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Thorough and comprehensive planning is crucial to the success of any large, long-term project, especially one with the cost, complexity, and high stakes of the decennial census. Indeed, the Bureau's past experience has shown that the lack of proper planning can increase the costs and risks of downstream operations. Past experience has also underscored the importance of strong oversight of the census to (1) inform congressional decision making on budgetary and operational matters, (2) raise Congress's confidence that the Bureau has chosen an optimum design and will manage operations and control costs effectively, and (3) help ensure the progress the Bureau has made thus far in refining, planning, and testing census-taking activities, continues as the Bureau shifts into the operational phases of the decennial. Given the escalating cost of the census in an era of serious national fiscal challenges, oversight will be particularly important. Bureau officials estimate the total life-cycle cost of the 2010 Census will be around $11.3 billion, which would make it the most expensive census in our country's history, even after adjusting for inflation. Although some cost growth can be expected, in part, because the number of housing units--and hence the Bureau's workload--has grown, the cost escalation has far exceeded the housing unit increase. The Bureau estimates that the number of housing units for the 2010 Census will increase by 10 percent over 2000 Census levels; meanwhile, the average cost per housing unit for 2010 is expected to increase by approximately 29 percent from 2000 levels (from $56 to $72), nearly five and a half times greater than the $13 it cost to count each household in 1970 (see fig. 1). A key reason for the increasing cost of the census is that because of various societal trends such as concerns over personal privacy, more non- English speakers, and more people residing in makeshift and other nontraditional living arrangements, the Bureau is finding it increasingly difficult to locate people and get them to participate in the census. As a result, the Bureau needs to spend more money simply to achieve the accuracy of earlier enumerations. This can be seen, for example, in the rising cost of securing public participation in the census. During the 1990 Census, the Bureau spent an average of $0.88 per housing unit (in 2000 dollars) to market the census and was able to rely on a pro-bono advertising campaign. The response rate was 65 percent. For the 2000 Census, recognizing that extra effort would be needed to motivate participation, the Bureau used a paid advertising campaign developed by a consortium of private-sector advertising agencies. It cost an average of $3.19 per housing unit (in 2000 dollars) and achieved a response rate of 64 percent. As the Bureau plans for 2010, maintaining cost effectiveness will be one of the single greatest challenges confronting the agency. The Bureau's preparations for the 2010 Census appear to be further along than at a similar point during the planning cycle for the 2000 Census. For example, the fundamental design of the 2010 Census has the potential to contain costs and improve coverage and accuracy, and the Bureau's planning process for 2010 is generally more thorough than was the case for the 2000 Census. At the same time, the 2004 test and, to date, the 2006 test, have identified areas where improvements are needed. Uncovering trouble spots is an important objective of any test, thus it is not surprising, and, in fact, should be expected and commended that problems were found. Moreover, the Bureau has taken steps to resolve the issues that have surfaced. Remaining activities in the 2006 test, and the 2008 Dress Rehearsal, will help determine the effectiveness of the Bureau's efforts. The Bureau developed a design for the 2010 Census early in the decade, and Congress has been supportive of the Bureau's approach. The situation 10 years ago was vastly different. In testimony before Congress in late 1995, we expressed concern that Congress and the Bureau had not agreed on the fundamental design and budget of the census, and that the longer this situation continued, the opportunity for a well-planned census would be lost and the greater the risk that hundreds of millions of dollars would be spent inefficiently. Key features of the design of the 2010 Census include the following: Enhancing procedures for building its address list, known as the Master Address File, and its associated geographic information system, called the Topologically Integrated Geographic Encoding and Referencing (TIGER)®️ database; Replacing the census long-form questionnaire with the American Community Survey (ACS); and Conducting a short-form-only decennial census supported by early research and testing. Also noteworthy is the fact that for the 2010 Census, the Bureau plans to make the most extensive use of contractors in its history, turning to the private sector to supply a number of different mission-critical functions, including the Bureau's nationwide data processing activities, and improvements to the Master Address File and TIGER. The Bureau estimates that of the $11.3 billion total cost of the census, around $1.9 billion (approximately 17 percent) will be spent via its seven largest contracts which include information technology systems, advertising, and the leasing of local census offices. The Bureau is relying more heavily on contractors because it recognizes it needs to look outside the agency to obtain the expertise and services essential for a successful enumeration. That said, the Bureau's contracting efforts during the 2000 Census did not always go smoothly, and it will be important for Bureau management to focus on its procurement activities to help ensure the 2010 contractors fulfill the Bureau's expectations. Our companion testimony at today's hearing provides greater detail on two of the Bureau's information technology contracts. In concept, the Bureau's approach has the potential to achieve its principal goals for the 2010 Census which include (1) increasing the relevance and timeliness of data, (2) reducing operational risk, (3) increasing coverage and accuracy, and (4) containing costs. However, some aspects of the design, including the use of technology that has never been employed for the decennial, as well as the heavy reliance on contractors, introduce new risk. This is not inappropriate as the need to secure a complete count and addressing problems with past censuses call for bold new initiatives that entail risk. What will be important is how effectively the Bureau manages those risks. Another sign of progress can be found in the thoroughness of the Bureau's planning process where the Bureau has taken several positive steps to correct problems it encountered when planning past censuses. For example, early in the decade, senior Bureau staff considered various goals for the 2010 Census and articulated a design to achieve those goals. Moreover, staff with operational experience in the census participated in the 2010 design process. According to Bureau officials, this was a departure from the 2000 planning effort when Bureau staff with little operational experience played key roles in the design process, which resulted in impractical reform ideas that could not be implemented. At the same time, the Bureau's planning process could benefit from an overall business or project plan that (1) includes milestones for completing key activities; (2) itemizes the estimated cost of each component; (3) articulates a clear system of coordination among project components; and (4) translates key goals into measurable, operational terms to provide meaningful guidance for planning and measuring progress. Some, but not all of this information is available in various documents, but one would need to piece it together. Noting the importance of this information to inform congressional decision-making and oversight of the census, as well as to improve the Bureau's planning process, in our January 2004 report, we recommended that the Bureau combine this information into a single, comprehensive document. The Bureau disagreed with the recommendation although it said it would develop such a plan nonetheless and provide it to GAO, Congress, and other stakeholders. The Bureau has not yet issued this document. A complete and accurate address list is the cornerstone of a successful census because it identifies all households that are to receive a census questionnaire, and serves as the control mechanism for following up with households that fail to respond. Although the Bureau went to great lengths to build a complete and accurate Master Address File for the 2000 Census, of the 116 million housing units contained in the database, the Bureau estimates it incorrectly included 2.3 million housing units and missed another 2.7 million housing units. In light of these and other problems, the Bureau concluded that enhancements to the Master Address File and TIGER were necessary to make census data more complete and accurate. In the preliminary results of our ongoing work on enhancements to the Master Address File and TIGER, we found that the Bureau has developed procedures to help resolve each of the broad categories of problems experienced in 2000 including addresses that were duplicated, missed, deleted, and incorrectly located on a map (a problem known as geocoding error). The Bureau has several ongoing evaluations that should provide valuable information on the effectiveness of these procedures. The Bureau is also taking steps to improve the accuracy of the TIGER maps which, among other benefits, should help prevent geocoding errors. In June 2002, the Bureau awarded an 8-year contract, in excess of $200 million intended to, among other tasks, correct in TIGER the location of every street, boundary, and other map feature so that coordinates are aligned with their true geographic locations. According to the Bureau, the contractor completed this work for 250 counties in 2003, 602 counties in 2004, and 623 counties in 2005. Furthermore, the contractor plans to deliver the remaining 1,758 county maps between 2006 and 2008. However, based on this time line, it appears that several hundred county TIGER maps will not be updated in time for the Local Update of Census Addresses (LUCA) program, through which the Bureau gives local and tribal government officials the opportunity to review and suggest corrections to the address lists and maps for their jurisdictions. LUCA is to begin in July 2007 when, according to the current schedule, the Bureau will still have 368 counties to update in 2008 alone. These counties will not have the most current maps to review but will instead be given the most recent maps the Bureau has available. According to the Bureau, some of the maps have been updated for the American Community Survey, but others have not been updated since the 2000 Census, which could affect the quality of a local government's review. The Bureau is aware of the overlapping schedules, but told us that it needs to start LUCA in 2007 in order to complete the operation in time for address canvassing. LUCA is an example of how the Bureau partners with external entities, tapping into their knowledge of local populations and housing conditions in order to secure a more complete count. In 1994, Congress required the Bureau to develop a local address review program to give local and tribal governments greater input into the Bureau's address list development process. When the Bureau conducted LUCA for the 2000 Census, the results were mixed. In our 1999 congressional testimony, we noted that many local governments said they were satisfied with specific aspects of the materials and assistance the Bureau provided to them. At the same time, LUCA may have stretched the resources of local governments, and participation in the program could have been better. The census schedule will also be a challenge for an operation called address canvassing, where census workers are to walk every street in the country, verifying addresses and updating maps as necessary. The Bureau has allotted 6 weeks to verify the nation's inventory of 116 million housing units. This translates into a completion rate of over 2.75 million housing units every day. The challenge in maintaining this schedule can be seen in the fact that for the 2000 Census, it took the Bureau 18 weeks just to canvass "city-style" address areas, which are localities where the U.S. Postal Service uses house-number and street-name addresses for most mail delivery. Of particular concern is the previous unreliability of the MCDs the Bureau plans to use for its address canvassing and nonresponse follow-up operations (see fig. 2). For address canvassing, the MCDs are to be loaded with address information and maps; for nonresponse follow-up, they will be used in lieu of paper questionnaires and maps to collect household information. The MCDs are also equipped with global positioning system (GPS) receivers, a satellite-based navigational system to help enumerators locate street addresses and to collect coordinates for each structure in their assignment area. Bureau officials expect the MCDs will help improve the cost- effectiveness of the census by allowing it to eliminate millions of paper questionnaires and maps, improve the quality of address data, and update enumerators' nonresponse follow-up workload on a daily basis. The move from paper to digital was a very positive step. At the same time, rigorous testing is essential to assess their durability, functionality, and that enumerators are able to use them. The MCDs were first evaluated for nonresponse follow-up as part of the 2004 Census Test, and for address canvassing in 2005 as part of the 2006 Census Test. The Bureau will use MCDs next month for nonresponse follow-up in the 2006 test. In both our prior and ongoing work, we found the test results have been mixed. On the one hand, the census workers we observed had little difficulty using the MCDs. For example, address canvassers we interviewed said the electronic maps were accurate and that they were able to find their assignment areas with relative ease. On the other hand, the reliability of the MCDs proved troublesome during the 2004 and to date, the 2006 test. For example, in 2004, the MCDs experienced transmission problems, memory overloads, and difficulties with a mapping feature--all of which added inefficiencies to the nonresponse follow-up operation. The Bureau is using MCDs made by a different manufacturer for the 2006 test which resolved some of these problems, but other difficulties emerged during address canvassing. For example, the device was slow to pull up and exit address registers, accept the data entered by the canvassers, and link map locations to addresses for multi-unit structures. Furthermore, the MCDs would sometimes lock up, requiring canvassers to reboot them. Canvassers also found it difficult to transmit an address and map location that needed to be deleted from the master list. The Bureau was unable to fix this problem so canvassers had to return to the local census office where technicians dealt with the problem. The reliability of the GPS was also problematic. Some workers had problems receiving a signal, and when a signal was available, it was sometimes slow to locate assignment areas and correct map locations. According to the Bureau, these problems reduced the productivity of the canvassers, and the Bureau stopped the operation 10 days after it was scheduled to finish. Even with the extension, however, the Bureau was unable to complete the job, leaving census blocks in both Austin and on the Cheyenne Indian Reservation unverified. According to the Bureau, the problems were caused by unstable software and insufficient memory. The Bureau delayed the start of address canvassing for a month at both test sites to troubleshoot the MCDs. However, it was unable to fix all the problems and decided to move forward with the test. The MCDs will be evaluated again next month as part of the 2006 Census Test and we will be on-site to assess the extent to which the Bureau has fixed the MCD problems. However, even if the MCDs prove to be more reliable, questions remain for the future. The Bureau has acknowledged that the MCD's performance is an issue, but believes it will be addressed as part of its contract for the Field Data Collection Automation (FDCA) program, which is aimed at automating the Bureau's field data collection efforts, and is scheduled to be awarded later this month (the MCDs used for the 2006 test are off-the-shelf purchases that were customized by the Bureau). As a result, the 2008 Dress Rehearsal will be the first time the entire system--including the contractor's MCD--will be tested under conditions that are as close as possible to the actual census. If new problems emerge, little time will be left to develop and test any refinements. Our field observations also suggest that the training of census workers could be improved to help ensure they follow proper procedures. Failure to do so could affect the reliability of census data. During the 2004 test, for example, we observed enumerators who did not read the coverage and race/ethnicity question exactly as worded, and did not properly use flashcards the Bureau had developed that were designed to help respondents answer specific questions. During the address canvassing operation for the 2006 test, we observed workers who were not properly verifying addresses, or were unsure of what to do when they happened upon dwellings such as duplex housing units. In our past work, we recommended that the Bureau take a more strategic approach to training, and that local census offices include in their instruction special modules covering the unique living arrangements that might be prevalent in that particular jurisdiction. The Bureau acknowledged that the shortcomings we identified require improvement, and indicated that for the 2006 test, it will enhance training to reinforce the procedural requirements. The Bureau also intends to incorporate additional training to prepare enumerators to handle realistic situations encountered in their work. As part of our field work for the 2006 test, we will review the improvements the Bureau made to its training procedures. If the operational challenges of conducting a census were not daunting enough, the Bureau faces the additional challenge of a possible brain drain. In our June 2005 report, we noted that the Bureau has projected that 45 percent of its workforce will be eligible to retire by 2010. The Bureau has long benefited from its core group of managers and experienced staff who developed their expertise over several census cycles; their institutional knowledge is critical to keeping the census on track. Indeed, according to Bureau officials, many experienced employees retired or left the agency after the 1990 Census which affected planning efforts for the 2000 Census. Leading organizations go beyond simply backfilling vacancies, and instead focus on strengthening both current and future organizational capacity. In this regard the Bureau acknowledges that re-engineering the 2010 Census requires new skills in project, contract, and financial management; advanced programming and technology; as well as other areas. To help address this important human capital issue, the Bureau has implemented various succession planning and management efforts to better position the agency to meet its future skill requirements. Still, we found that the Bureau could take additional steps to enhance its succession planning and management efforts and recommended that the Bureau (1) strengthen the monitoring of its mission-critical workforce, (2) seek appropriate opportunities to coordinate and share core succession training and development programs with other outside agencies, and (3) evaluate core succession training and development programs to gauge the extent to which they contribute to enhancing organizational capacity. The Bureau agreed with our recommendations and indicated it was taking steps to implement them. On August 29, 2005, Hurricane Katrina devastated the coastal communities of Louisiana, Mississippi, Texas, and Alabama. A few weeks later, Hurricane Rita plowed through the border area of Texas and Louisiana. Damage was widespread. In the wake of Katrina, for example, the Red Cross estimated that nearly 525,000 people were displaced. Their homes were declared uninhabitable, and streets, bridges, and other landmarks were destroyed. Approximately 90,000 square miles were affected overall and, as shown in figure 3, entire communities were obliterated. The destruction and chaos caused by the storms underscore the nation's vulnerability to all types of hazards, and highlights how important it is for government agencies to consider disaster preparedness and continuity of operations as part of their planning. We have had a preliminary discussion with the Bureau on this topic and will continue to assess the Bureau's contingency planning as part of our oversight of the 2010 Census. Moreover, it will be important for the Bureau to assess the impact the storms might have on its census-taking activities, as well as whether the affected areas have any special needs for data. Securing a complete count, a difficult task under normal circumstances, could face additional hurdles along the Gulf Coast, in large part because the baseline the Bureau will be working with--streets, housing stock, and the population itself--will be in flux for some time to come. According to the Bureau, different parts of the agency work on hurricane-related issues at different times, but no formal body has been created to deal with the hurricanes' impact on the 2010 Census. The Bureau anticipates that by 2008, as it is preparing to conduct address canvassing, people will have decided whether or not to return. At that time, the Bureau believes it will be in a better position to identify vacant, occupied, and new construction for 2010. Although Census Day is still several years away, preliminary activities, such as operations for building the Master Address File, are to occur sooner. Consequently, a key question is whether the Bureau's existing operations are adequate for capturing the migration that has taken place along the Gulf Coast, the various types of dwellings in which people live, and the changes to roads and other geographic features that have occurred, or does the Bureau need to develop enhanced and/or additional procedures to account for them? For example, new housing and street construction could require more frequent updates of the Bureau's address file and maps, while local governments' participation in LUCA might be affected because of the loss of key personnel, information systems, or records needed to verify the Bureau's address lists and maps. It will also be important for the Bureau to work with Congress and state and local governments to determine whether the hurricane-affected areas have any special data needs to track the economic and social well-being of the region and benchmark the recovery process. Although the decennial census would not be the instrument to collect this information, it might be feasible doing so through one of the Bureau's other survey programs. To date, the Bureau plans to do a special tabulation of its American Community Survey (ACS) data for the areas affected by Katrina that will provide information on the population that remained in the region. However, because of several methodological issues, it will not be an "official" ACS data product. The Bureau is also trying to use data from administrative records to update its population estimates of the area. Building on these efforts, some key considerations for the future include the following: 1. How have the hurricanes affected the counties and parishes in the Gulf Coast region and what are the implications, if any, for the Bureau's future operations? 2. Which external and internal stakeholders including federal, state, and local government agencies, as well as nonprofit organizations and specific areas of expertise need to be included in the Bureau's decision-making process? 3. To what extent does the Bureau have a plan (including objectives, tasks, milestones, etc.) for assessing and acting on any new requirements imposed by the hurricanes? 4. Do the hurricane-affected areas have any special data requirements, and if so, how should they be addressed and which stakeholders need to be involved? In summary, over the last few years, the Bureau has put forth a tremendous effort to help ensure the success of the 2010 Census. The Bureau is moving forward along a number of fronts, and has been responsive to the recommendations we made in our past work aimed at improving its planning process, address file, MCDs, training, human capital, and other census-taking activities. Still, some aspects of the census are proving to be problematic and a number of operational questions need to be resolved. To be sure, challenges are to be expected in an endeavor as vast and complex as the decennial census. Moreover, shortcomings with prior censuses call for the Bureau to consider bold initiatives for 2010 that entail some risk. Thus, in looking toward the future, as the planning and testing phases of the 2010 Census begin to wind down, it will be important for Congress to monitor the Bureau's progress in (1) identifying and diagnosing problems, (2) devising cost-effective solutions, and (3) integrating refinements and fixes in time to be evaluated during the Dress Rehearsal in 2008. Indeed, while the ramp-up to 2010 is making progress, past experience has shown that Congress has every reason to remain vigilant. As we have done throughout the past several decades, we look forward to supporting the subcommittee in its decision-making and oversight efforts. Mr. Chairman, Mr. Clay, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the subcommittee might have. For further information regarding this testimony, please contact Brenda S. Farrell on (202) 512-3604, or by e-mail at [email protected]. Individuals making contributions to this testimony included Betty Clark, Robert Goldenkoff, Carlos E. Hazera, Shirley Hwang, Andrea Levine, Anne McDonough-Hughes, Lisa Pearson, Michael Volpe, and Timothy Wexler. 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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Rigorous planning is key to a successful census as it helps ensure greater effectiveness and efficiency. The U.S. Census Bureau (Bureau) estimates the 2010 Census will cost around $11.3 billion, which would make it the most expensive census in our country's history, even after adjusting for inflation. GAO was asked to testify on (1) the Bureau's progress in preparing for the 2010 Census, (2) the challenges that Hurricanes Katrina and Rita might pose for the Bureau's future activities, and, (3) more broadly, the importance of planning for a range of events that could severely disrupt the census. The Bureau's preparations for the 2010 Census are making progress along several fronts. Of particular note is (1) the re-engineered design of the census, which holds promise for controlling costs and maintaining accuracy; (2) the Bureau's early planning process which was more rigorous than for the 2000 Census; and (3) the Bureau's greater willingness to outsource key census-taking operations that would be difficult for it to carry out on its own. At the same time, it will be important for the Bureau to resolve issues that pose a risk to a successful census. For example, the Bureau plans to use hand-held mobile computing devices (MCD) to develop the census address list and collect data from millions of households that do not respond to the initial census questionnaire. The MCDs are an important step forward because they are designed to replace many of the paper questionnaires and maps that were used in past censuses, and are a key element of the Bureau's Field Data Collection Automation program. The Bureau has never before used the devices in a decennial. In tests held in 2004 and 2006 to date, census workers found the MCDs easy to use, but sometimes unreliable, which reduced efficiency. Some workers also deviated from prescribed procedures which points to the need for better training. The Bureau has taken steps to address these issues and future tests will help determine the effectiveness of the Bureau's actions. The Bureau also faces a possible brain drain, as 45 percent of its workforce will be eligible to retire by 2010. Although the Bureau has taken preventative measures, it could improve those efforts by, among other actions, strengthening the monitoring of its mission-critical workforce. Hurricanes Katrina and Rita highlight the importance of contingency planning and examining whether the Bureau's existing operations are adequate for capturing the demographic and physical changes that have occurred along the Gulf Coast. Overall, as the Bureau's preparations for 2010 continue, it will be important for Congress to monitor the Bureau's progress in (1) identifying and diagnosing problems, (2) devising solutions, and (3) integrating refinements in time to be evaluated during the Census Dress Rehearsal scheduled for 2008.
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Generally, HCFA considers transportation costs to be part of physicians' practice expense for a service under Medicare's physician fee schedule. For example, physicians do not receive separate transportation payments when they visit Medicare beneficiaries in nursing homes. However, this policy is not followed when it comes to the transportation of equipment used to do diagnostic tests. HCFA established specific guidance for carriers to follow regarding portable x-ray and EKG services. Because HCFA did not issue specific instructions for other diagnostic tests, such as ultrasound, each Medicare carrier developed its own policies. Section 1861(s)(3) of the Social Security Act provides the basis for the coverage of diagnostic x-rays furnished in a Medicare beneficiary's residence. HCFA believes that because of the increased costs associated with transporting x-ray equipment to the beneficiary, the Congress intended for HCFA to pay an additional amount for the transportation service furnished by an approved portable x-ray supplier. Thus, HCFA has established specific procedure codes to pay for the transportation of x-ray equipment. HCFA added EKG services allowed in homes to the established list of approved services that suppliers may provide and established a code to pay for the transportation of EKG equipment. Many Medicare carriers limited payment of transportation costs for EKG services to portable x-ray suppliers. However, others had allowed it for other types of providers such as independent physiological laboratories (IPL). HCFA never established a national policy for transportation costs related to ultrasound services. Each carrier developed its own policy. Medical directors for each of the carriers decided whether to reimburse for transportation costs separately. In 15 states, carriers had a policy to reimburse separately for transportation costs associated with ultrasound services. Beginning January 1, 1996, carriers could allow transportation payments for only the following services: (1) x-ray and standard EKG services furnished by an approved portable x-ray supplier and (2) standard EKG services furnished by an IPL under special conditions. For all other types of diagnostic tests payable under the physician fee schedule, travel expenses were considered "bundled" into the procedure payment. For example, carriers could no longer make separate transportation payments associated with ultrasound services. After further review, HCFA again revised its policy. HCFA concluded that the statute authorized carriers to make separate transportation payments only for portable x-ray services. Therefore, HCFA published a final regulation providing that effective January 1, 1997, carriers would no longer make separate transportation payments associated with EKG services. The enactment of the Balanced Budget Act in August 1997 caused additional changes in Medicare's transportation payment policy. First, BBA temporarily restored separate payments for transporting EKG equipment but not ultrasound equipment during 1998. The law requires the Secretary of Health and Human Services to make a recommendation by July 1, 1998, to the Committees on Commerce and Ways and Means of the House of Representatives and the Committee on Finance of the Senate on whether there should be a separate Medicare transportation fee for portable EKGs starting in 1999. Second, BBA phases in a prospective payment system for skilled nursing care that will pay an all-inclusive per diem rate for covered services. Beneficiaries needing skilled care after being discharged from the hospital are covered under Part A for 100 days of care during a benefit period. Part A coverage includes room and board, skilled nursing and rehabilitative services, and other services and supplies. Thus, the per diem rate paid to nursing facilities would include all services during the period the beneficiary is receiving posthospital extended care. For example, services such as EKGs and ultrasound will no longer be paid for separately but will be included in the per diem rate. The prospective payment provision begins July 1, 1998. Third, BBA establishes an ambulance service fee schedule beginning in 2000. This provision is designed to help contain Medicare spending on ambulance service. Medicare paid for more than 14 million EKG and 5 million ultrasound services in 1995 at a cost to the Medicare program of about $597 and $976 million, respectively. Most EKG and ultrasound services were performed in physicians' offices or hospitals. In 1995, about 2 percent of the EKG and less than 1 percent of the ultrasound services were provided in beneficiaries' homes or nursing homes, costing the Medicare program about $12 million for the EKGs and $8 million for the ultrasound services. Of these services, about 88 percent of the EKG and 82 percent of the ultrasound services were done in a nursing home. These services were usually provided by portable x-ray suppliers and IPLs. Table 1 compares these services in these settings. Because HCFA regulations allowed EKG service transportation payments to be paid only to portable x-ray providers and certain IPLs for EKG services done in a beneficiary's residence, it is not surprising that these providers accounted for 83 percent of all Medicare EKG services performed in nursing homes. Likewise, these two types of providers accounted for a high portion of the Medicare ultrasound services provided in nursing homes. General practitioners, cardiologists, and internists also provided EKG and ultrasound services. In 1995, 1,317 providers were doing EKGs and 337 were doing ultrasound services in nursing homes. Of the total EKG providers, 676 were portable x-ray suppliers and 75 were IPLs. Of the total ultrasound providers, 51 were portable x-ray suppliers and 83 were IPLs, and combined they accounted for more than half of the ultrasound services done in nursing homes. About one-fifth of the states accounted for a disproportionately high concentration of EKG and ultrasound services in 1995, compared with these states' nursing home populations. In addition, it appears that these services were generally provided by a few large providers. Thus, this change in transportation policy will have a larger effect on Medicare spending in some geographic areas. Eleven states accounted for nearly three-fourths of the 255,000 EKGs done in nursing homes. This appears to be disproportionately high when compared with the nursing home population in the 11 states. Figure 1 shows the use rates in each state per 100 Medicare nursing home residents. Furthermore, a handful of providers in each of these states accounted for most of the services. For example, in New York 7 percent of the providers accounted for 77 percent of the services. (See table 2.) Similarly, the data show that 10 states accounted for more than 84 percent of the ultrasound services done in nursing homes in 1995. The use rate in these 10 states appears to be somewhat higher than in the 40 other states. Figure 2 shows the ultrasound use rates in each state. Less than half of the portable x-ray suppliers and IPLs did most of the ultrasound services for which separate transportation payments were made, and only a handful of them did more than half of these services. Data show that 54 portable x-ray suppliers and IPLs did 89 percent of these services. Further, 11 of these 54 providers accounted for 52 percent of the transportation claims. Similar to what we found in the EKG data, there were a few high-volume providers in the 10 states, as shown in table 3. About 19 percent of the EKGs and 21 percent of the ultrasound tests done in nursing homes in 1995 would be unaffected by any change in the transportation payment policy because BBA eliminates separate payments for services provided to beneficiaries in skilled facilities while their stay is covered under posthospital extended care. An additional 37 percent of the portable EKGs and 68 percent of the ultrasound tests were done without the providers' receiving additional payments for transporting the equipment. Consequently, 56 percent of the EKG services and 89 percent of the ultrasound tests provided to beneficiaries in their place of residence would be unaffected by the elimination of separate transportation payments. There is some uncertainty, however, as to whether (and to what extent) providers will cut back on services for which they previously received a transportation payment. Nonetheless, it is reasonable to assume that at least some of these services would also continue under a revised payment policy. If providers reduced services in nursing homes, some residents would be inconvenienced by having to travel to obtain these tests. In some instances, the nursing home may need to provide transportation or staff to accompany a resident to a test site. Consequently, nursing homes could be affected as well. In the future, all services provided to Medicare beneficiaries in skilled facilities who are under posthospital extended care will be included under a per diem prospective payment rate. Nursing facilities will receive a per diem rate for routine services such as room and board and all other services such as EKGs and ultrasound. Based on the 1995 data, 19 percent (48,000) of the EKG services and 21 percent (6,520) of the ultrasound services will be incorporated under the prospective rates. In 1995, only portable x-ray suppliers and certain IPLs received separate transportation payments. Therefore, any EKG services done in nursing homes by other medical providers such as general practitioners, internists, and cardiologists did not include separate transportation payments. Data for 1995 show that 55,580 of the EKG services done in nursing homes did not include a separate transportation payment. (See table 4.) When an EKG or ultrasound service is done in conjunction with an x-ray, the provider receives a transportation fee for the x-ray service but not the EKG or ultrasound. The 1995 data covering EKG services with separate transportation payments show that 38,820 of the beneficiaries who received an EKG service also had an x-ray service done during the same visit. Thus, any provider doing an EKG and an x-ray service would continue to receive a separate transportation payment for the x-ray service. Before HCFA issued regulations in December 1995, Medicare providers in less than a third of the states were paid for transporting ultrasound equipment to beneficiaries' residences. Each carrier had its own policy regarding reimbursement for ultrasound equipment transportation costs. Carrier representatives responsible for Medicare Part B program payments in only 14 states and part of another told us that they had a policy to make transportation payments when billed for ultrasound services. See figure 3. Because carriers responsible for fewer than one-third of the states allowed separate transportation payments, most ultrasound services performed in nursing homes were done without such payment. Only 3,220 (15 percent) of the 23,600 ultrasound services done in nursing homes in 1995 had claims for separate transportation payments. The remainder, approximately 20,380, were done without a separate transportation payment. (See table 4.) Even in states where carriers had a policy to pay separate transportation payments, there were many instances in which providers performed ultrasound services in nursing homes but did not receive a separate transportation payment. For example, in Maryland and Pennsylvania, where carriers had policies to make separate transportation payments, 79 and 55 percent, respectively, of the ultrasound services done in nursing homes by providers did not involve separate transportation payments. The average frequency of ultrasound tests per nursing home resident varied among states but did not vary systematically with carriers' transportation payment policies. That is, there is no indication from the 1995 data that nursing home residents systematically received fewer services in states that did not make separate transportation payments compared with residents in states that did pay. For example, Michigan and New York--states where separate transportation payments were generally not made--had high ultrasound use rates, while Massachusetts--where separate transportation payments were made--had a low rate. Advocacy groups gave contradictory opinions as to the possible effects HCFA's changed policy would have on Medicare beneficiaries. Generally, officials representing medical groups believed that EKG and ultrasound services would continue to be available and thus did not see an adverse effect on the availability of care for patients. In contrast, representatives from nursing homes and EKG provider associations expressed concern about potential decreases in quality of care, especially for frail elderly beneficiaries who would be most affected by being transported away from their homes. In addition, officials at several nursing homes we visited said that sending beneficiaries out also imposes additional costs and burdens on the nursing home because often these beneficiaries have to be accompanied by a nursing home representative. We cannot predict whether the revised payment policy will decrease or increase Medicare spending because we do not know the extent to which providers will continue to supply portable EKG and ultrasound services without separate transportation payments. Because of these uncertainties, we developed a range estimate of potential savings and costs associated with the revised payment policy. In 1995, if the prospective payment system for skilled nursing care and the policy of not making transportation payments had been in effect, Medicare outlays would have been lower by as much as $11 million on EKGs and $400,600 on ultrasound services. However, these savings would have materialized only to the extent that homebound beneficiaries and nursing home residents did not travel outside in Medicare-paid ambulances to receive these tests. We cannot predict the likelihood that savings will be realized because they depend upon the future actions of portable equipment providers and nursing home operators. Providers of portable equipment may continue to provide EKG and ultrasound services even if they no longer receive the separate transportation payments. Many mobile providers have established private business relationships with the nursing homes they serve and may be eager to maintain those relationships. In addition, many also provide other services to nursing homes, such as x-ray services. Therefore, they would be likely to continue EKG services to some degree. Prospective payment may change the way nursing facilities provide services. Some nursing homes may purchase the equipment to provide diagnostic tests in house. Representatives from two of the seven nursing homes we visited told us that they were considering purchasing EKG equipment and having nursing home staff perform the tests. The representatives noted that this would be feasible because EKG equipment is relatively inexpensive and staff need only limited training to perform the tests (no certification is needed). They also noted that residents needing EKGs would receive quicker service if the equipment were always on the premises. Because nursing homes may have additional transportation or staff costs for each test, the revised payment policy may produce Medicare savings by reducing the use of EKG and ultrasound services. During our review of case files at selected nursing homes, we observed a number of instances in which beneficiaries entering the nursing home were receiving EKG tests, although there were no indications that these beneficiaries were experiencing any problems to warrant such tests. In many of these situations, nursing home officials said that the tests provided baseline information. To the extent that eliminating the transportation payment would reduce inappropriate screening tests billed to Medicare, it would produce savings. Eliminating separate transportation payments could increase Medicare spending if beneficiaries travel to hospitals or physicians' offices to be tested. Some very sick or frail beneficiaries would need to travel by ambulance. We found that the costs for the service itself are about the same whether the service is delivered in a hospital, a physician's office, or a nursing home. However, the cost of transporting a beneficiary by ambulance is substantially greater than the amount paid to mobile providers for transporting equipment to a beneficiary's residence. We estimate that the potential annual net costs to Medicare from eliminating transportation payments could be as much as $9.7 million for EKGs and $125,000 for ultrasound tests. These estimates, based on 1995 data, represent an upper limit that would be reached only if equipment providers stopped providing all services for which they previously received a transportation payment and the beneficiaries were transported by ambulance to receive the services. Our net cost estimates are based on (1) the number of beneficiaries who would be likely to need transporting by ambulance to receive EKG and ultrasound services, (2) the cost of ambulance transportation, and (3) the costs of EKGs and ultrasound tests in other settings. We estimate that about half of the beneficiaries who received an EKG and more than one-third of the beneficiaries who received an ultrasound service in 1995 would likely have been transported by ambulance had the equipment not been brought to them. Our estimates are based on our review of beneficiary case files from several nursing homes in two states. (See appendix I for more detail.) The transportation payments by Medicare for ambulance services are significantly greater than the transportation payments made to providers of portable EKG and ultrasound equipment. In 1995, the average ambulance transportation payment for beneficiaries in skilled nursing facilities who were transported for an EKG test ranged from $164 (for an average trip in North Carolina) to $471 (for an average trip in Connecticut). For the same period, the average payment made for transporting EKG equipment to a nursing home ranged from about $26 (in Illinois) to $145 (in Hawaii, Maine, Massachusetts, New Hampshire, and Rhode Island). The cost for EKG or ultrasound services is about the same in every setting. Anywhere other than a hospital outpatient setting, the Medicare payment for the service is determined by the physician fee schedule. In a hospital outpatient setting, Medicare payments for services such as EKGs and ultrasound tests are limited to the lesser of reasonable costs, customary charges, or a "blended amount" that relates a percentage of the hospital's costs to a percentage of the prevailing charges that would apply if the services had been performed in a physician's office. Our analysis of 1995 hospital cost reports does not suggest that Medicare would pay more for the services if they were performed at a hospital. While millions of EKG and ultrasound tests are provided yearly to Medicare beneficiaries, only a small percentage of these tests are performed in a beneficiary's home or nursing home. Many of the EKGs and most of the ultrasound tests performed in those settings would be unaffected by the elimination of separate transportation payments. We cannot predict how providers of portable EKG and ultrasound equipment will react over the long term to the elimination of transportation payments or what actions nursing homes might take to provide services if they were not delivered. Also, we cannot predict what actions skilled facilities may take as a result of the prospective payment system that will be implemented. Consequently, our estimate of the effect of a revised payment policy ranges from a savings of $11 million to a cost of $9.7 million for EKG tests and a savings of $400,000 to a cost of $125,000 for ultrasound tests. Because providers' reactions are uncertain, HCFA would have to eliminate transportation payments to reliably gauge the revised policy's effect on Medicare spending. By carefully monitoring the revised policy over a sufficient period of time, HCFA could determine whether the revised payment policy caused a net decrease in Medicare spending or a net increase. In the absence of such hard data, however, we cannot recommend a specific course of action regarding the retention or elimination of separate Medicare transportation payments for portable EKG and ultrasound tests. HCFA officials stated that our methodology was appropriate and that they generally agreed with the results of our review. Furthermore, they agreed that precisely estimating the potential cost of the revised payment policy is difficult. However, HCFA officials believe that the upper limit of our potential Medicare spending estimate is based on very conservative assumptions and that this amount of additional Medicare spending is unlikely to occur if separate transportation payments are eliminated. We agree that our approach was conservative so as not to understate the potential for additional Medicare spending. However, as we state in the report, if providers continue to supply these services for business reasons, then Medicare might save money or incur additional costs below our estimated upper limit because fewer beneficiaries would need transporting by ambulance for the services. This would also be true, especially in the case of EKGs, if nursing homes purchase the necessary equipment and keep it on site. HCFA officials were also concerned over what appears to be a disproportionate amount of EKG and ultrasound services by a few providers in selected states. HCFA officials thought this pattern may indicate potential abuse. We did not attempt to determine appropriate use rates for these services and thus cannot conclude whether the rates are too high or too low in some areas. Our purpose in showing the concentration of EKG and ultrasound services was to provide some perspective on the beneficiaries likely to be most affected by HCFA's changed payment policy. We incorporated other HCFA comments in the final report where appropriate. As agreed with your office, unless you publicly announce the contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. We will then send copies to the Secretary of the Department of Health and Human Services, the Administrator of HCFA, interested congressional committees, and others who are interested. We will also make copies available to others on request. Please call James Cosgrove, Assistant Director, at (202) 512-7029 if you or your staffs have any questions about this report. Other major contributors include Cam Zola and Bob DeRoy. To obtain information on electrocardiogram (EKG) and ultrasound tests done in 1995, we extracted pertinent use data from a national database consisting of all Medicare Part B claims from a 5-percent sample of beneficiaries. We used valid 1995 EKG and ultrasound procedure codes for the diagnostic procedure itself. We eliminated all codes that represented only a physician's interpretation or report and codes for procedures that were delivered in settings other than nursing homes. We used 1995 data because it was the last year in which both EKG and ultrasound transportation costs could have been reimbursed under Medicare. In addition, we obtained data on outpatient costs for radiological and other diagnostic tests for all hospitals reporting such data to the Health Care Financing Administration (HCFA) in 1995. Because paying transportation costs relating to ultrasound services was a "local" decision, we contacted all the Medicare Part B carriers to determine the reimbursement practices in effect in every state in 1995. We visited 12 judgmentally chosen nursing homes in Florida and Pennsylvania and randomly selected 176 cases of beneficiaries who had an EKG or ultrasound test done in the home during 1995. We discussed the reasons for the test and the general condition of the beneficiary at the time of the test with an appropriate nursing home official, usually a nurse. We asked the nurses to provide us with their opinion as to how each beneficiary would have been transported if he or she had to travel away from the home for the test. These beneficiaries may better reflect the need for ambulance services by most nursing home beneficiaries. From our sample, we determined that about 50 percent of the beneficiaries who received an EKG test and 40 percent of the beneficiaries who received an ultrasound test would most likely have been transported by ambulance if the tests had been done outside the nursing home. Most of the beneficiaries who the nurses believed would have needed an ambulance were totally bedridden. The concern generating the order for the test had been either that an episode developed late at night or that a condition was serious enough to border on a call to 911. Beneficiaries whom the nurses believed could be transported by means other than an ambulance were usually ambulatory and their medical situations generally involved a scheduled service done 1 or 2 days after the order or a baseline test requested upon entering the home. We discussed HCFA's policy with HCFA officials, representatives of organizations representing portable x-ray suppliers, independent physiological laboratory providers, and several individual providers of EKG and ultrasound services. Also, we sought the opinions of several medical associations, including the American College of Cardiology, the American College of Physicians, and the American College of Radiology. In addition, we solicited comments from 11 health care associations. In estimating the potential net cost to Medicare from eliminating transportation payments, we did the following: (1) identified, from the sample 5-percent national claims data file, the Medicare beneficiary population that received an EKG or ultrasound service from a provider that was paid a transportation fee for delivering the service; (2) reduced this count by the beneficiaries who also had an x-ray service (since the provider would continue to get transportation fees for the x-ray), the beneficiaries who had the service delivered by a provider who could not be paid transportation expenses, and beneficiaries receiving the services while covered under posthospital extended care; (3) estimated the percentage of beneficiaries who would have been transported by ambulance (using our observations from case files in two states); (4) developed an average ambulance fee paid in each state (using data on the skilled nursing home beneficiaries who went by ambulance in 1995 to an outpatient facility for a diagnostic test); and (5) determined the transportation fee paid to mobile providers in each state. 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Pursuant to a congressional request, GAO reviewed how the Health Care Financing Administration's (HCFA) revised payment policies would affect Medicare beneficiaries and program costs, focusing on the: (1) Medicare recipients, places of service, and providers who might be affected most; (2) number of services that would be affected by the changed policy; and (3) effect on Medicare's program costs. GAO noted that: (1) only a fraction of the electrocardiogram (EKG) and ultrasound tests paid for by Medicare are performed outside of physicians' offices or hospital settings and, thus, are potentially affected by the payment policy changes; (2) in 1995, Medicare paid approximately $597 million for 14 million EKGs and about $976 million for 5 million ultrasound tests in various settings; (3) only 290,000 of the EKGs and only 37,000 of the ultrasound tests were done in locations such as nursing homes or beneficiaries' residences where the provider needed to transport the diagnostic equipment; (4) nearly 90 percent of the services that required transporting equipment were provided to residents of nursing homes; (5) they were usually provided by portable x-ray and ultrasound providers; (6) some states appear to have a higher concentration of these services, with a small number of providers accounting for a large portion of each state's total portable EKG and ultrasound services; (7) many EKGs and ultrasound services provided in nursing homes would be unaffected if transportation payments were eliminated; (8) given the experience of 1995, about 56 percent of the EKGs and 89 percent of the ultrasound services provided in nursing homes would be unaffected by transportation payment changes and presumably would continue to be provided in those settings; (9) in July 1998, nursing homes will receive an inclusive per diem payment for all services provided to beneficiaries receiving Medicare-covered skilled nursing care; (10) a decision to eliminate or retain separate transportation payments for other beneficiaries will not affect the per diem payment; (11) another reason is that many nursing home EKGs and most ultrasound services in 1995 were performed by providers who did not receive a transportation payment; (12) the effect of eliminating transportation payments on the remaining 44 percent of the EKG and 11 percent of the ultrasound services is unknown because it depends on how providers respond; (13) because relatively few services would be affected, eliminating transportation payments would likely have a nominal effect on Medicare spending; (14) Medicare could save $11 million if mobile providers continue to supply services; (15) however, if mobile providers stopped bringing portable EKG equipment to beneficiaries, then some people would travel in Medicare-paid ambulances to obtain these tests; (16) eliminating transportation payments for ultrasound services would have a smaller effect; and (17) GAO estimates the effect on Medicare spending might range from $400,000 in savings to $125,000 in increased costs.
