or when the responsible party does not have the ability to pay. In other cases, since the cost recovery can take a period of years, the responsible party may become bankrupt or dissolved. NPFC manages the Fund by disbursing funds for federal cleanup, monitoring the sources and uses of funds, adjudicating claims submitted to the Fund for payment, and pursuing reimbursement from the responsible party for costs and damages paid by the Fund. The Coast Guard is responsible for adjusting vessels' limits of liability for significant increases in inflation and for making recommendations to Congress on whether other adjustments are necessary to help protect the Fund. DOI's Minerals Management Service is responsible for adjusting limits of liability of offshore facilities. Response to large oil spills is typically a cooperative effort between the public and private sector, and there are numerous players who participate in responding to and paying for oil spills. To manage the response effort, the responsible party, the Coast Guard, EPA, and the pertinent state and local agencies form the unified command, which implements and manages the spill response. OPA defines the costs for which responsible parties are liable and the costs for which the Fund is made available for compensation in the event that the responsible party does not pay or is not identified. These costs, or "OPA compensable" costs, are of two main types: Removal costs: Removal costs are incurred by the federal government or any other entity taking approved action to respond to, contain, and clean up the spill. For example, removal costs include the equipment used in the response--skimmers to pull oil from the water, booms to contain the oil, planes for aerial observation--as well as salaries and travel and lodging costs for responders. Damages caused by the oil spill: Damages that can be compensated under OPA cover a wide range of both actual and potential adverse effects from an oil spill, for which a claim may be made to either the responsible party or the Fund. Claims include natural resource damage claims filed by trustees, claims for uncompensated removal costs and third-party damage claims for lost or damaged property and lost profits, among other things. The Fund has two major components--the Principal Fund and the Emergency Fund. The Principal Fund provides the funds for third-party and natural resource damage claims, limit of liability claims, reimbursement of government agencies' removal costs, and provides for oil spill-related appropriations. A number of agencies--including the Coast Guard, EPA, and DOI--receive an annual appropriation from the Principal Fund to cover administrative, operational, personnel, and enforcement costs. To ensure rapid response to oil spills, OPA created an Emergency Fund that authorizes the President to spend $50 million each year to fund spill response and the initiation of natural resource damage assessments, which provide the basis for determining the natural resource restoration needs that address the public's loss and use of natural resources as a result of a spill. Emergency funds not used in a fiscal year are carried over to the subsequent fiscal years and remain available until expended. To the extent that $50 million is inadequate, authority under the Maritime Transportation Security Act of 2002 grants authority to advance up to $100 million from the Fund to pay for removal activities. These emergency funds may be used for containing and removing oil from water and shorelines, preventing or minimizing a substantial threat of discharge, and monitoring the removal activities of the responsible party. NPFC officials told us in June 2010 that the emergency fund has received the advanced authority of $100 million for the Federal On-Scene Coordinator to respond to the spill and for federal trustees to initiate natural resource damage assessments along with an additional $50 million that had not been apportioned in 2006. Officials said they began using emergency funds at the beginning of May to pay for removal activities in the Gulf of Mexico. The Fund is financed primarily from a per-barrel tax on petroleum products either produced in the United States or imported from other countries. The balance of the Fund (including both the Principal and the Emergency Fund) has varied over the years (see fig. 1). The Fund's balance generally declined from 1995 through 2006, and from fiscal year 2003 through 2007, its balance was less than the authorized limit on federal expenditures for the response to a single spill, which is currently set at $1 billion. This was in part because the Fund's main source of revenue--a $0.05 per barrel tax on U.S. produced and imported oil--was not collected for most of the time from 1995 through 2006. However, the Energy Policy Act of 2005 reinstated the barrel tax beginning in April 2006. Subsequently, the Emergency Economic Stabilization Act of 2008 increased the tax rate to $0.08 per barrel through 2016. The balance in the Fund as of June 1, 2010, was about $1.6 billion. With the barrel tax once again in place, NPFC anticipates that the Fund will be able to cover potential noncatastrophic liabilities. In 2007 we reported several risks to the Fund, including the threat of a catastrophic spill. Although the Fund's balance has increased, significant uncertainties remain regarding the impact of a catastrophic spill--such as the Deepwater Horizon--or --or multiple catastrophic spills on the Fund's viability. multiple catastrophic spills on the Fund's viability. Location, time of year, and type of oil are key factors affecting oil spill costs of noncatastrophic spills, according to industry experts, agency officials, and our analysis of spills. Given the magnitude of the current spill, however, the size of this spill will also be a factor that affects the costs. Officials also identified two other factors that may influence oil spill costs to a lesser extent--the effectiveness of the spill response and the level of public interest in a spill. In ways that are unique to each spill, these factors can affect the breadth and difficulty of the response effort or the extent of damage that requires mitigation. According to state officials with whom we spoke and industry experts, there are three primary characteristics of location that affect costs: Remoteness: For spills that occur in remote areas, spill response can be particularly difficult in terms of mobilizing responders and equipment, and they can complicate the logistics of removing oil from the water--all of which can increase the costs of a spill. Proximity to shore: There are also significant costs associated with spills that occur close to shore. Contamination of shoreline areas has a considerable bearing on the costs of spills as such spills can require manual labor to remove oil from the shoreline and sensitive habitats. The extent of damage is also affected by the specific shoreline location. Proximity to economic centers: Spills that occur in the proximity of economic centers can cost more when local services are disrupted. For example, a spill near a port can interrupt the flow of goods, necessitating an expeditious response in order to resume business activities, which could increase removal costs. Additionally, spills that disrupt economic activities can result in expensive third-party damage claims. The time of year in which a spill occurs can also affect spill costs--in particular, affecting local economies and response efforts. According to several state and private-sector officials with whom we spoke, spills that disrupt seasonal events that are critical for local economies can result in considerable expenses. For example, spills in the spring months in areas of the country that rely on revenue from tourism may incur additional removal costs in order to expedite spill cleanup, or because there are stricter standards for clean up, which increase the costs. The time of year in which a spill occurs also affects response efforts because of possible inclement weather conditions such as harsh winter storms and even hurricanes that can result in higher removal costs because of the increased difficulty in mobilizing equipment and personnel to respond to a spill in adverse conditions. The different types of oil can be grouped into four categories, each with its own set of effects on spill response and the environment. Lighter oils such as jet fuels, gasoline, and diesel fuel dissipate and evaporate quickly, and as such, often require minimal cleanup. However, these oils are highly toxic and can severely affect the environment if conditions for evaporation are unfavorable. For instance, in 1996, a tank barge that was carrying home-heating oil grounded in the middle of a storm near Point Judith, Rhode Island, spilling approximately 828,000 gallons of heating oil (light oil). Although this oil might dissipate quickly under normal circumstances, heavy wave conditions caused an estimated 80 percent of the release to mix with water, with only about 12 percent evaporating and 10 percent staying on the surface of the water . Natural resource damages alone were estimated at $18 million, due to the death of approximately 9 million lobsters, 27 million clams and crabs, and over 4 million fish. Heavier oils, such as crude oils and other heavy petroleum products, are less toxic than lighter oils but can also have severe environmental impacts. Medium and heavy oils do not evaporate much, even during favorable weather conditions, and can blanket structures they come in contact with--boats and fishing gear, for example--as well as the shoreline, creating severe environmental impacts to these areas, and harming waterfowl and fur-bearing mammals through coating and ingestion. Additionally, heavy oils can sink, creating prolonged contamination of the sea bed and tar balls that sink to the ocean floor and scatter along beaches. These spills can require intensive shoreline and structural clean up, which is time-consuming and expensive. For example, in 1995, a tanker spilled approximately 38,000 gallons of heavy fuel oil into the Gulf of Mexico when it collided with another tanker as it prepared to lighter its oil to another ship. Less than 1 percent (210 gallons) of the oil was recovered from the sea, and, as a result, recovery efforts on the beaches of Matagorda and South Padre Islands were labor intensive, as hundreds of workers had to manually pick up tar balls with shovels. The total removal costs for the spill were estimated at $7 million. In our 2007 report, we also reported that industry experts cited two other factors that also affect the costs incurred during a spill. Effectiveness of Spill Response: Some private-sector experts stated that the effectiveness of spill response can affect the cost of cleanup. The longer it takes to assemble and conduct the spill response, the more likely it is that the oil will move with changing tides and currents and affect a greater area, which can increase costs. Some experts said the level of experience of those involved in the incident command is critical to the effectiveness of spill response. For example, they said poor decision making during a spill response could lead to the deployment of unnecessary response equipment, or worse, not enough equipment to respond to a spill. Several experts expressed concern that Coast Guard officials are increasingly inexperienced in handling spill response, in part because the Coast Guard's mission has been increased to include homeland security initiatives. Public interest: Several experts with whom we spoke stated that the level of public attention placed on a spill creates pressure on parties to take action and can increase costs. They also noted that the level of public interest can increase the standards of cleanliness expected, which may increase removal costs. The total costs of the Deepwater Horizon spill in the Gulf of Mexico are currently undetermined and will be unknown for some time even after the spill is fully contained. According to a press release from BP, as of June 7, 2010, the cost of the response amounted to about $1.25 billion, which includes the spill response, containment, relief well drilling, grants to the Gulf states, damage claims paid and federal costs. Of the $1.25 billion, approximately $122 million (as of June 1, 2010) has been paid from the Fund for the response operation, according to NPFC officials. The total costs will not likely be known for a while, as it can take many months or years to determine the full effect of a spill on natural resources and to determine the costs and extent of the natural resource damage. However, the spill has been described as the biggest U.S. offshore platform spill in 40 years, and possibly the most costly. Our work for this testimony did not include a thorough evaluation of the factors affecting the current spill. However, some of the same key factors that have influenced the cost of 51 major oil spills we reviewed in 2007 will likely have an effect on the costs in the Gulf Coast spill. For example, the spill occurred in the spring in an area of the country--the Gulf Coast--that relies heavily on revenue from tourism and the commercial fishing industry. Spills that occur in proximity of tourist destinations like beaches can result in additional removal costs in order to expedite spill cleanup, or because there are stricter standards for cleanup, which increase the costs. In addition, according to an expert, the loss in revenue from suspended commercial and recreational fishing in the Gulf Coast states is currently estimated at $144 million per year. Another factor affecting spills' costs is the type of oil. The oil that continues to spill into the Gulf of Mexico is a light oil--specifically "light sweet crude" oil--that is toxic and can create long-term contamination of shorelines, and harm waterfowl and fur- bearing mammals. According to the U.S. Fish and Wildlife Service, many species of wildlife face grave risk from the spill, as well as 36 national wildlife refuges that may be affected. In recent testimony, the EPA Deputy Administrator described the Deepwater Horizon spill as a "massive and potentially unprecedented environmental disaster." To date, the Fund has been able to cover costs from major spills that responsible parties have not paid, but risks and uncertainties remain. We reported in 2007 that the current liability limits for certain vessel types, notably tank barges, may have been disproportionately low relative to costs associated with such spills. In addition, the Fund faced other potential risks to its viability, including ongoing claims from existing spills and the potential for a catastrophic oil spill. The current spill in the Gulf of Mexico could result in a significant strain on the Fund, which currently has a balance of about $1.6 billion. The Fund has been able to cover costs from major spills that responsible parties have not paid, but additional focus on limits of liability is warranted. Limits of liability are the amount, under certain circumstances, above which responsible parties are no longer financially liable for spill removal costs and damage claims, in the absence of gross negligence or willful misconduct, or the violation of an applicable federal safety, construction, or operating regulation. If the responsible party's costs exceed the limit of liability, the responsible party can make a claim against the Fund for the amount above the limit. Major oil spills that exceed a vessel's limit of liability are infrequent, but their effect on the Fund can be significant. In our 2007 report, we reported that 10 of the 51 major oil spills that occurred from 1990 through 2006 resulted in limit-of-liability claims on the Fund. These limit-of-liability claims totaled more than $252 million and ranged from less than $1 million to more than $100 million. Limit-of- liability claims will continue to have a pronounced effect on the Fund. NPFC estimates that 74 percent of claims under adjudication that were outstanding as of January 2007 were for spills in which the limit of liability had been exceeded. The amount of these claims under adjudication was $217 million. In 2007, we identified two key areas in which further attention to these liability limits appeared warranted and made recommendations to the Commandant of the Coast Guard regarding both--the need to adjust limits periodically in the future to account for significant increases in inflation and the appropriateness of some current liability limits. Regarding the need to adjust liability limits to account for increases in inflation, we reported that the Fund was exposed to about $39 million in liability claims for the 51 major spills from 1990 through 2006 that could have been saved if the limits of liability had been adjusted for inflation as required by law, and recommended adjusting limits of liability for vessels every 3 years to reflect significant changes in inflation, as appropriate. Per requirements in OPA as amended by the Delaware River Protection Act, the Coast Guard published an interim rule in July 2009--made final in January 2010--that adjusted vessels' limits of liability to reflect significant increases in the Consumer Price Index, noting that the inflation adjustments to the limits of liability are required by OPA to preserve the deterrent effect and polluter-pays principle embodied in the OPA liability provisions. DOI has been delegated responsibility by the President to adjust the liability limits for offshore facilities and this responsibility has been redelegated by DOI to the Minerals Management Service. To date, these liability limits have not been adjusted for inflation. The Coast Guard and Maritime Transportation Act of 2006 significantly increased the limits of liability. Both laws base the liability on a specified amount per gross ton of vessel volume, with different amounts for vessels that transport oil commodities (tankers and tank barges) than for vessels that carry oil as a fuel (such as cargo vessels, fishing vessels, and passenger ships). The 2006 act raised both the per-ton and the required minimum amounts, differentiating between vessels with a double hull, that helps prevent oil spills resulting from collision or grounding, and vessels without a double hull. For example, the liability limit for single-hull vessels larger than 3,000 gross tons was increased from the greater of $1,200 per gross ton or $10 million to the greater of $3,000 per gross ton or $22 million. However, our analysis of the 51 major spills showed that the average spill cost for some types of vessels, particularly tank barges, was higher than the limit of liability, including the new limits established in 2006. Thus, we recommended that the Commandant of the Coast Guard determine whether and how liability limits should be changed by vessel type, and make specific recommendations about these changes to Congress. In its August 2009 Annual Report to Congress on OPA liability limits, the Coast Guard had similar findings on the adequacy of some of the new limits. The Coast Guard found that 51 spills or substantial threats of a spill have resulted or are likely to result in removal costs and damages that exceed the liability limits amended in 2006. Specifically, the Coast Guard reported that liability limits for tank barges and cargo vessels with substantial fuel oil may not sufficiently account for the historic costs incurred by spills from these vessel types. The Coast Guard concluded that increasing liability limits for tank barges and non tank vessels--cargo, freight, and fishing vessels--over 300 gross tons would increase the Fund balance. With regard to making specific adjustments, the Coast Guard said dividing costs equally between the responsible parties and the Fund was a reasonable standard to apply in determining the adequacy of liability limits. However, the Coast Guard did not recommend explicit changes to achieve either that 50/50 standard or any other division of responsibility. The Fund also faces several other potential challenges that could affect its financial condition: Additional claims could be made on spills that have already been cleaned up: Natural resource damage claims can be made on the Fund for years after a spill has been cleaned up. The official natural resource damage assessment conducted by trustees can take years to complete, and once it is completed, claims can be submitted to the NPFC for up to 3 years thereafter. Costs and claims may occur on spills from previously sunken vessels that discharge oil in the future: Previously sunken vessels that are submerged and in threat of discharging oil represent an ongoing liability to the Fund. There are over 1000 sunken vessels that pose a threat of oil discharge. These potential spills are particularly problematic because in many cases there is no viable responsible party that would be liable for removal costs. Therefore, the full cost burden of oil spilled from these vessels would likely be paid by the Fund. Spills may occur without an identifiable source and, therefore, no responsible party: Mystery spills also have a sustained effect on the Fund, because costs for spills without an identifiable source--and therefore no responsible party--may be paid out of the Fund. Although mystery spills are a concern, the total cost to the Fund from mystery spills was lower than the costs of known vessel spills in 2001 through 2004. Additionally, none of the 51 major oil spills was the result of discharge from an unknown source. A catastrophic spill could strain the Fund's resources: In 2007, we reported that since the 1989 Exxon Valdez spill, which was the impetus for authorizing the Fund's usage, no oil spill has come close to matching its costs--estimated at $2.2 billion for cleanup costs alone, according to the vessel's owner. However, as of early June, the response for the Deepwater Horizon spill had already totaled over $1 billion, according to BP, and to date, the spill has not been fully contained. As a result, the Gulf of Mexico spill could easily eclipse the Exxon Valdez, becoming the most costly offshore spill in U.S. history. The Fund is currently authorized to pay out a maximum of $1 billion on a single spill for response costs, with up to $500 million for natural resource damage claims. Although the Fund has been successful thus far in covering costs that responsible parties did not pay, it may not be sufficient to pay such costs for a spill--such as the Deepwater Horizon--that are likely to have catastrophic consequences. While BP has said it will pay all legitimate claims associated with the spill, should the company decide it will not or cannot pay for the costs exceeding their limit of liability, the Fund may have to bear these costs. Given the magnitude of the Deepwater Horizon spill, the costs could result in a significant strain on the Fund. Recently, several options have been identified to address the Fund's vulnerabilities. In particular, the Congressional Research Service (CRS) has identified options to address the vulnerabilities, and Members of Congress have also introduced legislation that would address the risks to the Fund. These options include: Increasing liability limits. CRS proposes raising the liability caps for vessels so that the responsible party would be required to pay a greater share of the costs before the Fund is used. In addition, S. 3305 proposes raising the liability limit for damage claims related to offshore facilities from $75 million to $10 billion. Increasing the per-barrel tax. CRS and congressional options include increasing the current per-barrel tax used to generate revenue for the Fund in order to raise the Fund's balance--H.R. 4213 proposes raising the tax from the current $0.08 per barrel to $0.34. According to CRS, this option would increase the likelihood that there is sufficient money available in the Fund if costs exceed the responsible party's liability limits. Including oil owners as liable parties. CRS suggests expanding the definition of liable parties to include the owner of the oil being transported by a vessel. In addition, the Administration announced a proposal on May 12, 2010, that addresses several aspects of the response to the Deepwater Horizon spill, primarily by changing the way the Fund operates. It includes, among other things, proposals to increase the statutory limitation on expenditures from the Fund for a single oil spill response from $1 billion to $1.5 billion for spill response and from $500 million to $750 million per spill for natural resource damage assessments and claims. In addition, similar to the CRS and congressional proposals, the Administration is proposing an increase on the per-barrel tax to $0.09 this year, 7 years earlier than the current law requires. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. For questions about this statement, contact Susan Fleming at (202) 512- 2834 or [email protected]. Individuals making key contributions to this testimony include Jeanette Franzel, Heather Halliwell, David Hooper, Hannah Laufe, Stephanie Purcell, Susan Ragland, Amy Rosewarne, Doris Yanger, and Susan Zimmerman. 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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On April 20, 2010, an explosion at the mobile offshore drilling unit Deepwater Horizon resulted in a massive oil spill in the Gulf of Mexico. The spill's total cost is unknown, but may result in considerable costs to the private sector, as well as federal, state, and local governments. The Oil Pollution Act of 1990 (OPA) set up a system that places the liability--up to specified limits--on the responsible party. The Oil Spill Liability Trust Fund (Fund), administered by the Coast Guard, pays for costs not paid for by the responsible party. GAO previously reported on the Fund and factors driving the cost of oil spills and is beginning work on the April 2010 spill. This testimony focuses on (1) how oil spills are paid for, (2) the factors that affect major oil spill costs, and (3) implications of major oil spill costs for the Fund. It is largely based on GAO's 2007 report, for which GAO analyzed oil spill cost data and reviewed documentation on the Fund's balance and vessels' limits of liability. To update the report, GAO obtained information from and interviewed Coast Guard officials. OPA places the primary burden of liability for the costs of oil spills on the responsible party in return for financial limitations on that liability. Thus, the responsible party assumes the primary burden of paying for spill costs--which can include both removal costs (cleaning up the spill) and damage claims (restoring the environment and compensating parties that were economically harmed). To pay both the costs above this limit and costs incurred when a responsible party does not pay or cannot be identified, OPA authorized use of the Fund, up to a $1 billion per spill, which is financed primarily from a per-barrel tax on petroleum products. The Fund also may be used to pay for natural resource damage assessments and to monitor the recovery activities of the responsible party, among other things. While the responsible party is largely paying for the current spill's cleanup, Coast Guard officials said that they began using the Fund--which currently has a balance of $1.6 billion--in May 2010 to pay for certain removal activities in the Gulf of Mexico. Several factors, including location, time of year, and type of oil, affect the cleanup costs of noncatastrophic spills. Although these factors will certainly affect the cost of the Gulf spill--which is unknown at this time--in this spill, additional factors such as the magnitude of the oil spill will impact costs. These factors can affect the breadth and difficulty of recovery and the extent of damage in the following ways: (1) Location. A remote location can increase the cost of a spill because of the additional expense involved in mounting a remote response. A spill that occurs close to shore can also become costly if it involves the use of manual labor to remove oil from sensitive shoreline habitat. (2) Time of year. A spill occurring during fishing or tourist season might carry additional economic damage, or a spill occurring during a stormy season might prove more expensive because it is more difficult to clean up than one occurring during a season with generally calmer weather. (3) Type of oil. Lighter oils such as gasoline or diesel fuels dissipate and evaporate quickly--requiring minimal cleanup--but are highly toxic and create severe environmental impacts. Heavier oils such as crude oil do not evaporate and, therefore, may require intensive structural and shoreline cleanup. Since the Fund was authorized in 1990, it has been able to cover costs not covered by responsible parties, but risks and uncertainties exist regarding the Fund's viability. For instance, the Fund is at risk from claims resulting from spills that significantly exceed responsible parties' liability limits. Of the 51 major oil spills GAO reviewed in 2007, the cleanup costs for 10 exceeded the liability limits, resulting in claims of about $252 million. In 2006, Congress increased liability limits, but for certain vessel types, the limits may still be low compared with the historic costs of cleaning up spills from those vessels. The Fund faces other potential risks as well, including ongoing claims from existing spills, claims related to sunken vessels that may begin to leak oil, and the threat of a catastrophic spill--such as the recent Gulf spill.
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Food and beverages have been served onboard Amtrak trains since Amtrak was created. Amtrak's eleven commissaries are located around the country and are responsible for receiving, warehousing and stocking food, beverages, and other items for Amtrak's onboard dining and cafe service. Until January 1999, Amtrak ran these commissaries with its own employees. Since then, Amtrak has contracted out the responsibility for the commissaries and for ordering and stocking all food, beverages, and related items under a contract that expires in September 2006. Gate Gourmet (the contractor), is also a supplier of food and beverages to several major airlines. During fiscal years 2002 through 2004, the 3-year period we focused on in our audit work, Amtrak paid Gate Gourmet between $59 and $64 million a year in reimbursements and fees. Gate Gourmet personnel operate Amtrak-owned commissaries and order, receive, store, and stock trains with food, beverages, and other related items such as table linens and napkins. Food and beverage stock are charged to Amtrak employees who account for the food en route. When a train arrives at its final destination, all remaining stock items are returned to a commissary. Gate Gourmet charges Amtrak for the items used, as well as for labor, management, and other fees. The contract requires that Gate Gourmet provide Amtrak an independently audited annual report within 120 days following the expiration of each contract year. Amtrak's model for handling its food and beverage service is similar to other passenger transportation companies, with some important differences. Northwest Airlines has outsourced their kitchen and commissary operations and have food and beverages delivered to each airplane before each flight. VIA Rail Canada, Canada's national passenger railroad, serves food on most of its trains and owns and operates its own commissaries. Food and other items are delivered to each train, consumed during the train's run and restocked at the destination. The Alaska Railroad, however, has a private contractor that orders, stocks, delivers, prepares, and serves all of its food and beverages on its trains using their own labor force. With certain exceptions and limits, all food and beverage revenues and expenses are the responsibility of the contractor. Amtrak's financial records show that for every dollar Amtrak earns in food and beverage revenue, it spends about $2--a pattern that has held consistent for all 3 years we reviewed. (See table 1 and fig. 2.) Amtrak's financial records also indicate that Amtrak has lost a total of almost $245 million for fiscal year 2002 through fiscal year 2004 on food and beverage service. Section 24305(c)(4) of Title 49, United States Code, states that Amtrak is not to operate a food and beverage service whose revenues do not exceed the cost of providing such service. About half of the total food and beverage expenditure is labor cost for Amtrak staff who prepare and serve the food aboard the trains. About 38 percent is reimbursements and fees to Gate Gourmet, representing the cost of food and other products in addition to other fees paid to Gate Gourmet. About 9 percent is for other Amtrak costs. While Amtrak's labor costs for its food and beverage service are significant, these costs are part of Amtrak's overall labor cost structure, and as such, are beyond the scope of work we did for this testimony. However, a recent Amtrak Inspector General report suggested that Amtrak could save money on its food and beverage labor if the cost of this labor was similar to that of the restaurant industry. Amtrak has responded to these continued losses with some incremental reductions in food and beverage service. On July 1, 2005, Amtrak plans to discontinue food and beverage service on its routes between New York City and Albany, New York, which would allow Amtrak to close its commissary in Albany. An official in Amtrak's Office of Inspector General stated that Amtrak lost between $6 to $8 per person on food service on those routes and that closing the commissary will save Amtrak about $1 million per year. However, achieving additional savings by closing commissaries could be limited, as Amtrak's other commissaries serve multiple Amtrak trains that would continue to offer food and beverage service. In other words, closing a commissary could affect multiple trains on multiple routes. According to an Amtrak procurement official, a team consisting of members of Amtrak's procurement, legal, financial and transportation departments is currently working to identify ways to reduce Amtrak's costs in its next commissary contract. Other transportation companies have taken actions to better control their food and beverage costs in recent years. For example, Northwest Airlines officials stated that they pay particular attention to food and beverage expenses. Since 2002, Northwest has reduced its food costs by 4 percent. This has been achieved by reducing or eliminating complimentary food service for coach passengers on domestic flights (even to the point of eliminating pretzels on these flights), aggressive pricing of food products and flexible budgeting that adjusts each month to reflect increases or decreases in ridership. VIA Rail officials told us they have considerable flexibility in hiring its onboard service personnel to adjust its labor force to respond to peak and off-peak tourist seasons for its long-distance trains. In addition, VIA Rail officials said they have considerable flexibility in how onboard service staff are used; in essence, all onboard service staff can be used wherever and whenever needed. The Alaska Railroad restructured the contract with its food and beverage service provider to allow for food price fluctuation within defined limits. One way to control costs is to build provisions into a contract that motivate a contractor to keep costs as low as possible. Amtrak's current cost reimbursable contract with Gate Gourmet creates, if anything, an incentive to increase Amtrak's costs unless properly monitored. Under the contract, Gate Gourmet receives a number of reimbursements, including commissary, labor, and insurance costs, in addition to an operating fee. The operating fee is defined in the contract as 5 percent of the total actual cost of the onboard food and beverage items. This fee is an incentive for the contractor to increase Amtrak's food and beverage costs. These costs can change in each yearly operating budget. This operating budget is subject to review by Amtrak and is mutually agreed to by both Amtrak and Gate Gourmet. Incentives can also be written into a cost reimbursable contract to control costs and enhance performance. Although the contract included a discussion of performance standards, these standards and related measures were never created, even though they were required 45 days after the contract was signed in January 1999. Performance standards would have allowed for performance incentives and penalties. If these incentives had been developed, then they could have been used to pay Gate Gourmet based on such things as finding lower-priced food products of similar quality to what is being purchased now, or identifying ways the food and beverage service could be operated more economically or efficiently. Other factors may not provide the needed incentives for Gate Gourmet to aggressively seek to reduce Amtrak's food costs. Under current contract provisions, Gate Gourmet can charge Amtrak for food prepared in Gate Gourmet facilities and delivered to Amtrak's commissaries. The contract provides considerable pricing flexibility to Gate Gourmet for these items with no detailed definitions or price caps. This makes it difficult to determine whether or not Amtrak is being charged a reasonable price. In addition, the contract also provides that Gate Gourmet deduct any trade or quantity discounts on items purchased for Amtrak either immediately from Amtrak's invoices or retroactively based on the proportion of Amtrak's purchases. Discounts applied retroactively are to be applied by Gate Gourmet in "good faith" and retroactive payments are "an approximation and that cannot guarantee exactness." The contract stipulates these payments are subject to an audit by Amtrak. However, these audits have never been conducted. In contrast, while Northwest Airlines has cost plus contracts with its largest food and beverage contractors (including Gate Gourmet), Northwest's management of them is different. Northwest's caterer contracts have labor and other rates specified in the contract. According to Northwest's food and beverage officials, they know quickly if they change their menu, how much their suppliers will charge them--even to the addition or subtraction of a leaf of lettuce served as part of an entree. In addition, Northwest officials stated that each price charged by its contractors is checked and invoices are audited. We identified five types of management controls that Amtrak did not fully exercise regarding oversight of its food and beverage service. These include the following: Requirement for an annual report has never been enforced. Amtrak's contract requires Gate Gourmet to provide an independently audited annual report within 120 days following the expiration of each contract year; this report must also be certified by Gate Gourmet officials. This report is to provide actual and budgeted amounts for key line items and to provide a narrative explanation for any actual to budget variance greater than one percent in the aggregate for all commissaries. However, Gate Gourmet has not provided this report during the five completed years the contract has been in place. Amtrak food and beverage officials could not provide us with a reason as to why they had decided not to enforce this provision. They told us that they relied on contractor-provided monthly operating statements and on reports from Amtrak's Inspector General instead. Our review found that the monthly operating statements lacked critical information that was to be included in the annual report, were prepared by the party seeking reimbursement, and, perhaps more importantly, were not independently reviewed or audited. By contrast, the annual report was to be certified by contractor officials and audited by an independent certified public accountant. The Inspector General's reports, while providing management with information on some aspects of Amtrak's food and beverage service activities, should not be viewed as a substitute for a comprehensive audit and report. Audits of discounts and rebates were not conducted. The contract provides that Amtrak audit Gate Gourmet's allocations of trade and quantity discounts received from purchases of food and beverages. However, Amtrak has never conducted an audit of the discounts credited to it, nor has it requested that the contractor certify that all of the discounts that Amtrak should receive have been credited to its account. Information we reviewed indicates that such audits may yield savings for Amtrak. For example, Amtrak officials advised us that discounts and rebates totaling over $550,000 for fiscal years 2002 and 2003 had been credited on gross purchases of about $6.5 million. However, total Gate Gourmet purchases exceeded $90 million for the 2-year period--roughly 13 times the amount of purchases the contractor reported as being subject to discounts and rebates. Because Amtrak did not require an independent audit or otherwise analyze the trade and quantity discounts received, Amtrak does not know whether or not it received all of the discounts and rebates to which it was entitled. Amtrak could not provide us with reasons supporting its decision or its consideration of this issue. Adequate monitoring of purchase price information needs improvements. Amtrak did not adequately monitor its purchase price information for food and beverage items purchased by Gate Gourmet. Amtrak officials said they monitored contractor purchases using daily price reports that listed unit prices for purchases ordered the previous day and the price the last time the item was ordered. However, given the importance of purchase orders in a food and beverage operation, internal controls need to be developed to systematically monitor and analyze purchase information. These controls should then be monitored on a regular basis to assess the quality of performance over time. For example, controls should include processes to identify unit price variances over established or pre-set amounts and actions taken to document follow- up work performed. Although Amtrak had some processes that compare prices, the process was not robust enough to include a record of price trends or follow up actions taken such as corrections of amounts billed. Our testing of this control showed that if Amtrak had approached this review in a more rigorous manner, it may have identified discrepancies warranting further investigation. For example: Monitoring of Purchase Order Pricing: Using data mining and other audit techniques, we selectively reviewed more than $80 million of purchase order information for fiscal years 2002 and 2003 and found that the contractor was generating purchase orders with significant variances in unit prices. For example, in 2003, the purchase order price of a 10-ounce strip steak ranged from $3.02 to $7.58. Monitoring of Actual Product Price Charged by Gate Gourmet: When Amtrak officials told us that purchase order information did not always reflect actual amounts paid, we tested actual prices paid by Amtrak to Gate Gourmet. To test purchase order data, we nonstatistically selected 37 payment transactions and reviewed the underlying supporting documentation and found evidence of widely variable product prices. For instance, in fiscal years 2002 and 2003, payments of over $400,000 for 12-ounce Heineken beer varied from $0.43 to $3.93 per bottle. Amtrak product pricing excludes labor costs. Our work revealed that Amtrak's product price to the customer does not take into account over half of Amtrak's total food and beverage costs. Amtrak's target profit margin is 67 percent for prepared meals and 81 percent for controlled beverages. These target profit margins are expressed as a percentage of sales over the item product cost charged to Amtrak. However, these target profit margins do not take into account Amtrak's on-board labor costs, which our work has determined is estimated at over half of Amtrak's food and beverage total expenditures. Amtrak's current food and beverage product pricing seems to ensure that its food and beverage service will not be profitable. Available procurement expertise not brought to bear. Finally, Amtrak's procurement department was not involved in the negotiation of the original contract. The current contract was signed by officials of Amtrak's now defunct Northeast Corridor Strategic Business Unit. The contract's initial period was for about 7 years (January 29, 1999, to September 30, 2006), with a 5-year extension option. In addition, another agreement to supply Amtrak's Acela train service for food and beverage items from Gate Gourmet's flight kitchens was made verbally between Amtrak's former president and the president of Gate Gourmet. Amtrak does not have any documentation for the contract terms for this service. In contrast to Amtrak, other transportation companies we interviewed closely monitor their invoices and contractor payments through periodic audits or have given the responsibility for costs and pricing to the contractor. For example, Northwest Airlines officials stated that they conduct regular audits of "every price" they are charged from their contractors and have found errors in either prices or labor charges in their contractor invoices. VIA Rail selectively audits their food supplier invoices that are attached to every billing statement they receive. Finally, the Alaska Railroad food and beverage business model gives responsibility for food and labor costs to the contractor, subject to contractual limits. Finally, information that would provide accountability over this service, both internally and externally, is limited. We noted that while Amtrak reports the combined revenue from its food and beverage services in its monthly performance reports, it does not identify for stakeholders the revenue attributable to each service. Amtrak also does not include any information about its food and beverage expenses in any of its internal or external reports, including its monthly performance reports, its internal quarterly progress reports, or its annual consolidated financial statements. Absent this information, it is difficult for internal and external stakeholders to determine the amount of expense attributable to the food and beverage service and to gauge the profit or loss of the operation. This hinders oversight and accountability. Other transportation companies we studied have a different accountability structure for their food and beverage service. Because VIA Rail has a fixed subsidy from the federal Canadian government, VIA Rail's management has an inherent incentive to control its costs in all areas of its operation, including its food and beverage service. VIA Rail controls its food and beverage costs in many different ways including fixed fee supplier contracts, item price reports, monitoring of supplier markups and item prices, and fixed food cost budgets to VIA Rail menu planners. Northwest Airlines has a flexible monthly food and beverage budget that increases or decreases with ridership levels. In addition, each supplier contract has established markups on product prices and its contracts with food preparation and delivery providers have detailed labor rates that are all audited for accuracy. The Alaska Railroad receives biweekly reports from its contractor detailing its labor and food costs that show, among other things, contractor performance against the contractual cost caps. In addition, the contractor and the Alaska Railroad will conduct annual audits of its contractor's performance under the contract. Amtrak's food and beverage service may represent a relatively small part of the company's operating budget, but it speaks volumes about Amtrak's need to get its operations in better order. In administering this contract, basic steps for good management have been ignored or otherwise set aside. Omissions include not completing agreed-upon provisions of the contract, not carrying through with basic oversight called for in the contract, and ensuring that the organization was getting products at the most reasonable price. Prudence requires a stronger effort, beginning with carrying out those steps that, under the contract, should have been taken all along. Amtrak needs to take such steps not only to curb the losses in this program, but to help convince the public that it is acting as a careful steward of the federal dollars that continue to keep it operating. Based on our work to date, we anticipate making recommendations to Amtrak to improve controls over its food and beverage operations. Since we did not have sufficient time to obtain Amtrak's comments, as required by government auditing standards prior to this hearing, the recommendations remain tentative until that process is complete. At that time, we anticipate making the following recommendations that Amtrak: 1. Better contain its food and beverage costs through: Following its own procedures for ensuring proper contracts and Enforcing key provisions of the current Gate Gourmet contract including annual reports that are independently audited by an outside auditing firm and certified by Gate Gourmet officials and conduct regular audits of discount and rebates. 2. Prepare a written contract for food and beverage service on Acela trains that specifies the service to be provided, includes incentives to ensure efficient and effective contractor performance, and includes regular annual reports and audits. 3. Create separate revenue and expenditure reporting and other basic food service metrics to allow for internal and external accountability for its food and beverage service and create incentives to reduce costs and/or increase revenue. 4. Comprehensively review the revenue and cost structure of its food and beverage service to determine the most cost effective solution that can increase the financial contribution of its food and beverage function. Mr. Chairman, this concludes my testimony. I would be happy to answer whatever questions you or the other members might have. For further information, please contact JayEtta Z. Hecker at [email protected] or at 202-512-2834. Individuals making key contributions to this statement include Greg Hanna, Heather Krause, Bert Japikse, Richard Jorgenson, Steven Martin, Robert Martin, Irvin McMasters, Robert Owens, and Randy Williamson. 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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Amtrak has provided food and beverage service on its trains since it began operations in 1971. Amtrak has struggled since its inception to earn sufficient revenues and depends heavily on federal subsidies to remain solvent. While a small part of Amtrak's overall expenditures, Amtrak's food and beverage service illustrates concerns in Amtrak's overall cost containment, management and accountability issues. This testimony is based on GAO's work on Amtrak's management and performance as well as additional information gained from Amtrak and other transportation providers. This testimony focuses on (1) the provisions written into Amtrak's contract with Gate Gourmet to control costs, (2) the types of management controls Amtrak exercises to prevent overpayments, and (3) the information Amtrak collects and uses to monitor the service and to report to stakeholders such as its Board of Directors. Amtrak's financial records show that for every dollar Amtrak earns in food and beverage revenue, it spends about $2--a pattern that has held consistent for all 3 years GAO reviewed. In GAO's estimation, Amtrak has lost a total of almost $245 million from fiscal year 2002 through fiscal year 2004 on food and beverage service. Since 1999, Amtrak has contracted out the responsibility to Gate Gourmet International (Gate Gourmet) for managing commissaries and for ordering and stocking all food and beverages and related items managing under a contract that expires in September 2006. Amtrak's current cost reimbursable contract with Gate Gourmet creates, if anything, an incentive to increase Amtrak's costs unless properly monitored. Gate Gourmet can charge Amtrak for the cost of the food and beverage items, as well as management, labor, and other expenses. Without defined controls and management, this type of contract structure provides little incentive for a contractor to reduce or contain costs to provide better value to its customer. GAO found five different management controls that Amtrak did not fully exercise regarding oversight of its food and beverage service. These controls include: (1) requiring an independently audited financial report, (2) auditing for all applicable rebates and discounts that Gate Gourmet could have applied to food and beverage items purchased for Amtrak, (3) adequately monitoring purchase price information for its food and beverage items, (4) not considering Amtrak's food and beverage labor costs, as a part of product markups, and that (5) not utilizing Amtrak's procurement department in negotiating the current contract. Information that could provide both internal and external accountability for the food and beverage function is limited. Amtrak does not include any information about its food and beverage expenses in any of its internal or external reports, including its monthly performance reports, its internal quarterly progress reports or its annual consolidated financial statements. This lack of information makes it difficult for internal and external stakeholders to gauge the profit or loss of the operation as well as to assign accountability.
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In our June 2016 report, we found that although the Coast Guard had assessed its Arctic capabilities and worked with its Arctic partners--such as other federal agencies-- to carry out actions to help mitigate Arctic capability gaps--it had not systematically assessed how its actions have helped to mitigate these gaps. Specifically, we reported that the Coast Guard had assessed its capability to conduct its Arctic missions and had identified various capability gaps, primarily through two key studies. The capability gaps identified in these reports--which Coast Guard officials confirmed remain relevant and highlighted in their Arctic strategy--include (1) communications, (2) Arctic maritime domain awareness, (3) infrastructure, (4) training and exercise opportunities, and (5) icebreaking. These gaps are similar to the ones we identified in 2010. According to Coast Guard officials, through the agency's role in implementing the various Arctic strategies and implementation plans, the Coast Guard has taken actions, along with its Arctic partners, that have helped to mitigate capability gaps. For example, the Coast Guard is the lead agency for implementing the strategies' tasks related to enhancing Arctic maritime domain awareness. In addition, Coast Guard officials reported that they utilize the annual Arctic Shield operations as the primary operational method to better understand the agency's Arctic capabilities and associated gaps and to take actions to help mitigate them. For example, during Arctic Shield operations, the Coast Guard tested communications equipment belonging to the Department of Defense--extending communications capabilities further north than previously possible--and conducted Arctic oil spill response exercises. However, we found in our June 2016 report that the Coast Guard had not systematically tracked the extent to which its actions agency-wide have helped mitigate Arctic capability gaps. Coast Guard officials attributed this, in part, to not being able to unilaterally close the gaps. While fully mitigating these gaps requires joint efforts among Arctic partners, the Coast Guard has taken actions in the Arctic that are specific to its missions and has responsibility for assessing the extent to which these actions have helped to close capability gaps. Standards for Internal Control in the Federal Government provide that ongoing monitoring should occur in the course of normal operations and should help ensure that the findings of reviews, such as the capability gaps identified in the previously mentioned reports, are resolved. As a result, we recommended in our June 2016 report that the Coast Guard develop measures, as appropriate, and design and implement a process for systematically assessing the extent to which its actions have helped mitigate Arctic capability gaps. DHS concurred with our recommendations, and in response, the Coast Guard reported that it planned to develop specific measures for some of its Arctic activities and systematically assess how its actions have helped to mitigate the capability gaps for which the Coast Guard is the lead agency, such as icebreaking capacity. We believe that these actions, if implemented, will help the Coast Guard better understand the status of these capability gaps and better position it to effectively plan its Arctic operations. However, we continue to believe that it is important for the Coast Guard to also systematically assess how its actions affect Arctic capability gaps for which it is not the lead, such as communications. Although the Coast Guard may not be the lead for these gaps, assessing the impact of Coast Guard actions for such capability gaps would better enable the Coast Guard to understand the effectiveness of its actions and the status of all capability gaps. Also, as these gaps may affect its Arctic missions, this knowledge may be helpful to the Coast Guard in planning its operations. Our June 2016 report found the Coast Guard has been unable to fulfill some of its polar icebreaking responsibilities with its aging polar icebreaking fleet, and had efforts underway to acquire a heavy icebreaker--which has greater icebreaking capability than a medium icebreaker. Specifically, in 2011 and 2012 when its heavy icebreakers were not active, the Coast Guard was unable to maintain assured, year- round access to the Arctic and did not meet 4 of 11 requests for polar icebreaking services. The Coast Guard reported that increased heavy icebreaking capacity is needed to fully meet requirements in the Arctic and Antarctic regions. A 2010 Coast Guard-commissioned study found that at least six icebreakers--three heavy and three medium--would be required to carry out the Coast Guard's statutory missions, if the Coast Guard were to fully accomplish all of its polar icebreaking responsibilities. Recognizing the fiscal challenges posed by such a request, Coast Guard officials have stated that obtaining a minimum of two heavy icebreakers is needed to at least maintain the fleet's self- rescue capability in the event one vessel became beset in ice--a capability the Coast Guard does not currently have. We also found that the Coast Guard initiated a program in 2013 to acquire a new heavy icebreaker to maintain polar icebreaking capability after the Polar Star's projected service life ends between 2020 and 2023. Currently, the Coast Guard is working to determine the optimal acquisition strategy. To move forward with the acquisition process, the Coast Guard would need to receive funding for an icebreaker--which, according to a 2013 preliminary estimate, would be about $1.09 billion--and ensure that a U.S.-based commercial shipyard would be able to build the vessel. For many years, the Coast Guard's annual acquisition budget has been allocated primarily to other projects. The President's fiscal year 2017 budget request outlined plans to accelerate the acquisition process for a heavy icebreaker, so that production activities could commence by 2020. Various factors limit the options available to the Coast Guard to maintain, or increase, its icebreaker capacity. The Coast Guard has reported that the long-term lease of a polar icebreaker is unlikely to result in cost savings when compared with a purchase. Specifically, we reported in June 2016 that two key factors limiting the Coast Guard's options for acquiring icebreaking capacity are the lack of an available icebreaker that meets agency and legal requirements, and the total cost that would be associated with a long-term lease. Availability. The Coast Guard reported that no existing heavy icebreakers were available to lease or purchase that met both its legal and operational requirements. Specifically, to meet legal requirements, the Coast Guard would need to either purchase or demise charter the icebreaker, as legal requirements associated with several Coast Guard missions prohibit a short-term lease. Specifically, under federal law, to be capable of conducting all of its statutory missions, the Coast Guard must use a public vessel, which federal law defines as one that the United States owns or demise charters. For example, federal law states that the Coast Guard's Ports, Waterways, and Coastal Security Mission may be carried out with public vessels or private vessels tendered gratuitously for that purpose. Further, federal law provides that no Coast Guard vessel may be constructed in a foreign shipyard. According to the Coast Guard, besides the Polar Star and the Polar Sea, the only existing icebreakers powerful enough to meet the Coast Guard's operational requirements were built in and are owned by Russia and would not comply with this legal requirement. Budgeting and Total Cost. Budget requirements also affect the Coast Guard's ability to acquire an icebreaker. For example, Office of Management and Budget (OMB) guidelines require federal agencies to acquire assets in the manner least costly overall to the government. Specifically, for a large acquisition like a heavy icebreaker, OMB Circular A-94 requires the Coast Guard to conduct a lease-purchase analysis based on total lifecycle costs of the asset. To proceed with a lease, the Coast Guard would need to show that leasing is preferable to direct government purchase and ownership. Budget scorekeepers--specifically, OMB, the Congressional Budget Office, and the House and Senate Budget Committees--score purchases and capital leases at the outset of the acquisition. A 2011 preliminary cost analysis prepared for the Coast Guard indicated that the lease option would be more costly to the federal government over an icebreaker's expected 30-year service life. According to this analysis, the prospective ship owner's profit rate would increase the overall expense as this profit rate is priced into the lease, such that government ownership would be less costly in the long run. Moreover, because a demise charter requires the lessee to operate and maintain the vessel, the Coast Guard would not be able to outsource crewing or maintenance activities to reduce its operating costs. Previous GAO work on the question of leasing versus buying an icebreaker identified important assumptions in comparing the costs to the federal government and suggested that outright purchase could be a less costly alternative than a long-term vessel lease. Assuming that the cost of building and operating the vessel was the same under both the buy and the lease scenarios, the cost advantage to government purchase over leasing in our previous work was based on two factors. First, the costs of private sector financing under a lease arrangement--which were higher than the government's borrowing costs--could be expected to be passed on to the federal government in lease payments, thereby increasing the vessel's financing costs over what they would be under outright government purchase. Second, under a lease arrangement, an additional profit would accrue to the lessor for services related to its retained ownership of the vessel. Anticipating a likely gap of 3 to 6 years in heavy icebreaker capability between the expected end of the Polar Star's service life between 2020 and 2023 and the deployment of a new icebreaker in 2026, we reported in June 2016 that the Coast Guard is developing a bridging strategy, as required by law, to determine how to address this expected gap (see fig. 2). We reported in June 2016 that the Coast Guard has not determined the cost-effectiveness of reactivating the Polar Sea, and that a Bridging Strategy Alternatives Analysis will assess and make recommendations on whether to reactivate the Polar Sea and whether to further extend the service life of the Polar Star. Coast Guard officials said that they have not established a completion date for this report, but do not anticipate a final decision on the Polar Sea before fiscal year 2017, after which they will evaluate the cost-effectiveness of extending the Polar Star's life, if necessary. In conclusion, the Coast Guard has made progress in assessing its capabilities in the Arctic and taking steps to address identified capability gaps, but the Coast Guard could do more to systematically determine the progress it has made in helping to mitigate these various gaps. Further, several factors exist that affect the Coast Guard's options for acquiring a new icebreaker, including both legal and budgetary considerations that suggest a purchase of an icebreaker may be preferable to a long-term lease. Regardless of the acquisition approach, there is a strong likelihood of a 3 to 6 year gap in heavy icebreaking service, which underscores the need for the Coast Guard to move forward with its bridging strategy. Chairman Hunter, Ranking Member Garamendi, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff have any questions about this testimony, please contact Jennifer Grover at (202) 512-7141 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Dawn Hoff (Assistant Director), Tracey Cross (Analyst-in-Charge), Chuck Bausell, Linda Collins, John Crawford, Michele Fejfar, Laurier Fish, Eric Hauswirth, Carol Henn, Susan Hsu, Tracey King, Jan Montgomery, Jillian Schofield, Katherine Trimble, and Eric Warren. Description Requires the Coast Guard to, in part, establish, develop, maintain, and operate icebreaking facilities on, under, and over the high seas and waters subject to the jurisdiction of the United States; and, pursuant to international agreements, requires the Coast Guard to develop, establish, maintain, and operate icebreaking facilities on, under, and over waters other than the high seas and waters subject to the jurisdiction of the United States. Requires the President to facilitate planning for the design, procurement, maintenance, deployment, and operation of icebreakers as needed to support the statutory missions of the Coast Guard in the polar regions by allocating all funds to support icebreaking operations in such regions, except for recurring incremental costs associated with specific projects, to the Coast Guard. Authorizes the Coast Guard to maintain icebreaking facilities. Requires the Coast Guard to conduct such oceanographic research, use such equipment or instruments, and collect and analyze such oceanographic data, in cooperation with other agencies of the government, or not, as may be in the national interest. Authorizes the Coast Guard to provide and accept personnel and facilities, from other federal and state agencies, to perform any activity for which such personnel and facilities are especially qualified and as may be helpful in the performance of its duties, respectively. Congress finds that the United States has important security, economic, and environmental interests in developing and maintaining a fleet of icebreaking vessels capable of operating effectively in the heavy ice regions of Antarctica. The Department of Homeland Security is required to facilitate planning for the design, procurement, maintenance, deployment, and operation of icebreakers needed to provide a platform for Antarctic research. Congress finds that the United States has important security, economic, and environmental interests in developing and maintaining a fleet of icebreaking vessels capable of operating effectively in the heavy ice regions of the Arctic. Strategic policies Implementation Framework for the National Strategy for the Arctic Region (2016) The Coast Guard is the lead agency for ensuring the United States maintains icebreaking capability with sufficient capacity to project an assured Arctic maritime access, supports U.S. interests in the polar regions, and facilitates research that advances the fundamental understanding of the Arctic. National Security Presidential Directive 66/Homeland Security Presidential Directive 25 (NSPD-66/ HSPD- 25): Artic Region Policy (2009) The Department of Homeland Security and other departments shall "reserve the global mobility of United States military and civilian vessels and aircraft throughout the Arctic region" and "project a sovereign United States maritime presence in the Arctic in support of essential United States interests." Presidential Memorandum 6646: United States Antarctic Policy and Programs (1982) The Departments of Defense and Transportation (now Department of Homeland Security) shall provide logistical support as requested by the National Science Foundation to support the United States Antarctic Program. Interagency agreements Memorandum of Agreement between Department of the Navy and Department of the Treasury on the Operation of Icebreakers (1965) Navy agreed to transfer all icebreakers to the Coast Guard, and the Coast Guard agreed, among other things, to maintain and operate the U.S. icebreaker fleet, to prepare for contingency or wartime operations in polar regions, to assign icebreakers to the Navy's operational control for seasonal polar deployments, and to support scientific programs to the extent possible. Memorandum of Agreement between Coast Guard and National Science Foundation (2010) The Coast Guard agreed to provide polar icebreaker support to conduct the resupply of McMurdo Station to support the U.S. Antarctic program and to conduct research in the Antarctic. Memorandum of Agreement between the Department of Defense and Department of Homeland Security on the Use of U.S. Coast Guard Capabilities and Resources in Support of the National Military Strategy (2008/2010) In ice-covered and ice-diminished waters, Coast Guard icebreakers are the only means of providing assured surface access in support of the Department of Defense missions. . 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 retreat of polar sea ice in the Arctic, as reported by the U.S. National Snow and Ice Data Center, combined with an expected increase in human activity there, has heightened U.S. and other nations' interests in the Arctic region in recent years. Growth in Arctic activity is expected to increase demand for services such as search and rescue and maritime navigation support, which can be a challenge to provide given the harsh and unpredictable weather and vast distances that responding agencies must travel to reach the Arctic. The Coast Guard plays a significant role in U.S. Arctic policy and issued its Arctic strategy in May 2013. This statement addresses the extent to which the Coast Guard has (1) assessed its Arctic capabilities and taken actions to mitigate any identified gaps, and (2) reported being able to carry out polar icebreaking operations. This testimony is based on a June 2016 GAO report. GAO reviewed relevant laws and policies and Coast Guard documents that detail Arctic plans, among other things. Detailed information on GAO's scope and methodology can be found in the June 2016 report. GAO reported in June 2016 that the U.S. Coast Guard, within the Department of Homeland Security (DHS), had assessed its Arctic capabilities and worked with its Arctic partners--such as other federal agencies-- to mitigate Arctic capability gaps, including communications and training. Although Coast Guard officials stated that the agency's actions, such as testing communication equipment in the Arctic and conducting Arctic oil spill response exercises, have helped to mitigate Arctic capability gaps, the Coast Guard has not systematically assessed the impact of its actions on these gaps. GAO recommended in June 2016 that the Coast Guard develop measures, as appropriate, and design and implement a process, for systematically assessing the extent to which its actions have helped mitigate Arctic capability gaps. DHS concurred with GAO's recommendations, and the Coast Guard reported that it planned to develop specific measures for some of its Arctic activities and systematically assess how its actions have helped to mitigate the capability gaps for which the Coast Guard is the lead agency. While officials stated they are unable to unilaterally close capability gaps for which the Coast Guard is not the lead agency, assessing the impact of Coast Guard actions for such capability gaps would better enable the Coast Guard to understand the effectiveness of its actions and the status of all capability gaps, as well as plan its Arctic operations. GAO's June 2016 report also found that the Coast Guard has been unable to fulfill its polar icebreaking responsibilities with its aging icebreaker fleet, which currently includes two active icebreakers. In 2011 and 2012, the Coast Guard was unable to maintain year-round access to the Arctic and did not meet 4 of 11 requests for polar icebreaking services. With its one active heavy icebreaker--which has greater icebreaking capability--nearing the end of its service life, the Coast Guard initiated a program in 2013 to acquire a new one and is working to determine the optimal acquisition strategy. However, the Coast Guard's efforts to acquire an icebreaker, whether by lease or purchase, will be limited by legal and operational requirements. In addition, current projections show that the Coast Guard is likely to have a 3- to 6-year gap in its heavy icebreaking capability before a new icebreaker becomes operational, as shown below. The Coast Guard is developing a strategy to determine how to address this expected gap. Coast Guard's Heavy Icebreaker Availability and Expected Capability Gap, Present until 2030
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We defined the financial services industry to include the following sectors: depository credit institutions, which include commercial banks, thrifts (savings and loan associations and savings banks), and credit unions; holdings and trusts, which include investment trusts, investment companies, and holding companies; nondepository credit institutions, which extend credit in the form of loans and include federally sponsored credit agencies, personal credit institutions, and mortgage bankers and brokers; the securities sector, which is made up of a variety of firms and organizations (e.g., broker-dealers) that bring together buyers and sellers of securities and commodities, manage investments, and offer financial advice; and the insurance sector, including carriers and insurance agents that provide protection against financial risks to policyholders in exchange for the payment of premiums. The financial services industry is a major source of employment in the United States. EEO-1 data showed that financial services firms we reviewed for this work, which have 100 or more staff, employed over 3 million people in 2008. Moreover, according to the U.S. Bureau of Labor Statistics, employment in the financial services industry was expected to grow by 5 percent from 2008 to 2018. Employment in the credit intermediation and related activities industry, which includes banks, is expected to account for 42 percent of all new jobs within the finance and insurance sector. As discussed in our 2006 report, overall diversity in management-level positions did not change substantially from 1993 through 2004. Specifically, figure 1 shows that diversity in senior positions increased from 11.1 percent to 15.5 percent during that period. Regarding the change within specific groups, African-Americans increased their representation from 5.6 percent to 6.6 percent, Asians from 2.5 percent to 4.5 percent, Hispanics from 2.8 percent to 4.0 percent, and American Indians from 0.2 to 0.3 percent. Management-level representation by white women was largely unchanged at slightly more than one-third during the period, while representation by white men declined from 52.2 percent to 47.2 percent. Revised EEO-1 data for the period 2005 through 2008 show an increase in minority representation in management positions from 15.5 percent to 17.4 percent (fig. 2). This increase was largely driven by the growing representation of Asians in management positions--an increase of nearly a full percentage point from 4.7 percent to 5.5 percent during the period. Meanwhile, African-American representation remained stable at about 6.3 percent from 2005 through 2008, while Hispanic representation increased by half of a percentage point from 4.3 to 4.8 percent. Management-level representation by white women and white men both decreased by about one percentage point from 2005 through 2008. However, before 2008 EEO-1 data generally overstated representation levels for minorities and white women in the most senior-level positions, such as chief executive officers of large investment firms or commercial banks, because the category that captured these positions--"officials and managers"--covered all management positions. Thus, this category included lower-level positions (e.g., assistant manager of a small bank branch) that may have a higher representation of minorities and women. Recognizing this limitation, starting in 2007 EEOC revised its data collection form for employers to divide the "officials and managers" category into two subcategories: "executive/senior-level officers and managers" and "first/midlevel officials." EEOC's revised data, as reported in 2008, indicate that minorities accounted for 10 percent of senior positions in the financial services industry. As I discussed previously, the percentage in the broader data category was 17.4 percent. Moreover, as shown in figure 3, white men accounted for approximately 64 percent of senior-level management positions. In contrast, African Americans held 2.8 percent of such senior management positions, while Hispanics held 3.0 percent and Asians 3.5 percent. Officials from the firms that we contacted for our previous work said that their top leadership was committed to implementing workforce diversity initiatives but noted that making such initiatives work was challenging. In particular, the officials cited ongoing difficulties in recruiting and retaining minority candidates and in gaining employees' "buy-in" for diversity initiatives, especially at the middle management level. Some firms noted that they had stepped up efforts to help ensure a diverse workforce. However, the recent financial crisis has raised questions about their ongoing commitment to initiatives and programs that are designed to promote workforce diversity. Minorities' rapid growth as a percentage of the overall U.S. population, as well as increased global competition, convinced some financial services firms that workforce diversity was a critical business strategy. Since the mid-1990s, some financial services firms have implemented a variety of initiatives designed to recruit and retain minority and women candidates to fill key positions. Officials from several banks said that they had developed scholarship and internship programs to encourage minority students to consider careers in banking. Some firms and trade organizations had also developed partnerships with groups that represent minority professionals and with local communities to recruit candidates through events such as conferences and career fairs. To help retain minorities and women, firms have established employee networks, mentoring programs, diversity training, and leadership and career development programs. Industry studies have noted, and officials from some financial services firms we contacted confirmed, that senior managers were involved in diversity initiatives. Some of these officials also said that this level of involvement was critical to success of a program. For example, according to an official from an investment bank, the head of the firm meets with all minority and female senior executives to discuss their career development. Officials from a few commercial banks said that the banks had established diversity "councils" of senior leaders to set the vision, strategy, and direction of diversity initiatives. A 2007 industry trade group study and some officials also noted that some companies were linking managers' compensation to their progress in hiring, promoting, and retaining minority and women employees. However, the study found that most companies reported that they still did not offer managers financial rewards for improving diversity performance. This study also found that firms, overall, have significantly increased accountability for driving diversity results. For example, more firms reported that they were holding managers accountable for improving diversity. Performance reviews and management-by-objectives were the top two methods for measuring managers' diversity performance. Finally, firms whose representation of women and minorities was above the median for the survey group were considerably more likely to use certain diversity management strategies and practices. A few firms had also developed performance indicators to measure progress in achieving diversity goals. These indicators include workforce representation, turnover, promotion of minority and women employees, and employee satisfaction survey responses. Officials from several financial services firms stated that measuring the results of diversity efforts over time was critical to the credibility of the initiatives and to justifying the investment in the resources such initiatives demanded. While financial services firms and trade groups we contacted had launched diversity initiatives, officials from these organizations and other information suggested that several challenges may have limited the success of their efforts. These challenges include the following: Recruiting minority and women candidates for management development programs. Available data on minority students enrolled in Master of Business Administration (MBA) programs suggest that the pool of minorities, a source that may feed the "pipeline" for management-level positions within the financial services industry and other industries is a limiting factor. In 2000, minorities accounted for 19 percent of all students enrolled in MBA programs in accredited U.S. schools; in 2006, that student population had risen to 25 percent. Financial services firms compete for minorities in this pool not only with one another but also with firms from other industries. Fully leveraging the "internal" pipeline of minority and women employees for management-level positions. As shown in figure 4, there are job categories within the financial services industry that generally have more overall workforce diversity than the "Executive/Senior Level Officials & Managers" category, particularly among minorities. For example, minorities held almost 25 percent of "professional" positions in the industry in 2008, compared with 10 percent of "executive/senior level officials & managers" positions. According to a 2006 EEOC report, the professional category represented a possible pipeline of available management-level candidates. The EEOC report stated that the chances of minorities and women (white and minority combined) advancing from the professional category into management-level positions were lower than they were for white males. Retaining minority and women candidates that are hired for key management positions. Many industry officials said that financial services firms lack a critical mass of minority men and women, particularly in senior-level positions, to serve as role models. Without a critical mass, the officials said that minority or women employees might lack the personal connections and access to informal networks that are often necessary to navigate an organization's culture and advance their careers. For example, an official from a commercial bank we contacted said he learned from staff interviews that African-Americans believed that they were not considered for promotion as often as others partly because they were excluded from informal employee networks needed for promotion or to promote advancement. Achieving the "buy-in" of key employees, such as middle managers. Middle managers are particularly important to the success of diversity initiatives because they are often responsible for implementing key aspects of such initiatives and for explaining them to other employees. However, some financial services industry officials said that middle managers may be focused on other aspects of their responsibilities, such as meeting financial performance targets, rather than the importance of implementing the organization's diversity initiatives. Additionally, the officials said that implementing diversity initiatives represented a considerable cultural and organizational change for many middle managers and employees at all levels. An official from an investment bank told us that the bank had been reaching out to middle managers who oversaw minority and women employees by, for example, instituting an "inclusive manager program." In closing, with the implementation of a variety of diversity initiatives over the past 15 years, diversity at the management level in the financial services industry has improved but not changed substantially. Further, EEOC's new EEO-1 data provide a clearer view of diversity within senior executive ranks, showing that diversity is lower than the overall industry management diversity statistics had indicated. Initiatives to promote management diversity at all levels within financial services firms face several key challenges, such as recruiting and retaining candidates and achieving the "buy-in" of middle managers. The impact of the recent financial crisis on diversity also warrants ongoing scrutiny. Without a sustained commitment to overcoming these challenges, management diversity in the financial services industry may continue to remain largely unchanged over time. Mr. Chairman and Madam Chairwoman, this concludes my prepared statement. I would be pleased to respond to any questions you or other members of the subcommittees may have. For further information about this testimony, please contact Orice M. Williams Brown on (202) 512-8678 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Wesley M. Phillips, Assistant Director; Emily Chalmers; William Chatlos; John Fisher; Simin Ho; Marc Molino; and Linda Rego. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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As the U.S. workforce has become increasingly diverse, many private and public sector organizations have recognized the importance of recruiting and retaining minority and women candidates for key positions. However, previous congressional hearings have raised concerns about a lack of diversity at the management level in the financial services industry, which provides services that are essential to the continued growth and economic recovery of the country. The recent financial crisis has renewed concerns about the financial services industry's commitment to workforce diversity. This testimony discusses findings from a June 2006 GAO report (GAO-06-617), February 2008 testimony (GAO-08-445T), and more recent work on diversity in the financial services industry. Specifically, GAO assesses (1) what the available data show about diversity at the management level from 1993 through 2008 and (2) steps that the industry has taken to promote workforce diversity and the challenges involved. To address the testimony's objectives, GAO analyzed data from the Equal Employment Opportunity Commission (EEOC); reviewed select studies; and interviewed officials from financial services firms, trade organizations, and organizations that represent minority and women professionals. To the extent possible, key statistics have been updated. EEOC data indicate that overall diversity at the management level in the financial services industry did not change substantially from 1993 through 2008, and diversity in senior positions remains limited. In general, EEOC data show that management-level representation by minority women and men increased from 11.1 percent to 17.4 percent during that period. However, these EEOC data overstated minority representation at senior management levels, because the category includes mid-level management positions, such as assistant branch manager, that may have greater minority representation. In 2008, EEOC reported revised data for senior-level positions only, which showed that minorities held 10 percent of such positions compared with 17.4 percent of all management positions. The revised data also indicate that white males held 64 percent of senior positions in 2008, African-Americans held 2.8 percent, Hispanics 3 percent, and Asians 3.5 percent. Financial services firms and trade groups have initiated programs to increase workforce diversity, but these initiatives face challenges. The programs include developing scholarships and internships, partnering with groups that represent minority professionals, and linking managers' compensation with their performance in promoting a diverse workforce. Some firms have developed indicators to measure progress in achieving workforce diversity. Industry officials said that among the challenges these initiatives faced were recruiting and retaining minority candidates, and gaining the "buy-in" of key employees such as the middle managers who are often responsible for implementing such programs. Without a sustained commitment to overcoming these challenges, diversity at the management level may continue to remain generally unchanged over time.
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Originally, SSNs were used to keep track of earnings, contributions, and old-age, disability, and survivor benefits for people covered by the Social Security program. Increasingly, however, SSNs have been used for a wide variety of purposes by private firms and federal, state, and local governments. Cases in which ineligible foreign-born individuals have obtained or used SSNs to secure employment and receive Social Security benefits, and increasing incidents of identity theft, have focused attention on the need to prevent abuse of SSNs. An estimated 96 percent of workers in the U.S., including many foreign- born citizens and noncitizens, are required to pay Social Security payroll taxes, also called Federal Insurance Contribution Act (FICA) taxes. When workers pay Social Security taxes, they earn up to 4 coverage credits each year. Generally 40 credits--equal to at least 10 years of work--entitle workers to Social Security benefits when they reach retirement age. Social Security benefits are based on workers' covered earnings during their career. Different requirements apply in cases where workers become disabled or die with relatively short work careers. Although the Social Security Act provides that people meeting the work and contribution requirements accrue benefits, the act also generally prohibits payment of benefits to people who are not lawfully present in the U.S. as specified by DHS regulations. In fiscal year 2005, SSA assigned about 1.1 million original SSNs to noncitizens, representing about one-fifth of the 5.4 million original SSNs issued that year. Fewer than 15,000 of these were cards with "nonwork" SSNs issued to noncitizens unauthorized to work in the U.S. under immigration law. SSA also issues replacement cards to people who have already been assigned SSNs, but have lost their card. In fiscal year 2005, SSA issued over 800,000 such replacement cards to noncitizens, about 7 percent of the 12.1 million replacement cards issued that year. SSA uses different procedures for assigning SSNs depending on whether individuals are born in the U.S. or are foreign-born and depending on their citizenship or immigration status. Almost all individuals born in the U.S. or in U.S. jurisdictions are U.S. citizens at birth; however, some foreign-born individuals can also become U.S. citizens if their adoptive or birth parents are U.S. citizens or if they become naturalized citizens. Because foreign-born citizens are eligible for the same types of SSNs and benefits as U.S.-born citizens, we will focus for the remainder of this testimony on noncitizens. Immigrants are noncitizens who may lawfully reside and work permanently in the U.S. About 600,000 to 1.1 million noncitizens come to the US each year as immigrants. Nonimmigrants include noncitizens who come to the U.S. lawfully (for example, with temporary visas) and those who reside in the U.S. unlawfully (in violation of the Immigration and Nationality Act). Nonimmigrants who remain in the U.S. without DHS authorization overstay their nonimmigrant visas or enter the country illegally. As of 2004, an estimated 10.3 million unauthorized noncitizens lived in the U.S., according to the Pew Hispanic Center's analysis of March 2004 Current Population Survey and other Census data. The State Department, DHS, SSA, and employers have responsibilities to help ensure that noncitizens who are not authorized to work are denied employment. The State Department identifies who among people abroad seeking to come to the U.S. is eligible to enter the U.S. and who is eligible to work in the U.S. DHS denies entry to people who are ineligible and enforces immigration requirements in cases where people enter the U.S. illegally or work without authorization. In cooperation with the State Department and DHS, SSA assigns SSNs to eligible noncitizens. Employers are required to inspect employees' work authorization documents. A regular Social Security card can be one of the key documents that employers use to verify that employees are authorized to work. In some cases, however it may be difficult to distinguish a regular card from a nonwork card. Specifically, cards for individuals not eligible to work did not contain the restriction "NOT VALID FOR EMPLOYMENT" until May 1982. Finally, the SSA ensures that benefit payments go only to people who have earned them and who are lawfully present in the U.S. or in another country with which the U.S. has an agreement for reciprocal cross border payment of benefits. The Intelligence Reform and Terrorism Prevention Act of 2004 (IRTPA) was enacted in response to the terrorist attacks of September 11, 2001 to reform our nation's intelligence community and strengthen terrorism prevention and prosecution, border security, and international cooperation and coordination. IRTPA included several specific provisions for strengthening the SSN enumeration process and documentation requirements for obtaining SSNs and cards. For example, the act required minimum standards for birth certificates and directed the Department of Health and Human Services to establish these standards in consultation with DHS, SSA, and others. IRTPA also required that SSA limit the number of replacement cards it issues annually; adopt measures to improve verification of documents presented to obtain an original or replacement Social Security card; independently verify any birth record presented to obtain an SSN; prevent the assignment of SSNs to unnamed children and adopt additional measures to prevent assignment of multiple SSNs to the same child; form an interagency taskforce to establish standards to better protect Social Security cards and SSNs from counterfeiting, tampering, alteration, and theft; and provide for implementation of security requirements by June 2006. The Social Security Protection Act (SSPA) of 2004 imposed new restrictions on the payment of Social Security benefits to noncitizens. Before these provisions went into effect, all payments into the system would count toward insured status, regardless of whether or not the noncitizen was authorized to work by DHS. Under this new law, noncitizens who apply for benefits with an SSN originally assigned after 2003 must have work authorization at the time their SSN is assigned or at some later point before applying for benefits to gain insured status under the Social Security program. If the individual never had authorization to work in the United States, none of his or her earnings would count toward insured status and neither the worker nor dependent family members could receive Social Security benefits. SSA also has specific procedures to award benefits for foreign-born workers who work in both the U.S. and in another country with which the U.S. has a totalization agreement. These are bilateral agreements intended to accomplish three purposes. First, they eliminate dual social security coverage and taxes that multinational employers and employees encounter when workers temporarily reside in a foreign country with its own Social Security program. Under these agreements, U.S. employers and their workers sent temporarily abroad benefit by paying only U.S. social security taxes, and foreign businesses and their workers benefit by paying only Social Security taxes to their home country. Second, the agreements provide benefit protection to workers who have divided their careers between the U.S. and a foreign country, but do not qualify for benefits under one or both Social Security systems, despite paying taxes into both. Totalization agreements allow such workers to combine (totalize) work credits earned in both countries to meet minimum benefit qualification requirements. Third, totalization agreements generally improve the portability of Social Security benefits by authorizing the waiver of residency requirements. The U.S. has totalization agreements in effect with 21 countries--several western European countries, and others including Canada, Australia, Japan, South Korea, and Chile. (See table 4 in App. I for a list of countries with which the U.S. has totalization agreements.) In coordination with the State Department and DHS, SSA determines who is eligible for an SSN by verifying certain immigration documents and determining if an individual's card requires a work restriction. Our 2003 report identified improvements SSA had made in its enumeration processes, but also pointed to continued weaknesses, some of which SSA and the Congress have since addressed. Under current law U.S. citizens are eligible for SSNs whether they were born in the U.S. or elsewhere. Depending on their immigration status, noncitizens may be eligible for one of three types of Social Security cards: regular cards, those cards valid for work only with authorization from the DHS, and nonwork SSN cards. 1. Regular Social Security card: The first and most common type of card is for individuals who are eligible to work. Individuals issued these SSNs receive a Social Security card showing their name and SSN without marked restriction. To be eligible for this card an individual must be one of the following U.S. citizen (whether foreign-born or not), noncitizen lawfully admitted to the U.S. for permanent residence (an immigrant), noncitizen with permission from the DHS to work permanently in member of a group eligible to work in the U.S. on a temporary basis (e.g., with a work visa, certain authorized workers in an approved exchange program). 2. DHS-authorized work card: A much less common type of Social Security card is issued to noncitizens who are eligible to work under limited circumstances. They receive a card showing the inscription "VALID FOR WORK ONLY WITH DHS AUTHORIZATION." To be eligible for these cards noncitizens must have DHS permission to work temporarily in the U.S. SSA issues these cards to eligible workers, such as certain foreign students and spouses and children of exchange visitors. 3. Nonwork card: The third type of card is for people not eligible to work in the U.S. SSA sends recipients of these SSNs a card showing their name, SSN, and the inscription "NOT VALID FOR EMPLOYMENT." To be issued these cards, noncitizens who are legally in the U.S. and do not have DHS permission to work must have been found eligible to receive a federally-funded benefit or are subject to a state or local law that requires them to have an SSN to get public benefits. Examples include Temporary Assistance for Needy Families, Supplemental Security Income, Social Security Survivor benefits, Medicaid, and Food Stamps. As of 2003, SSA had issued a total of slightly more than 7 million nonwork Social Security cards, but in recent years SSA has greatly reduced the number it issues. Our 2003 report identified improvements SSA had made in its enumeration processes, but also pointed to continued weaknesses, some of which SSA and the Congress have since addressed. We found that SSA has over the years improved document verifications and developed new initiatives to prevent the inappropriate assignment of SSNs to noncitizens. For example, SSA requires third-party verification of all noncitizen documents, such as a birth certificate, with DHS and the State Department before issuing an SSN. SSA also requires field staff to visually inspect documents before issuing an SSN. However, many field staff we interviewed at that time were relying heavily on DHS's verification and neglecting SSA's standard inspection practices, even though both were required. We found that SSA's automated system for assigning SSNs was not designed to prevent issuing SSNs if field staff bypass required verification steps. We also found that SSA has undertaken new initiatives to shift the burden of processing noncitizen SSN applications and verifying documents away from its field offices. In late 2002, SSA began phasing in a new process for issuing SSNs to noncitizens, called "Enumeration at Entry" (EAE). Through this initiative, immigrants 18 and older can visit a State Department post abroad to apply for an SSN at the same time they apply for a visa to come to the U.S. The State Department and DHS authenticate the documents and transmit them to SSA, which then issues the SSN. Also, SSA was planning to expand the program over time to include other noncitizen groups, such as students and exchange visitors. In addition, SSA established a specialized center in Brooklyn, New York, which focuses exclusively on enumeration and utilizes the expertise of DHS immigration status verifiers and investigators from SSA's Office of the Inspector General. More recently, SSA established a similar center in Las Vegas, Nevada. At the time we did our field work for the 2003 report, SSA had not tightened controls in two key areas of its enumeration process that could be exploited by individuals seeking fraudulent SSNs: the assignment of SSNs to children under age 1 and the replacement of Social Security cards. SSA requires third-party verification of the birth records for U.S.-born children age 1 and over, but calls only for a visual inspection of birth documents for children under age 1. In our field work, we found that this remains an area vulnerable to fraud. Working undercover and posing as parents of newborns, our investigators were able to obtain two SSNs using counterfeit documents. Since then the IRTPA was enacted and requires SSA to independently verify any birth documents other than for purposes of enumeration at birth. Until the passage of the IRTPA, SSA's policy allowed individuals to obtain up to 52 replacement cards per year, leaving it vulnerable to misuse. While SSA requires noncitizens applying for a replacement SSN card to provide the same identity and immigration documents as if they were applying for an original SSN, SSA's requirements for citizens were much less stringent. Individuals could obtain numerous replacement SSN cards with relatively weak or counterfeit documentation for a wide range of illicit uses, including selling them to noncitizens. Our 2003 report contained six recommendations to SSA. As shown in table 1 below, SSA has implemented all, except one concerning enhancement of its Modernized Enumeration System to prevent issuance of SSNs without use of required verification procedures. In the interim, however, SSA now requires staff to use a software tool that documents verification procedures. Although SSA has implemented our recommendation concerning an evaluation of the Enumeration at Entry program, the results of the evaluations prompted the SSA's Office of Inspector General and Office of Quality Assurance and Performance Assessment to recommend several additional measures to correct errors during the early implementation of the program. To determine whether noncitizens are eligible for SSA benefits, SSA has implemented new procedures including some required by the SSPA. The SSPA tightened restrictions on payment of benefits to noncitizens who are not authorized to work. Generally both citizens and noncitizens in the U.S. accrue credits through paying Social Security payroll taxes. Noncitizens must also have authority to work in the U.S., and be lawfully present in the U.S. at the time they apply for benefits. Under some circumstances, unauthorized workers may receive benefits based on work credits they accrued while working without an immigration status permitting employment in the U.S., with a nonwork SSN or without a valid SSN during their work years. If noncitizens later receive a valid SSN and become eligible to work, they can show SSA their wage records and request credit for earnings from prior unauthorized work. If they establish legal immigration status, they may then receive benefit payments based on the earlier periods of unauthorized work. There are some exceptions for the lawful presence requirement, such as for workers covered under the terms of a totalization agreement. However, our work shows that SSA's processes for entering into totalization agreements have been largely informal and do not mitigate potential risks. The enactment of the SSPA in 2004 tightened the eligibility requirements for paying Social Security benefits to noncitizens. Before SSPA, noncitizens who worked in covered employment could in some circumstances eventually earn SSA benefits without obtaining a work- authorized SSN. If noncitizens had no SSN, but were entitled to benefits, SSA would assign a nonwork SSN so their Social Security eligible earnings could be recorded. SSPA provides that in order to accrue benefits noncitizens with a SSN issued on or after January 1, 2004 must have authorization to work in the U.S. at the time that the SSN is assigned, or at some later time. Without work authorization, noncitizens and their dependents or surviving family members cannot receive any benefits. See table 2 below. Nonetheless to receive benefits while in the U.S., noncitizens must be legally present in the U.S. under immigration law regardless of when they were first assigned an SSN. Previously if noncitizens accrued Social Security benefits and resided outside the U.S., they could under some circumstances receive those benefits without ever having been legally present in the U.S. Since SSPA required all noncitizens originally assigned an SSN on or after January 1, 2004, to have a work authorized SSN to accrue benefits, those living outside the country must also obtain a work- authorized SSN. Obtaining a work-authorized SSN requires both lawful presence in the U.S. and an immigration status permitting work in the U.S. However, a noncitizen may receive benefits outside the U.S. if he or she is a citizen of a country that has a social insurance or pension system that pays benefits to eligible U.S. citizens residing outside that country or is a worker covered under a totalization agreement. A noncitizen not meeting any of these exceptions will have his or her benefits suspended beginning with the seventh month of absence. In general, totalization agreements between the U.S. and other countries provide mutually beneficial business, tax and other incentives to employers and employees, but the agreements also expose both countries to financial costs and risk. Our recent reports on totalization agreements identified two fundamental vulnerabilities in SSA's existing procedures when entering into totalization agreements. First, our analysis demonstrated that the agency's actuarial estimates for the number of foreign citizens who would be affected by an agreement (and thus entitled to U.S. Social Security benefits) have overstated or understated the number, usually by more than 25 percent. As a result, depending on the size of the foreign population covered by an agreement, the actual cost to the Social Security trust fund from a given agreement could be greater or smaller than predicted. In response to our recommendation to improve its process for projecting costs to the trust fund from totalization agreements, SSA responded that it cannot eliminate all variations between projected costs and subsequent actual experience. Secondly, our work has shown that SSA's processes for entering into these agreements have been largely informal and have not included specific steps to assess and mitigate potential risks to the U.S. Social Security system. For example, we found that SSA's procedures for verifying critical information such as foreign citizens' earnings, birth, and death data were insufficient to ensure the integrity of such information. Inaccurate or incomplete information could lead to improper payments from the Social Security trust fund. In response to our recommendations, SSA developed several new initiatives to identify risks associated with totalization agreements. For example, SSA developed a standardized questionnaire to help the agency identify and assess the reliability of earnings data in countries that may be considered for future totalization agreements. In addition, SSA is conducting numerous "vulnerability assessments" to detect potential problems with the accuracy of foreign countries' documents. SSA is also exploring a more systematic approach for independently verifying foreign countries' data, such as the use of computer matches. (For a summary of the status of recommendations, see table 3 below.) Laws and policies are in place to ensure that SSA treats noncitizens fairly in the issuance of SSNs, the provision of benefits, and in cases where they are covered under the terms of totalization agreements. Recent legislation and revisions to SSA policies represent some progress in these areas. While SSA is making progress in improving the program's integrity by strengthening its procedures for verifying documents and coordinating with other agencies and foreign governments, opportunities remain for additional progress. SSA plans further enhancements to the Enumeration at Entry program in order to protect against errors, fraud and abuse. In addition, a more systematic approach to verifying data from other countries with which we have totalization agreements can help ensure proper payments of benefits and prompt notice of the death of beneficiaries. SSA will, however, continue to face challenges in its dealings with noncitizens. Changes in immigration laws and shortcomings in the enforcement of those laws make it difficult for SSA to identify noncitizens who are eligible for SSNs and for benefit payments. Continued attention to these issues by both SSA and the Congress is essential to ensure that noncitizens receive benefits to which they are entitled and the integrity of the Social Security program is protected. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I'd be happy to answer any questions you may have. For further information regarding this testimony, please contact Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security Issues at (202) 512-7215. Blake L. Ainsworth, Assistant Director; Alicia Puente Cackley, Assistant Director; Benjamin P. Pfeiffer; Anna H. Bonelli; Jeremy D. Cox; Jacqueline Harpp; Nyree M. Ryder; Daniel A. Schwimer; and Paul C. Wright also contributed to this report.
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In 2004, an estimated 35.7 million foreign-born people resided in the United States, and many legitimately have SSNs. Many of these individuals have Social Security numbers (SSNs) which can have a key role in verifying authorization to work in the United States. However, some foreign-born individuals have been given SSNs inappropriately. Recent legislation, aimed at protecting the SSN and preventing fraud and abuse, changes how the Social Security Administration (SSA) assigns numbers and awards benefits for foreign-born individuals. The chairman of the Subcommittee on Social Security asked GAO to address two questions. First, how does SSA determine who is and is not eligible for an SSN? Second, how does SSA determine who is and is not eligible for Social Security benefits? SSA determines who is eligible for an SSN by verifying certain immigration documents and determining if an individual's card requires a work restriction. Some foreign-born individuals are eligible for one of three kinds of Social Security cards depending in part on their immigration status: (1) regular cards, (2) those valid for work only with authorization from the Department of Homeland Security (DHS), and (3) those that are not valid for work--non-work cards. As of 2003 SSA had issued slightly more than 7 million non-work cards to people who need them to receive benefits for which they were otherwise entitled. Both SSA's Inspector General and GAO have identified weaknesses in SSA procedures for assigning SSNs and issuing cards, also known as enumeration. For example, working undercover and posing as parents of newborns, GAO investigators were able to obtain Social Security cards by using counterfeit documents. Congress has enacted recent legislation strengthening the SSN enumeration process and documentation requirements. SSA is implementing the law and is improving document verification and now requires third-party verification of noncitizen documents such as birth certificates and visual inspection of documents before issuing an SSN. SSA also continues to strengthen program integrity by, for example, restricting the number of replacement cards. Congress and SSA have also improved laws and procedures designed to strengthen program integrity in the payment of benefits to the foreign-born. Due to provisions of the Social Security Protection Act of 2004, some foreign-born individuals who were not authorized to work will no longer be eligible for benefits. To be entitled to benefits, the law requires noncitizens originally assigned an SSN after 2003 to have a work-authorized SSN. Amendments to the Social Security Act in 1996 require individuals to be lawfully present in the U.S. to receive Social Security benefits, though some noncitizens can receive benefits while living abroad, such as noncitizens who have worked in the U.S. and in a country with which the U.S. has a totalization agreement. SSA's totalization agreements coordinate taxation and public pension benefits. The agreements help eliminate dual taxation and Social Security coverage that multinational employers and employees encounter when workers temporarily reside in a foreign country with its own Social Security program. Successful implementation of these agreements requires the countries involved to carefully coordinate and verify data they exchange. Computer matches with foreign countries, for example, may help protect totalization programs from making payments to ineligible individuals. SSA is exploring options for undertaking such exchanges.