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As we noted in GAO's strategic plan, the United States and other nations face increasingly diffuse threats. In the future, potential adversaries are more likely to strike vulnerable civilian or military targets in nontraditional ways to avoid direct confrontation with our military forces on the battlefield. The President's December 2000 national security strategy states that porous borders, rapid technological change, greater information flow, and the destructive power of weapons now within the reach of small states, groups, and individuals make such threats more viable and endanger our values, way of life, and the personal security of our citizens. Hostile nations, terrorist groups, transnational criminals, and even individuals may target American people, institutions, and infrastructure with weapons of mass destruction and outbreaks of infectious disease. They may attempt to disrupt or destroy our information systems through cyber warfare. International criminal activities such as money laundering, arms smuggling, and drug trafficking can undermine the stability of social and financial institutions and the health of our citizens. As we witnessed in the tragic events of last week, some of the emerging threats can produce mass casualties. Others can lead to mass disruption of critical infrastructure and can hold serious implications for both our domestic and the global economy, as we saw when the New York Stock Exchange re- opened for trading this past Monday and the Dow Jones Industrial Average fell more than 600 points. Terrorist attacks also could compromise the integrity or delivery of water or electricity to our citizens, compromise the safety of the traveling public, and undermine the soundness of government and commercial data systems supporting a myriad of activities. A basic and fundamental role of the government under our Constitution is to protect America from both foreign and domestic threats. The government must be able to prevent and deter threats to our homeland as well as detect impending danger before attacks or incidents occur. However, it may not be possible to prevent, deter, and detect every threat, so steps should be taken to harden potential targets. We also must be ready to manage the crises and consequences of an event, to treat casualties, reconstitute damaged infrastructure, and move the nation forward. Finally, the government must be prepared to retaliate against the responsible parties in the event of an attack. Now I would like to turn to what the government could do to make our homeland more secure. First, I will discuss the need for clearly defined and effective leadership with a clear vision of what needs to be accomplished. Second, I will address the need for a coordinated national strategy and comprehensive threat assessment. Yesterday, we issued a report that discusses challenges confronting policymakers in the war on terrorism and offered a series of recommendations. One of these recommendations is that the government needs more clearly defined and effective leadership to develop a strategy for combating terrorism, to oversee development of a new national threat and risk assessment, and to coordinate implementation among federal agencies. Similar leadership also is needed to address the broader issue of homeland security. Specifically, a national focal point will be critical to articulate a vision for ensuring the security of the American homeland and to develop and implement a strategy to realize that vision. The entity that functions as the focal point should be dedicated to this function. In addition, the person who heads this entity should be dedicated full-time to this effort and consideration should be given to a term appointment in order to enhance continuity. In testimony on March 27, 2001, we stated that overall leadership and management efforts to combat terrorism are fragmented because there is no single focal point managing and overseeing the many functions conducted by more than 40 different federal departments and agencies.Also, our past work in combating terrorism has shown that the multitude of federal programs requires focus and attention to minimize redundancy of effort and eliminate confusion within the federal government and at the state and local level. Homeland security will rely on the concerted efforts of scores of agencies, which may exceed the number in the fight against terrorism. Consequently, the need for overall leadership is even more critical. At present, we do not have a national strategy specifically for ensuring homeland security. Thus, the strategy must establish the parameters of homeland security and contain explicit goals and objectives. It will need to be developed in partnership with Congress, the executive branch, state and local governments, and the private sector (which owns much of the critical infrastructure that can be targeted). Without such a strategy, efforts may be fragmented and cause confusion, duplication of effort, and ineffective alignment of resources with strategic goals. Consequently, clarifying the roles and responsibilities of the various levels of government and the private sector will be a critical function for the entity that is given oversight responsibility for homeland security efforts. The United States does not have a national threat and risk assessment to help guide federal programs for homeland security. A threat and risk assessment is a decision-making tool that helps to define the threats, to evaluate the associated risk, and to link requirements to program investments. In our March 2001 testimony on combating terrorism, we stated that an important first step in developing a strategy for combating terrorism is to conduct a national threat and risk assessment to define and prioritize requirements.. Combating terrorism is a major component of homeland security, but it is not the only one. It is essential that a national threat and risk assessment be undertaken that will address the full range of threats to the homeland. Results from hearings and other studies also underscore the importance of a national threat and risk assessment. For example, in a July 2001 letter to the vice president from several senators, the senators stated that federal programs to combat domestic terrorism are being initiated and expanded without the benefit of a sound national threat and risk assessment process. In a May 2001 Center for Strategic and International Studies' report on homeland defense, the authors stated that an annual threat assessment would provide federal planners with the basis for assessing the emerging risk of attacks and developing an integrated analysis structure for planning. We recognize that a national-level threat and risk assessment will not be a panacea for all the problems in providing homeland security. However, we believe that such a national threat and risk assessment could provide a framework for action and facilitate multidisciplinary and multi- organizational participation in planning, developing, and implementing programs to enhance the security of our homeland. Given the tragic events of Tuesday, September 11, 2001, a comprehensive national-level threat and risk assessment that addresses all threats has become an urgent imperative. Now, I would like to discuss some elements that may need to be included in the development of the national strategy and a means to assign roles to federal, state, and local governments and the private sector. Three essential elements provide a basis for developing a national strategy: a risk assessment, vulnerability analysis, and infrastructure criticality analysis. This approach, developed by the Department of Defense for its antiterrorism program, could be an instructive model in developing a homeland security strategy. First, our nation must thoroughly assess the threats posed by nations, groups, or individuals and, to the extent possible, eliminate or reduce the threat. Second, we have to identify the vulnerabilities and weaknesses that exist in our infrastructure, operations, planning, and exercises and then identify steps to mitigate those risks. Third, we must assure our ability to respond to and mitigate the consequences of an attack. Given time and resource limitations, we must identify the most critical aspects of our infrastructure and operations that require the most immediate attention. Our strategy, to be comprehensive in nature, should include steps designed to reduce our vulnerability to threats, for example, by hardening targets to minimize the damage from an attack; use intelligence assets to identify threats; stop attacks before they occur; and manage the consequences of an incident. In addition, the strategy should incorporate mechanisms to assess resource utilization and program performance as well as provide for training, exercises, and equipment to respond to tragic events such as those that occurred last week. Because we may not be able to eliminate all vulnerabilities within our borders, prevent all threat activity, or be completely prepared to respond to all incidents, our strategy should focus finite national resources on areas of greatest need. Once a strategy is developed, all levels of government and the private sector will need to understand and prepare for their defined roles under the strategy. While the federal government can assign roles to federal agencies under the strategy, it will need to reach consensus with the other levels of government and with the private sector on their roles. In the 1990s, the world was concerned about the potential for computer failures at the start of the new millennium, an issue that came to be known as Y2K. The Y2K task force approach may offer a model for developing the public-private partnerships necessary under a comprehensive homeland security strategy. A massive mobilization with federal government leadership was undertaken in connection with Y2K which included partnerships with the private sector and international governments and effective communication to implement any needed corrections. The value of federal leadership, oversight, and partnerships was repeatedly cited as a key to success in addressing Y2K issues at a Lessons Learned summit held last year. Developing a homeland security plan may require a similar level of leadership, oversight, and partnerships with nearly every segment of American society--including individual U.S. citizens--as well as with the international community. In addition, as in the case of our Y2K efforts, Congress needs to take an active, ongoing, and crosscutting approach to oversight in connection with the design and implementation of the homeland security strategy. We at GAO have completed several congressionally requested efforts on numerous topics related to homeland security. I would like to briefly summarize some of the work that we have done in the areas of combating terrorism, aviation security, transnational crime, protection of critical infrastructure, and public health. Given concerns about the preparedness of the federal government and state and local emergency responders to cope with a large-scale terrorist attack involving the use of weapons of mass destruction, we have reviewed the plans, policies, and programs for combating domestic terrorism involving weapons of mass destruction. Our report, Combating Terrorism: Selected Challenges and Related Recommendations, was issued yesterday and updates our extensive evaluations in recent years of federal programs to combat domestic terrorism and protect critical infrastructure. Progress has been made since we first began looking at these issues in 1995. Interagency coordination has improved, and interagency and intergovernmental command and control now is regularly included in exercises. Agencies also have completed operational guidance and related plans. Federal assistance to state and local governments to prepare for terrorist incidents has resulted in training for thousands of first responders, many of whom went into action at the World Trade Center and at the Pentagon on September 11, 2001. However, some key elements remain incomplete. As a result, we recommended that the President designate a single focal point with responsibility and authority for all critical functions necessary to provide overall leadership and coordination of federal programs to combat terrorism. The focal point should oversee a national-level threat assessment on likely weapons of mass destruction that might be used by terrorists and lead the development of a national strategy to combat terrorism and oversee its implementation. Furthermore, we recommended that the Assistant to the President for Science and Technology complete a strategy to coordinate research and development to improve federal capabilities and avoid duplication. Now let me turn to aviation security. Since 1996, we have presented numerous reports and testimonies and reported on numerous weaknesses that we found in the commercial aviation security system. For example, we reported that airport passenger screeners do not perform well in detecting dangerous objects, and Federal Aviation Administration tests showed that as testing gets more realistic--that is, as tests more closely approximate how a terrorist might attempt to penetrate a checkpoint-- screener performance declines significantly. In addition, we were able to penetrate airport security ourselves by having our investigators create fake credentials from the Internet and declare themselves law enforcement officers. They were then permitted to bypass security screening and go directly to waiting passenger aircraft. In 1996, we outlined a number of steps that required immediate action, including identifying vulnerabilities in the system; developing a short-term approach to correct significant security weaknesses; and developing a long-term, comprehensive national strategy that combines new technology, procedures, and better training for security personnel. Federal critical infrastructure-protection initiatives have focused on preventing mass disruption that can occur when information systems are compromised because of computer-based attacks. Such attacks are of growing concern due to the nation's increasing reliance on interconnected computer systems that can be accessed remotely and anonymously from virtually anywhere in the world. In accordance with Presidential Decision Directive 63, issued in 1998, and other information-security requirements outlined in laws and federal guidance, an array of efforts has been undertaken to address these risks. However, progress has been slow. For example, federal agencies have taken initial steps to develop critical infrastructure plans, but independent audits continue to identify persistent, significant information security weaknesses that place virtually all major federal agencies' operations at high risk of tampering and disruption. In addition, while federal outreach efforts have raised awareness and prompted information sharing among government and private sector entities, substantive analysis of infrastructure components to identify interdependencies and related vulnerabilities has been limited. An underlying deficiency impeding progress is the lack of a national plan that fully defines the roles and responsibilities of key participants and establishes interim objectives. Accordingly, we have recommended that the Assistant to the President for National Security Affairs ensure that the government's critical infrastructure strategy clearly define specific roles and responsibilities, develop interim objectives and milestones for achieving adequate protection, and define performance measures for accountability. The administration currently is reviewing and considering adjustments to the government's critical infrastructure-protection strategy that may address this deficiency. On September 20, 2001, we publicly released a report on international crime control and reported that individual federal entities have developed strategies to address a variety of international crime issues, and for some crimes, integrated mechanisms exist to coordinate efforts across agencies. However, we found that without an up-to-date and integrated strategy and sustained top-level leadership to implement and monitor the strategy, the risk is high; scarce resources will be wasted; overall effectiveness will be limited or not known; and accountability will not be ensured. We recommended that the Assistant to the President for National Security Affairs take appropriate action to ensure sustained executive-level coordination and assessment of multiagency federal efforts in connection with international crime. Some of the individual actions we recommended were to update the existing governmentwide international crime threat assessment, to update or develop a new International Crime Control Strategy to include prioritized goals as well as implementing objectives, and to designate responsibility for executing the strategy and resolving any jurisdictional issues. The spread of infectious diseases is a growing concern. Whether a disease outbreak is intentional or naturally occurring, the public health response to determine its causes and contain its spread is the same. Because a bioterrorist event could look like a natural outbreak, bioterrorism preparedness rests in large part on public health preparedness. In our review last year of the West Nile virus outbreak in New York, we found problems related to communication and coordination among and between federal, state, and local authorities. Although this outbreak was relatively small in terms of the number of human cases, it taxed the resources of one of the nation's largest local health departments. In 1999, we reported that surveillance for important emerging infectious diseases is not comprehensive in all states, leaving gaps in the nation's surveillance network. Laboratory capacity could be inadequate in any large outbreak, with insufficient trained personnel to perform laboratory tests and insufficient computer systems to rapidly share information. Earlier this year, we reported that federal agencies have made progress in improving their management of the stockpiles of pharmaceutical and medical supplies that would be needed in a bioterrorist event, but that some problems still remained. There are also widespread concerns that hospital emergency departments generally are not prepared in an organized fashion to treat victims of biological terrorism and that hospital emergency capacity is already strained, with emergency rooms in major metropolitan areas routinely filled and unable to accept patients in need of urgent care. To improve the nation's public health surveillance of infectious diseases and help ensure adequate public protection, we recommended that the Director of the Centers for Disease Control and Prevention lead an effort to help federal, state, and local public health officials achieve consensus on the core capacities needed at each level of government. We advised that consensus be reached on such matters as the number and qualifications of laboratory and epidemiological staff as well as laboratory and information technology. Based on the tragic events of last week and our observations over the past several years, there are several key questions that need to be asked in addressing homeland security: 1. What are our vision and our national objectives to make the homeland more secure? 2. What essential elements should constitute the government's strategy for securing the homeland? 3. How should the executive branch and the Congress be organized to address these issues? 4. How should we assess the effectiveness of any homeland security strategy implementation to address the spectrum of threats? Homeland security issues are now at the top of the national agenda, as a result of last week's tragic events. As a result, it is clear that the administration has taken and is taking a variety of actions to identify responsible parties for last week's attacks, manage the related consequences and mitigate future risks. Obviously, we have not been able to assess the nature and extent of this effort in the wake of last week's events. We expect that we will be asked to do so in due course. Finally, Mr. Chairman, as you might expect, we have been inundated with requests to brief congressional committees and members on our present and pending work and to undertake new work. We are working with the congressional leadership to be sure we have focused our limited resources on the most important issues. We look forward to working with you and others to focus our work and to identify options for how best to proceed while holding responsible parties accountable for desired outcomes. This concludes my prepared statement. I would be happy to answer any questions that you may have. Combating Terrorism: Selected Challenges and Related Recommendations (GAO-01-822, Sept. 20, 2001). Combating Terrorism: Actions Needed to Improve DOD Antiterrorism Program Implementation and Management (GAO-01-909, Sept. 19, 2001). Combating Terrorism: Comments on H.R. 525 to Create a President's Council on Domestic Preparedness (GAO-01-555T, May 9, 2001). Combating Terrorism: Observations on Options to Improve the Federal Response (GAO-01-660T, Apr. 24, 2001). Combating Terrorism: Accountability Over Medical Supplies Needs Further Improvement (GAO-01-463, Mar. 30, 2001). Combating Terrorism: Comments on Counterterrorism Leadership and National Strategy (GAO-01-556T, Mar. 27, 2001). Combating Terrorism: FEMA Continues to Make Progress in Coordinating Preparedness and Response (GAO-01-15, Mar. 20, 2001) Combating Terrorism: Federal Response Teams Provide Varied Capabilities; Opportunities Remain to Improve Coordination (GAO-01- 14, Nov. 30, 2000). Combating Terrorism: Linking Threats to Strategies and Resources (GAO/T-NSIAD-00-218, July 26, 2000). Combating Terrorism: Action Taken but Considerable Risks Remain for Forces Overseas (GAO/NSIAD-00-181, July 19, 2000). Weapons of Mass Destruction: DOD's Actions to Combat Weapons Use Should Be More Integrated and Focused (GAO/NSIAD-00-97, May 26, 2000). Combating Terrorism: Comments on Bill H.R. 4210 to Manage Selected Counterterrorist Programs (GAO/T-NSIAD-00-172, May 4, 2000). Combating Terrorism: How Five Foreign Countries Are Organized to Combat Terrorism (GAO/NSIAD-00-85, Apr. 7, 2000). Combating Terrorism: Issues in Managing Counterterrorist Programs (GAO/T-NSIAD-00-145, Apr. 6, 2000). Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training (GAO/NSIAD-00-64, Mar. 21, 2000). Combating Terrorism: Chemical and Biological Medical Supplies Are Poorly Managed (GAO/HEHS/AIMD-00-36, Oct. 29, 1999). Combating Terrorism: Observations on the Threat of Chemical and Biological Terrorism (GAO/T-NSIAD-00-50, Oct. 20, 1999). Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attack (GAO/NSIAD-99-163, Sept. 7, 1999). Combating Terrorism: Analysis of Federal Counterterrorist Exercises (GAO/NSIAD-99-157BR, June 25, 1999). Combating Terrorism: Observations on Growth in Federal Programs (GAO/T-NSIAD-99-181, June 9, 1999). Combating Terrorism: Analysis of Potential Emergency Response Equipment and Sustainment Costs (GAO/NSIAD-99-151, June 9, 1999). Combating Terrorism: Use of National Guard Response Teams Is Unclear (GAO/NSIAD-99-110, May 21, 1999). Combating Terrorism: Issues to Be Resolved to Improve Counterterrorist Operations (GAO/NSIAD-99-135, May 13, 1999). Combating Terrorism: Observations on Biological Terrorism and Public Health Initiatives (GAO/T-NSIAD-99-112, Mar. 16, 1999). Combating Terrorism: Observations on Federal Spending to Combat Terrorism (GAO/T-NSIAD/GGD-99-107, Mar. 11, 1999). Combating Terrorism: FBI's Use of Federal Funds for Counterterrorism-Related Activities (FYs 1995-98) (GAO/GGD-99-7, Nov. 20, 1998). Combating Terrorism: Opportunities to Improve Domestic Preparedness Program Focus and Efficiency (GAO/NSIAD-99-3, Nov. 12, 1998). Combating Terrorism: Observations on the Nunn-Lugar-Domenici Domestic Preparedness Program (GAO/T-NSIAD-99-16, Oct. 2, 1998). Combating Terrorism: Observations on Crosscutting Issues (GAO/T- NSIAD-98-164, Apr. 23, 1998). Combating Terrorism: Threat and Risk Assessments Can Help Prioritize and Target Program Investments (GAO/NSIAD-98-74, Apr. 9, 1998). Combating Terrorism: Spending on Governmentwide Programs Requires Better Management and Coordination (GAO/NSIAD-98-39, Dec. 1, 1997). Combating Terrorism: Federal Agencies' Efforts to Implement National Policy and Strategy (GAO/NSIAD-97-254, Sept. 26, 1997). Combating Terrorism: Status of DOD Efforts to Protect Its Forces Overseas (GAO/NSIAD-97-207, July 21, 1997). Chemical Weapons Stockpile: Changes Needed in the Management Structure of Emergency Preparedness Program (GAO/NSIAD-97-91, June 11, 1997). Terrorism and Drug Trafficking: Responsibilities for Developing Explosives and Narcotics Detection Technologies (GAO/NSIAD-97-95, Apr. 15, 1997). Federal Law Enforcement: Investigative Authority and Personnel at 13 Agencies (GAO/GGD-96-154, Sept. 30, 1996). Terrorism and Drug Trafficking: Technologies for Detecting Explosives and Narcotics (GAO/NSIAD/RCED-96-252, Sept. 4, 1996). Terrorism and Drug Trafficking: Threats and Roles of Explosives and Narcotics Detection Technology (GAO/NSIAD/RCED-96-76BR, Mar. 27, 1996). Responses of Federal Agencies and Airports We Surveyed About Access Security Improvements (GAO-01-1069R, Aug. 31, 2001). Aviation Security: Additional Controls Needed to Address Weaknesses in Carriage of Weapons Regulations (GAO/RCED-00-181, Sept. 29, 2000). Aviation Security: Long-Standing Problems Impair Airport Screeners' Performance (GAO/RCED-00-75, June 28, 2000). Aviation Security: Breaches at Federal Agencies and Airports (GAO/T- OSI-00-10, May 25, 2000). Aviation Security: Vulnerabilities Still Exist in the Aviation Security System (GAO/T-RCED/AIMD-00-142 Apr. 6, 2000). Aviation Security: Slow Progress in Addressing Long-Standing Screener Performance Problems (GAO/T-RCED-00-125 Mar. 16, 2000). Aviation Security: FAA's Actions to Study Responsibilities and Funding for Airport Security and to Certify Screening Companies (GAO/RCED- 99-53, Feb. 25, 1999). Aviation Security: Progress Being Made, but Long-term Attention Is Needed (GAO/T-RCED-98-190, May 14, 1998). Aviation Security: FAA's Procurement of Explosives Detection Devices (GAO/RCED-97-111R, May 1, 1997). Aviation Safety and Security: Challenges to Implementing the Recommendations of the White House Commission on Aviation Safety and Security (GAO/T-RCED-97-90, Mar. 5, 1997). Aviation Security: Technology's Role in Addressing Vulnerabilities (GAO/T-RCED/NSIAD-96-262, Sept. 19, 1996). Aviation Security: Urgent Issues Need to Be Addressed (GAO/T- RCED/NSIAD-96-251, Sept. 11, 1996) Aviation Security: Immediate Action Needed to Improve Security (GAO/T-RCED/NSIAD-96-237, Aug. 1, 1996). Aviation Security: Development of New Security Technology Has Not Met Expectations (GAO/RCED-94-142, May 19, 1994). Aviation Security: Additional Actions Needed to Meet Domestic and International Challenges (GAO/RCED-94-38, Jan. 27, 1994). Information Security: Serious and Widespread Weaknesses Persist at Federal Agencies (GAO/AIMD-00-295, Sept. 6, 2000). Critical Infrastructure Protection: Significant Challenges in Developing Analysis, Warning, and Response Capabilities (GAO-01-769T, May 22, 2001). Critical Infrastructure Protection: Significant Challenges in Developing National Capabilities (GAO-01-232, Apr. 25, 2001). Critical Infrastructure Protection: Challenges to Building a Comprehensive Strategy for Information Sharing and Coordination (GAO/T-AIMD-00-268, July 26, 2000). Security Protection: Standardization Issues Regarding Protection of Executive Branch Officials (GAO/GGD/OSI-00-139, July 11, 2000). Critical Infrastructure Protection: Comments on the Proposed Cyber Security Information Act of 2000 (GAO/T-AIMD-00-229, June 22, 2000). Critical Infrastructure Protection: "I LOVE YOU" Computer Virus Highlights Need for Improved Alert and Coordination Capabilities (GAO/T-AIMD-00-181, May 18, 2000). Critical Infrastructure Protection: National Plan for Information Systems Protection (GAO/AIMD-00-90R, February 11, 2000). Critical Infrastructure Protection: Comments on the National Plan for Information Systems Protection (GAO/T-AIMD-00-72, Feb. 1, 2000). Critical Infrastructure Protection: Fundamental Improvements Needed to Assure Security of Federal Operations (GAO/T-AIMD-00-7, Oct. 6,1999). Critical Infrastructure Protection: The Status of Computer Security at the Department of Veterans Affairs (GAO/AIMD-00-5, Oct. 4, 1999). Critical Infrastructure Protection: Comprehensive Strategy Can Draw on Year 2000 Experiences (GAO/AIMD-00-1, Oct. 1, 1999). Information Security: The Proposed Computer Security Enhancement Act of 1999 (GAO/T-AIMD-99-302, Sept. 30, 1999). Information Security: NRC's Computer Intrusion Detection Capabilities (GAO/AIMD-99-273R, Aug. 27, 1999). Electricity Supply: Efforts Underway to Improve Federal Electrical Disruption Preparedness (GAO/RCED-92-125, Apr. 20, 1992). West Nile Virus Outbreak: Lessons for Public Health Preparedness (GAO/HEHS-00-180, Sept. 11, 2000). Food Safety: Agencies Should Further Test Plans for Responding to Deliberate Contamination (GAO/RCED-00-3, Oct. 27, 1999). Emerging Infectious Diseases: Consensus on Needed Laboratory Capacity Could Strengthen Surveillance (GAO/HEHS-99-26, Feb. 5, 1999). International Crime Controls: Sustained Executive Level Coordination of Federal Response Needed (GAO-01-629, Sept. 20, 2001). Alien Smuggling: Management and Operational Improvements Needed to Address Growing Problem (GAO/GGD-00-103, May 1, 2000). Criminal Aliens: INS' Efforts to Identify and Remove Imprisoned Aliens Continue to Need Improvement (GAO/T-GGD-99-47, Feb. 25, 1999). Criminal Aliens: INS' Efforts to Remove Imprisoned Aliens Continue to Need Improvement (GAO/GGD-99-3, October 16, 1998). Immigration and Naturalization Service: Overview of Management and Program Challenges (GAO/T-GGD-99-148, July 29, 1999). Illegal Immigration: Status of Southwest Border Strategy Implementation (GAO/GGD-99-44, May 19, 1999). Illegal Immigration: Southwest Border Strategy Results Inconclusive; More Evaluation Needed (GAO/GGD-98-21, Dec. 11, 1997). Naturalization of Aliens: INS Internal Controls (GAO/T-GGD-97-98, May 1, 1997). Naturalization of Aliens: INS Internal Controls (GAO/T-GGD-97-57, Apr. 30, 1997). Naturalization of Aliens: Assessment of the Extent to Which Aliens Were Improperly Naturalized (GAO/T-GGD-97-51, Mar. 5, 1997).
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The United States now faces increasingly diverse threats that put great destructive power into the hands of small states, groups, and individuals. These threats range from cyber attacks on critical infrastructure to terrorist incidents involving weapons of mass destruction or infectious diseases. Efforts to combat this threat will involve federal agencies as well as state and local governments, the private sector, and private citizens. GAO believes that the federal government must address three fundamental needs. First, the government needs clearly defined and effective leadership with a clear vision carry out and implement a homeland security strategy and the ability to marshal the necessary resources to get the job done. Second, a national homeland security strategy should be based on a comprehensive assessment of national threats and risks. Third, the many organizations that will be involved in homeland security must have clearly articulated roles, responsibilities, and accountability mechanisms. Any strategy for homeland security must reduce risk where possible, assess the nation's vulnerabilities, and identify the critical infrastructure most in need of protection. To be comprehensive, the strategy should include steps to use intelligence assets or other means to identify attackers and prevent attacks before they occur, harden potential targets to minimize the damage from an attack, and effectively manage the consequences of an incident.
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The radio frequency spectrum is the part of the natural spectrum of electromagnetic radiation lying between the frequency limits of 3 kilohertz (kHz) and 300 gigahertz (GHz). Not all spectrum has equal value. The spectrum most highly valued generally consists of frequencies between 225 MHz and 3700 MHz, as these frequencies have properties well suited to many important wireless technologies, such as mobile phones, radio, and television broadcasting. According to NTIA, as of September 2012, federal agencies had exclusive access to about 18 percent of these high- value frequencies, and nonfederal users had exclusive licenses to about 33 percent. The remainder of this spectrum is allocated to shared use. However, in many cases in these shared bands, federal or nonfederal uses may dominate and actual sharing is nominal. NTIA has concluded that overall, approximately 43 percent of these high-value frequencies are predominantly used by federal operations. Federal agencies use spectrum to help meet a variety of missions, including emergency communications, national defense, land management, and law enforcement. Over 60 federal agencies and departments combined have over 240,000 frequency assignments. Agencies and departments within the Department of Defense have the most assignments, followed by the Federal Aviation Administration, the Department of Justice, the Department of Homeland Security, the Department of the Interior, the Department of Agriculture, U.S. Coast Guard, the Department of Energy, and the Department of Commerce, respectively. These federal agencies and departments hold 94 percent of all federally assigned spectrum. Nonfederal entities (which include commercial companies and state and local governments) also use spectrum to provide a variety of services. For example, state and local police departments, fire departments, and other emergency services agencies use spectrum to transmit and receive critical voice and data communications, while commercial entities use spectrum to provide wireless services, including mobile voice and data, paging, broadcast radio and television, and satellite services (see fig. 1). In the United States, responsibility for spectrum management is divided between NTIA and FCC. NTIA and FCC jointly determine the amount of spectrum allocated for federal, nonfederal, and shared use. After this allocation occurs, in order to use spectrum, nonfederal users must follow rules and obtain authorizations from FCC to use specific spectrum frequencies, and federal users must follow rules and obtain frequency assignments from NTIA. In order for nonfederal users to share federal spectrum, NTIA and FCC are jointly involved in the process. The nonfederal party petitions FCC, and FCC in turn coordinates rulemakings and licenses with NTIA through IRAC. NTIA manages sharing between federal users on a day-to-day basis. If federal users are requesting frequency assignments in exclusive nonfederal or shared bands, that request is coordinated through IRAC with FCC. If sharing is solely between nonfederal users in exclusive nonfederal bands, sharing is generally governed by FCC rules and does not go through NTIA, unless there could be out-of-band interference. In addition to its spectrum allocation and authorization duties, NTIA serves as the President's principal advisor on telecommunications and information policy and manages federally assigned spectrum, including preparing for, participating in, and implementing the results of international radio conferences, as well as conducting extensive research and technical studies through its research and engineering laboratory, the Institute for Telecommunication Sciences. NTIA has authority to issue rules and regulations as may be necessary to ensure the effective, efficient, and equitable use of spectrum both nationally and internationally. It also has authority to develop long-range spectrum plans to meet future spectrum requirements for the federal government. Spectrum sharing can be defined as the cooperative use of common spectrum. In this way, multiple users agree to access the same spectrum at different times or locations, as well as negotiate other technical parameters, to avoid adversely interfering with one another. For sharing to occur, users and regulators must negotiate and resolve where (geographic sharing), when (sharing in time), and how (technical parameters) spectrum will be used (see fig. 2). Spectrum sharing also occurs with unlicensed use of spectrum, since it is accessible to anyone using wireless equipment certified by FCC for those frequencies. Equipment such as wireless microphones, baby monitors, and garage door openers typically share spectrum with other services on a non-interference basis using low power levels to avoid interference with higher priority uses. In contrast with most licensed spectrum use, unlicensed spectrum users have no regulatory protection against interference from other licensed or unlicensed users in the band. However, unlicensed use is regulated to ensure that unlicensed devices do not cause undue interference to operations with a higher priority. For example, in the 5 GHz band, wireless fidelity (Wi-Fi) devices share a band with military radar subject to the condition that the Wi-Fi devices are capable of spectrum sensing and dynamic frequency selection; if radar is detected, the unlicensed user must immediately vacate the channel. As the federal agency authorized to develop national spectrum policy, NTIA has been directed to conduct several projects focused on reforming governmentwide federal spectrum management and promoting efficiency among federal users of spectrum; however, we reported in 2011 that its efforts in this area had resulted in limited progress toward improved spectrum management. NTIA has authority to, among other things, establish policies concerning assigning spectrum to federal agencies, coordinate spectrum use across federal agencies, and promote efficient use of spectrum by federal agencies in a manner which encourages the most beneficial public use. As such, NTIA has a role in ensuring that federally allocated spectrum is used efficiently. According to NTIA's Redbook and agency officials, efficient use includes ensuring that federal agencies' decisions to use spectrum to support government missions have been adequately justified and that all viable tradeoffs and options have been explored before making the decision to use spectrum- dependent technology, and ensuring that these tradeoffs are continuously reviewed to determine if the need for spectrum has changed over time. NTIA's primary guidance to federal agencies is technical guidance provided through NTIA's Redbook concerning how to manage assigned spectrum. In 2003, the Bush Administration directed NTIA to develop strategic plans, and in March 2008, NTIA issued its report on federal spectrum use entitled the Federal Strategic Spectrum Plan. While the intent of the Federal Strategic Spectrum Plan was to identify the current and projected spectrum requirements and long-range planning processes for the federal government, we reported in 2011 that the final plan is limited in these areas. For example, the plan does not identify or include quantitative governmentwide data on federal spectrum needs. Instead, NTIA's plan primarily consists of a compilation of the plans submitted by 15 of the more than 60 agencies that use federal spectrum. Additionally, due to the fact that they contained limited information regarding future requirements and technology needs, NTIA concluded that its "long-range assumptions are necessarily also limited." Furthermore, NTIA's plan did not contain key elements and best practices of strategic planning. NTIA's primary spectrum management operations include authorizing federal frequency assignments and certifying spectrum-dependent equipment for federal users; however, these processes are primarily focused on interference mitigation as determined by IRAC and do not focus on ensuring the best use of spectrum across the federal government. In 2011, we found that the process as established by federal regulations for review and approval of frequency assignment and system certification was technical in nature, focusing on ensuring that the new frequency or system that an agency wants to use would not interfere with another agency's operations. According to NTIA officials, this focus on day-to-day spectrum activities, such as interference mitigation, is due to the agency's limited resources. This focus, while important, makes limited consideration about the overall best use of federally allocated spectrum. Therefore, NTIA's current processes provide limited assurance that federal spectrum use is evaluated from a governmentwide perspective to ensure that decisions will meet the current and future needs of the agencies, as well as the federal government as a whole. NTIA's data management system is antiquated and lacks transparency and internal controls. In 2011, we reported that NTIA collects all federal spectrum data in the Government Master File (GMF), which according to NTIA officials is an outdated legacy system that was developed primarily to store descriptive data. These data are not detailed enough to support the current analytical needs of NTIA or other federal users, as the system was not designed to conduct such analyses. NTIA does not generate any data, but maintains agency-reported spectrum data in the GMF, which are collected during the frequency assignment and review processes. NTIA's processes for collecting and verifying GMF data lack key internal controls, including those focused on data accuracy, integrity, and completeness. Control activities such as data verification and reconciliation are essential for ensuring accountability for government resources and achieving effective and efficient program results. In 2011, we reported that NTIA's data collection processes lack accuracy controls and do not provide assurance that data are being accurately reported by agencies. Rather, NTIA expects federal agencies to supply accurate and up-to-date data submissions, but it does not provide agencies with specific requirements on how to justify that the agencies' spectrum assignments will fulfill their mission needs. NTIA is developing a new data management system--the Federal Spectrum Management System (FSMS)--to replace the GMF. According to NTIA officials, the new system will modernize and improve spectrum management processes by applying modern information technology to provide more rapid access to spectrum and make the spectrum management process more effective and efficient. NTIA projects that FSMS will improve existing GMF data quality, but not until 2018. According to NTIA's FSMS transition plan, at that time data accuracy will improve by over 50 percent. However, in the meantime it is unclear whether important decisions regarding current and future spectrum needs are based on reliable data. In response to the government initiatives to make a total of 500 MHz of spectrum available for wireless broadband, in 2010 NTIA (1) identified 115 MHz of federally allocated spectrum to be made available for wireless broadband use within the next 5 years, referred to as the Fast Track Evaluation, and (2) developed an initial plan and timetable for repurposing additional spectrum for broadband, referred to as the 10-Year Plan. Fast Track Evaluation. NTIA and the Policy and Plans Steering Group (PPSG) identified and recommended portions of two frequency bands, totaling 115 MHz of spectrum within the ranges of 1695-1710 MHz and 3550-3650 MHz to be made available for wireless broadband use. For each of these bands, NTIA reviewed the number of federal frequency assignments within the band, the types of federal operations and functions that the assignments support, and the geographic location of federal use. Since clearing these bands of federal users and relocating incumbent federal users to new bands was not an option in the given time frame, the bands that NTIA recommended be made available will be opened to geographic sharing by incumbent federal users and commercial broadband. 10-Year Plan. By a presidential memorandum, NTIA was directed to collaborate with FCC to make available 500 MHz of spectrum over the next 10 years, suitable for both mobile and fixed wireless broadband use, and complete by October 1, 2010, a specific plan and timetable for identifying and making available the 500 MHz for broadband use. publicly released this report in November 2010. In total, NTIA and the National Broadband Plan identified 2,264 MHz of spectrum to analyze for possible repurposing, of which 639 MHz is exclusively used by the federal government and will be analyzed by NTIA. Additionally, NTIA will collaborate with FCC to analyze 835 MHz of spectrum that is currently located in bands that are shared by federal and nonfederal users. Furthermore, NTIA has stated that it plans to seek advice and assistance from CSMAC, its federal advisory committee comprised of industry representatives and experts, as it conducts analyses under the 10-Year Plan. Unleashing the Wireless Broadband Revolution, 75 Fed. Reg. 38387. previously evaluated for reallocation, and in 2001, we reported that at the time adequate information was not currently available to fully identify and address the uncertainties and risks of reallocation. Industry stakeholders, including wireless service providers, representatives of an industry association, and a think tank representative we contacted in 2011 expressed concerns over the usefulness of the spectrum identified by NTIA in the Fast Track Evaluation, since most of the spectrum identified (100 of the 115 MHz) is outside the range considered to have the best propagation characteristics for mobile broadband. Overall, there has been limited interest in the bands above 3 GHz for mobile broadband use because, according to industry stakeholders, there has been minimal development of mobile broadband in bands above 3 GHz and no foreseeable advances in this area at this time. According to industry representatives, the 1755-1780 MHz band that NTIA considered as part of the Fast Track Evaluation has the best characteristics for mobile broadband use, and it is internationally harmonized for this use. NTIA did not select this band to be made available in the 5-year time frame due to the large number of federal users currently operating there. However, NTIA identified it as the first band to be analyzed under the 10-Year Plan to determine if it can be made available for commercial broadband use. An industry stakeholder has stated that the 1695-1710 MHz band identified by NTIA in the Fast Track Evaluation is the second-best alternative for wireless broadband if the 1755-1780 MHz band were not made available; however, the 1695- 1710 MHz band is not currently used internationally for wireless broadband, which may reduce device manufacturers' incentive for developing technology that can be used in these frequencies. While federal spectrum users often share spectrum among themselves, they may have little economic incentive to otherwise use spectrum efficiently, including sharing it with nonfederal users. From an economic perspective, when a consumer pays the market price for a good or service and thus cannot get more of it without this expense, the consumer has an incentive to get the most value and efficiency out of the good as possible. If no price is attached to a good--which is essentially the case with federal agencies' use of spectrum--the normal market incentive to use the good efficiently may be muted. In the case of federal spectrum users, obtaining new spectrum assignments may be difficult, so an agency may have an incentive to conserve and use the spectrum it currently has assigned to it or currently shares efficiently, but the extent of that incentive is likely weaker than if the agency had had to pay a market price for the all of their spectrum needs. As such, federal spectrum users do not fully face a market incentive to conserve on their use of spectrum or use it in an efficient manner. The full market value of the spectrum assigned to federal agencies has not been assessed, but, according to one expert, would most likely be valued in the tens of billions of dollars. Similarly, many nonfederal users, such as television broadcasters and public safety entities, did not pay for spectrum when it was assigned to them and do not pay the full market price for their continuing use of spectrum so, like federal agencies, they may not fully have market-based incentives to use spectrum efficiently. While licensed, commercial users who purchased spectrum at auction generally have market incentives to use their spectrum holdings efficiently, these users also have incentives that work against sharing spectrum, except in those instances where the incumbent licensee is unlikely to build out its network or offer services to a particular area, such as in certain remote, sparsely populated areas. FCC officials and industry stakeholders and experts told us that these users may prefer not to share their unused spectrum because they are concerned about the potential for interference to degrade service quality to their customers. Also, they may prefer to not give potential competitors access to spectrum. Industry stakeholders and experts also said that companies seeking spectrum may prefer obtaining exclusive spectrum licenses over sharing spectrum that is licensed to another company or federal user, given uncertainties about regulatory approvals, interference, and enforcement if interference occurs. There are several barriers that can deter sharing. One such barrier is that federal agencies will not risk mission failure, particularly when there are security and public safety implications. According to the agency officials we contacted, federal agencies will typically not agree to share spectrum if it puts achieving their missions at risk. The officials stressed that when missions have security and safety implications, sharing may pose unacceptable risks. For example, the military tests aircraft and trains pilots over test ranges that can stretch hundreds of miles, maintaining constant wireless contact. The ranges, according to officials, cannot share the communication frequencies because even accidental interference in communications with an aircraft could result in catastrophic mission failure. Further, sharing information about such flights could expose particular pilots and aircraft, or the military's larger mission, to increased risk. According to FCC officials, concerns about risk can drive conservative technical standards that can make sharing impractical. In general, the technical analyses and resulting standards are based on worst-case scenarios, and not on assessments of the most likely scenario or a range of scenarios. Moreover, in contrast to FCC's open rulemaking process, there is little opportunity for public input to the standards setting process. Stakeholders may meet or have discussions with NTIA and the relevant federal agencies, but this occurs without any formal public process. Nor do stakeholders have any effective means to appeal other than by asking FCC to reject NTIA's analysis or standards. Another barrier is that spectrum sharing can be costly. Stakeholders told us that sharing federal spectrum can be costly for both the nonfederal and federal users seeking to share for the following reasons: Mitigation of potential interference can be costly in terms of equipment design and operation. Users applying to share federal frequencies may find that those frequencies are being used by more than one federal agency or program. As a result of needing to mitigate inference for multiple users, costs to share spectrum in that band could increase. Federal users often use and rely on proven older technology that was designed to use spectrum to meet a specific mission and typically is not conducive to operating as efficiently or flexibly as the state-of-the- art technologies might now allow. Limited budgets may prevent them from being able to invest in newer technology which can facilitate easier sharing. Additionally, we found that spectrum sharing approval and enforcement processes can be lengthy and unpredictable. FCC and NTIA processes can cause two main problems when nonfederal users seek to share federal spectrum, or when nonfederal users share with one another, according to stakeholders: The spectrum-sharing approval process between FCC and NTIA can be lengthy and unpredictable, and the risk associated with it can be costly for new entrants. FCC officials told us that its internal processes can potentially last years if requiring a rulemaking to accommodate shared use of spectrum. In addition to that time, NTIA officials said that IRAC's evaluation of potential harmful interference could take months. In one example, the Department of Defense, along with other federal agencies and nonfederal entities, currently shares a spectrum band between 413-457 MHz with a nonprofit medical devices provider for use in implant products for veterans. It took approximately 2 years (from 2009 to 2011) for FCC and NTIA to facilitate this arrangement, as FCC required a rulemaking and NTIA required a lengthy evaluation of potential interference. This nonprofit is funded by an endowment and was not dependent on income from the device to sustain itself during this process, but such delays, and the potential for a denial, could discourage for-profit companies from developing and investing in business plans that rely on sharing federal spectrum. Stakeholders we interviewed told us that when federal or nonfederal users share spectrum, both parties have concern that harmful interference may affect their missions or operations if the other party overreaches or does not follow the agreement. They also fear that the enforcement actions that are taken by FCC will happen too slowly to protect their interests or that enforcement outcomes can be unpredictable. Besides lacking incentives and overcoming other barriers, users may also have difficulty identifying spectrum suitable for sharing because data on available spectrum is incomplete or inaccurate, and information on some federal spectrum usage is not publicly available. According to NTIA officials, coordinating spectrum sharing requires accurate data on users, frequencies, locations, times, power levels, and equipment, among other things. We recently reported that both FCC's and NTIA's spectrum databases may contain incomplete and inaccurate data. Further, federal agency spectrum managers told us that agencies have not been asked to regularly update their strategic spectrum plans, in which they were required to include an accounting of spectrum use. As mentioned, NTIA is developing a new data system that officials believe will provide more robust data that will enable more accurate analysis of spectrum usage and potential interference, which may in turn identify more sharing opportunities. In addition, recently proposed legislation would require in part that FCC, in consultation with NTIA and the White House Office of Science and Technology Policy, prepare a report for Congress that includes an inventory of each radio spectrum band they manage. The inventory is also to include data on the number of transmitters and receiver terminals in use, if available, as well as other technical parameters--coverage area, receiver performance, location of transmitters, percentage and time of use, a list of unlicensed devices authorized to operate in the band and description of use--that allow for more specific evaluation of how spectrum can be shared. However, experts and federal officials we contacted told us that there may be some limitations to creating such an inventory. For instance, measuring spectrum usage can be difficult because it can only be accomplished on a small scale and technologies to measure or map widespread spectrum usage are not yet available. Additionally, FCC and NTIA officials told us that information on some federal spectrum bands may never be made publicly available because of the sensitive and classified nature of some federal spectrum use. We have previously reported that to improve spectrum efficiency among federal agencies, Congress may wish to consider evaluating what mechanisms could be adopted to provide incentives and opportunities for agencies to move toward more efficient use of spectrum, which could free up some spectrum allocated for federal use to be made available for sharing or other purposes. Federal advisors and experts we talked to identified several options that could provide incentives and opportunities for more efficient spectrum use and spectrum sharing by federal and nonfederal users, which include, among others: (1) assessing spectrum usage fees; (2) expanding the availability of spectrum for unlicensed uses; and (3) increasing the federal focus on research and development of technologies that can enable spectrum sharing and improve spectral efficiency. Assessing spectrum usage fees. Several advisory groups and spectrum industry experts, including those we interviewed, have recommended that spectrum fees be assessed based on spectrum usage. As previously mentioned, with the exception of administrative fees for frequency assignments, federal users incur no costs for using spectrum. As such, federal users may have little incentive to share spectrum assigned to them with nonfederal users or identify opportunities to use spectrum more efficiently--except to the extent that sharing or more efficient use helps them achieve their mission requirements. In 2011, the CSMAC Incentives Subcommittee recommended that NTIA and FCC study the implementation of spectrum fees to drive greater efficiency and solicit input from both federal and nonfederal users who might be subject to fees. The National Broadband Plan has also recommended that Congress consider granting FCC and NTIA authority to impose spectrum fees on unauctioned spectrum license holders--such as TV broadcasters and public safety entities--as well as government users. Fees may help to free spectrum for new uses, since licensees who use spectrum inefficiently may reduce their holdings or pursue sharing opportunities once they bear the opportunity cost of letting it remain fallow or underused. Further, FCC officials told us that they have proposed spectrum usage fees at various times, including in FCC's most recent congressional budget submission, and requested the legislative authorities to implement such a program. While noting the benefits, the CSMAC Incentives Subcommittee report mentions specific concerns about the impact of spectrum fees on government users. For instance, some CSMAC members expressed concern that fees do not fit into the federal annual appropriations process and new appropriations to cover fees are neither realistic nor warranted in the current budget environment. Other members suggested that fees will have no effect because agencies will be assured additional funds for their spectrum needs. Similarly, the National Broadband Plan notes that a different approach to setting fees may be appropriate for different spectrum users, and that a fee system must also avoid disrupting public safety, national defense, and other essential government services that protect human life, safety, and property. To address some of the concerns regarding agency budgets, the recent PCAST report recommended the use of a "spectrum currency" process to promote spectrum efficiency. Rather than using funds to pay for spectrum, federal agencies would each be given an allocation of synthetic currency that they could use to "buy" their spectrum usage rights. Usage fees would be set based on valuations of comparable private sector uses for which the market has already set a price. Agencies would then have incentive to use their assignments more efficiently or share spectrum. In the PCAST proposal, agencies would also be rewarded for making spectrum available to others for sharing, by being reimbursed for their investments in improving spectrum sharing from a proposed Spectrum Efficiency Fund. Expanding the availability of spectrum for unlicensed use. Unlicensed spectrum use is inherently shared spectrum access, and according to spectrum experts we interviewed and other stakeholders, unlicensed use of spectrum is a valuable complement to licensed spectrum and more spectrum could be made available for unlicensed use. Spectrum for unlicensed use can be used efficiently and for high value applications, like Wi-Fi, for example. Increasing the amount of spectrum for unlicensed use may allow more users to share without going through lengthy negotiations and interference mitigations, and also allow for more experimentation and innovation. More recently, FCC has provided unlicensed access to additional spectrum, known as TV "white spaces," to help address spectrum demands. The white spaces refer to the buffer zones that FCC assigned the television broadcasters to mitigate unwanted inference between adjacent stations. With the more efficient TV transmission capabilities that resulted from the digital television transition, the buffer zones are no longer needed and FCC approved the previously unused spectrum for unlicensed use. To identify available white space spectrum, devices must access a database which responds with a list of the frequencies that are available for use at the device's location. As an example, one local official explained that his city uses TV white space spectrum to provide a network of public Wi-Fi access and public safety surveillance functions. Increasing the federal focus on research and development of technologies. Several technological advances promise to make sharing easier, but are still at early stages of development and testing. For example, various spectrum users and experts we contacted mentioned the potential of dynamic spectrum access technology. If made fully operational, dynamic spectrum access technology will be able to sense available frequencies in an area and jump between frequencies to seamlessly continue communication as the user moves geographically and through the spectrum. According to experts and researchers we contacted, progress has been made but there is no indication of how long it will be before this technology is fully deployable. Such new technologies can obviate or lessen the need for extensive regulatory procedures to enable sharing and can open up new market opportunities for wireless service providers. If a secondary user or sharing entity employs these technologies, the incumbent user or primary user would theoretically not experience harmful interference, and agreements and rulemakings that are currently needed may be streamlined or unnecessary to enable sharing. Although industry participants indicated that extensive testing under realistic conditions is critical to conducting basic research on spectrum efficient technologies, we found that only a few companies are involved in such research and may experience challenges in the testing process. Companies tend to focus technology development on current business objectives as opposed to conducting basic research that may not show an immediate business return. For example, NTIA officials told us that one company that indicated it would participate in NTIA's dynamic spectrum access testing project removed its technologist from the testing effort to a project more closely related to its internal business objectives. Furthermore, some products are too early in the development stage to even be fully tested. For example, NTIA officials also said six companies responded to NTIA's invitation to participate in the previously mentioned dynamic spectrum access testing project. However, only two working devices were received for the testing, and a third device received did not work as intended. Other companies that responded told NTIA that they only had a concept and were not ready to test an actual prototype. Recent federal advisory committee recommendations emphasize the importance of funding and providing incentives for research and development endeavors. For example, to promote research in efficient technologies, PCAST recommended that (1) the Research and Development Wireless Innovation Fund release funds for this purpose and (2) the current Spectrum Relocation Fund be redefined as the Spectrum Efficiency Fund. As discussed, this adjustment would allow for federal agencies to be reimbursed for general investments in improving spectrum sharing. Similarly, CSMAC recommended the creation of a Spectrum Innovation Fund. Unlike the Spectrum Relocation Fund, which is strictly limited to the actual costs incurred in relocating federal systems from auctioned spectrum bands, the Spectrum Innovation Fund could also be used for spectrum sharing and other opportunities to enhance spectrum efficiency. Radio frequency spectrum is a scarce national resource that enables wireless communications services vital to the U.S. economy and to a variety of government functions, yet NTIA has not developed a strategic, governmentwide vision for managing federal use of this valuable resource. NTIA's spectrum management authority is broad in scope, but NTIA's focus is on the narrow technical aspects of spectrum management, such as ensuring new frequency assignments will not cause interference to spectrum-dependent devices already in use, rather than on whether new assignments should be approved based on a comprehensive evaluation of federal spectrum use from a governmentwide perspective. Lacking an overall strategic vision, NTIA cannot ensure that spectrum is being used efficiently by federal agencies. Furthermore, agencies are not required to submit justifications for their spectrum use and NTIA does not have a mechanism in place to validate and verify the accuracy of spectrum-related data submitted by the federal agencies. This has led to decreased accountability and transparency in how federal spectrum is being used and whether the spectrum-dependent systems the agencies have in place are necessary. Without meaningful data validation requirements, NTIA has limited assurance that the agency-reported data it collects are accurate and complete. In our April 2011 report, we recommended that NTIA (1) develop an updated plan that includes key elements of a strategic plan, as well as information on how spectrum is being used across the federal government, opportunities to increase efficient use of federally allocated spectrum and infrastructure, an assessment of future spectrum needs, and plans to incorporate these needs in the frequency assignment, equipment certification, and review processes; (2) examine the assignment review processes and consider best practices to determine if the current approach for collecting and validating data from federal agencies can be streamlined or improved; and (3) establish internal controls for management oversight of the accuracy and completeness of currently reported agency data. With respect to our first recommendation, NTIA has not developed an updated strategic plan and previously noted that the Presidential Memorandum of June 28, 2010, and the Wireless Innovation Initiative provide significant strategic direction for NTIA and the other federal agencies. In September 2012, NTIA officials told us that NTIA intends to update its strategic plan by October 2013. NTIA concurred with our other two recommendations and is taking action to address them. For example, NTIA has proposed approaches to implement new measures to better ensure the accuracy of agency- reported data, and is taking steps to implement internal controls for its data management system in a cost efficient manner. With respect to spectrum sharing, there are currently insufficient incentives to encourage more sharing, and even if incentives were created, several barriers to sharing will continue. Options to address these issues in turn create new challenges, and may require further study. Chairman Walden, Ranking Member Eshoo, and Members of the Subcommittee, this concludes my prepared statement. I will be happy to respond to any questions you may have at this time. For further information on this testimony, please contact me at (202) 512- 2834, or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Sally Moino and Andrew Von Ah, Assistant Directors; Amy Abramowitz; Colin Fallon; Bert Japikse; Elke Kolodinski; Maria Mercado; Erica Miles; and Hai Tran. 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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Demand for spectrum is increasing rapidly with the widespread use of wireless broadband devices and services. However, nearly all usable spectrum has been allocated either by NTIA for federal use or by the Federal Communications Commission (FCC) for commercial and nonfederal use. Federal initiatives are under way to identify federal spectrum that could be repurposed or possibly shared by federal users or wireless broadband providers and other nonfederal users. This statement discusses how NTIA manages spectrum to address governmentwide spectrum needs and the steps NTIA has taken to repurpose spectrum for broadband. As part of an ongoing review, the statement also discusses preliminary information on the factors that prevent spectrum sharing and actions that can encourage sharing and efficient spectrum use. This testimony is based on GAO's prior work on federal spectrum management and ongoing work on spectrum sharing. GAO analyzed NTIA processes, policies and procedures, and interviewed relevant government officials, experts, and industry stakeholders. The National Telecommunications and Information Administration (NTIA) is responsible for governmentwide federal spectrum management, but GAO reported in 2011 that NTIA's efforts in this area had been limited. In 2003, the President directed NTIA to develop plans identifying federal and nonfederal spectrum needs, and in 2008, NTIA issued the federal plan. GAO found it did not identify governmentwide spectrum needs and did not contain key elements and conform to best practices for strategic planning. Furthermore, NTIA's primary spectrum management operations do not focus on governmentwide needs. Instead, NTIA depends on agency self-evaluation of spectrum needs and focuses on mitigating interference among spectrum users, with limited emphasis on overall spectrum management. Additionally, NTIA's data management system is antiquated and lacks internal controls to ensure the accuracy of agency-reported data, making it unclear if reliable data inform decisions about federal spectrum use. NTIA is developing a new data management system, but implementation is years away. Despite these limitations, NTIA has taken steps to identify spectrum that could potentially be made available for broadband use. For example, in 2010 NTIA evaluated various spectrum bands and identified 115 megahertz of spectrum that could be repurposed within the next 5 years. In doing so, NTIA worked with a special steering group consisting of the Assistant Secretaries with spectrum management oversight in agencies that were the major stakeholders in the spectrum bands under consideration. For each of the identified bands, NTIA reviewed the number of federal frequency assignments within the band, the types of federal operations and functions that the assignments support, and the geographic location of federal use. In addition to efforts to repurpose spectrum, industry stakeholders have also suggested that sharing spectrum between federal and nonfederal users be considered to help make spectrum available for broadband. Our ongoing work has identified several barriers that limit sharing. Primarily, many users may lack incentives to share assigned spectrum. Typically, paying the market price for a good or service helps to inform users of the value of the good and provides an incentive for efficient use. But federal agencies pay only a small fee to NTIA for spectrum assignments, and may, in some contexts, have little incentive to conserve or share it. Federal agencies may also have limited budgets to upgrade to more spectrally-efficient equipment that would better enable sharing. Nonfederal users are also reluctant to share spectrum. For instance, license holders may be reluctant because of concerns that spectrum sharing could encourage competition. A lack of information on federal spectrum use may limit users' ability to easily identify spectrum suitable for sharing. GAO's ongoing work suggests that some actions might provide greater incentives and opportunities for more efficient spectrum use and sharing. These actions could include assessing spectrum usage fees to provide economic incentive for more efficient use and sharing, expanding the availability of unlicensed spectrum, and increasing the federal focus on research and development of technologies that can enable spectrum sharing and improve spectral efficiency. However, all of these actions also involve challenges and may require further study.
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As a DHS component, TSA follows the department's policies and procedures for managing its acquisition programs. DHS has established policies and procedures for acquisition management, test and evaluation, and resource allocation. The department uses these policies and procedures to deliver systems that are intended to close critical capability gaps and enable DHS to execute its missions and achieve its goals. DHS's policies govern TSA's acquisition programs and are primarily set forth in DHS Acquisition Management Directive 102-01 (AD 102). DHS acquisition policy establishes that an acquisition decision authority shall review the program through the acquisition life cycle phases. Under this directive, an important aspect of an acquisition decision authority's review and approval of acquisition programs is to ensure that key acquisition documents are completed, including (1) a life cycle cost estimate, which provides an exhaustive and structured accounting of all resources and associated cost elements required to develop, produce, deploy, and sustain a program, and (2) the acquisition program baseline, which establishes a program's cost, schedule, and performance parameters. When an acquisition program exceeds cost, schedule, or performance thresholds, it is considered to be in breach. TSA's acquisition policies, which supplement DHS policies, generally designate roles and responsibilities and identify the procedures that TSA is to use to implement the requirements in DHS policies. For example, a TSA policy designates an official to ensure TSA's acquisition programs comply with AD 102, including the review and approval of key acquisition program management documents and determining required acquisition documentation for TSA programs. In addition, a TSA policy guide provides the procedures that TSA is to use to meet the acquisition review and reporting requirements defined in AD 102. TSA has policies and procedures that address TSARA's requirements for justifying acquisitions, including a security-related technology acquisition. TSA had implemented most of these procedures prior to TSARA's enactment because they were required by existing DHS and TSA policy. For acquisition justifications, TSARA provides that before TSA implements any security-related technology acquisition the agency must, in accordance with DHS policies and directives, conduct an analysis to determine whether the acquisition is justified, or whether the benefits exceed the cost of the acquisition. TSA's policies and procedures address this requirement. One change resulting from TSARA is the requirement that TSA notify Congress at least 30 days preceding contract awards for new security-related technology acquisitions exceeding $30 million, which TSA addressed by developing new procedures. See appendix I for our detailed analysis on the status of TSA's efforts to implement all TSARA requirements. TSA policies and procedures address TSARA provisions related to justifying acquisitions by requiring the development and approval of specific acquisition documents, including a concept of operations and an analysis of alternatives, prior to the implementation of an acquisition. The concept of operations is to include identifying scenarios of transportation security risk and assessing how the use of the proposed acquisition would help improve transportation security. The analysis of alternatives is to include identifying different security solutions, including technology and non-technology solutions, and an analysis of the operational effectiveness, cost, and benefits of each viable solution. Regarding the requirement that congressional notification be made in advance of obtaining acquisitions of more than $30 million, TSA amended its policies to include the 30-day notification for contracts exceeding $30 million awarded after TSARA's enactment. TSA also developed a template for a notification letter to Congress that is to include a certification by the TSA Administrator. Consistent with TSARA, TSA is to provide 5-day notice for contract awards that exceed $30 million to facilitate a rapid response if there is a known or suspected imminent threat to transportation security. TSA officials stated they will continue to provide 5-day notice for all individual task order awards or delivery order awards exceeding $1 million or more based on policies in effect prior to TSARA's enactment. According to TSA officials, TSA has not yet awarded a contract for security-related technology in excess of $30 million since TSARA's enactment. These officials also said that there have been no acquisitions related to a known or suspected imminent threat to transportation security that would require TSA to immediately notify Congress since TSARA's enactment. TSA has policies and procedures in place that address TSARA's requirements to establish acquisition baselines and review whether acquisitions are meeting these requirements. These policies and procedures were largely established prior to TSARA's enactment. For example, TSA acquisition policies require that TSA prepare an acquisition program baseline, a risk management plan, and the acquisition program office staffing requirements before obtaining an acquisition. According to TSARA, TSA must report a breach if there is a cost overrun of more than 10 percent, a delay in actual or planned schedule for delivery of more than 180 days, or a failure to meet any performance milestone that directly affects security effectiveness. TSA's TSARA Implementation Strategy Memorandum addresses TSARA's requirements for reporting breaches to Congress. Specifically, the memorandum designates the Office of Acquisition as being responsible for implementing TSARA breach requirements and includes procedures that outline the steps TSA should take to notify DHS and Congress about breaches. According to TSA's TSARA Implementation Strategy Memorandum, TSA had existing policies that require breach memorandums and remediation plans when breaches occur. The procedures state that in the event of a breach, TSA will provide a report to Congress that includes the cause and type of breach and a corrective action plan. In addition, TSA officials have briefed acquisition program staff about TSARA's breach notification requirement changes. Prior to TSARA's enactment, TSA followed DHS's acquisition policies that defines breaches against an acquisition program baseline as performance failures, schedule delays, or cost overruns of up to 15 percent, and did not mandate reporting breaches to congressional committees. As required by TSARA, TSA established procedures to notify Congress within 30 days of schedule delays, cost overruns, or performance failures constituting a breach against acquisition program baselines. As of December 2015, TSA reported that it had not experienced such breaches in any existing acquisitions since TSARA's enactment. TSA's policies and procedures address TSARA requirements for managing inventory related to, among other things, (1) using existing units before procuring more equipment; (2) establishing policies and procedures to track the location, use, and quantity of security-related equipment in inventory; and (3) providing for the exception from using just-in-time logistics, a process that involves delivering equipment directly from manufacturers to airports to avoid the need to warehouse equipment. For example, TSA's Security Equipment Management Manual describes the policies and procedures that require TSA to use equipment in its inventory if, for example, an airport opens a new terminal or it recapitalizes security-related technology at the end of its life cycles. Additionally, the current TSA system tracks the location, utilization status, and quantity of security-related equipment in inventory. Further, TSA's policies and procedures describe TSA's system of internal controls in place prior to TSARA's enactment to conduct reviews, which require reporting and following up on corrective actions. TSA's Security Equipment Management Manual provides for two exemptions from just- in-time logistics that are applicable if just-in-time logistics would (1) inhibit planning needed for large-scale equipment delivery to airports or other facilities or (2) reduce TSA's ability to respond to a terrorist threat. In accordance with TSARA, TSA must execute its acquisition-related responsibilities in a manner consistent with and not duplicative of, the FAR and DHS policies and directives. TSA policy documents state that TSA is required to ensure that its policies and directives are in accordance with the FAR and DHS acquisition and inventory policies and procedures. According to TSA's TSARA Implementation Strategy Memorandum, TSA was able to address this requirement. For example, TSA formed a working group, chaired by TSA Executive Secretariat staff, as part of an effort to ensure that TSA implemented TSARA in a manner that was consistent with the FAR and DHS policies and directives. DHS officials further reported that TSA's actions towards implementation of TSARA requirements is part of DHS's Acquisition Review Board process and has not led to any duplication or inconsistency with the FAR or AD 102. TSA submitted a Strategic Five-Year Technology Investment Plan (the Plan) to Congress that generally addresses TSARA-mandated elements. For example, the Plan that TSA submitted to Congress identifies capability gaps and security-related technology acquisition needs and procedures. Specifically, the Plan describes TSA's test, evaluation, modeling, and simulation capabilities, and identifies security- related technologies that are at or near the end of their life cycles. In addition, the Plan identifies TSA's efforts to provide the private sector with greater predictability and clarity about TSA's security-related technology needs and acquisition procedures by sharing testing documents and plans. TSA also took steps to ensure that the Plan adhered to TSARA by (1) consulting with DHS officials and an advisory committee, (2) obtaining approval of the Secretary of Homeland Security prior to publishing the Plan, (3) incorporating private sector input on the Plan, and (4) identifying the nongovernment persons who contributed to writing the Plan. TSARA required TSA to submit a report to congressional committees on TSA's performance record in meeting its published small business contracting goals during fiscal year 2014. In April 2015, TSA reported for fiscal year 2014 that it fell 1.5 percent short of its small business contracting goal of 23 percent, and 1.6 percent short of its Historically Underutilized Business Zones (HUBZone) program goal of 3 percent of its total contracts. To meet its small business contracting goal, TSA would have had to award an additional $22 million in contracts to small businesses of its $1.5 billion in total contracts. According to TSA officials, small businesses' limited ability to support security-related technology acquisition and TSA's existing large scale prime contract awards to large businesses for human resources and information technology are part of the challenges that it faces in meeting its small business goals. TSARA provides that if the small business contracting goals are not met, or if the agency's performance is below the published DHS small business contracting goals, TSA's report is to include a list of challenges that contributed to TSA's performance and an action plan, prepared after consultation with other federal departments and agencies. The report submitted by TSA includes an action plan for integrating small business concerns into the acquisition planning procedures and enhancing outreach to disabled, women-owned and HUBZone businesses. TSA's small business officials also said that they attend monthly meetings with officials from other DHS components' small business units and conduct outreach events with small businesses. To develop the action plan, TSA did not consult with the Secretary of Defense and the heads of federal departments and agencies that met their small business goals as required by TSARA. However, TSA officials said that they met with the Department of Defense Office of Small Business Programs after they developed the action plan and the agency plans to fully comply with TSARA's small business requirements in the future. DHS and TSA officials reported that to date TSA has not identified any efficiencies, cost savings, or delays from its implementation of TSARA. TSA officials further stated that because many of their current policies and procedures that met the provisions of the law were in place prior to TSARA's enactment, it was unlikely for TSARA to result in major cost savings, efficiencies, or delays. TSA officials reported that they recently developed a mechanism to track its progress in implementing follow-on actions identified in the Plan, such as ongoing stakeholder engagement, as well as to track progress and identify challenges and best practices in implementing TSARA requirements to help update the Plan. We provided a draft of this report to DHS for review and comment. DHS did not provide formal comments but provided technical comments from TSA which we incorporated as appropriate. We are sending copies of this report to the appropriate 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) 512-7141 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 the following tables, we identify the status of Transportation Security Administration (TSA) efforts to address requirements of the Transportation Security Acquisition Reform Act (TSARA). Jennifer A. Grover, (202) 512-7141 or [email protected]. In addition to the contact named above, Glenn Davis (Assistant Director), Nima Patel Edwards (Analyst-in-Charge), David Alexander, Rodney Bacigalupo, Richard Hung, Thomas Lombardi, Luis E. Rodriguez, Tovah Rom, Carley Shinault, and Edith Sohna made key contributions to this report.
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Within DHS, TSA is the federal agency with primary responsibility for preventing and defending against terrorist and other threats to domestic transportation systems. From fiscal years 2002 through August 2015, TSA obligated $13.4 billion to acquire security-related technologies such as through the Electronic Baggage Screening Program and the Passenger Screening Program. However, GAO and the DHS Office of Inspector General have reported that TSA did not fully follow DHS policies in deploying Advanced Imaging Technology systems to screen passengers and in estimating costs to screen checked baggage, and faced challenges in managing inventory. Enacted in December 2014, TSARA specifies measures that TSA must take to improve transparency and accountability in acquiring security-related technologies. TSARA contains a provision that GAO report to Congress on TSA's progress in implementing TSARA. This report examines TSA's actions taken toward addressing TSARA. GAO is not fully evaluating the extent to which TSA is implementing the act at this time because TSA has not undertaken an acquisition of security-related technology subject to the requirements of the act since its enactment. Pursuant to TSARA, GAO will report again on TSA's implementation of the act in approximately 3 years. TSA provided technical comments on a draft of this report which GAO incorporated as appropriate. DHS did not provide formal comments. The Transportation Security Administration (TSA) in the Department of Homeland Security (DHS) has policies and procedures that generally address requirements of the December 2014 Transportation Security Acquisition Reform Act (TSARA). Specifically, TSA policy and procedures address TSARA requirements for justifying acquisitions, establishing baselines, managing inventory, and submitting plans, among other requirements. Justifying Acquisitions TSA had taken action toward addressing most TSARA requirements related to justifying acquisitions prior to TSARA's enactment because they were required by existing DHS and TSA acquisition policies. Consistent with TSARA, TSA amended its policies to notify Congress within 30 days of awarding contracts exceeding $30 million for the acquisition of security-related technology. According to agency officials, TSA has not made any such new acquisitions since the enactment of TSARA. Acquisition Baselines TSA policies require that it prepare an acquisition program baseline, risk management plan, and staffing requirements before acquiring security-related technology. Consistent with TSARA, TSA established policies to notify Congress within 30 days of making a finding of performance failures, schedule delays, or cost overruns constituting a breach against acquisition program baselines. TSA reported that it had not experienced breaches in any existing acquisitions (i.e., those in place prior to December 2014) since the enactment of TSARA. Managing Inventory TSA's policies and procedures address TSARA requirements for using existing units before procuring more equipment; tracking the location, use, and quantity of security-related equipment in inventory; and using just-in-time delivery to avoid warehousing equipment. Submitting Plans TSA submitted its Technology Investment Plan and Small Business Report to Congress as required by TSARA. The Technology Investment Plan addresses required elements such as identifying security gaps and security-related technology needs and processes. The Small Business Report includes an action plan for integrating the concerns of small businesses into acquisition processes and increasing outreach to targeted small businesses. DHS and TSA officials said that TSA has not yet identified any efficiencies, cost savings, or delays from its implementation of TSARA. They added that because many of the policies and procedures that meet the provisions of the act were in place prior to the enactment of TSARA, it was unlikely for TSARA to result in major efficiencies, cost savings, or delays. According to TSA officials, TSA has developed mechanisms to monitor various aspects of TSARA, such as tracking progress in implementing planned technology programs.
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Vanuatu consists of 83 islands spread over hundreds of miles of ocean in the South Pacific, 1,300 miles northeast of Sydney, Australia. About 39 percent of the population is concentrated on the islands of Santo and Efate. Vanuatu's capital, Port Vila, is on Efate, and Vanuatu's only other urban center, Luganville, is on Santo. In the past decade, Vanuatu's real GDP growth averaged 2 percent, although more rapid population growth led to a decline in per capita GDP over the same period. Average growth of real GDP per capita was negative from 1993 to 2005. An estimated 40 percent of Vanuatu's population of about 207,000 has an income below the international poverty line of $1 per day. Agriculture and tourism are the principal productive sectors of Vanuatu's economy, contributing approximately 15 percent and 19 percent to GDP, respectively. Although agriculture represents a relatively small share of Vanuatu's overall economy, approximately 80 percent of Vanuatu's residents live in rural areas and depend on subsistence agriculture for food and shelter. The tourism sector is dominated by expatriates of foreign countries living in Vanuatu, who also predominate in other formal sectors of the economy such as plantation agriculture and retail trade. On May 6, 2004, MCC determined that Vanuatu was eligible to submit a compact proposal for Millennium Challenge Account funding. Vanuatu's proposal identified transportation infrastructure as a key constraint to private-sector development. The timeline in figure 1 shows the development and implementation of the Vanuatu proposal and compact. The $65.7 million Vanuatu compact includes $54.5 million for the rehabilitation or construction of 11 transportation infrastructure assets on 8 of Vanuatu's 83 islands, including roads, wharves, an airstrip, and warehouses (see fig. 2). The compact also includes $6.2 million for an institutional strengthening program to increase the capacity of the Vanuatu Public Works Department (PWD) to maintain transportation infrastructure. The remaining $5 million is for program management and monitoring and evaluation. More than half of the compact, $37 million, is budgeted for three road projects on Santo and Efate islands. The compact provides for upgrading existing roads on both islands; the compact also includes five new bridges for an existing road on Santo. MCC's compact with Vanuatu and congressional notification state that the compact will have a transformational impact on Vanuatu's economic development, increasing average per capita income by approximately $200--15 percent--by 2010 and increasing total GDP by "an additional 3 percent a year." MCC's investment memo further quantifies the per capita income increase as $488--37 percent--by 2015. The compact and the congressional notification also state that the compact will provide benefits to approximately 65,000 poor, rural inhabitants (see fig. 3). In projecting the impact of the Vanuatu compact, MCC estimated the benefits and costs of the proposed infrastructure improvements. MCC also estimated the number of beneficiaries within a defined catchment area-- that is, the geographic area in which benefits may be expected to accrue. MCC used the estimated benefits and costs to calculate the compact's ERR and impact on Vanuatu's GDP and per capita income. MCC's analysis determined that the compact will reduce transportation costs and improve the reliability of access to transportation services for poor, rural agricultural producers and providers of tourism-related goods and services and that these benefits will, in turn, lead to increases in per capita income and GDP and reduction in poverty. MCC projects several direct and induced benefits from the compact's infrastructure improvement projects over a 20-year period, beginning in full in 2008 or 2009 and increasing by at least 3 percent every year. Direct benefits. MCC projects that direct benefits will include, for example, construction spending, reduced transportation costs, and time saved in transit on the improved roads. Induced benefits. MCC projects that induced benefits from tourism and agriculture will include, for example, increased growth in Vanuatu tourism, tourist spending, and hotel occupancy and increased crop, livestock, and fisheries production. Figure 4 illustrates MCC's logic in projecting the compact's impact. MCC expects compact benefits to flow from different sources, depending on the project and its location. In Efate, the Ring Road is expected to provide direct benefits from decreased road user costs and induced benefits through tourism and foreign resident spending. In Santo, MCC anticipates similar benefits as well as the induced benefit of increased agricultural production. On other islands, where tourism is not as developed, MCC expects benefits to derive primarily from user cost savings and increased agriculture. To calculate construction and maintenance costs for the transportation infrastructure projects, MCC used existing cost estimates prepared for the government of Vanuatu and for another donor as well as data from the Vanuatu PWD. To estimate the number of poor, rural beneficiaries, MCC used Vanuatu maps to identify villages in the catchment area and used the 1999 Vanuatu National Population and Housing Census to determine the number of persons living in those villages. In all, MCC calculated that approximately 65,000 poor, rural people on the eight islands would benefit from MCC projects. On the basis of the costs and benefits projected over a 20-year period, MCC calculated three summaries of the compact's impact: its ERR, effect on per capita income, and effect on GDP. MCC projected an overall compact ERR of 24.7 percent over 20 years. In projecting the compact's impact on Vanuatu's per capita income, MCC used a baseline per capita income of $1,326 for 2005. MCC also prepared a sensitivity analysis to assess how a range of possible outcomes would affect compact results. MCC's tests included a 1-year delay of the start date for accrued benefits; a 20 percent increase of all costs; a 20 percent decrease of all benefits; and a "stress test," with a 20 percent increase of all costs and a 20 percent decrease of all benefits. MCC calculated a best-case compact ERR of 30.2 percent and a worst-case compact ERR of 13.9 percent. MCC's public portrayal of the Vanuatu compact's projected effects on per capita income and on GDP suggest greater impact than its analysis supports. In addition, MCC's portrayal of the compact's projected impact on poverty does not identify the proportion of benefits that will accrue to the rural poor. Impact on per capita income. In the compact and the congressional notification, MCC states that the transportation infrastructure project is expected to increase "average income per capita (in real terms) by approximately $200, or 15 percent of current income per capita, by 2010." MCC's investment memo states that the compact will cause per capita income to increase by $488, or 37 percent, by 2015. These statements suggest that as a result of the program, average incomes in Vanuatu will be 15 percent higher in 2010 and 37 percent higher in 2015 than they would be without the compact. However, MCC's underlying data show that these percentages represent the sum of increases from per capita income in 2005 that MCC projects for each year. For example, according to MCC's data, Vanuatu's per capita income in a given year between 2006 and 2010 will range from about 2 percent to almost 4 percent higher than in 2005; in its statements, MCC sums these percentages as 15 percent without stating that this percentage is a cumulative increase from 2005. Our analysis of MCC's data shows that actual gains in per capita income, relative to income in 2005, would be $51, or 3.9 percent, in 2010 and $61, or 4.6 percent, in 2015 (see fig. 5). Figure 6 further illustrates MCC's methodology in projecting the compact's impact on per capita income levels for 2010 and 2015. Impact on GDP. Like its portrayal of the projected impact on per capita income, MCC's portrayal of the projected impact on GDP is not supported by the underlying data. In the compact and the 2006 congressional notification, MCC states that the compact will have a transformational effect on Vanuatu's economy, causing GDP to "increase by an additional 3 percent a year." Given the GDP growth rate of about 3 percent that MCC expects in Vanuatu without the compact, MCC's statement of a transformational effect suggests that the GDP growth rate will rise to about 6 percent. However, MCC's underlying data show that although Vanuatu's GDP growth rate will rise to about 6 percent in 2007, in subsequent years the GDP growth rate will revert to roughly the rate MCC assumes would occur without the compact, approximately 3 percent (see fig. 7). Although MCC's data show that the compact will result in a higher level (i.e., dollar value) of GDP, the data do not show a transformational increase to the GDP growth rate. Impact on poverty. MCC's portrayal of the compact's projected impact on poverty does not identify the proportion of the financial benefits that will accrue to the rural poor. In the compact and the congressional notification, MCC states that the program is expected to benefit "approximately 65,000 poor, rural inhabitants living nearby and using the roads to access markets and social services." In its underlying documentation, MCC expects 57 percent of the monetary benefits to accrue to other beneficiaries, including expatriate tourism services providers, transport providers, government, and local businesses; 43 percent is expected to go to the local population, which MCC defines as "local producers, local consumers and inhabitants of remote communities" (see fig. 8). However, MCC does not establish the proportion of local- population benefits that will go to the 65,000 poor, rural beneficiaries. Our analysis shows that risks related to construction costs, timing of benefits, project maintenance, induced benefits, and efficiency gains may lessen the Vanuatu compact's projected impact on poverty reduction and economic growth. Accounting for these risks could reduce the overall compact ERR. Construction costs. Although MCC considered the risk of construction cost increases, the contingencies used in its calculations may not be sufficient to cover actual construction costs. Cost estimate documentation for 5 of MCC's 11 construction projects shows that these estimates include design contingencies of 20 percent. However, cost overruns of more than 20 percent occur in many transportation projects, and as MCC's analysis notes, the risk of excessive cost overruns is significant in a small country such as Vanuatu. Any construction cost overrun must be made up within the Vanuatu compact budget by reducing the scope, and therefore the benefits, of the compact projects; reduced project benefits would in turn reduce the compact's ERR and effects on per capita income and GDP. Timing of benefits. Although MCC's analysis assumes compact benefits from 2008 or 2009--shortly after the end of project construction--we found that benefits are likely to accrue more slowly. Our document review and discussions with tourism services providers and agricultural and timber producers suggest that these businesses will likely react gradually to any increased market opportunities resulting from MCC's projects, in part because of constraints to expanding economic activity. In addition, MCC assumes that all construction spending will occur in the first year, instead of phasing the benefits from this spending over the multiyear construction schedule. Project maintenance. Uncertainty about the maintenance of completed transportation infrastructure projects after 2011 may affect the compact's projected benefits. Vanuatu's record of road maintenance is poor. According to World Bank and Asian Development Bank officials, continuing donor involvement is needed to ensure the maintenance and sustainability of completed projects. However, although MCC has budgeted $6.2 million for institutional strengthening of the Vanuatu PWD, MCC has no means of ensuring the maintenance of completed projects after the compact expires in 2011; the Millennium Challenge Act limits compacts to 5 years. Poor maintenance performance will reduce the benefits projected in the MCC compact. Induced benefits. The compact's induced benefits depend on the response of Vanuatu tourism providers and agricultural producers. However, constraints affecting these economic sectors may prevent the sector from expanding as MCC projects. Limited response to the compact by tourism providers and agricultural producers would have a significant impact on compact benefits. Efficiency gains. MCC counts efficiency gains--such as time saved because of better roads--as compact benefits. However, although efficiency gains could improve social welfare, they may not lead to changes in per capita income or GDP or be directly measurable as net additions to the economy. Accounting for these risks could reduce the overall compact ERR from 24.2 percent, as projected by MCC, to between 5.5 percent and 16.5 percent (see table 1). MCC's public portrayal of the Vanuatu compact's projected benefits-- particularly the effect on per capita income--suggests a greater impact than MCC's underlying data and analysis support and can be understood only by reviewing source documents and spreadsheets that are not publicly available. As a result, MCC's statements may foster unrealistic expectations of the compact's impact in Vanuatu. For example, by suggesting that per capita incomes will increase so quickly, MCC suggests that its compact will produce sustainable growth that other donors to Vanuatu have not been able to achieve. The gaps between MCC's statements about, and underlying analysis of, the Vanuatu compact also raise questions about other MCC compacts' projections of a transformational impact on country economies or economic sectors. Without accurate portrayals of its compacts' projected benefits, the extent to which MCC's compacts are likely to further its goals of poverty reduction and economic growth cannot be accurately evaluated. In addition, the economic analysis underlying MCC's statements does not reflect the time required to improve Vanuatu's transportation infrastructure and for the economy to respond and does not fully account for other risks that could substantially reduce compact benefits. In our report, we recommend that the CEO of MCC take the following actions: revise the public reporting of the Vanuatu compact's projected impact to clearly represent the underlying data and analysis; assess whether similar statements in other compacts accurately reflect the underlying data and analysis; and improve its economic analysis by phasing the costs and benefits in compact ERR calculations and by more fully accounting for risks such as those related to continuing maintenance, induced benefits, and monetized efficiency gains as part of sensitivity analysis. In comments on a draft of our report, MCC did not directly acknowledge our recommendations. MCC acknowledged that its use of projected cumulative compact impact on income and growth was misleading but asserted that it had no intention to mislead and that its portrayal of projected compact benefits was factually correct. MCC questioned our finding that its underlying data and analysis do not support its portrayal of compact benefits and our characterization of the program's risks. (See app. VI of our report for MCC comments and our response.) Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact me at (202) 512-3149 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. In addition to the person named above, Emil Friberg, Jr. (Assistant Director), Gergana Danailova-Trainor, Reid Lowe, Angie Nichols-Friedman, Michael Simon, and Seyda Wentworth made key contributions to this statement. Also, David Dornisch, Etana Finkler, Ernie Jackson, and Tom McCool provided technical assistance. 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In January 2004, Congress established the Millennium Challenge Corporation (MCC) for foreign assistance. Congress has appropriated almost $6 billion to MCC. As of March 2007, MCC had signed almost $3 billion in compacts with 11 countries, including a 5-year, $65.7 million compact with Vanuatu. MCC states that the Vanuatu compact will have a transformational effect on the country's economy, increasing per capita income and GDP and benefiting 65,000 poor, rural people. This testimony summarizes a July 2007 report (GAO-07-909) examining (1) MCC's methods of projecting economic benefits, (2) MCC's portrayal and analysis of the projected benefits, and (3) risks that may affect the compact's impact. To address these objectives, GAO reviewed MCC's analyses and met with officials and business owners in Vanuatu as well as with other donors. In its July 2007 report, GAO recommended that the Chief Executive Officer of MCC revise the public reporting of the Vanuatu compact's projected impact; assess whether similar reporting in other compacts accurately reflects underlying analyses; and improve its economic analyses by more fully accounting for risks to project benefits. MCC did not directly address GAO's recommendations but commented that it had not intended to make misleading statements and that its portrayal of projected results was factual and consistent with underlying data. MCC projects that the Vanuatu compact's transportation infrastructure projects will provide direct benefits such as reduced transportation costs and induced benefits from growth in tourism and agriculture. MCC estimated the costs and benefits over 20 years, with benefits beginning in full in 2008 or 2009 and growing each year, and it counted poor, rural beneficiaries by defining the area where benefits were likely to accrue. Using projected benefits and costs, MCC calculated the compact's economic rate of return (ERR) and its effects on Vanuatu's gross domestic product (GDP) and per capita income. MCC's portrayal of the projected impact does not reflect its underlying data. MCC states that per capita income will increase by approximately $200, or 15 percent, by 2010 and by $488, or 37 percent, by 2015. However, MCC's underlying data show that these figures represent the sum of individual years' gains in per capita income relative to 2005 and that actual gains will be $51, or 3.9 percent, in 2010 and $61, or 4.6 percent, in 2015. MCC also states that GDP will increase by an additional 3 percent a year, but its data show that after GDP growth of 6 percent in 2007, the economy's growth will continue at about 3 percent, as it would without the compact. MCC states that the compact will benefit approximately 65,000 poor, rural inhabitants, but this statement does not identify the financial benefits that accrue to the rural poor or reflect its own analysis that 57 percent of benefits go to others.We identified five key risks that could affect the compact's projected impacts. (1) Cost estimate contingencies may not be sufficient to cover project overruns. (2) Compact benefits will likely accrue more slowly than MCC projected. (3) Benefit estimates assume continued maintenance, but MCC's ability to ensure maintenance will end in 2011, and Vanuatu's maintenance record is poor. (4) Induced benefits depend on businesses' and residents' response to new opportunities. (5) Efficiency gains, such as time saved in transit, may not increase per capita income. Our analysis of these areas of risk illustrates the extent that MCC's projections are dependent on assumptions of immediate realization of benefits, long-term maintenance, realization of induced benefits, and benefits from efficiency gains.
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In its July 1999 Morton decision, the U.S. Court of Appeals for Veterans Claims ruled that the VA did not have a duty to assist in developing claims unless they were "well-grounded" as required by federal statute. Prior to this court decision, VA policy was to assist claimants in developing a well- grounded claim. This practice, however, was not required by law, and VBA regional offices varied in the amount of assistance they provided. The VCAA (P.L. 106-475), commonly referred to as the "duty to assist" law, was enacted in November 2000. This law repealed the requirement that claims be well-grounded and it obligated VA to assist a claimant in obtaining evidence that is necessary to establish eligibility for the benefit being sought. VCAA requires VBA to take specific steps to assist claimants once they have filed a complete claim for benefits. Specifically, the VCAA requires VBA to: (1) notify claimants of the information necessary to complete the application; (2) indicate what information not previously provided is needed to prove the claim, and distinguish between the portion of the information for which the claimant will be responsible and the portion for which VA will be responsible; (3) make reasonable efforts to assist claimants in obtaining evidence to substantiate claimants' eligibility for benefits, including relevant records; and (4) inform claimants when relevant records are unable to be obtained. The VCAA also allowed for the re-adjudication of claims denied as not well-grounded between the date of the Morton decision, July 14, 1999, and the effective date of the VCAA, November 9, 2000. The act stated that this rework could be done at the veteran's request or on VBA's initiative. VBA decided to review all such claims and perform any necessary work, such as sending additional notifications or making new rating decisions. The compensation program pays monthly benefits to veterans who have service-connected disabilities (injuries or diseases incurred or aggravated while on active military duty). The pension program pays monthly benefits based on financial need to wartime veterans who have low incomes and are permanently and totally disabled for reasons not service-connected.VA expects to provide about $25 billion in compensation and pension benefits in fiscal year 2002 to over 3 million veterans and their dependents and survivors. Disability compensation benefits are graduated in 10 percent increments based on the degree of disability from 0 percent to 100 percent. Eligibility and priority for other VA benefits and services such as health care and vocational rehabilitation are affected by these VA disability ratings. Basic monthly payments range from $103 for 10 percent disability to $2,163 for 100 percent disability. Generally, veterans do not receive compensation for disabilities rated at 0 percent. About 65 percent of veterans receiving disability compensation have disabilities rated at 30 percent or lower; about 8 percent have disabilities rated at 100 percent. The most common impairments for veterans who began receiving compensation in fiscal year 2000 were skeletal conditions; tinnitus; auditory acuity impairment rated at 0 percent; arthritis due to trauma; scars; and post-traumatic stress disorder. Veterans may submit claims to any one of VBA's 57 regional offices. To develop veterans' claims, veterans service representatives at the regional offices request and obtain the necessary information to evaluate the claims. This includes veterans' military service records; medical examinations and treatment records from VA medical facilities; and treatment records from private providers. Once claims are developed and "ready to rate," rating veterans service representatives (hereafter referred to as rating specialists) evaluate the claimed disabilities and assign ratings based on degree of disability. Veterans with multiple disabilities receive a single, composite rating. For veterans claiming pension eligibility, the regional office determines if the veteran served in a period of war, is permanently and totally disabled for reasons not service-connected, and meets the income thresholds for eligibility. If a veteran disagrees with the regional office's decision, he or she can ask for a review of that decision or appeal to VA's Board of Veterans' Appeals (BVA). BVA makes the final decision on such appeals and can grant benefits, deny benefits, or remand (return) the case to the regional office for further development and reconsideration. After reconsidering a remanded decision, the regional office either grants the claim or returns it to BVA for a final VA decision. If the veteran disagrees with BVA's decision, he or she may appeal to the U.S. Court of Appeals for Veterans Claims. If either the veteran or VA disagrees with the court's decision, they may appeal to the U.S. Court of Appeals for the Federal Circuit. In fiscal year 1999, VBA implemented the Systematic Technical Accuracy Review (STAR) system to measure the accuracy of its claims processing for its rating-related work. Under the STAR system, VBA considers a claim to have been processed accurately if the regional office determines basic eligibility correctly, obtains all required medical and nonmedical documentary evidence, decides service-connection correctly, gives the correct rating to each impairment, determines the correct payment amount, and properly notifies the veteran of the outcome of his or her claim. If a claim has any errors in any of these areas, VBA counts the entire claim as incorrect for accuracy rate computation purposes. For the nation as a whole, VBA reported an accuracy rate of 81 percent for fiscal year 2001. VBA's goal for fiscal year 2002 is 85 percent, and its strategic goal is to achieve a national accuracy rate of 96 percent by fiscal year 2006. Beginning with fiscal year 2002, VBA has revised its accuracy measure to focus on whether regional office decisions to grant or deny are correct. Prior to this change, VA's accuracy rate included whether the decision to grant or deny claims were correct and also included errors stemming from procedural and technical issues, such as failure to include all the documentation in the case file. This revision to VBA's quality assurance program for compensation claims processing is consistent with recommendations made by the VA Secretary's 2001 Claims Processing Task Force. Issues related to benefit entitlement decisions would be the basis for future revision based on clear and unmistakable error or would result in a BVA remand if not otherwise corrected during the appeal process. To implement the VCAA, VBA has issued guidance, obtained and responded to regional office staff questions, conducted an informal review of cases, and issued clarifying instructions based on the questions it received and the results of its review. To better hold regional offices accountable for proper implementation, VBA revised its quality assurance system to reflect the VCAA requirements. However, recent quality reviews show that VCAA requirements are not always being met. Though VBA does not know the underlying reason why regional offices may not be meeting VCAA requirements, it has attempted to correct the implementation deficiencies by requiring regional office managers to certify that staff had read and understand VCAA guidance. On October 19, 2000, in anticipation of enactment of the VCAA, VBA instructed regional offices to stop denying claims as not well-grounded under the Morton decision. On November 17, 2000--8 days after the VCAA's enactment--VBA issued its first VCAA implementation guidance and rescinded guidance on implementing Morton. This guidance was provided pending the revision of VA's adjudication regulations to conform with the VCAA. To clarify and supplement its initial guidance, VBA issued several other guidance letters through February 2001. VBA supplemented this written guidance with teleconferences and questions and answers posted on VBA's Intranet site. This guidance covered the development and adjudication of claims (1) denied as not well-grounded under Morton, (2) pending when the VCAA was enacted, and (3) received after the law was enacted. The guidance also covered the handling of appealed claims. In February 2001, VBA issued guidance for the review of about 98,000 claims that regional offices had previously denied as not well-grounded under Morton. VBA required regional offices to complete reviews of these claims by October 1, 2001; it later extended this deadline to December 31, 2001. Where a new decision was required, regional offices were to follow the VCAA guidance on notifications to veterans and claims development. This included sending "duty to assist" letters to veterans requesting any additional evidence the veterans may have to substantiate their claims; developing any previously or newly identified evidence; obtaining medical examinations, if appropriate; and making a new rating decision. If the veteran did not respond to the regional office's request for information within 60 days, VBA could deny the claim again for lack of evidence. As of the end of March 2002, VBA has completed about 81 percent of its reviews. The areas in which VBA clarified and supplemented its initial guidance included: (1) requesting VHA medical examinations and medical opinions; (2) pursuing records from federal agencies and private providers; and (3) notifying veterans, including requests for evidence, and notifications that VBA was unable to obtain identified evidence. For example, in response to staff questions about the criteria for scheduling medical exams and requesting medical opinions, VBA advised that medical exams should be scheduled unless it is absolutely clear that no relation exists between the veteran's current disability and military service. Also, in response to staff questions on what to do if federal and private provider records are unavailable, VBA advised that regional offices needed positive confirmation that federal records do not exist. Regional offices also asked if they needed to develop all claims denied under Morton as not well- grounded or simply re-rate the claims without performing additional development. VBA responded that for all such claims that required readjudication, VBA must develop the claim in accordance with the VCAA's requirements. Furthermore, VBA provided templates for VCAA development letters. Veterans Service Organization (VSO) officials we spoke with at the regional offices we visited expressed concerns about the clarity and necessity of VCAA pre-decision notification letters. They said that some veterans did not understand why they were receiving the letters-- particularly if they had already responded to previous VBA letters requesting evidence. Also, the officials said that the letters were not always clear and were often not tailored to the circumstances of individual veterans' claims. We reported in April 2002 that 43 percent of our sample of development letters did not clearly explain the actions that claimants were to take to support their claims. We recommended that VBA eliminate deficiencies in its development letter to clarify the actions that the claimant should take to substantiate a claim. In response to our recommendations, VBA agreed to revise its development letter. In an effort to assess the impact of VCAA on the outcome of claims and to assess regional office compliance with VCAA, VBA conducted an informal review in the summer and fall of 2001 of claims that had been denied as not well-grounded under Morton. VBA found that its VCAA implementation instructions had not been followed in some of the cases it sampled. In particular, the letters notifying the veteran of necessary evidence were not being sent in about 20 percent of the cases. As a result of this study, VBA issued instructions in August 2001 that emphasized the need to follow the previous written guidance, particularly the need to fully and completely develop claims. This included providing notice to the veteran of any additional evidence needed, pursuing records from federal agencies and private providers, and obtaining medical examinations when needed to make a decision on the claim. VBA noted that failure to take these actions would cause STAR reviewers to find the claim to be in error and could serve as a basis for BVA to remand the claim, if appealed. To ensure accountability by regional offices and their claims processing staffs for VCAA compliance, VBA has incorporated the requirements into its STAR quality assurance review checklists. These revised checklists-- which began to be used to review claims decisions made in October 2001--include two specific VCAA-related questions: (1) Was VCAA pre- decision notice provided and adequate? and (2) Does the record show VCAA compliant development to obtain all indicated evidence (including a VA exam, if required) prior to deciding the claim? Early fiscal year 2002 data show that benefit entitlement errors are still occurring because of VCAA implementation errors. Of the STAR sample of 830 rating-related decisions made from October 2001 through January 2002, the overall accuracy rate--under VBA's new standard, which focuses on the accuracy of the decision on entitlement to benefits--was 71 percent. VBA found that about half (142 of 288) of the entitlement decision errors involved noncompliance with VBA's guidance on the VCAA. Of these errors, 60 involved a pre-decision notice that was not adequate or not provided at all and 82 showed that not all indicated evidence was obtained as required. VBA considered the error rate for VCAA compliance to be significant enough that in April 2002 it asked regional offices to "retrain" staff on the VCAA guidance and certify that the staff have read and understand the guidance, by the end of April 2002. As of May 7, 2002, 56 of the 57 offices had certified that their staff had read and understand the guidance. Although ensuring that staff have read and understand the guidance is a positive step, this may not be enough. VBA had already issued a series of implementing guidance letters to answer staff questions and to reinforce guidance prior to the STAR review. However, the STAR review showed that regional offices continued to experience problems with implementation. VBA has not determined the reasons why the regional offices are not properly implementing the VCAA. VBA is managing the slowdown in case processing by attempting to significantly increase regional offices' rating decision production. VCAA contributed to the slowdown in claims processing because VBA reworked many claims based on the VCAA's new requirements and because new claims must also be processed under these more time-consuming requirements. VBA has set production and inventory goals for fiscal year 2002, which it believes will put it on track to reducing the average time to process claims to 100 days by the end of fiscal year 2003. Although VBA has made some progress in increasing production, it faces challenges in meeting these production and inventory goals. Monthly production will need to significantly increase in the second half of the fiscal year if VBA is to meet its goal for the year. Even if VBA achieves its production and inventory goals, it still faces additional challenges to achieving its end of fiscal year 2003 goal of processing claims in an average of 100 days. VBA attributes a significant part of the increase in pending claims inventory in fiscal year 2001, and the associated increase in claims processing times, to the VCAA's impact. According to VBA, the VCAA added to the inventory because of the need to rework many claims. VBA also believes that VCAA will lengthen the processing time of new claims, but could not quantify the extent. Several other factors, such as the addition of diabetes as a presumptive service-connected disability for veterans who served in Vietnam, the implementation of VBA's new claims processing software, and the hiring and training of a large number of staff, also impacted VBA's workload and production in fiscal year 2001. As shown in table 1, VBA received about 95,000 more claims and produced about 120,000 fewer claims decisions in fiscal year 2001 than in the prior fiscal year. The VCAA contributed to VBA receiving more claims in fiscal year 2001 than the prior fiscal year. The VCAA required VA, if requested by a veteran, to readjudicate claims that were denied as not well-grounded under the Morton decision. It also allowed VA to readjudicate these claims on its own initiative. VBA undertook a review of about 98,000 veterans' disability claims that it had identified as previously denied as not well grounded. In addition, VBA had an inventory of about 244,000 rating-related claims pending when the VCAA was enacted in November 2000. VBA decided to review these claims to ensure that VCAA requirements were met. VBA had completed about 64,000 of these claims as of April 29, 2002. In addition to the VCAA, VBA has cited other factors as contributing to the increase in its claims inventory. For example, the recent addition of diabetes as a presumptive service-connected disability for veterans who served in Vietnam has caused an influx of new disability claims. By the end of fiscal year 2003, VBA expects to have received 197,500 diabetes claims. The addition of new claims processing staff during fiscal year 2001 has also temporarily hampered the productivity of experienced staff. According to officials at some of the regional offices we visited, experienced rating specialists had less time to spend on rating work because they were helping train and mentor new rating specialists. The learning curve and implementation difficulties with VBA's new automated rating preparation system (Rating Board Automation 2000) also hampered regional offices' productivity. Furthermore, the VCAA has significantly impacted VBA's work processes. According to VA officials, the most significant change is the requirement to fully develop claims even in the absence of evidence showing a current disability or a link to military service. Under Morton, if a veteran could not provide enough information to show that the claim was plausible, VBA could deny the claim as not well-grounded. These claims must now be developed and evaluated under the expanded procedures required by the VCAA. For example, officials at one regional office we visited noted that they are requesting more medical examinations than they did before the VCAA was enacted. Also, time can be added in waiting for evidence. For example, VBA must make repeated efforts to obtain evidence from federal agencies--stopping only when the agency certifies that the record does not exist, or VBA determines that further efforts to obtain the evidence would be futile. VBA is addressing its claims processing slowdown by taking steps to increase production and reduce its claims inventory. VBA believes that it will be able to reduce its inventory to a level that will enable it to process cases in an average of 100 days by the end of fiscal year 2003. Specifically, VBA has established an end of fiscal year 2002 inventory goal of about 316,000 claims. To meet this goal, VBA plans to complete about 839,000 rating-related claims during the fiscal year. The regional offices are expected to complete about 792,000 of these claims. This level of production is greater than VBA has achieved in any of the last 5 fiscal years--as shown in table 1, VBA's peak production was about 702,000 claims in fiscal year 1997. However, VBA has significantly more rating staff now than it did in any of the previous 5 fiscal years. VBA's rating staff has increased by about 50 percent since fiscal year 1997 to 1,753. To reach VBA's fiscal year 2002 production goal, rating specialists will need to complete an average of about 2.5 cases per day--a level VBA achieved in fiscal year 1999. VBA expects this production level to enable it to achieve its end-of-year inventory goal of about 316,000 rating-related claims, which VBA believes would put the agency on track to meet the Secretary's inventory goal of 250,000 cases by the end of fiscal year 2003. To meet its production goal, in December 2001, VBA allocated its fiscal year 2002 national production target to its regional offices based on each regional office's capacity to produce rating-related claims given each office's number of rating staff and their experience levels. For example, an office with 5 percent of the national production capacity received 5 percent of the national production target. In February 2002, VBA revised how it allocated the monthly production targets to its regional offices based on input from regional offices regarding their current staffing levels. In allocating the target, VBA considered each regional office's fiscal year 2001 claims receipt levels, production capacity, and actual production in the first quarter of fiscal year 2002. In March 2001, VBA allowed regional offices to suspend or alter several VBA initiatives in order to increase production. Offices were allowed to revert back to an early version of VBA's Rating Board Automation (RBA) software for ratings where the new software (RBA 2000) was significantly impeding productivity. In an effort to increase rating decision output while VBA continued its training of new rating specialists, offices were directed to have their decision review officers--who handle veterans' appeals of regional office decisions--spend half their time rating claims. Also, offices were given latitude to vary from VBA's case management principles, under which claims processing teams handle most types of claims, and realign staff to perform specialized processing of certain types of claims. To hold regional office managers accountable, VBA incorporated specific regional office production goals into regional office performance standards. For fiscal year 2002, regional office directors are expected to meet their annual production target or their monthly targets in 9 out of 12 months. Generally, the combined monthly targets for the regional offices increase as the year progresses and as the many new rating specialists hired in previous years gain experience and become fully proficient claims processors. At the same time as it is expecting regional offices to complete more claims, VBA has implemented two initiatives to expedite claim decisions and supplement regional office capacity. In October 2001, VBA established the Tiger Team at its Cleveland Regional Office to expedite decisions on claims by veterans aged 70 and older and clear from the inventory claims that have been pending for over a year. The Tiger Team relies on 17 experienced rating specialists, complemented by a staff of veterans service representatives. The Tiger Team also relies on expedited access to evidence needed to complete claims development. For example, VA and the National Archives and Records Administration completed a Memorandum of Understanding in October 2001 to expedite Tiger Team requests for service records at the National Personnel Records Center (NPRC) in St. Louis, Missouri. Also, VBA and the Veterans Health Administration (VHA) established procedures and timeframes for expediting Tiger Team requests for medical evidence and examinations. As of the end of May 2002, the Tiger Team had completed about 10,000 claims requested from 49 regional offices. From December 2001 through May 2002, the team's production exceeded its goal of 1,328 decisions per month. According to Tiger Team officials, its experienced rating specialists were averaging about 4 completed ratings per day. Officials added that in the short term, completing old claims might increase VBA's average time to complete decisions. VBA also established nine Resource Centers to supplement regional offices' rating capacity. The Resource Centers receive claims from nearby regional offices that are "ready to rate," but which are awaiting decisions. From October 2001 through May 2002, the Resource Centers had completed about 22,000 ratings. The Tiger Team and Resource Centers are expected to complete 47,000 claim decisions in fiscal year 2002; as of the end of May 2002, they had completed about 32,000 decisions. VBA's ability to achieve this increase in production, and reduction in inventory, depends on (1) increasing productivity of new claims processing staff over the second half of fiscal year 2002 and (2) receipts being consistent with projected levels. VBA's monthly goals for fiscal year 2002 assume that its large number of new rating specialists will become more productive, with additional experience and training, as the fiscal year progresses. However, VBA lacks historical data on the productivity of staff by experience level. Meanwhile, receipts of new claims must not exceed VBA's projections. VBA received about 359,000 rating-related claims--about 3,000 fewer than projected--in the first half of fiscal year 2002. However, an unexpected surge in receipts could mean that, even if VBA achieved its production goal for the fiscal year, it might not meet its inventory goal. External factors beyond VBA's control, such as the decisions made by the U.S. Court of Appeals for Veterans Claims, could affect VBA's workload and its ability to make sustained improvements in performance. As stated in our April 2002 testimony, even if VBA meets its production and inventory goals, it still faces challenges in meeting its 100-day goal. Improving timeliness depends on more than increasing production and reducing inventory. VBA continues to face some of the same challenges that we identified in the past that can lengthen claims processing times. For example, VBA needs to continue to make progress in reducing delays in obtaining evidence, ensuring that it will have enough well-trained staff in the long term, and implementing information systems to help improve claims processing productivity. Figure 1 shows that VBA will need to cut average processing time from 224 days to 100 days by the end of fiscal year 2003. This is less than half its fiscal year 2002 goal and 65 days less than its fiscal year 2003 goal. VBA officials noted that the link between increasing production and improving timeliness is not clear. Thus, the officials could not show how meeting VBA's production and inventory goals would result in a specific level of timeliness improvement. Given this uncertainty, it is possible that VBA could meet its fiscal years 2002 and 2003 production and inventory goals but not meet the 100-day goal. To its credit, VBA has taken a number of steps over the last year and a half to provide guidance to its regional offices on the proper application of the VCAA requirements for both new and pending veterans' claims. However, despite VBA's efforts, results from VBA's quality assurance reviews indicate a decrease in rating accuracy due to regional office noncompliance with VCAA requirements. In an effort to improve rating accuracy, VBA recently instructed regional office management to ensure that all claims processing employees read and understand VCCA-related guidance. But, VBA may need to do more than verify that claims processors have read and understood the VBA guidance. In the past, we have noted that VBA needs better analysis of case-specific data to identify the root causes of claims processing problems and target corrective actions. If VCAA-related accuracy problems continue, VBA will need to determine the underlying causes for the improper implementation as part of its continuing efforts to monitor proper implementation of the VCAA. Without proper implementation of VCAA, some veterans may not receive the benefits to which they are entitled by law. If VBA continues to experience significant problems with implementing the VCAA, we recommend that the Secretary of Veterans Affairs, direct the Under Secretary for Benefits to identify the causes of the VCAA-related errors so that more specific corrective actions can be taken. We received written comments on a draft of this report from VA (see app. I). In its comments, VA concurred with our recommendation that if VBA continues to experience problems with implementing the VCAA, VBA identify the causes of the VCAA-related errors so that more specific corrective actions can be taken. We will send copies of this report to the Secretary of the Department of Veterans Affairs, appropriate congressional committees, and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please call me at (202) 512-7101 or Irene Chu, Assistant Director, at (202) 512-7102. In addition to those named previously, Steve Morris, Corinna Nicolaou, Martin Scire, and Greg Whitney made key contributions to this report.
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The Veterans Claims Assistance Act of 2000 was passed in response to concerns expressed by veterans, veterans service organizations, and Congress over a 1999 decision of the U.S. Court of Appeals for Veterans Claims that held that the VA did not have a duty to assist veterans in developing their claims unless they were "well-grounded." The Veterans' Benefits Administration (VBA) has taken a number of steps, including issuing guidance, revising and supplementing this guidance based on questions raised by regional offices, and reinforcing the guidance based on the results of its accuracy reviews. Despite these efforts, VBA has found problems with consistent regional office compliance with the law. While taking steps to implement the act, VBA is also focusing on significantly increasing production and reducing the claims inventory to manage the slowdown in case processing. In fiscal year 2002, VBA plans to complete 839,000 claims to reduce its inventory to 316,000 claims.