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The following programs are authorized under Title IV of the Higher Education Act, as amended: Pell grants--grants to undergraduate students who are enrolled in a degree or certificate program and have federally defined financial need. Stafford and PLUS loans--these loans may be made by private lenders and guaranteed by the federal government (guaranteed loans) or made directly by the federal government through a student's school (direct loans). Subsidized Stafford loans--loans made to students enrolled at least half-time in an eligible program of study and have federally defined financial need. The federal government pays the interest costs on the loan while the student is in school. Unsubsidized Stafford loans--non-need-based loans made to students enrolled at least half-time in an eligible program of study. Although the terms and conditions of the loan (i.e., interest rates, etc.) are the same as those for subsidized loans, students are responsible for paying all interest costs on the loan. PLUS loans--non-need-based loans made to credit worthy parents of dependent undergraduate students enrolled at least half-time in an eligible program of study. Borrowers are responsible for paying all interest on the loan. Dependent students may borrow combined subsidized and unsubsidized Stafford loans up to $2,625 in their first year of college, $3,500 in their second year, and $5,500 in their third year and beyond. Independent students and dependent students without access to PLUS loans can borrow combined subsidized and unsubsidized Stafford loans up to $6,625 in their first year, $7,500 in their second year, and $10,500 in their third year and beyond. There are aggregate limits for an entire undergraduate education of $23,000 for dependent students and $46,000 for independent students or dependent students without access to PLUS loans. Campus-based aid--participating institutions receive separate allocations for three programs from Education. The institutions then award the following aid to students: Supplemental Educational Opportunity Grants (SEOG)--grants for undergraduate students with federally defined financial need. Priority for this aid is given to Pell grant recipients. Perkins loans--low-interest (5 percent) loans to undergraduate and graduate students. Interest does not accrue while the student is enrolled at least half-time in an eligible program. Priority is given to students who have exceptional federally defined financial need. Students can borrow up to $4,000 for any year of undergraduate education with an aggregate limit of $20,000. Work-study--on- or off-campus jobs in which students who have federally defined need earn at least the current federal minimum wage. The institution or off-campus employer pays a portion of their wages. The amount of nonfederal financial aid has been increasing faster than the amount of federal grants for financial aid while the amount of federal loans for financial aid has increased the most. As figure 1 shows, from 1991-92 to 2001-02, the total financial aid awarded from nonfederal grants more than doubled, while the amounts from federal grant programs increased much more slightly. During this time, the amount of aid borrowed through federal loan programs nearly doubled. Growth in the amount borrowed through nonfederal loans from 1995-96 to 2001-02 also rose, but it remains the smallest source of the four categories. As a result of increasing reliance on loans to pay college costs, there is growing concern about the level of loan debt students are accumulating. The median cumulative amount borrowed from all loan sources for graduating seniors increased (in constant 2001 dollars) from $9,800 in 1992-93 to $18,000 in 1999-2000. Even though income of graduates may have increased over the same period, some analysts have expressed concern about the increased reliance on the use of loans in lieu of other options for financing a college education, such as resources the student and family already have. Education is responsible for, among other things, formulating the federal postsecondary education policy, overseeing federal investments in support of students enrolled in postsecondary education, and managing the distribution of Title IV funds. Part of its role in fulfilling these responsibilities is to ensure that Title IV funds are used effectively. Education has established a performance indicator of maintaining borrower indebtedness and average borrower payments for federal student loans at less than 10 percent of borrower income in the first year of repayment. This indicator was established based on the belief that an educational debt burden of 10 percent of income or higher will negatively affect a borrower's ability to repay his or her student loans. Schools are responsible for determining individual students' eligibility for specific sources of financial aid and compiling these sources to meet each student's need--a process known as packaging. Part of this process involves deciding which types or sources of aid should be awarded first-- for example, grants or loans, federal or nonfederal aid, need-based or non- need-based aid. Another factor to consider in packaging aid is whether to reduce aid from any source in a student's package to offset an aid award from another source. Such a reduction might be done, for example, when a student who has been awarded a significant amount of need-based aid subsequently obtains a substantial non-need-based aid award from a source outside of their school's financial aid office. In school year 1999-2000, an estimated 732,000 out of 3.4 million full- time/full-year federal aid recipients (22 percent) received $2.96 billion in financial aid greater than their federally defined financial need, either because they or their parents received substitutable loans or because they received nonfederal financial aid, such as scholarships, in addition to federal aid. Figure 2 shows how the number of aid recipients receiving aid greater than their federally defined need compares to the total number of financial aid recipients. Figure 3 shows how the amount of aid greater than federally defined need compares to total aid received. Of all federal aid recipients, about 19 percent (628,000) received total financial aid that was greater than their federally defined need solely as a result of receiving substitutable loans. We estimate this to be $2.72 billion with an average amount of about $4,300. These students received aid that was greater than their federally defined need because, under the Higher Education Act, students and their families can borrow substitutable loans--unsubsidized Stafford and PLUS loans--to offset the amount of their expected family contribution (provided they do not exceed the annual and cumulative borrowing limits established for these programs). The way that schools package student financial aid could contribute to students receiving substitutable loans that increase their aid beyond their federally defined need. For example, of the 12 schools that provided information on their aid packaging practices, 7 automatically package substitutable loans for students that are greater than their federally defined need while 5 require that a student or family who wishes to obtain such a loan apply for it. Another 3 percent of federal aid recipients (104,000) received aid that was greater than their federally defined need as a result of receiving nonfederal aid in addition to their federal aid. We estimate this to be a total of $238 million with an average of about $2,300. This group of students continued to have aid greater than their federally defined need even after any substitutable loans they received were accounted for. Further, there was no pattern among these students in terms of the sources from which they received their financial aid, except that the majority received unsubsidized Stafford loans. (See table 1.) In addition, there was no pattern in terms of the types of schools they attended. The lack of any such pattern may be due to factors not captured in NPSAS data, such as the sequence in which financial aid was packaged. While we did not identify any common patterns or characteristics associated with students receiving aid greater than their federally defined need as a result of combinations of federal and nonfederal aid, there are a number of possible reasons why this may occur: In limited circumstances, students who receive Title IV assistance are allowed to receive aid that is greater than their federally defined need. In the first situation, schools cannot reduce the amount of a Pell grant even if it results in a student receiving aid greater than federally defined need. We found, however, that only 17 percent of the students in this group received Pell grants. Also, if aid greater than federally defined need is $300 or less, campus-based assistance does not need to be reduced and subsidized Stafford loans do not need to be reduced if the student is also receiving federal work study. Finally, after any Stafford loan funds have been delivered to the student, the student is allowed to receive aid from a non- Title IV source, even if that aid results in aid greater than federally defined need. This could, for example, explain some of the 39 percent of students in this group who received subsidized Stafford loans. In some cases, rules for nonfederal assistance can increase the likelihood of students receiving aid greater than their federally defined need from sources such as private scholarships. Benefactors of private scholarships may sometimes prohibit schools from reducing the amount of the scholarship even if a student's total aid package will be greater than their federally defined need. Also, several of the schools that provided information to us specifically cited students who receive both Pell grants and state, merit, or athletic scholarships that are greater than their federally defined need as cases in which they would not reduce total aid in order to stay within their federally defined need. We found that, among the students whose aid was greater than federal need due to combinations of federal and nonfederal aid, less than 5 percent received both Pell grants and state or institutional merit scholarships or athletic scholarships. Some schools--primarily private 4-year institutions--use different factors than those used by the federal government to determine eligibility for institutional need-based aid. These need formulas, known as institutional methodologies, may identify a higher level of need for a student than the federal government would. However, schools that use institutional methodologies must still use the federal definition of need to award federal need-based aid. By filling this higher level of need from aid sources that are not counted towards federally defined need, the student could receive more aid than his/her federally defined need would dictate. NPSAS does not capture whether any nonfederal need-based aid was distributed using these institutional methodologies. Under Title IV, financial aid officers have discretion to recalculate a student's need if the family's financial circumstances change dramatically, such as a parent's loss of employment. This discretion, known as professional judgment, could result in an increase to a student's financial need. NPSAS does not capture whether a student's aid package was adjusted due to professional judgment. However, the 12 schools that provided information to us generally said they changed aid awards as a result of professional judgment for 5 percent or fewer of federal aid recipients. These cases describe situations under which federal aid recipients may legitimately receive more financial aid than their federally defined need. While each of the situations described provides a plausible explanation of how a combination of federal and nonfederal aid can raise overall aid above federally defined need, we cannot determine with certainty, without looking in detail at each case, why these aid recipients received more aid than their federally defined need. Compared to those federal aid recipients who did not receive aid greater than their federally defined need, the 732,000 who did were more likely to have higher family incomes, be dependent, or attend public universities. They are also more likely to have higher grade point averages or attend schools in the Southwest or Plains states. Among those variables that proved statistically significant, table 2 shows selected student and school characteristics that were associated with receiving aid greater than federally defined need. Appendix II more fully describes all of the variables used in our analysis and more completely discusses their levels of statistical significance. These patterns generally held regardless of whether the aid greater than federally defined need could be attributed to substitutable loans or a combination of federal and nonfederal aid. The one exception we found was that students who received aid greater than their need as a result of a combination of federal and nonfederal aid were more likely to be white. In addition, these 732,000 students were more likely to have financial aid packages consisting mostly of non-need-based federal aid or nonfederal aid. Among those variables that proved statistically significant, table 3 shows selected financial aid package characteristics that were associated with receiving aid greater than federally defined need. (See app. II for a more complete description of variables and their significance levels.) Based on NPSAS data alone, we cannot say why the characteristics listed in tables 2 and 3 are associated with a greater likelihood of receiving aid greater than federally defined need. Changing the Higher Education Act to limit the receipt of aid that is greater than students' federally defined financial need is not likely to achieve significant federal savings. However, the use of substitutable loans could increase overall student indebtedness. Any cost savings from changing the Higher Education Act to limit the receipt of aid that is greater than students' federally defined financial need would likely be very modest, much less than the dollar amount of such aid--the $2.96 billion. In the case of the larger group of students and their families whose aid greater than federally defined need is attributable to substitutable loans, the actual cost to the government is not the face value of the loans. For guaranteed loans, the government incurs costs--primarily insurance claims payments to lenders for defaulted loans and special allowance payments made to lenders to ensure a guaranteed return on the loans they make. For direct loans, interest from loan repayments offsets costs the government incurs for defaults and interest payments to the treasury on funds Education borrows to make loans. These interest earnings produce savings for the government. Determining the net cost of federal substitutable loans would require comparing savings generated by direct loans with the net costs associated with guaranteed loans. We could not estimate these costs given the data available in NPSAS. For the smaller group of cases involving combinations of federal and nonfederal aid, any savings would depend on how aid is packaged. Assuming that most schools package loans and work study last--8 of the 12 schools that provided us with information said this was the typical practice at their institutions--loans and work study would most likely be eliminated first to keep aid packages within federally defined need limits. Any savings on loans would be derived using the same basic calculation we described above for substitutable loans. In addition, the government would also save the interest it pays on subsidized loans while students are still in school. Thus, these savings would be considerably smaller than the face value of the loan. With regard to work study, it is likely that schools rather than the federal government would obtain most of the savings. According to our analysis of the NPSAS data, this would occur because a larger percentage of these students received institution-funded work study rather than federally funded work study (29 percent versus 12 percent). Although changing the Higher Education Act to limit receiving aid greater than federally defined need is not likely to result in any substantial cost savings, continuing this practice may affect some students' loan indebtedness. The one fifth of federal aid recipients who received substitutable loans may face higher monthly loan repayments that might constrain their other financial choices. In addition, as student loan indebtedness rises, borrowers could experience difficulty in meeting their monthly payments, particularly under weak economic conditions. The widespread use of substitutable loans might also affect Education's ability to help students and their families maintain their loan indebtedness at manageable levels. Officials at Education told us that the agency is committed to tracking overall student debt burden. However, the 19 percent of students and their families who borrowed substitutable loans may have higher monthly repayments and spend a larger share of their income on loan repayments than other students. This could increase the average debt burden of these students above that of other students. While students and their families have a range of options for paying for college, the money students borrow could influence their later debt burden. Given Education's performance indicator of maintaining borrower indebtedness at less than 10 percent of income in the first year of repayment, this relationship should be of interest to the agency. Education may find it more difficult to meet this standard if indebtedness continues to grow through the use of substitutable loans. Such information might prove useful to help inform federal policymakers on how best to minimize student indebtedness. To ensure that the use of substitutable loans will not lead to unmanageable student loan indebtedness, we recommend that the Secretary of Education, over time, monitor the impact of substitutable loans on student debt burden and, if debt burden associated with substitutable loans rises substantially, develop and propose alternatives for the administration or Congress to consider to help students manage student loan debt burden. Such alternatives could range from shifting students into repayment plans that would lower their debt burden to limiting the use or amount of substitutable loans. In written comments on a draft of this report, Education agreed that student indebtedness is of concern, however, Education disagreed with what we included in our analysis. Specifically, we included PLUS loans to a student's family--usually to the parents--as part of our analysis. Education stated that by including these loans we were mischaracterizing student debt and that loans to families should be excluded from our analysis. Education also stated that we should distinguish between students and their families as the recipients of federal financial aid. We modified the report to more clearly detail when non-students were responsible for the loans. However, based on the 1999-2000 NPSAS data, 1.3 million federal aid recipients received unsubsidized Stafford loans while 323,000 federal aid recipients received PLUS loans, indicating to us that far more substitutable loans are likely to be made to students. Education also had technical comments, which were incorporated when appropriate. See appendix III for a printed copy of Education's comments. We are sending copies of this report to the Chairmen and Ranking Members of the Senate Committee on Health, Education, Labor and Pensions and the House Committee on Education and the Workforce; and the Director of the Office of Management and Budget. We will also make copies available to others on request. This report is also available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me at (202) 512-8403. Major contributors are listed in appendix IV. The objectives of this study were to determine how often students who were federal financial aid recipients received aid that was greater than their federally defined financial need, identify the student, school, and financial aid package characteristics associated with receiving such aid, and determine what the implications might be, if any, of changing the Higher Education Act to limit the receipt of aid that is greater than a student's federally defined need. When students receive financial aid from multiple sources or some aid that is not need-based, the potential exists for some students to receive aid that is greater than their federally defined need. Most Title IV aid is based on a student's federally defined financial need, which is the difference between the student's cost of attendance and the family's federally determined ability to pay these costs--known as the expected family contribution (EFC). To meet their EFC under Title IV, families can obtain non-need-based loans, which we refer to as substitutable loans. To carry out our objectives, we used the National Postsecondary Student Aid Study (NPSAS) data collected by the Department of Education's National Center for Education Statistics. We also contacted 19 college and university financial aid officers to obtain information on their schools' financial aid packaging policies and practices. We received responses from 12 of these officials. To determine the extent to which students received financial aid greater than their federally defined need, we analyzed the NPSAS data to identify the amount and source of financial aid received by full-time, full-year undergraduates who received aid from any federal source whether or not it was a Title IV program. We identified two distinct groups of students who received aid greater than their federally defined need. We first identified all students who received aid greater than the federally defined need, regardless of the source of that aid (see block A in fig. 2). The first group of students were those whose aid greater than federally defined need was accounted for by the substitutable loans they received (see block A-1 in fig. 2). The second group of students were those whose aid still remained greater than their federally defined need, after accounting for any substitutable loans in their aid packages (see block A-2 in fig. 2). To determine what student and school characteristics were associated with receiving aid greater than federally defined need, we again used NPSAS data for our analysis. For all of the students receiving aid greater than federally defined need and the second group of these students, we employed logistic regression models to estimate the association between student and school characteristics and the likelihood of receiving aid greater than federally defined need. We chose logistic models due to the dichotomous nature of the phenomenon of interest--whether or not students received aid greater than their federally defined need. We did not perform a similar analysis on the first group because, since it was such a large portion of the students receiving aid greater than their federally defined need and since the aid that was greater than need could be attributed entirely to receiving substitutable loans, it was not likely the results would show this group to be different in any other ways. The variables that we used are listed and defined in appendix II. In general, we included student characteristics such as race, marital status, and dependency status. We included such school characteristics as graduation rate, geographical location, and whether or not a school was public. We also included some characteristics of the aid packages the students received. To report the results of the regressions, we use odds ratio tables. (See app. II.) Some variables proved not to have a statistically significant association with receiving aid greater than federally defined need. For all of the students receiving aid greater than their federally defined need, these included whether the student was white, the graduation rate of the school, and if the majority of a student's aid package was composed from federal need-based loans. For the second group, whether the student was a veteran, was a U.S. citizen, and whether the majority of aid was received from federal need-based loans or nonfederal loans were statistically insignificant. In analyzing the results for the second group of students, we sought to determine if a large proportion of these students had characteristics in common, such as receiving aid from specific programs or attending schools with a certain common characteristic (e.g., public versus private, regional location). We did not undertake any further analysis to identify how these students received aid that was greater than their federally defined need. This would have entailed individually analyzing each of the over 400 cases and obtaining additional information directly from the school. This analysis would have been beyond the scope of our review. To analyze the student and school characteristics that are associated with receiving aid greater than federally defined need, we ran logistic regressions from variables in the 1999-2000 NPSAS. We sought to determine which student, school, and aid package characteristics were significantly associated with the receipt of aid greater than the federally defined need. We included variables representing dependency status, grade point average (GPA), region of the country, race, veteran status, income, a private college indicator, the source of the majority of the student's aid, and the number of different aid source in the aid package. The results for the models we used are odds ratios that estimate the relative likelihood of receiving aid greater than federally defined need for each factor. Table 4 shows these odds ratios for all students receiving aid greater than their federally defined need (see blocks A-1 and A-2 in fig. 2). Table 5 shows the results for the students whose aid greater than their need could not be attributed entirely to receiving substitutable loans (see block A-2 in fig. 2). If there were no significant differences between those who received aid greater than federal need and those who did not with regard to a particular characteristic then the odds ratio would be 1.00. The more the odds ratio differs from 1.00 in either direction, the larger the effect. The odds ratios were generally computed in relation to a reference group; for example, if the odds ratio refers to being a dependent student, then the reference group would be independent students. Some variables, such as GPA and income, are continuous in nature. In these cases, the odds ratio can be interpreted as representing the increase in the likelihood of receiving aid greater than federally defined need given a 1 unit increase in the continuous variable. An odds ratio greater than 1.00 indicates an increase in the likelihood of receiving aid greater than the federally defined need relative to the reference group, whereas an odds ratio less than 1.00 indicates a decrease in the likelihood of receiving aid greater than the federally defined need relative to the reference group. Both tables also include the 95 percent confidence intervals around the odds ratios. If these intervals contain 1.00, then the difference is not statistically significant. Table 6 shows the means for all the variables considered. Dependent. All else equal, dependents are more than twice (2.62) as likely to receive aid greater than federally defined need. Currently Married. All else equal, being currently married (as opposed to single or separated, divorced or widowed) increased the likelihood of receiving aid greater than federally defined need by a factor of 1.63. Veteran. Veterans were almost twice as likely (1.83) than nonveterans to receive aid greater than the federally defined need. Household Size. As the size of a household increases, the likelihood of receiving aid greater than the federally defined need decreases. For example, a student from a two-member household is 1.4 times more likely to receive aid greater than federally defined need than a person from a three-member household. GPA. GPA is usually calculated on a 4-point scale. In the NPSAS data set, GPA is multiplied by 100 or reported on a 400-point scale. In our analysis, we have GPA ranging from 0 to 40, such that a unit increase in our GPA variable (say from 37 to 38) represents a 0.1 change in grade point average as it is usually calculated (3.7 to 3.8). An odds ratio of 1.03 should thus be interpreted as follows: On a 4-point GPA scale, increasing GPA by one- tenth of one point (2.53 to 2.63) increases the likelihood of receiving aid greater than federally defined need by 3 percent. Thus, a change of one grade point (2.5 to 3.5) increases the likelihood of receiving aid greater than federally defined need by 35 percent (1.0310 = 1.35). Income. For every $5,000 change in income, the probability of receiving aid greater than federally defined need increases by 24 percent. A person earning $50,000 more than another, all else equal, is 8.6 (1.2410 = 8.59) times more likely to receive aid greater than federally defined need. Private Not-for-profit University. Attending a private university decreases the likelihood of receiving aid greater than federally defined need. Someone who attends a public university increases his/her chances of receiving aid greater than federally defined need by a factor of 2.86 (1/0.35). Four-year School. All else equal, attending a 4-year institution increases the likelihood of receiving aid greater than federally defined need by a factor of 1.5. Urban. All else equal, attending a rural (rather than urban) institution increases the likelihood of receiving aid greater than federally defined need by a factor of 1.5 (1/0.68). Plains-Southwest. A student attending school in the Plains states or the Southwest is 1.7 times more likely to receive aid greater than federally defined need than a similar student attending school in other regions of the country. The aid package variables represent the source of the "majority" of the student's aid, if there was a majority source. The omitted reference group is the category of people whose majority of aid comes from federal grants such as Pell and Supplemental Educational Opportunity Grants (SEOG). About 17 percent of the sample falls into the reference group. In general, the people who had a majority of their aid coming from federal grants were less likely to receive aid greater than the federally defined need than any other group (as defined by majority of aid source). Majority from Non-Need-Based Federal Loans. Holding all else equal, a student who receives a majority of aid from federal, non-need-based loans was almost 5 times more likely to receive aid greater than federally defined need than a student who receives the majority of aid from federal grants. Majority from Federal Work Study and PLUS Loans to Parents. Holding all else equal, a student who receives a majority of aid from federal work study and PLUS loans is about 6 (6.02) times more likely to receive aid greater than federally defined need than a student who receives the majority of aid from federal grants. Majority from Nonfederal Grants, Scholarships and Work Study. Holding all else equal, a student who has a majority of aid coming from nonfederal grants or scholarships, work study, Veterans/Department of Defense benefits, Vocational Rehabilitation assistance or other non-loan sources is about 6.12 times more likely to receive aid greater than federally defined need than a student who receives the majority of aid from federal grants. Majority from Nonfederal Loans. Holding all else equal, a student who receives a majority of aid from nonfederal loan sources is about 7.8 times more likely to receive aid greater than federally defined need than a student who receives the majority of aid from federal grants. No Majority. A student who has no distinct majority source of aid is 2.33 times more likely to receive aid greater than federally defined need than a student who the majority of aid from federal grants. Number of Aid Components in Aid Packages. Having more aid sources in a student's aid package results in a higher probability of receiving aid greater than the federally defined need. Having an additional aid component increases the likelihood of receiving aid greater than federally defined need by a factor of 1.33. This means that having five sources of aid, rather than one source of aid, can cause a three-fold increase in the likelihood of receiving aid greater than federally defined need (2.994 = 1.314). Substitutable Loans. Receiving loans that can be substituted for EFC is associated with a great increase in the likelihood of receiving aid greater than federally defined need. This can be attributed to the fact that aid greater than federally defined need can be accounted for by substitutable loans for over 85 percent of the students who received such aid (628,000 out of 732,000). Dependent. All else equal, being a dependent increases the probability of receiving aid greater than federally defined need three-fold. White. Being white as opposed to nonwhite almost doubles the chances of getting aid greater than federally defined need (1.75). GPA. GPA is usually calculated on a 4-point scale. In the NPSAS data set, GPA is multiplied by 100 or reported on a 400-point scale. In our analysis, we have GPA ranging from 0 to 40, such that a unit increase in our GPA variable (say from 37 to 38) represents a 0.1 change in grade point average as it is usually calculated (3.7 to 3.8). An odds ratio of 1.05 should thus be interpreted as follows: On a 4-point GPA scale, increasing GPA by one- tenth of one point (2.53 to 2.63) increases the likelihood of receiving aid greater than federally defined need by 5 percent. Thus, a change of one grade point (2.5 to 3.5) increases the likelihood of receiving aid greater than federally defined need by 63 percent (1.0510). Income. For every $5,000 change in income, the probability of receiving aid greater than federally defined need increases by 6 percent. Thus, a $50,000 increase in income (say between someone earning $25,000 and someone earning $75,000) results in a 79 percent (1.0610 = 1.79) increase in the likelihood of receiving aid greater than federally defined need. Plains-Southwest. A student attending school in the Plains states or the Southwest is 1.77 times more likely to receive aid greater than federally defined need than a similar student attending school in other regions of the country. Private University. Attending a private university decreases the likelihood of receiving aid greater than federally defined need. Someone who attends a public university increases his or her chances of receiving aid greater than the federally defined need by a factor of 1.35 (1/0.74). The aid package variables represent the source of the "majority" of the student's aid, if there was a majority source. The omitted reference group is the category of people whose majority of aid comes from federal grants such as Pell and SEOG. About 17 percent of the sample falls into the reference group. In general, the students who had a majority of their aid coming from federal grants were less likely to receive aid greater than federally defined need than any other group (as defined by majority of aid source). Majority from Non-Need-Based Federal Loans. A student who receives a majority of aid from federal non-need-based loans is 6.6 times more likely to receive aid greater than federally defined need than a student who receives the majority of aid from federal grants. Majority from Federal Work Study and PLUS Loans to Parents. A student who receives a majority of aid from federal work study and PLUS loans is 3 times more likely to receive aid greater than federally defined need than a student who receices the majority of his aid in the form of federal grants. Majority from Nonfederal Grants, Scholarships and Work Study. Holding all else equal, a student who receives a majority of aid from nonfederal grants or scholarships, work study, Veterans/Department of Defense benefits, Vocational Rehabilitation assistance or other nonloan sources is about 20 times more likely to receive aid greater than federally defined need than a student who receives the majority of aid from federal grants. No Majority. A student who has no distinct majority source of aid is about 7 times more likely to receive aid greater than federally defined need than a student who receives the majority of aid from federal grants. Number of Aid Components in Aid Packages. Having more aid sources in a student's aid package results in a higher probability of receiving aid greater than federally defined need. Having an additional aid component increases the likelihood of receiving aid greater than federally defined need by a factor of 1.2. This means that having seven sources of aid rather than one source of aid can double the likelihood of receiving aid greater than federally defined need (2.14 = 1.214). In addition to the name above, Mary Crenshaw, Patrick diBattista, Nagla'a El-Hodiri, Kathy Hurley, Joel Marus, John Mingus, Doug Sloane, and Wendy Turenne made important contributions to this report.
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Over half of the $80.4 billion in financial aid provided to college students in the 2000-01 school year came from the federal government in the form of grants and loans provided under Title IV of the Higher Education Act (HEA). To help finance their education, students and families may have received other funds from states, private groups or lenders, and/or the schools themselves. We initiated this study to, among other things, determine how often federal financial aid recipients received aid that was greater than their federally defined need and what cost or other implications might result from changing HEA to limit such aid. We found that in school year 1999-2000, of the 3.4 million full-time/full-year federal aid recipients, 22 percent (732,000) received a total of $2.96 billion in financial aid that was greater than their federally defined financial need. Of these, 628,000 received an estimated $2.72 billion in such aid by obtaining non-need-based loans--which we identify as substitutable loans--that families borrow to meet their expected family contribution. Title IV allows for students and families to obtain these non-need-based loans to meet their expected family contribution. Another 104,000 federal aid recipients received an estimated $238 million in such aid as a result of receiving a combination of aid from federal and nonfederal sources. Changing the HEA to limit the receipt of aid that is greater than students' federally defined financial need is not likely to achieve significant federal savings, although, the use of substitutable loans may increase overall student indebtedness. In terms of cost implications, limiting those instances where federal aid recipients receive substitutable loans--which is the main reason why students received aid greater than their federally defined need--will not likely result in significant savings. While the government will not have to pay default claims or special allowance payments on loans it guarantees, it would forego any interest earnings on loans it makes directly. Any savings from limiting these loans would be substantially less than the total amount of the loans made--the $2.72 billion. However, the widespread use of substitutable loans may increase the average debt of borrowers and may affect Education's ability to help students and their families maintain their loan debt at manageable levels.
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Overall, agencies are taking high-risk problems seriously, trying to correct them, and making progress in many areas. The Congress has also acted to address several problems affecting these high-risk areas through oversight hearings and specific legislative initiatives. Full and effective implementation of legislative mandates, our suggestions, and corrective measures by agencies, however, has not yet been achieved because the high-risk areas involve long-standing problems that are difficult to correct. The following discussion provides a quick synopsis of progress and remaining challenges related to many high-risk areas. Detailed information on the current status of all 25 high-risk areas, which are listed in appendix I, is available in our overview report, quick reference guide, and individual reports included in our set of 1997 high-risk reports. Reports included in this series are listed at the end of this testimony. Our high-risk initiative has monitored five areas that affect accountability and cost-effective management of Department of Defense (DOD) programs: financial management, contract management, inventory management, weapon systems acquisition, and the Corporate Information Management (CIM) initiative. These areas are key to effectively managing DOD's vast resources, including a budget of over $250 billion in fiscal year 1996 and over $1 trillion in assets worldwide. While improvement activities have been started, DOD's high-risk problems are especially serious and much remains to be done to resolve them. First, DOD's lingering financial management problems are among the most severe in government. For example, the Department has acknowledged over 30 material weaknesses that cross the spectrum of its financial operations, including continuing problems in accurately accounting for billions of dollars in problem disbursements. Also, DOD has reported that of its nearly 250 financial systems only 5 conform fully with governmentwide financial systems standards. Further, financial audits have highlighted significant deficiencies in every aspect of DOD's financial management and reporting, resulting in the failure of any major DOD component to receive a positive audit opinion. Since 1990, auditors have made over 400 recommendations aimed at helping to correct these weaknesses. Deficiencies such as these prevent DOD managers from obtaining the reliable financial information needed to make sound decisions on alternate uses for both current and future resources. DOD's financial management leaders have recognized the importance of tackling these problems and have many initiatives under way to address widespread financial management problems. Fixing DOD's financial management problems is also critical to the resolution of the Department's other high-risk areas. In addition, as DOD seeks to streamline its contracting and acquisition processes--including contract administration and audit--to adjust to reduced staffing levels, new business process techniques will be key to accomplishing effective and efficient oversight in the future. DOD contracts now cost about $110 billion annually. Without an improved and simplified contract payment system, DOD continues to risk overpaying contractors millions of dollars. DOD is aware of the seriousness of its payment problems and is taking steps to address them. Also, DOD needs to further strengthen its oversight of contractor cost-estimating systems, which are critical to ensuring sound price proposals and reducing the risk that the government will pay excessive prices. While DOD has improved its oversight of contractors' cost-estimating systems, poor cost-estimating systems remain an area of concern at some contractor locations. Further, about half of DOD's centrally managed inventory of spare parts, clothing, medical supplies, and other secondary inventory items, which totaled about $70 billion in September 1995, does not need to be on hand to support war reserves or current operating requirements. DOD has had some success in addressing its inventory management problems and is in the midst of changing a culture that believed it was better to overbuy items than to manage with just the amount of stock needed. Also, with reduced force levels and the implementation of some of our recommendations, DOD has reduced its centrally managed inventory by about $20 billion. DOD has implemented certain commercial best practices, but only in a very limited manner and has made little progress in developing the management tools needed to help solve its long-term inventory management problems. Consequently, inventory managers continue to have difficulty managing DOD's multibillion dollar inventory supply systems efficiently and effectively. Also, despite DOD's past and current efforts to reform its acquisition system, wasteful practices still add billions of dollars to defense weapon systems acquisition costs, which are about $79 billion annually. DOD continues to (1) generate and support acquisition of new weapon systems that will not satisfy the most critical weapon requirements at minimal cost and (2) commit more procurement funds to programs than can reasonably be expected to be available in future defense budgets. Many new weapon systems cost more and do less than anticipated, and schedules are often delayed. Moreover, the need for some of these costly weapons, particularly since the collapse of the Soviet Union, is questionable. Finally, DOD started the CIM initiative in 1989 with the expectation of saving billions of dollars by streamlining operations and implementing standard information systems supporting such important business areas as supply distribution, material management, personnel, finance, and transportation. However, 8 years after beginning CIM, and after spending a reported $20 billion, DOD's savings goal has not been met because the Department has not yet implemented sound management practices. Not surprising, the results of DOD's major technology investments have been meager and some investments are likely to result in a negative return on investment. The Department estimates that it will spend more than an additional $11 billion on system modernization projects between now and the year 2000. As part of its Clinger-Cohen Act implementation efforts, the Department is establishing a framework to use its planning, programming, and budgeting system to better manage this investment. While this framework is a step in the right direction, these corrective actions are just the beginning. At the Internal Revenue Service (IRS) we have monitored four high-risk areas that affect IRS' ability to ensure that all revenues are collected and accounted for: financial management, accounts receivable, filing fraud, and tax systems modernization (TSM). In 1995, IRS reported collecting $1.4 trillion from taxpayers, disbursing $122 billion in tax refunds, and managing an estimated accounts receivable inventory of $113 billion in delinquent taxes. The reliability of IRS' financial information is critical to effectively manage the collection of revenue to fund the government's operations. However, our audits of IRS' financial statements have identified many significant weaknesses in accurately accounting for revenue and accounts receivable, as well as for funds provided to carry out IRS' operations. IRS has made progress in improving payroll processing and accounting for administrative operations and is working on solutions to revenue and accounts receivable accounting problems. However, much remains to be done, and effective management follow-through is essential to achieving fully the goals of the CFO Act. In addition, IRS is hampered in efficiently and effectively managing its huge inventory of accounts receivable due to inadequate management information. The root cause here is IRS' antiquated information systems and outdated business processes, which handle over a billion tax returns and related documents annually. IRS has undertaken many initiatives to deal with its accounts receivable problems, including correcting errors in its tax receivable masterfile and attempting to speed up aspects of the collection process. Efforts such as these appear to have had some impact on collections and the tax debt inventory, but many of the efforts are long-term in nature and demonstrable results may not be available for several years. Further, IRS' efforts to reduce filing fraud have resulted in some success, especially through more rigid screening in the electronic filing program, but this continues to be a high-risk area. IRS' goal is to increase electronic filings, which would strengthen its fraud detection capabilities. But to achieve its electronic filing goal, IRS must (1) identify those groups of taxpayers who offer the greatest opportunity for filing electronically and (2) develop strategies focused on eliminating or alleviating impediments that have inhibited those groups from participating in the program. In attempting to overhaul its timeworn, paper-intensive approach to tax return processing, IRS has spent or obligated over $3 billion on its TSM efforts. This program has encountered severe difficulties. Currently, funding for the initiative has been curtailed, and IRS and the Department of the Treasury are taking several steps to address modernization problems and implement our recommendations. However, much more progress is needed to fully resolve serious underlying management and technical weaknesses. Also, Medicare--the nation's second largest social program--is inherently vulnerable to and a perpetually attractive target for exploitation. The Congress and the President have been seeking to introduce changes to Medicare to help control program costs, which were $197 billion in fiscal year 1996. At the same time, they are concerned that the Medicare program loses significant amounts due to persistent fraudulent and wasteful claims and abusive billings. The Congress has passed the Health Insurance Portability and Accountability Act of 1996 to protect Medicare from exploitation by adding funding to bolster program safeguard efforts and making the penalties for Medicare fraud more severe. Effective implementation of this legislation and other agency actions is key to mitigating many of Medicare's vulnerabilities to fraud and abuse. Also, the Health Care Financing Administration (HCFA), which runs the Medicare program, has begun to acquire a new claims processing system, the Medicare Transaction System (MTS), to provide, among other things, better protection from fraud and abuse. In the past, we have reported on risks associated with this project, including HCFA's plan to implement the system in a single stage rather than incrementally, difficulty in defining requirements, inadequate investment analysis, and significant schedule problems. HCFA has responded to these concerns by (1) changing its single-stage approach to one under which the system will be implemented incrementally and (2) working to resolve other reported problems. Since our high-risk program began 7 years ago, we have called attention to difficulties major lending agencies--the Departments of Housing and Urban Development (HUD), Education, and Agriculture--have experienced in managing federal credit programs and the government's resulting exposure to large losses. As of September 30, 1995, total federal credit assistance outstanding was reported to be over $941 billion, consisting of (1) $204 billion in loans receivables held by federal agencies, including $160 billion in direct loans and $44 billion in defaulted guaranteed loans that are now receivables of the federal government, and (2) $737 billion in loans guaranteed by the federal government. HUD is responsible for managing more than $400 billion in insured loans; $435 billion in outstanding securities; and, in fiscal year 1995, over $31.8 billion in discretionary budget outlays. However, effectively carrying out these responsibilities is hampered by HUD's weak internal controls, inadequate information and financial management systems, an ineffective organization structure, and an insufficient mix of staff with the proper skills. These problems are not new--we reported them in 1995 and they were a major factor contributing to the incidents of fraud, waste, abuse, and mismanagement reported in the late 1980s. HUD has undertaken some improvement efforts to correct these problems through such means as implementing a new management planning and control program. However, HUD's improvement efforts are far from fruition, and long-standing, fundamental problems remain. HUD's program will remain high risk until the agency completes more of its planned corrective actions and the administration and the Congress reach closure on a restructuring that (1) focuses HUD's mission and (2) consolidates, reengineers, and/or reduces HUD's programs. What is needed is for the administration and the Congress to agree on the future direction of federal housing and community development policy and put in place the organizational and program delivery structures that are best suited to carry out that policy. Actions by the Department of Education, combined with legislative changes, have achieved some results in addressing many of the underlying problems with the student financial aid programs' structure and management. In fiscal year 1995, the federal government paid out over $2.5 billion to make good its guarantee on defaulted student loans--an amount that represents an improvement over the last several years. The Department has taken many administrative actions to correct problems and improve program controls, but it must overcome management and oversight problems that have contributed to abuses by some participating schools. Since our last high-risk report series in 1995, the Congress has enacted legislation--Title VI of the Federal Agriculture Improvement and Reform Act of 1996--to make fundamental changes in the farm loan programs' loan-making, loan-servicing, and property management policies. The Department of Agriculture is in the process of implementing the new legislative mandates and other administrative reforms to resolve farm loan program risks. The impact of these actions on the $17 billion farm loan portfolio's financial condition will not be known for some time. The Debt Collection Improvement Act of 1996 also was enacted to expand and strengthen agencies' debt collection practices and authorities. This important new legislation can provide a much needed new impetus to improve lending program performance, but it will take time to implement the act. Additional agency attention to improve lending management and actions by the Congress are necessary as well. With government downsizing, civilian agencies will continue to rely heavily on contractors to operate programs. While this approach can help to achieve program goals with a reduced workforce, it can also result in increased vulnerability to risks, such as schedule slippages, cost growth, and contractor overpayments. Our high-risk program has followed efforts to resolve contract management weaknesses undertaken by several of the government's largest civilian contracting agencies--the Department of Energy (DOE), the National Aeronautics and Space Administration (NASA), and the Environmental Protection Agency (EPA) for the Superfund. Most of DOE's $17.5 billion in 1995 contract obligations was for its management and operating contracts. DOE has made headway in overcoming its history of weak contractor management through a major contract reform effort that has included developing an extensive array of policies and procedures. Although the Department recently adopted a policy favoring competition in the award of these contracts, in actual practice most contracts continue to be made noncompetitively. NASA has made considerable progress in better managing and overseeing contracts, for which it spends about $13 billion a year. The improvements have included establishing a process for collecting better information for managing contractor performance and placing greater emphasis on contract cost control and contractor performance. Our most recent work, however, identified additional problems in contract management and opportunities for improving procurement oversight. For the past several years, EPA has focused attention on strengthening its management and oversight of Superfund contractors. Nonetheless, EPA remains vulnerable to contractor overpayments. At the same time, the magnitude of the nation's hazardous waste problem, estimated to cost hundreds of billions of dollars, calls for the efficient use of available funds to protect public health and the environment. In addition to the 20 areas we previously designated high risk, we are adding 5 new ones. We are alerting the Congress to these new areas because they involve serious problems: fraud and abuse in benefit claims, widespread computer security weaknesses, inefficient Department of Defense operation and support activities, the possibility of disastrous computer disruptions in service to the public, and the potential for a costly, unsatisfactory 2000 Decennial Census. The first newly designated high-risk area involves overpayments in the Supplemental Security Income (SSI) program, which provided about $22 billion in federal benefits to recipients between January 1, 1996, and October 31, 1996. One root cause of SSI overpayments, which have grown to over $1 billion annually, is the difficulty the Social Security Administration has in corroborating financial eligibility information that program beneficiaries self report and that affects their benefit levels. Determining whether a claimant's impairment qualifies an individual for disability benefits can often be difficult as well, especially in cases involving applicants with mental impairments and other hard-to-diagnose conditions. Second, information systems security weaknesses across government have now been designated high risk. These weaknesses pose high risk of unauthorized access and disclosure or malicious use of sensitive data. Many federal operations that rely on computer networks are attractive targets for individuals or organizations with malicious intention. Examples of such operations include law enforcement, import entry processing and various financial transactions. Most notably, DOD's systems may have experienced as many as 250,000 attacks from hackers during 1995 alone, with about 64 percent of them being successful and most going undetected. Since June 1993, we have issued over 30 reports describing serious information security weaknesses at major federal agencies. In September 1996, we reported that during the previous 2 years, serious information security control weaknesses had been reported for 10 of the 15 largest federal agencies. We have made dozens of recommendations to individual agencies and the Office of Management and Budget for improvement, and they have started acting on many of them. Third, DOD's efforts to reduce its infrastructure will now be monitored as part of our high-risk efforts. Over the last 7 to 10 years, DOD has reduced operations and support costs, which will amount to about $146 billion this year. However, billions of dollars are wasted annually on inefficient and unneeded DOD activities. DOD has, in recent years, undergone substantial downsizing in force structure. However, commensurate reductions in operations and support costs have not been achieved. Reducing the cost of excess infrastructure activities is critical to maintaining high levels of military capacities. Expenditures on wasteful or inefficient activities divert limited defense funds from pressing defense needs, such as the modernization of weapon systems. Fourth, we have designated another serious governmentwide computer information systems issue, the Year 2000 Problem, as a new high-risk area. This problem poses the high risk that computer systems throughout government will fail to run or malfunction because computer equipment and software were not designed to accommodate the change of date at the new millennium. For example, IRS' tax systems could be unable to process returns, which in turn could jeopardize the collection of revenue and the entire tax processing system. Federal systems used to track student education loans could produce erroneous information on their status, such as indicating that an unpaid loan has been satisfied. Or the Social Security Administration's disability insurance process could experience major disruptions because the interface with various state systems fails, thereby causing delays and interruptions in disability payments to citizens. The fifth new high-risk area involves the need for agreement between the administration and the Congress on an approach that will both minimize the risk of an unsatisfactory 2000 Decennial Census and keep the cost of doing it within reasonable bounds. The longer the delay in securing agreement over design and funding, the more difficult it will be to execute an effective census, and the more likely it will be that the government will have spent billions of dollars and still have demonstrably inaccurate results. The country can ill afford an unsatisfactory census at the turn of the century, especially if it comes at a substantially higher cost than previous censuses. The census results are critical to apportioning seats in the House of Representatives; they are also used to allocate billions of dollars in federal funds for numerous programs and to guide the plans for decisions of government, business, education, and health institutions in the multibillion dollar investments they make. Shifting to the future, the government can gain major benefits by focusing on the resolution of high-risk problems and fully and effectively implementing the legislative foundation established for broader management reforms. As countless studies we have performed have long noted and our high-risk series of reports demonstrates, federal agencies often fail to appropriately manage their finances, identify clearly what they intend to accomplish, or do the job effectively with a minimum of waste. Left unresolved, persistent and long-standing high-risk areas will result in the government continuing to needlessly lose billions of dollars and missing huge opportunities to achieve its objectives at less cost and with better service delivery. The 25 areas that are the focus of our high-risk program cover almost all of the government's annual $1.4-trillion revenue collection efforts and hundreds of billions of dollars in annual federal expenditures. Consequently, further progress to fully and effectively implement actions to resolve high-risk problems can result in substantial savings, for example, by reducing Medicare losses due to fraudulent and abusive claims, which could be from $6 billion to as much as $20 billion based on 1996 outlays; decreasing SSI overpayments, which have grown to over $1 billion a year; cutting back further on unneeded centrally managed defense inventories, which DOD succeeded in reducing by $23 billion during the 6-year period from 1989 to 1995; implementing better practices for acquiring weapon systems and reducing defense infrastructure, which are two areas that each experience billions of dollars in unneeded costs annually; and adopting improved contract management practices, as NASA is doing with considerable progress. For instance, NASA lowered the value of contract changes for which prices had not yet been negotiated from $6.6 billion in December 1991 to less than $500 million in September 1996. In addition, overcoming several high-risk problems has great potential for increased collections or other monetary gains to the government. For instance, these benefits are possible by further preventing or deterring tax filing fraud, which involved over 62,000 fraudulent returns with refunds of almost $132 million in 1995; reducing the growing inventory of tax assessments, which was $216 billion at the end of fiscal year 1996; ensuring that duties, taxes, and fees on importations are properly assessed and collected by the Customs Service and that refunds of such amounts are valid; and continuing to implement improved credit management practices. For example, the Department of Education has increased collections on defaulted loans from $1 billion in fiscal year 1992 to $2 billion in fiscal year 1995. Information technology is now integral to nearly every aspect of federal government operations and thus, is pivotal to the government's interaction with the public and critical to public health and safety issues. In the past 6 years, federal agencies have spent about $145 billion on information systems. Yet, despite years of experience in developing and acquiring systems, agencies across government continue to have chronic problems harnessing the full potential of information technology to improve performance, cut costs, and/or enhance responsiveness to the public. We have already discussed in this testimony the high risks associated with two multibillion dollar information systems modernizations--IRS' tax systems modernization and DOD's corporate information management initiative. In addition, the information systems modernization efforts of other agencies are at risk of being late, running over cost, and falling short of promised benefits. Our high-risk initiative includes two of these modernizations--those at the Federal Aviation Administration (FAA) and the National Weather Service (NWS). FAA's $34-billion air traffic control (ATC) modernization has historically experienced cost overruns, schedule delays, and performance shortfalls. While FAA has had success on a recent small, well defined effort to replace one aging system, the underlying causes of its past problems in modernizing larger, more complex ATC systems remain and must be addressed for the modernization to succeed. We recently identified and made recommendations to correct several of these root causes, including (1) strengthening project cost estimating and accounting practices and (2) defining and enforcing an ATC-wide system architecture, and we have work under way to identify other improvements that could help to resolve the modernization's long-standing problems. The success of NWS' $4.5 billion modernization effort hinges on how quickly the Service addresses problems with the existing system's operational effectiveness and efficient maintenance and on how well it develops and deploys the remaining system. NWS has acknowledged that a technical blueprint is needed and is currently developing one. To improve situations such as these and stop bad information technology investments, we have worked closely with the Congress to fundamentally revamp and modernize federal information management practices. Our study of leading public and private sector organizations showed how they applied an integrated set of management practices to create the information technology infrastructure they needed to dramatically improve their performance and achieve mission goals. These practices provide federal agencies with essential lessons in how to overcome the root causes of their chronic information management problems. The 104th Congress used these lessons to create the first significant reform in information technology management in over a decade: the 1995 Paperwork Reduction Act and the Clinger-Cohen Act of 1996. These laws require agencies to implement a framework of modern technology management--one that is based on practices followed by leading public and private sector organizations that have successfully used technology to dramatically improve performance and meet strategic goals. These laws emphasize involving senior executives in information management decisions, establishing senior-level Chief Information Officers, tightening controls over technology spending, redesigning inefficient work processes, and using performance measures to assess technology's contribution to achieving mission results. These management practices provide a proven, practical means of addressing the federal government's information problems, maximizing benefits from technology spending, and controlling the risks of systems development efforts. The challenge now is for agencies to apply this framework to their own technology efforts, particularly those at high risk of failure. Traditionally, federal agencies have used either the amount of money directed toward their programs, the level of staff deployed, or even the number of tasks completed as some of the measures of their performance. But at a time when the value of many federal programs is undergoing intense public scrutiny, an agency that reports only these measures has not answered the defining question of whether these programs have produced real results. For high-risk areas, measuring performance and focusing on results is key to pinpointing opportunities for improved performance and increased accountability. For instance, performance measures would be useful for guiding management of defense inventory levels to prevent the procurement of billions of dollars of centrally managed inventory items that may not be needed; reaching agreement with the Congress on and monitoring acceptable levels of errors in benefit programs, which may never be totally eliminated but can be much better controlled; monitoring loan loss levels and delinquency rates for the government's direct loan and loan guarantee programs--multibillion dollar operations in which loses for a variety of programs involving farmers, students, and home buyers are expected but can be minimized with greater oversight; and assessing the results of tax enforcement initiatives, delinquent tax collection activities, and filing fraud reduction efforts. Yesterday, we testified before the Committee on using the Government Performance and Results Act of 1993 (GPRA) to assist congressional and executive branch decision-making. Under GPRA, every major federal agency must now ask itself basic questions about performance to be measured and how performance information can be used to make improvements. GPRA requires agencies to set goals, measure performance, and report on their accomplishments. This will not be an easy transition, nor will it be quick. GPRA will be more difficult for some agencies to apply than for others. But GPRA has the potential for adding greatly to government performance--a particularly vital goal at a time when resources are limited and public demand is high. To help the Congress and federal managers put GPRA into effect, we have identified key steps that agencies need to take toward its implementation, along with a set of practices that can help make that implementation a success. Reliable financial information is key to better managing government programs, providing accountability, and addressing high-risk problems. The government's financial systems are all too often unable to perform the most rudimentary bookkeeping for organizations, many of which are oftentimes much larger than many of the nation's largest private corporations. Federal financial management suffers from decades of neglect and failed attempts to improve financial management and modernize outdated financial systems. This situation is illustrated in a number of high-risk areas, including the weaknesses that permeate critical DOD financial management areas, the substantial improvements that are needed in IRS' accounting and financial reporting, the significant problems that continue to be identified during audits of the Customs Service's financial statements, and the fundamental control weaknesses that resulted in the HUD Inspector General being unable to give an opinion on the Department's fiscal year 1995 financial statements. As a result of situations such as these, financial information has not been reliable enough to use in federal decision-making or to provide the requisite public accountability. Good information on the full costs of federal operations is frequently absent or extremely difficult to reconstruct, and complete, useful financial reporting is not yet in place. The landmark Chief Financial Officers (CFO) Act spelled out a long overdue and ambitious agenda to help resolve these types of financial management deficiencies. Important and steady progress is being made under the act to bring about sweeping reforms and rectify the devastating legacy from inattention to financial management. Moreover, the regular preparation of financial statements and independent audit opinions required by the 1990 act, as expanded by the Government Management Reform Act of 1994, are bringing greater clarity and understanding to the scope and depth of problems and needed solutions. Under the expanded CFO Act, the 24 largest agencies are required to prepare and have audited financial statements for their entire operations, beginning with those for fiscal year 1996. Together, these agencies account for virtually the entire federal budget. Also, the 1994 expansion of the act requires the preparation and audit of consolidated governmentwide financial statements, beginning with those for fiscal year 1997. Making CFO Act reforms a reality in the federal government remains a challenge and a great deal more perseverance will be required to sustain the current momentum and successfully overcome decades of serious neglect in fundamental financial management operations and reporting methods. But fully and effectively implementing the CFO Act is a very important effort because it is a key to achieving better accountability; implementing broader management reforms, such as GPRA; and providing the nation's leaders and the public with a wealth of relevant information on the government's true financial status. We will continue to identify ways for agencies to more effectively manage and control high-risk areas and to make recommendations for improvements that can be implemented to overcome the root causes of these problems. Also, we have long supported annual congressional hearings that focus on agencies' accountability for correcting high-risk problems and implementing broad management reforms. Mr. Chairman, this concludes my statement. I would be happy to now respond to any questions. Financial management Contract management Inventory management Weapon systems acquisition Defense infrastructure (added in 1997) Tax Systems Modernization Air traffic control modernization Defense's Corporate Information Management initiative National Weather Service modernization Information security (added in 1997) The Year 2000 Problem (added in 1997) Medicare Supplemental Security Income (added in 1997) Superfund Also, planning for the 2000 Decennial Census was designated high risk in February 1997. An Overview (GAO/HR-97-1) Quick Reference Guide (GAO/HR-97-2) Defense Financial Management (GAO/HR-97-3) Defense Contract Management (GAO/HR-97-4) Defense Inventory Management (GAO/HR-97-5) Defense Weapon Systems Acquisition (GAO/HR-97-6) Defense Infrastructure (GAO/HR-97-7) IRS Management (GAO/HR-97-8) Information Management and Technology (GAO/HR-97-9) Medicare (GAO/HR-97-10) Student Financial Aid (GAO/HR-97-11) Department of Housing and Urban Development (GAO/HR-97-12) Department of Energy Contract Management (GAO/HR-97-13) Superfund Program Management (GAO/HR-97-14) The entire series of 14 high-risk reports is numbered GAO/HR-97-20SET. 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 major government programs and operations it has identified as high risk because of vulnerability to waste, fraud, abuse, and mismanagement and legislative and agency actions that have resulted in progress towards resolving these problems. GAO noted that: (1) without additional attention to resolve problems in the 25 areas that are the current focus of GAO's high-risk initiative, the government will continue to miss huge opportunities to save billions of dollars, make better investments to reap the benefits of information technology, improve performance and provide better service, and more effectively manage the cost of government programs; (2) effective and sustained follow-through by agency managers is essential to make further headway and achieve greater benefits; (3) continued oversight by Congress will add essential impetus to ensuring progress as well; (4) landmark legislation passed by Congress in the 1990s has established broad management reforms, which, with successful implementation, will help resolve high-risk problems and provide greater accountability in many government programs and operations; (5) overall, agencies are taking high-risk problems seriously, trying to correct them, and making progress in many areas; (6) Congress has also acted to address several problems affecting these high-risk areas through oversight hearings and specific legislative initiatives; (7) full and effective implementation of legislative mandates, GAO suggestions, and corrective measures by agencies, however, have not yet been achieved because the high-risk areas involve long-standing problems that are difficult to correct; (8) federal agencies often fail to appropriately manage their finances, identify clearly what they intend to accomplish, or do the job effectively with a minimum of waste; (9) the Government Performance and Results Act (GPRA) requires agencies to set goals, measure performance, and report on their accomplishments; (10) GPRA will be more difficult for some agencies to apply than for others, but GPRA has the potential for adding greatly to government performance, a particularly vital goal at a time when resources are limited and public demand is high; (11) reliable financial information is key to better managing government programs, providing accountability, and addressing high-risk problems, but financial information has not been reliable enough to use in federal decisionmaking or to provide the requisite public accountability; (12) the landmark Chief Financial Officers Act spelled out a long overdue and ambitious agenda to help resolve financial management deficiencies; and (13) important and steady progress is being made under the act to bring about sweeping reforms and rectify the devastating legacy from inattention to financial management.