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The DATA Act requires OMB and Treasury to establish government-wide financial data standards for the specific items to be reported under the act. These specific items are generally referred to as "data elements." The standards for these data elements consist of two distinct but related components as described in the text box: Definitions which describe what is included in the element with the aim of ensuring that information will be consistent and comparable. Technical specifications on the format, structure, tagging, and transmission of each data element. OMB and Treasury have developed a data exchange, also known as a technical schema, which is intended to provide a comprehensive view of the data definitions and their relationships to one another. OMB and Treasury have proposed standardizing 57 data elements for reporting under the act. They released 15 elements in May 2015, a year after the passage of the act, and have since released 12 more. Eight of these were new elements required under the DATA Act; the balance of the first 15 data elements were required under the Federal Funding Accountability and Transparency Act of 2006 (FFATA). Figure 1 provides a list of these data elements and their roll-out schedule. Officials told us that they expect to complete the process by the end of the summer. The DATA Act requires the establishment of standards that produce consistent and comparable data across programs, agencies, and time. We reviewed the first set of 15 data standards finalized by OMB and Treasury in May 2015. We found that most of the elements adhere to the definitions used in widely accepted government standards such as OMB Circular A-11 and the Census Bureau's North American Industry Classification System. For example, as required by the DATA Act, OMB and Treasury provided a standard for "program activity" and finalized the definition as "a specific activity or project listed in the program and financing schedules of the annual budget of the United States Government." Program activities are a long-standing reporting structure in the federal budget and are intended to provide a meaningful representation of the operations funded by a specific budget account. Therefore, program activities can be mission or program focused. For example, the Federal Emergency Management Agency's program activities include "Response," "Recovery," and "Mitigation," and the Environmental Protection Agency's program activities include "Clean and Safe Water" and "Healthy Communities and Ecosystems." Program activities can also be organized by type of personnel such as Officers, Enlisted, and Cadets, in the Army's Military Personnel Account, or by organizational unit such as the National Cancer Institute, and National Heart, Lung, and Blood Institute in the National Institutes of Health. As the examples illustrate, OMB and Treasury will need to build on the program activity structure and provide agencies with guidance if they are to meet the stated purpose of the DATA Act to "link federal contract, loan, and grant spending information to federal programs to enable taxpayers and policy makers to track federal spending more effectively." To underscore the differences between program activities and programs, our September 2005 Glossary of Terms Used in the Federal Budget Process defines a program as "an organized set of activities directed toward a common purpose or goal that an agency undertakes or proposes to carry out its responsibilities." The GPRA Modernization Act of 2010 (GPRAMA), among other things, requires OMB to make publicly available, on a central government-wide website, a list of all federal programs identified by agencies. For each program, the agency is to provide to OMB for publication an identification of how the agency defines the term "program," consistent with OMB guidance, including program activities that were aggregated, disaggregated, or consolidated to be considered a program by the agency; a description of the purposes of the program and how the program contributes to the agency's mission and goals; and an identification of funding for the current fiscal year and the previous 2 fiscal years. Effective implementation of both the DATA Act and GPRAMA's program inventory provisions, especially the ability to crosswalk spending data to individual programs, could provide vital information to assist federal decision makers in addressing significant challenges the government faces. As our annual reports on fragmentation, overlap, and duplication have highlighted, creating a comprehensive list of federal programs along with related funding and performance information is critical for identifying potential fragmentation, overlap, or duplication among federal programs or activities. The lack of such a list makes it difficult to determine the scope of the federal government's involvement in particular areas and the results it is achieving, and therefore, where action is needed to eliminate, reduce, or better manage fragmentation, overlap, or duplication. Until these steps are taken and linked to the appropriate program activity data element, OMB and Treasury will be unable to provide a complete picture of spending by federal programs as required under the act. Our recent work reviewing implementation of GPRAMA identified a number of challenges related to executive branch efforts to identify and define federal programs. OMB staff explained that a one-size-fits-all approach does not work well; agencies and their stakeholders use the term "program" in different ways because agencies achieve their missions through different programmatic approaches. Therefore, OMB issued guidance allowing agencies flexibility to define their programs using different approaches, but within a broad definition of what constitutes a program--a set of related activities directed toward a common purpose or goal. Not surprisingly, our October 2014 report reviewing implementation of GPRAMA's program inventory requirements showed that agencies did indeed use different approaches to define their programs. We reported that these differences limited the comparability of programs within and across agencies. We made related recommendations in our October 2014 report aimed at improving the completeness and comparability of the program inventory. In commenting on that report, OMB staff generally agreed with those recommendations. According to OMB staff, as of June 2015 they have not taken any actions to address these recommendations, because implementation of the program inventory requirements remains on hold as OMB determines how best to merge that effort with implementation of the DATA Act. One approach could be for OMB to explore ways to improve the comparability of program data by using tagging or similar approaches that allow users to search by key words or terms and combine elements based on the user's interests and needs. This merging could help ensure consistency in the reporting of related program-level spending information. As a result, we recommend the following: To ensure that federal program spending data are provided to the public in a transparent, useful, and timely manner, we recommend that the Director of OMB accelerate efforts to determine how best to merge DATA Act purposes and requirements with the GPRAMA requirement to produce a federal program inventory. The DATA Act requires Treasury, in consultation with OMB, to publish a report of funds made available to, or expended by, federal agencies and their components on USAspending.gov or an alternative system. Given that OMB has not yet provided an example of the form and content of the envisioned financial reporting under the DATA Act, it is difficult to determine at this point whether additional data standards and elements are needed. As Treasury and OMB continue establishing the DATA Act data standards and elements, linking them to established financial accounting and reporting processes will be important in helping ensure consistency and comparability of the information reported and could provide a means for determining data quality between new financial information reported under the DATA Act and information in audited agency financial statements. For example, certain data standards and elements used by agencies in reporting financial data in their audited Statement of Budgetary Resources may also be used to report certain agency budgetary data under the DATA Act. In addition, the DATA Act requires Treasury to include certain financial information similar to that reported in the Schedule of Spending, which is included in agency annual financial reports, as required by OMB Circular No. A-136, Financial Reporting Requirements. Therefore, established data standards and elements used by agencies in preparing this unaudited schedule could be used to report certain information under the DATA Act. Further, leveraging existing and establishing new controls over the data standards and elements--financial and non-financial--used in reporting under the DATA Act could help ensure data reliability. The DATA Act also requires OMB and Treasury to incorporate widely accepted common data standards and elements, to the extent reasonable and practicable, such as those developed and maintained by international standards-setting bodies and accounting standards organizations, in a machine-readable format. As OMB and Treasury move forward with establishing data standards, given their limited time and resources, they could benefit from leveraging existing international standards for digital reporting of financial, performance, risk, or compliance information. For example, the International Organization for Standardization (ISO) has developed data standards such as one that describes an internationally accepted way to represent dates and times which may help address the DATA Act requirement to establish a standard method of conveying a reporting period. The ISO also has a standard for a digital object identification system which may help address the DATA Act requirements to have a unique identifier and use a widely accepted, nonproprietary, searchable, platform-independent, machine-readable format. The use of such standards helps reduce uncertainty and confusion with organizations interpreting standards and reporting differently which could lead to inconsistent results and unreliable data. Treasury's draft technical schema is intended to standardize the way financial assistance, contract, and loan award data, as well as other financial data, will be collected and reported under the DATA Act. Toward that end, the technical schema describes, among other things, the standard format for data elements including their description, type, and length. We reviewed version 0.2 of the technical schema that was publicly Treasury officials said that they are testing this released in May 2015.schema and are continually revising it based on considerations of these tests as well as feedback they receive from stakeholders. In light of this, we shared the following potential issues with Treasury. Treasury developed a subset of the schema based on the U.S. Standard General Ledger, which provides a uniform chart of accounts and technical guidance for standardizing federal agency accounting of financial activity. We found that some of the data elements, as defined in the most recent draft version available for us to review, could allow for inconsistent information to be entered. For example, alphabetic characters could be entered into a data field that should only accept numeric data. This could, in turn, affect the proper reporting, reliability, and comparability of submitted data. Further, OMB and Treasury intended to fulfill a portion of their requirements by leveraging existing agency reporting. Going forward, the technical schema will need to describe enhancements or changes to current financial reporting. We also noted that the schema does not currently identify the computer markup language (i.e., standards for annotating or tagging information so that it can be transmitted over the Internet and readily interpreted by disparate computer systems) that agencies can use for communicating financial data standards. Treasury officials said they plan to address this issue in a forthcoming version of the schema, which they estimated would be publicly released by the end of the summer. We will continue to review additional versions of the schema and will share our views with Treasury and you. The DATA Act designates OMB and Treasury to lead government-wide implementation efforts. Toward that end, OMB and Treasury have established a governance framework that includes structures for both project management and data governance. At the top of this framework is an executive steering committee, which is responsible for setting overarching policy guidance and making key policy decisions affecting government-wide implementation of the act. The executive steering committee consists of two senior administration individuals: OMB's Controller and Treasury's Fiscal Assistant Secretary. The executive steering committee is supported by the Interagency Advisory Committee (IAC), which is responsible for providing recommendations to the steering committee related to DATA Act implementation. The IAC includes the chairs of various federal government-wide councils as well as other agency officials. In addition, the IAC members are responsible for updating their respective agencies and for providing leadership in implementing DATA Act requirements. As part of their plans for agency implementation, OMB and Treasury have asked federal agencies to identify a Senior Accountable Official and organize an agency-wide team to coordinate agency-level implementation activities. OMB and Treasury have made progress in developing a governance structure for government-wide implementation. However, a recent Treasury Office of the Inspector General (OIG) report raised a number of concerns with Treasury's project management practices that the OIG believes could hinder the effective implementation of the act if not addressed.management documents designed to track the implementation of significant DATA Act workstreams lacked several key attributes--such as project planning tools, progress metrics, and collaboration documentation--called for by project management best practices. Due to the complexities involved, OMB and Treasury are using a mix of both agile and traditional project management approaches to implement the DATA Act. Specifically, the Treasury OIG found that project However, the Treasury OIG found that project planning documents did not describe the different approaches being used for each workstream. The Treasury OIG recommended that Treasury's Fiscal Assistant Secretary strengthen project management over the DATA Act's implementation by defining the project management methodology being used for each significant workstream and ensuring that project management artifacts appropriate to those methodologies are adopted and maintained. Treasury agreed with the OIG findings and stated that it was taking corrective action in response, including a commitment to implementing a recognized agile development approach in an appropriate and disciplined manner for each workstream and improving documentation to identify when the agile approach is being used. Treasury OIG officials told us that they are continuing to monitor OMB and Treasury project management efforts and will report their audit findings on an ongoing basis. In coordination with the Treasury OIG, we will be monitoring OMB and Treasury's governance process as part of our ongoing work as well. OMB and Treasury have taken steps to establish a governance process for developing data standards. However, more effort is needed to build a data governance structure that not only addresses the initial development of the data standards but also provides a framework for adjudicating revisions, enforcing the standards, and maintaining the integrity of standards over time. One of the key responsibilities of the IAC is to provide support for the development of data standards. In this capacity, the IAC is responsible for developing white paper proposals and building consensus within members' respective communities for new standardized data elements that align with existing business practices across multiple reporting communities (e.g., grants, procurement, and financial reporting) that will be using the standards. OMB and Treasury officials told us that while they have established a process to develop data standards through the IAC, they have not yet instituted procedures for maintaining the integrity of the standards over time. According to these officials, they are taking an iterative approach to developing additional procedures for data governance, similar to their overall approach for managing the implementation of the act. Industry and technology councils, and domestic and international standards-setting organizations, endorse the establishment and use of governance structures to oversee the development and implementation of standards. While there are a number of governance models, many of them promote a set of common principles that includes clear policies and procedures for broad-based participation from a cross-section of stakeholders for managing the standard-setting process and for controlling the integrity of established standards. Standards-setting organizations, such as the Software Engineering Institute (SEI), define data governance as a set of institutionalized policies and processes that can help ensure the integrity of data standards over time. According to these entities, a data governance structure should have a defined focus, such as monitoring policies and standards, monitoring and reporting on data quality, and ensuring the consistency of the standards across potentially different data definitions. These organizations also suggest that for a data governance structure to be successful, an organization needs clear processes and methods to govern the data that can be standardized, documented, and repeatable. Ideally, this structure could include processes for evaluating, coordinating, approving, and implementing changes in standards from the initial concept through design, implementation, testing, and release; maintaining established standards; and gaining a reasonable degree of agreement from stakeholders. Going forward, in the absence of a clear set of institutionalized policies and processes for developing standards and for adjudicating necessary changes, the ability to sustain progress and maintain the integrity of established data standards may be jeopardized as priorities and data standards shift over time. As a result, we are recommending the following action: To ensure that the integrity of data standards is maintained over time, we recommend that the Director of OMB, in collaboration with the Secretary of the Treasury, establish a set of clear policies and processes for developing and maintaining data standards that are consistent with leading practices for data governance. One component of good data governance involves establishing a process for consulting with and obtaining agreement from stakeholders. In fact, the DATA Act requires OMB and Treasury to consult with public and private stakeholders when establishing data standards. Recognizing the importance of engaging on data standards, OMB and Treasury have taken the following steps: convened a town hall meeting on data transparency in late September 2014 to, in part, allow stakeholders to share their views and recommendations; published a Federal Register notice seeking public comment on the establishment of financial data standards by November 25, 2014; presented periodic updates on the status of DATA Act implementation to federal and non-federal stakeholders at meetings and conferences; solicited public comment on data standards using GitHub, an online collaboration space, including the posing of general questions in December 2014 and subsequently seeking public comment on proposed data standards beginning in March 2015; and collaborated with federal agencies on the development of data standards and the technical schema through MAX.gov, an OMB- supported website. Such efforts by OMB and Treasury have provided valuable opportunities for non-federal stakeholders to provide input into the development of data standards. However, more can be done to engage in meaningful two-way dialogue with these stakeholders. Creating such a dialogue and an "open exchange of ideas between federal and non-federal stakeholders" is identified as an explicit goal of the Federal Spending Transparency GitHub site established by OMB and Treasury. Moreover, the site's landing page links such interactive communication with the successful development of data standards. However, we found only a few examples that OMB and Treasury have engaged in such a dialogue or have otherwise substantively responded to stakeholder comments on the site. When we asked OMB and Treasury officials how public comments from GitHub were considered when finalizing the first 15 data standards issued in May 2015, they said that none of the comments warranted incorporation and confirmed that substantive replies to stakeholder comments were not posted. Our work examining the implementation of the Recovery Act underscored the importance of obtaining stakeholder input as guidance is developed to address potential reporting challenges. We found that during implementation of the Recovery Act, OMB and other federal officials listened to recipients' concerns and changed guidance in response, which helped recipients meet reporting requirements. Some stakeholders we spoke with cited the process OMB followed in developing Recovery Act guidance as an example of effective two-way communication; however, these stakeholders indicated that they have not experienced this same level of outreach and communication with OMB and Treasury thus far with DATA Act implementation. Without similar outreach for OMB and Treasury's current initiatives there is the possibility that reporting challenges may be neglected or not fully understood and therefore not addressed, potentially impairing the data's accuracy and completeness or increasing reporting burden. As DATA Act implementation progresses, establishing an effective two- way dialogue will likely become even more important. As they primarily pertain to federal budget reporting activities, the first set of 15 data elements finalized in May 2015 may not have been viewed as being directly applicable to some non-federal stakeholders including state and local governments. However, future data elements to be issued by OMB and Treasury are directly related to federal grants and contracts. These may be perceived as being more relevant to states, localities, businesses, nonprofits, and other non-federal stakeholders, resulting in increased questions and desire for input and involvement from these communities. Additional policies and procedures that address the whole lifecycle of standards development will be needed to ensure the integrity of government-wide financial data standards is maintained over time. These policies and procedures could also provide an opportunity for OMB and Treasury to establish effective two-way communication with a broad representation of federal fund recipients to ensure all interested parties' concerns are addressed as this important work continues. As a result we are making the following recommendation: To ensure that interested parties' concerns are addressed as implementation efforts continue, we recommend that the Director of OMB, in collaboration with the Secretary of the Treasury, build on existing efforts and put in place policies and procedures to foster ongoing and effective two-way dialogue with stakeholders including timely and substantive responses to feedback received on the Federal Spending Transparency GitHub website. The DATA Act authorizes Treasury to establish a data analysis center or to expand an existing service, to provide data, analytic tools, and data management techniques for preventing or reducing improper payments and improving the efficiency and transparency in federal spending. Should Treasury elect to establish a data analysis center or expand an existing service, all assets of the Recovery Accountability and Transparency Board (Recovery Board) that support the operations and activities of the Recovery Operations Center (ROC)--a central data analytics service to support fraud detection and prevention and assist the oversight communities in their efforts to prevent fraud, waste, and abuse--will be transferred to Treasury by September 30, 2015, the day that the authority for the Recovery Board expires. Treasury officials have told us that the department does not plan to transfer any of the ROC's assets, and, as discussed below, outlined the challenges that led to this decision. As a consequence, some OIGs who were the primary users of the ROC will either need to develop, replace, or lose the existing capabilities for certain audit and investigative services. The Recovery Act created the Recovery Board, made up of inspectors general to promote accountability by overseeing recovery-related funds and transparency by providing the public with easily accessible information. To accomplish this goal, the Recovery Board established the ROC to provide predictive analysis capability to help oversight entities focus limited government oversight resources based on risk indicators such as a program previously identified as high-risk, high-dollar-value projects, past criminal history of key parties involved in a project, and tips from citizens; and in-depth fraud analysis capability to identify non-obvious relations between legal entities using public information about companies. After its initial mandate to oversee Recovery Act funds, subsequent legislation expanded the Recovery Board's mandate to include oversight of all federal spending as well as funds appropriated for purposes related to the impact of Hurricane Sandy. In addition to expanding its authority, the legislation also extended the termination date of the Recovery Board from September 30, 2013 to September 30, 2015. The ROC serves as an independent central repository of tools, methods, and expertise for identifying and mitigating fraud, waste, and mismanagement of federal funds. The Recovery Board's assets supporting the ROC include human capital, hardware, data sets, and software. (See figure 2.) The ROC developed specialized data analytic capabilities that members of the federal oversight community could leverage by submitting a request for analysis. For instance: The Appalachian Regional Commission (ARC) OIG used the ROC's capabilities to analyze text from A-133 single audit data to search for indications of risk and identify the highest risk grantees for review. This approach allowed the ARC OIG to identify 30 to 40 grantees out of approximately 400 grants per year based on risk rather than selecting grantees randomly based on geography and grant type. The Environmental Protection Agency (EPA) OIG used the ROC's data visualizations of a link analysis, which identifies relationships among entities involved in activities such as a fraud ring or an effort to commit collusion, to present to juries. An EPA OIG official said that the visualization of these relationships made it easier for juries to understand how entities had collaborated in wrongdoing. Since 2012, after its mandate was expanded to cover all federal funds, over 50 federal OIGs and agencies have asked the ROC for help. Based on requests for analysis compiled in the Recovery Board's Annual Reports, the ROC researched roughly 1.7 million entities associated with $36.4 billion in federal funds during fiscal years 2013 and 2014. The largest single user of ROC assistance over this time was the ARC OIG in 2012 and the Department of Homeland Security OIG in fiscal years 2013 and 2014. To facilitate a potential transition, Recovery Board officials provided a transition plan to Treasury in late spring of 2014. The plan provided an overview of the ROC's assets and presented possible scenarios for a transition and steps needed including estimated time frames assuming a transfer by September 30, 2015. In May 2015, Treasury officials told us that the agency does not plan to transfer any of the ROC's assets, identifying the following challenges to assuming ROC's assets: Hardware. Although Treasury officials viewed hardware as being feasible to transfer, in their assessment it was not cost effective to do so because the ROC's hardware is aging, lessening the value of these assets. Human capital. The agency would have to use the competitive hiring process to hire key ROC employees, which can be time consuming. In addition, because some ROC staff were term-limited hires or contractors, a competitive hiring process would not guarantee that ROC staff would ultimately be selected for employment. Data sets. The ROC obtained access to federal datasets through memoranda of understanding, which are not transferrable and therefore would need to be negotiated. Commercially procured data sets also are not transferrable but would instead have to go through a procurement process. Software contracts. Because the Recovery Board extended its software contracts on a sole source basis when it was re-authorized for 2 additional years, Treasury would need to use a competitive procurement process to obtain these data analytic tools. Because of these challenges, Treasury focused on facilitating information sharing through meetings between the ROC and Treasury's Do Not Pay (DNP) initiative, which assists agencies in preventing improper payments. Treasury officials stated that the expertise developed at the ROC was its most valuable asset, so officials focused on meeting with the ROC staff to discuss best practices and share knowledge with the DNP staff. In addition, Treasury officials noted that they had hired the former Assistant Director for Data and Performance Metrics at the Recovery Board as the Director of Outreach and Business Process for DNP. Officials further noted that the Director's experience at the ROC included leveraging data to identify high risk entities and conducting outreach to the ROC's user community--skills that Treasury officials said were complementary to DNP's activities. (See figure 3.) In 2013, the Council of the Inspectors General on Integrity and Efficiency (CIGIE) explored the viability of assuming some ROC assets to continue providing analytic capabilities to the OIG community. CIGIE estimated that it would cost $10.2 million per year to continue to run the ROC and because CIGIE is primarily funded by membership dues, CIGIE determined the additional cost to operate the ROC would be too burdensome for the organization. A CIGIE official indicated they have continued to look for opportunities to provide centralized data analytic resources to OIGs. However, this official said given its financial resources, any resources CIGIE might provide would be at a significantly scaled back level compared to the ROC. Some large OIGs that previously used the ROC intend to develop their own analytic capabilities. However, according to some OIG officials, the ROC's closure may impact the audit and investigative capabilities of some small and medium-sized OIGs who do not have the resources to develop independent data analytics or pay fees for a similar service. According to some OIG officials, the loss of the ROC's analytical capabilities could also result in auditors and investigators working more staff hours to research the same types of linkages rather than verifying the information that the ROC could provide in a shorter time. Treasury officials stated that the Fiscal Service operations assist federal agencies--including OIG and other law enforcement agencies--in identifying, preventing, and recovering improper payments under existing authorities. However, as noted earlier, our work on the potential impact of the ROC's sunset on the oversight community is on-going, and we have not independently compared the services of Fiscal Service operations to the ROC. We plan to issue a report on the ROC later this year. The DATA Act requires OMB to establish a 2-year pilot program to develop recommendations for standardizing financial data elements, eliminating unnecessary duplication, and reducing compliance costs for recipients of federal awards. Toward this end, OMB has partnered with the Department of Health and Human Services (HHS), the General Services Administration (GSA), and the Chief Acquisition Officers Council (CAOC). According to OMB staff, HHS is assisting OMB for grants- specific activities while GSA and the CAOC are doing so for contract- specific activities. Our work to date has centered on the grants-related part of the pilot. The pilot was launched this May with three activities: (1) a national dialogue on reducing the reporting burden faced by recipients of federal funds; (2) an online repository of common data elements; and (3) a new section on Grants.gov with information about the grants lifecycle. Conducting a national dialogue on reducing recipient reporting burden. A national dialogue is being conducted for federal contractors and grantees with a focus on sharing ideas for easing reporting burden, eliminating duplication, and standardizing processes. According to OMB and HHS officials, this online dialogue will be open on a public website through May 2017 and comments will be actively reviewed, incorporated, and addressed as appropriate.number of questions to federal award recipients in this dialogue, including the following: HHS, GSA, and CAOC have posed a If you could change one thing that would ease your reporting burden associated with your grants or sub-grants, what would it be (e.g., time, cost, resource burden)? If you have reporting requirements to the federal government, how are those met? If you could create a central reporting portal into which you could submit all required reports, what capabilities/functions would you include? Online repository of common grants-related data elements. The HHS DATA Act Program Management Office manages an online repository of agreed-upon standardized data elements, called the Common Data Element Repository (C-DER) Library, to be an authorized source for data elements and definitions used by the federal government in agency interactions with the public. The C-DER is designed to include data standards that have been approved through the implementation of the DATA Act. Specifically, as of July 16, 2015, the C-DER is populated with 112 data elements from a variety of sources.finalized by OMB and Treasury under the DATA Act on May 8, 2015, are included in the C-DER; however the remaining 12 that have been finalized since then are not yet included. A number of the terms included in the C-DER go beyond the data elements that are required to be standardized under the DATA Act, such as definitions for audit finding, auditee, auditor, and hospital. According to HHS officials, the C-DER was developed through an analysis of 1,000 data elements from 17 different sources. HHS officials stated that key findings that led to the creation of the C-DER were (1) lessons learned from the development of Uniform Grants Guidance that different communities, such as grants, acquisitions, and procurement, use terms and concepts differently; (2) that it is difficult for the public to access common definitions across these different communities; and (3) that data standards in and of themselves are not helpful unless they are used. The purpose of the C-DER is to reconcile these three findings and accommodate different data standards as they are developed under the act. Providing grants-related resources. The third component of the pilot is the launch of a portal that provides the public with grants resources and information on the grants lifecycle, known as the Grants Information Gateway (GIG). Available on Grants.gov, the GIG is intended to serve as a clearinghouse for information on the federal grants management process and lifecycle. Further, HHS officials stated that they intend to leverage Grants.gov and the GIG to improve the transparency of federal spending by educating the public and potential applicants for federal grants about federal grant-making. As part of our ongoing work on this pilot, we are reviewing past experiences and good practices on designing, implementing, and evaluating pilots; assessing whether the pilot's design is likely to meet DATA Act requirements and objectives; and evaluating whether the pilot is managed in a way that will likely result in useful recommendations. We will report our findings to Congress next spring. We provided a draft of this statement to Treasury, Health and Human Services, Office of Management and Budget, the Chair of the Council of the Inspectors General on Integrity and Efficiency, and the Chair of the Recovery Accountability and Transparency Board. OMB staff and Treasury officials did not have comments on the recommendations. OMB staff, Treasury officials, HHS, the Recovery Board, and the CIGIE provided technical comments on the draft, which we incorporated as appropriate. In conclusion, given the complexity and government-wide scale of the activities required by the DATA Act, full and effective implementation will not occur without sustained commitment by the executive branch and continued oversight by Congress. We welcome the responsibility that the Congress has placed on us to assist in the oversight of the DATA Act. Toward that end, we look forward to continuing to monitor and assess the efforts of OMB, Treasury, and other federal agencies while standing ready to assist this and other committees in carrying out Congress's key oversight role in the months and years to come. Chairman Hurd, Ranking Member Kelly, Chairman Meadows, Ranking Member Connolly, and Members of the Subcommittees, this concludes my prepared statement. I would be pleased to respond to any questions you have. Questions about this testimony can be directed to J. Christopher Mihm, Managing Director, Strategic Issues at (202) 512-6806 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement are Shari Brewster; Mark Canter; Jenny Chanley; Giny Cheong; Lon Chin; Peter Del Toro (Assistant Director); Kathleen Drennan (Analyst-in-Charge); Gary Engel; Robert Gebhart; Meafelia Gusukuma; Shirley Hwang (Analyst-in-Charge); Joah Iannotta; Charles Jones; Lauren Kirkpatrick; Michael LaForge; Jason Lyuke; Donna Miller; Laura Pacheco; Carl Ramirez; Paula Rascona; Brynn Rovito; Kiran Sreepada; James Sweetman, Jr.; Andrew Stephens; Carroll Warfield, Jr.; and David Watsula. Additional members of GAO's DATA Act Working Group also contributed to the development of this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. 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The DATA Act directs OMB and Treasury to establish government-wide data standards by May 2015. The act also requires agencies to begin reporting financial spending data using these standards by May 2017 and to post spending data in machine- readable formats by May 2018. This statement is part of a series of products that GAO will provide the Congress as the DATA Act is implemented. This statement discusses four DATA Act implementation areas to date: (1) establishment of government-wide data standards; (2) OMB and Treasury's effort to establish a governance structure and obtain stakeholder input; (3) the status of the potential transfer of the ROC's assets to Treasury; and (4) the pilot program to reduce reporting burden. GAO reviewed the first 15 data elements finalized under the act; analyzed key documents, technical specifications and applicable guidance; interviewed OMB, Treasury, HHS, and other staff as well as officials from organizations representing non-federal stakeholders; and reviewed literature. Since the Digital Accountability and Transparency Act (DATA Act) became law in May 2014, the Office of Management and Budget (OMB) and the Department of the Treasury (Treasury) have taken significant steps towards implementing key provisions. These steps include the release of 27 data standards, draft technical documentation, and implementation guidance to help federal agencies meet their responsibilities under the act. However, given the complexity and government-wide scale of activities required by the DATA Act, much more remains to be done. Data standards. OMB and Treasury have proposed standardizing 57 data elements for reporting under the act. They released 15 elements on May 8, 2015, a year after the passage of the act, and have since released 12 more. Eight of the first 15 were new elements required under the DATA Act; the balance were required under the Federal Funding Accountability and Transparency Act of 2006. GAO identified several issues that may impact the quality and ability to aggregate federal spending data. For example, GAO found: (1) the data standards may not provide a complete picture of spending by program unless OMB accelerates its efforts to produce an inventory of federal programs as required under the GPRA Modernization Act of 2010 (GPRAMA); (2) the data standards and elements may not yet represent all that are necessary to fully capture and reliably report on federal spending; and (3) the draft technical specifications GAO reviewed may result in the reporting of inconsistent information. GAO shared its observations with officials who are considering revisions and updating their technical documentation. Governance and stakeholder engagement. OMB and Treasury have made progress in initial implementation activities by developing structures for project management and data governance as well as for obtaining stakeholder input. However, GAO found that additional effort to address the whole lifecycle of standards development will be needed to ensure that the integrity of data standards is maintained over time. Establishing these policies and procedures now could provide an opportunity for OMB and Treasury to build on existing efforts to reach out to stakeholders by taking steps to foster effective two-way communication to help ensure that the concerns of interested parties are responded to and addressed as appropriate on an ongoing and timely basis. Recovery Operations Center (ROC). GAO's review of the potential transfer of the ROC's assets found that Treasury does not plan to assume these assets because of a number of impediments. Instead, Treasury has focused on facilitating information sharing between the ROC and Treasury's Do Not Pay initiative, which assists agencies in preventing improper payments. GAO has ongoing work on this issue and plans to issue a report later this year. Reporting burden pilot. The DATA Act requires OMB to establish a 2-year pilot program to develop recommendations for reducing reporting burden for recipients of federal awards. The pilot was launched this May with the initiation of a national dialogue on reducing reporting burden, building of an online repository of common grants-related data elements, and addition of grants-related resources on Grants.gov. GAO also has ongoing work focusing on this pilot. GAO recommends that OMB accelerate efforts to merge DATA Act purposes with the production of a federal program inventory under GPRAMA, and that OMB and Treasury (1) establish policies and processes for a governance structure to maintain the integrity of data standards over time and (2) enhance policies and procedures to provide for ongoing and effective two-way dialogue with stakeholders. OMB staff, Treasury officials, and others provided technical comments which GAO incorporated as appropriate.
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Managed care and fee-for-service (FFS) are two possible models that states use to deliver benefits under their Medicaid programs. Most states provide a combination of these two delivery models, which offer different financial incentives. Nationally, more than half of Medicaid beneficiaries are enrolled in a managed care plan. States contract with MCOs to provide a specific set of Medicaid-covered services to beneficiaries, and MCOs are expected to report encounter data to state Medicaid programs that allow the Medicaid administrators to track the services received by enrolled beneficiaries. The state pays the MCO a predetermined amount per beneficiary per month--known as capitation--and, in turn, the MCO pays providers for their services. According to CMS, by contracting with various types of Medicaid MCOs to deliver services, states can reduce program costs and better manage utilization of health care services. However, since MCOs receive a fixed amount per beneficiary regardless of the number of services used, we have noted in our prior work that there may be financial incentives for MCOs to limit access to services, potentially compromising quality of care and leading to underutilization of services. Historically, most Medicaid programs relied on a FFS delivery model. Under the FFS model, states pay providers directly for each service provided to a Medicaid beneficiary and the data included on a Medicaid FFS claim includes a specific amount for services delivered to a beneficiary. Certain states continue to use the FFS model to provide Medicaid services, such as behavioral health and dental care. We have noted in our prior work that, unlike managed care, the FFS model may give providers an incentive to use more services than necessary. Despite the fact that states have been required to submit encounter data to CMS since 1999, little is known about the utilization of services by Medicaid beneficiaries in MCOs. Historically, encounter data have been relatively incomplete and unreliable; thus, little is known about these data. At the behest of CMS, Mathematica Policy Research published a number of studies focused primarily on the usability and completeness of 2007- 2010 Medicaid encounter data, as reported in MAX. These studies first reported that encounter data were suitable for research purposes in 2012. CMS has provided guidance to states on methods to improve the completeness and accuracy of encounter data. In 2012, CMS released a protocol for validating Medicaid encounter data that states receive from MCOs. The protocol specifies a procedure for assessing the completeness and accuracy of encounter data that Medicaid MCOs are required to submit. Additionally, PPACA strengthened the requirement that Medicaid MCOs provide encounter data to states by withholding federal matching payments from states that do not report encounter data to CMS in a timely manner. The service utilization patterns of beneficiaries enrolled in Medicaid managed care plans can vary substantially and be related to a variety of factors, including the characteristics of beneficiaries and the scope of state Medicaid benefits offered. Beneficiary participation in managed care: States vary in the populations enrolled in managed care plans. States that enroll their most medically needy beneficiaries into managed care plans are likely to have higher service utilization. Conversely, states that enroll broader, generally healthier populations--such as children--into managed care plans are likely to have a larger pool of beneficiaries and potentially lower service utilization. The amount, duration, and scope of services covered by MCOs: Consistent with federal requirements, a state may determine the amount, duration, and the scope of benefits covered in their Medicaid programs. Thus, variations in service utilization patterns could reflect states' benefit choices that are independent of their service delivery choices. Variation in Medicaid managed care payments: Medicaid MCO payments to providers for specific services vary substantially across states and this variation could affect the service utilization of beneficiaries. Specifically, we previously reported that in 23 states where we compared MCO and private insurance payments for E/M services, managed care payments were 31 to 65 percent lower in 18 states. Access to Providers: Access to providers who serve beneficiaries enrolled in Medicaid managed care plans can vary substantially within a state, such as between urban and rural areas, and also across states. Geographic variation in provider access, which can be driven by the breadth of an MCO's network and the availability of providers in a given geographic area, can affect the type and amount of services used by beneficiaries. Based on our analysis of encounter data, the number of professional services utilized by adult and child beneficiaries per year in the 19 selected states ranged widely, with adult beneficiaries typically receiving more services. States also varied in how adult and child service utilization for professional services were distributed across service categories, and by whether beneficiaries were enrolled in comprehensive managed care plans for all of 2010 or part of the year. A detailed, interactive display of the data used to support our findings is available at http://www.gao.gov/products/GAO-15-481. For the 19 selected states, the number of services per beneficiary per year for adults ranged from about 13 to 55 services per beneficiary per year. (See fig. 1.) Services used by adult beneficiaries included E/M services, such as office visits and emergency room and critical care services; procedural services, such as surgery and ophthalmology; ancillary services, such as pathology and lab services and anesthesiology; and other professional services, such as oxygen therapy and hospital-mandated on-call service. Service utilization levels for adult beneficiaries are affected by many factors, including the extent to which they receive services on a FFS basis. Among the states in our analysis, the percentage of professional services that adult beneficiaries received on a FFS basis ranged from 0 to about 11 percent, with a median of 1 percent. Service utilization among adults was concentrated primarily in the ancillary and E/M categories. Specifically, ancillary services were the largest category in all but one state and accounted for 53 percent, on average, of all services utilized by adult beneficiaries across selected states. E/M services made up the second largest category (27 percent), followed by procedural services (15 percent) and, lastly, other professional services (4 percent). However, states varied considerably in how service utilization was distributed within service categories, as was shown in figure 1. Ancillary: Of total services, adult per beneficiary utilization of ancillary services ranged from 37 percent in Rhode Island to 65 percent in Washington and Illinois--a difference of about 28 percentage points. Pathology/lab services accounted for 63 percent, on average, of all ancillary service utilization across selected states. E/M: Of total services, adult per beneficiary utilization of E/M services ranged from 19 percent in Connecticut to 38 percent in Rhode Island--a difference of 19 percentage points. Office visits accounted for 68 percent on average, of E/M service utilization, while emergency room and critical care services accounted for 16 percent, on average. Procedural: Of total services, adult per beneficiary utilization of procedural services ranged from 8 percent in Illinois to 23 percent in Indiana--a difference of about 15 percentage points. Surgical services accounted for the largest portion--36 percent, on average-- of all procedural service utilization across selected states. Other professional services: Of total services, adult per beneficiary utilization of other professional services ranged from 1 percent in Illinois, Kentucky, Nebraska, and Washington to 15 percent in Arizona--a difference of about 15 percentage points. For slightly more than half of the selected states, total service utilization among adults was higher for partial-year beneficiaries--those in comprehensive managed care plans for less than the full-year of 2010. Specifically, in 11 of the 19 states, the number of services utilized per year ranged from 2 to 78 percent higher for partial-year beneficiaries than for full-year beneficiaries. In the remaining 8 states, service utilization for partial-year beneficiaries was 3 to 15 percent lower than for full-year beneficiaries. Of the states that had comparatively higher service utilization for partial-year beneficiaries, there were generally no major differences in service utilization among partial-year beneficiaries based on the length of their enrollment. Specifically, partial-year beneficiaries who were enrolled for 1 to 3 months, 4 to 6 months, or 7 to 11 months generally had similarly high utilization rates. Further, we found that partial-year adult beneficiaries utilized more procedural and ancillary services than full-year beneficiaries in about two- thirds of the selected states. Among those states, partial-year adult beneficiaries used 19 and 26 percent more of these services, respectively, than full-year adult beneficiaries. (See fig. 2.) The utilization of professional services by children was generally lower than adults in selected states. In the 19 selected states, the number of services per beneficiary per year for children ranged from about 6 to 16. (See fig. 3.) Services used by child beneficiaries included E/M services, such as office visits and emergency room and critical care services; procedural services, such as surgery and ophthalmology; ancillary services, such as pathology and lab services and anesthesiology; and other professional services, such as oxygen therapy and hospital- mandated on-call service. Service utilization for child beneficiaries is affected by many factors, including the extent to which beneficiaries receive services on a FFS basis. Among selected states, the percentage of professional services that child beneficiaries received on a FFS basis ranged from 0 to about 29 percent, with a median of 9 percent. In contrast to adults, for which service utilization consisted mostly of ancillary services, utilization for children was distributed more evenly across service categories. For example, on average, E/M services were utilized most commonly by children (37 percent of services), followed by procedural services (33 percent), ancillary services (24 percent), and other professional services (5 percent). However, considerable state variation existed within service categories, as was shown in figure 3. E/M: Of total services, child per beneficiary utilization of E/M services ranged from 29 percent in Minnesota to 45 percent in Georgia and Rhode Island--a difference of 16 percentage points. On average, office visits (58 percent) and preventive visits (22 percent) comprised most E/M service utilization across selected states. Procedural: Of total services, child per beneficiary utilization of procedural services ranged from 25 percent in Arizona to 41 percent in Oregon and Texas--a difference of 16 percentage points. On average, immunizations and injections (60 percent) made up the majority of procedural service utilization across selected states. Ancillary: Of total services, child per beneficiary utilization of ancillary services ranged from 17 percent in Oregon to 36 percent in Illinois--a difference of 19 percentage points. On average, pathology and lab services (63 percent) made up the majority of ancillary service utilization across selected states. Other professional services: Of total services, child per beneficiary utilization of other professional services ranged from 1 percent in Georgia, Illinois, and New York to 21 percent in Arizona--a difference of 20 percentage points. Total service utilization among children was higher for partial-year beneficiaries--those enrolled in comprehensive managed care for less than the full year of 2010--than full-year beneficiaries for almost every selected state. For example, for all but one state, the number of services utilized per year was 4 to 44 percent higher for partial-year child beneficiaries than for full-year child beneficiaries. In the remaining state, the number of services utilized per year for partial-year child beneficiaries was 5 percent less than for full-year child beneficiaries. Further, partial-year child beneficiaries utilized more E/M and procedural services than full-year child beneficiaries across all selected states; specifically, partial-year child beneficiaries utilized 19 percent more E/M services and 22 percent more procedural services than full-year child beneficiaries. (See fig. 4.) Among selected states with higher utilization for partial-year child beneficiaries, most experienced the highest utilization for child beneficiaries who were enrolled for 1 to 3 months as compared with 4 to 6 months or 7 to 11 months. When compared with full-year child beneficiaries, partial-year child beneficiaries enrolled for 1 to 3 months utilized, on average, significantly more E/M and procedural services (61 percent and 34 percent, respectively). Furthermore, the increased utilization among child beneficiaries enrolled for 1 to 3 months was particularly pronounced for certain E/M, procedural, and ancillary services. We found the following examples: Inpatient visits: Across all selected states, utilization of inpatient visits ranged from 1.4 to over 15 times greater for child beneficiaries enrolled for 1 to 3 months than for full-year child beneficiaries. Preventive services: For all but one selected state, utilization of preventive visits ranged from 1.5 to almost 4 times greater for child beneficiaries enrolled for 1 to 3 months than for full-year child beneficiaries. Emergency room and critical care: For all but one selected state, utilization of emergency room and critical care services ranged from 1.2 to almost 3 times greater among child beneficiaries enrolled for 1 to 3 months than for full-year child beneficiaries. Surgery: For all but one selected state, utilization of surgery ranged from 1 to 2.5 times greater for child beneficiaries enrolled for 1 to 3 months than for full-year child beneficiaries. Radiology: Across all selected states, utilization of radiology ranged from 1.2 to 2.5 times greater for child beneficiaries enrolled for 1 to 3 months than for full-year child beneficiaries. We provided the Secretary of Health and Human Services with a draft of this report. The Department of Health and Human Services provided technical comments, which we incorporated as appropriate. As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after its issuance date. At that time, we will send copies of this report to the Secretary of Health and Human Services. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 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 members who made major contributions to this report are listed in appendix IV. We examined service utilization patterns for Medicaid beneficiaries enrolled in comprehensive managed care plans using Medicaid Analytic eXtract (MAX) encounter data for calendar year 2010, the most recent year for which encounter data were available for the majority of states at the time we began our analyses. Our analysis consisted of the following three steps: (1) state selection, which included assessing data reliability for our selected states; (2) beneficiary and service identification; and (3) utilization calculation. Lastly, we present limitations of this study and technical comments that we received from 13 of the 19 selected states. Step 1: State Selection To assess the reliability and usability of the MAX data for our purposes, we reviewed related documentation and studies that assessed the reliability of or analyzed MAX data, and we interviewed officials from the Centers for Medicare & Medicaid Services (CMS) and its contractor responsible for processing the MAX data (Mathematica Policy Research, We determined that 19 states reported data that were reliable for Inc.).our purposes: Arizona, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Minnesota, Nebraska, New Mexico, New York, Oregon, Rhode Island, Tennessee, Texas, Virginia, and Washington. We excluded the remaining 31 states and the District of Columbia because we determined their data were unreliable or not usable for our purposes for one or more of the following reasons: (1) no adults or children were enrolled in comprehensive managed care plans, according to MAX (13 states); (2) MAX data were unavailable at the time we began our analysis (11 states); (3) the data were unreliable, such as if fewer than 30 percent of beneficiaries used at least one service--one of the thresholds established by Mathematica when evaluating the completeness and usability of MAX data (6 states); and (4) services were not reported using a standard coding convention, namely the Health Care Common Procedural Coding System (HCPCS) (2 states). (See table 1.) Step 2: Beneficiary and Service Identification Based on eligibility information in the MAX Person Summary file, we restricted our study to adults and children who (1) were eligible to receive full Medicaid benefits and were enrolled for any given month during calendar year 2010, and (2) did not have other sources of health coverage during the calendar year in addition to Medicaid, such as coverage from Medicare or private insurance.95 percent of the adults and children in comprehensive managed care among the 19 states in our analysis in 2010. We used the MAX Other Services file to identify professional services used by beneficiaries while they were enrolled in a comprehensive managed care plan. We, in large part, used the Health Care Cost Institute's methodology for grouping professional services based on a range of HCPCS codes. These codes are used by providers to bill for professional services. We grouped the professional services in our analysis into four broad categories. (See table 2.) We excluded dental and behavioral health services from our analysis because these services may be contracted out by managed care organizations (MCO) and provided on a fee-for-service (FFS) basis. Additionally, Mathematica reported concerns regarding the quality of managed care behavioral health data. Step 3: Utilization Calculation For each service provided to each beneficiary described in steps 1 and 2 above, we calculated the number of services per beneficiary per year. This is defined as the number of services that beneficiaries enrolled in comprehensive managed care plans used in a year (includes users and nonusers enrolled in comprehensive managed care plans within the state). We presented service utilization patterns for adults and children by state, by service category, and by the length of beneficiary enrollment--in particular, whether beneficiaries were enrolled in a comprehensive managed care plan for a full or partial year. We then further grouped partial-year beneficiaries into monthly increments--1-3, 4-6, and 7-11 months--to determine whether there were differences in utilization patterns by the varying lengths of enrollment. In addition to services used by beneficiaries enrolled in a comprehensive managed care plan, we also calculated the extent to which the beneficiaries in our analysis received professional services paid on a FFS basis while they were enrolled in a comprehensive managed care plan. See http://www.gao.gov/products/GAO-15-481 for further detail on these measures and the FFS data. The results we present are based on data reported to CMS by the 19 states in our analysis. We did not independently verify whether the individual MCOs in these states submitted complete and accurate data on the enrollment and services for beneficiaries enrolled in comprehensive managed care. To better understand the factors that may affect service utilization, we asked representatives from each state to comment on the accuracy and completeness of the state's 2010 managed care data submitted to CMS. Thirteen of the 19 selected states responded to our request. These states met our criteria for inclusion, as well as the minimum threshold for the number of services per adult or child beneficiary used by Mathematica to assess the completeness of each state's data. Nevertheless, of these 13 states, 4 states indicated that they may have submitted incomplete enrollment or encounter data in 2010, citing a variety of reasons. For example, 1 state indicated its Medicaid managed care program was in the process of major changes and service data were likely not complete. Another state indicated that, in calendar year 2010, some of the state's managed care data were not reported due to quality problems. Officials from the remaining 9 states noted their results either seemed reasonable based on their knowledge of their state's Medicaid managed care program or that the managed care data they submitted to CMS for 2010 was believed to be accurate. The results we present for the 19 states in our analysis are not representative of all states and their managed care programs, nor do our results draw any conclusions regarding whether the level of service utilization identified is appropriate. There are a number of state-specific factors--such as differences in beneficiary health status and provider supply--that could contribute to variation in service utilization across the states. For example, officials from 1 state noted that the state's MCOs were limited to certain geographical areas of the state. As such, geographic variation in provider access, which can be driven by the breadth of an MCO's network and the availability of providers in a given geographic area, can affect the type and amount of services used by beneficiaries in Medicaid managed care. The tables below provide the number of services per beneficiary per year for adults and children by state, service category, and length of enrollment. Based on our analysis of encounter data, the number of professional services utilized per beneficiary per year reported by the 19 selected states for adults enrolled in comprehensive managed care plans in 2010 ranged from about 13 to 55; the range for children was generally lower, from about 6 to 16. States varied in how adult and child utilization of professional services were distributed across service categories. In addition, service utilization for both adults and children varied by whether beneficiaries were enrolled in comprehensive managed care plans for all of 2010 or part of the year. In particular, for nearly all states in our analysis, partial-year child beneficiaries utilized significantly more services overall than those enrolled for the full year. In addition to the contact named above, William Black, Assistant Director; Christine Brudevold, Assistant Director; Ramsey Asaly; Stella Chiang; Greg Dybalski; Sandra George; Drew Long; Jessica Morris; and Vikki Porter made key contributions to this report.
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Medicaid, a federal-state health financing program for low-income and medically needy individuals, covered 65 million beneficiaries at an estimated cost of $508 billion in fiscal year 2014. More than half of Medicaid beneficiaries are enrolled in managed care plans, a health care delivery model where states contract with managed care organizations to provide covered services for a set cost. Historically, states have submitted relatively unreliable managed care service utilization data, also known as encounter data, to the Centers for Medicare & Medicaid Services, the federal agency that oversees Medicaid. However, recent evidence suggests that encounter data may be improving. Information on beneficiaries' service utilization could serve as a baseline for future analyses of utilization trends over time. GAO was asked to examine the level of services provided to these beneficiaries. In this report, GAO describes what encounter data indicate about the service utilization of Medicaid beneficiaries in managed care plans. To do this work, GAO analyzed state-reported data included in CMS's 2010 Medicaid Analytic eXtract data and determined that 19 states had data that were reliable for its purposes, but excluded the remaining 31 states and the District of Columbia. For these 19 states, GAO calculated service utilization rates for adult and child beneficiaries enrolled in comprehensive managed care plans by state, service category, and length of enrollment. GAO received technical comments on a draft of this report from HHS and incorporated them as appropriate. Based on GAO's analysis of 2010 encounter data reported by 19 states, the number of professional services utilized by adult beneficiaries ranged from about 13 to 55. For children, the number of professional services utilized per beneficiary was lower, ranging from about 6 to 16 among the 19 states. Professional services included four categories of services: (1) evaluation and management (E/M) services, such as office visits and emergency room and critical care services; (2) procedural services, such as surgery and ophthalmology; (3) ancillary services, such as pathology and lab services; and (4) other professional services, such as oxygen therapy. States varied considerably in how service utilization was distributed within service categories. For example, of total services, adult per beneficiary utilization of ancillary services ranged from 37 percent in Rhode Island to 65 percent in Washington and Illinois; and child per beneficiary utilization of E/M services ranged from 29 percent in Minnesota to 45 percent in Georgia and Rhode Island. Service utilization for both adult and child beneficiaries also varied by the length of enrollment. When compared with beneficiaries enrolled for a full year, total service utilization for adults was 2 to 78 percent higher for partial-year beneficiaries--those enrolled in a comprehensive managed care plan for less than the full year--in slightly more than half of selected states. For children in all but one selected state, service utilization was 4 to 44 percent higher for partial-year beneficiaries compared with full-year beneficiaries.
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As I have stated in other testimony, Medicare as currently structured is fiscally unsustainable. While many people have focused on the improvement in the HI trust fund's shorter-range solvency status, the real news is that we now have a more realistic view of Medicare's long-term financial condition and the outlook is much bleaker. A consensus has emerged that previous program spending projections have been based on overly optimistic assumptions and that actual spending will grow faster than has been assumed. First, let me talk about how we measure Medicare's fiscal health. In the past, Medicare's financial status has generally been gauged by the projected solvency of the HI trust fund, which covers primarily inpatient hospital care and is financed by payroll taxes. Looked at this way, Medicare--more precisely, Medicare's Hospital Insurance trust fund--is described as solvent through 2029. However, even from the perspective of HI trust fund solvency, the estimated exhaustion date of 2029 does not mean that we can or should wait until then to take action. In fact, delay in addressing the HI trust fund imbalance means that the actions needed will be larger and more disruptive. Taking action today to restore solvency to the HI trust fund for the next 75 years would require benefit cuts of 37 percent or tax increases of 60 percent, or some combination of the two. While these actions would not be easy or painless, postponing action until 2029 would require more than doubling of the payroll tax or cutting benefits by more than half to maintain solvency. (See fig. 1.) Given that in the long-term, Medicare cost growth is now projected to grow at 1 percentage point faster than GDP, HI's financial condition is expected to continue to worsen after the 75-year period. By 2075, HI's annual financing shortfall--the difference between program income and benefit costs--will reach 7.35 percent of taxable payroll. This means that if no action is taken this year, shifting the 75-year horizon out one year to 2076--a large deficit year--and dropping 2001--a surplus year--would yield a higher actuarial deficit, all other things being equal. Moreover, HI trust fund solvency does not mean the program is financially healthy. Under the Trustees' 2001 intermediate estimates, HI outlays are projected to exceed HI tax revenues beginning in 2016, the same year in which Social Security outlays are expected to exceed tax revenues. (See fig. 2.) As the baby boom generation retires and the Medicare-eligible population swells, the imbalance between outlays and revenues will increase dramatically. Thus, in 15 years the HI trust fund will begin to experience a growing annual cash deficit. At that point, the HI program must redeem Treasury securities acquired during years of cash surplus. Treasury, in turn, must obtain cash for those redeemed securities either through increased taxes, spending cuts, increased borrowing, retiring less debt, or some combination thereof. Finally, HI trust fund solvency does not measure the growing cost of the Part B SMI component of Medicare, which covers outpatient services and is financed through general revenues and beneficiary premiums. Part B accounts for somewhat more than 40 percent of Medicare spending and is expected to account for a growing share of total program dollars. As the Trustees noted in this year's report, a rapidly growing share of general revenues and substantial increases in beneficiary premiums will be required to cover part B expenditures. Clearly, it is total program spending--both Part A and Part B--relative to the entire federal budget and national economy that matters. This total spending approach is a much more realistic way of looking at the combined Medicare program's sustainability. In contrast, the historical measure of HI trust fund solvency cannot tell us whether the program is sustainable over the long haul. Worse, it can serve to distort perceptions about the timing, scope, and magnitude of our Medicare challenge. These figures reflect a worsening of the long-term outlook. Last year a technical panel advising the Medicare Trustees recommended assuming that future per-beneficiary costs for both HI and SMI eventually will grow at a rate 1 percentage point above GDP growth--about 1 percentage point higher than had previously been assumed. That recommendation--which was consistent with a similar change CBO had made to its Medicare and Medicaid long-term cost growth assumptions--was adopted by the Trustees. In their new estimates published on March 19, 2001, the Trustees adopted the technical panel's long-term cost growth recommendation. The Trustees note in their report that this new assumption substantially raises the long-term cost estimates for both HI and SMI. In their view, incorporating the technical panel's recommendation yields program spending estimates that represent a more realistic assessment of likely long-term program cost growth. Under the old assumption (the Trustees' 2000 best estimate intermediate assumptions), total Medicare spending consumed 5 percent of GDP by 2063. Under the new assumption (the Trustees' 2001 best estimate intermediate assumptions), this occurs almost 30 years sooner in 2035-- and by 2075 Medicare consumes over 8 percent of GDP, compared with 5.3 percent under the old assumption. The difference clearly demonstrates the dramatic implications of a 1-percentage point increase in annual Medicare spending over time. (See fig. 3) In part the progressive absorption of a greater share of the nation's resources for health care, as with Social Security, is a reflection of the rising share of the population that is elderly. Both programs face demographic conditions that require action now to avoid burdening future generations with the program's rising costs. Like Social Security, Medicare's financial condition is directly affected by the relative size of the populations of covered workers and beneficiaries. Historically, this relationship has been favorable. In the near future, however, the covered worker-to-retiree ratio will change in ways that threaten the financial solvency and sustainability of this important national program. In 1970 there were 4.6 workers per HI beneficiary. Today there are about 4, and in 2030, this ratio will decline to only 2.3 workers per HI beneficiary. (See fig. 4.) Unlike Social Security, however, Medicare growth rates reflect not only a burgeoning beneficiary population, but also the escalation of health care costs at rates well exceeding general rates of inflation. Increases in the number and quality of health care services have been fueled by the explosive growth of medical technology. Moreover, the actual costs of health care consumption are not transparent. Third-party payers generally insulate consumers from the cost of health care decisions. All of these factors contribute to making Medicare a much greater and more complex fiscal challenge than even Social Security. When viewed from the perspective of the federal budget and the economy, the growth in health care spending will become increasingly unsustainable over the longer term. Figure 5 shows the sum of the future expected HI cash deficit and the expected general fund contribution to SMI as a share of federal income taxes under the Trustees 2001 intermediate estimates. SMI has received contributions from the general fund since the inception of the program. This general revenue contribution is projected to grow from about 5 percent of federal personal and corporate income taxes in 2000 to 13 percent by 2030. Beginning in 2016, use of general fund revenues will be required to pay benefits as the HI trust fund redeems its Treasury securities. Assuming general fund revenues are used to pay benefits after the trust fund is exhausted, by 2030 the HI program alone would consume more than 6 percent of income tax revenue. On a combined basis, Medicare's draw on general revenues would grow from 5.4 percent of income taxes today to nearly 20 percent in 2030 and 45 percent by 2070. Figure 6 reinforces the need to look beyond the HI program. HI is only the first layer in this figure. The middle layer adds the SMI program, which is expected to grow faster than HI in the near future. By the end of the 75- year projection period, SMI will represent almost half of total estimated Medicare costs. To get a more complete picture of the future federal health care entitlement burden, Medicaid is added. Medicare and the federal portion of Medicaid together will grow to 14.5 percent of GDP from today's 3.5 percent. Taken together, the two major government health programs-- Medicare and Medicaid--represent an unsustainable burden on future generations. In addition, this figure does not reflect the taxpayer burden of state and local Medicaid expenditures. A recent statement by the National Governors Association argues that increased Medicaid spending has already made it difficult for states to increase funding for other priorities. Our long-term simulations show that to move into the future with no changes in federal health and retirement programs is to envision a very different role for the federal government. Assuming, for example, that Congress and the President adhere to the often-stated goal of saving the Social Security surpluses, our long-term simulations show a world by 2030 in which Social Security, Medicare, and Medicaid absorb most of the available revenues within the federal budget. Under this scenario, these programs would require more than three-quarters of total federal revenue even without adding a Medicare prescription drug benefit. (See fig. 7.) Revenue as a share of GDP declines from its 2000 level of 20.6 percent due to unspecified permanent policy actions. In this display, policy changes are allocated equally between revenue reductions and spending increases. The "Save the Social Security Surpluses" simulation can only be run through 2056 due to the elimination of the capital stock. This scenario contemplates saving surpluses for 20 years--an unprecedented period of surpluses in our history--and retiring publicly held debt. Alone, however, even saving all Social Security surpluses would not be enough to avoid encumbering the budget with unsustainable costs from these entitlement programs. Little room would be left for other federal spending priorities such as national defense, education, and law enforcement. Absent changes in the structure of Medicare and Social Security, sometime during the 2040s government would do nothing but mail checks to the elderly and their health care providers. Accordingly, substantive reform of the Medicare and Social Security programs remains critical to recapturing our future fiscal flexibility. Demographics argue for early action to address Medicare's fiscal imbalances. Ample time is required to phase in the reforms needed to put this program on a more sustainable footing before the baby boomers retire. In addition, timely action to bring costs down pays large fiscal dividends for the program and the budget. The high projected growth of Medicare in the coming years means that the earlier reform begins, the greater the savings will be as a result of the effects of compounding. Beyond reforming the Medicare program itself, maintaining an overall sustainable fiscal policy and strong economy is vital to enhancing our nation's future capacity to afford paying benefits in the face of an aging society. Today's decisions can have wide-ranging effects on our ability to afford tomorrow's commitments. As I have testified before, you can think of the budget choices you face as a portfolio of fiscal options balancing today's unmet needs with tomorrow's fiscal challenges. At the one end-- with the lowest risk to the long-range fiscal position--is reducing publicly held debt. At the other end--offering the greatest risk--is increasing entitlement spending without fundamental program reform. Reducing publicly held debt helps lift future fiscal burdens by freeing up budgetary resources encumbered for interest payments, which currently represent about 12 cents of every federal dollar spent, and by enhancing the pool of economic resources available for private investment and long- term economic growth. This is particularly crucial in view of the known fiscal pressures that will begin bearing down on future budgets in about 10 years as the baby boomers start to retire. However, as noted above, debt reduction is not enough. Our long-term simulations illustrate that, absent entitlement reform, large and persistent deficits will return. Despite common agreement that, without reform, future program costs will consume growing shares of the federal budget, there is also a mounting consensus that Medicare's benefit package should be expanded to cover prescription drugs, which will add billions to the program's cost. This places added pressure on policymakers to consider proposals that could fundamentally reform Medicare. Our previous work provides, I believe, some considerations that are relevant to deliberations regarding the potential addition of a prescription drug benefit and Medicare reform options that would inject competitive mechanisms to help control costs. In addition, our reviews of HCFA offer lessons for improving Medicare's management. Implementing necessary reforms that address Medicare's financial imbalance and meet the needs of beneficiaries will not be easy. We must have a Medicare agency that is ready and able to meet these 21st century challenges. Among the major policy challenges facing the Congress today is how to reconcile Medicare's unsustainable long-range financial condition with the growing demand for an expensive new benefit--namely, coverage for prescription drugs. It is a given that prescription drugs play a far greater role in health care now than when Medicare was created. Today, Medicare beneficiaries tend to need and use more drugs than other Americans. However, because adding a benefit of such potential magnitude could further erode the program's already unsustainable financial condition, you face difficult choices about design and implementation options that will have a significant impact on beneficiaries, the program, and the marketplace. Let's examine the current status regarding Medicare beneficiaries and drug coverage. About a third of Medicare beneficiaries have no coverage for prescription drugs. Some beneficiaries with the lowest incomes receive coverage through Medicaid. Some beneficiaries receive drug coverage through former employers, some can join Medicare+Choice plans that offer drug benefits, and some have supplemental Medigap coverage that pays for drugs. However, significant gaps remain. For example, Medicare+Choice plans offering drug benefits are not available everywhere and generally do not provide catastrophic coverage. Medigap plans are expensive and have caps that significantly constrain the protection they offer. Thus, beneficiaries with modest incomes and high drug expenditures are most vulnerable to these coverage gaps. Overall, the nation's spending on prescription drugs has been increasing about twice as fast as spending on other health care services, and it is expected to keep growing. Recent estimates show that national per-person spending for prescription drugs will increase at an average annual rate exceeding 10 percent until at least 2010. As the cost of drug coverage has been increasing, employers and Medicare+Choice plans have been cutting back on prescription drug benefits by raising enrollees' cost-sharing, charging higher copayments for more expensive drugs, or eliminating the benefit altogether. It is not news that adding a prescription drug benefit to Medicare will be costly. However, the cost consequences of a Medicare drug benefit will depend on choices made about its design--including the benefit's scope and financing mechanism. For instance, a Medicare prescription drug benefit could be designed to provide coverage for all beneficiaries, coverage only for beneficiaries with extraordinary drug expenses, coverage only for low-income beneficiaries. Policymakers would need to determine how costs would be shared between taxpayers and beneficiaries through premiums, deductibles, and copayments and whether subsidies would be available to low-income, non-Medicaid eligible individuals. Design decisions would also affect the extent to which a new pharmaceutical benefit might shift to Medicare portions of the out-of- pocket costs now borne by beneficiaries as well as those costs now paid by Medicaid, Medigap, or employer plans covering prescription drugs for retirees. Clearly, the details of a prescription drug benefit's implementation would have a significant impact on both beneficiaries and program spending. Experience suggests that some combination of enhanced access to discounted prices, targeted subsidies, and measures to make beneficiaries more aware of costs may be needed. Any option would need to balance concerns about Medicare sustainability with the need to address what will likely be a growing hardship for some beneficiaries in obtaining prescription drugs. The financial prognosis for Medicare clearly calls for meaningful spending reforms to help ensure that the program is sustainable over the long haul. The importance of such reforms will be heightened if financial pressures on Medicare are increased by the addition of new benefits, such as coverage for prescription drugs. Some leading reform proposals envision that Medicare could achieve savings by adapting some of the competitive elements embodied in the Federal Employees Health Benefits Program. Specifically, these proposals would move Medicare towards a model in which health plans compete on the basis of benefits offered and costs to the government and beneficiaries, making the price of health care more transparent. Currently, Medicare follows a complex formula to set payment rates for Medicare+Choice plans, and plans compete primarily on the richness of their benefit packages. Medicare permits plans to earn a reasonable profit, equal to the amount they can earn from a commercial contract. Efficient plans that keep costs below the fixed payment amount can use the "savings" to enhance their benefit packages, thus attracting additional members and gaining market share. Under this arrangement, competition among Medicare plans may produce advantages for beneficiaries, but the government reaps no savings. In contrast, a competitive premium approach offers certain advantages. Instead of having the government administratively set a payment amount and letting plans decide--subject to some minimum requirements--the benefits they will offer, plans would set their own premiums and offer at least a required minimum Medicare benefit package. Under these proposals, Medicare costs would be more transparent: beneficiaries could better see what they and the government were paying for in connection with health care expenditures. Beneficiaries would generally pay a portion of the premium and Medicare would pay the rest. Plans operating at lower cost could reduce premiums, attract beneficiaries, and increase market share. Beneficiaries who joined these plans would enjoy lower out-of- pocket expenses. Unlike today's Medicare+Choice program, the competitive premium approach provides the potential for taxpayers to benefit from the competitive forces. As beneficiaries migrated to lower- cost plans, the average government payment would fall. Experience with the Medicare+Choice program reminds us that competition in Medicare has its limits. First, not all geographic areas are able to support multiple health plans. Medicare health plans historically have had difficulty operating efficiently in rural areas because of a sparseness of both beneficiaries and providers. In 2000, 21 percent of rural beneficiaries had access to a Medicare+Choice plan, compared to 97 percent of urban beneficiaries. Second, separating winners from losers is a basic function of competition. Thus, under a competitive premium approach, not all plans would thrive, requiring that provisions be made to protect beneficiaries enrolled in less successful plans. The extraordinary challenge of developing and implementing Medicare reforms should not be underestimated. Our look at health care spending projections shows that, with respect to Medicare reform, small implementation problems can have huge consequences. To be effective, a good program design will need to be coupled with competent program management. Consistent with that view, questions are being raised about the ability of CMS to administer the Medicare program effectively. Our reviews of Medicare program activities confirm the legitimacy of these concerns. In our companion statement today, we discuss not only the Medicare agency's performance record but also areas where constraints have limited the agency's achievements. We also identify challenges the agency faces in seeking to meet expectations for the future. As the Congress and the Administration focus on current Medicare management issues, our review of HCFA suggests several lessons: Managing for results is fundamental to an agency's ability to set meaningful goals for performance, measure performance against those goals, and hold managers accountable for their results. Our work shows that HCFA has faltered in adopting a results-based approach to agency management, leaving the agency in a weakened position for assuming upcoming responsibilities. In some instances, the agency may not have the tools it needs because it has not been given explicit statutory authority. For example, the agency has sought explicit statutory authority to use full and open competition to select claims administration contractors. The agency believes that without such statutory authority it is at a disadvantage in selecting the best performers to carry out Medicare claims administration and customer service functions. To be effective, any agency must be equipped with the full complement of management tools it needs to get the job done. A high-performance organization demands a workforce with, among other things, up-to-date skills to enhance the agency's value to its customers and ensure that it is equipped to achieve its mission. HCFA began workforce planning efforts that continue today in an effort to identify areas in which staff skills are not well matched to the agency's evolving mission. In addition, CMS recently reorganized its structure to be more responsive to its customers. It is important that CMS continue to reevaluate its skill needs and organizational structure as new demands are placed on the agency. Data-driven information is essential to assess the budgetary impact of policy changes and distinguish between desirable and undesirable consequences. Ideally, the agency that runs Medicare should have the ability to monitor the effects of Medicare reforms, if enacted--such as adding a drug benefit or reshaping the program's design. However, HCFA was unable to make timely assessments, largely because its information systems were not up to the task. The status of these systems remains the same, leaving CMS unprepared to determine, within reasonable time frames, the appropriateness of services provided and program expenditures. The need for timely, accurate, and useful information is particularly important in a program where small rate changes developed from faulty estimates can mean billions of dollars in overpayments or underpayments. An agency's capacity should be commensurate with its responsibilities. As the Congress continues to modify Medicare, CMS' responsibilities will grow substantially. HCFA's tasks increased enormously with the enactment of landmark Medicare legislation in 1997 and the modifications to that legislation in 1999 and 2000. In addition to the growth in Medicare responsibilities, the agency that administers this program is also responsible for other large health insurance programs and activities. As the agency's mission has grown, however, its administrative dollars have been stretched thinner. Adequate resources are vital to support the kind of oversight and stewardship activities that Americans have come to count on--inspection of nursing homes and laboratories, certification of Medicare providers, collection and analysis of critical health care data, to name a few. Shortchanging this agency's administrative budget will put the agency's ability to handle upcoming reforms at serious risk. In short, because Medicare's future will play such a significant role in the future of the American economy, we cannot afford to settle for anything less than a world-class organization to run the program. However, achieving such a goal will require a clear recognition of the fundamental importance of efficient and effective day-to-day operations. In determining how to reform the Medicare program, much is at stake-- not only the future of Medicare itself but also assuring the nation's future fiscal flexibility to pursue other important national goals and programs. I feel that the greatest risk lies in doing nothing to improve the Medicare program's long-term sustainability. It is my hope that we will think about the unprecedented challenge facing future generations in our aging society. Engaging in a comprehensive effort to reform the Medicare program and put it on a sustainable path for the future would help fulfill this generation's stewardship responsibility to succeeding generations. It would also help to preserve some capacity for future generations to make their own choices for what role they want the federal government to play.