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The WBC program is administered through the Office of Women's Business Ownership (OWBO) in SBA's Office of Entrepreneurial Development (OED). The program was established by the Women's Business Ownership Act of 1988 to provide long-term training, counseling, networking, and mentoring to women who own businesses or are potential entrepreneurs after Congress found that existing business assistance programs for small business owners were not addressing women's needs. The program's goal is to add more well-trained women entrepreneurs to the U.S. business community and to specifically target services to women who are socially and economically disadvantaged. In fiscal year 2007, SBA funded 99 WBCs throughout the United States and its territories. Private nonprofit organizations are eligible to apply for funds to set up WBCs, and successful applicants are initially awarded cooperative agreements for a maximum of 5 years. WBCs must raise matching funds from nonfederal sources such as state and local public funds, private individuals, corporations and foundations, and program income derived from WBC services. In the first 2 years of the 5-year award, each WBC is required to match SBA award funding at one nonfederal dollar for each two federal dollars. In the last 3 years, the match is one nonfederal dollar for each federal dollar. WBC award amounts cannot exceed $150,000 each fiscal year per recipient. Award amounts may vary depending upon a WBC's location, staff size, project objectives, performance, and agency priorities. WBC funding is performance-based, and each additional 12-month budget period beyond the initial award may be exercised at SBA's discretion. Among the factors involved in deciding whether to exercise an option for continued funding are the availability of funds, the extent to which past WBC funds were spent, and satisfactory performance against SBA- established performance measures, including the number of clients served and the number of jobs created. WBCs are required to provide this performance data to SBA in quarterly reports. In the Women's Business Centers Sustainability Act of 1999, Congress established the sustainability pilot program because of concerns that WBCs could not become self-sustaining in 5 years and needed continued SBA funding. Under the sustainability pilot program, WBCs that had been receiving funding for 5 years could receive sustainability awards for an additional 5 years. Criteria for receiving awards under the pilot program were similar to those for receiving the initial awards. WBCs were assessed on their record of performance and had to provide nonfederal matching funds equal to one dollar for each federal dollar. Unlike the WBC regular award, WBC sustainability award amounts could not exceed $125,000 each budget year per recipient. As noted earlier, Congress recently replaced these sustainability awards with 3-year renewable awards of not more than $150,000 each year per recipient. SBA has not yet begun making these new awards. In addition to the WBC program, SBA's SBDC and SCORE programs also provide training and counseling services to small business clients. The SBDC program was created by Congress in 1980. SBDC services include, but are not limited to, assisting prospective and existing small businesses with financial, marketing, production, organization, engineering, and technical problems and feasibility studies. Each state and U.S. territory has a lead organization that sponsors and manages the SBDC program. The lead organization coordinates program services offered to small businesses through a network of centers and satellite locations in each state that are located at colleges, universities, community colleges, vocational schools, chambers of commerce and economic development corporations. In fiscal year 2007, the SBDC program received $87 million to make awards to 63 lead SBDCs throughout the United States. The SCORE program was founded in 1964 as a nonprofit organization. Under the Small Business Act, as amended, SCORE is sponsored by and may receive appropriations through SBA. The SCORE program is designed to provide free expert advice to prospective and existing small businesses in all aspects of business formation, advancement, and problem solving. SCORE counselors are volunteers who assist clients through a Web site, SCORE chapter offices, SBA district offices, and other establishments. In fiscal year 2007, the SCORE program received $5 million to support its activities and currently has 389 chapters throughout the United States. Recent legislation addresses concerns about long-term funding for WBCs, but prior to this legislation, the funding structure had been in flux since the program's inception in 1988. In establishing the WBC program in 1988, Congress authorized SBA to help private nonprofit organizations conduct projects that benefit small business concerns owned and controlled by women. The 1988 act allowed for demonstration projects that terminated in 1991. However, in 1991, Congress authorized SBA to make awards for 3- year projects, and in 1997 Congress authorized SBA to make awards to WBCs for 5-year projects. In its 1999 reauthorization of the WBC program, as noted earlier, Congress added 5-year sustainability funding for WBCs that successfully completed 5-year projects to provide additional time for the centers to become self-sustaining. Because the WBC program is a competitive discretionary award program, WBCs in the program compete annually for the maximum award amount but continue to receive SBA funds as long as their performance is satisfactory. WBCs that we spoke with identified two related factors that have largely been responsible for their funding uncertainties. First, because until recently the WBC program offered limited-term funding--in contrast to the SBDC and SCORE programs, which receive continuous funding-- WBCs "graduated" from SBA support after 5 or 10 years. Several WBCs that we spoke with expressed concern about the funding term limits and pointed out that the SBDC and SCORE programs do not have the same limits, even though SBA also administers those programs. Some WBCs in both the regular and sustainability programs also said that they were concerned about their ability to continue operations after losing SBA support. Second, Congress did not make the additional 5-year term for sustainability funding permanent. Instead, Congress extended the pilot program with each SBA reauthorization, creating uncertainty that limited SBA's ability to manage the program effectively and causing concern among the WBCs themselves. Several WBCs said that they were concerned that sustainability funding was not a permanent aspect of the WBC program. Several of the WBCs that we spoke with said that funding uncertainties made it difficult to establish an annual program budget with performance goals. Each year, SBA requires that WBCs participating in its program submit project-year proposals with performance goals in anticipation of an award. WBCs are not guaranteed funding each year because SBA makes awards each year at its discretion. Also, because the program is competitive and performance based, WBCs may receive varying award amounts each year. As noted, WBCs in the regular program can receive annual awards up to $150,000, and those in the sustainability program can receive annual awards up to $125,000. OMB's 2007 PART report found that frequent changes by Congress in the WBC program's funding structure, delays in extending sustainability funding, and uncertainty about the future had created challenges for the program. OMB's report also noted that SBA had taken steps to foster more consistent management of the WBC program but added that long- term planning was problematic because of the program's funding structure. When we spoke with officials at OMB, they emphasized that SBA appeared to be making a significant effort to assist WBCs, given the program's limitations. They also noted that the funding challenges that WBCs faced after graduating from the sustainability pilot could be related to the fact that these organizations operate resource-intensive programs and collect nominal revenues in program fees, largely because of their focus on economically disadvantaged clients, causing them to rely heavily on external support. Our preliminary review indicates that WBCs that perform satisfactorily continue to receive funds until they complete the program, and SBA indicates that it will fund WBCs through the project term, subject to availability of funds. But SBA officials in headquarters and the district offices were aware of the challenges WBCs faced in planning annual budgets without knowing how much they would receive or whether sustainability funds would continue to be available. In discussing the WBC program's limited term funding, some SBA district office officials emphasized that the agency had invested in creating successful WBCs and should be working to make those that performed well permanent SBA partners. Recent legislation for the WBC program replaces the sustainability pilot program with 3-year renewable awards, providing an opportunity for SBA to continue funding WBCs. Current program participants and those that have successfully graduated will be eligible to apply for continuous funding through these awards. The award process will remain competitive and the number of organizations competing could increase while SBA's annual budget for the WBC program may not increase beyond the approximate $12 million provided in the last 5 years. However, increased award competition provides an opportunity for SBA to continue funding high-performing centers. Prior to the new program changes, SBA officials emphasized that the WBC program is the agency's only performance based program and said that they believed this provided an incentive for WBCs to continuously improve. SBA officials told us that by the end of fiscal year 2007, 26 WBCs would have graduated since the beginning of the program. SBA has criteria for ranking new award applicants and performance-based criteria for placing existing program participants into three funding categories for annual awards. As a result of the new legislation, which allows graduated WBCs to re-enter the pool of applicants for continuous funding and which changes the existing 5-year sustainability project terms going forward, SBA has begun revising its existing award process. SBA just completed making WBC awards for fiscal year 2007 to fund activities in fiscal year 2008, and SBA officials told us that they plan to begin providing the 3-year renewable awards in fiscal year 2008. Our preliminary review found that SBA had developed written procedures for monitoring the performance and financial management activities of WBCs and has taken steps to measure the WBC program's effectiveness. Since 1997, as a condition of continued funding, SBA has been required to assess WBCs' performance at least annually through programmatic and financial examinations. SBA also requires that WBCs submit performance and financial reports quarterly to describe their progress in meeting annual performance goals and to detail program expenses that qualify for SBA reimbursement. Some of the performance data that SBA collects from WBCs are reported in the agency's annual performance reports through several output and outcome measures that are meant to evaluate the WBC program's performance and effectiveness. As part of a broader impact assessment of its business assistance programs, in 2004, SBA initiated a 3- year longitudinal study of the WBC program, surveying clients served by WBCs nationwide. SBA relies heavily on District Office Technical Representatives (DOTRs) to carry out oversight responsibilities, but our preliminary review suggests that the downsizing of SBA's staffing may have created challenges for DOTRs in fulfilling their assigned responsibilities. District directors currently assign the role of DOTR as a collateral duty to district office staff. In 2001, we reported that DOTRs had been given an increased role in assessing WBCs' performance to ensure that the programs were fiscally sound and functioning smoothly. To this end, we reported that DOTRs were receiving intensive training each year at the postaward conference at SBA headquarters on how to monitor the WBCs' programmatic and financial activities. DOTRs are expected to conduct the WBC's programmatic and financial examinations semiannually, but also have other program duties and full-time agency responsibilities. SBA has a list of 23 responsibilities for DOTRs, some of which involve oversight, including (1) reviewing the WBC's requests for project revisions, (2) determining the extent to which the WBC is meeting the match requirement, (3) reviewing the scope and quality of services provided to clients, (4) reviewing all WBC signage and media, and (5) helping to resolve problems. DOTRs are also expected to act as advocates for the WBCs within their district. Some of the DOTRs' responsibilities related to this role include (1) ensuring that the district office displays and distributes WBC brochures; (2) collecting success stories from WBCs to be used for publicizing the program; and (3) including WBCs in district office conferences, workshops, and other events for women business owners. The DOTRs' total responsibilities for the WBC program appear to be substantial, particularly since this oversight is a collateral role. Given SBA's downsizing in recent years, some DOTRs may have more responsibilities than they had in the past to perform their WBC program duties effectively, and others new to the role may lack the necessary experience and training. Although most WBCs we interviewed spoke positively of their relationship with their DOTR, several told us that the reduction in district office staffing had led to changes, including assigning DOTR responsibilities to a different district office staff member. DOTRs still attend required training for the WBC program annually at SBA headquarters, and SBA provides them with a handbook to assist them in performing their duties. However, district office staff at one location felt that DOTRs were not adequately trained to conduct the financial component of WBC programmatic and financial examinations and told us that SBA headquarters had previously coordinated financial examinations for WBCs. When we followed up with OWBO officials, they said that in 2004 a requirement was added that WBCs' financial records be certified annually by a certified public accountant (CPA), both because the agency recognized that some DOTRs lacked this expertise and because of isolated incidents of mismanagement of WBC award funds. OWBO officials also said that they were coordinating with SBA's Office of SBDCs, which is also under OED, to use SBDC financial examiners for these onsite financial reviews of WBCs but added that recently there had not been enough staff to do all of the reviews. The officials also said that OED was reviewing how future financial audits for all of SBA's business assistance programs would be conducted. Our preliminary review found that SBA had taken some steps to adapt program oversight procedures to staffing changes in district offices. For example, before January 2007 DOTRs conducted programmatic and financial examinations four times a year, and SBA switched to semiannual examinations to conserve its staff resources. In March 2007, SBA also revised its reporting procedures for WBCs to streamline communication and reduce review and processing times. For example, WBCs had previously submitted quarterly financial reports with reimbursement requests through the district office but now submit them directly to OWBO and copy the district office. These and other revisions that SBA has made to date appear to have been made on an as-needed basis and were not part of a strategic process or plan to revise its oversight activities. WBCs also cited concerns about communication with SBA. One study that we reviewed reported that 54 percent of 52 WBCs surveyed said that SBA could improve its communication with them. OWBO, which administers the program, conducts monthly conference calls with the WBCs and DOTRs, but some WBCs said that the calls were not a good forum for asking questions though the topics covered in the call may raise questions. OWBO also uses email to communicate policy changes and make interim information requests, but several WBCs said these communications often came without sufficient explanation and mentioned areas in which policy changes or program requirements were unclear. The study specifically noted that better communication should include an effort to seek information from WBCs on how SBA's frequent information requests and policy changes impacted WBC operations. Some WBCs also told us that they were not sure how well they were performing because they did not receive feedback on semi-annual examinations or the reports they submitted quarterly to SBA. SBA officials told us that they are aware of this concern and are taking steps to make the performance-based funding process more transparent. Based on our preliminary review, we found that the WBCs we spoke with focused on a different type of client than the SBDCs and SCORE chapters in their areas, and several WBCs actively coordinated with the other programs to avoid duplicating services. But based on our review to date, the centers appear to lack guidance and information from SBA on how to successfully coordinate. Consistent with the WBC program's statutory authority and SBA requirements, WBCs tailor services to meet the needs of economically and socially disadvantaged women. According to one academic study and WBCs we reviewed, WBCs offered services emphasizing financial literacy and more intensive long-term business plan training. Through our work, we also found that WBCs tended to serve smaller businesses with fewer employees and lower revenues than SBDCs and SCORE. According to an SBA study of WBCs, WBC clients had businesses with an average of 2.5 employees that produced average annual revenues of $63,694, while other SBA business assistance programs served businesses with an average of 4.5 employees and $175,076 in annual revenue. Most WBCs told us that they referred clients to the SBDCs and SCORE when appropriate, and several coordinated services with the other programs to leverage resources and avoid duplication. SBA officials told us that they expected district offices to ensure that the programs did not duplicate each other, and the program requirement suggests that WBCs can promote coordination through co-sponsorship arrangements or memorandums of understanding. However, SBA has not provided detailed guidance explaining how WBCs could effectively coordinate with SBDC and SCORE. Lacking such guidance, WBCs used a variety of approaches to facilitate coordination. Some coordination efforts were initiated by local business assistance providers, including WBCs, and involved a memorandum of understanding or regularly scheduled meetings. For example, a WBC in Wisconsin coordinated with SBDC, SCORE, and other small business service providers in the area to develop a detailed triage system for small business clients in their area. In order to better coordinate services, the WBC and other Wisconsin business assistance providers developed a flow chart to help service providers divide resources and determine where to refer customers. In some cases, we found that the SBA district office was active in the coordination effort and participated in regular meetings or organized events that included all of the programs. Several WBCs were co-located with an SBDC, allowing the two programs to benefit from shared office space and other resources. However, our preliminary review also found that some WBCs experienced challenges in their attempts to coordinate services with SBDC and SCORE. Some WBCs told us that coordinating services could be difficult. Several WBCs told us that they had considered co-locating or sharing space with an SBDC or SCORE chapter in order to reduce costs but feared that co- location would inhibit the WBC's ability to maintain its identity and reach its target client group of low-income women. WBCs and SBDCs are both measured on the number of clients that participate in small business training and counseling services, and one WBC told us that co-location would cause WBCs to compete for clients. Also, in some instances SBA encouraged WBCs to provide services similar to those that SBDCs were already providing to small businesses. For example, one WBC told us that staff were encouraged to develop a government procurement curriculum although an SBDC in their area was already providing this service to small business clients. These concerns and uncertainties thwart coordination efforts and could increase the risk of service duplication in some geographic areas. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the Committee may have. For additional information about this testimony, please contact William B. Shear at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Affairs and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Kay Kuhlman, Assistant Director; Bernice Benta, Michelle Bracy, Tania Calhoun, and Emily Chalmers. This is a work of the U.S. government and is not subject to copyright protection in the United States. This published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Small Business Administration (SBA) provides training and counseling services to women entrepreneurs through the Women's Business Center (WBC) program. With approximately $12 million in fiscal year 2007, SBA funded awards to 99 WBCs. However, Congress and WBCs have expressed concerns about the uncertain nature of the program's funding structure. Concerns have also been raised about the possibility that the WBC and two other SBA programs, the Small Business Development Center (SBDC) and SCORE programs, are duplicating each other's efforts. This testimony discusses preliminary views on (1) uncertainties associated with the funding process for WBCs; (2) SBA's oversight of the WBC program; and (3) actions that SBA and WBCs have taken to avoid duplication among the WBC, SBDC, and SCORE programs. GAO reviewed policies, procedures, examinations, and studies related to the funding, oversight, and services of WBCs and interviewed SBA, WBC, SBDC, and SCORE officials. Until 2007, WBCs were funded on a temporary basis for up to 10 years, at which time it was expected that the centers would become self-sustaining. Beginning in 1997, SBA made annual awards to WBCs for up to 5 years. Because of concerns that WBCs could not sustain their operations without continued SBA funding, in 1999, Congress created a pilot program to extend funding an additional 5 years. Due to continued uncertainty about WBCs' ability to sustain operations without SBA funding, in May 2007, Congress passed legislation authorizing renewable 3-year awards to WBCs that "graduated" from the program after 10 years, as well as to current program participants. Like the current awards, the 3-year awards are competitive, and more centers may be applying for limited dollars. SBA is currently revising its award process to incorporate the new program changes. Though SBA has oversight procedures in place to monitor WBCs' performance and use of federal funds, staff shortages from the agency's downsizing and limited communication may hinder SBA's oversight efforts. SBA relies extensively on district office technical representatives (DOTRs) to oversee WBCs, but these staff members also have other job responsibilities and may not have the needed expertise to conduct some oversight procedures. SBA provides annual training and has taken steps to adjust its oversight procedures to adapt to staffing changes, but concerns remain. Some WBCs also cited communication problems, and one study reported that 54 percent of 52 WBCs responding to the study's survey said that SBA could improve its communication with the centers. For example, some WBCs told us that SBA did not provide sufficient feedback on their performance. Under the terms of the WBC award, the centers are required to coordinate with local SBDCs and SCORE chapters. SBA officials told us that they expected district offices to ensure that the programs did not duplicate each other. However, based on our preliminary review, we found that SBA provided limited guidance on how to successfully carry out coordination efforts. Most of the WBCs that we spoke with explained that in some situations they referred clients to an SBDC or SCORE counselor, and some WBCs also took steps to more actively coordinate with local SBDCs and SCORE chapters to avoid duplication and leverage resources. However, some WBCs told us that coordinating services was difficult, as the programs were each measured by the number of clients served and could end up competing for clients. Such concerns thwart coordination efforts and could increase the risk of duplication in some geographic areas.
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Based on state responses to our survey, we estimated that nearly 617,000, or about 89 percent of the approximately 693,000 regulated tanks, had been upgraded with the federally required equipment by the end of fiscal year 2000. EPA data showed that about 70 percent of the total number of tanks that its regions regulate on tribal lands had also been upgraded. With regard to the approximately 76,000 tanks that we estimated have not been upgraded, closed, or removed as required, 17 states and the 3 EPA regions we visited reported that they believed that most of these tanks were either empty or inactive. However, another five states reported that at least half of their non-upgraded tanks were still in use. EPA and states assume that the tanks are empty or inactive and therefore pose less risk. As a result, they may give them a lower priority for resources. However, states also reported that they generally did not discover tank leaks or contamination around tanks until the empty or inactive tanks were removed from the ground during replacement or closure. Consequently, unless EPA and the states address these non-compliant tanks in a more timely manner, they may be overlooking a potential source of soil and groundwater contamination. Even though most tanks have been upgraded, we estimated from our survey data that more than 200,000 of them, or about 29 percent, were not being properly operated and maintained, increasing the risk of leaks. The extent of operations and maintenance problems varied across the states, as figure 1 illustrates. The states reported a variety of operational and maintenance problems, such as operators turning off leak detection equipment. The states also reported that the majority of problems occurred at tanks owned by small, independent businesses; non-retail and commercial companies, such as cab companies; and local governments. The states attributed these problems to a lack of training for tank owners, installers, operators, removers, and inspectors. These smaller businesses and local government operations may find it more difficult to afford adequate training, especially given the high turnover rates among tank staff, or may give training a lower priority. Almost all of the states reported a need for additional resources to keep their own inspectors and program staff trained, and 41 states requested additional technical assistance from the federal government to provide such training. To date, EPA has provided states with a number of training sessions and helpful tools, such as operation and maintenance checklists and guidelines. One of EPA's tank program initiatives is also intended to improve training and tank compliance with federal requirements, such as setting annual compliance targets with the states. At the time of our review, the Agency was just beginning to work out the details of how it will implement this initiative and had set up a working group of state and EPA representatives to begin work on compliance targets. According to EPA's program managers, only physical inspections can confirm whether tanks have been upgraded and are being properly operated and maintained. However, only 19 states physically inspect all of their tanks at least once every 3 years--the minimum that EPA considers necessary for effective tank monitoring. Another 10 states inspect all tanks, but less frequently. The remaining 22 states do not inspect all tanks, but instead generally target inspections to potentially problematic tanks, such as those close to drinking water sources. In addition, not all of EPA's own regions comply with the recommended rate. Two of the three regions that we visited inspected tanks located on tribal land every 3 years. Figure 2 illustrates the states' reported inspection practices. According to our survey results, some states and EPA regions would need additional staff to conduct more frequent inspections. For example, under staffing levels at the time of our review, the inspectors in 11 states would each have to visit more than 300 facilities a year to cover all tanks at least once every 3 years, but EPA estimates that a qualified inspector can only visit at most 200 facilities a year. Moreover, because most states use their own employees to conduct inspections, state legislatures would need to provide them additional hiring authority and funding to acquire more inspectors. Officials in 40 states said that they would support a federal mandate requiring states to periodically inspect all tanks, in part because they expect that such a mandate would provide them needed leverage to obtain the requisite inspection staff and funding from their state legislatures. In addition to more frequent inspections, a number of states stated that they need additional enforcement tools to correct problem tanks. EPA's program managers stated that good enforcement requires a variety of tools, including the ability to issue citations or fines. One of the most effective tools is the ability to prohibit suppliers from delivering fuel to stations with problem tanks. However, as figure 3 illustrates, 27 states reported that they did not have the authority to stop deliveries. In addition, EPA believes, and we agree, that the law governing the tank program does not give the Agency clear authority to regulate fuel suppliers and therefore prohibit their deliveries. Almost all of the states said they need additional enforcement resources and 27 need additional authority. Members of both an expert panel and an industry group, which EPA convened to help it assess the tank program, likewise saw the need for states to have more resources and more uniform and consistent enforcement across states, including the authority to prohibit fuel deliveries. They further noted that the fear of being shut down would provide owners and operators a greater incentive to comply with federal requirements. Under its tank initiatives, EPA has said that it will attempt to obtain state commitments to increase its inspection and enforcement activities, or it may supplement state activities in some cases. EPA's regions have the opportunity, to some extent, to use the grants that they provide to the states for their tank programs as a means to encourage more inspections and better enforcement. However, the Agency does not want to limit state funding to the point where this further jeopardizes program implementation. The Congress may also wish to consider making more funds available to states to improve tank inspections and enforcement. For example, the Congress could increase the amount of funds it provides from the Leaking Underground Storage Tank trust fund, which the Congress established to specifically provide funds for cleaning up contamination from tanks. The Congress could then allow states to spend a portion of these funds on inspections and enforcement. It has considered taking this action in the past, and 40 states said that they would welcome such funding flexibility. In fiscal year 2000, EPA and the states confirmed a total of more than 14,500 leaks or releases from regulated tanks, although the Agency and many of the states could not verify whether the releases had occurred before or after the tanks had been upgraded. According to our survey, 14 states said that they had traced newly discovered leaks or releases that year to upgraded tanks, while another 17 states said they seldom or never detected such leaks. The remaining 20 states could not confirm whether or not their upgraded tanks leaked. EPA recognizes the need to collect better data to determine the extent and cause of leaks from upgraded tanks, the effectiveness of the current equipment, and if there is a need to strengthen existing equipment standards. The Agency has launched studies in several of its regions to obtain such data, but it may have trouble concluding whether leaks occurred after the upgrades. In a study of local tanks, researchers in Santa Clara County, California, concluded that upgraded tanks do not provide complete protection against leaks, and even properly operated and maintained tank monitoring systems cannot guarantee that leaks are detected. EPA, as one of its program initiatives, plans to undertake a nationwide effort to assess the adequacy of existing equipment requirements to prevent leaks and releases and if there is a need to strengthen these requirements, such as requiring double-walled tanks. The states and the industry and expert groups support EPA's actions. In closing, the states and EPA cannot ensure that all regulated tanks have the required equipment to prevent health risks from fuel leaks, spills, and overfills or that tanks are safely operated and maintained. Many states are not inspecting all of their tanks to make sure that they do not leak, nor can they prohibit fuel from being delivered to problem tanks. EPA has the opportunity to help its regions and states correct these limitations through its tank initiatives, but it is difficult to determine whether the Agency's proposed actions will be sufficient because it is just defining its implementation plans. The Congress also has the opportunity to help provide EPA and the states the additional inspection and enforcement authority and resources they need to improve tank compliance and safety. Therefore, to better ensure that underground storage tanks meet federal requirements to prevent contamination that poses health risks, we have recommended to the Administrator, EPA, that the Agency 1. work with the states to address the remaining non-upgraded tanks, such as reviewing available information to determine those that pose the greatest risks and setting up timetables to remove or close these tanks, 2. supplement the training support it has provided to date by having each region work with each of the states in its jurisdiction to determine specific training needs and tailored ways to meet them, 3. negotiate with each state to reach a minimum frequency for physical inspections of all its tanks, and 4. 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. In addition, the Congress may want to consider EPA's estimate of resource needs and determine whether to increase the resources it provides for the program. For example, one way would be to increase the amount of funds it appropriates from the trust fund and allow states to spend a limited portion on training, inspection, and enforcement activities, as long as cleanups are not delayed. The Congress may also want to (1) authorize EPA to require physical inspections of all tanks on a periodic basis, (2) authorize EPA to prohibit fuel deliveries to tanks that do not comply with federal requirements, and (3) require that states have similar authority to prohibit fuel deliveries. For further information, please contact John Stephenson at (202) 512-3841. Individuals making key contributions to this testimony were Fran Featherston, Rich Johnson, Eileen Larence, Gerald Laudermilk, and Jonathan McMurray.
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Contaminated soil or water resulting from leaks at underground storage tanks can pose serious health risks. In 1984, Congress created the Underground Storage Tank (UST) program to protect the public from potential leaks. Under the program, the Environmental Protection Agency required tank owners to install new leak detection equipment and new spill-, overfill-, and corrosion-prevention equipment. GAO found that about 1.5 million tanks have been permanently closed since the program was created, but more than half of the states do not inspect all of their tanks often enough to meet the minimum rate recommended by EPA--at least once every three years. States reported that even tanks with the required leak prevention and detection equipment continue to leak, although the full extent of the problem is unknown.