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Although the short-term outlook of Medicare's hospital insurance trust fund improved in the last year, Medicare's long-term prospects have worsened. The Medicare Trustee's latest projections, released in March, use more realistic assumptions about health care spending in the years ahead. These latest projections call into question the program's long-term financial health. The Congressional Budget Office also increased its long-term estimates of Medicare spending. The slowdown in Medicare spending growth in recent years appears to have ended. In the first eight months of fiscal year 2001, Medicare spending was 7.5 percent higher than a year earlier. This testimony discusses several fundamental challenges to Medicare reform. Without meaningful entitlement reform, GAO's long-term budget simulations show that an aging population and rising health care spending will eventually drive the country back into deficit and debt. The addition of a prescription drug benefits would boost spending projections even further. Properly structured reform to promote competition among health plans could make Medicare beneficiaries more cost conscious. The continued importance of traditional Medicare underscores the need to base adjustments to provider payments on hard evidence rather than on anecdotal information. Similarly, reforms in the management of the Medicare program should ensure that adequate resources accompany increased expectations about performance and accountability. Ultimately, broader health care reforms will be needed to balance health care spending with other societal priorities.
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The financial statements and accompanying notes present fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, the Foundation's financial position as of September 30, 2004, and 2003, and the results of its activities and its cash flows for the fiscal years then ended. However, material misstatements may nevertheless occur in information reported by the Foundation on its financial status to its Board of Directors and others as a result of the material weakness in internal control over financial reporting described in this report. As discussed in a later section of this report and in Note 12 to the financial statements, the Foundation continues to experience increasing difficulties in meeting its financial obligations. The Foundation's continuing financial difficulties and deteriorating financial condition raise substantial doubt, for the third consecutive year, about its ability to continue as a going concern. The financial statements have been prepared under the assumption that the Foundation would continue as a going concern, and do not include any adjustments that would need to be made if the Foundation were to cease operations. Because of the material weakness in internal control discussed below, the Foundation did not maintain effective internal control over financial reporting (including safeguarding assets) or compliance with laws and regulations, and thus did not provide reasonable assurance that losses, misstatements, and noncompliance with laws material in relation to the financial statements would be prevented or detected on a timely basis. Our opinion is based on criteria established in our Standards for Internal Control in the Federal Government. The deteriorating financial condition of the Foundation led to further deterioration in its control over its financial reporting process during fiscal year 2004, impeding its ability to prepare timely and accurate financial statements. The lack of an individual with accounting and financial management expertise taking responsibility for the Foundation's financial operations during the period, brought about by the Foundation's lack of funds, prevented it from fulfilling this and other key financial operations, and contributed to its inability to maintain current and accurate financial records. We reported on this matter during our audit of the Foundation's fiscal year 2003 financial statements. The Foundation's Director of Finance and Administration resigned his paid position at the Foundation and became Treasurer of the Congressional Award Board of Directors, an unpaid position, during fiscal year 2003. He continued to perform, on a limited and voluntary basis, some of the duties associated with his former position during the first three quarters of fiscal year 2004, as the continued shortage of funds precluded the Foundation from hiring a replacement. This resulted in the Foundation continuing to be unable to fulfill its financial reporting responsibilities, particularly with respect to preparing timely and accurate financial statements. For example, because the Foundation did not always record transactions in its general ledger as they occurred during the year, numerous entries had to be made to the general ledger as late as 12 months after fiscal year-end. These entries were ultimately prepared and recorded by a part-time bookkeeper hired 6 months after the end of the fiscal year. However, these entries were not adequately reviewed by Foundation management to ensure their completeness and accuracy. This resulted in the need for management to make material adjustments to correct errors we identified during our audit. Additionally, the Foundation continued to lack appropriate written procedures for making closing entries in its financial records and for preparing complete and accurate financial statements. At the conclusion of our audit of the Foundation's fiscal year 2003 financial statements, we stressed to the Foundation's management the importance of documenting the Foundation's financial reporting policies and procedures, and further stressed that the policies and procedures should detail such functions as the monthly closing procedures, preparation of the financial statements, and review of financial data by management. The continued lack of written policies and procedures contributed to the errors we identified during our audit of the Foundation's fiscal year 2004 financial statements. The Foundation was ultimately able to produce financial statements that were fairly stated in all material respects for fiscal years 2004 and 2003. However, the process was long and laborious, due to the lack of 1) appropriate written policies and procedures and 2) routine maintenance of the Foundation's financial books and records by personnel experienced in accounting and financial management. As a result, material corrections were required between the first draft of the financial statements and the final version. Additionally, the Foundation's continued lack of an effective financial reporting process forced us for the second consecutive year to notify its congressional oversight committees that we would be unable to meet our May 15, 2005, statutorily mandated audit reporting date. Consequently, the Foundation's weakness in internal control over its financial reporting process resulted in its inability to prepare reliable financial statements on time and to produce financial information to support management decision making. This is especially critical in light of the Foundation's precarious financial condition--when accurate and timely financial information is of utmost importance to make prudent and informed operational decisions. Foundation management asserted that its internal control during the period were not effective over financial reporting or compliance with laws and regulations based on criteria established under Standards for Internal Control in the Federal Government. In making its assertion, Foundation management stated the need to improve control over financial reporting and compliance with laws and regulations. Although the weakness did not materially affect the final fiscal year 2004 financial statements as adjusted for misstatements identified by the audit process, this deficiency in internal control may adversely affect any decision by management that is based, in whole or in part, on information that is inaccurate because of the deficiencies. Unaudited financial information reported by the Foundation may also contain misstatements resulting from these deficiencies. Our tests for compliance with relevant provisions of laws and regulations disclosed one area of material noncompliance that is reportable under U.S. generally accepted government auditing standards. This concerns the Foundation's ability to ensure that it has appropriate procedures for fiscal control and fund accounting and that its financial operations are administered by personnel with expertise in accounting and financial management. Specifically, section 104(c)(1) of the Congressional Award Act, as amended (2 U.S.C. SS 804(c)(1)), requires the Director, in consultation with the Congressional Award Board, to "ensure that appropriate procedures for fiscal control and fund accounting are established for the financial operations of the Congressional Award Program, and that such operations are administered by personnel with expertise in accounting and financial management." The Comptroller General is required by section 104(c)(2)(A) of the Congressional Award Act, as amended (2 U.S.C. SS 804(c)(2)(A)), to (1) annually determine whether the Director has substantially complied with the requirement to have appropriate procedures for fiscal control and fund accounting for the financial operations of the Congressional Award Program and to have personnel with expertise in accounting and financial management to administer the financial operations, and (2) report the findings in the annual audit report. We reported a material internal control weakness in financial reporting-- due in part, to a lack of written policies and procedures--in our audit report covering fiscal year 2003. For calendar year 2004, the Foundation still did not have appropriate written fiscal procedures for its financial operations. Additionally, the Foundation recorded entries for only half of the calendar year, leaving many of the financial transactions of the Foundation unrecorded during 2004. For 2004, because the Foundation did not have appropriate fiscal procedures and did not have an individual with expertise in accounting and financial management to routinely administer the procedures and account for the financial operations of the Foundation, we determined that the Director did not substantially complied with the requirements in section 104(c)(1) of the Congressional Award Act, as amended (2 U.S.C. SS 804(c)(1)). Under the requirements of section 104(c)(2)(B) of the Congressional Award Act, as amended (2 U.S.C. SS 804(c)(2)(B)), if the Director fails to comply with the requirements of section 104(c)(1) of the Act, the Director is to prepare, pursuant to section 108 of the Act, for the orderly cessation of the activities of the Board. The Foundation's Board Chairman stated that during fiscal year 2005, its Board elected several new Board Members and the Foundation hired an accountant to focus on improving financial management. The newly elected Treasurer and Audit Committee Chair are working with the National Office staff to improve internal control over financial reporting and develop written fiscal policies and procedures for financial operations and reporting. Additionally, the accountant is to help ensure the accurate and timely accounting and reporting of financial information occurs. Except as noted above, our tests for compliance with selected provisions of laws and regulations for fiscal year 2004 disclosed no other instances of noncompliance that would be reportable under U.S. generally accepted government auditing standards. However, the objective of our audit was not to provide an opinion on overall compliance with laws and regulations. Accordingly, we do not express such an opinion. The Foundation incurred losses (decreases in net assets) of almost $168,000 and $6,000 in fiscal years 2004 and 2003, respectively. Although the Foundation's expenses decreased by over $166,000 between fiscal years 2003 and 2004, revenues decreased even more--by about $290,000, largely attributable to a nearly $334,000 decline in contributions. Net assets as of September 30, 2004 were approximately $42,000. During fiscal year 2002, the Foundation borrowed $100,000, the maximum amount allowable against its revolving line of credit, due to ongoing cash flow problems associated with its daily operations. This debt, partially secured by a $50,000 certificate of deposit, remained outstanding at September 30, 2004. Note 12 to the financial statements acknowledges the Foundation's increasing difficulties in meeting its financial obligations. While the Foundation has taken steps to decrease its expenditures and liabilities, those steps may not be sufficient to allow it to continue operations. For example, accounts payable at September 30, 2004, were approximately $135,500, with 86 percent of that amount representing unpaid balances owed to vendors from expenses incurred in fiscal year 2002. The Foundation was able to negotiate with certain of its vendors to cancel nearly $39,000 in liabilities to these vendors subsequent to the end of the fiscal year. However, unaudited financial data compiled by the Foundation as of September 30, 2005, showed that its financial condition has not improved. This raises substantial doubt about the Foundation's ability to continue as a going concern, absent a means of generating additional funding. As discussed earlier, during fiscal year 2003, the Director of Finance and Administration resigned his position at the Foundation and became Treasurer of the Congressional Award Board of Directors. This move was in part because of the Foundation's deteriorating financial condition. In another effort to keep expenses to a minimum, the Foundation reduced its staff by over one-half during fiscal year 2004. Additionally, during the second half of fiscal year 2004, the Foundation's Board directed the National Director to reduce his pay by 50 percent in order to further control Foundation expenses. The National Director retired as of September 30, 2004, and the Foundation promoted the Program Director to serve as the Acting National Director. In its plan to deal with its deteriorating financial condition and increase its revenues, the Foundation modified its approach to fundraising by holding more frequent but smaller and less expensive fundraising events than in the past. However, these smaller fundraisers did not increase contributions which, as noted above, decreased by $334,000 or 54 percent between fiscal years 2003 and 2004. To further improve fundraising efforts, the Foundation stated that its Board created a Congressional Liaison Committee, Development Committee, and Program Committee during fiscal year 2005. The newly elected Development Chairperson is leading fundraising initiatives in the corporate community, including pursuing grant opportunities, and the Foundation continues to work with professional fundraisers to more actively involve congressional members. At present, the Foundation is prohibited from receiving federal funds, but is permitted to receive certain in-kind and indirect resources, as explained in Note 5 to the financial statements. The Foundation has attempted, but has been unsuccessful, in securing federal funding through a direct appropriation. On July 14, 2005, the Senate passed S. 335 to reauthorize the Congressional Award Board, which terminated on October 1, 2004, until October 1, 2009. The bill was received in the House of Representatives and was referred to the Committee on Education and the Workforce on July 19, 2005. Subsequently, on September 22, 2005, H.R. 3867, which is identical to S. 335, was introduced in the House to reauthorize the Board and was also referred to the Committee on Education and the Workforce. The ultimate outcome of the reauthorization efforts was unknown at the date of our report. The Foundation's management is responsible for preparing the annual financial statements in conformity with U.S. generally accepted accounting principles; establishing, maintaining, and assessing the Foundation's internal control to provide reasonable assurance that the Foundation's control objectives are met; and complying with applicable laws and regulations. We are responsible for obtaining reasonable assurance about whether (1) the financial statements are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles and (2) management maintained effective internal control, the objectives of which are the following. Financial reporting-transactions are properly recorded, processed, and summarized to permit the preparation of financial statements, in conformity with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use, or disposition. Compliance with laws and regulations-transactions are executed in accordance with laws and regulations that could have a direct and material effect on the financial statements. We are also responsible for testing compliance with selected provisions of laws and regulations that have a direct and material effect on the financial statements. In order to fulfill these responsibilities, we examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessed the accounting principles used and significant estimates made evaluated the overall presentation of the financial statements and notes; read unaudited financial information for the Foundation for fiscal year obtained an understanding of the internal control related to financial reporting (including safeguarding assets) and compliance with laws and regulations; tested relevant internal control over financial reporting and compliance and evaluated the design and operating effectiveness of internal control; and tested compliance with selected provisions of the Congressional Award Act, as amended. We did not evaluate internal control relevant to operating objectives, such as controls relevant to ensuring efficient operations. We limited our internal control testing to controls over financial reporting and compliance. We did not test compliance with all laws and regulations applicable to the Foundation. We limited our tests of compliance to those provisions of laws and regulations that we deemed to have a direct and material effect on the financial statements for the fiscal year ended September 30, 2004. We caution that noncompliance may occur and not be detected by our tests and that such testing may not be sufficient for other purposes. We performed our work in accordance with U.S. generally accepted government auditing standards. In commenting on a draft of this report, the Foundation discussed past and ongoing efforts to obtain reauthorization for the Foundation, as well as its efforts to improve its financial condition through increases in revenues and reductions in expenses to support the growth in the Congressional Award program. The Foundation also discussed its efforts to improve its financial management. The Foundation noted that in fiscal year 2004, a bill to reauthorize the Foundation and provide it authority to receive direct federal appropriations of $750,000 of matched funds annually through 2009 was passed unanimously by the Senate. However, the bill did not pass the House of Representatives. Since then, the Foundation has continued to seek reauthorization of the program, excluding the provision for federal appropriations. The Foundation noted that legislation reauthorizing the Foundation again passed the Senate in 2005, and is currently being considered by the House of Representatives. The Foundation also noted its efforts to increase revenues. With newly appointed Foundation Board Members and fundraising consultants, the Foundation stated it had developed ways to recruit new donors and keep current and former donors informed and engaged. In order to raise awareness and funding for the program, the Foundation holds events with members of Congress in Washington, D.C. Several events were held in fiscal year 2004 and similar fund-raising events continued in fiscal year 2005. In addition, the Foundation noted that it continued to hold its annual Congressional Award Golf Classic during 2005 as another fundraising event. At the same time, the Foundation noted that it continues to keep its expenses down. The Foundation noted that in fiscal year 2004, it had reduced operating expenses to less than $595,000 (down from about $760,000 in fiscal year 2003) and reduced its staff by 50 percent. The Foundation stated that it currently has only five full-time employees and four unpaid interns to oversee program activity in all 50 states. With the program continuing to grow, the Foundation stated that it is using new methods to operate the program at very little cost. By utilizing the Web site and online tools, the Foundation stated that it is able to communicate with new and current participants, parents, volunteers, congressional offices, and donors electronically, which minimizes printing, postal, and travel expenses. The Foundation also emphasized its efforts to improve its financial management, noting that the newly elected Treasurer and Audit Committee Chair are working with the Foundation's National Office staff to improve internal control over financial reporting and develop written fiscal policies and procedures for financial operations and reporting. The Foundation noted that the accountant it hired in 2005 will help ensure that accurate and timely accounting and reporting of financial information occurs. Congressional Award Fellowship Trust (note 4) Equipment, furniture, and fixtures, net Accounts payable (note 9) Accrued payroll, related taxes, and leave (250,133) Temporarily restricted (note 6) Permanently restricted (note 4) The accompanying notes are an integral part of these financial statements. Changes in unrestricted net assets: Operating revenue and other support Contributions - In-kind (note 5) Interest and dividends applied to current operations Net assets released from restrictions (note 6) Total operating revenue and other support Operating expenses (note 11) Salaries, benefits, and payroll taxes Program, promotion, and travel (18,548) Unrealized investment gains not applied to current operations Realized investment (losses) not applied to current operations (1,669) (7,642) (Decrease) increase in unrestricted net assets (3,785) Changes in temporarily restricted net assets: Net assets released from restrictions (note 6) (164,171) (164,394) (Decrease) increase in temporarily restricted net assets (164,171) (164,394) (Decrease) increase in net assets (167,956) (5,990) The accompanying notes are an integral part of these financial statements. Cash flows from operating activities: Cash received from program activities (340,527) (579,918) (88,017) (276,583) Net cash provided/(used) from operating activities (12,973) Cash flows from investing activities: (146,996) Proceeds from sale of investments Net cash provided/(used) in investing activities (12,448) Cash flows from financing activities: (2,283) Net cash provided/(used) in financing activities (2,283) Net (Decrease) increase in cash (2,590) (5,242) Reconciliation of change in net assets to net cash provided/(used) from operating activities ($167,956) ($5,990) Adjustments to reconcile change in net assets to net cash used/provided from operating activities: Investment (losses) not applied to operations (5,388) (53,406) Decrease (increase) in contributions receivable (Increase) decrease in accounts receivable (242) (Increase) decrease in prepaid expenses (1,068) (Increase) decrease in Board of Directors prepaid expense (4,620) Decrease (increase) in investments (money funds/equity securities) (2,040) (Decrease) increase in accounts payable (14,840) (124,318) Increase (Decrease) in accrued payroll, related taxes, and leave (25,102) (Increase) decrease in Gold Award Ceremony (945) (Increase) decrease in program, promotion, and travel (1,393) Decrease (increase) in Plan 403(b) Net cash provided/(used) from operating activities ($12,973) The accompanying notes are an integral part of these financial statements. For the Fiscal Years Ended September 30, 2004, and 2003 The Congressional Award Foundation (the Foundation) was formed in 1979 under Public Law 96-114 and is a private, nonprofit, tax-exempt organization under Section 501(c)(3) of the Internal Revenue code established to promote initiative, achievement, and excellence among young people in the areas of public service, personal development, physical fitness, and expedition. New program participants totaled over 2,700 in fiscal year 2004. During fiscal year 2004, there were over 17,000 participants registered in the Foundation Award's program. Certificates and medals were awarded to 2,205 participants during fiscal year 2004. In October 1999, the President signed Public Law 106-63, section 1(d) of which reauthorized the Congressional Award Foundation through September 30, 2004. The financial statements are prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles applicable to not-for- profit organizations. The Foundation considers funds held in its checking account and all highly liquid investments with an original maturity of 3 months or less to be cash equivalents. Money market funds held in the Foundation's Congressional Award Trust (the Trust) are not considered cash equivalents for financial statement reporting purposes. The Declaration of Trust of the Congressional Award Trust was amended, with the consent of the original declarants of the Trust and the Trustees, effective December 2003. Among other changes, the Amended Trust Declaration removes the restriction on the use of endowment donations. The Trustees may now apply any trust funds for the benefit of the Foundation. Unconditional promises to give are recorded as revenue when the promises are made. Contributions receivable to be collected within less than one year are measured at net realizable value. D. Equipment, Furniture and Fixtures, and Related Depreciation Equipment, furniture, and fixtures are stated at cost. Depreciation of furniture and equipment is computed using the straight-line method over estimated useful lives of 5 to 10 years. Leasehold improvements are amortized over the lesser of their For the Fiscal Years Ended September 30, 2004, and 2003 estimated useful lives or the remaining life of the lease. Expenditures for major additions and betterments are capitalized; expenditures for maintenance and repairs are charged to expense when incurred. Upon retirement or disposal of assets, the cost and accumulated depreciation are eliminated from the accounts and the resulting gain or loss is included in revenue or expense, as appropriate. Investments consist of equity securities, money market funds, and a $50,000 certificate of deposit and are stated at market value. F. Classification of Net Assets The net assets of the Foundation are reported as follows: Unrestricted net assets represent the portion of expendable funds that are available for the general support of the Foundation. Temporarily restricted net assets represent amounts that are specifically restricted by donors or grantors for specific programs or future periods. Permanently restricted net assets result from donor-imposed restrictions stipulating that the resources donated are maintained permanently. Contribution revenue is recognized when received or promised and recorded as temporarily restricted if the funds are received with donor or grantor stipulations that limit the use of the donated assets to a particular purpose or for specific periods. When a stipulated time restriction ends or purpose of the restriction is met, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. H. Functional Allocation of Expenses The costs of providing the various programs and other activities have been summarized on a functional basis as described in note 11. Accordingly, certain costs have been allocated among the programs and supporting services benefitedThe preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Note 3. Contributions Receivable At September 30, 2004, and 2003, promises to give totaled $60,573 and $160,021, respectively, of which $0 and $160,000, respectively, were due within 1 year. All amounts have subsequently been collected. At September 30, 2004, and 2003, $31,626 and $195,798, respectively, were temporarily restricted by donors for future periods. For fiscal year 2003, the promises to give were a result of the "Charter for Youth" fundraising initiative. Charter for Youth benefactors are requested to contribute a minimum of $100,000 per year for 3 consecutive years for the direct support of The Congressional Award and its initiatives for participant recruitment and awardees recognition. Charter for Youth members have the opportunity to participate in Congressional Award events, and receive recognition as benefactors at the national and regional events and meetings. Note 4. Unrestricted and Permanently Restricted Net Assets The Congressional Award Fellowship Trust (the Trust Fund) was established in 1990 to benefit the charitable and educational purposes of the Foundation. The Trust Fund has received $264,457 of contributions since 1990, which were designated as permanently restricted by the donors when the donations were originally made. In accordance with the terms of the 1990 Trust Agreement (the Agreement), the Foundation was permitted to use all Trust Fund income for the benefit of the charitable and educational purposes of the Foundation. Trust Fund income represents the value of the Trust Fund's assets (including interest and dividends earned and realized and unrealized gains and losses on Trust Fund investments) in excess of the aggregate amount received as endowment donations. Proceeds from investments can only be used in operations with approval of the Foundation's Board. The agreement describes endowment donations as the aggregate fair market value (as of the contribution date) of all donations to the Trust Fund. As defined by the agreement, this represents the amount of the Trust Fund's assets that the Foundation could not use or distribute. During the fiscal year ending September 30, 2004, the trust conditions changed. The Declaration of Trust of the Congressional Award Trust was amended, with the consent of the original declarants of the Trust and the Trustees, effective December 2003. Among other changes, the Amended Trust Declaration removes the permanent restriction on the use of endowment donations. The Trustees must approve any Trust Fund amounts for unrestricted use by the Foundation. Also, during the fiscal year ended September 30, 2004, the Trustee's authorized and the Foundation's Board approved the use of $34,915 of the Trust Fund to support 2004 operations. At September 30, 2004, and 2003, the Trust Fund's investments at fair value consisted of the following: For the Fiscal Years Ended September 30, 2004, and 2003 Activity in the Trust Fund for the fiscal years ended September 30, 2004, and 2003 was as follows: Net realized gains (losses) (1,669) (7,642) Investments transferred to current operations (55,092) Investment earnings applied to current operations Net change in Trust Fund investments (34,915) Trust Fund investments, beginning of year Trust Fund investments, end of year The value of the Trust Fund at September 30, 2003 dropped below the permanently restricted balance by $33,991. During fiscal year 2004, the Foundation received in-kind (non-cash) contributions from donors, which are accounted for as contribution revenue and as current period operating expenses. The in-kind contributions received were for professional services relating to support of activities of the Foundation. The value of the in-kind contributions was $94,596 for fiscal year 2004 and $33,367 for fiscal year 2003. In 2004, legal activities included several one-time matters including amendment of the Trust Agreement and securing a state ruling for Trust exemption. Professional services: Legal Web-hosting In addition, Section 7(c) of Public Law 101-525, the Congressional Award Amendments of 1990, provided that "the Board may benefit from in-kind and indirect resources provided by the Offices of Members of Congress or the Congress." Resources so provided include use of office space, office furniture, and certain utilities. In addition, section 102 of the Congressional Award Act, as amended, provides that the United States Mint may charge the United States Mint Public Enterprise Fund for the cost of striking Congressional Award Medals. The costs of these resources cannot be readily determined and, thus, are not included in the financial statements. Note 7. Employee Retirement Plan For the benefit of its employees, the Foundation participates in a voluntary 403(b) tax- For the Fiscal Years Ended September 30, 2004, and 2003 deferred annuity plan, which was activated on August 27, 1993. Under the plan, the Foundation may, but is not required to, make employer contributions to the plan. There was no contribution to the plan in 2004 or 2003. Note 8. Line of Credit The Foundation has a $100,000 revolving line of credit with its bank that bears interest at 6 percent per annum. The line of credit is partially secured by the Foundation's investment in a $50,000 certificate of deposit held by the same bank. At September 30, 2004 and 2003, the outstanding balance on the line of credit was $100,000. Note 9. Accounts Payable The accounts payable balance of $135,503 at September 30, 2004, is comprised of $116,635 attributable to goods and services received in fiscal year 2002, and the remainder attributable to goods and services received in fiscal years 2003 and 2004. The accounts payable balance at September 30, 2003, was $150,343. Subsequent to the end of fiscal year 2004, there was approximately $39,000 in accounts payable that were cancelled and converted to an "in-kind" donation. See subsequent events note 13. Note 10. Related Party Activities During fiscal year 2004, an ex-officio director of the Board provided pro bono legal services to the Foundation. The value of legal services has been included in the in-kind contributions and professional fees line items (see note 5). In addition, a director of the Board served as portfolio manager with the brokerage firm responsible for managing the Congressional Award Fellowship Trust account during fiscal years 2004 and 2003. During March 2004, the Foundation entered into an agreement with a professional fundraiser. Also in 2004, the spouse of this professional fundraiser was elected to the Board of Directors of the Foundation. The professional fundraiser was retained on a 10% commission basis. Expenses incurred by the Foundation during fiscal year 2004 to the related party totaled $ 9,756. Note 11. Expenses by Functional Classification The Foundation has presented its operating expenses by natural classification in the accompanying Statements of Activities for the fiscal years ending September 30, 2004, For the Fiscal Years Ended September 30, 2004, and 2003 and 2003. Presented below are the Foundation's expenses by functional classification for the fiscal years ended September 30, 2004, and 2003. Note 12. The Foundation's Ability to Continue as a Going Concern The Congressional Award Foundation is dependent on contributions to fund its operations and, to a far lesser extent, other revenues, interest, and dividends. The Foundation incurred decreases in net assets of $167,956 and $5,990 in fiscal years 2004 and 2003, respectively. As a result, the Foundation continues to experience difficulty in meeting its obligations. The Foundation has taken steps to substantially decrease administrative expenses, and has implemented numerous initiatives to increase fundraising revenue. The Foundation's ability to continue as a going concern is dependent on increasing revenues. Revenues have been impacted by the fact that the Foundation has not been reauthorized by the Congress. The Foundation has taken all actions necessary to seek reauthorization of the program. Legislation has passed the Senate and is being considered by the House of Representatives. While the Foundation has taken steps to decrease its expenses, those steps may not be sufficient to enable it to continue operations. Unaudited financial data compiled by the Foundation as of September 30, 2005, showed that the Foundation's financial condition has not improved. The continuing deterioration in the Foundation's financial condition raises substantial doubt about its ability to continue as a going concern. During fiscal year 2005, the Board elected several new Members and the Foundation hired an accountant to focus on improving financial management. The newly elected Treasurer and Audit Committee Chair are working with the National Office staff to improve internal control over financial reporting and develop written fiscal policies and procedures for financial operations and reporting. The accountant is expected to provide accurate and timely accounting and reporting. To improve fundraising efforts, the Board created a Congressional Liaison Committee, Development Committee, and Program Committee during fiscal year 2005. The newly elected Development Chairperson is leading fundraising initiatives in the corporate community, including pursuing grant opportunities, and the Foundation continues to work with professional fundraisers to more actively involve congressional members. These events should generate funds from new donors and provide opportunities to maintain relations with current Foundation supporters. Note 13. Subsequent Events On July 14, 2005, the Senate passed S. 335 to reauthorize the Congressional Award Board, which terminated on October 1, 2004, until October 1, 2009. The bill was received in the House of Representative and was referred to the Committee on Education and the Workforce on July 19, 2005. Subsequently, on September 22, 2005, H.R. 3867, which is identical to S. 335, was introduced in the House to reauthorize the Board and was also referred to the Committee on Education and the Workforce. the Foundation negotiated cancellation of Subsequent approximately $39,000 of its liabilities with vendors. The vendors offered these balances owed as "in-kind" contributions to the Foundation. On October 1, 2005, the Foundation appointed a new Treasurer and Audit Committee Chair. The new Treasurer is currently with the Willard Group and the new Audit Committee Chair is currently the Senior Director of Corporate Finance at McDonald's. Both positions are voluntary.
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This report presents our opinion on the financial statements of the Congressional Award Foundation for the fiscal years ended September 30, 2004, and 2003. These financial statements are the responsibility of the Congressional Award Foundation. This report also presents (1) our opinion on the effectiveness of the Foundation's related internal control as of September 30, 2004, and (2) our conclusion on the Foundation's compliance in fiscal year 2004 with selected provisions of laws and regulations we tested. We conducted our audit pursuant to section 107 of the Congressional Award Act, as amended (2 U.S.C. 807), and in accordance with U.S. generally accepted government auditing standards. We have audited the statements of financial position of the Congressional Award Foundation (the Foundation) as of September 30, 2004, and 2003, and the related statements of activities and statements of cash flows for the fiscal years then ended. We found (1) the financial statements are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, although substantial doubt exists about the Foundation's ability to continue as a going concern; (2) the Foundation did not have effective internal control over financial reporting (including safeguarding assets) and compliance with laws and regulations; and (3) a reportable noncompliance with one of the laws and regulations we tested.
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PCASG fund recipients that responded to our October 2008 survey reported that they used PCASG funds to hire or retain health care providers and other staff, add primary care services, and open new sites. (See table 1.) Recipients also said that the PCASG funds helped them improve service delivery and access to care for the patients they served. As of September 20, 2009, PCASG recipients reported to LPHI that they had used PCASG funds--in conjunction with other funds, such as other federal grants and Medicaid reimbursement--to support services provided to almost 252,000 patients. These patients had over 1 million encounters with a health care provider, two-thirds of which were for medical and dental care and one-third of which were for mental health care. A small number of encounters were for specialty care. The patients served by the PCASG fund recipients were typically uninsured or enrolled in Medicaid. We reported in July 2009 that for the first several months during which PCASG funds were available, at more than half of the PCASG fund recipients, at least half--and at times over 70 percent--of the patient population was uninsured. Of the 20 recipients that reported in our October 2008 survey that they used PCASG funds to hire health care providers, half hired both medical and mental health providers. (See fig. 1.) One recipient reported that by hiring one psychiatrist, it could significantly increase clients' access to services by cutting down a clinic's waiting list and by providing clients with a "same-day" psychiatric consultation or evaluation. Another recipient reported that it hired 23 medical care providers, some of whom were staffed at its new sites. Some recipients reported that hiring additional providers enabled them to expand the hours some of their sites were open. Of the 23 recipients that responded to our survey, 17 reported they used PCASG funds to retain health care providers, and 15 of these reported that they also used grant funds to retain other staff. For example, one recipient reported that PCASG funds were used to stabilize positions that were previously supported by disaster relief funds and donated services. Nineteen of the 23 PCASG fund recipients that responded to our survey reported using PCASG funds to add or expand medical, mental health, or dental care services, and more than half of these added or expanded more than one type of service. Specifically, 11 added or expanded medical care, 15 added or expanded mental health care, and 4 added or expanded dental care services. In addition, PCASG fund recipients also reported using grant funds to add or expand specialty care or ancillary services. One recipient reported that it used PCASG funds to create a television commercial announcing that a clinic was open and that psychiatric services were available there, including free care for those who qualified financially. Almost all of the PCASG fund recipients that responded to our survey reported they used PCASG funds for their physical space. Ten recipients that responded to our survey reported using grant funds to renovate existing sites, such as expanding a waiting room, adding a registration window, and adding patient restrooms, to accommodate more patients. Officials from one PCASG fund recipient reported that relocating to a larger site allowed providers to have additional examination rooms. PCASG fund recipients that responded to our survey reported that certain program requirements--such as developing a network of local specialists and hospitals for patient referrals and establishing a quality assurance and improvement program that includes clinical guidelines or evidence-based standards of care--have had a positive effect on their delivery of primary care services. In addition, they reported that the PCASG funds helped them improve access to health care services for residents of the greater New Orleans area. For example, one PCASG fund recipient reported that the PCASG funds have helped it to expand services beyond residents in shelter and housing programs to include community residents who were not homeless but previously lacked access to health care services. Representatives of other PCASG fund recipients have reported that their organization improved access to care by expanding services in medically underserved neighborhoods or to people who were uninsured or underinsured. Representatives of local organizations also told us the PCASG provided an opportunity to rebuild the health care system and shift the provision of primary care from hospitals to community-based primary care clinics. PCASG fund recipients also used other federal hurricane relief funds to help support the restoration of primary care services. According to LDHH data, as of August 2008, 11 PCASG fund recipients expended $12.9 million of the SSBG supplemental funds that were awarded to Louisiana and that the state designated for primary care. They used these funds to pay for staff salaries, purchase medical equipment, and support operations. For example, one recipient used SSBG supplemental funds to hire new medical and support staff and, as a result, expanded its services for mammography, cardiology, and mental health. The two PCASG fund recipients that received a total of almost $12 million in SSBG supplemental funds designated for mental health care used those funds to provide crisis intervention, substance abuse, and other mental health services, mostly through contracts to other organizations and providers. The majority of funds were expended on the categories LDHH identified as "substance abuse treatment and prevention services," "immediate intervention and crisis response services," and "behavioral health services for children and adolescents." As of August 2008, most of the 25 PCASG fund recipients had retained or hired a health care provider who had received a Professional Workforce Supply Grant incentive payment to continue or begin working in the greater New Orleans area. Among the health care providers working for PCASG fund recipients, 69 received incentives that totaled $4.5 million. The number of those health care providers who were employed by individual PCASG fund recipients ranged from 1 or 2 at 7 recipient organizations to 10 at 2 recipient organizations. Three-quarters of recipients of incentive payments were existing employees who were retained, while one-quarter were newly hired. PCASG fund recipients face significant challenges in hiring and retaining staff, as well as in referring patients outside of their organizations, and these challenges have grown since Hurricane Katrina. Recipients are taking actions to address the challenge of sustainability, but are concerned about what will happen when PCASG funds are no longer available. Although most of the 23 PCASG fund recipients that responded to our October 2008 survey hired or retained staff with grant funds, most have continued to face significant challenges in hiring and retaining staff. Twenty of the 23 recipients reported the hiring of health care providers to be either a great or moderate challenge. Among those, over three-quarters responded that this challenge had grown since Hurricane Katrina. For example, in discussing challenges, officials from one recipient organization told us that after Hurricane Katrina they had greater difficulty hiring licensed nurses than before the hurricane and that most nurses were being recruited by hospitals, where the pay was higher. Moreover, officials we interviewed from several recipient organizations said that the problems with housing, schools, and overall community infrastructure that developed after Hurricane Katrina made it difficult to attract health care providers and other staff. In addition, 16 of the 23 recipients reported that retaining health care providers was a great or moderate challenge. Among those, about three-quarters also reported that this challenge had grown since Hurricane Katrina. An additional indication of the limited availability of primary care providers in the area is HRSA's designation of much of the greater New Orleans area as health professional shortage areas (HPSA) for primary care, mental health care, and dental care. Specifically, HRSA designated all of Orleans, Plaquemines, and St. Bernard parishes, and much of Jefferson Parish, as HPSAs for primary care. While some portions of the greater New Orleans area had this HPSA designation before Hurricane Katrina, additional portions of the area received that designation after the hurricane. Similarly, HRSA designated all four parishes of the greater New Orleans area as HPSAs for mental health in late 2005 and early 2006; before Hurricane Katrina, none of the four parishes had this designation for mental health. In addition, HRSA has designated all of Orleans, St. Bernard, and Plaquemines parishes and part of Jefferson Parish as HPSAs for dental care; before Katrina, only parts of Orleans and Jefferson parishes had this designation. The PCASG fund recipients that primarily provide mental health services in particular faced challenges both in hiring and in retaining providers. Six of the seven that responded to our October 2008 survey reported that both hiring and retaining providers were either a great or moderate challenge. Officials we interviewed from one recipient told us that while the Greater New Orleans Service Corps, which was funded through the Professional Workforce Supply Grant, had been helpful for recruiting and retaining physicians, it had not helped fill the need for social workers. Furthermore, officials we interviewed from two recipients told us that some staff had experienced depression and trauma themselves and found it difficult to work in mental health settings. Beyond challenges in hiring and retaining their own providers and other staff, PCASG fund recipients that responded to our survey reported significant challenges in referring their patients to other organizations for mental health, dental, and specialty care services. We also reported on a lack of mental health providers in our July 2009 report that examined barriers to mental health services for children in the greater New Orleans area. Specifically, 15 of the 18 organizations we interviewed for that work identified a lack of mental health providers-- including challenges recruiting and retaining child psychiatrists, psychologists, and nurses--as a barrier to providing mental health services for children. In addition, we reported that HRSA's Area Resource File (ARF)--a county-based health resources database that contains data from many sources including the U.S. Census Bureau and the American Medical Association--indicated that the greater New Orleans area has experienced more of a decrease in mental health providers than some other parts of the country. For example, we found that ARF data documented a 21 percent decrease in the number of psychiatrists in the greater New Orleans area from 2004 to 2006, during which time there was a 1 percent decrease in Wayne County, Michigan (which includes Detroit and which had pre- Katrina poverty and demographic characteristics similar to those of the greater New Orleans area) and a 3 percent increase in counties nationwide. In our July 2009 report on the PCASG, we found that an additional challenge that the PCASG fund recipients face is to be sustainable after PCASG funds are no longer available in September 2010. All 23 recipients that responded to our October 2008 survey reported that they had taken or planned to take at least one type of action to increase their ability to be sustainable--that is, to be able to serve patients regardless of the patients' ability to pay after PCASG funds are no longer available. For example, all responding recipients reported that they had taken action--such as screening patients for eligibility--to facilitate their ability to receive reimbursement for services they provided to Medicaid or LaCHIP beneficiaries. Furthermore, 16 recipients that responded to our October 2008 survey reported that they were billing private insurance, with an additional 5 recipients reporting they planned to do so. However, obtaining reimbursement for all patients who are insured may not be sufficient to ensure a recipient's sustainability, because at about half of the PCASG fund recipients, over 50 percent of the patients were uninsured. Many PCASG fund recipients reported that they intended to use Health Center Program funding or FQHC Look-Alike designation--which allows for enhanced Medicare and Medicaid payment rates--as one of their sustainability strategies. Four recipients were participating in the Health Center Program at the time they received the initial disbursement of PCASG funds. One of these recipients had received a Health Center New Access Point grant to open an additional site after Hurricane Katrina and had also received an Expanded Medical Capacity grant to increase service capacity, which it used in part to hire additional staff and buy equipment. Another of these recipients received a New Access Point grant to open an additional site after receiving PCASG funds. Beyond these four recipients, one additional recipient received an FQHC Look-Alike designation in July 2008. HRSA made additional grants from appropriations made available by the American Recovery and Reinvestment Act of 2009, awarding five PCASG fund recipients with additional Health Center Program grants totaling $7.4 million as of October 19, 2009. Specifically, three PCASG fund recipients were awarded New Access Point grants totaling $3.9 million, five received Capital Improvement Program grants totaling more than $2.4 million, and five received Increased Demand for Services grants totaling nearly $1.1 million. Of the remaining 18 recipients that responded to our survey, 6 said they planned to apply for both a Health Center Program grant and an FQHC Look-Alike designation. In addition, one planned to apply for a grant only and another planned to apply for an FQHC Look-Alike designation only. Although many recipients indicated that they intended to use Health Center Program funding as a sustainability strategy, it is unlikely that they would all be successful in obtaining a grant. For example, in fiscal year 2008 only about 16 percent of all applications for New Access Point grants resulted in grant awards. About three-quarters of PCASG fund recipients reported that as one of their sustainability strategies they had applied or planned to apply for additional federal funding, such as Ryan White HIV/AIDS Program grants, or for state funding. In addition, a few reported that they had applied or planned to apply for private grants, such as grants from foundations. In our fall 2009 interviews, LPHI and PCASG recipient officials told us that there is uncertainty and concern among the PCASG fund recipients as the time approaches when PCASG funding will no longer be available. LPHI officials told us that they expect that some PCASG fund recipients might have to close, and others could be forced to scale back their current capacity by as much as 30 or 40 percent. For example, one PCASG fund recipient official we spoke with in November 2009 told us that the organization's mobile medical units may not be sustainable without PCASG funding; services provided by mobile units are not eligible for Medicaid funding without a referral and collecting cash from patients could make the units targets for crime. LPHI officials said they expect that the loss of PCASG funds would most affect PCASG fund recipients that serve the largest number of uninsured patients. To help PCASG fund recipients achieve sustainability, the LPHI developed a sustainability strategy guide in April 2009. This guide suggests actions that the recipients could take to become sustainable entities, such as maximizing revenues by improving their ability to screen patients for eligibility for Medicaid and other third party payers, enroll eligible patients, electronically bill the insurers, and collect payment from insurers. LPHI and a PCASG fund recipient have identified additional potential approaches for securing revenues to decrease what LPHI estimated would be a $30 million gap in the PCASG fund recipients' annual revenues when PCASG funds are no longer available. The LPHI sustainability strategy guide proposed that expanding Medicaid eligibility through a proposed Medicaid demonstration project that HHS is reviewing could result in a decrease in the number of uninsured people; these are the patients for whom PCASG fund recipients are most dependent on federal subsidies. The LPHI guide also suggested that it could be helpful if Louisiana received greater flexibility to use Medicaid disproportionate share dollars for outpatient primary care not provided by hospitals. In addition, a PCASG fund recipient official told us in November 2009 that a no-cost extension for PCASG funds might help some PCASG fund recipients if they are able to stretch their PCASG dollars beyond September 30, 2010. Although PCASG fund recipients have completed or planned actions to increase their ability to be sustainable and have received guidance from LPHI, it is unclear which recipients' sustainability strategies will be successful and how many patients recipients will be able to continue to serve. With the availability of PCASG funds scheduled to end in less than 10 months, preventing disruption in the delivery of primary care services could depend on quickly identifying and implementing workable sustainability strategies. Mr. Chairman, this completes my prepared remarks. I would be happy to respond to any questions you or other members of the committee may have at this time. For further information about this statement, please contact Cynthia A. Bascetta at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement were Helene F. Toiv, Assistant Director; Carolyn Feis Korman; Deitra Lee; Coy J. Nesbitt; Roseanne Price; and Jennifer Whitworth. 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 greater New Orleans area--Jefferson, Orleans, Plaquemines, and St. Bernard parishes--continues to face challenges in restoring health care services disrupted by Hurricane Katrina which made landfall in August 2005. In 2007, the Department of Health and Human Services (HHS) awarded the $100 million Primary Care Access and Stabilization Grant (PCASG) to Louisiana to help restore primary care services to the low-income population. Louisiana gave PCASG funds to 25 outpatient provider organizations in the greater New Orleans area. GAO was asked to testify on (1) how PCASG fund recipients used the PCASG funds, (2) how recipients used and benefited from other federal hurricane relief funds, and (3) challenges recipients faced and recipients' plans for sustaining services after PCASG funds are no longer available. This statement is based on a recent GAO report, Hurricane Katrina: Federal Grants Have Helped Health Care Organizations Provide Primary Care, but Challenges Remain (GAO-09-588), other GAO work, and updated information on services, funding, and sustainability plans, which we shared with HHS officials. For the report, GAO analyzed responses to an October 2008 survey sent to all 25 PCASG fund recipients, to which 23 responded, and analyzed information related to other federal funds received by PCASG fund recipients. GAO also interviewed HHS and Louisiana Department of Health and Hospitals officials and other experts. PCASG fund recipients reported in 2008 that they used PCASG funds to hire or retain health care providers and other staff, add primary care services, and open new sites. For example, 20 of the 23 recipients that responded to the GAO survey reported using PCASG funds to hire health care providers, and 17 reported using PCASG funds to retain health care providers. In addition, most of the recipients reported that they used PCASG funds to add primary care services and to add or renovate sites. Recipients also reported that the grant requirements and funding helped them improve service delivery and expand access to care in underserved neighborhoods. As of September 2009, recipients used PCASG funds to support services for almost 252,000 patients, who had over 1 million interactions with a health care provider. Other federal hurricane relief funds helped PCASG fund recipients pay staff, purchase equipment, and expand mental health services to help restore primary care. According to data from the Louisiana Department of Health and Hospitals, 11 recipients received HHS Social Services Block Grant (SSBG) supplemental funds designated by Louisiana for primary care, and 2 received SSBG supplemental funds designated by Louisiana specifically for mental health care. The funds designated for primary care were used to pay staff and purchase equipment, and the funds designated for mental health care were used to provide a range of services including crisis intervention and substance abuse prevention and treatment. Most of the PCASG fund recipients benefited from the Professional Workforce Supply Grant incentives. These recipients hired or retained 69 health care providers who received incentives totaling over $4 million to work in the greater New Orleans area. PCASG fund recipients face multiple challenges and have various plans for sustainability. Recipients face significant challenges in hiring and retaining staff, as well as in referring patients outside of their organizations, and these challenges have grown since Hurricane Katrina. For example, 20 of 23 recipients that responded to the 2008 GAO survey reported hiring health care providers was a great or moderate challenge, and over three-quarters of these 20 recipients reported that this challenge had grown since Hurricane Katrina. PCASG fund recipients also reported challenges in referring patients outside their organization for mental health, dental, and specialty care services. Although all PCASG fund recipients have completed or planned actions to increase their ability to be sustainable, recipients are concerned about what will happen when PCASG funds are no longer available. Officials of the Louisiana Public Health Institute, which administers the PCASG locally, expect that some recipients might have to close and others could be forced to scale back capacity by as much as 30 or 40 percent. They have suggested strategies to decrease what they estimate would be a $30 million gap in annual revenues when PCASG funds are no longer available. With the availability of PCASG funds scheduled to end in less than 10 months, preventing disruptions in the delivery of primary care services could depend on quickly identifying and implementing workable sustainability strategies.