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VA operates one of the largest health care systems in America, providing care to millions of veterans and their families each year. The department's health information system--VistA--serves an essential role in helping the department to fulfill its health care delivery mission. Specifically, VistA is an integrated medical information system that was developed in-house by the department's clinicians and information technology (IT) personnel, and has been in operation since the early 1980s. The system consists of 104 separate computer applications, including 56 health provider applications; 19 management and financial applications; 8 registration, enrollment, and eligibility applications; 5 health data applications; and 3 information and education applications. Within VistA, an application called the Computerized Patient Record System enables the department to create and manage an individual electronic health record for each VA patient. Electronic health records are particularly crucial for optimizing the health care provided to veterans, many of whom may have health records residing at multiple medical facilities within and outside the United States. Taking these steps toward interoperability--that is, collecting, storing, retrieving, and transferring veterans' health records electronically--is significant to improving the quality and efficiency of care. One of the goals of interoperability is to ensure that patients' electronic health information is available from provider to provider, regardless of where it originated or resides. Since 1998, VA has undertaken a patchwork of initiatives with DOD to allow the departments' health information systems to exchange information and increase interoperability. Among others, these have included initiatives to share viewable data in the two departments' existing (legacy) systems, link and share computable data between the departments' updated heath data repositories, and jointly develop a single integrated system that would be used by both departments. Table 1 summarizes a number of these key initiatives. In addition to the initiatives mentioned in table 1, VA has worked in conjunction with DOD to respond to provisions in the National Defense Authorization Act for Fiscal Year 2008, which required the departments to jointly develop and implement fully interoperable electronic health record systems or capabilities in 2009. Yet, even as the departments undertook numerous interoperability and modernization initiatives, they faced significant challenges and slow progress. For example, VA's and DOD's success in identifying and implementing joint IT solutions has been hindered by an inability to articulate explicit plans, goals, and time frames for meeting their common health IT needs. In March 2011, the secretaries of VA and DOD announced that they would develop a new, joint integrated electronic health record system (referred to as iEHR). This was intended to replace the departments' separate systems with a single common system, thus sidestepping many of the challenges they had previously encountered in trying to achieve interoperability. However, in February 2013, about 2 years after initiating iEHR, the secretaries announced that the departments were abandoning plans to develop a joint system, due to concerns about the program's cost, schedule, and ability to meet deadlines. The Interagency Program Office (IPO), put in place to be accountable for VA's and DOD's efforts to achieve interoperability, reported spending about $564 million on iEHR between October 2011 and June 2013. In light of VA and DOD not implementing a solution that allowed for the seamless electronic sharing of health care data, the National Defense Authorization Act for Fiscal Year 2014 included requirements pertaining to the implementation, design, and planning for interoperability between the departments' electronic health record systems. Among other actions, provisions in the act directed each department to (1) ensure that all health care data contained in their systems (VA's VistA and DOD's Armed Forces Health Longitudinal Technology Application, referred to as AHLTA) complied with national standards and were computable in real time by October 1, 2014; and (2) deploy modernized electronic health record software to support clinicians while ensuring full standards-based interoperability by December 31, 2016. In August 2015, we reported that VA, in conjunction with DOD, had engaged in several near-term efforts focused on expanding interoperability between their existing electronic health record systems. For example, the departments had analyzed data related to 25 "domains" identified by the Interagency Clinical Informatics Board and mapped health data in their existing systems to standards identified by the IPO. The departments also had expanded the functionality of their Joint Legacy Viewer--a tool that allows clinicians to view certain health care data from both departments in a single interface. More recently, in April 2016, VA and DOD certified that all health care data in their systems complied with national standards and were computable in real time. However, VA acknowledged that it did not expect to complete a number of key activities related to its electronic health record system until sometime after the December 31, 2016, statutory deadline for deploying modernized electronic health record software with interoperability. Specifically, the department stated that deployment of a modernized VistA system at all locations and for all users is not planned until 2018. Even as VA has undertaken numerous initiatives with DOD that were intended to advance electronic health record interoperability, a significant concern is that these departments have not identified outcome-oriented goals and metrics to clearly define what they aim to achieve from their interoperability efforts, and the value and benefits these efforts are expected to yield. As we have stressed in our prior work and guidance, assessing the performance of a program should include measuring its outcomes in terms of the results of products or services. In this case, such outcomes could include improvements in the quality of health care or clinician satisfaction. Establishing outcome-oriented goals and metrics is essential to determining whether a program is delivering value. The IPO is responsible for monitoring and reporting on VA's and DOD's progress in achieving interoperability and coordinating with the departments to ensure that these efforts enhance health care services. Toward this end, the office issued guidance that identified a variety of process-oriented metrics to be tracked, such as the percentage of health data domains that have been mapped to national standards. The guidance also identified metrics to be reported that relate to tracking the amounts of certain types of data being exchanged between the departments, using existing capabilities. This would include, for example, laboratory reports transferred from DOD to VA via the Federal Health Information Exchange and patient queries submitted by providers through the Bidirectional Health Information Exchange. Nevertheless, in our August 2015 report, we noted that the IPO had not specified outcome-oriented metrics and goals that could be used to gauge the impact of the interoperable health record capabilities on the departments' health care services. At that time, the acting director of the IPO stated that the office was working to identify metrics that would be more meaningful, such as metrics on the quality of a user's experience or on improvements in health outcomes. However, the office had not established a time frame for completing the outcome-oriented metrics and incorporating them into the office's guidance. In the report, we stressed that using an effective outcome-based approach could provide the two departments with a more accurate picture of their progress toward achieving interoperability, and the value and benefits generated. Accordingly, we recommended that the departments, working with the IPO, establish a time frame for identifying outcome- oriented metrics; define related goals as a basis for determining the extent to which the departments' modernized electronic health record systems are achieving interoperability; and update IPO guidance accordingly. Both departments concurred with our recommendations. Further, since that time, VA has established a performance architecture program that has begun to define an approach for identifying outcome-oriented metrics focused on health outcomes in selected clinical areas, and it also has begun to establish baseline measurements. We intend to continue monitoring the department's efforts to determine how these metrics define and report on the results achieved by interoperability between the departments. Following the termination of the iEHR initiative, VA moved forward with an effort to modernize VistA separately from DOD's planned acquisition of a commercially available electronic health record system. The department took this course of action even though it has many health care business needs in common with those of DOD. For example, in May 2010, VA (and DOD) issued a report on medical IT to Congressional committees that identified 10 areas--inpatient documentation, outpatient documentation, pharmacy, laboratory, order entry and management, scheduling, imaging and radiology, third-party billing, registration, and data sharing--in which the departments have common business needs. Further, the results of a 2008 study pointed out that over 97 percent of inpatient requirements for electronic health record systems are common to both departments. We also issued several prior reports regarding the plans for separate systems, in which we noted that the departments did not substantiate their claims that VA's VistA modernization, together with DOD's acquisition of a new system, would be achieved faster and at less cost than developing a single, joint system. Moreover, we noted that the departments' plans to modernize their two separate systems were duplicative and stressed that their decisions should be justified by comparing the costs and schedules of alternate approaches. We recommended that VA and DOD develop cost and schedule estimates that would include all elements of their approach (i.e., modernizing both departments' health information systems and establishing interoperability between them) and compare them with estimates of the cost and schedule for developing a single, integrated system. If the planned approach for separate systems was projected to cost more or take longer, we recommended that the departments provide a rationale for pursuing such an approach. VA, as well as DOD, agreed with our recommendations and stated that an initial comparison had indicated that the approach involving separate systems would be more cost effective. However, as of June 2016, the departments had not provided us with a comparison of the estimated costs of their current and previous approaches. Further, with respect to their assertions that separate systems could be achieved faster, both departments had developed schedules which indicated that their separate modernization efforts are not expected to be completed until after the 2017 planned completion date for the previous single-system approach. As VA has proceeded with its program to modernize VistA (known as VistA Evolution), the department has developed a number of plans to support its efforts. These include an interoperability plan and a road map describing functional capabilities to be deployed through fiscal year 2018. Specifically, these documents describe the department's approach for modernizing its existing electronic health record system through the VistA Evolution program, while helping to facilitate interoperability with DOD's system and the private sector. For example, the VA Interoperability Plan, issued in June 2014, describes activities intended to improve VistA's technical interoperability, such as standardizing the VistA software across the department to simplify sharing data. In addition, the VistA 4 Roadmap, last revised in February 2015, describes four sets of functional capabilities that are expected to be incrementally deployed during fiscal years 2014 through 2018 to modernize the VistA system and enhance interoperability. According to the road map, the first set of capabilities was delivered by the end of September 2014 and included access to the Joint Legacy Viewer and a foundation for future functionality, such as an enhanced graphical user interface and enterprise messaging infrastructure. Another interoperable capability that is expected to be incrementally delivered over the course of the VistA modernization program is the enterprise health management platform. The department has stated that this platform is expected to provide clinicians with a customizable view of a health record that can integrate data from VA, DOD, and third-party providers. Also, when fully deployed, VA expects the enterprise health management platform to replace the Joint Legacy Viewer. However, a recent independent assessment of health IT at VA reported that lengthy delays in modernizing VistA had resulted in the system becoming outdated. Further, this study questioned whether the VistA Evolution program to modernize the electronic health record system can overcome a variety of risks and technical issues that have plagued prior VA initiatives of similar size and complexity. For example, the study raised questions regarding the lack of any clear advances made during the past decade and the increasing amount of time needed for VA to release new health IT capabilities. Given the concerns identified, the study recommended that VA assess the cost versus benefits of various alternatives for delivering the modernized capabilities, such as commercially available off-the-shelf electronic health record systems, open source systems, and the continued development of VistA. In speaking about this matter, VA's Under Secretary for Health has asserted that the department will follow through on its plans to complete the VistA Evolution program in fiscal year 2018. However, the Chief Information Officer has also indicated that the department is taking a step back in reconsidering how best to meet its electronic health record system needs beyond fiscal year 2018. As such, VA's approach to addressing its electronic health record system needs remains uncertain. In summary, VA's approach to pursuing electronic health record interoperability with DOD has resulted in an increasing amount of standardized health data and has made an integrated view of that data available to department clinicians. Nevertheless, a modernized VA electronic health record system that is fully interoperable with DOD's system is still years away. Thus, important questions remain about when VA intends to define the extent of interoperability it needs to provide the highest possible quality of care to its patients, as well as how and when the department intends to achieve this extent of interoperability with DOD. In addition, VA's unsuccessful efforts over many years to modernize its VistA system raise concern about how the department can continue to justify the development and operation of an electronic health record system that is separate from DOD's system, even though the departments have common system needs. Finally, VA's recent reconsideration of its approach to modernizing VistA raises uncertainty about how it intends to accomplish this important endeavor. Chairman Kirk, Ranking Member Tester, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions that you may have. If you or your staff have any questions about this testimony, please contact Valerie C. Melvin at (202) 512-6304 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony statement. GAO staff who made key contributions to this statement are Mark T. Bird (Assistant Director), Jennifer Stavros-Turner (Analyst in Charge), Rebecca Eyler, Nancy Glover, Jacqueline Mai, and Scott Pettis. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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VA operates one of the nation's largest health care systems, serving millions of veterans each year. For almost two decades, the department has undertaken a patchwork of initiatives with DOD to increase interoperability between their respective electronic health record systems. During much of this time, VA has also been planning to modernize its system. While the department has made progress in these efforts, it has also faced significant information technology challenges that contributed to GAO's designation of VA health care as a high risk area. This statement summarizes GAO's August 2015 report (GAO-15-530) on VA's efforts to achieve interoperability with DOD's electronic health records system. It also summarizes key content from GAO's reports on duplication, overlap, and fragmentation of federal government programs. Lastly, this statement provides updated information on VA's actions in response to GAO's recommendation calling for an interoperability and electronic health record system plan. Even as the Department of Veterans Affairs (VA) has undertaken numerous initiatives with the Department of Defense (DOD) that were intended to advance the ability of the two departments to share electronic health records, the departments have not identified outcome-oriented goals and metrics to clearly define what they aim to achieve from their interoperability efforts. In an August 2015 report, GAO recommended that the two departments establish a time frame for identifying outcome-oriented metrics, define related goals as a basis for determining the extent to which the departments' systems are achieving interoperability, and update their guidance accordingly. Since that time, VA has established a performance architecture program that has begun to define an approach for identifying outcome-oriented metrics focused on health outcomes in selected clinical areas and has begun to establish baseline measurements. GAO is continuing to monitor VA's and DOD's efforts to define metrics and report on the interoperability results achieved between the departments. Following an unsuccessful attempt to develop a joint system with DOD, VA switched tactics and moved forward with an effort to modernize its current system separately from DOD's planned acquisition of a commercially available electronic health record system. The department took this course of action even though, in May 2010, it identified 10 areas of health care business needs in common with those of DOD. Further, the results of a 2008 study pointed out that more than 97 percent of inpatient requirements for electronic health record systems are common to both departments. GAO noted that the departments' plans to separately modernize their systems were duplicative and recommended that their decisions should be justified by comparing the costs and schedules of alternate approaches. The departments agreed with GAO's recommendations and stated that their initial comparison indicated that separate systems would be more cost effective. However, the departments have not provided a comparison of the estimated costs of their current and previous approaches. Further, both departments developed schedules that indicated their separate modernization efforts will not be completed until after the 2017 planned completion date for the previous joint system approach. VA has developed a number of plans to support its development of its electronic health record system, called VistA, including a plan for interoperability and a road map describing functional capabilities to be deployed through fiscal year 2018. According to the road map, the first set of capabilities was delivered by the end of September 2014 and included a foundation for future functionality, such as an enhanced graphical user interface and enterprise messaging infrastructure. However, a recent independent assessment of health information technology (IT) at VA reported that lengthy delays in modernizing VistA had resulted in the system becoming outdated. Further, this study questioned whether the modernization program can overcome a variety of risks and technical issues that have plagued prior VA initiatives of similar size and complexity. Although VA's Under Secretary for Health has asserted that the department will complete the VistA Evolution program in fiscal year 2018, the Chief Information Officer has indicated that the department is reconsidering how best to meet its future electronic health record system needs. In prior reports, GAO has made numerous recommendations to VA to improve the modernization of its IT systems. Among other things, GAO has recommended that VA address challenges associated with interoperability, develop goals and metrics to determine the extent to which the modernized systems are achieving interoperability, and address shortcomings with planning. VA generally agreed with GAO's recommendations.
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Social Security provides retirement, disability, and survivor benefits to insured workers and their dependents. Insured workers are eligible for reduced benefits at age 62 and full retirement benefits between age 65 and 67, depending on their year of birth. Social Security retirement benefits are based on the worker's age and career earnings, are fully indexed for inflation after retirement, and replace a relatively higher proportion of wages for career low-wage earners. Social Security's primary source of revenue is the Old Age, Survivors, and Disability Insurance (OASDI) portion of the payroll tax paid by employers and employees. The OASDI payroll tax is 6.2 percent of earnings each for employers and employees, up to an established maximum. One of Social Security's most fundamental principles is that benefits reflect the earnings on which workers have paid taxes. Social Security provides benefits that workers have earned to some degree because of their contributions and those of their employers. At the same time, Social Security helps ensure that its beneficiaries have adequate incomes and do not have to depend on welfare. Toward this end, Social Security's benefit provisions redistribute income in a variety of ways--from those with higher lifetime earnings to those with lower ones, from those without dependents to those with dependents, from single earners and two-earner couples to one-earner couples, and from those who do not live very long to those who do. These effects result from the program's focus on helping ensure adequate incomes. Such effects depend to a great degree on the universal and compulsory nature of the program. According to the Social Security trustees' 2003 intermediate, or best- estimate, assumptions, Social Security's cash flow is expected to turn negative in 2018. In addition, all of the accumulated Treasury obligations held by the trust funds are expected to be exhausted by 2042. Social Security's long-term financing shortfall stems primarily from the fact that people are living longer. As a result, the number of workers paying into the system for each beneficiary has been falling and is projected to decline from 3.3 today to about 2 by 2030. Reductions in promised benefits and/or increases in program revenues will be needed to restore the long-term solvency and sustainability of the program. About one-fourth of public employees do not pay Social Security taxes on the earnings from their government jobs. Historically, Social Security did not require coverage of government employees because they had their own retirement systems, and there was concern over the question of the federal government's right to impose a tax on state governments. However, virtually all other workers are now covered, including the remaining three-fourths of public employees. The 1935 Social Security Act mandated coverage for most workers in commerce and industry, which at that time comprised about 60 percent of the workforce. Subsequently, the Congress extended mandatory Social Security coverage to most of the excluded groups, including state and local employees not covered by a public pension plan. The Congress also extended voluntary coverage to state and local employees covered by public pension plans. Since 1983, however, public employers have not been permitted to withdraw from the program once they are covered. Also, in 1983, the Congress extended mandatory coverage to newly hired federal workers. The Social Security Administration (SSA) estimates that 5.25 million state and local government employees, excluding students and election workers, are not covered by Social Security. SSA also estimates that annual wages for these noncovered employees totaled about $171 billion in 2002. In addition, 1 million federal employees hired before 1984 are also not covered. Seven states--California, Colorado, Illinois, Louisiana, Massachusetts, Ohio, and Texas--account for more than 75 percent of the noncovered payroll. Most full-time public employees participate in defined benefit pension plans. Minimum retirement ages for full benefits vary; however, many state and local employees can retire with full benefits at age 55 with 30 years of service. Retirement benefits also vary, but they are usually based on a specified benefit rate for each year of service and the member's final average salary over a specified time period, usually 3 years. For example, plans with a 2-percent rate replace 60 percent of a member's final average salary after 30 years of service. In addition to retirement benefits, a 1994 U.S. Department of Labor survey found that all members have a survivor annuity option, 91 percent have disability benefits, and 62 percent receive some cost-of-living increases after retirement. In addition, in recent years, the number of defined-contribution plans, such as 401(k) plans and the Thrift Savings Plan for federal employees, has been growing and becoming a relatively more common way for employers to offer pension plans; public employers are no exception to this trend. Even though noncovered employees may have many years of earnings on which they do not pay Social Security taxes, they can still be eligible for Social Security benefits based on their spouses' or their own earnings in covered employment. SSA estimates that 95 percent of noncovered state and local employees become entitled to Social Security as workers, spouses, or dependents. Their noncovered status complicates the program's ability to target benefits in the ways it is intended to do. To address the fairness issues that arise with noncovered public employees, Social Security has two provisions--GPO, which addresses spouse and survivor benefits and WEP, which addresses retired worker benefits. Both provisions depend on having complete and accurate information that has proven difficult to get. Also, both provisions are a source of confusion and frustration for public employees and retirees. As a result, proposals have been offered to revise or eliminate both provisions. Under the GPO provision, enacted in 1977, SSA must reduce Social Security benefits for those receiving noncovered government pensions when their entitlement to Social Security is based on another person's (usually their spouse's) Social Security coverage. Their Social Security benefits are to be reduced by two-thirds of the amount of their government pension. Under the WEP, enacted in 1983, SSA must use a modified formula to calculate the Social Security benefits people earn when they have had a limited career in covered employment. This formula reduces the amount of payable benefits. Regarding GPO, spouse and survivor benefits were intended to provide some Social Security protection to spouses with limited working careers. The GPO provision reduces spouse and survivor benefits to persons who do not meet this limited working career criterion because they worked long enough in noncovered employment to earn their own pension. Regarding WEP, the Congress was concerned that the design of the Social Security benefit formula provided unintended windfall benefits to workers who spent most of their careers in noncovered employment. The formula replaces a higher portion of preretirement Social Security-covered earnings when people have low average lifetime earnings than it does when people have higher average lifetime earnings. People who work exclusively, or have lengthy careers, in noncovered employment appear on SSA's earnings records as having no covered earnings or a low average of covered lifetime earnings. As a result, people with this type of earnings history benefit from the advantage given to people with low average lifetime earnings when in fact their total (covered plus noncovered) lifetime earnings were higher than they appear to be for purposes of calculating Social Security benefits. Both GPO and WEP apply only to those beneficiaries who receive pensions from noncovered employment. To administer these provisions, SSA needs to know whether beneficiaries receive such noncovered pensions. However, our prior work found that SSA lacks payment controls and is often unable to determine whether applicants should be subject to GPO or WEP because it has not developed any independent source of noncovered pension information. In that report, we estimated that failure to reduce benefits for federal, state, and local employees caused $160 million to $355 million in overpayments between 1978 and 1995. In response to our recommendation, SSA performed additional computer matches with the Office of Personnel Management to get noncovered pension data for federal retirees in order to ensure that these provisions are applied. These computer matches detected payment errors; correcting these errors will generate hundreds of millions of dollars in savings, according to our estimates. Also, in that report, we recommended that SSA work with the Internal Revenue Service (IRS) to revise the reporting of pension information on IRS Form 1099R, so that SSA would be able to identify people receiving a pension from noncovered employment, especially in state and local governments. However, IRS does not believe it can make the recommended change without new legislative authority. Given that one of our recommendations was implemented but not the other, SSA now has better access to information for federal employees but not for state and local employees. As a result, SSA cannot apply GPO and WEP for state and local government employees to the same degree that it does for federal employees. To address issues such as these, the President's budget proposes "to increase Social Security payment accuracy by giving SSA the ability to independently verify whether beneficiaries have pension income from employment not covered by Social Security." In addition to facing administrative challenges, GPO and WEP have also faced criticism regarding their design in the law. For example, GPO does not apply if an individual's last day of state/local employment is in a position that is covered by Social Security. This GPO "loophole" raises fairness and equity concerns. In the states we visited for a previous report, individuals with a relatively minimal investment of work time and Social Security contributions gained access to potentially many years of full Social Security spousal benefits. To address this issue, the House recently passed legislation that provides for a longer minimum time period in covered employment. At the same time, GPO and WEP have been a source of confusion and frustration for the roughly 6 million workers and nearly 1 million beneficiaries they affect. Critics of the measures contend that they are basically inaccurate and often unfair. For example, some opponents of WEP argue that the formula adjustment is an arbitrary and inaccurate way to estimate the value of the windfall and causes a relatively larger benefit reduction for lower-paid workers. A variety of proposals have been offered to either revise or eliminate them. While we have not studied these proposals in detail, I would like to offer a few observations to keep in mind as you consider them. First, repealing these provisions would be costly in an environment where the Social Security trust funds already face long-term solvency issues. According to SSA and the Congressional Budget Office (CBO), proposals to reduce the number of beneficiaries subject to GPO would cost $5 billion or more over the next 10 years and increase Social Security's long-range deficit by up to 1 percent. Eliminating GPO entirely would cost $21 billion over 10 years and increase the long-range deficit by about 3 percent. Similarly, a proposal that would reduce the number of beneficiaries subject to WEP would cost $19 billion over 10 years, and eliminating WEP would increase Social Security's long-range deficit by 3 percent. Second, in thinking about the fairness of the provisions and whether or not to repeal them, it is important to consider both the affected public employees and all other workers and beneficiaries who pay Social Security taxes. For example, SSA has described GPO as a way to treat spouses with noncovered pensions in a fashion similar to how it treats dually entitled spouses, who qualify for Social Security benefits both on their own work records and their spouses'. In such cases, each spouse may not receive both the benefits earned as a worker and the full spousal benefit; rather the worker receives the higher amount of the two. If GPO were eliminated or reduced for spouses who had paid little or no Social Security taxes on their lifetime earnings, it might be reasonable to ask whether the same should be done for dually entitled spouses who have paid Social Security on all their earnings. Far more spouses are subject to the dual-entitlement offset than to GPO; as a result, the costs of eliminating the dual-entitlement offset would be commensurately greater. Aside from the issues surrounding GPO and WEP, another aspect of the relationship between Social Security and public employees is the question of mandatory coverage. Making coverage mandatory has been proposed in the past to help address the program's financing problems. According to Social Security actuaries, doing so would reduce the 75-year actuarial deficit by 10 percent. Mandatory coverage could also enhance inflation- protection for the affected beneficiaries, improve portability, and add dependent benefits in many cases. However, to provide for the same level of retirement income, mandatory coverage could increase costs for the state and local governments that would sponsor the plans. Moreover, if coverage were extended primarily to new state and local employees, GPO and WEP would continue to apply for many years to come for existing employees and beneficiaries even though they would become obsolete in the long run. While Social Security's solvency problems have triggered an analysis of the impact of mandatory coverage on program revenues and expenditures, the inclusion of such coverage in a comprehensive reform package would need to be grounded in other considerations. In recommending that mandatory coverage be included in the reform proposals, the 1994-1996 Social Security Advisory Council stated that mandatory coverage is basically "an issue of fairness." The Advisory Council's report noted that "an effective Social Security program helps to reduce public costs for relief and assistance, which, in turn, means lower general taxes. There is an element of unfairness in a situation where practically all contribute to Social Security, while a few benefit both directly and indirectly but are excused from contributing to the program." The impact on public employers, employees, and pension plans would depend on how states and localities with noncovered employees would react to mandatory coverage. Many public pension plans currently offer a lower retirement age and higher retirement income benefit than Social Security. For example, many public employees, especially police and firefighters, retire before they are eligible for full Social Security benefits; new plans that include Social Security coverage might provide special supplemental benefits for those who retire before they could receive Social Security benefits. Social Security, on the other hand, offers automatic inflation protection, full benefit portability, and dependent benefits, which are not available in many public pension plans. Costs could increase by as much as 11 percent of payroll for those states and localities, depending on the benefit package of the new plans that would include Social Security coverage. Alternatively, states and localities that wanted to maintain level spending for retirement would likely need to reduce some pension benefits. Additionally, states and localities could require several years to design, legislate, and implement changes to current pension plans. Finally, mandating Social Security coverage for state and local employees could elicit a constitutional challenge. There are no easy answers to the difficulties of equalizing Social Security's treatment of covered and noncovered workers. Any reductions in GPO or WEP would ultimately come at the expense of other Social Security beneficiaries and taxpayers. Mandating universal coverage would promise the eventual elimination of GPO and WEP but at potentially significant cost to affected state and local governments, and even so GPO and WEP would continue to apply for some years to come, unless they were repealed. Whatever the decision, it will be important to administer all elements of the Social Security program effectively and equitably. GPO and WEP have proven difficult to administer because they depend on complete and accurate reporting of government pension income, which is not currently achieved. The resulting disparities in the application of these two provisions is yet another source of unfairness in the final outcome. We have made recommendations to the Internal Revenue Service to provide for complete and accurate reporting, but it has responded that it lacks the necessary authority from the Congress. We therefore take this opportunity to bring the matter to the Subcommittee's attention for consideration. To facilitate complete and accurate reporting of government pension income, the Congress should consider giving IRS the authority to collect this information, which could perhaps be accomplished through a simple modification to a single form. Mr. Chairman, this concludes my statement, I would be happy to respond to any questions you or other members of the Subcommittee may have. For information regarding this testimony, please contact Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security Issues, on (202) 512-7215. Individuals who made key contributions to this testimony include Daniel Bertoni and Ken Stockbridge.
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Social Security covers about 96 percent of all US workers; the vast majority of the rest are state, local, and federal government employees. While these noncovered workers do not pay Social Security taxes on their government earnings, they may still be eligible for Social Security benefits. This poses difficult issues of fairness, and Social Security has provisions that attempt to address those issues, but critics contend these provisions are themselves often unfair. Congress asked GAO to discuss these provisions as well as the implications of mandatory coverage for public employees. Social Security's provisions regarding public employees are rooted in the fact that about one-fourth of them do not pay Social Security taxes on the earnings from their government jobs, for various historical reasons. Even though noncovered employees may have many years of earnings on which they do not pay Social Security taxes, they can still be eligible for Social Security benefits based on their spouses' or their own earnings in covered employment. To address the issues that arise with noncovered public employees, Social Security has two provisions--the Government Pension Offset (GPO), which affects spouse and survivor benefits, and the Windfall Elimination Provision (WEP), which affects retired worker benefits. Both provisions reduce Social Security benefits for those who receive noncovered pension benefits. Both provisions also depend on having complete and accurate information on receipt of such noncovered pension benefits. However, such information is not available for many state and local pension plans, even though it is for federal pension benefits. As a result, GPO and WEP are not applied consistently for all noncovered pension recipients. In addition to the administrative challenges, these provisions are viewed by some as confusing and unfair, and a number of proposals have been offered to either revise or eliminate GPO and WEP. Such actions, while they may reduce confusion among affected workers, would increase the long-range Social Security trust fund deficit and could create fairness issues for workers who have contributed to Social Security throughout their working lifetimes. Making coverage mandatory has been proposed to help address the program's financing problems, and doing so could ultimately eliminate the need for the GPO and the WEP. According to Social Security actuaries, mandatory coverage would reduce the 75-year actuarial deficit by 10 percent. However, to provide for the same level of retirement income, mandating coverage would increase costs for the state and local governments that would sponsor the plans. Moreover, GPO and WEP would still be needed for many years to come even though they would become obsolete in the long run.
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The Congress passed the Communications Satellite Act of 1962 to promote the creation of a global satellite communications system. As a result of this legislation, the United States joined with 84 other nations in establishing the International Telecommunications Satellite Organization--more commonly known as INTELSAT--roughly 10 years later. Each member nation designated a single telecommunications company to represent its country in the management and financing of INTELSAT. These companies were called "signatories" to INTELSAT and were typically government- owned telecommunications companies, such as France Telecom, that provided satellite communications services as well as other domestic communications services. Unlike any of the other nations that originally formed INTELSAT, the United States designated a private company, Comsat Corporation, to serve as its signatory to INTELSAT. The ORBIT Act, enacted by the Congress in March 2000, was designed to promote a competitive global satellite communication services market. The act did so primarily by calling for the privatization of INTELSAT after about three decades of operation as an intergovernmental entity. The ORBIT Act required, for example, that INTELSAT be transformed into a privately held, for-profit corporation with a board of directors that would be largely independent of former INTELSAT signatories. Moreover, the act required that the newly privatized Intelsat retain no privileges or other benefits from governments that had previously owned or controlled it. To ensure that this transformation occurred, the Congress imposed certain restrictions on the granting of licenses that allow Intelsat to provide services within the United States. The Congress coupled the issuance of licenses granted by FCC to INTELSAT's successful privatization under the ORBIT Act. That is, FCC was told to consider compliance with provisions of the ORBIT Act as it made decisions about licensing Intelsat's domestic operations in the United States. Moreover, FCC was empowered to restrict any satellite operator's provision of certain new services from the United States to any country that limited market access exclusively to that satellite operator. When satellite technology first emerged as a vehicle for commercial international communications, deploying a global satellite system was both risky and expensive. Worldwide organizations were considered the best means for providing satellite-based services throughout the world. When INTELSAT was established, the member governments put in place a number of protections to encourage its development. In essence, INTELSAT was created as an international monopoly--with little competition to its international services allowed by other satellite systems, although domestic and other satellite systems were allowed under certain conditions. As such, during the 1970s and early 1980s, INTELSAT was the only wholesale provider of certain types of global satellite communications services such as international telephone calls and relay of television signals internationally. As satellite technology advanced, it became economically more feasible for private companies to develop global satellite systems. This occurred in part because of growing demand for communications services as well as falling costs for satellite system equipment. In particular, some domestic systems that were already in operation expressed interest in expanding into global markets. By the mid-1980s, the United States began encouraging the development of commercial satellite communications systems that would compete with INTELSAT. To do so under the INTELSAT treaty agreements, President Reagan determined that competing international satellite systems were required in the national interest of the United States. After that determination, domestic purchasers of international satellite communications services were allowed to use systems other than INTELSAT. In 1988, PanAmSat was the first commercial company to begin launching satellites in an effort to develop a global satellite system. Within a decade after PanAmSat first entered the market, INTELSAT faced other global satellite competitors. Moreover, intermodal competition emerged during the 1980s and 1990s as fiber optic networks were widely deployed on the ground and underwater to provide international communications services. As competition to INTELSAT grew throughout the 1990s, commercial satellite companies became concerned that INTELSAT enjoyed certain advantages stemming from its intergovernmental status. In particular, the new satellite companies noted that INTELSAT enjoyed immunity from legal liability and was often not taxed in the various countries it served. Additionally, new competitors noted that the signatories to INTELSAT in many countries were typically government-owned telecommunications companies, and many were the regulatory authorities that made decisions on satellite access to their respective domestic markets. As such, new satellite companies were concerned that those entities, because of their ownership stake in INTELSAT as signatories, might favor INTELSAT and thus render entry for other satellite companies more difficult. Because of these concerns, competitors began to argue that the satellite marketplace would not become fully competitive unless INTELSAT became a private company that operated like any other company and no longer enjoyed any advantages. During the same time frame, some of the signatories to INTELSAT came to believe that certain of INTELSAT's obligations as an intergovernmental entity impeded its own market competitiveness. For example, decision- makers within INTELSAT became concerned that the cumbersome nature of the intergovernmental decision-making process left the company unable to rapidly respond to changing market conditions--a disadvantage in comparison with competing private satellite providers. In 1999, INTELSAT announced its decision to become a private corporation, but to leave in place a residual intergovernmental organization that would monitor the privatized Intelsat's remaining public service obligations. On July 18, 2001, INTELSAT transferred virtually all of its financial assets and liabilities to a private company called Intelsat, Ltd., a holding company incorporated in Bermuda. Intelsat, Ltd. has several subsidiaries, including a U.S.-incorporated indirect subsidiary called Intelsat LLC. Upon their execution of privatization, INTELSAT signatories received shares of Intelsat, Ltd. in proportion to their investment in the intergovernmental INTELSAT. Two months before the privatization, FCC determined that INTELSAT's privatization plan was consistent with the requirements of the ORBIT Act for a variety of reasons, including the following: Intelsat, Ltd.'s Shareholders' Agreement provided sufficient evidence that the company would conduct an initial public offering (IPO). Intelsat, Ltd. no longer enjoyed the legal privileges or immunities of the intergovernmental INTELSAT. Both Intelsat, Ltd. and Intelsat LLC are incorporated in countries that are signatories to the World Trade Organization (WTO) and have laws that secure competition in telecommunications services. Intelsat, Ltd. converted into a stock corporation with a fiduciary board of directors. Measures were taken to ensure that a majority of the members of Intelsat, Ltd.'s Board of Directors were not directors, employees, officers, managers, or representatives of any signatory or former signatory of the intergovernmental INTELSAT. Intelsat, Ltd. and its subsidiaries had only arms-length business relationships with certain other entities that obtained INTELSAT's assets. In light of these findings, FCC conditionally authorized Intelsat LLC to use its U.S. satellite licenses to provide services within the United States. However, FCC conditioned this authorization on Intelsat, Ltd. conducting an IPO of securities as mandated by the ORBIT Act. In the past year, however, several changes have occurred that alter the circumstances and requirements associated with Intelsat's IPO. On August 16, 2004, Intelsat, Ltd. announced that its Board of Directors approved the sale of the company to a consortium of four private investors. According to an Intelsat official, this transaction, which was completed on January 28, 2005, eliminates former signatories' ownership in Intelsat. Additionally, on October 25, 2004, the President signed legislation modifying the requirements for privatization in the ORBIT Act. Specifically, Intelsat, Ltd. may forgo an IPO under certain conditions, including, among other things, certifying to FCC that it has achieved substantial dilution of the aggregate amount of signatory or former signatory financial interest in the company. FCC is still reviewing this transaction to determine whether Intelsat has met the requirements of the ORBIT Act as amended and thus is no longer required to hold an IPO. According to most stakeholders and experts we spoke with, access to non- U.S. satellite markets has generally improved during the past decade, which they generally attribute to global trade agreements and privatization trends. In particular, global satellite companies appear less likely now than they were in the past to encounter government restraints or business practices that limit their ability to provide service in non-U.S. markets. Satellite companies and experts we spoke with generally indicated that access to non-U.S. satellite markets has improved. Additionally, most stakeholders attributed this improved access to global trade agreements that helped to open telecommunications markets around the world, as well as to the trend toward privatization in the global telecommunications industry. At the same time, many stakeholders noted that the ORBIT Act had little to no impact on improving market access. According to several stakeholders, market access was already improving when the ORBIT Act was passed. Despite the general view that market access has improved, some satellite companies and experts expressed concerns that market access issues still exist. These remaining market access problems were attributed to foreign government policies that limit or slow satellite competitors' access to certain markets. For example: Some companies and experts we spoke with said that some countries have policies that favor domestic satellite providers over other satellite systems and that this can make it difficult for nondomestic companies to provide services in these countries. Some companies and one expert we spoke with said that because some countries carefully control and monitor the content that is provided within their borders, the country's policies may limit certain satellite companies' access to their market. Several companies and an expert we interviewed said that many countries have time-consuming or costly approval processes for satellite companies. In addition to these government policies, some stakeholders believe that Intelsat may benefit from legacy business relationships. Since INTELSAT was the dominant provider of global satellite services for approximately 30 years, several stakeholders noted that Intelsat may benefit from the long- term business relationships that were forged over time, as telecommunications companies in many countries may feel comfortable continuing to do business with Intelsat as they have for years. Additionally, two stakeholders noted that because companies have plant and equipment as well as proprietary satellite technology in place to receive satellite services from Intelsat, it might cost a significant amount of money for companies to replace equipment in order to use satellite services from a different provider. Alternatively, representatives of Intelsat, Ltd. told us that Intelsat seeks market access on a transparent and nondiscriminatory basis and that Intelsat has participated with other satellite operators, through various trade organizations, to lobby governments to open their markets. Further, some companies and many of the experts we interviewed told us that, in their view, Intelsat does not have preferential access to non-U.S. satellite markets and that they have no knowledge that Intelsat in any way seeks or accepts exclusive market access arrangements or attempts to block competitors' access to non-U.S. satellite markets. Finally, some of the companies we spoke with believe that FCC should take a more proactive role in improving access for satellite companies in non-U.S. markets. For example, one satellite company said that section 648 of the ORBIT Act, which prohibits any satellite operator from acquiring or enjoying an exclusive arrangement for service to or from the United States, provides a vehicle for FCC to investigate the status of access for satellite companies to other countries' markets. Conversely, FCC officials told us they do not believe that FCC should undertake investigations of market access concerns without specific evidence of violations of section 648 of the ORBIT Act. While some comments filed with FCC in proceedings on Intelsat's licensing and for FCC's annual report on the ORBIT Act raise concerns about market access, FCC has stated that these filings amount only to general allegations and fall short of alleging any specific statutory violation that would form a basis sufficient to trigger an FCC enforcement action. 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 questions regarding this testimony and the report on which it is based, please contact JayEtta Z. Hecker at (202) 512-2834 or [email protected], or Mark L. Goldstein at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony included Amy Abramowitz, Michael Clements, Emil Friberg, Bert Japikse, Logan Kleier, Richard Seldin, and Juan Tapia-Videla. Tax Policy: Historical Tax Treatment of INTELSAT and Current Tax Rules for Satellite Corporations. GAO-04-994. Washington, D.C.: September 13, 2004. Telecommunications: Intelsat Privatization and the Implementation of the ORBIT Act. GAO-04-891. Washington, D.C.: September 13, 2004. Telecommunications: Competition Issues in International Satellite Communications. GAO/RCED-97-1. Washington, D.C.: October 11, 1996. Telecommunications: Competitive Impact of Restructuring the International Satellite Organizations. GAO/RCED-96-204. Washington, D.C.: July 8, 1996. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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In 2000, the Congress passed the Open-market Reorganization for the Betterment of International Telecommunications Act (ORBIT Act) to help promote a more competitive global satellite services market. The ORBIT Act called for the full privatization of INTELSAT, a former intergovernmental organization that provided international satellite services. In this testimony, GAO discusses (1) the impetus for the privatization of Intelsat as competition developed in the 1990s, (2) the extent to which the privatization steps required by the ORBIT Act have been implemented, and (3) whether access by global satellite companies to non-U.S. markets has improved since the enactment of the ORBIT Act. When commercial satellite technology was first deployed, a worldwide system was seen as the most efficient means to facilitate the advancement of a fully global provider. INTELSAT was thus established as an intergovernmental entity, originally established by 85 nations, that was protected from competition in its provision of global satellite communications services. By the 1980s, however, technology developments enabled private companies to efficiently compete for global communications services, and in 1984, President Reagan determined that it would be in the national interest of the United States for there to be greater competition in this market. New commercial satellite systems emerged, but soon found that INTELSAT enjoyed advantages stemming from its intergovernmental status and ownership by telecommunications companies in other countries that impeded new satellite companies from effectively competing. The new satellite companies began to call for INTESLAT to be privatized. Decision makers within INTELSAT also determined that privatization would enable more rapid business decisions. Just prior to INTELSAT's privatization in July 2001, FCC determined that INTELSAT's privatization plan was consistent with requirements of the ORBIT Act. The Federal Communications Commission (FCC) thus authorized the privatized Intelsat--the official name of the company after privatization--to use its U.S. satellite licenses to provide services within the United States pending an initial public offering (IPO) of securities that was mandated by the ORBIT Act to occur at a later time. New legislation was passed in 2004 that allows Intelsat to forgo an IPO if it has achieved substantial dilution of its "signatory" ownership--that is, dilution of ownership by those entities (mostly government-controlled telecommunications companies) that had been the investors in INTELSAT when it was an intergovernmental entity. Since Intelsat has recently been sold to a consortium of four private investors, it no longer has, according to an Intelsat official, any former signatory ownership. FCC is still reviewing this transaction to determine whether Intelsat has met the requirements of the ORBIT Act as amended and thus is no longer required to hold an IPO. Most of the stakeholders we spoke with said that access to non-U.S. satellite markets has generally improved during the past decade. This improvement in market access is generally attributed to global trade agreements and privatization trends. Despite this general view, some satellite companies expressed concerns that some market access issues still exist. For example, some companies noted that some countries may favor domestic satellite providers or may choose to continue obtaining service from Intelsat because of long-term business relationships that were forged over time. Nevertheless, Intelsat officials noted that it seeks market access on a transparent and nondiscriminatory basis and that Intelsat has participated with other satellite operators, through various trade organizations, to lobby governments to open their markets.
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The Coast Guard is in the process of receiving 14 C-27Js as a part of a Congressionally mandated transfer, at no cost to the Coast Guard, from the Air Force, and these aircraft are planned to significantly contribute to the Coast Guard's missions once they are operational. However, as we reported in March 2015, it will take time and money to fully transfer and modify the aircraft. As of May 2015, 2 of the 14 C-27J aircraft had been removed from storage at the Air Force's 309th Aerospace Maintenance and Regeneration Group (AMARG) at Davis-Monthan Air Force Base where 13 of the 14 C-27Js are stored. These 2 aircraft are currently at the Coast Guard's aviation maintenance facility in Elizabeth City, North Carolina where the aircraft are continuing to be inducted into the Coast Guard. The Coast Guard expects to deliver 2 additional C-27Js from AMARG to its maintenance facility by the end of fiscal year 2015. The first part of induction entails removing the aircraft from the AMARG storage facility, which involves taking off a protective compound, conducting system checks and basic maintenance, and successfully completing a flight test--among other steps. The Coast Guard then needs to ensure that it can support these assets and modify the C-27Js to meet its missions. This is a lengthy and complex process and, as a result, the fleet of 14 fully operational C-27Js is not anticipated until 2022. In our March 2015 report, we identified a number of milestones and risks that will need to be addressed to achieve fully capable aircraft. In general, the Coast Guard must achieve three major milestones before the aircraft are fully operational: 1. induct the aircraft, 2. establish operational units (bases), and 3. add surveillance and advanced communication capabilities. In addition, complicating these efforts are areas of risk that need to be addressed before the Coast Guard can field fully operational C-27Js. These three risk areas are: (1) purchasing spare parts, (2) accessing technical data, and (3) understanding the condition of the aircraft. These and other risks may inhibit the Coast Guard's ability to operate the aircraft as planned. However, the Coast Guard is working to mitigate these risks. Figure 1 illustrates the milestones and risk areas the Coast Guard must address before it can field a fully capable C-27J aircraft. According to initial Coast Guard estimates, while the C-27J aircraft come at no acquisition cost to the Coast Guard, the costs to fully operationalize them will total about $600 million. The fiscal year 2016 Capital Investment Plan includes $482 million for this effort. The Capital Investment Plan also notes that the Coast Guard has yet to fully estimate the total cost of incorporating and operating the C-27J. The Coast Guard is planning to refine this initial estimate by January 2016, in accordance with a February 2015 DHS acquisition decision memo. In addition to the challenges in converting the C-27Js to fully operational aircraft, we found in March 2015 that the Coast Guard faces a shortfall in To fully meet its mission needs, the achieving its overall flight hour goal.Coast Guard's 2005 mission needs statement set forth a goal of 52,400 hours per year. In fiscal year 2014, the Coast Guard's fixed-wing aviation fleet flew 38 percent fewer hours than these stated needs--a total of 32,543 hours. The revised fleet as currently envisioned, with the addition of the C-27J, will narrow this gap, but the Coast Guard will still fall short of the 52,400 flight hour goal. As a result of planned changes to its fleet composition to accommodate the C-27J--specifically reducing its planned purchase of 36 HC-144s to 18--and other reasons the Coast Guard is now on a path to fall short of meeting this goal by 18 percent when all planned assets are operational. Table 1 shows: (1) the aircraft that comprise the current 2014 fleet plan and the Coast Guard's planned fleet once the C-27Js are operational, (2) the annual flight hours each fleet provides, and (3) the difference between the flight hours of the fleets and the 52,400 hour goal. According to the fiscal year 2016 Capital Investment Plan, the Coast Guard is currently conducting a revised fixed-wing fleet analysis, intended to be a fundamental reassessment of the capabilities and mix of fixed- wing assets needed to fulfill its missions. Coast Guard budget and programming officials recognize the aviation fleet may change based on the flight hour goals in the new mission needs statement and the overall fleet mix analysis. The fiscal year 2016 Capital Investment Plan, therefore, does not include any additional fixed-wing asset purchases. For example, DHS and the Coast Guard have formally paused the HC-144 acquisition program at 18 aircraft, which are the aircraft they have already purchased. The Coast Guard has begun to rewrite its mission needs statement and concept of operations and plans to complete this effort by 2016. The Coast Guard plans to complete its full fixed-wing fleet mix analysis, which includes the assets it estimates will best meet these needs, by 2019, but has not set forth specific timeframes for completing key milestones. We recommended in our March 2015 report that the Secretary of Homeland Security and the Commandant of the Coast Guard inform Congress of the time frames and key milestones for completing the fleet mix study, including the specific date when the Coast Guard will publish its revised annual flight hour needs and when it plans to inform Congress of the corresponding changes to the composition of its fixed-wing fleet to meet these needs. DHS concurred with our recommendation but did not provide specific time lines for meeting this recommendation. The bill for the Coast Guard Authorization Act of 2015, introduced in April 2015, requires a revised Coast Guard fixed-wing aircraft fleet mix analysis to be submitted to congressional transportation committees by the end of fiscal year 2015. The Coast Guard continues to field National Security Cutters (NSCs) and Fast Response Cutters (FRCs), which are replacing the legacy 378'-foot high endurance cutters and the 110'-foot patrol boats, respectively. As we reported in April 2015, the Coast Guard is also in the process of working with three potential shipbuilders to design the Offshore Patrol Cutter, but this asset, needed to recapitalize the vast majority of the major cutter fleet, remains years away from being fielded. In the meantime, the Coast Guard's legacy Medium Endurance Cutters, which the Offshore Patrol Cutter is planned to replace, have begun to reach the end of their service lives creating a potential gap. The Coast Guard has all 8 NSCs on contract or delivered as of May 2015, and, as we reported in April 2015, completed operational test and evaluation in April 2014. All 8 NSCs are planned to be fully operational by 2020 and the Coast Guard is phasing out the legacy 378'-foot high endurance cutters as the NSCs become operational. We are currently conducting a detailed review of the NSC's recent test event at the request of this subcommittee. We reported in April 2015, however, that during this initial operational testing, the NSC was found to be operationally effective and suitable, but with several major deficiencies. For example, the NSC's small boat--which is launched from the back of the cutter--is not suited to operate in rough waters (sea state 5) as intended. officials told us they planned to test a new small boat by March 2015. In addition, the Coast Guard deferred testing for several key capabilities on the cutter, such as cybersecurity, the use of unmanned aerial systems, or its ability to handle certain classified information. Coast Guard officials said follow-on operational tests will be conducted between fiscal years 2015 and 2017. While future tests will be key to understanding the NSC's capabilities, any necessary changes resulting from these tests will have to be retrofit onto all 8 NSCs since they are all either built or under contract. In June 2014, we found that the NSC program had at least $140 million in retrofits and design changes to fund and implement on the NSC fleet. Sea states refer to the height, period, and character of waves on the surface of a large body of water. Sea state 5 represents 8.2- to 13.1-foot waves. As we also reported in June 2014, further changes may be needed due to issues discovered through operating the NSC, which could result in the Coast Guard having to spend even more money in the future to ensure the NSC fleet meets requirements and is logistically supportable. For example, the cutter is experiencing problems operating in warm climates, including cooling system failures, excessive condensation forming puddles on the deck of the ship, and limited redundancy in its air conditioning system affecting use of information technology systems. According to operational reports from a 2013 deployment, the Commanding Officer of an NSC had to impose speed restrictions on the vessel because of engine overheating when the seawater temperature was greater than 68 degrees. In addition, cold climate issues on the cutter include a lack of heaters to keep oil and other fluids warm during operations in cold climates, such as the arctic. Further, Coast Guard operators state that operating near ice must be done with extreme caution since the ice can move quickly and the NSC could sustain significant damage if it comes in contact with the ice. In June 2014 we reported that while senior Coast Guard officials acknowledged that there were issues to address, they stated that the Coast Guard has not yet determined what, if any, fixes are necessary and that it depends on where the cutter ultimately operates. In April 2015, the Coast Guard accepted delivery of the 13th of 58 FRCs and now has 32 of the cutters on contract. As we reported in April 2015, the Coast Guard is introducing additional competition into this purchase by recompeting the construction contract for the remaining 26 vessels; this contract is planned to be awarded in fiscal year 2016. According to the Coast Guard, the FRC has already been used to rescue over 400 undocumented immigrants, seize nearly $20 million in contraband, and apprehend several suspected drug smugglers. The fiscal year 2016 Capital Investment Plan includes $1.47 billion over the next 5 years to continue purchasing these assets by which time the Coast Guard plans to have fielded 42 FRCs. As we reported in June 2014, operational testers within the Department of the Navy determined in July 2013 that the FRC, without the cutter's small boat, is operationally effective--meaning that testers determined that the asset enables mission success. However, these operational testers also determined that the FRC is not operationally suitable because a key engine part failed, which lowered the amount of time the ship was available for missions to an unacceptable level. Despite the mixed test results, Navy and DHS testers as well as Coast Guard program officials all agreed that the FRC is a capable vessel, and the Coast Guard plans to confirm that it has resolved these issues during follow-on testing planned to be completed by the end of fiscal year 2015. The Coast Guard is using a two-phased, competitive strategy to select a contactor to construct the Offshore Patrol Cutter (OPC), as we reported in April 2015. First, the Coast Guard conducted a full and open competition to select three contractors to perform preliminary and contract design work, and in February 2014, the Coast Guard awarded firm-fixed price contracts to three shipbuilders. Second, by the end of fiscal year 2016, the Coast Guard plans to award a contract to one of these shipbuilders to complete the detailed design of the vessel and construct the first 9 to 11 ships, at which time the Coast Guard plans to recompete the contract for the remaining vessels. The Coast Guard currently plans to begin construction on the lead ship in fiscal year 2018--one year later than planned in its most recent program baseline--and deliver this ship in 2022. The Coast Guard attributes the schedule delay to procurement delays, including a bid protest. The fiscal year 2016 Capital Investment Plan has $1.5 billion in funding for the OPC, which funds the design work and construction of the first three vessels. After the first 3 of the planned fleet of 25 OPCs are built, the Coast Guard plans to increase its purchase to 2 OPCs per year until the final asset is delivered, currently scheduled for fiscal year 2035. As we reported in July 2012, the Coast Guard faces capability gaps in its surface fleet over the next several years as the projected service life of its Medium Endurance Cutter fleet expires before planned delivery of the OPCs, which will replace these aging cutters. The Coast Guard completed a refurbishment of the Medium Endurance Cutters in September 2014 to increase their reliability and reduce longer-term maintenance costs. Senior Coast Guard officials responsible for this project reported that these efforts may provide up to 15 years of additional service life to the fleet. However, they noted that this estimate is optimistic and that the refurbishment provided needed upgrades to the Medium Endurance Cutters, but was not designed to further extend the cutters' service lives. As depicted in figure 2, even with the most optimistic projection for the current service life of the Medium Endurance Cutters, we estimated in our July 2012 report that there was a gap before the planned OPC deliveries. The figure shows the service lives for each of the 27 210'-foot and 270'- foot Medium Endurance Cutters if the service life extensions provide 5, 10, or 15 years of additional service, and the planned delivery of the 25 OPCs. Coast Guard budget officials recently told us that the Coast Guard is studying whether to perform additional service life extension work on the Medium Endurance Cutters to keep them operational until the OPCs are delivered. Coast Guard officials could not tell us when a decision will be made about this work and the fiscal year 2016 Capital Investment Plan does not include funds for this effort. As we have found in recent years, the Coast Guard faces a significant challenge in the affordability of its overall fleet, driven primarily by the upcoming OPC procurement, which is planned to cost $12.1 billion. The OPC will absorb about two-thirds of the Coast Guard's acquisition funding between 2018 and 2032 while it is being built. As a result, remaining Coast Guard acquisition programs will have to compete for a small percentage of funding during this time. We found in June 2014 that there are gaps between what the Coast Guard estimates it needs to carry out its program of record for its major acquisitions and what it has traditionally requested and received. For example, senior Coast Guard officials have stated a need for over $2 billion per year, but the Coast Guard has received $1.5 billion or less over the past 5 years. The President's budget requests $1 billion for fiscal year 2016. In an effort to address the funding constraints it has faced annually, the Coast Guard has been in a reactive mode, delaying and reducing its capability through the annual budget process but without a plan to realistically set forth affordable priorities. The Coast Guard, DHS, and Office of Management and Budget officials have acknowledged that the Coast Guard cannot afford to recapitalize and modernize its assets in accordance with the current plan at current funding levels. Efforts are underway to address this issue, but so far, these efforts have not led to the difficult trade-off decisions needed to improve the affordability of the Coast Guard's portfolio. We recommended in 2014 that the Coast Guard develop a 20-year fleet modernization plan that identifies all acquisitions needed to maintain the current level of service--aviation and surface-- and the fiscal resources needed to buy the identified assets. We recommended that the plan should consider trade-offs if the fiscal resources needed to execute the plan are not consistent with annual budgets. The Coast Guard concurred with our recommendation, but its response did not fully address our concerns or set forth an estimated date for completion. In June 2014, we also reported that the Coast Guard faces a potentially expensive recapitalization of other surface assets, such as the polar icebreakers and its fleet of river buoy tenders, as these assets continue to age beyond their expected service lives and, in some cases, have been removed from service without a replacement. These issues pose additional potential challenges to the affordability of the Coast Guard's overall acquisition portfolio. Icebreakers--According to program officials, due to funding constraints, the Coast Guard chose not to invest in either of its heavy icebreakers as they approached the end of their service lives. Thus, both heavy icebreakers were out of service from 2010 to 2013 and the Coast Guard could not complete missions, such as resupplying a science laboratory in Antarctica. The Coast Guard has recently returned one of these heavy icebreakers back to service, but still has one fewer heavy icebreaker than it has historically operated and several fewer than it needs, according to the Coast Guard's June 2013 heavy icebreaker mission need statement. The fiscal year 2016 President's Budget asks for $4 million for continued preparatory studies to develop a cost estimate, among other things. The associated fiscal year 2016 Capital Investment Plan contains $166 million for polar icebreakers over the next five years but does not identify what this money is for, though it is far short of the estimated $831 million needed to build the vessel. The Coast Guard is currently working with several U.S. government agencies to develop requirements and establish a plan to build a heavy icebreaker that could be jointly funded by the U.S. government agencies that need the asset to accomplish its missions. River Buoy Tenders--The Coast Guard is facing a gap in its river buoy tender fleet and has yet to formalize an acquisition project to replace this fleet--a project estimated to cost over $1.5 billion. HH-60 and HH-65 Helicopter Fleets--The HH-60 and HH-65 helicopter fleets will approach the end of their lifespans between 2022 and 2026 and will need to either be replaced or have a service life extension performed to keep them operational. Regardless of the future path, significant acquisition dollars will be required to maintain annual flight hours for the next 20 years, according to Coast Guard program officials. Chairman Hunter, Ranking Member Garamendi, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions. If you or your staff have any questions about this statement, please contact Michele Mackin at (202) 512-4841 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony include Katherine Trimble, Assistant Director; Laurier R. Fish; John Crawford; and Peter W. Anderson. 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 Coast Guard is managing a multi-billion dollar effort to modernize aging assets, including ships, aircraft, and information technology, to provide new capabilities to conduct missions ranging from marine safety to defense readiness. The Coast Guard has made progress in its acquisition management capabilities, such as more closely following acquisition best practices and taking steps to increase competition. However, GAO has consistently found that DHS and the Coast Guard recognize, but have yet to address, the fact that the Coast Guard's acquisition needs are not affordable. This statement is based on GAO's body of work issued during the past three years on Coast Guard major acquisitions and highlights GAO's recently completed review of the transfer to the Coast Guard of the C-27J aircraft as well as observations regarding the Coast Guard's fiscal year 2016 Capital Investment Plan. The statement addresses the status of the Coast Guard's (1) aviation assets, particularly the C-27J aircraft and (2) surface assets, as well as (3) the overall affordability of its major acquisition portfolio. GAO has made a number of recommendations to improve acquisition management and assess the affordability of the Coast Guard's portfolio. DHS and the Coast Guard agreed with GAO's recommendations and are working on implementing them by revisiting the Coast Guard's mission needs and fleet mix, as well as creating a 20-year acquisition plan that balances needs and resources, though the agencies have not specified when they will finish these efforts. GAO reported in March 2015 that the Coast Guard is in the process of receiving 14 C-27J fixed-wing aircraft transferred from the Air Force at no cost to the Coast Guard. However, it will take 7 years and about $600 million to fully transfer and modify the aircraft by adding information technology and surveillance systems. Transfer of the C-27J faces a number of risks but the aircraft is expected to contribute significant flight hours toward the Coast Guard's goal once complete. In light of this transfer, the Coast Guard is in the process of determining the best mix of fixed-wing aircraft to provide the capabilities it needs to carry out its missions. As shown in the table, GAO reported that the Coast Guard has fallen short of its flight hour goal; this trend is expected to continue until the Coast Guard revises its mission needs, an effort it expects to complete in 2016. The Coast Guard also plans to complete a fixed-wing fleet mix analysis by 2019, which will revisit the current flight hour goal and the assets that will best meet its needs. The table reflects the existing fleet and flight hours as compared to GAO's analysis of the Coast Guard's planned fleet including the C-27J aircraft. Note: The HC-144 and C-27J are medium range assets while the HC-130H and HC-130J are long range assets. The fiscal year 2014 'medium range' column includes 4 legacy medium range aircraft. According to GAO's April 2015 review, the Coast Guard continues to field National Security Cutters and Fast Response Cutters. The Coast Guard is also working with three potential shipbuilders to design the Offshore Patrol Cutter, needed to recapitalize the majority of the major cutter fleet, with plans for the first ship to be fielded in 2022. In the meantime, the Coast Guard's legacy Medium Endurance Cutters, which the Offshore Patrol Cutter is planned to replace, have begun to reach the end of their service lives. The Coast Guard currently has no definitive plan to extend the service life of these legacy assets and as a result faces a potentially significant capability gap. GAO found in June 2014 that budget officials have acknowledged that the Coast Guard's current plan for developing new, more capable assets is not affordable given current and expected funding levels. For the past 5 years, GAO has found that the Coast Guard's acquisition funding has fallen short of what it estimates it needs to fully recapitalize its assets. The Coast Guard has responded by annually delaying or reducing its capability. The Coast Guard and the Department of Homeland Security (DHS) have taken some steps to address these affordability issues, but as yet these efforts have not led to the types of significant trade-off decisions among resources and needs that would improve the long-term outlook of the Coast Guard's acquisition portfolio.
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State has authority to acquire, manage, and dispose of real property abroad. Specifically, the Foreign Buildings Act (Act) of 1926, as amended, authorizes the Secretary of State to acquire by purchase, construction, exchange, or lease sites and buildings in foreign cities for use by diplomatic and consular establishments of the United States. The Act allows State to alter, repair, furnish, and dispose of these properties, and to provide residential and office space and necessary related facilities to federal agencies abroad. It also authorizes the Secretary to apply disposal proceeds toward real property needs or to deposit proceeds into the Foreign Service Buildings Fund and use the proceeds for authorized purposes. OBO manages State's real property abroad to support U.S. government presence at embassies and consulates, which are also known as missions or posts. This office is responsible for managing U.S. government-owned and government-leased real property, which includes land, structures, and buildings such as embassies, warehouses, offices, and residences. OBO coordinates directly with officials at posts tasked with managing the post's real property. Posts are responsible for implementing OBO policies related to the management, acquisition, disposal, and reporting of real property, outlined in State's FAM. Table 1 below provides an overview of OBO's and the posts' roles and responsibilities for real property management. In 2004, the administration added managing federal real property to the President's Management Agenda and the President issued an executive order directing executive agencies to submit real property information annually for inclusion in a single, comprehensive database, which is now known as the Federal Real Property Profile (FRPP) that provides an annual report on the government's real property holdings. State is currently undertaking a multiyear, multibillion-dollar capital- security construction program to replace 214 of its facilities abroad due to security concerns. State is taking these steps due to continuing threats and incidences such as the terrorist bombings in 1998 of embassies in Dar es Salaam, Tanzania, and Nairobi, Kenya, that killed more than 220 people and injured 4,000 others. The program incorporates the requirements of the Secure Embassy Counterterrorism Act of 1999 and instructs State to replace facilities at vulnerable posts and to require that all new diplomatic facilities be sufficiently sized to ensure that all U.S. government personnel at the post work onsite. Construction projects are prioritized by State's annual risk matrix that ranks facilities based on their vulnerability across a wide range of security threats. In 2004, to aid in the construction of new embassies, a related program, the Capital Security Cost Sharing (CSCS) program was authorized, which required agencies with personnel overseas to provide funding for the construction of new, secure, and safe diplomatic facilities for U.S. government personnel overseas. State expects funding of $2.2 billion per year over a 5 year period through fiscal year 2018 to carry out new construction projects. Our analysis of State's real property portfolio indicated that the overall inventory has increased. State reported its leased properties, which make up approximately 75 percent of the inventory, increased from approximately 12,000 to 14,000 between 2008 and 2013. However, comparing the total number of owned properties between years can be misleading because State's method of counting these properties has been evolving over the past several years. OBO officials explained that in response to changes in OMB's and FRPP's reporting guidance, they have made efforts to count properties more precisely. For example, OBO has focused on separately capturing structural assets previously recorded as part of another building asset, such as perimeter walls, guard booths, and other ancillary structures. As a result of this effort, State recorded approximately 650 additional structural assets in its fiscal year 2012 FRPP report and approximately 900 more structures the following year in its fiscal year 2013 FRPP report, according to OBO officials. Additionally, OBO officials told us that former Department of Defense (DOD) properties in Iraq and Afghanistan were transferred to State; the largest of these transfers occurred in 2012 when State assumed responsibility from DOD for approximately 400 properties in Iraq. State reported additional changes in its real property portfolio, which are described below. Acquisitions: State reported spending more than $600 million to acquire nearly 300 properties from fiscal year 2008 through 2013 (see fig.1). State uses two sources of funding to acquire real property. It acquires land for building new embassy compounds (NEC) with funding from the CSCS program. It acquires residences, offices, and other functional facilities with proceeds from the disposal of unneeded property. In fiscal years 2008 through 2013, State reported spending approximately $400 million of these disposal proceeds to acquire approximately 230 properties. Disposals: From fiscal years 2008 through 2013, State reported selling approximately 170 properties. In doing so, it received approximately $695 million in proceeds (see fig.1). According to State, property vacated when personnel move into newly constructed facilities is the largest source of property that can be disposed of. When State completes construction of a NEC, personnel previously working in different facilities at multiple locations are then collocated into the same NEC, a move that provides State an opportunity to dispose of its former facilities. Further information on State's acquisitions and disposals from fiscal year 2008 through 2013, can be found in figures 1 and 2 below. Leases: The majority of State's leased properties are residences. State reported spending approximately $500 million on leases in 2013 and projects a potential increase to approximately $550 million by 2016 as growing populations in urban centers around the world push rental costs higher and the U.S. government's overseas presence increases. OBO provides guidance to posts for disposing of unneeded properties as the post prepares to move into a NEC. In Belgrade, OBO is working with the post to sell an old embassy that is no longer needed following the completion of Belgrade's NEC. Post officials told us that relocating to the NEC in April 2013 allowed them to market their old embassy and terminate multiple leases. In London, State sold its existing embassy building in August 2013 to fund the construction of a NEC. State is leasing the existing building until construction of the NEC is completed, which is expected in 2017. NEC construction has also provided State the opportunity to sell residential properties that are not located near the new embassies under construction. For example, according to post officials in London, transitioning to the NEC in London allowed State to make cost effective changes in its residential property portfolio by selling valuable older properties near the current embassy and purchasing newer lower cost residences near the NEC. State reports these types of real property transactions to Congress quarterly. Also, as required, State submits annual reports to Congress listing surplus overseas properties that have been identified for sale. For example, our analysis found that State listed 39 properties that it identified for disposal in its fiscal year 2013 annual report to Congress. Some properties identified as unneeded in State's fiscal year 2013 FRPP report were not included in the 2013 annual report to Congress, such as a former embassy in Tashkent, Uzbekistan; land in New Delhi, India, and Manila, Philippines; and various properties in Beijing, China. According to OBO officials, the annual reports to Congress do not include unneeded properties they expect to retain or have determined they cannot sell for various reasons, such as host government restrictions related to diplomatic or political differences. For example, according to a State IG report, after State refused to pay what it considered an illegal tax to support the Brazilian social security system in 1996, the government of Brazil blocked the disposal of all U.S. diplomatic properties in the country. OBO officials told us that they do not report unneeded properties that cannot be sold because the Congressional reporting requirement is to list surplus properties that have been identified for sale. State's officials said that they consider many factors in managing their real property portfolio, specifically in terms of identifying and disposing of unneeded property, as well as in purchasing and leasing property. The officials also described challenges associated with each of those aspects of managing the real property portfolio. State collects data on costs associated with properties identified for disposal to track costs, but we found that posts did not use the required code to track these costs consistently. As a result, this raises questions about the extent to which posts worldwide are using the code as State intends, and the extent to which State is receiving accurate and comprehensive cost information about its properties. We requested to review 202 files from fiscal year 2008 through 2013 on acquisitions, disposals, and leases, but were only provided 90 files since, according to State officials, the files were not centrally located and too time consuming to find and provide within the time frame of our review. State was able to provide most of the "core" documents agreed to, although some of the documentation was missing for the 90 files provided. For example, State provided all 36 of the requested lease files, but some documentation that FAM and OMB directs State to retain, and that State agreed to provide, was missing for 30 of the 36 lease files provided. OBO officials told us that they work with posts to identify and dispose of unneeded properties primarily using factors outlined in FAM, along with other strategies. FAM lists 18 factors that OBO and posts might consider when identifying and disposing of property (see table 2), such as whether (1) the property has excessive operating costs, (2) State used the property only irregularly, or (3) the property is uneconomical to retain. Officials at two of the four posts we visited told us that they were aware of and use the guidelines to identify unneeded property. Officials at a third post that owned property was unaware of the guidelines, but told us they used excessive maintenance costs to identify properties for disposal. Excessive maintenance cost is one of the 18 listed factors in FAM. OBO also uses other strategies to help identify unneeded property, such as: (1) reviewing the Department's internal property database to identify properties newly classified by posts as unneeded, (2) monitoring new construction to identify property vacated as personnel move to new facilities, (3) reviewing reports of State's (IG) for recommendations on disposals, and (4) evaluating changing political conditions and evolving post conditions to help right-size a post's real estate portfolio. Once posts identify and OBO approves a property as unneeded, OBO takes the lead in disposing of the property. For example, OBO sold residences in London in fiscal year 2012 and an embassy in fiscal year 2013 (see fig.3), and the Department received approximately $497 million in proceeds that State is using to design and build the new London embassy and to obtain replacement residences closer to the new embassy (see fig.4). OBO also sold a residence in Helsinki in fiscal year 2011 and received approximately $657,000 that was deposited back into its asset management account for other real property needs worldwide. OBO officials acknowledged challenges with disposing of unneeded properties. These challenges included: the condition and location of facilities, changing missions in countries, and diplomatic reasons or political situations that require State to retain property previously marked as unneeded. For example, unneeded residential units can be in poor condition, which makes selling them challenging. Also, officials told us that the State's primary mission of diplomacy overrides property disposal. In countries such as Mexico, Brazil, and India, policy changes with the diplomatic mission have led to retaining property previously marked as unneeded. For example, in Ciudad Juarez, Mexico, a new consulate was built; however, State retained property to accommodate and expand their mission. Officials at the posts we visited also described some past and recurring challenges to disposing of unneeded real property: Officials at the Helsinki and Sarajevo posts told us that differing opinions between OBO and posts about whether to dispose or retain unneeded property presented challenges. For example, officials in Helsinki told us they wanted to dispose of two unneeded residential properties in 2014 because of excessive maintenance costs and a longer commuting time due to the need to take mass transit because parking space was eliminated at the renovated embassy (see fig. 5). However, OBO officials told the post to retain and assign staff to the two properties for an additional 3 years. OBO believed that marketing the two properties, located next to two additional unneeded properties they had been attempting to sell since 2011, would possibly depress the disposal price if all the properties were marketed at the same time. However, post officials believe it will cost the post and State more in maintenance costs to bring the properties to a state of good repair, and believe selling the properties now would be more financially beneficial than retaining the properties for an additional 3 years as the costs to maintain the property would outweigh the potential for increased proceeds. OBO officials told us that they conduct an internal review to determine the financial benefit of whether to retain or sell properties in these situations as the agency attempts to maximize the disposal value of property. Officials at the Sarajevo post told us that they have had ongoing discussions with OBO about retaining their old embassy and converting it to a new Ambassador's residence. Post officials told us that OBO originally wanted the post to dispose of its interest in the embassy--which State has been leasing for only $1 per year since 1994 with the option to continue the lease at this rate for 150 years. OBO officials told us that, at this below-market lease rate of $1 per year, they anticipated that the disposal of this leasehold interest could generate proceeds for State. However, OBO and post officials told us that the host government denied the Department's request to transfer the lease to a third party. Given the Department's inability to transfer or sell its interest in the property, OBO and the post reached an agreement to retain the embassy and convert it into an Ambassador's residence. When the conversion is complete the post will terminate the lease for its current Ambassador's residence, which has an annual lease cost of $144,000. Officials at the Helsinki and Belgrade posts told us that OBO's process for appraising and marketing properties for sale was a challenge in disposing properties in a timely manner. Specifically, the post officials thought OBO's real estate firm's appraisals were too high and made the properties unsellable. OBO acknowledged that ensuring an accurate appraisal price presents challenges and therefore, it also reviews appraisals internally. Also, post officials in Helsinki and Belgrade told us that the global real estate firms OBO hired to market their properties did not have local offices, and thus may have not fully understood the local real estate market. For example, Belgrade post officials told us that an affiliate office in Hungary was marketing their old embassy, and that a Hungarian phone number was the primary number used to market the property, which they believe made selling the property more challenging (see fig. 6). OBO officials told us that they believe the global firms they contract with are more experienced than many local firms. Officials at the Belgrade post told us about zoning challenges with the host government that have delayed the disposal of their old embassy. They told us OBO notified the post that it would sell the old embassy once the new embassy had been built. However, post officials told us they have had to resolve zoning issues with the host government before the embassy could be sold. OBO officials told us that the old embassy was zoned for diplomatic use and that the process to change the zoning to mixed-use is under way. OBO and post officials have worked with the host government, and post officials believe the decision to zone the property for commercial and residential use will increase the disposal price of the property. OBO collects data on costs associated with unneeded properties identified for disposal to track costs associated with properties before their disposal, but the data do not specify costs associated with individual properties. Once OBO approves a property as unneeded, each post should charge a specific internal accounting code designated for property acquisition and disposal costs. OBO officials told us that each post is required to charge costs for property to this code so OBO can track the costs to maintain the property before the property is disposed by State. For example, these types of costs would include utilities, legal fees, and security services. Posts charged approximately $11.1 million to this code from fiscal year 2008 through 2013, according to the data provided by OBO. We found that the four posts we visited did not use this code consistently. State's Foreign Affairs Handbook instructs posts to use the code to record costs related to the disposal of unneeded real property, but does not describe in detail the types of costs that can be charged to this account. Specifically, the Foreign Affairs Handbook includes the following information on this accounting code: "7541 Real Estate-Program Costs: Costs in support of the acquisition and disposal of State real property." OBO officials told us costs for unneeded properties that should be charged to this code include disposal costs for government-owned buildings, such as guard, maintenance, utility, and other building operating costs of vacant/unneeded property until sold. Although State relies on this account to monitor costs associated with disposal of unneeded properties, on our site visits we found that officials at one post did not know they could use this account for costs related to properties identified for disposal, such as utility bills and condominium fees while marketing the property. This post charged these costs to its routine maintenance account not intended for unneeded properties. Post officials thought the code for unneeded properties was used to process the disposal, and not for ongoing costs related to the property while the property was being marketed for disposal. Officials at the other two posts we visited that had unneeded property for disposal used the code to charge all of their related costs while they marketed the property for disposal. We found posts in other countries with unneeded properties identified for disposal in fiscal year 2013 had not charged expenses to this account during that fiscal year such as posts in Jamaica, Ukraine, Tunisia, and Namibia. OMB's capital-planning guidance states that reliable data are critical to managing assets effectively. According to this guidance, only valid, complete, relevant, reliable, and timely data can help the agency make informed decisions regarding the allocation of resources. Additionally, government-wide internal control standards state that pertinent financial and operating information should be recorded and communicated to management and others within a time frame that enables them to carry out their internal control and other responsibilities. State will be unable to capture and maintain complete and accurate information on the operating costs for properties identified for disposal if posts do not consistently charge costs related to these properties to the designated account. This raises questions about the extent to which posts worldwide are using the code as State intends and the extent to which State is receiving accurate and comprehensive cost information about its properties. For example, State may not have the information it needs to make a decision to accept or decline an offer for a property when attempting to maximize revenue for a property disposal. In addition, posts may not have sufficient funding for routine property maintenance because they are using their designated routine maintenance funds on unneeded properties, which could reduce the amount of funding they have available for maintenance of other properties. This could impact the upkeep of posts' current real-property portfolio and increase the amount for deferred maintenance. We have previously reported that deferring maintenance and repair can reduce the overall life of federal facilities, lead to higher cost in the long term, and pose risks to safety and agencies' missions. OBO officials said that they would like to reduce the number of leased properties in State's portfolio and increase federally owned property. OBO officials told us that owning more housing will save on aspects of lease costs, such as exchange-rate fluctuations, rapid inflation, and rising property rents. The officials added that currently 15 percent of State's residential properties are federally owned, but officials would like to eventually increase this number to 40 percent. They told us that based on the average cost of a property's acquisition, along with expected reinvestment of disposal proceeds on a yearly basis; it will take about 50 years to reach this ownership target. Officials believe it is not cost effective or feasible to own 100 percent of properties due to the inability to own properties in some countries, high maintenance costs of owning properties in some countries, and the lack of flexibility in dealing with staffing changes. OBO officials told us that they consider the unique facts and circumstances of each country when deciding whether to lease or acquire properties. We have previously reported on the federal government's over-reliance on leasing, which could be more expensive in the long term than the cost to acquire property. State relies on its Opportunity Purchase Program to fund real property acquisitions, and to reduce its need to lease space. The Opportunity Purchase Program reinvests proceeds from property disposals to acquire real properties other than new embassy construction. According to OBO officials, the program allows State to acquire properties in order to avoid costs because State officials conduct a lease-versus-purchase analysis to measure savings from owning rather than leasing over an expected time frame they plan to retain a property. OBO officials told us that over the last several years the program has generated investment returns from its acquisitions that typically range from 7 percent to 10 percent. As funding from disposals becomes available, OBO reviews attractive purchasing markets and security needs at the approximately 275 posts and narrows down purchasing opportunities to 12 to 15 posts. OBO officials told us they notify the post that they have been selected for the program, and the post provides acquisition opportunities for OBO to review. OBO officials told us that disposals are unpredictable to forecast on an annual basis, making planning and funding for these acquisitions difficult. The Belgrade post is an example of where State has employed the Opportunity Purchase Program. State acquired four residential units in Belgrade for approximately $2.1 million in fiscal year 2013 (see fig. 7). According to OBO, from fiscal year 2006 through 2013, the Opportunity Purchase Program has produced approximately $16 million annually in lease cost avoidance and will provide another projected $6 million in lease cost avoidance once all pending acquisitions are completed. Post and OBO officials we interviewed echoed similar views on the preference of owning versus leasing based on the real estate market in each post's location. Post and OBO officials told us that the conditions of a specific location, such as the local real estate market and the mission of the post influence the decision to own or lease. For example, post officials in Helsinki told us that properties are costly to acquire and expensive to maintain in the area. They said leasing is a better option because it provides flexibility when staffing changes occur, and the property owners in the area are reliable and responsive. Post officials in Sarajevo told us that because of the instability of the real estate market and possible future changes in embassy staffing, it is more practical to lease residential housing. On the other hand, post officials in Belgrade told us that they would like to own more residential units because of the difficulty in finding quality housing to lease. OBO officials told us they prefer a mix of owned and leased housing to provide a stable housing pool, manage rental costs, and provide flexibility as mission requirements change, and officials seek to acquire housing in markets where they can acquire quality housing and where it is cost effective to own rather than lease. In addition to acquisitions, OBO and post officials described several steps they have taken to reduce costs associated with leasing: OBO reviews its highest cost expiring leases annually to determine if State is obtaining a market rate for these properties and if leases should be renewed or replaced. Officials told us that this review includes 100 of the most costly leases worldwide and is used to assist posts that take the lead in monitoring and securing lease renewals. OBO officials told us that in fiscal year 2014 after this review, they determined that 30 percent of leases were prospects for exploring whether rents can be reduced. Under FAM, appraisals or other documentation such as a market study or a design review for the acquisition and renewal of major leases are used for each transaction. OBO meets this guidance by providing fair-market rental estimates, market studies, surveys, and legal direction for posts. OBO is attempting to maximize the cost effectiveness of its leased portfolio. OBO officials told us they implemented a rental benchmark program in 2007 to help ensure the U.S. government pays the prevailing market rate, and does not overpay for leased housing. Officials told us that 25 posts were involved with the program when it began in 2007 and that it covered 171 posts in 2013. OBO works with posts and contracts with real estate experts to provide rental ceilings for leased residential properties at each post. OBO uses these ceilings to set a cap on the amount a post can spend on leased residential property, and if a post exceeds that cap, OBO must approve a waiver. OBO officials told us that they conduct a quarterly review of the posts to see that they are in compliance and that the program incentivizes posts to stay within their rental ceilings to secure cost-effective leases. Belgrade post officials spoke highly of the program as it has reduced the post's administrative burden in seeking waivers, by providing a more realistic ceiling, which has allowed the post to secure housing in a timelier manner. Also, OBO officials told us that the program has resulted in savings by slowing down the growth of leasing costs. Post and OBO officials told us that they proactively renegotiate leases to reduce costs. Officials at all four posts we visited told us that their locally employed staff had established strong working relationships with property owners from years of real estate experience. Post officials told us that the locally employed staff were instrumental in negotiating reduced lease costs. For example, one post official told us that the post secured office space for 30 percent below market value, and officials from another post told us that they were in the process of securing a new leased warehouse space that would save $50,000 to $80,000 per year due to the expertise of the local staff working at the post. In addition, posts and OBO have successfully renegotiated leases since fiscal year 2011 in St. Petersburg, Russia; Paris, France; La Paz, Bolivia; Budapest, Hungary; and Tokyo, Japan that have produced approximately $3.5 million in savings. Also, OBO officials told us that in their estimation, the lease waiver program avoided $43 million in lease costs by working with overseas posts to locate less costly property, renegotiating lease terms, and by rejecting approval of proposed rent increases or higher cost replacement properties. OBO could not provide us all the real property files we requested for acquisitions and disposals between fiscal year 2008 through 2013, except for the files pertaining to leases. Specifically, we requested 202 files which included property disposals, acquisitions, and leases, but OBO stated it was only able to provide 90 of the files because these files were not centrally located and too time consuming to find and provide within the timeframe of our review. OBO agreed to provide us "core" documents for acquisition and disposal files; however some of the documentation was missing in the files we reviewed. In addition, although OBO was able to provide all the lease files requested we found the lease files to be incomplete based on FAM and OMB guidance (see Table 3). Without the missing files and documentation, it is unclear how efficiently and effectively State is managing its overseas real property. Acquisitions and Disposals: Under FAM, OBO and posts should create and preserve records containing adequate and proper documentation of the decisions, procedures, and transactions or operations of the Department and posts. Further, Standards for Internal Control in the federal government states that an agency should establish control activities to ensure that the agency completely and accurately records all transactions. These standards explain that control activities include activities such as the creation and maintenance of related records that provide evidence of execution of these activities as well as appropriate documentation. OBO told us that they were unable to provide all of the information for acquisitions and disposals as requested because files were not centrally located, maintained by different groups within State, and too time consuming to find and provide within the time frame of our review. Thus, OBO officials agreed to provide what they considered "core" documents, which were a subset of the documentation we requested based on our analysis of FAM and OMB guidance. State was able to provide most of the "core" documents agreed to, although some of the documentation was missing. For example, we found instances of acquisition files missing deeds and disposal files missing deposit slips, which were both core documents State agreed to provide. Furthermore, since we received only core documents, we could not determine whether the work to meet additional FAM and OMB guidance was conducted and the records were missing, or if this work was not conducted at all. Without this information, it is unclear whether State is consistently following its internal FAM and external OMB guidance, and how State officials made real property decisions. These findings are similar to those of State's IG which found significant vulnerabilities due to inadequate file documentation that could potentially expose the Department to substantial financial losses. Leases: State was able to provide all 36 of the requested lease files, but some documentation listed in FAM and OMB guidance was not in 30 of the 36 of the files we reviewed. For example, State guidance directs OBO to complete documentation for leases such as: a lease agreement and documentation of OBO's approval. Additionally, OMB directs executive branch agencies, such as State, to conduct a lease-versus-purchase analysis when deciding to lease or acquire properties to ensure all leases are justified as preferable to direct U.S. government purchase and ownership.All 36 files contained a lease agreement. However, only 6 of the 36 files contained all of the information that FAM directs State to retain and that State agreed to provide. These findings are similar to those of State's IG which found that the Department's process to monitor lease information provided by posts was not always effective. The IG found numerous recorded lease terms that did not agree with supporting documentation. We found that 30 of 36 files lacked either documentation of OBO's approval or a lease-versus-purchase analysis, or both. OBO officials told us they do not conduct a lease versus purchase analysis when purchasing is not an option, such as in cases where there is a lack of sufficient funding or the property is in a country that does not allow non-domestic ownership. According to OBO, 6 of the 36 leases in our review were for space in a country that did not allow non- domestic ownership; however, the files did not include documentation that this was the case. We have previously found that without a lease-versus- purchase analysis, decision makers lack financial information on the long- term decisions to lease rather than own. Also, we have previously found that when this analysis has been conducted in the federal government that such analysis has identified savings from owning versus leasing. State manages a multibillion dollar portfolio of buildings, land, and structures at approximately 275 posts throughout the world and has $7.5 billion in projects currently under design and construction. The Department has taken a number of measures to improve management of these properties. These measures include actively identifying unneeded properties, providing posts with rental cost parameters, and other cost- saving initiatives. Despite these steps in managing the real property portfolio, State cannot identify the cost associated with properties identified for disposal, which may compromise State's ability to make fully informed decisions because of unclear guidance. Furthermore, State could not provide some key documents we requested for our review pertaining to acquisitions, disposals, and leases of its properties worldwide. As a result, the Department may not be able to ensure that it is making cost-effective decisions about properties. Improvements in these areas will become more important as State constructs additional NECs and disposes properties no longer needed when personnel relocate to new facilities. To improve State's management of real property overseas and enhance State's accountability and ability to track real-property management decisions, the Secretary of State should take the following four actions: 1. Clarify accounting-code guidance to the posts for tracking expenses related to disposal of unneeded properties. 2. Take steps to ensure that documents related to real property acquisitions are prepared and retained in accordance with FAM and OMB guidance. 3. Take steps to ensure that documents related to real property disposals are prepared and retained in accordance with FAM and OMB guidance. 4. Take steps to ensure that documents related to real property leases are prepared and retained in accordance with FAM and OMB guidance. We provided a draft of this product to the Department of State (State) for review and comment. In written comments, reproduced in appendix II, State concurred with the report's recommendations. State provided technical clarifications that were incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees and the Secretary of State. In addition, the report is available at no charge on the GAO website at www.gao.gov. If you or your staff have any questions about this report, please contact either of us at (202) 512-2834 or [email protected] or (202)-512-8980 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. To determine what is known about the Department of State's (State) real property inventory, we reviewed State's Federal Real Property Profile (FRPP) data for fiscal years 2008 through 2013--the time period of our review. Additionally, we reviewed State's real property reports to Congress and compared these with State's annual FRPP reports to the General Services Administration. We determined that FRPP data were sufficiently reliable for the purpose of reporting approximate numbers of properties in State's portfolio by interviewing knowledgeable Bureau of Overseas Buildings Operations (OBO) and post officials about data quality assurance procedures and reviewing related documentation, including previous GAO and State Inspector General (IG) reports, data dictionaries and user manuals, and data verification practices. We also reviewed State's internal report on costs associated with properties identified for disposal to determine costs for unneeded properties that State is selling. To evaluate the reliability of State's real property database we interviewed OBO and post officials and locally employed staff responsible for entering real property data at the four posts we visited. We also examined OBO's policies and processes for entering information into its real property database and issues affecting quality control over this information. Although we identified data reliability issues for some facilities in State's real property database, as those issues generally involved the classification or description of facilities, we determined that the data were sufficiently reliable to describe the approximate number of U.S. properties overseas. To determine what factors State considers in managing its real property portfolio and the extent to which it documents its decision-making process, we reviewed sections of the Foreign Affairs Manual (FAM) applicable to property management overseas and documents prepared by State officials in response to our questions. We reviewed State's data on costs associated with unneeded properties identified for disposal for fiscal years 2008 through 2013. We found the data had limitations, which we discuss in the report. We reviewed documentation that State provided for its real property disposals, acquisitions, and leases from fiscal years 2008 through 2013. We requested files on all 94 property disposals and 72 property acquisitions reported during this period. State provided 20 of the 94 disposal files we requested and 34 of the 72 acquisition files, which included all of the 2013 files. We also requested, and were provided with, all 36 major leases with $500,000 or more in annual rent, as defined in the FAM, that were active from fiscal years 2008 through 2013 and still were listed as active in FRPP at the end of fiscal year 2013. To evaluate the completeness of these files we compared State's documentation of real property disposals, acquisitions, and leases to the documentation directives listed in FAM and relevant Office of Management and Budget (OMB) Circulars. We also obtained information on how State reinvested revenue generated from property disposals between fiscal years 2008 through 2013. While our review of these disposals, acquisitions, and leases provides key insights and illustrates recent products of State's real property policies and guidance, the results of our review should not be used to make generalizations about all State disposals, acquisitions, and leases. We interviewed State Department officials at OBO and at four selected posts (Belgrade, Serbia; Helsinki, Finland; London, United Kingdom; and Sarajevo, Bosnia, and Herzegovina) to gather information on unneeded properties, disposals, acquisitions, and leases. We selected these posts because they had (1) ongoing or recently completed embassy construction or renovation projects without disposing of properties, (2) properties reported as identified for disposal for multiple years without being disposed of, and (3) a mix of owned and leased properties. We based our site visit selection on these factors in order to observe posts with (1) higher numbers of property disposals than other posts due to recently completed or ongoing construction of new embassies, (2) persistent challenges in selling unneeded properties, and (3) experience managing both owned and leased properties. The results of the case studies provide insight into State's management and decision-making practices but cannot be generalized for the purposes of this review. We conducted this performance audit from June 2013 to September 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contacts named above, Amelia Shachoy and Hynek Kalkus, Assistant Directors; Joshua Akery, George Depaoli, Colin Fallon, Hannah Laufe, Grace Lui, Josh Ormond, Nitin Rao, Kelly Rubin, Ozzy Trevino, and Crystal Wesco made key contributions to this report.
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The Department of State (State) holds or leases about 70-million square feet of real estate in about 275 posts worldwide and has the authority to construct, acquire, manage, and dispose of real property abroad. GAO was asked to review State's management of overseas real property. This report examines: (1) what is known about State's overseas real property inventory, and (2) what factors State considers in managing its overseas real property portfolio and to what extent it documents its decision-making process pertaining to real property. GAO requested 202 files for all acquisitions, disposals, and major leases pertaining to State's management of its real property abroad for the period from 2008-2013. In addition, GAO interviewed State officials in headquarters and at four posts abroad, selected because they had (1) ongoing or recently completed embassy construction or renovation projects without property disposals, (2) properties reported as identified for disposal for multiple years without being disposed, and (3) both owned and leased properties. The results of the four case studies cannot be generalized for the purpose of this review. GAO's analysis of the overseas real property portfolio of the Department of State (State) indicates that the overall inventory has increased in recent years. State reported that its leased properties, which make up about 75 percent of its inventory, increased from approximately 12,000 to 14,000 between 2008 and 2013. State's numbers of federally owned properties increased, but comparing the total number of owned properties from year to year can be misleading because State's method of counting these properties has been evolving over the past several years. Specifically, according to State officials, they have been revising their method for counting properties to produce more precise counts and to meet reporting guidance from the Office of Management and Budget (OMB), among others. For example, State began counting separately structural assets previously included as part of another building's assets, such as guard booths or perimeter walls, and consequently reported approximately 650 additional structural assets in fiscal year 2012 than in 2011, and approximately 900 more structures in 2013. State officials told GAO that they consider many factors in managing real property; however, GAO found State's available data and documentation on management decisions were limited. State officials said that they work with overseas posts to identify and dispose of unneeded properties, primarily using factors in State's Foreign Affairs Manual ( FAM ) guidance. Such factors include identifying properties deemed obsolete or with excessive maintenance costs. State collects data on costs associated with unneeded properties identified for disposal, relying on posts to charge all such costs to a specific accounting code. The four posts GAO visited did not use this code consistently. For example, officials at one post charged some disposal costs to a routine maintenance account. Officials at the other posts with properties for sale used the code to charge all related disposal costs. GAO also found that other posts with unneeded properties identified for disposal in fiscal year 2013 had not charged expenses to this account. The guidance provided in the FAM for using this code does not detail the types of costs that can be charged. This omission raises questions about the extent to which posts use the code as State intends and the extent to which State receives accurate and comprehensive cost information about its unneeded properties. State, without accurate data on unneeded property, may not have the information it needs to make a decision about property offers when attempting to maximize revenue for property sales. Also, posts may not have sufficient funding for routine property maintenance if they use funds designated for this type of maintenance on unneeded property. GAO requested to review 202 files between fiscal year 2008 through 2013 on acquisitions (72), disposals (94), and leases (36), but was provided 90, as State told GAO that these files were not centrally located and too time consuming to find and provide during the time frame of our review. State provided most of what it considers "core" documents for the acquisition and disposal files, but these documents do not constitute all of the documentation listed in the FAM and OMB guidance. In addition, although State provided all 36 of the requested lease files, some documentation that State agreed to provide was missing for 30 of the 36 files. Without the missing files and documentation, it is unclear how efficiently and effectively State is managing its overseas real property. GAO recommends that the Secretary of State (1) clarify accounting code guidance for tracking expenses related to disposal of unneeded properties, and (2) take steps to collect and retain documents related to real property purchases, disposals, and leases in accordance with the FAM and OMB's guidance. State concurred with GAO's recommendations.