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The Department of State has overall responsibility for ensuring that all proposed international agreements are fully consistent with U.S. foreign policy objectives. The Department negotiates and administers government-level S&T agreements, often referred to as "umbrella" or "framework" agreements, between the U.S. government and governments of foreign countries. The Department also delegates authority to other U.S. agencies for them to negotiate and administer government-level agreements with foreign governments in mission-specific areas, such as energy and space. Government-level agreements generally provide the protocol that multiple agencies can use to share scientific data and equipment, to exchange researchers and conduct collaborative projects, and to protect intellectual property rights. In addition, research agencies negotiate and administer agency-level agreements with their counterpart agencies in foreign governments and with international organizations to conduct international cooperative research, provide technical support, or share data and/or equipment. Agencies have the flexibility to determine the number of agreements in which they participate and to choose whether these agency-level agreements will be related to or not related to a government-level agreement. The Department of State; the Offices of Science and Technology Policy and the United States Trade Representative, within the Executive Office of the President; the Department of Commerce; and other relevant agencies review many of the proposed agreements that are legally binding, as described in the Department of State's Circular 175. The review--known as the Circular 175 process-- is designed to ensure interagency coordination; consistent treatment of issues such as access to foreign facilities, information, and expertise; and appropriate consideration of the foreign policy implications of specific agreements. While these agreements can be an indicator of national interest to cooperate in research and development, they are generally diplomatic agreements that have no associated budget authority. The U.S. government maintains these agreements to support and encourage international cooperation in science and technology. However, the government does not have a system for linking international S&T agreements with actual spending on cooperative research and development. According to a study by the Rand Corporation, the U.S. government spent more than $3 billion in fiscal year 1995 on research and development projects involving international cooperation that may or may not have been associated with specific international S&T agreements. In addition, the study states that government agencies spent as much as $1.5 billion in other activities that were not research and development but that constituted scientific or technical activities that involved significant international cooperation. In this report, we categorize the international S&T agreements into four types: (1) government-level bilateral agreements between the U.S. government and the government of another country, (2) agency-level bilateral agreements between a U.S. agency and a research agency of a foreign country that are related to a government-level agreement and provide additional details that define how each agency will cooperate, (3) agency-level bilateral agreements between a U.S. agency and a research agency of a foreign country that are not related to a government-level agreement, and (4) agency-level multilateral agreements between a U.S. agency and research agencies of international organization and/or of two or more foreign countries. Figure 1 illustrates the types of S&T agreements. During fiscal year 1997, the seven agencies we reviewed participated in 575 international S&T agreements. The number of agreements varied by agency, with the Department of Energy participating in 257 (or 45 percent) of the 575 agreements. Fifty-seven countries participated in bilateral agreements, while 8 international organizations and 10 groups of organizations and/or countries participated in multilateral agreements. Two-thirds of the agreements were agency-level bilateral agreements. Most of these were not related to government-level bilateral agreements. To be related to one of the government-level agreements, an agency-level agreement must specifically state that it is related to a government-level agreement. As figure 2 shows, 225 of the 575 agreements were agency-level bilateral agreements that did not refer to a government-level agreement, while 156 agency-level bilateral agreements did reference a government-level agreement. The 140 multilateral agreements did not have corresponding government-level multilateral agreements. App. I provides additional details on the number of agreements by type. Agency officials had different viewpoints on the relative advantages and disadvantages of developing agency-level bilateral agreements that relate to government-level agreements. At the National Institute of Standards and Technology, over 80 percent of the agency-level bilateral S&T agreements refer to existing government-level agreements. Program officials at the National Institute of Standards and Technology said that they believe that it is easier to negotiate an agency-level agreement that is related to a government-level agreement because intellectual property rights issues have already been resolved in the government-level agreement. Department of State officials agreed. Office of Science and Technology Policy officials added that having agency-level agreements related to government-level agreements provides it and the Department of State some degree of oversight to ensure that agency programs are consistent with nonproliferation, trade, and other national security interests. At the Department of Energy, on the other hand, 40 percent of the Department's agency-level bilateral agreements are not related to a government-level S&T agreement. According to Department of Energy officials, having agency-level agreements that are related to government-level agreements under certain conditions can impose an administrative burden. Government-level agreements with some countries may require numerous meetings and reports to monitor the status of projects and actions. According to these officials, agency-level agreements related to such government agreements would also require similar meetings and reports. These meetings and reports can increase the cost and decrease the time available for actual research or project implementation. The distribution of the 575 agreements varied widely among the seven agencies we reviewed. As figure 3 shows, the number of agreements varied from 26 for the National Science Foundation to 257 for the Department of Energy. The seven agencies that we reviewed have bilateral agreements with 57 countries from almost every region of the world and multilateral agreements with 8 international organizations and 10 groups of organizations and/or countries. Figure 4 summarizes the distribution of bilateral agreements among major regions of the world. For example, in North America, the United States has a total of 34 bilateral agreements with two countries--Canada and Mexico. App. II provides specific data on the number of bilateral agreements by agency and by country. As figure 4 shows, 301 (69 percent) of the bilateral agreements are with Asian and European countries; Middle Eastern countries have the least number of agreements. Agreements with Japan, Russia, and China together account for 146 (34 percent) of the 435 bilateral agreements. Japan has the most agreements with an individual agency--28 with the Department of Energy. Almost half of the 57 countries participating in bilateral agreements are involved in both government-level and agency-level agreements. Figure 5 summarizes the number of countries that participate in different types of agreements. As shown in figure 5, U.S. agencies have signed international S&T agreements with agencies in 23 foreign countries that do not participate in government-level S&T agreements. For example, the Department of Energy and the National Aeronautics and Space Administration have a number of agreements with agencies in France and Australia. The United States has not signed a government-level S&T agreement with either country. Officials at the Office of Science and Technology Policy and the Department of State indicated that, with some countries, there may not be sufficient interest by enough agencies to warrant a government-level agreement. Figure 5 also shows that U.S. agencies have not developed agreements with seven countries that have signed government-level S&T agreements.According to officials at the U.S. agencies, their agencies do not participate in agreements with some countries because the countries are not conducting research that meets their agencies' mission needs. The officials said that State Department officials use joint S&T agreements as one of several tools to improve foreign relations and to demonstrate diplomatic support for a country. However, these officials said that while they recognize that diplomacy and improved foreign relations may be valid reasons for signing broad S&T agreements, individual U.S. agencies will not sign agreements with other countries unless the agreements address agency research missions. In addition, National Institutes of Health and National Science Foundation officials said that agencies can informally collaborate on research projects and in other research-related activities without an international S&T agreement. U.S. agencies have also signed a total of 140 international S&T agreements with international organizations such as the International Energy Agency and the European Space Agency and groups of organizations and/or countries. Figure 6 summarizes the number of multilateral agreements by these organizations and groups. For example, U.S. agencies have 16 agreements with the European Space Agency. See appendix III for details on the agencies, organizations, and countries participating in the multilateral agreements. Figure 6 shows that 97 (about 70 percent) of the 140 multilateral agreements are with the International Energy Agency. The International Energy Agency represents the U.S. and 23 countries with common scientific interests and priorities. According to Department of Energy officials, the International Energy Agency acts as a broker for the Department of Energy whenever two or more member countries participate in an agreement. However, the participating countries may vary for each agreement, depending in part on the subject of the agreement and the countries' interests. For example, an agreement on coal research involves Australia, Canada, and 10 other countries and the United States, while another agreement on advance fuel cells research involves Japan, Korea, and 12 other countries and the United States. More than 90 percent of the international S&T agreements active in fiscal year 1997 resulted in research projects or other research-related activities. For the agreements that did not have such results, agencies cited two reasons: funding problems of one or both parties that developed after the agreements were signed and changes in research priorities. Figure 7 shows the percentage of agency agreements that have resulted in research projects or other research-related activities since the agreements were started or last renewed. The percentage of agency agreements resulting in projects or other activities during this time ranged from 61 percent at the National Institutes of Health to 98 percent at the National Aeronautics and Space Administration. In total, 93 percent of the agency agreements, 506 in all, resulted in projects or other research-related activities such as consultations among scientists and exchanges of data and/or personnel. About 7 percent resulted in no activities. For this report, we define a research project as a set of coherent activities designed to achieve a common purpose by a specific date. We define other research-related activities as meetings, consultations, and exchanges of data and/or personnel. Agreements resulted in research projects more often--about 82 percent of the time--than in other research-related activities. See appendix IV for additional details on the results of each agency's agreements. We did not include data on the number of research projects or other research-related activities associated with the 33 government-level agreements negotiated by the Department of State because these government-level agreements generally have associated agency-level agreements. As previously noted, U.S. agencies have developed agency-level agreements with all but seven countries that have government-level agreements. For three of these countries, four U.S. agencies have started projects under government-level agreements. These projects are funded from joint matching funds provided by the U.S. government and the participating countries to encourage international collaboration. For the remaining four countries, agencies have neither signed an agency-level agreement nor started a joint project with the country under a government-level agreement. A variety of research projects are conducted under international agreements at the U.S. agencies. For example, the National Aeronautics and Space Administration's projects conducted under international agreements include a project to develop crew return and transfer vehicles for the International Space Station and to launch satellites to conduct research projects. The National Science Foundation's projects include joint work in ocean drilling, and the National Institutes of Health sponsors projects to investigate potentially dangerous infectious diseases. Table 1 provides additional examples of projects and activities resulting from the agreements. Agencies' officials told us that some agreements did not result in projects because the participating agencies of either country changed their S&T priorities or were unable to fund projects after negotiating an agreement. For example, National Institutes of Health officials said that an agreement signed late in fiscal year 1997 with Chile has not resulted in the intended projects or other activities because the Chilean science agency has not yet been able to provide the expected funding. However, the officials anticipate that projects may result from this agreement in the future. National Science Foundation officials told us that an agreement with Indonesia has not resulted in activities because of administrative problems that researchers have encountered in dealing with the country. We provided a draft of this report to the Department of State; the Department of Energy; the Department of Commerce, which includes the National Institute of Standards and Technology and the National Oceanic and Atmospheric Administration; the National Science Foundation; the National Aeronautics and Space Administration; the National Institutes of Health; and the Office of Science and Technology Policy for review and comment. We obtained comments from each of these agencies. Generally, the agencies agreed that the report accurately describes their international S&T agreements and related activities. Some of the agencies suggested technical changes to help ensure an accurate description of their international S&T agreements. In addition, the Department of State suggested changes that would clarify its role and authority. We incorporated these suggestions in our report. To determine the number and type of international S&T agreements active during fiscal year 1997, we met with officials at the Department of State's Bureau of Oceans and International Environmental and Scientific Affairs and at selected agencies. Department of State officials provided us with data on some government-level agreements. However, detailed data on individual agencies' agreements had to be obtained from representatives from each agency's international S&T office. To respond to our request for information, these officials generally collected data from various units within the agency on agreements that were active during fiscal year 1997 and provided the data to us electronically. We analyzed the data to identify the number and type of agreements and the foreign participants. To determine the number of agreements that resulted in projects or other actions and the reasons some agreements have not produced these results, we obtained information from the six U.S. research agencies. The Department of State does not generally fund research projects under the broad government-level S&T agreements that it administers. In addition, we reviewed and discussed legislation with the Department of State and other agencies that was relevant to international S&T agreements. We also reviewed and discussed with the six research agencies their policies and procedures on international S&T agreements and obtained pertinent documents and reports that discussed their international activities and agreements. In general, we relied on the data the agencies provided us and did not independently verify its accuracy. However, we reviewed early drafts of the data that the agencies prepared for us and followed up with the agencies to clarify and resolve inconsistencies in all data that the agencies provided. Our review was performed from August 1998 through April 1999 in accordance with generally accepted government auditing standards. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this report. At that time, we will send copies to the Honorable William M. Daley, Secretary of Commerce; the Honorable Bill Richardson, Secretary of Energy; the Honorable Donna E. Shalala, Secretary of Health and Human Services; the Honorable Madeleine K. Albright, Secretary of State; the Honorable D. James Baker, Under Secretary, National Oceanic and Atmospheric Administration; Raymond G. Kammer, Director, National Institute of Standards and Technology; Dr. Harold E. Varmus, Director, National Institutes of Health; Daniel S. Goldin, Administrator, National Aeronautics and Space Administration; Dr. Rita R. Colwell, Director, National Science Foundation; and Dr. Neal Lane, Director, Office of Science and Technology Policy. We will also make copies available to others on request. Please contact me at (202) 512-3841 if you or your staff have any questions. Major contributors to this report are listed in appendix V. Bilateral (related to government-level) Bilateral (not related to government-level) The number of S&T agreements for NASA may be understated. Agency officials provided data on agreements that were approved during fiscal years 1995 through 1997 because they did not know how many active agreements the agency had in fiscal year 1997. In addition to the broad S&T agreements, the Department of State has negotiated government-level diplomatic notes with Canada, United Kingdom, and Germany that address intellectual property rights. (continued) (Table notes on next page) These countries participate with the United States in joint funds established through government-level agreements or other arrangements to support international cooperation in research and development. State Department has a joint government-level agreement with the Czech and Slovak Republics. For this report, we have counted it as one agreement with the Czech Republic. Croatia, the Former Yugoslav Republic of Macedonia, and Slovenia have started joint projects with the United States under government-level S&T agreements. Groups of organizations and/or countries (Table notes on next page) Number and percent of agreements by agency Pct. No. Pct. No. Pct. No. Pct. No. Pct. No. Mindi Weisenbloom The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO provided information on the U.S. government's international science and technology (S&T) agreements that support and encourage international cooperation in research and development, focusing on the: (1) number of international S&T agreements active during fiscal year (FY) 1997; and (2) number of these agreements that resulted in research projects or other activities. GAO noted that: (1) during FY 1997, the 7 agencies GAO reviewed participated in 575 international science and technology agreements with 57 countries, 8 international organizations, and 10 groups of organizations or countries; (2) 54 of the agreements were between the U.S. government and the government of another country; (3) the remaining 521 agreements were signed by representatives of an U.S. agency and representatives of an agency of a foreign government(s) or international organization; (4) more than 90 percent of the international science and technology agreements resulted in research projects or other research-related activities, such as consultations among scientists and exchanges of data and personnel; (5) the percentage of agency agreements that resulted in projects and other activities ranged, by agency, from 61 percent at the National Institutes of Health to 98 percent at the National Aeronautics and Space Administration; and (6) agencies' officials told GAO that changes in either country's science priorities or inability to fund projects after negotiating an agreement are frequently the reasons some agreements do not result in research projects.
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Dental care is a key component of the health care services provided by the military to active duty servicemembers, and a key benefit provided to those who are eligible to enroll for health care coverage through TRICARE. DHA's TRICARE Dental Care Office administers and oversees the TRICARE dental care programs. The ADDP supplements the dental services available to active duty servicemembers through DTFs with the goal of maintaining readiness for deployment. Active duty servicemembers are required to have a dental examination annually, during which their dental readiness is assessed. Dental readiness is a prerequisite for deployment and must be maintained among servicemembers who have been deployed. Active duty servicemembers may obtain necessary dental care at no cost to them at a DTF or through the ADDP. The majority of active duty servicemembers' dental care is provided in DTFs, which are staffed with general dentists and, in some cases, dental specialists. If a necessary service cannot be provided in a timely way through an accessible DTF, the servicemember may obtain dental care from a private dentist through the ADDP. To facilitate reasonable access to care, the ADDP includes a network of dental care providers throughout the United States and its territories. ADDP is not an insurance program, and active duty servicemembers do not pay premiums for their dental care, do not share in the costs of the care, and do not face any annual or lifetime maximums on the cost of that care. Prior to establishing the ADDP, DOD paid the full cost of necessary dental care provided to active duty servicemembers who were referred to private dentists, and the prices for such privately provided dental services were uncontrolled. By negotiating standard prices for dental services with a private insurance carrier, the ADDP was intended to contain the costs of providing necessary care to active duty servicemembers. The TDP is a dental insurance program that is available to dependents of active duty servicemembers, and to members of the National Guard and Reserve and their dependents.sharing premiums, certain procedure fees, and costs above annual and lifetime maximums. Enrollees' share of premiums varies with the status of the enrollee. For example, DOD pays: Enrollees are responsible for cost- 100 percent of the premiums of survivors of active duty servicemembers who died while on active duty and to eligible dependents of certain Reserve members; Up to 60 percent of the premiums of the dependents of active duty service members and of certain Reserve members; and 0 percent of the premiums of certain Reserve members who are not on active duty and their dependents. The TRDP is a dental insurance program that is available to retired uniformed service members and their dependents. DOD does not contribute to paying the costs of this program. Enrollees are responsible for the full premium, any cost-sharing fees, and costs above the annual and lifetime maximums. For information about the contracts for these programs, see table 1. The acquisition process for DHA's dental services contracts includes three main phases, each of which are governed by federal and department-level requirements. The phases include (1) acquisition planning, (2) RFP, and (3) award. (See fig. 1.) Acquisition Planning. Federal regulations require agencies to perform acquisition planning activities for all contracts to ensure that the government meets its needs in the most effective, economical, and timely manner possible. In the acquisition planning phase, DHA officials are to develop a strategy and plan to define and fulfill contract requirements in a timely manner and at a reasonable cost. Federal regulations also require that acquisition planning include market research, which can involve the development and use of requests for information (RFI). An internal working group consisting of a dental program manager, contracting officer, contracting officer's representatives, and a requirements specialist review information gathered during the acquisition planning process to determine contract requirements, according to DHA officials. RFP. In the RFP phase, DHA officials issue the RFP and receive proposals. Award. In the award phase, DHA officials are responsible for evaluating the proposals and awarding the contract to the offeror presenting the best value to the government based on a combination of technical, cost, and performance-based factors. After the contract is awarded, the contracting officer's representative is responsible for the day-to-day monitoring of contractor activities to ensure that the services are delivered in accordance with the contract's performance standards. Each dental service contract includes quality assurance standards for provider access, claims processing, and customer service (telephone coverage and correspondence timeliness) against which the contractor's performance is assessed. Contractors are required to meet these standards. Although DHA officials use a variety of methods to monitor contractors' performance, the primary method of monitoring performance is through monthly reports submitted by each contractor to DHA. To develop requirements for each of its current dental services contracts, DHA officials analyzed market research, data from contractors' past performance, legislation, independent cost estimates, and other information. DHA officials used this information to align the contracts' requirements with contract goals to deliver high quality dental services in a cost effective manner, and to facilitate access to care. Market Research. As part of its development of contract requirements, DHA officials gathered information through market research and analyzed it to determine the capabilities within the dental services market to satisfy the agency's needs. DHA's market research included soliciting information from current and potential dental services contractors. To do this, DHA officials issued RFIs and draft RFPs for comment. These documents included questions related to potential benefit changes--such as how the offeror would implement a specific benefit--and potential data requirements--such as how the offeror would submit required data to DHA. In addition to RFIs and draft RFPs, DHA's market research activities included one-on-one meetings with dental services contractors. DHA officials used information from these market research activities to revise contract requirements. For example, according to DHA officials, feedback from contractors indicated that DOD's contract requirements related to information security were costing dental contractors (and DOD) a substantial amount of money. Partly as a result of contractors' feedback, DHA determined that it would be more economical for contractors to comply with the information security standards used in the commercial sector, according to these officials. In all three new contracts, DHA officials therefore required contractors to comply with commercial information security requirements instead of those developed by DOD. DHA officials also used market research to determine the technical feasibility of potential contract requirements. For example, after encountering delays in treatment preauthorization decisions due to poor quality radiographs (commonly known as x-rays), the RFI that DHA issued for the ADDP contract included questions to determine the feasibility of the electronic submission of radiographs. According to DHA officials, dental technology has progressed to allow for easy electronic submission of this data, resulting in better radiograph quality. Partly as a result of information collected through the RFI, DHA officials incorporated a requirement into the new ADDP contract for the contractor to submit radiographs electronically when requesting pretreatment authorization from DHA. This requirement was intended to increase the quality of the diagnostic information and thus DHA's efficiency in making preauthorization decisions. Performance Monitoring. DHA officials analyzed information about contractors' past performance, including contractors' monthly reports and claims payment data, to assess and revise contract requirements for future contractors. DHA uses a variety of methods to monitor performance, primarily relying on their review of monthly reports submitted by each contractor to DHA, which reflect how well the contractor is performing against the performance standards. They use this information to assess and revise requirements for each future dental services contract. For example, according to DHA officials, before issuing the RFP for the current TRDP contract, DHA officials' review of the then current TRDP contractor's performance against the existing contract's network access standard indicated that the contractor consistently exceeded the standard. As a result, DHA raised the network access standard in the new TRDP contract from 90 to 99 percent, thus requiring that 99 percent of enrollees living within the United States, District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands have access to a network general dentist within a specified distance of their primary residence. DHA officials also used other performance monitoring information, such as claims payment data submitted by contractors, when developing contract requirements. For example, DHA officials' review of the ADDP contractor's claims payment data confirmed reports they received from DTFs that some servicemembers were being treated twice (and DHA paid more than they would have otherwise) for the same dental problem because they were treated by general dentists, not dental specialists, and the initial treatment was not successful, according to DHA officials. Partly as a result of their review of this information, DHA officials incorporated a new requirement in the new ADDP contract that requires that 90 percent of all DTF-referred endodontic procedures (such as root canals) or oral surgeries be completed by an endodontist or oral surgeon, respectively. Legal requirements. DHA officials reviewed laws relevant to each dental services contract to identify changes required by statute. DHA officials used the information to determine whether any changes to the benefit or eligibility structures of the contracts would be required. For example, DHA added a survivor benefit to the TDP contract as a result of a legislative change. In addition, the Transition Assistance Management Program, which provides 180 days of premium-free transitional health care benefits after regular TRICARE benefits end, was added to the ADDP contract as a result of a legislative change. Independent Cost Estimates. DHA officials reviewed independent cost estimates for new benefit requirements they were considering to assess cost efficiency. Specifically, prior to incorporating new benefit requirements into the TRDP and TDP contracts, DHA obtained and reviewed cost estimates from a private consulting firm to determine the impact of these benefits on enrollees' monthly premiums. For example, DHA requested cost estimates for increasing the TDP contract's maximum lifetime orthodontic benefit requirement from $1,500 to $1,750 and from $1,500 to $2,000. The estimates indicated that monthly premiums would increase 65 cents and $1.30, respectively. Based in part on the cost estimate, DHA increased the benefit requirement in the final TDP contract so that the contractor must provide coverage for benefits up to $1,750. According to DHA officials, they do not incorporate benefits if doing so would result in large increases in monthly premiums. Other Sources of Information. Other sources of information DHA officials reviewed prior to determining whether to add, change, or eliminate requirements from their dental service contracts included Lessons learned from previous procurements for other health services. We previously reported that DHA incorporated lessons learned into the RFP for the dental services contracts as a result of challenges to DHA's contract award decisions for certain managed care support contracts. Specifically, in drafting the RFP for the TDP contract, officials more clearly defined how DHA officials planned to assess the evaluation factors when awarding the contract. Current dental services contract requirements. DHA officials told us that they review current contract requirements and solicit feedback on them from stakeholders, including officials from various branches of the military and organizations representing beneficiaries, before each new solicitation. For example, DHA officials conducted a forum with military services officials through which they identified potential new requirements for the ADDP contract, including a referral tracking system that would indicate authorized care that was not completed and thereby allow military commanders ready access to information about servicemembers' dental readiness. As a result of this and other information they reviewed, the new ADDP contract required the contractor to develop a referral tracking system and train DHA staff on its use. Dental best practices and changes in the professional practice of dentistry. DHA officials review industry best practices and changes in the practice of dentistry to determine new contract requirements. For example, when developing new benefits for the current TDP contract, DHA officials researched common dental insurance benefits and best practices and solicited feedback from the American Dental Association's Council on Government Affairs. In addition, DHA officials told us that they used their knowledge of changes in the field of dentistry, including dentistry's increased use of digital technology, to help them identify the electronic submission of radiographs as a potential solution to the previously discussed problem of poor radiograph quality. DHA uses separate contracts for different beneficiary groups, in part, because the programs that serve them are funded differently. For example, the TRDP contract is separate from the ADDP and the TDP contracts because the government does not contribute any funds for the TRDP, but does contribute funds for the ADDP and TDP. Other factors that contributed to DHA's decision to use separate contracts for its different beneficiary groups included differences between programs, such as differences in their purposes, covered dental services, and network access standards. To provide assurance that government funds are not expended for the TRDP, the administrative costs associated with the TRDP must be kept separate from the administrative costs associated with government- funded programs. DHA officials told us that they discussed this issue with potential contractors, who said that they would have to operate the programs separately. DHA officials determined that there would be minimal cost savings or efficiencies from combining contracts under these circumstances. Because the TRDP is not directly supported by DOD funds, DHA is exploring the possibility of shifting the option for military retirees to purchase dental insurance, which is currently provided through the TRDP, to the Federal Employee Dental and Vision Insurance Program (FEDVIP), which is administered by the Office of Personnel Management (OPM).Unlike the TRDP, the FEDVIP allows enrollees to select from among several plan options. DHA and OPM are in the preliminary process of determining the viability of this plan. DHA officials said that this option has both advantages and disadvantages. The primary advantages would include: lowering the workload of staff within the TRICARE Dental Care Office, thereby allowing them to devote more of their time to administering and overseeing the remaining two programs; and allowing retirees greater flexibility to choose among insurance plans that differ in their premiums and coverage options. The primary disadvantages of shifting the option to purchase dental insurance to the FEDVIP would include: the loss, for retirees, of the increased ease in use that results from similarities that have been built into the various TRICARE programs, such as similarities across programs in educational materials; potentially higher premiums if the enrollee selects a plan with more extensive dental benefits; and potential resistance to the change among military retirees. DHA officials told us that it is too soon to determine whether it would be possible to shift the TRDP to the FEDVIP. If it is found to be a viable option, legislative action would be necessary for OPM to open the FEDVIP to military retirees and for DOD to terminate the TRDP. Among other factors, differences in how the ADDP and TDP programs are funded also influenced DHA's decision to use separate contracts for these programs. For example, DOD pays all costs for necessary care provided to active duty servicemembers through the ADDP upon receipt of invoices for individually priced services. In contrast, the TDP is an insurance program: DOD and TDP beneficiaries share in the costs of premiums, which are paid to the contractor; and the contractor is at risk for payment to providers. Thus, unlike the ADDP contractor, the TDP contractor bears the risk of loss if total costs through the program are greater than predicted. (If total costs are lower than predicted, the contractor would earn a larger profit than expected.) DHA officials told us that they consulted with potential contractors to identify advantages and disadvantages of merging the ADDP and TDP contracts and they concluded that the disadvantages of combining these two contracts, which are largely due to the differences in funding, outweighed the potential advantages. The potential advantages of combining the contracts that DHA officials and contractors identified included: enhanced continuity of care when individuals switch from reserve to fewer instances in which two contractors would need to work together to reconcile payments when an error has been made about whether someone is on active or reserve duty because a single contractor would be responsible for both programs; greater leverage in fee negotiations because the pool of potential enrollees would be larger; and slight gains in the efficiency of contract administration, particularly for monitoring contractors' performance, thereby allowing TRICARE Dental Care Office staff more time to devote to their other responsibilities. The potential disadvantages of combining the contracts that DHA officials and contractors identified included: a reduction in competition if carriers do not want to participate in one or the other program, do not want to manage two different programs simultaneously under the same contract, or do not want to undertake a contract of the resultant size; greater difficulty in selecting the best contractor to award the contract, as one offer may be a better match for the ADDP requirements and another offer a better match for the TDP requirements; the potential for confusion among beneficiaries, dentists, and contractor staff because of differences between the programs (such as different benefits and payment requirements); and the potential for a compromise on quality if the contractor is not able to meet the requirements of both programs simultaneously and well. In the past, there was an interval during which a single contractor held both the ADDP and TDP contracts, and DHA officials told us that there were problems with this arrangement, including obstacles to care; operational challenges; and confusion among beneficiaries, the contractor, and the military DTFs. They said that these problems negatively affected both the delivery of dental care and the reputation of the military health system. Having just awarded the ADDP contract, DHA officials stated that they are not exploring options for combining these contracts. They noted that the government would have to either terminate the ADDP contract early or sole-source the TDP contract to extend it until the ADDP contract expires. They also stated that having to re-solicit a contract would be inefficient. We requested comments on a draft of this product from DOD. In its written comments, reproduced in appendix I, DOD concurred with the findings of the report and stated that the review provided a critical examination of DOD's contracting initiatives supporting the ADDP, TDP, and TRDP. DOD also provided a technical comment, which was incorporated. We are sending copies of this report to appropriate congressional committees, the Secretary of Defense, the Assistant Secretary of Defense (Health Affairs), and other interested parties. 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) 512-7114 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 II. In addition to the contact named above, key contributors to this report were Kristi Peterson, Assistant Director; Kristen Joan Anderson; Jacquelyn Hamilton; Jennel Lockley; and Drew Long.
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DOD offers comprehensive health care coverage to millions of beneficiaries through TRICARE, a system of health care that DOD purchases from private insurers to supplement the health care that DOD provides through its military and dental treatment facilities (DTF). Purchased dental services are provided through separate programs for different groups of beneficiaries: (1) the ADDP provides dental care to active duty servicemembers who do not have ready access to a DTF; (2) the TDP provides dental insurance to eligible dependents of active duty servicemembers, and to National Guard and Reserve members and their dependents; and (3) the TRDP provides dental insurance to retired uniformed service members and their dependents. DHA is responsible for awarding, administering, and overseeing contracts with private insurers for these programs. Senate Report 112-173, which accompanied the Senate Committee on Armed Services' version of the National Defense Authorization Act for fiscal year 2013, mandated that GAO review DOD's private sector care contracts, including its contracts for dental services. GAO examined (1) how DHA developed the requirements for its current dental services contracts and (2) the reasons for DHA's use of separate contracts for different beneficiary groups. GAO reviewed relevant laws, regulations, and DOD contracts and acquisition planning documents. GAO also interviewed DHA officials and other stakeholders. GAO made no recommendations. To develop requirements for its current dental services contracts, officials from the Department of Defense's (DOD) Defense Health Agency (DHA) analyzed market research, data from contractors' past performance, legislation, independent cost estimates, and other information. DHA officials used this information to align the contracts' requirements with contract goals to deliver high quality dental services in a cost effective manner and to facilitate access to care. Market research: DHA officials gathered information through market research and analyzed it to determine the capabilities within the dental services market to satisfy the agency's needs. Performance monitoring: DHA officials analyzed information about contractors' past performance, including claims payment data, to assess and revise contract requirements. Legal requirements: DHA officials reviewed laws relevant to each dental services contract to identify changes required by statute. Independent cost estimates: DHA officials reviewed cost estimates for new benefit requirements they were considering for the TRICARE Retiree Dental Program (TRDP) and TRICARE Dental Program (TDP) contracts to assess cost efficiency. Other sources of information: DHA officials reviewed lessons learned from previous procurements, current dental services contract requirements, and dental best practices and changes in the professional practice of dentistry. DHA uses separate contracts for different beneficiary groups in part because the programs that serve them are funded differently. The TRDP contract is separate from the TRICARE Active Duty Dental Program (ADDP) and the TDP contracts because the government does not contribute any funds for the TRDP, but does contribute funds for the ADDP and TDP. To provide assurance that government funds are not expended for the TRDP, contractors said they would have to operate the programs separately. As a result, DHA officials determined that there would be minimal cost savings from combining contracts. Differences in how the ADDP and TDP programs are funded also influenced DHA's decision to use separate contracts for these programs. DOD pays all costs for necessary care provided to active duty servicemembers through the ADDP. In contrast, the TDP is an insurance program: DOD and TDP beneficiaries share in the costs of premiums, which are paid to the contractor; the contractor is at risk for payment to providers. DHA officials concluded that the disadvantages of combining these two contracts outweighed the potential advantages. Other factors that contributed to DHA's decision to use separate contracts for different beneficiary groups included differences in program purposes, dental services, and network access standards. In comments on a draft of this report, DOD agreed with its findings and provided a technical comment, which was incorporated.
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An adequate supply of health care professionals is necessary to ensure access to needed health care services. HRSA estimated that there were approximately 780,000 physicians and 261,000 physician assistants and advanced practice registered nurses engaged in patient care in 2010. Part of maintaining an adequate health care workforce involves projecting the future supply of health care professionals and comparing that supply to the expected demand for health care services to determine whether there will be enough providers to meet the demand. Such projections can provide advance warning of shortages or surpluses so that health care workforce policies, such as funding for health care training programs, can be adjusted accordingly. In its 2008 physician workforce report, HRSA noted that due to the long time needed to train physicians and to make changes to the medical education infrastructure, policymakers and others need to have information on the adequacy of the physician workforce at least 10 years in advance. We have also previously reported that producing supply and demand projections on a regular basis is important so that estimates can be updated as circumstances change. Health care workforce projections typically measure the supply of health care professionals and the demand for services in a base year and predict how each will change in the future given expected changes in the factors that affect supply and demand. On the supply side, "stock and flow" models are commonly used; these models start with the current number of health care professionals, add new entrants to the workforce, such as students who complete their medical training, and subtract providers who are expected to leave the workforce, such as those who retire. Factors influencing supply include the capacity of educational programs to train new health care professionals, the number of patients that health care professionals are able to care for, and attrition rates. On the demand side, a utilization-based approach is often used, which measures the current utilization of health care services and projects that pattern of utilization forward, making adjustments as the population receiving services changes over time. Factors affecting demand include economic conditions, population growth, and changing population demographics such as aging or an increase in insurance coverage. At the federal level, HRSA is responsible for monitoring the supply of and demand for health care professionals and disseminating workforce data and analysis to inform policymakers and the public about workforce needs and priorities. To meet this responsibility, HRSA conducts and contracts for health care workforce research to document and project shortages and to examine trends that influence the supply and distribution of health care professionals, as well as the demand for their services. In 2008, HRSA issued a physician workforce report containing national supply and demand projections for physicians through 2020, which was based on the agency's physician workforce models: the Physician Supply Model (PSM) and Physician Requirements Model (PRM). Using these models, HRSA projected a shortfall of approximately 49,000 FTE physicians by 2020. The PSM is a "stock and flow" model, which projected the future supply of physicians by taking the number of physicians from a base year (2000), adding new entrants, and subtracting physicians lost through retirement, disability, or death. The PSM projected both active supply (the number of individual physicians) and the effective supply (the number of FTE physicians accounting for the number of hours worked). The number of FTEs was determined by the average number of hours worked for physicians in each specialty by gender and age group. The PRM is a utilization-based model, which projected the demand for physicians starting with the utilization of health care services in 2000 by age, sex, geographic location, and insurance coverage type (see fig.1). The PRM assumed that supply and demand were in equilibrium in 2000, that is, that there were enough physicians to meet the demand for health care services. The PRM's baseline projection also assumed that patterns of utilization would not change, although HRSA created some alternative scenarios showing how utilization might change (and therefore affect demand) because of factors such as economic growth. HRSA also included a scenario that accounted for the effect of nonphysician providers, such as nurse practitioners and physician assistants, who may offset the demand for physicians by providing services that otherwise would have been provided by physicians. HRSA and others have noted that a drawback of the utilization-based approach, which carries forward current utilization patterns, is that when calculating the number of physicians needed, any current imbalances in the system, such as populations that may be underserved, or any overutilization of health care services are also carried forward. HRSA's 2008 physician workforce report predates PPACA, which was enacted in 2010. PPACA contains provisions that have the potential to affect both health care workforce supply and demand, which increases the uncertainty of health care workforce projections (see table 1). Several health care workforce researchers have published estimates of the effects of PPACA insurance coverage expansions on workforce supply and demand. These studies found varying estimates for the number of additional primary care providers required to meet the needs of the newly insured population, ranging from 4,300 to 8,000 providers. The variations in these projections are the result of differences in methodologies and assumptions used in modeling. AAMC also increased its overall projection of physician shortages for 2025 by 6,200 FTE physicians, on the basis of expected increases in health care demand as a result of greater rates of insurance coverage under PPACA, among other factors. PPACA provides for the establishment of new delivery models such as accountable care organizations (ACO) and patient- centered medical homes (PCMH). ACO models consist of integrated groups of providers who coordinate care for a defined patient population in an effort to improve quality, reduce costs, and share in any savings. The PCMH model is a way of organizing and delivering primary care that emphasizes comprehensive, coordinated, accessible, and quality care built on strong patient-provider relationships. Such models also encourage shifting care provision to nonphysician providers, potentially decreasing the need for additional physicians. Some researchers have stated that they expect new delivery models, such as ACOs, will have a significant and lasting effect on the broader health care marketplace, though research shows conflicting results as to how these new delivery models will affect the supply of and demand for health care professionals. PPACA also mandated the establishment of the National Health Care Workforce Commission and required HHS to establish the National Center for Health Workforce Analysis (NCHWA) to collect and analyze data on the health care workforce and evaluate workforce adequacy. The National Health Care Workforce Commission was charged with conducting analyses of health care supply and demand and submitting annual reports to Congress that included recommendations. However, this commission has not received appropriations and therefore has not met since it was appointed. In 2010, HRSA established NCHWA within its Bureau of Health Professions. NCHWA is responsible for developing and disseminating accurate and timely data and research on the health care workforce, among other things. In 2012, NCHWA produced a timeline for updating HRSA's workforce projections, as we recommended. Since its last published report on physician supply and demand in 2008, HRSA has initiated work to produce new workforce models and reports, but has not published any new reports containing national workforce projections. Specifically, HRSA has missed one of its publication goals for new workforce projections and has created a revised timeline that postpones future publications. Given that HRSA's 2008 report was based on 2000 data, the most recent projections available from HRSA to Congress, researchers, and the general public to inform health care workforce policy decisions are based on data that are more than a decade old. From 2008 to 2012, HRSA awarded five contracts to three research organizations to update or create new workforce projection models, generate new national workforce projections, and produce reports. (See table 2 for a summary of the contracts and their status.) As of July 2013, HRSA had received three reports resulting from these contracts, and two more reports were under development. Contractor A delivered the first report, which includes projections for the primary care workforce to 2020, in July 2010, but HRSA was still reviewing and revising the draft as of July 2013. HRSA officials said that this primary care report has required extensive consultation with other HHS components to ensure that the methods used were consistent with other ongoing workforce-related work within the department. In addition, officials said that significant revisions were required to incorporate the effects of PPACA. Contractor B delivered the second report, which updated HRSA's 2008 physician workforce projections using more recent data, in February 2011. However, according to HRSA officials, the agency decided not to publish this report because it did not incorporate nonphysician providers, which they have since determined should be accounted for when assessing the adequacy of the health care However, officials also said that research conducted under workforce.this contract regarding the health care workforce effects of PPACA was incorporated into HRSA's later projection models. The third report, the clinician specialty report, which projects the supply of and demand for health care professionals by specialty through 2025, was delivered in November 2012 and is still under HRSA's review. HRSA has missed one of its timeline goals for finalizing its review and publishing new reports containing national projections and has created a new timeline that postpones publication dates for this and two other health care workforce reports. Although HRSA's original timeline stated that the clinician specialty report would be published in December 2012, HRSA's revised timeline states that this report is expected to be published in the summer of 2014. The revised timeline also included new publication dates for HRSA's report on the primary care workforce and for reports based on its new microsimulation models. (Table 3 shows HRSA's original and revised timelines for publication.) HRSA attributed the delay in publishing the clinician specialty report to data challenges and modeling limitations. For example, HRSA officials cited limited research and data on the effects of new health care delivery models being funded and tested in response to PPACA. HRSA officials told us that new models such as ACOs and PCMHs have not yet been studied adequately to know whether they will increase or decrease the demand for health care professionals. It may be several years before relevant data are available. According to a health care workforce researcher we interviewed, there is going to be an inevitable lag in obtaining data given that some delivery system models, such as ACOs, are still being set up, and time will be needed to collect and analyze data and publish any findings. In addition, other researchers have pointed out that workforce-relevant data are not being systematically collected from new models being supported and tested in response to PPACA. HRSA officials also have cited challenges due to limited research on nonphysician providers. For example, more research is needed to determine how much nonphysician providers offset the demand for physicians across different specialties. In our review of HRSA's clinician specialty models, we observed that for some specialties, the addition of nonphysician providers has the potential to turn projected shortages into surpluses. Another challenge HRSA officials said they need to address stems from an inherent limitation of utilization-based models, namely, that they project forward the utilization patterns of the past and therefore do not adequately account for rapid changes in the health care system. HRSA officials said that this modeling limitation has caused surpluses and shortages that do not reflect anticipated workforce trends and require time to analyze. For example, officials explained that when a provider specialty is in shortage, utilization is by definition low. If investments are made to increase the supply of the specialty in shortage, then the model carries forward the past low utilization and incorporates increased provider supply, which consequently projects a surplus for the future because there will be more providers than were utilized in the past. HRSA officials said that the agency does not have a standard written work plan or set of procedures for accomplishing the tasks necessary to prepare a report for publication after final reports are delivered from contractors. Officials said that although there are general policies that guide review, the specific steps of the review process and which internal and external officials participate are determined on a case-by-case basis. In addition, officials said that it is common for milestone dates to change depending on the complexity of the issues raised during review. According to HRSA officials, the dates included in their timeline were based solely on when they expected to receive models and reports from contractors and did not account for the continued analytical work involved in reviewing delivered products. For example, according to HRSA officials, the original 2013 goal dates for publishing reports based on the new microsimulation models had to be postponed until 2014 because they will require additional time to review after they are received. Without standard procedures, agency officials may not be able to accurately predict how long products will take to review or to monitor their progress through the review process to ensure they are completed in a timely manner. However, HRSA officials have stated that once the microsimulation models are completed, these models will offer the ability to more easily update projections as new data become available and should result in more routine and frequent reporting. The federal government has made significant investments in health care professional training programs to help ensure that there is a sufficient supply of health care professionals to meet the nation's health care needs. Health care workforce projections play a critical role in providing information on future shortages or surpluses of health care professionals so that policies can be adjusted, including targeting health care training funds to the areas of greatest need. We recommended in 2006 that HRSA, as the federal agency designated to monitor the supply of and demand for health care professionals, develop a strategy and establish time frames to more regularly update and publish national workforce projections for the health professions. While HRSA created a timeline for publishing new projection reports in 2012, the agency has since revised its timeline to postpone publication of two other health care workforce reports after failing to meet its December 2012 publication goal for a clinician specialty report projecting the supply of and demand for health care professionals through 2025. Other reports that have been delivered by contractors since HRSA published its last report in 2008 have either been set aside or are still being reviewed. In the case of the primary care workforce report containing projections to 2020, review has been ongoing for 3 years. If this report were published in 2013, it would project only 7 years into the future. HRSA itself has stated that physician workforce projections should be completed at least 10 years in advance to provide enough time for policy interventions to influence the size and composition of the workforce. In the absence of published projections, policymakers are denied the opportunity to use timely information from HRSA to inform their decisions on where to direct billions of dollars in training funds. It is also important to update projections on a regular basis so that changing circumstances, such as the enactment of PPACA or the growth in nonphysician providers, can be incorporated. Currently, the most recent projections available from HRSA are based on patterns of utilization and care delivery in 2000, predating PPACA by a decade. HRSA is now making larger financial investments in new workforce projection models, but in the absence of standard written processes specifying how the reports resulting from these models will be reviewed, HRSA may be hindered in its ability to monitor the development of these reports and ensure that they are published in keeping with its revised timeline. We recommend that the Administrator of HRSA take the following three actions: Expedite the review of the report containing national projections to 2020 for the primary care workforce to ensure it is published in the fall of 2013 in accordance with HRSA's revised timeline. Create standard written procedures for completing the tasks necessary to review and publish workforce projection reports delivered from contractors; such procedures may include a list of necessary review steps, estimates of how long each step should take to complete, and designated internal and external reviewers. Develop tools for monitoring the progress of projection reports through the review process to ensure that HRSA's timeline goals for publication are met. We provided a draft of this report to HHS for review. HHS's comments are reprinted in appendix I. HHS also provided technical comments, which we incorporated as appropriate. In its comments, HHS agreed with our recommendations and described actions that the department is taking to implement them. In response to our first recommendation to expedite the review and publication of a report containing primary care workforce projections, HHS said that it expects to release the report on schedule in the fall of 2013. Regarding our second recommendation to develop standard written procedures for report review, HHS said that HRSA has developed a framework for report development based on project management principles that is being made available electronically to all HRSA employees. According to HHS, this framework facilitates planning and provides guidance throughout the report development process. Concerning our third recommendation to develop tools for monitoring the progress of reports through the review process, HHS said that HRSA has created a computer-based tool capable of generating estimated time ranges for completing each step in the report development and review process, which it anticipates will allow for better oversight of report timelines. In addition to these agencywide efforts, HHS said that BHPr is in the process of developing a review process specifically for proposed workforce studies and contracts that will emphasize more comprehensive review in the early stages of development with the aim of reducing the time needed for final report review. In addition to addressing our recommendations, HHS commented that our draft report did not discuss a number of other workforce-related activities undertaken by NCHWA, such as data collection efforts and the production of reports that do not include national projections. For example, in 2012 NCHWA fielded a survey to collect nationally representative data on nurse practitioners. While we agree with HHS that such activities are important, they are not a substitute for regularly producing updated national projections. We did not include information in this report on other HRSA reports not containing national projections, or HRSA's data collection efforts, because the scope of our review was limited to national projections of the supply of and demand for physicians, physician assistants, and APRNs. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after its issuance date. At that time, we will send copies of this report to the Administrator of HRSA and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions, 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. Major contributors to this report are listed in appendix II. In addition to the contact named above, Martin T. Gahart, Assistant Director; Hannah Locke; Elise Pressma; and Jennifer Whitworth made key contributions to this report.
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For over a decade, government, academic, and health professional organizations have projected national shortages of health care professionals, which could adversely affect patients' access to care. However, there is little consensus about the nature and extent of future shortages, partly because of the complexity of creating projections and uncertainty about future health care system changes. Up-to-date workforce estimates are essential given the significant federal investment in health care training programs. Within HHS, HRSA is responsible for monitoring health care workforce adequacy; to do this, HRSA conducts and contracts for workforce studies. GAO was asked to provide information about health care workforce projections. This report examines the actions HRSA has taken to project the future supply of and demand for physicians, physician assistants, and advanced practice registered nurses since publishing its 2008 report. GAO reviewed HRSA's contract documentation, select delivered products, and timeline goals for publication. GAO also interviewed HRSA officials, workforce researchers, and provider organizations. Since 2008, the Health Resources and Services Administration (HRSA) within the Department of Health and Human Services (HHS) has awarded five contracts to research organizations to update national workforce projections, but HRSA has failed to publish any new reports containing projections. As a result, the most recent projections from HRSA available to Congress and others to inform health care workforce policy decisions are from the agency's 2008 report, which is based on data that are more than a decade old. While HRSA created a timeline for publishing new workforce projection reports in 2012, the agency missed its goal to publish a clinician specialty report by December 2012 projecting the supply of and demand for health care professionals through 2025. HRSA officials attributed the delay in publishing this report to data challenges and modeling limitations. HRSA has also revised its timeline to postpone publication of two other health care workforce reports, as shown in the table below. HRSA officials said that the agency does not have standard written procedures for preparing a report for publication after final reports are delivered from contractors, which may impede its ability to accurately predict how long products will take to review and monitor their progress through the review process. GAO recommends that the Administrator of HRSA expedite the review and publication of HRSA's report on national projections for the primary care workforce, create standard written procedures for report review, and develop tools to monitor report review to ensure timeline goals for publication are met. HHS agreed with GAO's recommendations and provided technical comments.