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Our financial audits have found that IRS' financial statement amounts for revenue, in total and by type of tax, were not derived from its revenue general ledger accounting system or its master files of detailed individual taxpayer records. The revenue accounting system does not contain detailed information by type of tax, such as individual income tax or corporate tax, and the master file cannot summarize the taxpayer information needed to support the amounts identified in the system. As a result, IRS relied without much success on alternative sources, such as Treasury schedules, to obtain the summary total by type of tax needed for its financial statement presentation. To substantiate the Treasury figures, our audits attempted to reconcile IRS' master files--the only detailed records available of tax revenue collected--with Treasury records. For fiscal year 1994, for example, we found that IRS' reported total of $1.3 trillion for revenue collections taken from Treasury schedules was $10.4 billion more than what was recorded in IRS' master files. Because IRS was unable to satisfactorily explain, and we could not determine the reasons for this difference, the full magnitude of the discrepancy remains uncertain. In addition to the difference in total revenues collected, we also found large discrepancies between information in IRS' master files and the Treasury data used for the various types of taxes reported in IRS' financial statements. For fiscal year 1994, for example, some of the larger reported amounts in IRS' financial statement for which IRS had insufficient support were $615 billion in individual taxes collected--this amount was $10.8 billion more than what was recorded in IRS' master files; $433 billion in social insurance taxes collected--this amount was $5 billion less than what was recorded in IRS' master files; and $148 billion in corporate income taxes--this amount was $6.6 billion more than what was recorded in IRS' master files. Thus, IRS did not know and we could not determine if the reported amounts were correct. These discrepancies also further reduce our confidence in the accuracy of the amount of total revenues collected. Contributing to these discrepancies is a fundamental problem in the way tax payments are reported to IRS. IRS' tax receipt, return, and refund processes are highlighted in figure 1. About 80 percent, or about $1.1 trillion, of total tax payments are made by businesses and typically include (1) taxes withheld from employees' checks for income taxes, (2) Federal Insurance Compensation Act (FICA) collections, and (3) the employer's matching share of FICA. IRS requires business taxpayers to make tax payments using federal tax deposit coupons, shown in figure 2. The payment coupons identify the type of tax return to which they relate, such as a Form 941, Quarterly Wage and Tax Return, but do not specifically identify either the type of taxes being paid or the individuals whose tax withholdings are being paid. For example, the payment coupon in figure 2 reports that the deposit relates to a Form 941 return, which can cover payments for employees' tax withholding, FICA taxes, and employers' FICA taxes. Since only the total dollars being deposited are indicated on the form, IRS knows that the entire amount relates to a Form 941 return but does not know how much of the deposit relates to the different kinds of taxes covered by that type of return. Consequently, at the time tax payments are made, IRS is not provided information on the ultimate recipient of the taxes collected. Furthermore, the type of tax being collected is not distinguished early in the collection stream. This creates a massive reconciliation process involving billions of transactions and subsequent tax return filings. For example, when an individual files a tax return, IRS initially accepts amounts reported as a legitimate record of a taxpayer's income and taxes withheld. For IRS' purposes, these amounts represent taxes paid because they cannot be readily verified to the taxes reported by an individual's employer as having been paid. At the end of each year, IRS receives information on individual taxpayers' earnings from the Social Security Administration. IRS compares the information from the Social Security Administration to the amounts reported by taxpayers with their tax returns. However, this matching process can take 2 and a half years or more to complete, making IRS' efforts to identify noncompliant taxpayers extremely slow and significantly hindering IRS' ability to collect amounts subsequently identified as owed from false or incorrectly reported amounts. Consistent with this process, IRS' system is designed to identify only total receipts by type of return and not the entity which is to receive the funds collected, such as the General Fund at Treasury for employee income tax withholdings or the Social Security Trust Fund for FICA. Ideally, the system should contain summarized information on detailed taxpayer accounts, and such amounts should be readily and routinely reconciled to the detailed taxpayer records in IRS' master files. Also, IRS has not yet established an adequate procedure to reconcile the revenue data that the system does capture with data recorded and reported by Treasury. Further, documentation describing what IRS' financial management system is programmed to do is neither comprehensive nor up-to-date, which means that IRS does not have a complete picture of the financial system's operations--a prerequisite to fixing the problems. Beginning with our audit of IRS' fiscal year 1992 financial statements, we have made recommendations to correct weaknesses involving IRS' revenue accounting system and processes. They include addressing limitations in the information submitted to IRS with tax payments by requiring that payments identify the type of taxes being collected; implementing procedures to complete reconciliations of revenue and refund amounts with amounts reported by the Treasury; and documenting IRS' financial management system to identify and correct the limitations and weaknesses that hamper its ability to substantiate the revenue and refund amounts reported on its financial statements. With a contractor's assistance, an IRS task force attempted to document IRS' financial management system transaction flows. Because the contractor is not expected to complete this work until July 1996, it was not done in time to be useful in our fiscal year 1995 audit. Federal accounting standards provide new criteria for determining revenue, effective for fiscal year 1998. This will require IRS to account for the source and disposition of all taxes in a manner that enables accurate reporting of cash collections and accounts receivable and appropriate transfers of revenue to the various trust funds and the general fund. To achieve this, IRS' accounting system will need to capture the flow of all revenue-related transactions from assessment to ultimate collection and disposition. We could not verify the validity of either the $113 billion of accounts receivable or the $46 billion of collectible accounts receivables that IRS reported on its fiscal year 1995 financial statements. Consequently, these financial statements cannot be relied on to accurately disclose the amount of taxes owed to the government or the portion of that amount which is collectible. This is not a new problem, as we first identified IRS' accounts receivable accounting and reporting problems in fiscal year 1992 and again in each subsequent fiscal year's financial audit. In our audit of IRS' fiscal year 1992 financial statements, after performing a detailed analysis of IRS' receivables as of June 30, 1991, we estimated that only $65 billion of about $105 billion in gross reported receivables that we reviewed was valid and that only $19 billion of the valid receivables was collectible. At the time, IRS had reported that $66 billion of the $105 billion was collectible. Subsequently, we helped IRS develop a statistical sampling method that, if properly applied, would allow it to reliably estimate and report valid and collectible accounts receivable on its financial statements. We evaluated and tested IRS' use of the method as part of our succeeding financial audits and found that IRS made errors in carrying out the statistical sampling procedures, which rendered the sampling results unreliable. This year, for the first time, IRS tried, also without success, to specifically identify its accounts receivable. Reliable financial information on these amounts is important to IRS and the Congress for assessing the results of enforcement and collection efforts, measuring performance in meeting IRS' mission and objectives, and allocating resources and staffing; reviewing the collectibility of accounts, determining trends in accounts receivable balances, and deliberating on the potential for increased collections and related budgetary needs; and assessing the effect of potential collections of accounts receivables in reducing the deficit. The importance of having credible financial information for these purposes is underscored by the magnitude of IRS' inventory of uncollected assessments and by IRS' problems in collecting tax receivables, which we have monitored since 1990 as part of our high-risk program. IRS' reported inventory of uncollected assessments, which at September 30, 1995, was $200 billion, is composed of both compliance assessments, which are not yet but may become accounts receivable, and financial receivables, which are valid accounts receivable. In the case of compliance assessments, IRS records an assessment to a taxpayer's account, but neither the taxpayer nor a court has agreed that the assessment is appropriate. Normally, IRS makes these assessments to encourage compliance with the tax laws. For example, when a taxpayer is identified by an IRS matching program as being delinquent in filing a return, IRS creates an assessment using the single filing status and standard deduction. This action is to encourage the taxpayer to file a tax return in the right amount. The taxpayer has an opportunity to refute an estimated assessment, and often does, because the amount may be overstated or may not apply. On the other hand, financial receivables arise when taxpayers agree to assessments or a court determines that an amount is owed. These receivables may also include cases in which IRS and a taxpayer agree, or a court determines, that the amount of a compliance assessment is due. Financial receivables can include other situations as well, such as when taxpayers file returns but do not pay the full amounts due or they are making payments against amounts due. Figure 3 shows IRS' reported inventory of uncollected assessments for June 30, 1991, and each fiscal year from 1992 through 1995.
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GAO discussed its financial audits of the Internal Revenue Service for fiscal years 1992 through 1995. GAO noted that: (1) IRS relied on alternative sources to obtain revenue totals by type of tax for its financial statements; (2) IRS financial statements include various discrepancies that cannot be explained because of weaknesses in IRS information and collection systems; (3) the validity of IRS accounts receivable and collectible accounts receivable can not be verified; (4) many uncollected compliance assessments and financial receivables are uncollectible; (5) IRS has been unable to accurately account and report its total inventory of accounts receivable; (6) while IRS has made some improvements in accounting and reporting on its operating costs, significant problems remain; (7) IRS can not confirm when and if goods and services were received; and (8) the accuracy of the IRS Fund Balance with Treasury accounts cannot be verified.
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IRS designed NRP to obtain new information about taxpayers' compliance with the tax laws. While IRS is using NRP to measure voluntary filing, reporting, and payment compliance, the majority of NRP efforts are devoted to obtaining accurate voluntary reporting compliance data. In measuring reporting compliance, IRS's two primary goals are to obtain accurate information but minimize the burden on the approximately 47,000 taxpayers with returns in the NRP sample. IRS plans to use NRP data to update return selection formulas, allow IRS to design prefiling programs that will help taxpayers comply with the tax law, and permit IRS to focus its limited resources on the most significant areas of noncompliance. NRP's reporting compliance study consists of three major processes: (1) casebuilding--creating information files on returns selected for the NRP sample, (2) classification--using that information to classify the returns according to what, if any, items on the returns cannot be verified without additional information from the taxpayers, and (3) taxpayer audits limited to those items that cannot be independently verified. We reported in June 2002 that NRP's design, if implemented as planned, is likely to yield the sort of detailed information that IRS needs to measure overall compliance, develop formulas to select likely noncompliant returns for audit, and identify compliance problems for the agency to address. Figure 1 shows NRP's main elements. IRS designed the casebuilding process to bring together available data to allow the agency to establish the accuracy of information reported by taxpayers on their returns. For each taxpayer with a return in the NRP sample, IRS is compiling internal information, such as past years' returns and information reported to IRS by third parties, such as employers and banks, and information from outside databases, such as property listings, address listings, and stock sale price data. Classification is where IRS uses the casebuilding information to determine whether an NRP audit is necessary and which items need to be verified through an audit. Classifiers place NRP returns into one of four categories: (1) accepted as filed, (2) accepted with adjustments, (3) correspondence audit, and (4) face-to-face audit. If the casebuilding material allows IRS to verify all of the information that a taxpayer reported on his or her tax return, then the taxpayer will not be contacted and the return will be classified as accepted as filed. On returns where minor adjustments are necessary, the adjustments will be recorded for research purposes, but the taxpayers will not be contacted. These returns will be classified as accepted with adjustments. NRP returns that have one or two items from a specified list requiring examination will be classified for correspondence audits. All other NRP returns for which the casebuilding material does not enable IRS to independently verify the information reported on the returns will be classified for face-to-face audits. NRP audits will take place either through correspondence with the taxpayers or through face-to-face audits. When classifiers determine that an NRP return will be sent for a correspondence audit, IRS will request that the taxpayer send documentation verifying the line items in question. To ensure accurate and consistent data collection, NRP audits will address all issues identified by classifiers and will not be focused only on substantial issues or cases for which there is a reasonable likelihood of collecting unpaid taxes, according to IRS officials. NRP auditors also may expand the scope of the audits to cover items that were not classified initially. IRS plans to conduct detailed, line-by-line audits on 1,683 of the approximately 47,000 returns in the NRP sample in order to assess the accuracy of NRP classification and, if necessary, to adjust NRP results--a process called calibration. One-third of the returns in the calibration sample will be returns that were classified accepted as filed (either with or without adjustments), one-third from those classified for correspondence audits, and one-third from those classified for face-to-face audits. None of the taxpayers with returns in the calibration sample will have been audited or otherwise contacted by IRS prior to the start of these line-by-line audits. To describe IRS's implementation of NRP, we have conducted frequent meetings with officials in IRS's NRP Office and other IRS officials as they have implemented the program. We reviewed NRP training materials and observed NRP classifier, correspondence examination, and field examination training sessions. We also observed NRP process tests and conducted site visits to IRS area offices in Baltimore, Maryland; Brooklyn, New York; Oakland, California; Philadelphia, Pennsylvania; and St. Paul, Minnesota, in order to observe and review NRP classification in field offices. We considered whether NRP is being implemented in accordance with its design. In our report issued on June 27, 2002, we found that NRP's design, if implemented as planned, is likely to provide IRS with the type of information it needs to ensure overall compliance, update workload selection formulas, and discover other compliance problems that the agency needs to address. For this review, we also considered whether IRS was maintaining a focus on meeting NRP's objectives of obtaining quality research results while, at the same time, minimizing taxpayer burden. This assessment was also based on IRS's NRP implementation plans. As of the completion of our work, IRS had a significant amount of NRP implementation to carry out. Our evaluation of IRS's efforts to implement NRP, therefore, only provides an assessment of efforts that have taken place through the time of our work. Additionally, we did not attempt to assess IRS's efforts to measure filing compliance and payment compliance through NRP. Our evaluation focuses only on IRS's efforts to obtain voluntary reporting compliance information. A more detailed description of NRP can also be found in our 2002 report. We conducted our work from September 2002 through April 2003 in accordance with generally accepted government auditing standards. In addition to the two tests described in our prior report on NRP, IRS conducted two more tests of NRP processes prior to implementing the program. IRS tested the casebuilding and classification processes in an NRP simulation in July 2002, and conducted another classification process test during the initial classification training session in September 2002. IRS used the preliminary results of both of these tests to estimate NRP classification outcomes and to evaluate the effectiveness of NRP training. As we recommended in our June 2002 report, IRS substantially completed this testing prior to full NRP implementation, though final reports from the tests were not completed until later. In July 2002, IRS used draft NRP training materials to train 16 auditors from IRS field offices in the use of NRP casebuilding materials to carry out the NRP classification process. The newly trained classifiers then classified 506 tax year 2000 returns. NRP staff members reviewed the classifiers' results and found that, overall, the results of this NRP simulation were positive. They found that the classifiers understood the NRP approach to classification but that there were instances where the classifiers overlooked some of the issues indicated by the casebuilding materials or made other errors. In September 2002, IRS conducted another test of the NRP classification process immediately following the initial training session using final classification training materials. As we recommended in our June 2002 report, IRS had NRP classifiers classify previously audited tax returns in order to compare classifiers' results with the results of actual audits. Twenty-two newly trained classifiers classified 44 previously audited returns, with each return classified by 5 different classifiers. All of the earlier audits resulted in some changes. NRP staff members then compared the classifiers' results with those of the other classifiers and with the results of the earlier audits. NRP officials reported that the test showed that about three-fourths of the time the trained NRP classifiers were able to identify issues where noncompliance was found through an audit. IRS used preliminary results of these tests to identify and implement improvements to NRP. For example, NRP staff members noticed early in the course of the second test that NRP classifiers were failing to classify some line items in accordance with NRP guidelines. Trainers reiterated the importance of following the classification guidelines for these items. NRP staff members also saw that the format of the form that classifiers were to use to record their classification decisions made it easy to make mistakes. They revised the form to make decision recording less error-prone. IRS also used these tests to identify the need for more stringent classification review guidelines than initially planned in order to ensure that classifiers understand and follow the classification guidelines. IRS did not finish analysis and documentation of the NRP simulation and assessment and the classification process test until after the beginning of classification in IRS area offices. NRP classification began at IRS area offices during November 2002, but IRS did not finalize its report on the July 2002 NRP simulation until December 2002, and the report on the September 2002 NRP process test was finalized in December 2002. According to NRP officials, this did not create problems because they made changes to NRP processes and training materials before the reports of these tests were final. Though the final reports were not completed until later, these tests and the NRP modifications they generated were complete before full implementation of NRP. IRS identified and trained staff to complete NRP classification and audits. IRS selected NRP classifiers and auditors from field offices across the country to handle NRP cases along with the non-NRP enforcement cases and carried out plans for special training of the staff members tasked with NRP responsibilities. IRS delayed the delivery of computer software training to managers and clerks involved in NRP audits due to technical problems with NRP software. This initially delayed the start of NRP audits, but the training is now complete. The timing of NRP staff selection and training fit the conclusion and recommendation in our June 2002 report that IRS should make sure that these key steps are carried out in the appropriate sequence and not rushed to meet an earlier, self-imposed deadline. IRS selected over 3,000 auditors to handle NRP cases. Most of these auditors are assigned to the Small Business/Self Employed operating division. IRS selected 138 Small Business/Self Employed auditors to be NRP classifiers and about 3,500 to handle NRP face-to-face audits. According to NRP staff members, IRS offices across the country now have one or more auditors trained to handle the NRP cases that come to those offices. IRS area office managers determined how many auditors should receive NRP training based on the projected distribution of NRP returns to their areas. Unlike face-to-face audits, NRP correspondence audits are being handled out of a single office. IRS selected two groups of correspondence auditors--26 correspondence auditors--from the Wage and Investment operating division's Kansas City office to handle NRP correspondence audits. IRS originally planned to select a cadre of auditors to work only on NRP face-to-face audits. According to NRP officials, the geographic distribution of NRP returns would have made it difficult to have a cadre of auditors dedicated entirely to NRP examinations because they would have had to travel extensively to carry out NRP audits. IRS officials said that even though they did not implement the plan for a dedicated cadre of NRP auditors, the number of full-time equivalent employees needed for NRP-- about 1,000 in fiscal year 2003--has not changed. In September 2002, IRS trained 138 auditors to perform NRP classification. The classifiers learned how to apply the guidelines for NRP classification and were shown how to use NRP casebuilding materials. Instructors stressed the concept of "when in doubt, classify the item" meaning that, unless the casebuilding materials explicitly verify the line item in question, the classifier should classify the item as needing to be verified through an audit. Instructors explained that with a random sample such as in NRP, every return represents many others so even small oversights on the part of classifiers or auditors can have a substantial impact on data quality. After the classification training, the classifiers remained at the training location and began classifying NRP returns. Specially trained classification reviewers reviewed most of the classified cases and provided rapid feedback to the newly trained NRP classifiers. The intent of this was to ensure that NRP classifiers understood and consistently applied the NRP classification guidelines and received any needed retraining before returning to their respective field offices and participating in future NRP classification sessions. IRS delivered NRP correspondence and face-to-face auditor training during late 2002 and early 2003. Instructors provided an overview of NRP goals and objectives, reviewed the casebuilding materials that auditors would have at their disposal, and explained the guidelines for NRP audits. IRS trained about 3,500 auditors to conduct NRP face-to-face audits. This training took place in IRS field offices across the country from October 2002 through February 2003. Each face-to-face NRP audit training session lasted 3 days. The training consisted of an overview of NRP goals and objectives, an explanation of how NRP audits differ from traditional enforcement audits, and a description of how to apply NRP guidelines during NRP audits. Trainers stressed that, for the purposes of consistent and accurate data collection, NRP auditors should not focus solely on significant issues or take into consideration the likelihood of collecting unpaid taxes when conducting NRP audits, but should make sure that every item identified by the classifier is carefully verified in the course of the audit. Correspondence auditor training was similarly focused, and the 1-day training took place in September 2002. Staff members were trained before they began to carry out NRP tasks. IRS needed to provide training to NRP auditors and to IRS managers and clerks with NRP responsibilities in order for staff members to understand how to use the computer program IRS developed to capture NRP information. Because of some problems IRS encountered in installing the NRP software in offices across the agency, IRS had to delay training some clerks and managers. This led to delays in starting some NRP audits because managers were unable to assign NRP cases to auditors and clerks were unable to assist in loading NRP cases on NRP auditors' laptop computers. IRS resolved these problems and finished delivering the majority of this training by the end of January 2003. IRS is nearly finished creating NRP casebuilding files, has classified nearly three-fourths of the NRP returns, and has begun conducting NRP audits. As of the end of March 2003, IRS completed NRP casebuilding for about 94 percent of the approximately 47,000 returns in the NRP sample and about 73 percent of NRP returns have been classified. Also, for 3,651 NRP cases, IRS completed all necessary audit work. Some of these are cases where correspondence or face-to-face audits are finished, but most of the NRP cases closed so far--2,709--are those that did not require audits. Cases involving audits take longer to complete, so few have been closed thus far. IRS made substantial progress in casebuilding and classification starting in 2002, and the number of cases assigned to NRP auditors has been increasing quickly since January 2003. Figure 2 shows the progress IRS has made in casebuilding, classifying, and closing cases. The number of completed NRP casebuilding files began to grow during the second half of 2002, as shown in figure 3. As figure 3 also illustrates, NRP classification began in September 2002. These were the cases classified during sessions held immediately after classifier training. Over 9,000 NRP returns were classified by the end of October 2002. After these sessions, classification became an area office function, with some offices scheduling weeklong classification sessions on a somewhat regular basis and others classifying returns as they come into the office. IRS began conducting some NRP audits during November 2002, though these audits began in earnest during the first quarter of 2003. By the end of January 2003, IRS had assigned over 4,600 NRP cases to auditors to begin conducting face-to-face and correspondence audits. By the end of March 2003, about 18,000 taxpayers had been contacted regarding NRP audits. IRS recognizes the need for accurate NRP data and, as planned, has built into the program several measures to ensure the quality of NRP results. IRS designed the NRP classification process to include quality assurance reviews and has added additional quality assurance measures in response to suggestions we made in the course of this engagement. The NRP audit process also includes quality assurance measures that include both in- process and completed case reviews, with all NRP audits reviewed before they are formally closed with the taxpayer. IRS also built accuracy checks into the data capture steps that take place throughout the NRP process. IRS designed NRP classification to include regular reviews of classifiers' decisions. We found that these reviews are generally taking place according to NRP guidelines. We also found that additional measures could further improve NRP classification accuracy, and IRS implemented our suggestions. NRP guidelines specify that NRP classification reviewers review all cases for which returns are classified as needing either no audit at all or only correspondence audits to confirm their accuracy. Additionally, reviewers must initially review 25 percent of the cases classified by each auditor that are selected for face-to-face audits until they are satisfied with the quality and consistency with NRP guidelines of the classifier's work. After that standard has been met, the guidelines specify that reviewers need only review approximately 10 percent of the cases that each classifier selects for face-to-face audit. We conducted site visits to five IRS area offices where NRP classification was taking place and found that IRS's plans to implement the classification steps of the program were generally well understood by the classifiers carrying them out. Classifiers were knowledgeable about the differences between the NRP classification process and the classification process used in the enforcement audit environment and supported NRP goals in general. However, we also found instances where NRP classifiers were not consistently following NRP classification guidelines. Another issue we identified involved the use of the classification review sheets that reviewers fill out when they find problems with classifiers' decisions. We learned that there was no provision for further review of these forms. In some cases, we found that reviewers were not always documenting classification errors on the forms. We discussed with NRP officials the potential benefits of using NRP classification review sheets for more than identifying issues at the area office level. Specifically, we suggested that classification review sheets be forwarded from the area offices to a central location in order to identify problems that may be occurring in different locations around the country or other trends that the NRP Office may need to address during the course of NRP classification. The NRP Office agreed with our suggestion and added centralized review of classification review sheets to its other classification quality assurance measures. The NRP Office adopted our suggestion that it conduct site visits to area offices to identify NRP classification implementation issues. Similar to the visits we conducted, NRP staff members visited area offices and met with classifiers, reviewers, and managers to identify issues encountered in carrying out NRP classification and possible areas where NRP guidelines may have been misinterpreted. Among the issues they are asking about is the usefulness of the various materials included in the casebuilding files, information which may prove useful in the design of the casebuilding portion of future iterations of NRP. NRP staff members are also conducting separate reviews of completed classification cases. IRS has designed NRP to include several steps to identify NRP audit quality problems at both the individual auditor level and across the program. Reviews include quality checks while cases are in progress and after work is complete, and reviews by managers at different levels. Importantly, IRS's plans call for every NRP audit to be reviewed at least once at a point where it is still possible to return to the taxpayer and complete additional audit steps, if necessary. These quality assurance measures will serve to mitigate the risk of IRS including erroneous or incomplete data in the NRP database. NRP guidelines task group managers with reviewing one open NRP audit for each auditor in the first 90 days of that auditor's NRP activity and another in the first 180 days. NRP officials intend for these in-process reviews to be extensive and timed early enough in the program to identify individual auditors' misunderstandings of the program, correct them on the audits under review, and prevent them on future NRP audits. IRS has also created Quality Review Teams both to oversee individual audit cases and identify problems at the area office level and systemically across NRP. These teams are made up of IRS managers and are tasked with checking for compliance with NRP-specific and overall IRS standards on 40 open cases and 20 closed cases for each of IRS's 15 area offices. These reviews will be repeated in each area about once every 3 months throughout the planned 18-month NRP audit period. The IRS standards applied by the teams to the audits they review are the same standards employed by IRS's Examination Quality Measurement System (EQMS). Similar to the visits NRP officials made to area offices to review classification activities, NRP officials are also visiting area offices to review NRP audit activities. NRP officials said that any systemic issues identified through Quality Review Team reviews will then be addressed across NRP. Another NRP audit quality assurance element calls for all face-to-face audits to be checked by group managers after work is completed but before the cases are formally closed with the taxpayers. This review will include assessing technical correctness, mathematical accuracy, completeness, and adherence to procedural requirements. IRS officials said that these requirements include adherence to the NRP-specific requirement that audits include verification of all items identified through the NRP classification process. These reviews also include assessing adherence to IRS standards in areas such as audit depth and reviewing large, unusual, or questionable items on the audited return. We were initially concerned that IRS planned for these reviews to take place after NRP audits were completely closed, precluding IRS from reopening the cases or otherwise obtaining additional information from the taxpayers even if the reviewers found that the original NRP audits were incomplete. However, senior IRS officials informed us in March 2003 that these reviews will take place after NRP auditors consider their audit work to be complete but before the taxpayers are notified that the audits are over. The officials explained that these reviews of all NRP cases will be timed to provide an important means of ensuring that complete and accurate audit results are entered into the NRP database. They also explained that the importance of NRP audit reviews has been stressed throughout NRP implementation and will be the subject of ongoing communication with managers in the field. It is very important that IRS conduct reviews of NRP audits before they are closed because IRS data show that auditors do not always meet enforcement audit quality standards. In fiscal year 2002, IRS's EQMS found that auditors in the field did not meet the audit depth standard about 15 percent of the time on field audits; the standard for auditing taxpayer income was not met about 25 percent of the time on field audits; and the standard concerning audits of large, unusual, or questionable items was not met 40 percent of the time on field audits. IRS officials said that accurate audit results in these areas are critical to NRP's overall accuracy. IRS officials pointed out that the error rate for NRP audits should be lower than in the enforcement audit environment because NRP auditors received special training and because the NRP classification process will enhance NRP audit quality. For example, NRP guidelines call for classifiers to identify large, unusual, or questionable items on returns (the largest EQMS error category) and NRP auditors must address all classified items. However, IRS did not implement its earlier plan of having a selected cadre of auditors work only on NRP cases. While NRP-specific training will serve to prevent many audit errors, NRP audits are now being conducted by a cross section of auditors from IRS field offices across the country and more typical of the auditors who generated the 2002 EQMS error rates. Because every return in the NRP sample represents many returns in the whole population of 1040 filers, even a small number of cases closed with incomplete information could affect the accuracy of NRP data. IRS officials also noted that their plan to conduct early reviews of NRP cases will identify problems with auditors' understanding of NRP and help to keep them from recurring on subsequent NRP audits. At least two of each NRP auditor's early cases will have extensive manager involvement while the cases are still in progress, and other managers will be looking at a sample of both completed and open cases to identify problems. IRS officials believe that these measures are sufficient to ensure NRP audit quality. IRS is including a series of data consistency checks in the NRP database to verify that the information NRP auditors record in IRS's NRP reporting system agrees with the information that IRS recorded from the tax returns earlier in processing. NRP auditors must first record the results of NRP audits in the report-generating software that was modified for NRP purposes. Once auditors have recorded audit results, NRP coordinators must use a data conversion program to transfer the data into a format that the NRP database will accept. Following data conversion, IRS coordinators transfer the audit data to the NRP database. Once the data are transferred to the NRP database, a series of data consistency checks take place to confirm that the data IRS originally transcribed from the tax return are consistent, within specified tolerances, with the data that NRP auditors recorded in the NRP reporting software. If any of the consistency checks fail for a return in the NRP sample, the NRP area coordinator will be notified and the mistake will need to be corrected. According to IRS officials, they will impress upon NRP auditors the importance of entering data into the NRP software correctly the first time because it will be time-consuming to correct errors. NRP officials have developed a case tracking system in order to monitor which cases still need to pass all of the consistency tests and which tests they need to pass. IRS officials reported that, as of early April 2003, the NRP database and related programs were running and that completed NRP cases were being entered into the database. They said that they were still making some enhancements, but that the programs were fully functional. As IRS planned, NRP casebuilding and classification processes are helping minimize the burden on taxpayers with returns in the NRP sample. In addition, the size of the NRP sample is now smaller than IRS expected it to be. However, the number of taxpayers who will be subject to NRP audits has increased. IRS plans to survey taxpayers who receive NRP audits to assess their perceptions of the burden posed by those audits. IRS also used input from tax practitioners to identify ways to improve interactions with taxpayers subject to NRP audits. IRS is following its plans to reduce burden on taxpayers selected as part of the NRP sample by (1) compiling NRP casebuilding materials that allow IRS to verify certain items on tax returns without requesting the information from the taxpayer, (2) classifying returns according to items that need to be verified through an audit, and (3) limiting most NRP audits to items that cannot be verified without an audit. IRS officials also intend to compare classification decisions with the results of NRP audits to identify ways of improving the classification process for future rounds of NRP. Moreover, IRS's intent in carrying out NRP is to reduce the burden on taxpayers in general by developing better audit selection formulas and reducing the number of audits of fully compliant taxpayers. The NRP casebuilding and classification processes described on page 4 are having their intended effect of reducing the burden NRP creates for taxpayers with returns in the NRP sample. IRS has assembled IRS and third-party data on most of the returns in the NRP sample and classifiers have used these data to verify information on the returns, where possible, without contacting taxpayers. The remaining casebuilding and classification work was under way as of the end of March 2003. The material in the casebuilding files has allowed IRS to fully verify about 10 percent of NRP returns without any audit. Classifiers were able to use the casebuilding material to verify all but one or two items on another 5 percent of NRP returns, and these were sent for correspondence audits. Classifiers identified line items needing verification through a face-to-face audit on about 85 percent of NRP returns classified as of the end of March 2003. Because of the casebuilding and classification processes IRS developed for NRP, these audits will generally be limited to line items that cannot be verified using the information in the casebuilding files. This is a substantial change from earlier compliance research efforts, in which all returns were subject to audits of every line on the return. Only the 1,683 taxpayers with returns selected for NRP calibration audits will be subject to complete audits of their returns. IRS plans to use NRP results to improve future iterations of NRP. For example, NRP officials plan to compare classification outcomes with NRP audit results to help them to identify possible changes needed in casebuilding materials and the NRP classification process. They have told us that it may be possible to further reduce the number of accurately reported line items that are subject to compliance research audits. On the other hand, IRS may also find through NRP calibration audits that classification missed many items that should have been audited, so more line items should receive some form of audit in future rounds of NRP in order for the research results to be useful. IRS also intends to apply lessons learned in NRP classification to classification in the enforcement audit environment. As we noted in our prior report, NRP should also lead to reductions in taxpayer burden in general. IRS plans to use NRP results to help identify and reduce causes of noncompliance and to better target enforcement audits to noncompliant taxpayers, reducing the number of audits of fully compliant taxpayers. IRS projects that, without improved audit selection formulas based on NRP results, the percentage of enforcement audits that result in no tax change will be about 35 percent higher in 2005 than it was in 1993, the first year that selection formulas from the 1988 compliance study were available. Taxpayer burden will decrease if successful execution of NRP enables IRS to reduce the number of these audits of compliant taxpayers. The NRP sample consists of 46,860 tax returns. We reported in June 2002 that the NRP sample would consist of 49,251 returns. The current number is smaller than the initial estimate because IRS originally estimated the NRP sample size based on the characteristics of the filing population that existed during the 1988 reporting compliance study. According to IRS officials, when they applied the NRP sampling plan to the 2001 filing population, the number of returns necessary to satisfy the requirements for some of the NRP strata declined because filing rates for those strata were smaller than IRS officials had projected. The final NRP sample consists of about 2,400 fewer returns than initially planned. IRS officials are currently finding that the NRP classification results are different than initially planned. IRS now estimates that more face-to-face audits will take place than initially projected because (1) as the NRP plan recognized, IRS's initial estimates were uncertain and based on aging data and (2) the final form of NRP classification guidelines meant more face-to- face and fewer correspondence audits. IRS initially estimated that out of an NRP sample of over 49,000 tax returns, classification would result in about 30,000 face-to-face audits of selected line items, about 9,000 correspondence audits covering no more than two line items, and about 8,000 taxpayers who would not undergo any audit because classifiers were able to either verify all of the items on their returns or could correct some line items without contacting the taxpayers. The final NRP sample is 46,860 returns, and IRS now estimates that NRP classification will result in face-to-face audits of about 39,000 taxpayers, with approximately an additional 2,300 receiving correspondence audits and 3,800 subject to no audit at all. IRS also plans to conduct 1,683 line-by- line calibration audits, drawing 561 returns from each of the three classification categories--these numbers have not changed. Figure 4 shows IRS's current estimate of how the three NRP classification categories will be distributed. NRP officials explained that the number of face-to-face NRP audits is higher than expected because they were relying on aging data and preliminary classification guidelines. Our 2002 report on NRP also noted the preliminary nature of these estimates. Initial classification breakdown estimates were made using 14-year-old data from the 1988 Taxpayer Compliance Measurement Program study. NRP staff members said that changes in the tax code and in the economic makeup of the filing population since the 1988 study make the returns from that study an unreliable tool for predicting NRP classification results, though that was all they had to work with. They also said that some of the change can be attributed to changes they made in the final form of NRP classification guidelines. NRP staff members said that they modified the NRP classification guidelines as a result of discussions that took place between NRP staff members and representatives from IRS's business operating divisions. They instituted the changes to the classification guidelines in order to better match the training and skills of the examiners selected to conduct NRP correspondence and face-to-face audits with the types of issues to be covered by those audits. One change is that discrepancies between the casebuilding files and the tax returns for issues such as Individual Retirement Account contributions and Social Security income were removed from the list of issues that could be verified through a correspondence audit. Another change is that the final guidelines call for virtually all business returns to receive face-to-face audits--initial assumptions about the classification process allowed for some business returns to be accepted as filed or receive only correspondence audits. IRS will survey taxpayers who are subject to NRP audits to assess overall customer satisfaction and their perceptions of the burden audits created for them. IRS will ask taxpayers to fill out the same survey it uses to assess customer satisfaction in the enforcement audit environment and compare the results for the two populations. The surveys include issues related to taxpayer burden in the form of questions about the amount of time taxpayers spent preparing for the audits and the amount of time that they spent on the audits themselves. The surveys also ask whether taxpayers receiving NRP audits believe the information that they were asked to provide seemed reasonable and whether they feel they received fair treatment from IRS. After collecting the survey results, IRS will then develop a "score" for each question on the survey that relates to burden. IRS will compare the results from the NRP customer satisfaction survey to the results from surveys completed after enforcement audits. IRS consulted with outside stakeholders to enhance its efforts to minimize the burden NRP created for taxpayers with returns in the sample. IRS consulted with members of organizations that provide feedback to IRS on matters concerning taxpayers, including the National Public Liaison, the Information Reporting Program Advisory Committee, and the Internal Revenue Service Advisory Council. According to IRS, practitioner input led to wording changes on taxpayer notification letters and improvements to training materials, which strengthened the emphasis on maintaining good relations with NRP-selected taxpayers. Representatives of the National Public Liaison also participated in the training for the staff members who were selected to conduct NRP auditor training. IRS continues to be on track for meeting its NRP goal of obtaining meaningful compliance data while minimizing the burden on taxpayers with returns in the NRP sample. IRS has followed the key elements of the plans it laid out last year and has responded to identified needs to modify the program that have come from its own testing as well as from outside stakeholders. Because of this, we are not making any recommendations in this report. We recognize that IRS efforts to gather information about NRP implementation while the program is under way are very important to IRS's continued success in carrying out NRP. Classification review results, audit review results, and customer satisfaction surveys all provide the means for IRS to make immediate adjustments to NRP now and to enhance the design of future iterations of the program. Provisions for 100 percent review of NRP audits before they are closed are particularly important because even a small number of erroneous or incomplete cases will negatively affect the quality of NRP data. On May 22, 2003, we received written comments on a draft of this report from the Commissioner of Internal Revenue (see app. I). The commissioner noted the importance of NRP and IRS's continued emphasis on minimizing taxpayer burden and delivering quality results. We also received technical comments from NRP staff members, which we have incorporated into this report where appropriate. As agreed with your offices, 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 of this report to the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. This report is also available at no charge on GAO's Web site at http://www.gao.gov. If you or your staffs have any questions, please contact Ralph Block at (415) 904-2150, David Lewis at (202) 512-7176, or me at (202) 512-9110. Thomas Gilbert was also a key contributor to this assignment.
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The Internal Revenue Service (IRS) needs up-to-date information on voluntary compliance in order to assess and improve its programs. IRS's last detailed study of voluntary compliance was done in the late 1980s, so the compliance information IRS is using today is not current. IRS is now carrying out the National Research Program (NRP), through which IRS auditors are reviewing about 47,000 randomly selected tax year 2001 individual tax returns. In June 2002, GAO reported that NRP was necessary, that its design was sound, and that it appeared to meet IRS's goals of acquiring useful compliance data while minimizing burden on taxpayers with returns in the sample. GAO was asked to review IRS's implementation of NRP. GAO reviewed IRS's method of gathering internal and third-party data (casebuilding) and IRS's process of reviewing casebuilding materials to determine if audits are necessary (classification) and assessed IRS's plans to ensure consistent data collection while minimizing burden on taxpayers. IRS's NRP is being implemented as planned and consequently is on track to meet the agency's objectives of obtaining quality research results while minimizing the burden on the approximately 47,000 taxpayers with returns in the NRP sample. IRS officials have completed the development and testing of NRP processes and have selected and trained staff members to carry out the program. Additionally, as the graphic illustrates, IRS is currently nearing the completion of casebuilding and has made progress in classifying NRP returns. Audits, when required, began in November 2002. As of the end of March 2003, IRS had closed 3,651 NRP cases. In accordance with IRS's plans to minimize burden on taxpayers with returns in the NRP sample, some cases have been closed without any taxpayer contact or with only limited audits. The NRP plan recognized that the initial estimates for the overall NRP sample size and the number of returns to be audited were uncertain because they were based on aging data. The overall NRP sample size will be smaller and IRS officials expect to conduct more face-to face audits than initially estimated. As IRS completes NRP casebuilding, classification, and audits, it is implementing quality assurance steps, including efforts to ensure that key audit steps are completed on all NRP audits before they are formally closed with taxpayers. This is important since the data collected from each NRP audit represent information from thousands of similar taxpayers.