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Personnel from each of the services utilize a variety of PPE based on factors such as the operational environment, job description or occupation, and commander discretion. For example, Army and Marine Corps ground combat personnel utilize soft and hard body armor designed to protect against specific small arms, fragmentation, and other unconventional threats, such as improvised explosive devices. Likewise, personnel with aviation based occupations or explosive ordinance disposal responsibilities, and those operating in extreme climates or maritime environments have specific PPE options for their specific assignments. During ground combat operations in Iraq and Afghanistan in the 2000s, Soldiers and Marines typically wore tactical vests or plate carriers with hard armor ballistic inserts, a combat helmet, and other miscellaneous items such as eye protection and gloves. This PPE, added to the other items that personnel typically carry or wear in operational environments (weapon systems, food and water, communications equipment, and other items), cumulatively represent the total load burden on personnel. The total load varies to some degree between the Army and the Marine Corps, and the services use specific load categories for mission-planning purposes. For example, the Army uses three combat loads, fighting (lightest), approach march (mid), and emergency approach march (heaviest), based on a number of factors, including mission duration and purpose, the likelihood of resupply, climate, and other characteristics that affect equipment and supply decisions. Similarly, the Marine Corps uses the following categories for mission and load-planning purposes: fighting (lightest), assault (mid), and sustainment (heaviest). According to Army guidance and Marine Corps documentation, the two services generally use these load parameters as a guide for determining the most appropriate equipment and supply levels required to meet mission objectives. The services each have program offices that develop, acquire, and field PPE and other equipment based on generated and approved operational requirements for Soldiers and Marines. For example, Program Executive Office Soldier develops specifications, and acquires equipment, including PPE, based on capability requirements produced by the Army's Training and Doctrine Command. Similarly, the Marine Corps Systems Command develops, acquires, and fields PPE and other equipment to address operational requirements developed by the Capability Development Directorate of the Deputy Commandant for Combat Development and Integration. The service program offices typically collaborate with each other and partner with industry providers to research, design, and develop PPE and other equipment. The Army and the Marine Corps have developed requirements for PPE to address operational threats but these requirements contribute to the total load burden on ground combat personnel. The services expect ground combat personnel to wear a combination of equipment developed to meet these requirements, including hard armor plates, soft armor plate carrier vests, and combat helmets, as shown in figure 1. According to Army and Marine Corps program managers, these items individually provide specific functions that together form a protective system for personnel. According to Army and Marine Corps documentation, the current system was initially developed and fielded to address specific threats facing personnel operating in Iraq (Operation Iraqi Freedom) in 2003. Officials stated that the two services conducted capability and threat assessments in this theater to determine how best to mitigate threats without hindering mobility or combat effectiveness. The services have documented these assessments and protection requirements in PPE guidance, technical documentation, and acquisition specifications, which include the size, weight, coverage area, protective standards, and other key parameters for each primary PPE component. These documents standardize PPE expectations and operational requirements for Soldiers and Marines. Officials noted that they are able to change PPE requirements or standards to meet evolving needs, incorporate technological advancements, or modify goals. Additionally, they provide industry partners with specifications needed to develop equipment. While the services have produced individual PPE guidance and technical documentation, officials noted that they jointly develop protection requirements and acquire some of the primary PPE components. For example, the Army and Marine Corps jointly acquired modern hard armor plates and have coordinated on the development and acquisition of the enhanced combat helmet. The two services also have similar standards for the soft armor plate carrier vests, but Marine Corps officials noted that because each service has some unique operational requirements, they developed and acquired this item separately. Army and Marine Corps officials we met with stated that the body armor that was fielded to meet current threats provides significant additional protection when compared with previously available equipment. However, they also noted that providing this level of protection adds significant bulk and weight to the total load on Soldiers and Marines, which could impede mobility and have other adverse effects. Both Marine Corps guidance and Army capability requirements indicate that PPE should provide adequate protection levels without hindering mobility or combat effectiveness. The primary PPE (hard armor plates, soft armor vest, and combat helmet) currently used by both Army and Marine Corps personnel averages approximately 27 pounds (for size medium equipment), and adds to the weight of other uniform items and equipment worn or carried by personnel. The cumulative weight of all uniform items and other equipment expected to be carried or worn by personnel in operational environments represents the total load and can vary according to individual position (e.g., squad leader, rifleman, grenadier) and mission characteristics (see figure 2). According to program managers we met with, the typical total load on personnel has increased since about 2003 based on the incorporation of new PPE systems and other equipment that is designed to enhance personnel performance or protection capabilities. According to 2016 Marine Corps data, a typical load is expected to be approximately 90 to 159 pounds, or an average of 117 pounds, depending on the individual function within the squad. Similarly, Army ground personnel are expected to wear and carry approximately 96 to140 pounds, or an average of 119 pounds, depending on individual roles. These can vary based on individual PPE sizes and other equipment variations. However, the expected totals for Army ground combat personnel generally align with actual load totals ranging from 96 to 151 pounds, reported by personnel recently operating in Afghanistan. However, program officials also explained that excessive loads can have negative effects on personnel mobility, lead to earlier fatigue onset, and exacerbate the risk associated with high temperature operational environments. Army Field Manual 21-18, published in 1990, recommends that the fighting load not exceed 48 pounds and that the approach/march load not exceed 72 pounds. According to program managers, the Marine Corps does not have specific load thresholds or maximums, but documentation identifies that loads in excess of 30 percent of body weight for ground combat personnel increase the likelihood of detrimental performance effects. Medical researchers from the services whom we met with agreed that these are some of the risks associated with substantial combat loads, and stated that they have attempted to correlate load burdens with detrimental performance and increased injury risks. For example, the Naval Health Research Center in San Diego, CA, collected injury data from personnel operating in Afghanistan and Iraq between 2011 and 2013 and concluded that excessive loads may have exacerbated the reported injuries. Service officials said that they are studying these potential effects on personnel performance, but also stated that the available load guidelines could be outdated and not reflective of current PPE systems and other capability enhancing equipment. Additionally, they note that these thresholds may not be appropriate for all personnel and that load thresholds or limits could restrict commander flexibility in the field by potentially impairing their ability to properly outfit personnel to meet mission requirements. Nonetheless, officials from both services stated that they continually seek ways to reduce the weight of PPE and reduce or offset the overall loads on personnel while maintaining operational capabilities and protection standards. Army and Marine Corps officials coordinate through formal and informal working groups that seek to develop and improve PPE. For example, two to four times annually the services hold a Cross-Service Warfighter Equipment Board, which allows Army and Marine Corps representatives, along with members of the other military services, to share developments and advancements made to PPE and other individual equipment. The Army and Marine Corps also participate in the Personal Protective Equipment Capabilities Development Integrated Product Team, an interagency forum that shares information, such as injury data, research and development findings, material developments, technologies, and test methodologies, among key stakeholders involved in PPE development. In addition, the Army and Marine Corps work together on the development and procurement of PPE, such as the hard armor plates and the enhanced combat helmet that meet both services' needs. Informally, the Army and Marine Corps regularly communicate on a variety of PPE-related research, technology advancements, and planning efforts. Officials from both Army and Marine Corps program offices explained that coordination is mutually beneficial based on similar equipment needs for ground combat personnel. Officials noted that they have collaborated on the development, management, and procurement of current hard armor plates since their inception in the early 2000s. Additionally, in August 2016 we observed a Marine Corps-sponsored industry event focused on the next iteration of the enhanced combat helmet, where an Army engineer participated and shared with vendors the Army's perspective on weight reduction priorities for the helmet. Army and Marine Corps officials stated that they collaborate with vendors to gather input for the development of PPE. Army and Marine Corps program managers said that when developing or improving PPE and other equipment, they prioritize protection and operational capabilities, and that they have overarching goals of reducing weight, and improving form, fit, and function of equipment. These overarching goals have led to some improvements and reductions in the weight of some PPE. For example, the Army and Marine Corps have made updates and redesigned aspects of their respective soft armor vests, which according to program managers have resulted or will result in weight savings of up to approximately 40 to 50 percent, or about 6 to 7 pounds when compared with previous versions. In addition, according to Marine Corps documentation, the service is incentivizing industry partners to produce lighter equipment and systems by incorporating weight reduction as a part of the source selection process for the enhanced combat helmet. Further, in 2016 the Army began developing a goal and subsequent plan to reduce the weight of hard armor plates by 20 percent, or about 2 pounds, by identifying and eliminating excess ballistic protection parameters and potentially updating testing methodologies. Officials said that protection standards have largely prevented significant reductions to date; however, they believe that the plates may be over- designed and heavier than necessary, based on actual operational threats and PPE performance data collected in Iraq and Afghanistan. According to research officials, updates would allow for weight reductions without increasing the ballistic risk to personnel. According to Army officials, the plan is currently pending approval by senior Army officials. If approved, researchers expect to develop new hard armor plates, with reduced weight, in fiscal year 2019. The Army and Marine Corps are also pursuing other efforts to reduce the weight of PPE. For example, the Army and Marine Corps are promoting PPE scalability as an approach to realize near-term weight reductions. PPE scalability allows Soldiers and Marines to vary the levels of PPE worn, from minimal protection or no PPE to a maximum level whereby Soldiers and Marines utilize all available PPE. The Army and Marine Corps have categorized these protection levels based on configurations of all available PPE, and officials said that potential weight reductions could be realized if commanders were to adjust protection levels (amount of PPE utilized) based on an evaluation of environment, threat, and mission characteristics. However, Marine Corps officials noted that commanders may be reluctant to increase operational risk by reducing PPE protection levels. Finally, Army and Marine Corps researchers are exploring ways to better integrate individual equipment to provide improved functionality and potentially save weight. The Army's Warrior Integration Site and the Marine Corps' Marine Expeditionary Rifle Squad research the integration potential of all individual equipment worn by Soldiers and Marines. According to officials with whom we met, the two services see their analyses potentially resulting in improvements to the weight, form, and function of Soldier and Marine equipment. One analytical method used by both the Army and the Marine Corps entails load effect assessment programs that use instrumented obstacle courses to gather data and evaluate mobility and functions based on various combat loads that personnel experience (see figure 3 and associated video). Officials explained that these data and analyses help them identify specific equipment that could or should be improved. While these efforts may have implications for reducing the load burden of Soldiers and Marines, the main goal for both organizations is to improve personnel performance by providing better integration and function for equipment commonly utilized by Soldiers and Marines. Army and Marine Corps researchers are exploring initiatives--such as improvements to logistics and resupply capabilities, load transfer technologies, lighter ammunition, and reduced battery usage--that may decrease the total load burden on ground combat personnel. Improved Logistics and Resupply Capabilities. Researchers at the Natick Soldier Research Development and Engineering Center said that they are exploring new technologies and systems that could provide improved logistics support for squads in the form of precise and on-demand resupply. Army officials noted that personnel loads are affected by confidence levels in resupply and logistics support. For example, squads that are more confident in resupply may be more willing to carry less ammunition, water, food, and other supplies, thus reducing the total weight carried by personnel. Therefore, developing new aerial delivery systems capable of providing small- and medium-sized payloads with precision could enable Soldiers and Marines to carry not more than the necessary equipment and supplies. The Marine Corps has implemented one of these systems, the Joint Precision Airdrop System, which was developed by the Army's Aerial Delivery Directorate at the Natick Soldier Research Development & Engineering Center. This system is designed to accurately deliver (within 150 meters) up to 700 pounds of supplies to personnel operating in inaccessible environments. A Marine Corps program official stated that the system would likely alter planning and allow personnel to forgo packing excess food, water, ammunition, and other supplies. They also stated that the procurement and sustainment costs for all units of this system totaled approximately $850,000 for fiscal years 2013 through 2016. Load Transfer Technologies: The Army and Marine Corps are evaluating both manned and unmanned load transfer technologies capable of travelling with units or squads (see figure 4). These technologies may allow Soldiers and Marines to offload some items such as food, water, or ammunition. For example, the Marine Corps is currently employing 144 MRZR all-terrain vehicles capable of traveling with squads and transporting up to 1500 pounds of personnel, equipment, and supplies. Marine Corps officials stated that the total acquisition and sustainment costs for all the vehicles are projected to be approximately $15 million between fiscal years 2016 and 2018. Similarly, the Army is in the process of developing an unmanned or optionally-manned squad support vehicle capable of traveling with dismounted personnel and carrying up to 1000 pounds of equipment. The prototypes include both tracked and wheeled variants. Army officials stated that they plan to pursue this as an official program and field the vehicles in fiscal years 2020 and 2021. In addition, the Defense Advanced Research Project Agency supported similar research and development efforts by designing and testing the Legged Squad Support System, which researchers stated had the intended capability to carry up to 1,000 pounds of equipment and travel semi-autonomously with squads and fire teams. While the Army and Marine Corps are not currently pursuing this specific system, they plan to test additional unmanned ground systems with similar load transferring and mobility capabilities. Lighter Ammunition: Army and Marine Corps program managers are developing lightweight technologies and monitoring third-party research related to the development of polymer-case ammunition for commonly used .50 caliber, 7.62 mm, and 5.56 mm rounds. According to program managers, transitioning to polymer based ammunition casing could reduce ammunition weight by as much as 20 to 35 percent based on the weight difference between lighter polymer casing and traditional brass casing. The Marine Corps began testing a polymer-case .50 caliber round in March 2017, which could replace legacy ammunition without modifying the .50 caliber weapon systems currently in use. However, significant weight savings for personnel would require implementing this technology for smaller-caliber rounds with lightweight polymer-case compatible weapon systems, and officials noted that these investments would likely hinder near-term implementation. Reduced Battery Usage: The Army and Marine Corps are researching potential hardware and software changes that could reduce the energy demand for some commonly carried electronics and thus reduce energy usage and weight associated with batteries. For example, Army researchers stated that they are evaluating systems that harvest energy from Soldiers' movements and solar technology that could be used to power communications systems and other battery-driven equipment. Additionally, officials noted that they are monitoring private-sector technology developments that could reduce the weight of batteries by 20 percent while providing the same amount of energy as those batteries currently used. Marine Corps program officials explained that they are also developing a single radio with the same capability as is provided by two separate radios currently used by Marines. Officials stated that this new radio may reduce the need to carry excess batteries. However, Army and Marine Corps officials noted that battery demand and its associated weight continue to pose a significant challenge. For example, Army program managers said that squad leaders currently carry approximately 8 pounds of batteries to power a variety of optics, communications systems, and other equipment. DOD provided technical comments on a draft of this report, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees and to the Secretary of Defense, the Secretaries of the Army and the Navy, and the Commandant of the Marine Corps. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5431 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. In addition to the contact named above, Alissa Czyz (Assistant Director), Larry Junek (Assistant Director), Alexandra Gonzalez, Amie Lesser, Sean Manzano, Michael Shaughnessy, Michael Silver, Grant Sutton, and Cheryl Weissman made key contributions to the report.
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Army and Marine Corps ground combat personnel have long worn a variety of PPE such as vests, armor, and helmets to help protect them from operational risks. The two services have documented the advanced protection capabilities of current PPE systems, but identified that the armor contributes to the total load burden--or cumulative weight of items typically worn or carried. In addition to PPE, personnel typically carry food, water, ammunition, communications equipment, and other items. House Report 114-537, accompanying a bill for the National Defense Authorization Act for Fiscal Year 2017, included a provision for GAO to review Army and Marine Corps efforts to reduce the weight of PPE and other equipment worn or carried in combat. This report describes (1) the current operational requirements associated with PPE, and how those requirements contribute to the total load burden on Soldiers and Marines in combat environments; and (2) the coordination between the Army and the Marine Corps regarding efforts to reduce the weight of PPE and the total load burden on personnel. GAO reviewed Army and Marine Corps documentation related to PPE, total load burden on combat personnel, and weight reduction initiatives; and interviewed service researchers and program officials. The Army and Marine Corps have developed requirements for personal protective equipment (PPE) to address operational threats in ground combat environments, but this PPE has increased in weight over time and has added to the total load burden on personnel. PPE primarily consists of hard armor plates, soft armor plate carrier vests, and combat helmets. Army and Marine Corps officials stated that the PPE provides significant additional protection when compared with equipment used prior to operations in Iraq in the 2000s. However, they also noted that providing this level of protection adds significant bulk and weight to the total load on Soldiers and Marines, which could impede mobility and hinder combat effectiveness. According to service-provided data, the typical total load in 2016 for Army and Marine Corps ground combat personnel averaged about 119 and 117 pounds, respectively, of which the primary PPE represented about 27 pounds based on equipment sizes (see figure). Officials stated that these totals have increased over time based on the incorporation of new PPE and other equipment. Recognizing that the weight of PPE and other equipment could have negative effects on personnel performance, the Army and the Marine Corps have coordinated and developed goals for PPE-related weight reductions and are pursuing some efforts to reduce overall load burdens on personnel. The two services coordinate through formal working groups and informal methods to develop and improve PPE. Army and Marine Corps officials stated that while they prioritize protection and operational capabilities when developing PPE, they have overarching goals of reducing weight, in addition to improving the form, fit, and function of equipment. These goals have led to reductions in the weight of some PPE. The Army is also developing a goal and plan to reduce the weight of hard armor plates by 20 percent by identifying and eliminating excess ballistic protection. In addition, the Army and Marine Corps are pursuing other efforts to reduce the weight of PPE, such as by giving commanders the option to employ varying levels of PPE at their discretion and studying the effects of integrating PPE with overall combat loads. Finally, the Army and Marine Corps are exploring research initiatives that may reduce the total load on ground combat personnel, such as improvements to logistics and aerial delivery capabilities, load transferring systems, and other enhancements to equipment. GAO is not making recommendations in this report. DOD provided technical comments on a draft of this report, which GAO incorporated as appropriate.
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According to HHS, widespread use of health information technology could improve the quality of care received by patients and reduce health care costs. One such technology, electronic prescribing, can be used, for example, to electronically transmit a prescription or prescription-related information between a health care provider and a pharmacy or to provide other technological capabilities, such as alerting a provider to a potential interaction between a drug and the patient's existing medications. In traditional, or paper-based, prescribing, health care providers that are licensed to issue prescriptions for drugs (e.g., physicians or others licensed by the state) write a prescription, and calling it into or have the patient take that prescription to a dispenser (e.g., pharmacy) to be filled. In contrast, use of an electronic prescribing system consists of a licensed health care provider using a computer or hand-held device to write and transmit a prescription directly to the dispenser. Before doing so, the health care provider can request the beneficiary's eligibility, formulary, benefits, and medication history. Figure 1 illustrates an example of the flow of information during the electronic prescribing process. In order to transmit a prescription electronically, multiple entities need to have access to an individual's identifiable health information in an electronic format. Federal laws and regulations dictate the acceptable use and disclosure activities that can be performed with individually identifiable health information, defined as protected health information (PHI). These activities include treatment, payment, health care operations, and--provided certain conditions are met--public health or research purposes. For example, electronic health information can be held by covered entities that perform treatment functions for directly providing clinical care to a patient through electronic prescribing. These covered entities and business associates, such as medical professionals, pharmacies, health information networks, and pharmacy benefit managers, work together to gather and confirm patients' electronic health information for prescribing, such as a beneficiary's eligibility, formulary, benefits, and medication history. To electronically transmit prescription drug data between a health care provider and a pharmacy, an electronic health record can be used to obtain information about the health of an individual or the care provided by a health practitioner. In both paper-based and electronic prescribing, information is also provided to the individual's health plan for payment, which would include the identification of the beneficiary, the pharmacy, and the drug cost information. In the case of Medicare beneficiaries' prescription drug data, the information is provided to CMS for Part D payment calculations. Every time a beneficiary fills a prescription under Medicare Part D, a prescription drug plan sponsor must submit a summary record called prescription drug event data to CMS. The prescription drug event data record contains PHI, such as date of birth, the pharmacy that filled the prescription, and the drug dispensed, that enables CMS to make payments to plans. Appendix II provides a summary of the permitted uses and disclosures of PHI. Under certain circumstances, PHI, including prescription drug use information, can be used for purposes not related to directly providing clinical care to an individual. For example, CMS makes Medicare beneficiaries' prescription drug event data available for use in research studies. Release of these elements outside of CMS must be in accordance with its policies and data-sharing procedures. For example, in order to obtain access to this information interested parties must send in an application and submit a user agreement. Table 1 provides other examples of using prescription drug use data for purposes other than directly providing clinical care. Depending on the nature of the use, the prescription drug use information is used and transmitted in identifiable form or in de-identified format, which involves the removal of PHI (e.g., name, date of birth, and Social Security number) that can be used to identify an individual. Key privacy and security protections associated with individually identifiable health information, including prescription drug information used for purposes other than directly providing clinical care, are established in two federal laws, HIPAA and the HITECH Act. Recognizing that benefits and efficiencies could be gained by the use of information technology in health care, as well as the importance of protecting the privacy of health information, Congress passed HIPAA in 1996. Under HIPAA, the Secretary of HHS is authorized to promulgate regulations that establish standards to protect the privacy of certain health information and is also required to establish security standards that require covered entities that maintain or transmit health information to maintain reasonable and appropriate safeguards. HIPAA's Administrative Simplification Provisions provided for the establishment of national privacy and security standards, as well as the establishment of civil money and criminal penalties for HIPAA violations. HHS promulgated regulations implementing the act's provisions through its issuance of the HIPAA rules-the Privacy Rule, the Security Rule, and the Enforcement Rule. The rules cover PHI and require that covered entities only use or disclose the information in a manner permitted by the Privacy Rule, and take certain measures to ensure the confidentiality and integrity of the information and to protect it against reasonably anticipated unauthorized use or disclosure and threats or hazards to its security. HIPAA provides authority to the Secretary to enforce these standards. The Enforcement Rule provides rules governing HHS's investigation of compliance by covered entities, both through the investigation of complaints and the conduct of compliance reviews, and also establishes rules governing the process and grounds for establishing the amount of a civil money penalty for a HIPAA violation. The Secretary has delegated administration and enforcement of privacy and security standards to the department's Office for Civil Rights (OCR). The HITECH Act, enacted as part of the American Recovery and Reinvestment Act of 2009 (Recovery Act), is intended to promote the adoption and meaningful use of health information technology to help improve health care delivery and patient care. The act adopts amendments designed to strengthen the privacy and security protections of health information established by HIPAA and also adopts provisions designed to strengthen and expand HIPAA's enforcement provisions. Table 2 below provides a brief overview of the HITECH Act's key provisions for strengthening HIPAA privacy and security protection requirements. Under the HITECH Act, the Secretary of HHS has significant responsibilities for enhancing existing enforcement efforts, providing public education related to HIPAA protections, and providing for periodic audits to ensure HIPAA compliance. In implementing the act's requirements, OCR's oversight and enforcement efforts are to be documented and reported annually to Congress. These annual reports provide information regarding complaints of alleged HIPAA violations and the measures taken to resolve the complaints. These reports and other related information are required by the HITECH Act to be made publicly available on HHS's website. In response to requirements set forth in HIPAA and the HITECH Act, HHS, through OCR, has established a framework for protecting the privacy and security of individually identifiable health information, including Medicare beneficiaries' prescription drug use information used for purposes other than directly providing clinical care. This framework includes (1) establishing regulatory requirements, (2) issuing guidance and performing outreach efforts, and (3) conducting enforcement activities to ensure compliance with the rules. However, OCR has not issued required guidance to assist entities in de-identifying individually identifiable health information due to--according to officials--competing priorities for resources and internal and external reviews. Furthermore, although it has recently initiated a pilot audit program, the office has not implemented periodic compliance audits as required by the HITECH Act. Until these requirements are fulfilled, OCR will have limited assurance that covered entities and business associates are complying with HIPAA regulations. The Secretary of HHS issued regulations, such as the HIPAA rules, that implement HIPAA requirements and amendments required by the HITECH Act to govern the privacy and security of individually identifiable health information, known as PHI. These rules establish the required protections and acceptable uses and disclosures of individually identifiable health information, including Medicare beneficiaries' prescription drug use information. HIPAA provided for the Secretary of HHS to, among other things, (1) issue privacy regulations governing the use and disclosure of PHI and (2) adopt security regulations requiring covered entities to maintain reasonable and appropriate technical, administrative, and physical safeguards to protect the information. In December 2000, to address the privacy regulation requirement, HHS issued the Privacy Rule. The Privacy Rule regulates covered entities' use and disclosure of PHI. Under the Privacy Rule, a covered entity may not use or disclose an individual's PHI without the individual's written authorization, except in certain circumstances expressly permitted by the Privacy Rule. The Privacy Rule reflects basic privacy principles for ensuring the protection of personal health information, as summarized in table 3. The Privacy Rule generally requires that a covered entity make reasonable efforts to use, disclose, or request only the minimum necessary PHI to accomplish the intended purpose. Further, the Privacy Rule establishes methods for de-identifying PHI. Under the rule, once identifiers are removed from a data set, it is no longer considered individually identifiable health information and the HIPAA protections no longer apply. De-identification provides a mechanism for reducing the amount of PHI used and disclosed. The Privacy Rule establishes two ways in which PHI can be de-identified. The Safe Harbor Method requires the removal of 18 unique types of identifiers from a data set coupled with no actual knowledge that the remaining data could be used to reidentify an individual, either alone or in combination with other information. The expert determination method requires a qualified statistician or other appropriate expert, using generally accepted statistical and scientific principles, to determine that the risk is very small that an individual could be identified from the information when used alone or in combination with other reasonably available information. In February 2003, to implement HIPAA security requirements for protecting PHI, HHS issued the HIPAA Security Rule. To ensure that reasonable safeguards are in place to protect electronic PHI, including Medicare beneficiaries' health information, from unauthorized access or disclosure, the Security Rule specifies a series of administrative, technical, and physical safeguards for covered entities to implement to ensure the confidentiality, integrity, and availability of electronic PHI. Table 4 summarizes these security safeguards. The Security Rule, which applies only to PHI in electronic form, states that covered entities have the flexibility to use any security measures that allow them to reasonably and appropriately implement specified standards. Specifically, the rule states that in deciding what security measures are appropriate, the covered entity must take into account elements such as its size, complexity, technical infrastructure, cost of security measures, and the probability and criticality of potential risks to its PHI. The HITECH Act set additional requirements for the Secretary of HHS and expanded and strengthened certain privacy and security requirements mandated under HIPAA and the HIPAA rules. Specifically, to implement provisions of the HITECH Act, the Secretary was required to (1) issue breach notification regulations to require covered entities and business associates under HIPAA to provide notification to affected individuals and the Secretary concerning the unauthorized use and disclosure of unsecured PHI; (2) establish enforcement provisions for imposing an increased tiered structure for civil money penalties for violations of the Privacy and Security Rules; and (3) extend certain Privacy and Security Rule requirements to business associates of covered entities. Such required activities are intended to strengthen protections for PHI, including Medicare beneficiaries' prescription drug use information. To implement these provisions of the act, OCR issued two interim final rules--the Breach Notification for Unsecured Protected Health Information Rule, known as the "Breach Notification Rule," and the HITECH Act Enforcement Rule--and has developed a draft rule intended to, among other things, extend the applicability of certain requirements of the Privacy and Security Rules to business associates. OCR issued the Breach Notification for Unsecured Protected Health Information Rule in August 2009. This rule contains detailed requirements for HIPAA-covered entities and business associates to notify affected individuals and the Secretary following the discovery of a breach of unsecured PHI. In addition, in October 2009, OCR issued the HITECH Enforcement Rule, which amends the HIPAA rules to incorporate HITECH Act provisions establishing categories of violations based on increasing levels of culpability and correspondingly increased tier ranges of civil money penalty amounts. In addition, in July 2010, OCR issued a notice of proposed rulemaking to modify the HIPAA Privacy, Security, and Enforcement Rules to implement other provisions of the HITECH Act. According to the OCR website, the proposed rule is intended to, among other things, make modifications to extend the applicability of certain Privacy and Security Rule requirements to the business associates of covered entities, strengthen limitations on the use or disclosure of PHI for marketing and fundraising and prohibit the sale of PHI, and expand individuals' rights to access their information and obtain restrictions on certain disclosures of protected health information to health plans. According to OCR officials, the proposed rule is currently under review by the Office of Management and Budget (OMB), and OCR officials have not determined an estimated time frame for its issuance. The HITECH Act also requires HHS to educate members of the public about how their PHI, which may include Medicare beneficiaries' prescription drug use information, may be used. In addition, the HITECH Act requires HHS to provide guidance for covered entities on implementing HIPAA requirements for de-identifying data--that is, taking steps to ensure the data cannot be linked to a specific individual. Specifically, the act requires HHS to provide information to educate individuals about the potential uses of PHI, the effects of such uses, and the rights of individuals with respect to such uses. In addition--to clarify the de-identification methods established in the HIPAA Privacy Rule--the HITECH Act required OCR to produce guidance by February 2010 on how best to implement the HIPAA Privacy Rule requirements for the de- identification of protected health information. OCR has undertaken an array of efforts since the rules were issued, as well as to implement the HITECH Act's requirements to promote awareness of the general uses of PHI and the privacy and security protections afforded to the identifiable information. For example, the office has made various types of information resources publicly available. Through its website, the office provides a central hub of resources related to HIPAA regulations, ranging from guidance to consumers on their rights and protections under the HIPAA rules to compliance guidance to covered entities. More specifically, the office has developed resources to guide covered entities and business associates in implementing the provisions of the Privacy and Security Rules, which include, among other things, examples of business associate contract provisions for sharing PHI, answers to commonly asked questions, summaries of the HIPAA rules, and information on regional privacy officers designated to offer guidance and education assistance to entities and individuals on rights and responsibilities related to the Privacy and Security Rules. Table 5 below provides a brief overview of OCR's guidance and education outreach activities in regard to their target audience, purpose, and guidance materials. In another effort to promote awareness, OCR---in conjunction with the Office of the National Coordinator for Health Information Technology-- established a Privacy and Security Toolkit to provide guidance on privacy and security practices for covered entities that electronically exchange health information in a network environment. The toolkit was developed to implement the Nationwide Privacy and Security Framework for Electronic Exchange of Individually Identifiable Health Information, also known as the Privacy and Security Framework, and includes tools to facilitate the implementation of these practices to protect PHI. Guidance included with the toolkit includes, among other things, security guidelines to assist small health care practices as they become more reliant on health information technology and facts and template examples for developing notices for informing consumers about a company's privacy and security policies in a web-based environment. Although OCR has initiated these efforts to fulfill its responsibilities to promote awareness of allowable uses and provide guidance for complying with required protections under the HITECH Act, it has yet to publish HITECH Act guidance on implementing HIPAA de-identification methods, which was to be issued by February 2010. OCR officials stated that they have developed a draft of the de-identification guidance, but have not set an estimated issuance date. According to the officials, the draft guidance was developed based on the office's solicitation of best practices and guidelines from multiple venues and forums, including a workshop panel discussion with industry experts in March 2010 that included discussions on best practices and risks associated with de- identifying PHI. The officials stated that guidance will explain and answer questions about de-identification methods as well as clarify guidelines for conducting the expert determination method of de-identification to reduce entities' reliance on the Safe Harbor method. The issuance of such implementation guidance could provide covered entities--including those that rely on de-identified prescription drug use information for purposes other than directly providing clinical care--with guidelines and leading practices for properly de-identifying PHI in accordance with Privacy Rule requirements. According to OCR officials, competing priorities for resources and internal reviews have delayed the issuance of the guidance. Officials stated that the draft is currently under government wide review. Although officials stated that the guidance will be issued upon completion of the review, no estimated time frame has been set. Until this guidance is issued, increased risk exists that covered entities are not properly implementing the standards set by the HIPAA Privacy Rule and that identifiers are not properly removed from PHI. Federal laws authorize HHS to take steps to ensure that covered entities comply with HIPAA privacy and security requirements targeted toward protecting patient data, including Medicare beneficiaries' prescription drug use information. Specifically, HHS has authority to enforce compliance with the Privacy and Security Rules in response to, among other things, (1) complaints reporting potential privacy and security violations and (2) data breach notifications submitted by covered entities. Furthermore, the HITECH Act increased HHS's oversight responsibilities by requiring the department to perform periodic audits to ensure covered entities and business associates are complying with the Privacy and Security Rules and breach notification standards. OCR has developed and implemented an enforcement process that is focused on conducting investigations in response to actions that potentially violate the Privacy and Security Rules. According to OCR officials, the office opens investigations in response to submitted complaints and data breach notifications, as well as conducts compliance reviews based on other reports of potential violations of which the department becomes aware. If necessary, it then requires covered entities to make changes to their privacy and security practices. OCR receives thousands of complaints and breach notifications each year. Officials stated that these complaints and notifications are reviewed to determine if they are eligible for enforcement and require an OCR investigation. According to information provided by OCR, from 2006 to 2010 the office has received on average about 8,000 Privacy and Security Rule complaints each year. OCR officials reported that as of February 2012, the office conducted investigations of approximately 24,000 complaints alleging compliance violations of the Privacy or Security Rule, resulting in corrective actions by covered entities in 66 percent of the cases. Corrective actions have included training or sanctioning employees, revising policies and procedures, and mitigating any alleged harm. According to OCR's annual report to Congress on HIPAA Privacy and Security Rule compliance, in instances where an investigation resulted in a determination that a violation of the Privacy or Security Rule occurred, the office first attempted to resolve the case informally by obtaining voluntary compliance through corrective action. Compliance issues investigated most often include impermissible uses and disclosures of PHI and lack of safeguards for or patient access to PHI. As of May 2012, OCR investigations have resulted in the issuance of a resolution agreement in eight cases. According to OCR officials, a resolution agreement is a formal agreement between OCR and the investigated entity and is used to settle investigations with more serious outcomes. A resolution agreement is a contract signed by HHS and a covered entity in which the covered entity agrees to perform corrective actions (e.g., staff training), submit progress reports to HHS (generally for a period of 3 years), and--in some cases--pay a monetary fine. The eight resolution agreements entered into with the investigated entities all included a payment of a resolution amount, and the development or revision of policies and procedures. In six of these cases further submission of compliance reports or compliance monitoring was required for 2 to 3 years. For example, in response to complaints that several patients' electronic PHI was viewed without permission by university health system employees, OCR initiated an investigation which revealed that unauthorized employees repeatedly looked at the electronic PHI for numerous patients. The university health system agreed to settle potential violations of the Privacy and Security Rules by committing to a corrective action plan and paying approximately $865,000. When a covered entity does not cooperate with an OCR investigation or take action to resolve a violation, the office also has the authority to impose a civil money penalty. OCR can levy civil money penalties for failure to comply with the requirements of the Privacy Rule, Security Rule, and Breach Notification Rule. For each violation, the maximum penalty amount in four separate categories is $50,000. For multiple violations of an identical provision in a calendar year, the maximum penalty in each category is $1.5 million. As of May 2012, OCR had issued one civil money penalty for noncompliance in the amount of $4.3 million. Since February 2010, pursuant to the HITECH Act, OCR has received and used the money from settlement amounts and civil money penalties for enforcement of the HIPAA rules. In June 2011, OCR initiated efforts to conduct pilot audits of 150 covered entities by the end of December 2012. The office contracted for a private firm to identify the population of covered entities from which to select audit candidates. Additionally, the office contracted with a private audit firm to develop the initial audit procedures for covered entities. These procedures--which OCR documentation asserts are to be in accordance with generally accepted government auditing standards--are composed of the requirements from the Privacy, Security and Breach Notification Rules, which include protections afforded to prescription drug use information and uses of it for purposes other than directly providing clinical care. In January 2012, OCR officials stated that the target for audits to complete was revised to 115. According to OCR documentation, during the pilot each audit is conducted based on the following steps: 1. An audit is initiated with the selected covered entity being informed by OCR of its selection and asked to provide documentation of its privacy, security, and breach notification compliance efforts to the contracted auditors. 2. Contracted auditors use the audit procedures developed to assess the compliance activities of the covered entity. According to officials and documentation provided, these procedures correspond to the requirements of the Privacy, Security, and Breach Notification Rules. In this pilot phase, every audit will include a documentation review and site visit. 3. Contracted auditors will provide the audited covered entity the draft findings within 30 days after conclusion of the field work. 4. Audited entities will have 10 days to provide the audit contractor with comments and outline corrective actions planned or taken. 5. Contracted auditors will develop a final audit report to submit to OCR within 30 days of receipt of the comments. The final report will describe how the audit was conducted, what the findings were, and what actions the covered entity is taking in response to those findings as well as describe any best practices of the entity. According to OCR officials, an initial set of 20 pilot audits was completed by March 2012. Officials stated that these initial audits resulted in the identification of both privacy and security issues at covered entities, such as potential impermissible uses and disclosures and not appropriately conducting reviews of audit logs and other reports monitoring activity on information systems. OCR officials stated that the remaining 95 pilot audits, 25 of which were initiated in April 2012, will be completed by the end of December 2012. However, OCR has yet to establish plans for (1) continuing the audit program once the audit pilot finishes in December 2012 and (2) auditing business associates for privacy and security compliance. According to OCR officials, the dedicated Recovery Act funding for the office's audit effort will expire at the end of December 2012 and officials stated that they have not yet finalized a decision on the future of the program, including the manner in which an audit process will need to be designed to address compliance by business associates. OCR officials stated that the office plans to award a contract in 2012 for a review of the pilot program, including a sample of audits completed during the pilot. OCR officials anticipate that this review will help determine how the office can fully implement an audit function. Implementing a sustained audit program could allow OCR to help covered entities and business associates identify and mitigate risks and vulnerabilities that may not be identified through OCR's current reactive processes. Furthermore, inclusion of business associates in such a program is important because, according to OCR data, more than 20 percent of data breaches affecting over 500 individuals that were reported to OCR involved business associates. Without a plan for deploying a sustained audit capability on an ongoing basis, OCR will lack the ability to ensure that covered entities and business associates are complying with HIPAA regulations, including properly de-identifying PHI when data on prescription drug use are used for purposes other than directly providing clinical care. Through its issuance of regulations, outreach, and enforcement activities, HHS has established a framework for protecting the privacy and security of Medicare beneficiaries' prescription drug use information when used for purposes other than directly providing clinical care. It has also promoted public awareness on the uses and disclosures of PHI through its education and outreach activities. Further, OCR has established and implemented a process to enforce provisions of the HIPAA Privacy and Security Rules through investigations. However, it has not issued required implementation guidance to assist entities in de-identifying PHI. By not issuing the guidance, increased risk exists that covered entities are not properly implementing the standards set by the HIPAA Privacy Rule and that PHI is not properly stripped of all identifiers that would identify an individual. In addition, OCR has not fully established a capability to proactively monitor covered entities' compliance through the use of periodic audits as required by the HITECH Act. Specifically, OCR has yet to establish plans for a sustained audit capability upon completion of its pilot program at the end calendar year 2012 and has yet to determine how to include auditing business associates. Without a plan for deploying a sustained audit capability on an ongoing basis, OCR will have limited assurance that covered entities and business associates are complying with HIPAA regulations, including whether Medicare beneficiaries' prescription drug use information, when used for purposes other than directly providing clinical care, is being appropriately safeguarded from compromise. To improve the department's guidance and oversight efforts for ensuring the privacy and security of protected health information, including Medicare beneficiaries' prescription drug use information, we recommend that the Secretary of HHS direct the Director of the Office for Civil Rights to take the following two actions: Issue guidance on properly implementing the HIPAA Privacy Rule requirements for the de-identification of protected health information. Establish plans for conducting periodic audits to ensure covered entities and business associates are complying with the HIPAA Privacy and Security Rules and breach notification standards. In written comments on a draft of the report, the HHS Assistant Secretary for Legislation agreed with our two recommendations, but provided qualifying comments for both. HHS's comments are reprinted in appendix III. Regarding our recommendation that OCR issue guidance on properly implementing the HIPAA Privacy Rule requirements for the de- identification of protected health information, the Assistant Secretary stated that while the department agrees that issuing the guidance will be helpful to covered entities, the department does not agree that without the guidance, covered entities will have limited assurance that they are complying with the HIPAA Privacy Rule de-identification standards. The Assistant Secretary noted that covered entities have been operating under these existing de-identification standards for almost 10 years and that OCR has not found that the standards have been the subject of significant or frequent compliance issues by covered entities. The Assistant Secretary noted that OCR's purpose in issuing the de- identification guidance was to provide covered entities with the current options and approaches available for de-identifying health information. We agree that the existing agency information on the de-identification standards provide a level of assurance that covered entities have the parameters and requirements needed to properly remove identifiers from PHI and have clarified this in our report. However, the HITECH Act requires HHS to issue de-identification implementation guidance that addresses how covered entities should implement the de-identification standards. OCR officials stated that the planned guidance will explain and answer questions about de-identification methods as well as clarify guidelines for conducting the expert determination method of de- identification to reduce entities' reliance on the Safe Harbor method. Such information could assist covered entities in determining how to properly implement the de-identification methods. Until such implementation guidance is issued, increased risk exists that covered entities are not properly adhering to the standards set by the HIPAA Privacy Rule and that PHI is not properly stripped of all identifiers that would identify an individual. Regarding our recommendation that OCR establish plans for conducting periodic audits to ensure covered entities and business associates are complying with the HIPAA Privacy and Security Rules and breach notification standards, the Assistant Secretary stated the department did not agree with our report's conclusion that without such a plan, OCR will lack the ability to ensure that covered entities and business associates are complying with the HIPAA rules. Specifically, he stated that our conclusion did not adequately take into account the considerable impact of the thousands of complaint investigations, compliance reviews, and other enforcement activities OCR conducts annually to ensure covered entities are complying with the rules. He noted that although the audit function is a critical compliance tool for identifying vulnerabilities, the importance of the audit function should not be understood to diminish the effectiveness of OCR's other enforcement activities for bringing about and enforcing compliance with the HIPAA rules. As our report highlighted, OCR has developed and implemented an enforcement process that is focused on responding to actions that potentially violate the Privacy and Security Rules. OCR conducts this reactive process through processing complaints and conducting thousands of investigations each year. An audit program is an important addition to OCR's compliance program as it is a tool to identify vulnerabilities before they cause breaches and other incidents. Without the addition of a proactive process, such as an audit capability, OCR will have limited assurance that covered entities are complying with HIPAA regulations. HHS also provided technical comments on the report draft, which we addressed in the final report as appropriate. We will send copies of this report to other interested congressional committees and the Secretary of Health and Human Services. The report will also be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-6244 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. Our objective was to determine the extent to which the Department of Health and Human Services (HHS) has established a framework to ensure the privacy and security of Medicare beneficiaries' protected health information (PHI) when data on prescription drug use are used for purposes other than their direct clinical care. To address our objective, we identified HHS's and its Office for Civil Rights' (OCR) responsibilities for protecting the privacy and security of PHI by reviewing and analyzing the Health Insurance Portability and Accountability Act (HIPAA), including the HIPAA Privacy and Security Rules; the Health Information Technology for Economic and Clinical Health (HITECH) Act; and applicable privacy best practices, such as the Fair Information Practices. To obtain information on OCR efforts in implementing HIPAA's and the HITECH Act's requirements, we reviewed and analyzed documentation related to the office's public outreach and guidance efforts, enforcement practices, and regulations for covered entity and business associate compliance provided by the office and through the department's website and compared those documents to the office's statutory requirements. To obtain information on the office's enforcement through complaint and breach notice investigations, we interviewed officials, reviewed agency- provided and public information, and analyzed agency documentation. We conducted interviews with OCR officials to discuss the department's approaches and future plans for addressing the protection and enforcement requirements of the HIPAA Privacy and Security Rules that applied to covered entities and business associates. We also analyzed plans and documentation provided by OCR officials that described enforcement and compliance activities for developing an audit mechanism and compared them with requirements for the audit program established in the HITECH Act. To describe the uses of prescription drug use data for purposes other than directly providing clinical care, we interviewed representatives from several covered entities, business associates, and medical associations, and reviewed the HIPAA Privacy Rule and academic publications. We conducted this performance audit at the Department of Health and Human Services in Washington, D.C., from August 2011 through June 2012, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Description The provision, coordination, or management of health care and related services among health care providers or by a health care provider with a third party, consultation between health care providers regarding a patient, or the referral of a patient from one health care provider to another. The various activities of health care providers to obtain payment or be reimbursed for their services and of a health plan to obtain premiums, to fulfill their coverage responsibilities and provide benefits under the plan, and to obtain or provide reimbursement for the provision of health care. Certain administrative, financial, legal, and quality improvement activities of a covered entity, as defined in the Privacy Rule, that are necessary to run its business and to support the core functions of treatment and payment. Example A hospital may use protected health information about an individual to provide health care to the individual and may consult with other health care providers about the individual's treatment. A hospital may send a patient's health care instructions to a nursing home to which the patient is transferred. A hospital emergency department may give a patient's payment information to an ambulance service provider that transported the patient to the hospital in order for the ambulance provider to bill for its service. With certain exceptions, to make a communication about a product or service that encourages recipients of the communication to purchase or use the product or service. Marketing includes an arrangement between a covered entity and any other entity, whereby the covered entity discloses PHI to the other entity in exchange for direct or indirect remuneration, for the other entity or its affiliate to make a communication about a product or service that encourages recipients of the communication to purchase or use the product or service. With limited exceptions, such as for face to face communications, the Privacy Rule requires an individual's written authorization before a use or disclosure of his or her PHI can be made for marketing. Covered entities may disclose protected health information, without authorization, to public health authorities who are legally authorized to receive such reports for the purpose of preventing or controlling disease, injury, or disability. Conducting quality assessment and improvement activities, and case management and care coordination. Business management and general administrative activities, including those related to implementing and complying with the Privacy Rule. Needing an individual's authorization: A health plan sells a list of its members to a company that sells blood glucose monitors, which intends to send the plan's members brochures on the benefits of purchasing and using the monitors. Not needing an individual's authorization: An insurance agent sells a health insurance policy in person to a customer and proceeds to also market a casualty and life insurance policy as well. A systematic investigation, including research development, testing, and evaluation, designed to develop or contribute to generalizable knowledge. To use or disclose protected health information without authorization by the research participant, a covered entity must obtain either: (1) institutional review board or privacy board waiver of authorization; (2) representations for a preparatory to research activity; (3) representations that the research is on the protected health information of decedents; or (4) a data use agreement with recipient where only a limited data sets is shared. The social services department of a local government might have legal authority to receive reports of child abuse or neglect, in which case the Privacy Rule would permit a covered entity to report such cases to that authority without obtaining individual authorization. Approval of a waiver of authorization by an Institutional Review Board or Privacy Board for research, such as for certain records research, when the Board has determined that the use or disclosure of protected health information involves no more than a minimal risk to the privacy of individuals, and the research could not practicably be conducted without the waiver and without access to the protected health information. In addition to the contact above, John de Ferrari, Assistant Director; Nick Marinos, Assistant Director; Sher'rie Bacon; Marisol Cruz; Wilfred Holloway; Lee McCracken; Monica Perez-Nelson; Matthew Snyder; Daniel Swartz; and Jeffrey Woodward made key contributions to this report.
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Prescribing medications and filling those prescriptions increasingly relies on the electronic collection of individuals' health information and its exchange among health care providers, pharmacies, and other parties. While this can enhance efficiency and accuracy, it also raises privacy and security concerns. Federal law establishes the authority for the Secretary of HHS to develop standards for protecting individuals' health information (which includes Medicare beneficiaries) and to ensure that covered entities (such as health care providers and pharmacies) and their business associates comply with these requirements. The Medicare Improvements for Patients and Providers Act of 2008 required GAO to report on prescription drug use data protections. GAO's specific objective for this review was to determine the extent to which HHS has established a framework to ensure the privacy and security of Medicare beneficiaries' protected health information when data on prescription drug use are used for purposes other than direct clinical care. To do this, GAO reviewed HHS policies and other related documentation and interviewed agency officials. While the Department of Health and Human Services (HHS) has established a framework for protecting the privacy and security of Medicare beneficiaries' prescription drug use information when used for purposes other than direct clinical care through its issuance of regulations, outreach, and enforcement activities, it has not issued all required guidance or fully implemented required oversight capabilities. HHS has issued regulations including the Health Insurance Portability and Accountability Act (HIPAA) Privacy and Security Rules to safeguard protected health information from unauthorized use and disclosure. Through its Office for Civil Rights (OCR), HHS has undertaken a variety of outreach and educational efforts to inform members of the public and covered entities about the uses of protected health information. Specifically, OCR has made available on its website guidance and other materials informing the public about the uses to which their personal information may be put and the protections afforded to that information by federal laws. It has also made available guidance to covered entities and their business associates that is intended to promote compliance with the HIPAA Privacy and Security Rules. However, HHS has not issued required implementation guidance to assist entities in de-identifying personal health information including when it is used for purposes other than directly providing clinical care to an individual. This means ensuring that data cannot be linked to a particular individual, either by removing certain unique identifiers or by applying a statistical method to ensure that the risk is very small that an individual could be identified. According to OCR officials, the completion of the guidance, required by statute to be issued by February 2010, was delayed due to competing priorities for resources and internal reviews. Until the guidance is issued, increased risk exists that covered entities are not properly implementing the standards set forth by federal regulations for de-identifying protected health information. Additionally, in enforcing compliance with the HIPAA Privacy and Security Rules, OCR has established an investigations process for responding to reported violations of the rules. Specifically, the office annually receives thousands of complaints from individuals and notices of data breaches from covered entities, and initiates investigations as appropriate. If it finds that a violation has occurred, the office can require covered entities to take corrective action and pay fines and penalties. HHS was also required by law to implement periodic compliance audits of covered entities' compliance with HHS privacy and security requirements; however, while it has initiated a pilot program for conducting such audits, it does not have plans for establishing a sustained audit capability. According to OCR officials, the office has completed 20 audits and plans to complete 95 more by the end of December 2012, but it has not established plans for continuing the audit program after the completion of the pilots or for auditing covered entities' business associates. Without a plan for establishing an ongoing audit capability, OCR will have limited assurance that covered entities and business associates are complying with requirements for protecting the privacy and security of individuals' personal health information. GAO recommends that HHS issue de-identification guidance and establish a plan for a sustained audit capability. HHS generally agreed with both recommendations but disagreed with GAO's assessment of the impacts of the missing guidance and lack of an audit capability. In finalizing its report, GAO qualified these statements as appropriate.