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Compared with the traditional Medicare FFS program, HMOs typically cost beneficiaries less money and cover additional benefits. In addition to covering all Medicare part A and part B benefits, advantages of Medicare HMOs typically include low or no monthly premiums, expanded benefit coverage, and reduced out-of-pocket expenses. In effect, the HMO often acts much like a Medicare supplemental policy (Medigap insurance) by covering deductibles, coinsurance, and additional services. On the other hand, beneficiaries may be reluctant to enroll in HMOs because they give up their freedom to choose any provider. If a beneficiary enrolled in an HMO seeks nonemergency care from providers other than those designated by the HMO or seeks care without following the HMO's referral policy, the beneficiary is liable for the full cost of that care. In addition, beneficiaries may be reluctant to drop Medigap coverage and enroll in an HMO because it may be difficult to obtain supplemental insurance later at a reasonable price if they return to FFS. Because the elderly face a higher risk of serious illness, they may prefer to remain in the FFS program to take advantage of the ability to visit any provider or maintain their relationships with current providers. Medicare HMOs have enrollment procedures that reflect beneficiaries' freedom to move between the FFS program and HMO plans. Medicare rules allow beneficiaries to select any of the federally approved HMOs in their area and to switch plans or to return to the FFS program monthly. Beneficiaries who otherwise would be reluctant to try an HMO know they can easily leave if a plan does not meet their expectations. Because of this freedom to change plans every 30 days, disenrollments can indicate enrollee dissatisfaction with an HMO. Beneficiaries can also shift to HMOs to get specific benefits when needed and then disenroll with ease to return to FFS. Because enrolling more beneficiaries enables HMOs to spread their risk and better ensure profitability, recruiting or retaining beneficiaries in a plan is important. HMOs' marketing strategies often call attention to the size and geographic scope of the provider network and the quality of physicians in the network. However, as we have previously reported, some HMO sales agents have misled beneficiaries or used otherwise questionable sales practices to attract new enrollees. For a number of reasons, it would be expected that beneficiaries with chronic conditions would be drawn to HMO plans. HMOs have the potential to provide a range of integrated services required by such people. Ideally, HMO providers should have the flexibility to treat patients with chronic conditions or refer them to an appropriate mix of medical and nonmedical services. They have a financial incentive for keeping people healthy and as fully functioning as possible. To avoid use of emergency room and costly acute-care services, HMOs often emphasize prevention services that address the development or progression of disease complications. The combination of more extensive benefits and lower costs was evident in the benefit packages offered by the five largest California Medicare HMOs (accounting for 83 percent of the state's enrollment). In 1994, these plans offered zero to $30 monthly premiums; hospital coverage in full with unlimited days; physician and specialist visits with a copayment of $5 or less; emergency room care, in or out of the area, with a copayment of $5 to $50 (waived if admitted to the hospital); coverage for preventive health services, including an annual exam, eye glasses, routine eye and hearing tests, and health education; outpatient pharmacy coverage in three of the five plans, with copayments of $5 to $7 per prescription and an annual cap from $700 to $1,200; and outpatient mental health services with a copayment of $10 to $20 per visit, in most cases. Despite these extra benefits of HMOs, California Medicare beneficiaries with chronic conditions were less likely to enroll in an HMO than beneficiaries without any of the selected conditions. As a result, the new enrollee group had, on the whole, better health status than those who stayed in FFS. HMO enrollment typically involves only a fraction of FFS beneficiaries each year. Between January 1993 and December 1994, 16.4 percent of the beneficiaries in our decision-making cohort enrolled in an HMO. But beneficiaries with a single chronic condition were 19 percent less likely to join an HMO than those without any of the selected conditions, and those with multiple chronic conditions enrolled at a rate 27 percent below those with none of the conditions. One reason beneficiaries with chronic illnesses may be reluctant to enroll in an HMO is because they are more likely than nonchronic beneficiaries to have established provider relationships. In addition, because HMOs require that a primary care physician or "gatekeeper" decide when a patient needs a specialist or hospitalization, these beneficiaries may be particularly concerned about their access to specialty providers. Beneficiaries diagnosed with chronic conditions may prefer to remain in the FFS program to take advantage of the ability to visit any provider or to maintain relationships with current providers. Within each health status group, HMO enrollment rates declined with age. This may indicate that younger seniors are more familiar with HMOs and thus less reluctant to try them or that they have less severe medical problems and are more willing to switch physicians, if necessary. Reflecting both age and health status, beneficiaries over 85 years old who had multiple chronic conditions enrolled at about half the rate of those aged 65 to 69 without any of the conditions. (See table 1.) Comparing the two groups of beneficiaries, those who enrolled in an HMO and those who remained in FFS, we found that a larger proportion of the enrolled group had better health status. Whereas beneficiaries with none of the selected chronic conditions represented 49 percent of those staying in FFS, they represented 57 percent of the group enrolling to HMOs. Conversely, the share with multiple conditions was 26 percent greater in the group remaining in FFS than in the group joining an HMO. (See table 2.) Among the 12 California Medicare HMOs receiving the largest number of new enrollees from FFS, the health status of most plans' new enrollees resembled aggregate patterns. However, at one plan, 22.2 percent of its new enrollees had two or more selected chronic conditions. At another plan, 8.6 percent of its new enrollees had two or more chronic conditions. Not only were the enrollment rates for beneficiaries with chronic conditions lower than those with none of the selected conditions, but the prior costs of those who enrolled were substantially less than those who remained in FFS. As a result, the average cost of new enrollees was nearly one-third below the cost of FFS beneficiaries that did not enroll. New enrollees with chronic conditions are potential heavy users of expensive health care services in HMOs. Preenrollment data indicate that new enrollees with the selected chronic conditions had considerably higher FFS costs than those without one of the chronic conditions. On average, 1992 FFS costs for new enrollees were more than twice as high for beneficiaries with a single chronic condition compared with persons with none. Having multiple chronic conditions dramatically increased the prior cost of care among new enrollees, rising to 7 times the per capita costs of persons with none of the conditions. Even when the age of the beneficiary was taken into account, those with more than one chronic condition had substantially higher costs. For example, the 1992 average monthly FFS cost for new enrollees 70 to 74 years old ranged from $74 for individuals with none of the selected conditions to $565 for those with two or more conditions. (See table 3.) The enrollment patterns show that Medicare HMOs attracted people who did not need as costly medical care. Beneficiaries who enrolled in an HMO in 1993 or 1994 had substantially lower 1992 costs compared with those that remained in FFS during that period. As a group, new enrollees cost 29 percent less than those who did not join an HMO. This pattern of drawing new HMO enrollees from FFS beneficiaries with low costs held true for each of the health status categories. The differences in prior costs ranged from 31 percent among those with no chronic conditions to 16 percent for those with multiple chronic conditions. (See table 4.) Medicare beneficiaries voluntarily disenroll from HMOs for a variety of reasons. A 1996 Mathematica Policy Research, Inc., survey found that disenrollees to FFS who had been in their plan for 6 months or less were more likely than longer-term stayers to cite their reasons for disenrolling as dissatisfaction with the choice of primary care physicians, a misunderstanding of HMO rules, and an inability to obtain appointments when needed. High early disenrollment rates may reflect beneficiaries' lack of familiarity with the HMO concept. For example, a beneficiary may realize only after joining a plan that it does not pay for care from an out-of-network provider. These early disenrollees were more likely to return to FFS Medicare, while beneficiaries who disenrolled after a longer period were more likely to join other risk plans. Early disenrollees to FFS were a small group relative to all new enrollees. The vast majority of new enrollees, 91.5 percent, were still enrolled in their HMO 6 months after joining their plan. Within this brief period, 6 percent returned to FFS and 2.5 percent switched to another HMO. New HMO enrollees with chronic conditions rapidly disenrolled and returned to FFS at higher rates than healthier new enrollees. The early disenrollment rates were highest among those with multiple chronic conditions, which might indicate greater access barriers and less satisfaction with HMOs for such beneficiaries. Those with two or more of the selected conditions disenrolled at a rate more than twice that of new enrollees with none of the conditions. Also, a greater proportion of older seniors disenrolled than younger beneficiaries, regardless of health status. (See table 5.) In the 12 plans enrolling most of new enrollees, the early disenrollment rates for beneficiaries in each health status group exhibited a fairly consistent pattern. At most plans, beneficiaries with two or more of the selected chronic conditions disenrolled at about twice the rate of new enrollees with none of the conditions. However, the disenrollment rates for new enrollees with no chronic conditions ranged from 1.8 percent to 15.4 percent. For beneficiaries with two or more of the selected conditions, disenrollment rates varied even more widely, from 3.3 percent at one plan to 34.4 percent at another. Taking the enrollment and disenrollment rates together, we found that those beneficiaries who were least likely to enroll in an HMO were also those that were most likely to disenroll early. For example, among beneficiaries 70 to 74 years old with multiple chronic conditions, 13.8 percent enrolled in an HMO and 10.0 percent of those beneficiaries disenrolled early. This compares with 18.6 percent and 4.2 percent, respectively, for beneficiaries of the same age group with none of the conditions. This pattern of early disenrollment accentuates the health status differences between those who joined an HMO and those who remained continuously enrolled in FFS. Most of the disenrollees returning to FFS, 58 percent, had at least one of the selected chronic conditions. The composition of the group that stayed on in their HMO had better health status, with 42 percent having a chronic condition. (See table 6.) The higher early disenrollment rate for those with multiple chronic conditions reinforces the cost implications of an underrepresented enrollment of beneficiaries with chronic conditions. Disenrollment appears to winnow many of the highest cost beneficiaries out of the newly enrolled HMO population, widening the gap between FFS and managed care. Prior Medicare expenditures for early disenrollees ranged from $132 per month for those with none of the selected conditions to $690 for those with multiple conditions (see table 7). Costs generally increased with age for beneficiary groups with none or one of the selected chronic conditions. However, among disenrollees with multiple conditions, younger seniors had the highest costs. Compared with the prior cost of new enrollees (shown in table 3), the disenrollees' prior costs were higher in every health status group. On average, 1992 costs were 66 percent higher for early disenrollees than for new enrollees. Comparing the two groups of beneficiaries, those who disenrolled early also had substantially higher 1992 costs than those remaining in their HMO. This was true for all the health categories. The weighed average cost for beneficiaries who returned to FFS was 79 percent more than those who stayed on in an HMO. (See table 8.) The low prior costs of those who enrolled in an HMO and remained there for more than 6 months are in sharp contrast to costs for those who stayed in FFS continuously for the 24-month period (as shown in table 4). Longer-term HMO enrollees had far lower preenrollment costs than the FFS stayers, with cost differences ranging from 20 percent lower among beneficiaries with multiple chronic conditions to 34 percent lower for those with none of the conditions. Compared with healthier beneficiaries, California Medicare beneficiaries with selected chronic conditions were less likely to enroll in HMOs and more likely to rapidly disenroll from HMOs. This pattern was evident despite the fact that California HMOs' coverage of more services (particularly preventive care and prescription drugs) with less cost-sharing would be expected to attract beneficiaries with chronic conditions. Furthermore, the debate about the better health status of HMO enrollees hinges on a subtle point, but one that has significant cost implications. That is, beneficiaries grouped within health status categories--the presence of zero, one, or multiple chronic conditions--incur a range of costs depending on the severity of their chronic condition(s) or the presence of other conditions (not accounted for in this analysis). Those at the low end tend to be the new HMO enrollees, whereas those at the high end are likely to remain in FFS. Thus, this study helps explain a pattern of favorable selection in California Medicare HMOs despite the presence of some new enrollees with chronic conditions. We provided copies of a draft of this report to health care analysts at HCFA, the Physician Payment Review Commission, and the Prospective Payment Assessment Commission. They generally agreed with the information presented and offered some technical suggestions that we incorporated where appropriate. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to interested parties and make copies available to others on request. Please call me on (202) 512-7119 if you or your staff have any questions. Other major contributors to this report include Rosamond Katz, Robert Deroy, and Rajiv Mukerji. This appendix describes our (1) scope and data sources, (2) methodology for identifying Medicare fee-for-service (FFS) beneficiaries with selected chronic conditions, and (3) methodology for analyzing the health maintenance organization (HMO) enrollment and disenrollment patterns of FFS beneficiaries. Our study is an analysis of HMO enrollment and disenrollment patterns in 14 counties in California from January 1993 through June 1995. We chose California because it has been the hub of Medicare HMO activity nationwide. In 1995, over 40 percent of all Medicare beneficiaries enrolled in risk contract HMOs resided in the state. California had 32 HMOs with Medicare risk contracts, including 5 of the nation's 7 plans that had the largest number of beneficiaries enrolled. We selected California counties where opportunities for enrollment were not limited by HMO participation. The 14 counties included in our study each had at least one risk contract HMO operating within its boundaries, and 10 counties listed two or more Medicare HMOs. In addition, all of the counties had over 1,000 Medicare beneficiaries enrolled in risk contract HMOs and together accounted for 99.2 percent of California risk contract HMO enrollment. As a result of substantial HMO enrollment growth, several of these counties had high Medicare HMO market penetration rates (the proportion of Medicare beneficiaries enrolled in an HMO) in 1994: San Bernardino (47 percent), Riverside (47 percent), San Diego (42 percent), and Orange (36 percent). We used the Health Care Financing Administration's (HCFA) Enrollment Database (EDB) file to select a cohort of FFS beneficiaries who lived in the 14-county area in December 1992. The EDB is the repository of enrollment and entitlement information of anyone ever enrolled in Medicare. It contains information on a beneficiary's age, sex, entitlement status, state and county of residence, and HMO enrollment history. To focus on the enrollment behavior of people who had no recent HMO experience, we identified beneficiaries who were eligible for Medicare part A and part B for all of 1992 but were not in an HMO at any point during that year. We further narrowed the cohort by excluding patients with end-stage renal disease and those entitled to Medicare benefits because they were disabled and under 65 years old. We used HCFA's Standard Analytic Files (SAF) to determine Medicare's payments for each FFS beneficiary. The SAFs contain final action claims data for various types of Medicare-covered services, including inpatient hospital, outpatient, home health agency, skilled nursing facility, hospice, physician/supplier, and durable medical equipment. We obtained expenditure information from the "payment amount" portion of the claim and added pass-through and per diem expenses to the payment amount for inpatient claims. From the claim files, we computed 1992 monthly average expenditures for each beneficiary enrolled in FFS throughout 1992. Individual expenditure information was combined with EDB data to produce a single enrollment and expenditure file containing information on 1,270,554 California FFS Medicare beneficiaries. We also used claims information contained in the SAFs to determine the health status of each beneficiary, as measured by the presence or absence of any of five chronic conditions; that is, whether a claimant had been diagnosed with zero, one, or two or more of the chronic conditions. The chronic conditions included in this analysis were diabetes mellitus, ischemic heart disease, congestive heart failure, hypertension, and chronic obstructive pulmonary disease. These five conditions were identified by Medicare officials as ranking among the most highly prevalent in the elderly population and generating the highest costs to the program. For each cohort beneficiary, we screened 1991 and 1992 inpatient, outpatient, skilled nursing facility, home health agency, and physician/supplier claims for diagnoses (3-digit ICD-9 codes) related to the five chronic conditions. A beneficiary was classified as having a given chronic condition if he or she had one or more hospital claims with a diagnosis of any of the five chronic conditions, two or more other claims with the diagnosis of diabetes mellitus or chronic obstructive pulmonary disease, or three or more other claims with the diagnosis of hypertension, ischemic heart disease, or congestive heart failure. We then summarized the information for each beneficiary to determine if he or she had zero, one, or two or more chronic conditions. We analyzed information contained in the EDB to determine the cohort's HMO enrollment patterns from January 1993 to December 1994. For each beneficiary, there were four possible occurrences: death, change of residence (out of county), enrollment in an HMO, or 24 months of continuous enrollment in FFS. If the first occurrence for any beneficiary was death or a move, we excluded those beneficiaries from further analysis. During the period, the proportion who died was 6.2 percent for those with none of the selected conditions, 9.6 percent for those with one condition, and 18.6 percent for those with two or more conditions; the percentage who moved was about 5 percent for each health status group. Excluding beneficiaries who died or moved during the 2-year period reduced the size of the cohort to 1,074,819 beneficiaries. We then calculated their 1992 average monthly FFS expenditures, by number of chronic conditions and age group, and the proportion of the remaining beneficiaries that enrolled in an HMO. This 24-month requirement made our pool of potential enrollees a somewhat healthier group than otherwise, and therefore, our estimates of HMO enrollment rates were more favorable than if this requirement were not a criterion for inclusion. Also, because people in their last 12 months of life have costs that are significantly higher than those of other Medicare beneficiaries, the health status and 1992 average costs for those who stayed in FFS was below what they would be if a less stringent criterion were used. To determine the early disenrollment rates, we tracked those beneficiaries who joined an HMO (175,951) for 6 months after they enrolled using January 1993 to June 1995 EDB information. Disenrollments may occur for administrative reasons (the individual died or moved out of the HMO's service area) or voluntarily (to return to FFS or switch to another HMO). We excluded from further analysis those beneficiaries who disenrolled for administrative reasons, leaving a cohort of 14,455 who voluntarily disenrolled within 6 months. We then calculated the proportion of beneficiaries who chose to return to FFS and their 1992 average monthly FFS expenditures, for each health status and age group. We conducted our review of enrollment and disenrollment patterns between April 1996 and June 1997 in accordance with generally accepted government auditing standards. Chronic conditions may begin in middle age but often progress in terms of severity of symptoms and the degree to which they limit a person as the person ages. Many people with any kind of a chronic condition have more than one condition to manage, further adding to their health care burden. Those who are chronically ill have substantially higher utilization of health care services, accounting for a large share of emergency room visits, hospital admissions, hospital days, and home care visits. This appendix presents 1992 data on the proportion of California FFS beneficiaries that had selected chronic conditions and how their costs compared with those without the conditions. In 1992, about 660,000 or one-half of the elderly Californians in our cohort were identified as having diabetes, ischemic heart disease, congestive heart failure, hypertension, or chronic obstructive pulmonary disease. Of these, about 40 percent had more than one of these chronic condition. As shown in table II.1, the prevalence of these conditions is greatest among the oldest of the elderly. For example, for those over 75 years old, one in three beneficiaries had a single chronic condition and at least one in four had two or more of these chronic conditions. There were substantial cost differences between beneficiaries who had none, one, or several of the selected conditions. The average cost for a beneficiary with multiple chronic conditions was over 6 times the cost for a beneficiary with none of the conditions, and more than twice the cost for a beneficiary with only one of the conditions. As shown in table II.2, even within the same age group, costs varied widely across health status groups. Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions in Excess Payments (GAO/HEHS-97-16, Apr. 25, 1997). Medicare HMOs: Rapid Enrollment Growth Concentrated in Selected States (GAO/HEHS-96-63, Jan. 18, 1996). Medicare Managed Care: Growing Enrollment Adds Urgency to Fixing HMO Payment Problems (GAO/HEHS-96-21, Nov. 8, 1995). Medicare: Changes to HMO Rate Setting Methods Are Needed to Reduce Program Costs (GAO/HEHS-94-119, Sept. 2, 1994). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO examined a mature managed care market to determine: (1) the extent to which Medicare beneficiaries with chronic conditions enroll in health maintenance organizations (HMO); (2) whether beneficiaries with chronic conditions who enroll in HMOs are as costly as those remaining in fee-for-service (FFS) Medicare; and (3) whether beneficiaries with chronic conditions rapidly disenroll from HMOs to FFS at rates different from other newly enrolled beneficiaries. GAO noted that: (1) data on California's FFS beneficiaries who enrolled in HMOs help explain why, despite the presence of chronic conditions among new HMO enrollees, their average costs are lower than the average FFS beneficiary; (2) the health status of beneficiaries, as measured by the number of selected chronic conditions they have, showed significant differences between those who enrolled in an HMO and those who remained in FFS; (3) also, when comparing beneficiaries categorized by the presence of none, one, or multiple chronic conditions, new HMO enrollees tended to be the least costly in each health status group; (4) this resulted in a substantial overall cost difference between those that did and did not enroll in HMOs; (5) about one in six 1992 California FFS Medicare beneficiaries enrolled in an HMO in 1993 and 1994; (6) HMO enrollment rates differed significantly for beneficiaries with selected chronic conditions compared to other beneficiaries; (7) among those with none of the selected conditions, 18.4 percent elected to enroll in an HMO compared to 14.9 percent of beneficiaries with a single chronic condition and 13.4 percent of those with two or more conditions; (8) GAO found that prior to enrolling in an HMO a substantial cost difference, 29 percent, existed between new HMO enrollees and those remaining in FFS because HMOs attracted the least costly enrollees within each health status group; (9) even among beneficiaries belonging to either of the groups with chronic conditions, HMOs attracted those with less severe conditions as measured by their 1992 average monthly costs; (10) GAO found that rates of early disenrollment from HMOs to FFS were substantially higher among those with chronic conditions; (11) while only 6 percent of all new enrollees returned to FFS within 6 months, the rates ranged from 4.5 percent for beneficiaries without a chronic condition to 10.2 percent for those with two or more chronic conditions; (12) also, disenrollees who returned to FFS had substantially higher costs prior to enrollment compared to those who remained in their HMO; and (13) these data indicated that favorable selection still exists in California Medicare HMOs because they attract and retain the least costly beneficiaries in each health status group.
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In March 1997, a White House memorandum implemented adjudicative guidelines, temporary eligibility standards, and investigative standards governmentwide. The National Security Council is responsible for overseeing these guidelines and standards. Within DOD, the Office of the Under Secretary of Defense for Intelligence (OUSD ) is responsible for coordinating and implementing DOD-wide policies related to access to classified information. Within OUSD (I), the Defense Security Service (DSS) is responsible for conducting background investigations and administering the personnel security investigations program for DOD and 24 other federal agencies that allow industry personnel access to classified information. DSS's Defense Industrial Security Clearance Office (DISCO) adjudicates cases that contain only favorable information or minor security issues. The Defense Office of Hearings and Appeals (DOHA) within DOD's Office of General Counsel adjudicates cases that contain more serious security issues. As with military members and federal workers, industry personnel must obtain a security clearance to gain access to classified information, which is categorized into three levels: top secret, secret, and confidential. Individuals who need access to classified information over a long period are required to periodically renew their clearance (a reinvestigation). The time frames for reinvestigations are 5 years for top secret clearances, 10 years for secret clearances, and 15 years for confidential clearances. To ensure the trustworthiness, judgment, and reliability of contractor personnel in positions requiring access to classified information, DOD relies on a three-stage personnel security clearance process that includes (1) determining that the position requires a clearance and, if so, submitting a request for a clearance to DSS, (2) conducting an initial investigation or reinvestigation, and (3) using the investigative report to determine eligibility for access to classified information--a procedure known as "adjudication." Figure 1 depicts this three-stage process and the federal government offices that have the lead responsibility for each stage. In the preinvestigation stage, the industrial contractor must determine that a position requires the employee to have access to classified information. If a clearance is needed, the industry employee completes a personnel security questionnaire, and the industrial contractor submits it to DSS. All industry requests for a DOD-issued clearance are submitted to DSS while requests for military members and federal employees are submitted to either DSS or the Office of Personnel Management (OPM). In the investigation stage, DSS, OPM, or one of their contractors conducts the actual investigation of the industry employee by using standards established governmentwide in 1997 and implemented by DOD in 1998. As table 1 shows, the type of information gathered in an investigation depends on the level of clearance needed and whether an initial investigation or a reinvestigation is required. DSS forwards the completed investigative report to DISCO. In the adjudicative stage, DISCO uses the information from the investigative report to determine whether an individual is eligible for a security clearance. If the report is determined to be a "clean" case--a case that contains no potential security issue or minor issues--then DISCO adjudicators determine eligibility for a clearance. However, if the case is an "issue" case--a case containing issues that might disqualify an individual for a clearance (e.g., foreign connections or drug- or alcohol-related problems)--then the case is forwarded to DOHA adjudicators for the clearance-eligibility decision. Regardless of which office determines eligibility, DISCO issues the clearance-eligibility decision and forwards this determination to the industrial contractor. All adjudications are based on 13 federal adjudicative guidelines established governmentwide in 1997 and implemented by DOD in 1998. Recent legislation could affect DOD's security clearance process. The National Defense Authorization Act for Fiscal Year 2004 authorized the transfer of DOD's personnel security investigative functions and more than 1,800 investigative employees to OPM. However, as of March 31, 2004, this transfer had not taken place. The transfer can occur only after the Secretary of Defense certifies to Congress that certain conditions can be met and the Director of OPM concurs with the transfer. DOD's security clearance backlog for industry personnel is sizeable, and the average time needed to determine eligibility for a clearance increased during the last 3 fiscal years to over 1 year. DSS has established case-completion time frames for both its investigations and adjudications. For investigations, the time frames range from 75 to 180 days, depending on the investigative requirements. For DISCO adjudications, the time frames are 3 days for initial clearances and 30 days for periodic reinvestigations. DOHA's time frame is to maintain a steady workload of adjudicating 2,150 cases per month within 30 days of receipt. Cases exceeding these time frames are considered backlogged. Sizeable backlog continues to exist--As of March 31, 2004, the security clearance backlog for industry personnel was roughly 188,000 cases. This estimate is the sum of four separate DSS-supplied estimates: over 61,000 reinvestigations that were overdue but had not been submitted, over 101,000 ongoing DSS investigations, over 19,000 cases awaiting adjudication at DISCO, and more than 6,300 cases awaiting adjudication at DOHA that had exceeded the case-completion time frames established for conducting them. However, as of March 31, 2004, DOHA independently reported that it had eliminated its adjudicative backlog. Moreover, the size of the total DSS-estimated backlog for industry personnel doubled during the 6-month period ending on March 31, 2004, as the comparison in table 2 shows. This comparison does not include the backlog of overdue reinvestigations that have not been submitted because DSS was not able to estimate that backlog as of September 30, 2003. The industry backlogs for investigations and adjudications represent about one-fifth of the DOD-wide backlog for investigations and adjudications as of September 30, 2003 (the date of the most recent DOD-wide data). On that date, the estimated size of the investigative backlog for industry personnel amounted to roughly 44,600 cases, or 17 percent of the larger DOD-wide backlog of approximately 270,000 cases, which included military members, federal employees, and industry personnel. Similarly, the estimated size of the adjudicative backlog for industry personnel totaled roughly 17,300 cases, or 19 percent of the approximately 93,000 cases in the DOD-wide adjudicative backlog on that date. Furthermore, the size of the industrial personnel backlog may be underestimated. In anticipation of the authorized transfer of the investigative function from DSS to OPM, DSS had opened relatively few cases between October 1, 2003, and March 31, 2004. More specifically, DSS had not opened almost 69,200 new industry personnel requests received in the first half of fiscal year 2004. Because these requests have not been opened and investigations begun, they are not part of the 188,000 case backlog identified above. An unknown number of these cases might have already exceeded the set time frames for completing the investigation. Average time to determine clearance eligibility has increased--In the 3-year period from fiscal year 2001 through fiscal year 2003, the average time that DOD took to determine clearance eligibility for industry personnel increased from 319 days to 375 days, an increase of 18 percent. (See table 3.) During fiscal year 2003, DOD took an average of more than 1 year from the time DSS received a personnel security questionnaire to the time it issued an eligibility determination. From fiscal year 2001 through fiscal year 2003, the number of days to determine clearance eligibility for clean cases increased from 301 days to 332 days, whereas the time increased for issue cases from 516 days to 615 days. Backlogs and delays can have adverse effects--Delays in renewing security clearances for industry personnel and others who are doing classified work can lead to a heightened risk of national security breaches. In a 1999 report, the Joint Security Commission II pointed out that delays in initiating reinvestigations create risks to national security because the longer the individuals hold clearances, the more likely they are to be working with critical information and systems. In addition, delays in determining security clearance eligibility for industry personnel can affect the timeliness, quality, and cost of contractor performance on defense contracts. According to a 2003 Information Security Oversight Office report, industrial contractor officials who were interviewed said that delays in obtaining clearances cost industry millions of dollars per year and affect personnel resources. The report also stated that delays in the clearance process hampered industrial contractors' ability to perform duties required by their contracts and increased the amount of time needed to complete national-security-related contracts. Industrial contractors told us about cases in which their company hired competent applicants who already had the necessary security clearances, rather than individuals who were more experienced or qualified but did not have a clearance. Industry association representatives told us that defense contractors might offer monetary incentives to attract new employees with clearances--for example, a $15,000 to $20,000 signing bonus for individuals with a valid security clearance, and a $10,000 bonus to current employees who recruit a new employee with a clearance. In addition, defense contractors may hire new employees and begin paying them, but not be able to assign any work to them--sometimes for a year or more-- until they obtain a clearance. Contractors may also incur lost-opportunity costs if prospective employees decide to work elsewhere rather than wait to get a clearance. A number of impediments hinder DOD's efforts to eliminate the clearance backlog for industry personnel and reduce the time needed to determine eligibility for a clearance. Impediments include large investigative and adjudicative workloads resulting from a large number of clearance requests in recent years and an increase in the proportion of requests requiring top secret clearances, inaccurate workload projections, and the imbalance between workforces and workloads. The underutilization of reciprocity is an impediment that industrial contractors cited as an obstacle to timely eligibility determinations. Furthermore, DOD does not have a management plan that could help it address many of these impediments in a comprehensive and integrative manner. Large number of clearance requests--The large number of clearance requests that DOD receives annually for industry personnel, military members, and federal employees taxes a process that already is experiencing backlogs and delays. In fiscal year 2003, DOD submitted over 775,000 requests for investigations to DSS and OPM, about one-fifth of which (almost 143,000 requests) were for industry personnel. Table 4 shows an increase in the number of DOD eligibility determinations for industry personnel made during each of the last 3 years. DOD issued about 63,000 more eligibility determinations for industry personnel in fiscal year 2003 than it did 2 years earlier, an increase of 174 percent. During the same period, the average number of days required to issue an eligibility determination for industry personnel grew by 56 days, or about 18 percent. In other words, the increase in the average wait time was small compared to the increase in the number of cases. Increase in the proportion of requests for top secret clearances-- From fiscal year 1995 through fiscal year 2003, the proportion of all requests requiring top secret clearances for industry personnel grew from 17 to 27 percent. According to OUSD (I), top secret clearances take eight times more investigative effort to complete and three times more adjudicative effort to review than do secret clearances. The increased demand for top secret clearances also has budget implications for DOD. In fiscal year 2003, security investigations obtained through DSS cost $2,640 for an initial investigation for a top secret clearance, $1,591 for a reinvestigation of a top secret clearance, and $328 for an initial investigation for a secret clearance. Thus, over a 10-year period, DOD would spend $4,231 (in current-year dollars) to investigate and reinvestigate an industry employee for a top secret clearance, a cost 13 times higher than the $328 it would require to investigate an individual for a secret clearance. Inaccurate workload projections--Although DSS has made efforts to improve its projections of industry personnel security clearance requirements, problems remain. For example, inaccurate forecasts for both the number and type of security clearances needed for industry personnel make it difficult for DOD to plan ahead to size its investigative and adjudicative workforce to handle the workload and fund its security clearance program. For fiscal year 2003, DSS reported that the actual cost of industry personnel investigations was almost 25 percent higher than had been projected. DOD officials believed that these projections were inaccurate primarily because DSS received a larger proportion of requests for initial top secret investigations and reinvestigations. Further inaccuracies in projections may result when DOD fully implements a new automated adjudication tracking system, which will identify overdue reinvestigations that have not been submitted DOD-wide. Imbalance between workforces and workloads--Insufficient investigative and adjudicative workforces, given the current and projected workloads, are additional barriers to eliminating the backlog and reducing security clearance processing times for industry personnel. DOD partially concurred with our February 2004 recommendation to identify and implement steps to match the sizes of the investigative and adjudicative workforces to the clearance request workload. According to an OPM official, DOD and OPM together need roughly 8,000 full-time-equivalent investigative staff to eliminate the security clearance backlogs and deliver timely investigations to their customers. In our February 2004 report, we estimated that DOD and OPM have around 4,200 full-time-equivalent investigative staff who are either federal employees or contract investigators. In December 2003, advisors to the OPM Director expressed concerns about financial risks associated with the transfer of DSS's investigative functions and 1,855 investigative staff authorized in the National Defense Authorization Act for Fiscal Year 2004. The advisors therefore recommended that the transfer not occur, at least during fiscal year 2004. On February 6, 2004, DSS and OPM signed an interagency agreement that leaves the investigative functions and DSS personnel in DOD and provides DSS personnel with training on OPM's case management system and investigative procedures as well as access to that system. According to our calculations, if all 1,855 DSS investigative employees complete the 1-week training program as planned, the loss in productively will be equivalent to 35 person-years of investigator time. Also, other short-term decreases in productivity will result while DSS's investigative employees become accustomed to using OPM's system and procedures. Likewise, an adjudicative backlog of industry personnel cases developed because DISCO and DOHA did not have an adequate number of adjudicative personnel on hand. DISCO and DOHA have, however, taken steps to augment their adjudicative staff. DISCO was recently given the authority to hire 30 adjudicators to supplement its staff of 62 nonsupervisory adjudicators. Similarly, DOHA has supplemented its 23 permanent adjudicators with 46 temporary adjudicators and, more recently, has requested that it be able to hire an appropriate number of additional permanent adjudicators. Reciprocity of access underutilized--While the reciprocity of security clearances within DOD has not been a problem for industry personnel, reciprocity of access to certain types of information and programs within the federal government has not been fully utilized, thereby preventing some industry personnel from working and increasing the workload on already overburdened investigative and adjudicative staff. According to DOD and industry officials, a 2003 Information Security Oversight Office report on the National Industrial Security Program, and our analysis, reciprocity of clearances appears to be working throughout most of DOD. However, the same cannot be said for access to sensitive compartmented information and special access programs within DOD or transferring clearances and access from DOD to some other agencies. Similarly, a recent report by the Defense Personnel Security Research Center concluded that aspects of reciprocity for industrial contractors appear not to work well and that the lack of reciprocity between special access programs was a particular problem for industry personnel, who often work on many of these programs simultaneously. Industry association officials told us that reciprocity of access to certain types of information and programs, especially the lack of full reciprocity in the intelligence community, is becoming more common and one of the top concerns of their members. One association provided us with several examples of access problems that industry personnel with DOD-issued security clearances face when working with intelligence agencies. For example, the association cited different processes and standards used by intelligence agencies, such as guidelines for (1) the type of investigations and required time frames, (2) the type of polygraph tests, and (3) not accepting adjudication decisions made by other agencies. In addition to the reciprocity concerns relating to access to sensitive compartmented information and special access programs, industry officials identified additional reciprocity concerns. First, DSS and contractor association officials told us that some personnel with an interim clearance could not start work because an interim clearance does not provide access to specific types of national security information, such as sensitive compartmented information, special access programs, North Atlantic Treaty Organization data, and restricted data. Second, intelligence agencies do not always accept clearance reinstatements and conversions (e.g., a security clearance may be reactivated depending on the recency of the investigation and the length of time since the clearance was terminated). Third, the Smith Amendment--with exceptions-- prohibits an individual with a clearance from being eligible for a subsequent DOD clearance if certain prohibitions (e.g., unlawful user of a controlled substance) are applicable. Lack of overall management plan--Finally, DOD has numerous plans to address pieces of the backlog problem but does not have an overall management plan to eliminate permanently the current investigative and adjudicative backlogs, reduce the delays in determining clearance eligibility for industry personnel, and overcome the impediments that could allow such problems to recur. These plans do not address process wide objectives and outcome-related goals with performance measures, milestones, priorities, budgets, personnel resources, costs, and potential obstacles and options for overcoming the obstacles. DOD and industry association officials have suggested several initiatives to reduce the backlog and delays in issuing eligibility for a security clearance. They indicated that these steps could supplement actions that DOD has implemented in recent years or has agreed to implement as a result of our recommendations or those of others. Even if positive effects would result from these initiatives, other obstacles, such as the need to change investigative standards, coordinate these policy changes with other agencies, and ensure reciprocity, could prevent their implementation or limit their use. Today, I will discuss three of the suggested initiatives. Our final report to you will provide a more complete evaluation of these and other initiatives. Conducting a phased periodic reinvestigation--A phased approach to periodic reinvestigations for top secret clearances involves conducting a reinvestigation in two phases; the second phase would be conducted only if potential security issues were identified in the initial phase. Phase 1 information is obtained through a review of the personnel security questionnaire, subject and former spouse interviews, credit checks, a national agency check on the subject and former spouse or current cohabitant, local agency checks, records checks, and interviews with workplace personnel. If one or more issues are found in phase 1, then phase 2 would include all of the other types of information gathered in the current periodic reinvestigation for a top secret investigation. Recent research has shown that periodic reinvestigations for top secret clearances conducted in two phases can save at least 20 percent of the normal effort with almost no loss in identifying critical issues for adjudication. According to DSS, this initiative is designed to use the limited investigative resources in the most productive manner and reduce clearance-processing time by eliminating the routine use of low-yield information sources on many investigations and concentrating information-gathering efforts on high-yield sources. While analyses have not been conducted to evaluate how the implementation of phasing would affect the investigative backlog, the implementation of phasing could be a factor in reducing the backlog by decreasing some of the hours of fieldwork required in some reinvestigations. Even if additional testing confirms promising earlier findings that the procedure very rarely fails to identify critical issues, several obstacles, such as noncompliance with existing governmentwide investigative standards and reciprocity problems, could prevent the implementation or limit the use of this initiative. Establishing a single adjudicative facility for industry--Under this initiative, DOD would consolidate DOHA's adjudicative function with that of DISCO's to create a single adjudicative facility for all industry personnel cases. At the same time, DOHA would retain its hearings and appeals function. According to OUSD (I) officials, this consolidation would streamline the adjudicative process for industry personnel and make it more coherent and uniform. A single adjudicative facility would serve as the clearinghouse for all industrial contractor-related issues. As part of a larger review of DOD's security clearance processes, DOD's Senior Executive Council is considering this consolidation. An OUSD (I) official told us that the consolidation would provide greater flexibility in using adjudicators to meet changes in the workload and could eliminate some of the time required to transfer cases from DISCO and to DOHA. If the consolidation occurred, DISCO officials said that their operations would not change much, except for adding adjudicators. On the other hand, DOHA officials said that the current division between DISCO and DOHA of adjudicating clean versus issue cases works very well and that combining the adjudicative function for industry into one facility could negatively affect DOHA's ability to prepare denials and revocations of industry personnel clearances during appeals. They told us that the consolidation would have very little impact on the timeliness and quality of adjudications. Evaluation of the investigative standards and adjudicative guidelines--This initiative would involve an evaluation of the investigative standards used by personnel security clearance investigators to help identify requirements that do not provide significant information relevant for adjudicative decisions. By eliminating the need to perform certain tasks associated with these requirements, investigative resources could be used more efficiently. For example, DSS officials told us that less than one-half of one percent of the potential security issues identified during an investigation are derived from neighborhood checks; however, this information source accounts for about 14 percent of the investigative time. The modification of existing investigative standards would involve using risk management principles based on a thorough evaluation of the potential loss of information. Like a phased periodic reinvestigation, this initiative would require changes in the governmentwide investigative standards. In addition, the evaluation and any suggested changes would need to be coordinated within DOD, intelligence agencies, and others. Mr. Chairman, this concludes my prepared statement. I will be happy to respond to any questions you or other Members of the committee may have at this time. Individuals making key contributions to this statement include Mark A. Pross, James F. Reid, William J. Rigazio, and Nancy L. Benco. Industrial Security: DOD Cannot Provide Adequate Assurances That Its Oversight Ensures the Protection of Classified Information. GAO-04-332. Washington, D.C.: March 3, 2004. DOD Personnel Clearances: DOD Needs to Overcome Impediments to Eliminating Backlog and Determining Its Size. GAO-04-344. Washington, D.C.: February 9, 2004. DOD Personnel: More Consistency Needed in Determining Eligibility for Top Secret Security Clearances. GAO-01-465. Washington, D.C.: April 18, 2001. DOD Personnel: More Accurate Estimate of Overdue Security Clearance Reinvestigation Is Needed. GAO/T-NSIAD-00-246. Washington, D.C.: September 20, 2000. DOD Personnel: More Actions Needed to Address Backlog of Security Clearance Reinvestigations. GAO/NSIAD-00-215. Washington, D.C.: August 24, 2000. DOD Personnel: Weaknesses in Security Investigation Program Are Being Addressed. GAO/T-NSIAD-00-148. Washington, D.C.: April 6, 2000. DOD Personnel: Inadequate Personnel Security Investigations Pose National Security Risks. GAO/T-NSIAD-00-65. Washington, D.C.: February 16, 2000. DOD Personnel: Inadequate Personnel Security Investigations Pose National Security Risks. GAO/NSIAD-00-12. Washington, D.C.: October 27, 1999. Background Investigations: Program Deficiencies May Lead DEA to Relinquish Its Authority to OPM. GAO/GGD-99-173. Washington, D.C.: September 7, 1999. Military Recruiting: New Initiatives Could Improve Criminal History Screening. GAO/NSIAD-99-53. Washington, D.C.: February 23, 1999. Executive Office of the President: Procedures for Acquiring Access to and Safeguarding Intelligence Information. GAO/NSIAD-98-245. Washington, D.C.: September 30, 1998. Privatization of OPM's Investigations Service. GAO/GGD-96-97R. Washington, D.C.: August 22, 1996. Cost Analysis: Privatizing OPM Investigations. GAO/GGD-96-121R. Washington, D.C.: July 5, 1996. Personnel Security: Pass and Security Clearance Data for the Executive Office of the President. GAO/NSIAD-96-20. Washington, D.C.: October 19, 1995. Privatizing OPM Investigations: Perspectives on OPM's Role in Background Investigations. GAO/T-GGD-95-185. Washington, D.C.: June 14, 1995. Background Investigations: Impediments to Consolidating Investigations and Adjudicative Functions. GAO/NSIAD-95-101. Washington, D.C.: March 24, 1995. Security Clearances: Consideration of Sexual Orientation in the Clearance Process. GAO/NSIAD-95-21. Washington, D.C.: March 24, 1995. Personnel Security Investigations. GAO/NSIAD-94-135R. Washington, D.C.: March 4, 1994. Nuclear Security: DOE's Progress on Reducing Its Security Clearance Work Load. GAO/RCED-93-183. Washington, D.C.: August 12, 1993. Personnel Security: Efforts by DOD and DOE to Eliminate Duplicative Background Investigations. GAO/RCED-93-23. Washington, D.C.: May 10, 1993. DOD Special Access Programs: Administrative Due Process Not Provided When Access Is Denied or Revoked. GAO/NSIAD-93-162. Washington, D.C.: May 5, 1993. Administrative Due Process: Denials and Revocations of Security Clearances and Access to Special Programs. GAO/T-NSIAD-93-14. Washington, D.C.: May 5, 1993. Security Clearances: Due Process for Denials and Revocations by Defense, Energy, and State. GAO/NSIAD-92-99. Washington, D.C.: May 6, 1992. Due Process: Procedures for Unfavorable Suitability and Security Clearance Actions. GAO/NSIAD-90-97FS. Washington, D.C.: April 23, 1990. 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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Because of increased awareness of threats to national security and efforts to privatize federal jobs, the demand for security clearances for government and industry personnel has increased. Industry personnel are taking on a greater role in national security work for the Department of Defense (DOD) and other federal agencies. Because many of these jobs require access to classified information, industry personnel need security clearances. As of September 30, 2003, industry workers held about one-third of the approximately 2 million DOD-issued security clearances. Terrorist attacks have heightened national security concerns and underscored the need for a timely, high-quality personnel security clearance process. However, GAO's past work found that DOD had a clearance backlog and other problems with its process. GAO was asked to review the clearance eligibility determination process and backlog for industry personnel. This testimony presents our preliminary observations on the security clearance process for industry personnel and describes (1) the size of the backlog and changes in the time needed to issue eligibility determinations, (2) the impediments to reducing the backlog and delays, and (3) some of the initiatives that DOD is considering to eliminate the backlog and decrease the delays. Later this month, we plan to issue our final report. On the basis of our preliminary observations, long-standing backlogs and delays in determining security clearance eligibility for industry personnel continue to exist and can have adverse effects. DOD's security clearance backlog for industry personnel was roughly 188,000 cases as of March 31, 2004. The backlog included estimates by the Defense Security Service (DSS)--the agency responsible for administering DOD's personnel security investigations program--that consisted of more than 61,000 reinvestigations (required for renewing clearances) that were overdue but had not been submitted to DSS; over 101,000 new DSS investigations or reinvestigations that had not been completed within DOD's established time frames; and over 25,000 cases awaiting adjudication (a determination of clearance eligibility) that had not been completed within DOD's established time frames. From fiscal year 2001 through fiscal year 2003, the average time that it took DOD to determine clearance eligibility for industry personnel increased by 56 days to over 1 year. Delays in completing reinvestigations of industry personnel and others doing classified work can increase national security risks. In addition, delays in determining clearance eligibility can affect the timeliness, quality, and cost of contractor performance on defense contracts. Several impediments hinder DOD's ability to eliminate the backlog and decrease the amount of time needed to determine clearance eligibility for industry personnel. Impediments include a large number of new clearance requests; an increase in the proportion of requests for top secret clearances, which require more time to process; inaccurate workload projections for both the number and type of clearances needed for industry personnel; and the imbalance between workforces and workloads. Industrial contractors cited the lack of full reciprocity (the acceptance of a clearance and access granted by another department, agency, or military service) as an obstacle that can cause industry delays in filling positions and starting work on government contracts. Furthermore, DOD does not have an integrated, comprehensive management plan for addressing the backlog and delays. DOD is considering a number of initiatives to supplement actions that it has implemented in recent years to reduce the backlogs and the time needed to determine eligibility for a security clearance. Additional initiatives include (1) conducting a phased, periodic reinvestigation; (2) establishing a single adjudicative facility for industry; and (3) reevaluating investigative standards and adjudicative guidelines. GAO's forthcoming report will provide a more complete discussion of these and other initiatives.
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