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DOD has traditionally approached the acquisition of services differently than the acquisition of products, focusing its attention, policies, and procedures on managing major weapon systems, which it typically does by using the cost of the weapon system as a proxy for risk. For example, DOD classifies its acquisition programs, including research and development efforts related to weapon systems, in categories based upon estimated dollar value or designation as a special interest. The largest programs generally fall under the responsibility of the Under Secretary of Defense for Acquisition, Technology, and Logistics (USD(AT&L)), while less complex and risky programs are overseen by the service or component acquisition executive. As of December 2015, DOD managed 78 major defense acquisition programs on which it planned to invest $1.46 trillion over the life of these programs. These 78 programs will require just over one quarter of all DOD's development and procurement funding over the next 5 years. Conversely, we previously reported that DOD's approach to buying services is largely fragmented and uncoordinated, as responsibility for acquiring services is spread among individual military commands, weapon system program offices, or functional units on military installations, with little visibility or control at the DOD or military department level. DOD's January 2016 instruction reiterates that the acquisition of contracted services is a command responsibility. As such, the instruction notes that unit, organization, and installation commanders are responsible for the appropriate, efficient, and effective acquisition of contracted services by their organizations. Services differ from products in several aspects and can offer challenges when attempting to define requirements, establishing measurable and performance-based outcomes, and assessing contractor performance. For example, it can easily take over 10 years to define requirements and develop a product like a weapon system before it can be delivered for field use. Individual service acquisitions generally proceed through requirements, solution, and delivery more rapidly. Further, delivery of services generally begins immediately or very shortly after the contract is finalized. Over the past 15 years, Congress and DOD have identified actions intended to improve, among other things, service acquisition planning, tracking, and oversight (see figure 1). Since 2013, DOD took several additional actions to help improve the acquisition and management of services. For example, in April 2013, the USD(AT&L) appointed the Principal Deputy Under Secretary of Defense for Acquisition, Technology, and Logistics, as the Senior DOD Manager for Services Acquisition. Subsequently, in May 2013, DPAP established a Services Acquisition directorate, which is responsible for DOD-level oversight of services as part of its responsibilities; DPAP-SA was the principal author of DOD's January 2016 instruction. DPAP-SA also leads the Services Acquisition Functional Integrated Product Team, which creates services-acquisition training and tools and provides a forum to share best practices and lessons learned. The Services Acquisition Functional Integrated Product Team is comprised of representatives from DPAP-SA, the Defense Acquisition University, and SSMs, and others from the military departments and defense agencies. The January 2016 instruction calls for the strategic management of the acquisitions of contracted services. The instruction establishes policy, assigns responsibilities, provides direction for the acquisition of contracted services, and establishes and implements a hierarchical management structure for the acquisition of contracted services, including service categories, thresholds and decision authorities, and an SRRB framework. The instruction identifies three key leadership positions, FDEs, CLLs, and SSMs to strategically manage and oversee services. These actions were driven by evidence that DOD was increasingly reliant on contracted services, including complex services such as engineering support, and was obligating more of its contracting dollars on services than it was on products. As we noted in February 2016, DOD's obligations in fiscal year 2014 on its three largest services--knowledge- based, research and development, and facility-related services were more than double the amount DOD obligated for aircraft, land vehicles, and ships, the three largest product categories DOD acquired. GAO has issued a series of reports that assessed leading commercial practices and DOD's efforts to improve how it acquires contracted services. In our January 2002 report on commercial practices, for example, we reported that leading companies had examined alternative ways to manage their service spending to stay competitive, respond to market and stockholder pressures, and deal with economic downturns in key overseas markets. In looking at their service acquisitions, these companies discovered that they did not have a good grasp of how much was actually being spent and where these dollars were going. These companies also found that responsibility for acquiring services resided largely with individual business units or functions--such as finance, human resources, manufacturing, engineering, or maintenance--which hindered efforts to coordinate purchases across the company. The companies realized that they lacked the tools needed to make sure that the services they purchased met their business needs at the best overall value. We reported that such challenges were similar to those being experienced by DOD at the time--responsibility for acquiring services was spread among individual military commands, weapon system program offices, or functional units on military bases, with little visibility or control at the DOD or military department level over these acquisitions. The companies we reviewed instituted a series of structural, process, and role changes aimed at moving away from a fragmented acquisition process to a more efficient and effective enterprise-wide process. For example, they often established or expanded the role of corporate procurement organizations to help business managers acquire key services and made extensive use of cross-functional teams to help the companies better identify service needs, select providers, and manage contractor performance. Some companies found that, in establishing new procurement processes, they needed to overcome resistance from individual business units reluctant to share decision-making responsibility and to involve staff that traditionally did not communicate with each other. To do so, the companies found they needed to have sustained commitment from their senior leadership; to clearly communicate the rationale, goals, and expected results from the reengineering efforts; and to measure whether the changes were having their intended effects. We concluded that the strategic approach taken by the leading firms we reviewed could serve as a general framework to guide DOD's service contracting initiatives. We noted, however, that DOD might find that a "one-size-fits-all" approach would not work for all services and that it would need to tailor its approach to meet its specific needs and requirements. DOD officials acknowledged that some services were acquired department-wide, while other services (such as ship support and maintenance) were unique to specific commands, units, or geographic locations. DOD officials agreed that they would need, as a first step, to obtain and analyze data on DOD's service spending to identify and prioritize specific services where a more coordinated acquisition approach may be appropriate. Since that January 2002 report, we have issued several reports that examined DOD's efforts to implement a management structure and address other issues affecting service acquisitions, as illustrated by the following examples: In September 2003, we reported that while DOD and the military departments each had a management structure in place for reviewing individual service acquisitions valued at $500 million or more, that approach did not provide a department-wide assessment of how spending for services could be more effective. In November 2006, we reported that DOD's approach to managing service acquisitions tended to be reactive and had not fully addressed the key factors for success at either the strategic or transactional level. At the strategic level, DOD had not set the direction or vision for what it needed, determined how to go about meeting those needs, captured the knowledge to enable more informed decisions, or assessed the resources it had to ensure department-wide goals and objectives were achieved. In June 2013, we reported that USD(AT&L) and military department leadership had demonstrated a commitment to improving management of service acquisition, but that they faced challenges in developing goals and metrics to assess outcomes due to limitations with corroborating data between their contracting and financial data systems. We recommended that DOD establish baseline data, specific goals for improving service acquisitions, and associated metrics to assess its progress. DOD concurred with the three recommendations. Most recently, in our February 2016 report, we found, among other things, that DOD program offices we reviewed generally maintained data on current and estimated future spending needs for contracted service requirements, but did not identify spending needs beyond the budget year, since there was no requirement to do so. This limited DOD's leadership insight into future spending on contracted services. We recommended that the Secretaries of the Army, Navy, and Air Force revise their programming guidance to collect information on how contracted services will be used to meet requirements beyond the budget year. We also recommended that the Secretary of Defense establish a mechanism, such as a working group, to ensure the military departments' efforts to integrate services into the programming process and to develop forecasts on service contract spending provided the department with consistent data. DOD partially concurred with both recommendations but did not indicate any planned actions to implement the recommendations. DOD has not fully implemented the three key leadership positions-- FDEs, CLLs, and SSMs--that were identified in DOD's January 2016 instruction and which were to enable DOD to more strategically manage service acquisitions. DPAP-SA officials noted that the officials appointed to be FDEs had multiple responsibilities, and considered their FDE roles as secondary. Additionally, CLLs largely existed in name only. Consequently, FDEs and CLLs have had a minimal effect on how DOD manages services. More importantly, we found that SSMs were unsure about the value of FDEs and CLLs and how these positions were to influence decisions made by the commands. In particular, SSM officials cited cultural barriers to implementing the hierarchical approach to service acquisition envisioned in DOD's January 2016 instruction, in part because each military department has traditionally taken a decentralized approach to managing services. Our analysis of DOD fiscal year 2016 service contract obligations found that DOD could improve the management of services by better targeting individual military commands that were responsible for awarding the majority of their department's contract obligations for service portfolios. DPAP-SA officials responsible for services were aware of the implementation challenges and have efforts underway to revise the January 2016 instruction, in part to further clarify position authorities and responsibilities. We found that FDEs and CLLs have not been effective in improving DOD's ability to strategically manage service acquisitions. DOD's January 2016 instruction formalized a hierarchical approach to more strategically manage service acquisitions by portfolio within both OSD--through the use of FDEs--and the components--through the use of CLLs. Specifically, the January 2016 instruction stated that portfolio management enables a framework for strategic oversight by OSD, coupled with decentralized execution by the DOD components to improve the transparency of requirements across DOD, reduce redundant business arrangements, and increase awareness of alternatives. These positions, which were initially established in 2013 as part of the Better Buying Power initiative, were assigned a broad range of responsibilities and were to coordinate their efforts with the military departments' SSMs, who are responsible for strategic planning, sourcing, execution, and management of services within each military department (see table 1). Rather than creating new positions within OSD or the military departments to fill these leadership positions, DOD added services acquisitions-related responsibilities to existing positions. For example, see table 2 for the existing positions held by FDEs. DPAP-SA officials explained that the appointment of senior OSD officials was intended to give the positions the necessary visibility to carry out their responsibilities to provide strategic portfolio leadership to achieve greater efficiencies and reduce costs in services acquisition. DPAP-SA officials acknowledged, however, that implementation of the FDE positions has been beset by challenges. The senior OSD officials already had broad departmental management responsibilities and were assigned additional FDE responsibilities that were not within their control. For example, FDEs were tasked with forecasting and budgeting services requirements and developing policies to help prioritize requirements. In this regard, as noted in the DOD January 2016 instruction, the responsibilities for establishing and budgeting for service acquisitions are the responsibility of officials within the military commands and installations performed under DOD's Planning, Programming, Budgeting, and Execution process. Neither DOD's October 2013 letter that appointed the FDEs, nor DOD's January 2016 instruction provided specific guidance on how to accomplish these responsibilities. These senior OSD officials also considered their FDE responsibilities as secondary, other duties as assigned and in some cases were assigned multiple portfolios. For example, the Principal Deputy Assistant Secretary of Defense for Logistics and Materiel Readiness--who served as the FDE for three portfolios that comprised $22.9 billion in obligations in fiscal year 2015--has as his primary duty to serve as the principal advisor to the USD(AT&L) in the oversight of logistics policies, practices, operations, and efficiencies. Similarly, the Deputy Director for DPAP-SA--who is responsible for the technical and programmatic evaluation and functional oversight of all aspects of DOD service acquisitions--was named FDE for two out of six knowledge based services portfolio categories, identified in table 2. DPAP-SA officials told us that given their other responsibilities, FDEs devoted only minimal time to fulfilling their FDE responsibilities. Similarly, we found that the CLLs were generally appointed by the military departments, but were not actively engaged in the strategic management of specific services portfolios, as called for in the January 2016 instruction. For example, Air Force officials said that a previous effort to implement a CLL-like position had been unsuccessfully tried in the past and therefore they were reluctant to establish new CLL positions. Army officials identified staff to serve as CLLs, but acknowledged that the CLLs were not active because it was not a management priority. Navy SSM officials established Portfolio Managers within the SSM's office to carry out CLL responsibilities, but these positions had not actively managed services at the Navy's major commands. As a result, CLLs had a minimal effect on how DOD strategically manages and oversees services. Similar to the approach taken to create FDEs and CLLs, each of the three military departments created SSMs by appointing senior officials within their respective acquisition or contract policy offices (see table 3). However, SSMs identified challenges, including the lack of responsibility for developing or approving requirements or related funding requests and difficulties in identifying data or metrics to support strategic management in executing their SSM responsibilities. Further, while SSMs recognize the need to further improve management of services in their respective military departments, they were not convinced that a hierarchical, portfolio-based approach outlined in the January 2016 instruction would achieve the intended benefits. The three SSMs we interviewed were unsure about the value of FDEs and CLLs and how these positions were to influence decisions made by the commands. Further, SSM officials noted cultural barriers to implementation, in that commanders are reluctant to give up responsibilities on determining how and which services are needed to meet their missions. In addition, the January 2016 instruction underscores that the execution of services is a commander's responsibility. For example, each of the SSMs told us that commanders are responsible for fulfilling services requirements needed to accomplish missions within their allocated resources. Consistent with this perspective, SSMs have not implement a hierarchical, portfolio-based approach to services within their departments. The January 2016 instruction requires SSMs to strategically manage each service portfolio group with CLLs as appropriate to develop metrics, best practices, and data to achieve effective execution of the service contract requirements within each portfolio. SSMs told us, however, that they viewed their appropriate role as helping commands improve existing processes to better acquire and manage services. For example, each SSM conducts an annual services health assessment at each command to provide a qualitative picture of programs' processes and management. For example, at the Air Force in 2015, each command was asked to self-assess six qualitative performance areas, such as program management and fiscal responsibility. In turn, SSMs are to use this and other information to influence and educate the service acquisition community through working groups, training, and sharing best practices. DPAP-SA officials acknowledged that implementation of the hierarchical approach envisioned in the January 2016 instruction is not working as intended, in part because the approach does not fully address concerns that a more top-down approach to service acquisitions may adversely affect the commanders' ability to meet their missions. In that regard, our analysis of DOD fiscal year 2016 service contract obligations found that depending on the organization's structure and mission, specific commands within the military departments award the majority of contract obligations for particular portfolios of services (see table 4). For example, the Army Materiel Command and Air Force Materiel Command obligated almost all of their respective military department's dollars for logistics management and equipment-related service contracts. Conversely, the Naval Air Systems Command was responsible for a much smaller percentage of obligations for these and other services. Other Navy commands had the vast majority of service contract obligations for particular portfolios. For example, the Naval Facilities Engineering Command obligated 84 percent of the Navy's dollars for facility-related service contracts in fiscal year 2016. In February 2017, DPAP-SA held an initial meeting with the key stakeholders in the services management structure--for example, FDEs and SSMs--to discuss revising the instruction. This effort includes providing clearer definitions of terms such as service acquisition, revising service acquisition category review thresholds, and determining whether FDEs are needed in light of federal category management efforts. Federal internal control standards state that management should establish an organizational structure, assign responsibilities, and delegate authorities to achieve its objectives. That structure should allow the organization to plan, execute, control, and assesses progress toward achieving its objectives. Further, management should periodically review its reviews policies, procedures, and related control activities for continued relevance and effectiveness in achieving the organization's objectives, and if there is a significant change in its process, management should review the process in a timely manner after the change to determine that control activities are designed and implemented appropriately. DOD's ongoing effort to revise the January 2016 instruction provides the department the opportunity to reassess whether the hierarchical approach currently in place would, if fully implemented and resourced, enable the department to achieve its goal of strategically managing service acquisitions, or conversely, if an approach that focuses on strategically managing services at the military department or command level may fare better. DOD's January 2016 instruction formalized the requirement to hold SRRBs to validate, prioritize, and approve service requirements from a holistic viewpoint--an approach that comprehensively considers service requirements within and across portfolios. We found, however, that the three military commands we reviewed did not implement SRRBs that approved service requirements from a holistic perspective, but instead leveraged their existing contract review boards, which focus their efforts on assuring proposed contract solicitations and awards are in compliance with federal acquisition regulations and DOD guidance. As a result, SRRBs had a minimal effect on supporting trade-off decisions in the service portfolios or assessing opportunities for efficiencies and eliminating duplicative requirements. The January 2016 instruction requires DOD organizations and components to establish a process for senior leaders to review, prioritize, validate, and approve each service requirement with a value of $10 million or greater. DOD guidance for implementing the instruction notes that an SRRB is a structured process that, among other things, is to inform, assess, and support trade-off decisions by senior leaders regarding service requirements cost, schedule, and performance for the acquisition of services; identify opportunities for efficiencies, such as realignment of requirements to better align to mission, identification and elimination of duplicative capabilities, and identification of strategic sourcing capabilities; be holistic and requirement-focused rather than contract-focused; have an outcome of a prioritized list of both funded and non-funded existing and anticipated requirements; be established and managed by and held at the requiring command or organizational unit because that is where the requirement owner and funding is located; be held at least annually, but may be held more often as determined by the requiring organization; and have validated a service requirement before approval of an acquisition strategy. According to the Deputy Director of DPAP-SA, the SRRB process is intended to provide senior leaders more visibility over contracted services and requirements, and to provide opportunities to collect data and assess lessons learned and best practices from contracting, not only at individual level command levels but across the military departments and DOD. However, the instruction did not specify when boards should occur or how the results of the SRRBs would be captured or used to inform programming and budget decisions. Further, the instruction required commands to ensure, prior to contract award, that more tactical contracting elements were considered, such as workforce needs and the sufficiency of market research. The instruction also provided the military departments with flexibility in how they achieved these objectives. As a result, military department SSMs noted rather than creating a new SRRB process, they leveraged existing processes for reviewing and approving proposed service contract actions to meet the intent of the January 2016 instruction. For example, pursuant to Air Force Instruction 63-138, the Air Force Materiel Command utilized its Requirements Approval Document and database as its SRRB process. Air Force officials noted that they have used this process since 2008. Similarly, pursuant to Army Regulation 70-13, the Army Materiel Command used its Service Requirements Review Board or SR2B--established in 2010--as its SRRB process, while the Naval Air Systems Command used its Workload and Force Planning process--established in 2004--as its SRRB process. The Navy's approval process is governed by its 2012 SRRB guidance. While each of the processes varied in certain regards, these processes are designed to ensure requirements for individual services acquisitions have been validated; sufficient funding is available for the proposed action; appropriate acquisition planning and market research have been the proposed solicitation and proposal evaluation criteria are consistent. Consequently, we found that the commands' SRRB processes we reviewed did not holistically assess requirements within specific service portfolios as outlined in the January 2016 instruction. Further, since command SRRB processes were centered on approving individual contract actions, we found that SRRBs were held throughout the year and did not identify or document resulting savings or other efficiencies. As a result, SRRBs at the three commands we reviewed had a minimal effect on supporting trade-off decisions in the service portfolios or assessing opportunities for efficiencies and eliminating duplicative requirements that could inform the command's program objective memorandum (POM) submissions. In contrast, we recently reported that non-military department DOD organizations, in accordance with the instruction, conducted SRRBs that holistically assessed service requirements which led to the identification of hundreds of millions of dollars in cost savings for the period fiscal years 2017-2019 and were incorporated in the department's fiscal year 2018 to 2022 POM. These organizations included the Defense Logistics Agency and the Defense Threat Reduction Agency, among others. To accomplish these savings, the Deputy Chief Management Officer (DCMO) convened SRRBs that required each of the defense agencies and components they reviewed to identify service contracts by portfolio from a holistic perspective and make trade-off decisions based on risk assessment, timelines, and requirements that could be reduced or eliminated to generate efficiencies. In turn, a Senior Review Panel composed of DCMO (chair), the Principal Deputy Under Secretary of Defense for Acquisition, Technology, and Logistics, and Principal Staff Assistants approved the proposed savings or directed alternative reductions. Some military departments are exploring options to expand the role of SRRBs in the future to integrate service contract requirements into their POM process to allow them to better identify or forecast service contracts spending and trends. For example, the Army SSM noted that the Army plans to direct all Army commands to identify all service requirements and their associated contracts in the fiscal year 2018-2022 POM, and that this effort is intended to improve insight into future service contact requirements and to better control spending on service contracts. DPAP- SA and SSM officials also told us that the SRRB process would be more effective if it were better aligned with the POM, but DPAP-SA have not yet decided whether to include this element as part of the instruction update. Federal internal control standards call for agency management to identify, analyze, and respond to risks related to achieving defined objectives. Our work found that DOD and military department officials did not implement a portfolio-based approach when conducting SRRBs and given that the SRRB were held throughout the year, it was unclear whether efficiencies were achieved or how the SRRB process helped inform command POM submissions. In February 2016, we recommended that military departments integrate services into the programming process and update programming guidance to collect budget information on how contracted services will be used to meet requirements. Similarly, moving the SRRB to align with the POM process could help the military departments better identify, prioritize, and validate service requirements to support programming and budget decisions. Until DOD clarifies the purpose and timing of the SRRB process, DOD components may not be achieving the expected benefits of DOD's SRRB process. DOD's experience in implementing the January 2016 instruction highlights a number of deeply embedded institutional challenges that must be overcome before DOD can achieve a more strategic and portfolio-based approach to managing services. The January 2016 instruction sought to balance the benefits of a more hierarchical and strategic approach, such as identifying efficiencies and developing useful metrics tailored to portfolios through FDEs and CLLs, while retaining the ability of commanders to meet mission needs. This effort, simply stated, has not been successful. In practice, FDE and CLL positions generally have not produced tangible results or benefits and SSMs have questioned their overall value. Moreover, this concept has faced strong cultural resistance, as it required a change to DOD's traditional decentralized approach to managing services. As DOD works to update the instruction, it has an opportunity to either reaffirm and empower FDEs and CLLs and then hold them accountable for results, or more broadly reassess and rethink how best to tailor its approach to services. Our past work cautioned that a top-down, one-size-fits-all approach may not work. Our current analysis shows that certain commands already manage or award the majority of a particular service and are more closely aligned to the commanders that are responsible for executing the mission. In turn, this raises the question as to whether they would be in a better position to strategically manage specific service portfolios. Complementing this approach would be to provide clarity on the purpose and timing of the SRRBs to help commanders make better trade-off and resource decisions and inform DOD's programming and budget processes. Until DOD takes action to address the implementation challenges with the FDEs, CLLs, and SSMs, and clarifies the purpose and timing of SRRBs, its efforts to better manage service acquisitions will not be realized. To help foster strategic decision making and improvements in the acquisition of services, we recommend that the Under Secretary of Defense for Acquisition, Technology, and Logistics take the following two actions as part of its effort to update the January 2016 instruction: Reassess the roles, responsibilities, authorities, and organizational placement of key leadership positions, including functional domain experts, senior services managers, and component level leads; and Clarify the purpose and timing of the SRRB process to better align it with DOD's programming and budgeting processes. We provided a draft of this report to DOD for review and comment. In its written comments, reproduced in appendix I, DOD concurred with our two recommendations. Regarding our first recommendation, DOD concurred with the need to reassess key leadership positions roles and responsibilities. DOD indicated that an internal review of the January 2016 instruction found that portfolio oversight of services through FDEs was not providing the desired benefits, and as such, DOD is considering alternatives. Regarding our second recommendation that DOD clarify the purpose and timing of the SRRB process, DOD concurred, noting that lessons learned from implementation of SRRBs in non-military department organizations showed benefits. DOD stated that a rewrite of the January 2016 instruction will include additional clarifying policy. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense; the Secretaries of the Air Force, Army, and Navy; and the Under Secretary of Defense for Acquisition, Technology, and Logistics. In addition the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. In addition to the contact named above, W. William Russell (Assistant Director), Joe E. Hunter (Analyst in Charge), Stephanie Gustafson, Julia Kennon, Jonathan Munetz, Claudia A. Rodriguez, Sylvia Schatz, and Roxanna T. Sun made significant contributions to this review.
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In fiscal year 2016, DOD obligated about $150 billion, or just over half of its total contract spending, on contracted services. In January 2016, DOD issued an instruction on services that identified three key leadership positions, and clarified their roles and responsibilities, and called for Services Requirements Review Boards to holistically approve service requirements above $10 million. The House Armed Services Committee report accompanying the National Defense Authorization Act for Fiscal Year 2015 included a provision for GAO to report on DOD's acquisition of contracted services. This report assesses implementation of (1) key services acquisitions leadership positions and (2) Services Requirements Review Boards. GAO reviewed the roles and responsibilities of the three key leadership positions identified in DOD's January 2016 instruction. GAO also selected three military commands with large fiscal year 2015 contracted services obligations based on analysis of federal procurement spending; reviewed Review Board implementation for the selected commands; and interviewed responsible DOD, military department, and command officials. The Department of Defense (DOD) has not fully implemented the three key leadership positions--functional domain experts (FDE), component level leads (CLL), and senior services managers (SSM)--that were identified in DOD's January 2016 instruction and which were to enable DOD to more strategically manage service acquisitions (see table). Defense Procurement and Acquisition Policy officials noted that the officials appointed to be FDEs had multiple responsibilities, and considered their FDE roles as secondary. Additionally, CLLs largely existed in name only. Consequently, FDEs and CLLs had a minimal effect on how DOD manages services. GAO also found that SSMs--who are responsible for implementing the January 2016 instruction within their military departments--were unsure about the value of FDEs and CLLs and how these positions should influence decisions made by the commands. Moreover, the SSMs GAO interviewed cited cultural barriers to implementing the hierarchical, portfolio-management approach to service acquisition envisioned in DOD's January 2016 instruction, in part because each military department has traditionally taken a decentralized approach to managing services. Defense Procurement and Acquisition Policy officials responsible for services were aware of these challenges and have begun efforts to revise the January 2016 instruction, in part to further clarify position authorities and responsibilities. Federal internal control standards state that management should establish an organizational structure, assign responsibilities, and delegate authorities to achieve its objectives. Services Requirements Review Boards were intended to prioritize and approve services in a comprehensive portfolio-based manner in order to achieve efficiencies, but the military commands GAO reviewed did not do so. Instead, commands largely leveraged existing contract review boards that occurred throughout the year and focused on approving individual contracts. As a result, the Services Requirements Review Boards at these commands had minimal effect on supporting trade-off decisions within and across service portfolios or capturing efficiencies that could inform the command's programming and budgeting decisions. Federal internal control standards call for management to identify, analyze, and respond to risks related to achieving defined objectives. Until DOD clarifies the purpose and timing of the Services Requirements Review Boards process, DOD components will not achieve the expected benefits as anticipated in the January 2016 instruction. GAO recommends that DOD reassess the roles, responsibilities, authorities, and organizational placement of the three key leadership positions; and clarify policies concerning the purpose and timing of the Review Board process. DOD concurred with the recommendations.
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Before 1978, the U.S. airline industry was tightly regulated. The federal government controlled what fares airlines could charge and what cities they could serve. Legislatively mandated to promote the air transport system, the Civil Aeronautics Board believed that passengers traveling shorter distances--more typical of travel from small and medium-sized communities--would not choose air travel if they had to pay the full cost of service. Thus, the Board set fares relatively lower in short-haul markets and higher in long-haul markets than would be warranted by costs. In effect, long-distance travel subsidized short-distance markets. In addition, the Board did not allow new airlines to form and compete against the established carriers. Concerned that government regulation had caused fares to be too high in many heavily traveled markets, made the airline industry inefficient, and inhibited its growth, the Congress deregulated the industry. The Airline Deregulation Act of 1978 phased out the government's control over fares and service but did not change the government's role in regulating and overseeing air safety. Deregulation was expected to result in (1) lower fares at large-community airports, from which many trips are long-distance, and somewhat higher fares at small- and medium-sized-community airports; (2) increased competition from new airlines entering the market; and (3) greater use of turboprop (propeller) aircraft by airlines in place of jets in smaller markets that could not economically support jet service. In 1990, at the request of this Committee, we reported on the trends in airfares since deregulation for airports serving small, medium-sized, and large communities. For the 112 airports we reviewed, we found that overall fares had fallen not only at airports serving large communities, as was expected, but at airports serving small and medium-sized communities as well. We noted, however, that despite the overall trend toward lower airfares, some small- and medium-sized-community airports had experienced substantial increases in fares following deregulation, especially in the Southeast. Our current report on changes in airfares, service, and safety since airline deregulation updated this analysis for the same 112 airports. We have also reported on several other issues concerning airfares since deregulation, including the effects of market concentration and the industry's operating and marketing practices on fares. These reports are listed at the end of this statement. As of the first 6 months of 1995, airfares overall continued to be below what they were in 1979 for airports serving small, medium-sized, and large communities. Comparing full-year data for 1979 and 1994, the fares per passenger mile, adjusted for inflation, were about 9 percent lower for small-community airports, 11 percent lower for medium-sized-community airports, and 8 percent lower for large-community airports. Despite the general trend toward lower fares, however, fares at small- and medium-sized-community airports have remained consistently higher than fares at airports serving large communities, largely because of the economics associated with traffic volume and trip distance. As the volume of traffic and average length of haul increase, the average cost per passenger mile decreases, allowing for lower fares. Airports serving small and medium-sized communities tend to have fewer heavily traveled routes and shorter average distances, resulting in higher fares per passenger mile compared with those of large-community airports. Nevertheless, fares have fallen since deregulation for most of the airports in our sample. Of the 112 airports that we reviewed, 73 have lower fares, while 33 have higher fares. Specifically, fares have declined at 36 of the 49 airports serving small communities, 19 of the 38 airports serving medium-sized communities, and 18 of the 25 airports serving large communities. The overall trend toward lower fares since deregulation has resulted in large part from increased competition, spurred in many cases by the entry of new airlines. The average number of large airlines serving the medium-sized-community airports in our sample, for example, increased by over 50 percent between 1978 and 1994, while the average number of commuter carriers serving these airports increased by about 40 percent. Low-cost airlines, such as America West and Southwest Airlines, have accounted for much of this new entry, resulting in substantially lower fares at airports in the West and Southwest, regardless of the size of the community served. In addition, the established airlines' transition to hub-and-spoke systems following deregulation has increased competition at many airports serving small and medium-sized communities. By bringing passengers from multiple origins (the spokes) to a common point (the hub) and placing them on new flights to their ultimate destinations, these systems provide for more frequent flights and more travel options than did the direct "point-to-point" systems that predominated before deregulation. Thus, instead of having a choice of a few direct flights between their community and a final destination, travelers departing from a small community might now choose from among many flights by several airlines through different hubs to that destination. Nevertheless, while fares have fallen at the majority of airports in our sample, they have risen substantially for travel out of several airports. As appendix I shows, those airports that have experienced the largest fare increases--over 20 percent--mostly serve small and medium-sized communities in the Southeast and Appalachia. In contrast to those airports in the West and Southwest that have experienced substantial declines in fares, these airports tend to be dominated by one or two higher-cost airlines. For example, Delta accounted for nearly 90 percent of the passenger enplanements in 1994 at the airport serving Jackson, Mississippi, where fares have risen by over 25 percent since deregulation.By contrast, three low-cost, new entrant airlines--America West, Reno Air, and Southwest--accounted for about 65 percent of the enplanements in 1994 at the airport serving Reno, Nevada, where fares have fallen by about 21 percent since deregulation. The more widespread entry of low-cost airlines at airports in the West and Southwest in the nearly two decades since deregulation--and the resulting geographic differences in fare trends--stems primarily from stronger economic growth, less airport congestion, and more favorable weather conditions in those regions, compared to the East and Southeast. For example, the average annual increase in employment between 1979 and 1993 for Reno, Nevada, was 2.6 percent, which compares with an average annual increase of 0.9 percent for the communities in the Southeast and Appalachia whose airports have experienced an increase in fares of over 20 percent since deregulation. Nevertheless, over the past 2 years, a few new entrant airlines have attempted to initiate low-cost, low-fare service in the East. The results have been mixed. In early 1994, for example, Continental Airlines created a separate, low-cost service in the East, commonly referred to as "Calite." Largely because it grew too rapidly and was unable to compete successfully against USAir and Delta, Calite failed and was terminated in early 1995. As a result of the loss of competition brought by Calite, the largest fare increases during the first 6 months of 1995 occurred at airports in the East, primarily at small- and medium-sized communities in North Carolina and South Carolina. More recently, other low-cost carriers have emerged in the East. The most successful of these to date has been Valujet. However, Valujet has begun to experience some of the problems of operating in the East, such as difficulties in obtaining scarce take-off and landing slots at congested airports. Even so, Valujet's success has sparked competitive responses from the dominant airlines in the East. Delta, for example, plans to initiate a separate, low-cost operation of its own in the East later this year. However, because most of Valujet's growth occurred in the second half of 1995 and the competitive responses of other airlines are only beginning to unfold, data are not yet available to determine the extent to which Valujet has affected fares in the East, particularly at airports serving small and medium-sized communities that have yet to benefit from the overall trend toward lower airfares since deregulation. Most communities served by the airports in our sample have more air service today than they did under regulation. Seventy-eight percent of the small and medium-sized-community airports have had an increase in the number of departures, and every large-community airport has more departures. Overall, the number of departures has increased by 50 percent for small-community airports; 57 percent for medium-sized-community airports; and 68 percent for large-community airports. In addition, the overall number of available seats has increased for all three airport groups. However, because of the substitution of turboprops for jets in many markets serving small and medium-sized communities following deregulation, the increase in the number of available seats has been less dramatic for those communities than the increase in departures. For example, although the number of departures has increased by 50 percent for small-community airports, the number of seats has increased by only 15 percent--an increase that barely exceeds the overall increase in population over the past two decades at the communities served by these airports. Because of the greater use of turboprops, some airports serving small and medium-sized communities have actually had a decrease in the number of available seats even though the number of departures has increased. The airport serving Bismarck, North Dakota, for example, has had a 23-percent decrease in the number of seats even though the number of departures has increased by 54 percent. By comparison, every large-community airport has had an increase in the number of seats, and in some cases--like Phoenix's Sky Harbor Airport and Houston's Hobby Airport--that increase exceeds 300 percent. In addition, several other airports serving small and medium-sized communities have experienced a decline in the number of both departures and seats. The communities that these airports serve--including Duluth, Minnesota; Green Bay, Wisconsin; Moline, Illinois; and Rapid City, South Dakota--are located primarily in the Upper Midwest, where economic growth has been relatively slow. In some cases, the communities served by these airports have contracted. For example, the average annual change in population for Moline, Illinois, between 1979 and 1993 was -0.5 percent. For the three communities in our sample whose airports have experienced the sharpest decline in departures and seats--Lincoln, Nebraska; Rochester, Minnesota, and Sioux Falls, South Dakota--the average annual growth rate during this period was only 0.4 percent in population, 1.3 percent in personal income, and 1.4 percent in employment. By comparison, for Phoenix, Arizona, the average annual growth rate was 3.0 percent in population, 3.7 percent in personal income, and 3.7 percent in employment. Measuring the overall changes in air service quality since deregulation is more difficult than measuring the changes in quantity. Such an assessment requires, among other things, a subjective weighting of the relative importance of several variables that are generally considered dimensions of quality. These variables are the number of (1) departures and available seats, (2) destinations served by nonstop flights, (3) destinations served by one-stop flights and the efficiency of the connecting service, and (4) jet departures compared with the number of turboprop departures. We found that large-community airports, largely because of their central role in hub-and-spoke networks, have not only had an increase in the number of departures but have also experienced a nearly 25-percent increase in the number of cities served by nonstop flights. In addition, while the share of departures involving jets at large-community airports has decreased slightly with the greater use of turboprops, the actual number of jet departures has increased by 47 percent for airports serving large communities. For airports serving small and medium-sized communities, the picture is much less clear. For these airports, hub-and-spoke networks have resulted in more departures and more and better one-stop service. However, because much of this service is to hubs via turboprops, small and medium-sized communities have few destinations served by nonstop flights and relatively less jet service. For the small-community airports in our sample, for example, the number of cities accessible via nonstop service has declined by 7 percent since deregulation while the percentage of departures involving jets fell from 66 percent in 1978 to 39 percent in 1995. On the other hand, the number of cities accessible via one-stop service has increased by about 10 percent and the efficiency of that service has improved substantially as a result of the greater number of departures. Weighting the value placed on these changes depends on a subjective determination that will vary by individual. As a result, it is difficult to judge whether smaller communities such as Fayetteville, North Carolina, have better air service today. Even though the number of destinations served from Fayetteville's airport has declined from nine in 1978--including daily service to Washington, D.C.--to two in 1995, those two cities (Atlanta, Georgia, and Charlotte, North Carolina) are major hubs. When service to these hubs is combined with more frequent turboprop service to and from Fayetteville, the result is a substantial increase in one-stop connections and a corresponding decrease in layover times between flights for residents of Fayetteville. An assessment of service quality for small and medium-sized communities is further complicated because it is not possible to convert each dimension of quality into a common measure, such as total travel time. Although most of the dimensions can be measured in terms of travel time, one cannot: the perceived levels of amenities and comfort that travelers associate with the different types of turboprops and jets. As a result, developing a formula that combines the various factors to produce a single, objective "quality score" is problematic. Nevertheless, as appendix II shows, when we considered the airports in our sample that had either a positive or negative change in every quality dimension, we found not only that large-community airports have better air service today than they did under regulation but that geographical differences exist as well. Fast-growing communities of all sizes in the West, Southwest, Upper New England, and Florida have better service, while some small and medium-sized communities in the Upper Midwest and Southeast--areas of the country that have experienced relatively slow economic growth over the last two decades--are worse off today. In a recent study of the nation's smallest airports, which account for approximately 3 percent of the total passenger enplanements in the United States, the Department of Transportation has found trends in fares and service similar to those that we observed, and the study's conclusions are consistent with our findings. Because we were interested in fare trends at individual airports, we limited the airports we examined to those that had sufficient numbers of tickets to ensure that the results were statistically meaningful. As a result, we excluded the airports serving the nation's smallest communities. We believe that the Department of Transportation's study could therefore serve as a valuable complement to our analysis. Since the 1940s, the rate of airline accidents in the United States has been declining. Following the introduction of jet aircraft in the late 1950s (e.g., the Boeing 707) and second-generation jets in the 1960s (e.g., the Boeing 737), this long-term decline in the accident rate accelerated. By the late 1980s there were only a small number of airline accidents occurred each year, and as a result, the rate of decline has slowed in recent years. In addition, the overall accident rate for commuter carriers has declined by 90 percent over the last two decades, largely due to more advanced aircraft technology and better pilot training. As appendix III shows, this general trend toward improved safety is evident for all three airport groups that we reviewed, especially for airports serving medium-sized communities. Specifically, the rate of accidents at airports serving small communities fell from 0.47 accidents per 100,000 departures in 1978 to 0.14 accidents per 100,000 departures in 1994. At medium-sized-community airports, the rate fell from 1.29 accidents per 100,000 departures to 0.00 in 1994 because no accidents were recorded at those airports in 1994. Finally, at airports serving large communities, the rate fell from 0.41 accidents per 100,000 departures to 0.14 in 1994. However, as appendix III also shows, an increase of just one or two accidents in a given year can cause a significant fluctuation in accident rates. Thus, while it is true that turboprops do not have as good a safety record as the larger jets they replaced in many markets serving small and medium-sized communities, this fluctuation in accident rates makes it difficult to discern any impact of the increasing use of turboprops on relative safety between the airport groups. Our attempts to discern trends between airport groups by smoothing the data--employing, for example, such common practices as calculating a 3-year moving average--did not help identify any trends. Our analysis of accidents on routes to and from the airports in our sample was similarly inconclusive in terms of identifying any differences in the trends between airport groups. Mr. Chairman, this concludes our prepared statement. We would be glad to respond to any questions that you or any member of the Committee may have. Colorado Springs (M) Kansas City (L) Pittsburgh (L) Charleston (S) Knoxville (M) Chattanooga (M) Augusta (M) Tucson (M) Huntsville (S) Albuquerque (M) Montgomery (S) El Paso (M) Jackson (M) Midland (S) Lafayette (S) Houston Hobby (L) Fort Myers (S) Rochester (S) Colorado Springs (M) Kansas City (L) Appleton (S) Denver (L) Lincoln (S) Minneapolis (L) Duluth (S) Burlington (S) Rapid City (S) Madison (M) Moline (M) Peoria (M) Cleveland (L) Portland (S) Manchester (S) Boston (L) Newark (L) Philadelphia (L) Harrisburg (M) Pittsburgh (L) St. Louis (L) Asheville (S) Myrtle Beach (S) Charleston (M) Augusta (M) Albuquerque (M) Pensacola (M) Atlanta (L) El Paso (M) Amarillo (S) Miami (L) Dallas (L) Lafayette (S) Houston Intercontinental (L) Shreveport (M) Fort Myers (S) Houston Hobby (L) Little Rock (M) Sarasota (S) Airport Competition: Essential Air Service Slots at O'Hare International Airport (GAO/RCED-94-118FS, Mar. 4, 1994). Airline Competition: Higher Fares and Less Competition Continue at Concentrated Airports (GAO/RCED-93-171, July 15, 1993). Computer Reservation Systems: Action Needed to Better Monitor the CRS Industry and Eliminate CRS Biases (GAO/RCED-92-130, Mar. 20, 1992). Airline Competition: Effects of Airline Market Concentration and Barriers to Entry on Airfares (GAO/RCED-91-101, Apr. 26, 1991). Airline Competition: Weak Financial Structure Threatens Competition (GAO/RCED-91-110, Apr. 15, 1991). Airline Competition: Fares and Concentration at Small-City Airports (GAO/RCED-91-51, Jan. 18, 1991). Airline Deregulation: Trends in Airfares at Airports in Small and Medium-Sized Communities (GAO/RCED-91-13, Nov. 8, 1990). Airline Competition: Industry Operating and Marketing Practices Limit Market Entry (GAO/RCED-90-147, Aug. 29, 1990). Airline Competition: Higher Fares and Reduced Competition at Concentrated Airports (GAO/RCED-90-102, July 11, 1990). Airline Competition: DOT's Implementation of Airline Regulatory Authority (GAO/RCED-89-93, June 28, 1989). Airline Service: Changes at Major Montana Airports Since Deregulation (GAO/RCED-89-141FS, May 24, 1989). Airline Competition: Fare and Service Changes at St. Louis Since the TWA-Ozark Merger (GAO/RCED-88-217BR, Sept. 21, 1988). Competition in the Airline Computerized Reservation Systems (GAO/T-RCED-88-62, Sept. 14, 1988). Airline Competition: Impact of Computerized Reservation Systems (GAO/RCED-86-74, May 9, 1986). 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 changes that have occurred in domestic aviation since the deregulation of the airline industry, focusing on changes in airline fares, service quantity and quality, and safety. GAO noted that: (1) increased competition and especially the entry of new airlines has resulted in lower air fares than before deregulation at most airports; (2) fares have risen at some airports, many of which are dominated by one or two airlines; (3) most airports have more and better quality air service, in terms of number of departures and available seats, available now than they did before deregulation, although some airports serving small- and medium-sized communities have experienced decreases in service; and (4) air travel safety has improved since deregulation, and there were no statistically significant differences in air safety rates among airports serving small, medium, or large communities.
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The safe, efficient, and convenient movement of people and goods depends on a vibrant transportation system. Our nation has built vast systems of roads, airways, railways, transit systems, pipelines, and waterways that facilitate commerce and improve our quality of life. However, these systems are under considerable strain due to increasing congestion and the costs of maintaining and improving the systems. This strain is expected to increase as the demand to move people and goods grows resulting from population growth, technological change, and the increased globalization of the economy. DOT implements national transportation policy and administers most federal transportation programs. Its responsibilities are considerable and reflect the extraordinary scale, use, and impact of the nation's transportation systems. DOT has multiple missions--primarily focusing on mobility and safety--that are carried out by several operating administrations. (See table 1.) For fiscal year 2010, the President's budget requested $72.5 billion to carry out these and other activities. DOT carries out some activities directly, such as employing more than 15,000 air traffic controllers to coordinate air traffic. However, the vast majority of the programs it supports are not under its direct control. Rather, the recipients of transportation funds, such as state departments of transportation, implement most transportation programs. For example, the Federal Highway Administration (FHWA) provides funds to state governments each year to improve roads and bridges and meet other transportation demands, but state and local governments decide which transportation projects have high priority within their political jurisdictions. We have previously reported that current surface transportation programs--authorized in the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU)--do not effectively address the transportation challenges the nation faces. As a result, we have called for a fundamental reexamination of the nation's surface transportation programs to (1) have well-defined goals with direct links to an identified federal interest and federal role, (2) institute processes to make grantees more accountable by establishing more performance-based links between funding and program outcomes, (3) institute tools and approaches that emphasize the return on the federal investment, and (4) address the current imbalance between federal surface transportation revenues and spending. We have also called for a timely reauthorization of FAA programs that expired at the end of fiscal year 2007 and have continued under a series of funding extensions. Such short-term funding measures could delay key capital projects and may affect FAA's current programs and progress toward the Next Generation Air Transportation System. Congress and the presidential administration have fashioned the American Recovery and Reinvestment Act of 2009 to help our nation respond to what is generally reported to be the worst economic crisis since the Great Depression. DOT received about $48 billion of these funds for investments in transportation infrastructure--primarily for highways, passenger rail, and transit--mostly for use through fiscal year 2010. (See table 2.) As with other executive agencies, DOT now faces the challenges of using these funds in ways that aid economic recovery, making wise funding choices while spending the money quickly, and ensuring accountability for results. The act largely provided for increased transportation funding through existing programs--such as the Federal-Aid Highways, the New Starts transit, and the Airport Improvement programs. Channeling funding through existing programs should allow DOT to jump start its spending of recovery funds. However, there is a need to balance the requirement in the recovery act to get funds out quickly to help turn around the economy with the equally powerful need to make sure that funds are spent wisely on infrastructure investments and are not subject to waste, fraud, and abuse. We have reported on important design criteria for any economic stimulus package including that it be timely, temporary, and targeted. This is a difficult challenge for transportation infrastructure projects. First, they require lengthy planning and design periods. According to the Congressional Budget Office (CBO), even those projects that are "on the shelf" generally cannot be undertaken quickly enough to provide a timely stimulus to the economy. Second, spending on transportation infrastructure is generally not temporary because of the extended time frames needed to complete projects. Third, because of differences among states, it is challenging to target stimulus funding to areas with the greatest economic and infrastructure needs. The act will substantially increase the federal investment in the nation's surface transportation system. However, the current federal approach to addressing the nation's surface transportation problems is not working well. Many existing surface transportation programs are not effective at addressing key challenges because goals are numerous and sometimes conflicting, roles are unclear, programs lack links to the performance of the transportation system or of the grantees, and programs in some areas do not use the best tools and approaches to ensure effective investment decisions and the best use of federal dollars. In addition, evidence suggests that increased federal highway grants influence states and localities to substitute federal funds for state and local funds they otherwise would have spent on highways. In 2004, we estimated that states used roughly half of the increases in federal highway grants since 1982 to substitute for state and local highway funding, and that the rate of substitution increased during the 1990s. Our work has also shown that there is still room for improved oversight in surface transportation programs including the Federal-Aid Highway program. For example, we and the DOT Inspector General have each recommended that FHWA develop the capability to track and measure the costs of federally-aided projects over time. Among other things, the act gives our office the responsibility of reporting to Congress bimonthly on how selected states and localities are using the recovery funds. We will work with the department's Office of Inspector General and with the state and local audit community to coordinate our activities. We also anticipate that committees of jurisdiction will request that we assess specific issues related to the department's use of recovery funds. We look forward to working with this subcommittee and others to meet Congress's needs. DOT and Congress will be faced with numerous challenges as they work to reauthorize the surface transportation and aviation programs. In particular, the department and Congress will need to address challenges in (1) ensuring that the nation's surface transportation and aviation systems have adequate funding, (2) improving safety, (3) improving mobility, and (4) transforming the nation's air traffic control system. Surface transportation program funding is one of the issues on our high-risk list. Revenues from motor fuels taxes and truck-related taxes to support the Highway Trust Fund--the primary source of funds for highway and transit--are not keeping pace with spending levels. This fact was made dramatically apparent last summer when the Highway Account within the trust fund was nearly depleted. The balance of the Highway Account has been declining in recent years because, as designed in SAFETEA-LU, outlays from the account exceed expected receipts over the authorization period. Specifically, when SAFETEA-LU was passed in 2005 estimated outlays from Highway Account programs exceeded estimated receipts by about $10.4 billion. Based on these estimates, the Highway Account balance would have been drawn down from $10.8 billion to about $0.4 billion over the authorization period. This left little room for error. Assuming all outlays were spent, a revenue shortfall of even 1 percent below what SAFETEA-LU had predicted over the 5-year period would result in a cash shortfall in the account balance. In fact, actual Highway Account receipts were lower than had been estimated, particularly for fiscal year 2008. Account receipts were lower in fiscal year 2008 due to a weakening economy and higher motor fuel prices that affected key sources of Highway Trust Fund revenue. For example, fewer truck sales, as well as fewer vehicle miles traveled and correspondingly lower motor fuel purchases resulted in lower revenues. As a result, the account balance dropped more precipitously than had been anticipated and was nearly depleted in August 2008--1 year earlier than the end of the SAFETEA-LU authorization period. In response, Congress passed legislation in September 2008 to provide $8 billion to replenish the account. However, according to CBO, the account could reach a critical stage again before the end of fiscal year 2009. Without either reduced expenditures or increased revenues, or a combination of the two, shortfalls will continue. In the past, we have reported on several strategies that could be used to better align surface transportation expenditures and revenue. Each of these strategies has different merits and challenges, and the selection of any strategy will likely involve trade-offs among different policy goals. The strategies related to funding sources are also included in the recent report from the National Surface Transportation Infrastructure Financing Commission. Altering existing sources of revenue. The Highway Account's current sources of revenue--motor fuel taxes and truck-related taxes--could be better aligned with actual outlays. According to CBO and others, the existing fuel taxes could be altered in a variety of ways to address the erosion of purchasing power caused by inflation, including increasing the per-gallon tax rate and indexing the rates to inflation. Ensure users are paying fully for benefits. Revenues can also be designed to more closely follow the user-pay concept--that is, require users to pay directly for the cost of the infrastructure they use. This concept seeks to ensure that those who use and benefit from the infrastructure are charged commensurately. Although current per-gallon fuel taxes reflect usage to a certain extent, these taxes are not aligned closely with usage and do not convey to drivers the full costs of road use--such as the costs of congestion and pollution. We have reported that other user-pay mechanisms--for example, charging according to vehicle miles traveled, tolling, implementing new freight fees for trucks, and introducing congestion pricing (pricing that reflects the greater cost of traveling at peak times)--could more equitably recoup costs. Supplement existing revenue sources. We have also reported on strategies to supplement existing revenue sources. A number of alternative financing mechanisms--such as enhanced private-sector participation--can be used to help state and local governments finance surface transportation. These mechanisms, where appropriate, could help meet growing and costly transportation demands. However, these potential financing sources are forms of debt that must ultimately be repaid. Reexamine the base. Given the federal government's fiscal outlook, we have reported that we cannot accept all of the federal government's existing programs, policies, and activities as "givens." Rather, we need to rethink existing programs, policies, and activities by reviewing their results relative to the national interests and by testing their continued relevance and relative priority. Improve the efficiency of current facilities. Finally, better managing existing system capacity and improving performance of existing facilities could minimize the need for additional expenditures. We have reported that the efficiency of the nation's surface transportation programs are declining and that the return on investment could be improved in a number of ways, including creating incentives to better use existing infrastructure. In addition to better aligning revenues and outlays, improving existing mechanisms that are intended to help maintain Highway Account solvency could help DOT better monitor and manage the account balance, thereby reducing the likelihood of a funding shortfall. For example, statutory mechanisms designed to make annual adjustments to the Highway Account have been modified over time--particularly through changes in SAFETEA-LU--to the extent that these mechanisms either are no longer relevant or are limited in effectiveness. Furthermore, monitoring indicators throughout the year that could signal sudden changes in the Highway Account revenues could help DOT better anticipate potential changes in the account balance that should be communicated to Congress, state officials, and other stakeholders. We recently made recommendations to help DOT improve solvency mechanisms for the Highway Account and communication on the account's status with stakeholders. Turning to aviation funding, the excise taxes that fund Airport and Airway Trust Fund revenues have been lower than previously forecasted, and forecasts of future revenues have declined because of a decline in airline passenger travel, fares, and fuel consumption. Moreover, the uncommitted balance in the Trust Fund has decreased since fiscal year 2001. (See fig. 2). For the short run, lower-than-expected excise tax revenues will reduce the Trust Fund balance even further and could affect funding for FAA programs this year and next. In the longer run, continued declines in Trust Fund revenues may require Congress to reduce spending on FAA operations and capital projects, increase revenues for the trust fund by introducing new fees or increasing taxes, or increase FAA's funding provided by the General Fund. Improvements in transportation safety are needed to reduce the number of deaths and injuries from transportation accidents, the vast majority of which occur on our nation's roads. We recently reported that although the number of traffic crashes and the associated fatality rates has decreased over the last 10 years, the number of fatalities has, unfortunately, remained at about 42,000 annually and some areas are of particular concern. For example, in 2007, over half of the passenger vehicle occupants killed were not using safety belts or other proper restraint, nearly one-third of the total fatalities were in alcohol-impaired driving crashes, and motorcyclist fatalities increased for the 10th year in a row. While the U.S. commercial aviation industry is among the safest in the world, aviation safety is also a major concern because when accidents or serious incidents occur they can have catastrophic consequences. Moreover, last year there were 25 serious runway incursions--nine of these involved commercial aircraft--when collisions between aircraft on runways were narrowly avoided. Runway incursions can be considered a precursor to aviation accidents. Figure 4 shows the number of serious incursions involving commercial aircraft from fiscal year 2001 through fiscal year 2008. DOT has taken steps to address surface and aviation safety concerns. To improve traffic safety, the National Highway Traffic Safety Administration (NHTSA) has made substantial progress in administering traffic safety grant programs and high-visibility enforcement programs which, according to state safety officials, are helping them address key traffic safety issues, such as safety belt use and alcohol-impaired driving. NHTSA has also taken steps to improve the consistency of its process for reviewing states' management of traffic safety grants. To maintain and expand the margin of safety within the national airspace system, FAA is moving to a system safety approach to oversight and has established risk-based, data-driven safety programs to oversee the aviation industry. FAA has also taken recent actions to improve runway safety, including conducting safety reviews at airports and establishing an FAA-industry team to analyze the root causes of serious incursions and recommend runway safety improvements. Despite NHTSA's progress in administering and overseeing traffic safety programs, several challenges may limit the effectiveness of the programs and NHTSA's ability to measure and oversee program effectiveness: The grant programs generally lack performance accountability mechanisms to tie state performance to receipt of grants. Some states have faced challenges passing legislation required to qualify for some traffic safety incentive grants. Each safety incentive grant has a separate application process, which has proven challenging for some states to manage, especially those with small safety offices. Some states also would have preferred more flexibility in using the safety incentive grants to focus on key safety issues within the state. Over the past several years, we have made recommendations to help NHTSA further improve its ability to measure and oversee surface traffic safety programs and to help FAA improve its oversight of aviation safety. However, some challenges related to traffic safety--such as state challenges in administering the programs and the lack of performance accountability measures--result from the structure of the grant programs established under SAFETEA-LU. These challenges and the persistence of substantial numbers of traffic fatalities nationwide raise issues for Congress to consider in restructuring surface traffic safety programs during the upcoming reauthorization. Furthermore, to maintain the high level of safety in the aviation industry, FAA needs to address challenges in accessing complete and accurate aviation safety data, and improving runway and ramp safety. For example, recent actions by some major airlines to discontinue participation in an important data reporting program limit data access. Moreover, a lack of national data on operations involving air ambulances, air cargo, and general aviation hinders FAA's ability to evaluate accident trends and manage risks in these sectors. Improving runway safety will require a sustained effort by FAA that includes developing new technologies and revised procedures to address human factors issues, such as fatigue and distraction, which experts have identified as the primary cause of incursions. Congestion has worsened over the past 10 years, despite large increases in transportation spending at all levels of government and improvements to the physical condition of highways and transit facilities. Furthermore, according to DOT, highway spending by all levels of government has increased 100 percent in real dollar terms since 1980, but the hours of delay during peak travel periods have increased by almost 200 percent during the same period. These mobility issues have increased at a relatively constant rate over the last two decades. (See table 3.) In addition, demand has outpaced the capacity of the system, and projected population growth, technological changes, and increased globalization are expected to further strain the system. Likewise, increased demand and capacity constraints have threatened the mobility of the nation's freight transportation network. According to DOT, volumes of goods shipped by trucks and railroads are projected to increase by 98 percent and 88 percent, respectively, by 2035 over 2002 levels, at the same time that the ability to increase capacity will be constrained by geographic barriers, population density, and urban land-use development patterns. One study estimates that highway congestion alone costs shippers $10 billion annually. Constraints on freight mobility can also result in undesirable environmental effects, such as air pollution, and contribute to increased risks for illnesses, such as respiratory disease. Flight delays and cancellations at congested airports also continue to plague the U.S. aviation system. Flight delays and cancellations steadily increased from 2002 through 2007 and decreased slightly in 2008. (See fig. 5.) For example, almost one in four flights either arrived late or was canceled in 2008, and the average flight delay increased despite a 6 percent decline in the total number of operations through December 2008. Delays are a particular problem at a few airports, such as those in the New York area, where less than 70 percent of flights arrive on time. Because the entire airspace system is highly interdependent, delays at one airport may lead to delays rippling across the system and throughout the day. Commissions, proposals, and actions have attempted to address mobility issues in past years. To address concerns with the performance of the surface transportation system, including mobility concerns, Congress established two commissions to examine current and future needs of the system and recommend needed changes to surface transportation programs, one of which called for significantly increasing the level of investment in surface transportation. Various other transportation industry associations and research organizations have also issued proposals for restructuring surface transportation programs. DOT has also taken several steps in the last 5 years to address key impediments to freight mobility by developing policies and programs to address congestion in the United States. For example, it has drafted a framework for a national freight policy, released a national strategy to reduce congestion, and created a freight analysis framework to forecast freight flows along national corridors and through gateways. DOT and FAA began implementing several actions in summer 2008 intended to enhance capacity and reduce flight delays, particularly in the New York region. These actions include redesigning the airspace around the New York, New Jersey, and Philadelphia metropolitan area and establishing schedule caps on takeoffs and landings at the three major New York airports. In addition, as part of a broad congestion relief initiative, DOT awarded over $800 million to several cities under its Urban Partnership Agreements initiative to demonstrate the feasibility and benefits of comprehensive, integrated, performance-driven, and innovative approaches to relieving congestion. We have previously reported on several challenges that impede DOT's efforts to improve mobility: Although all levels of government have significantly invested in transportation, and recommendations have been made by transportation stakeholders for increasing investment in surface transportation even further, we have previously reported that federal transportation funding is generally not linked to specific performance-related goals or outcomes, resulting in limited assurance that federal funding is being channeled to the nation's most critical mobility needs. Federal funding is also often tied to a single transportation mode, which may limit the use of those funds to finance the greatest improvements in mobility. DOT does not possess adequate data to assess outcomes or implement performance measures. For example, DOT lacks a central source for data on congestion--even though it has identified congestion as a top priority--and available data are stovepiped by mode, impeding efficient planning and project selection. Although DOT and FAA should be commended for taking steps to reduce mounting flight delays and cancellations, as we predicted this past summer, delays and cancellations in 2008 did not markedly improve over 2007 levels despite a decline in passenger traffic. The growing air traffic congestion and delay problem that we face is the result of many factors, including airline practices and inadequate investment in airport and air traffic control infrastructure. Long-term investments in airport infrastructure and air traffic control, or other actions by Congress, DOT, or FAA could address the fundamental imbalance between underlying demand for, and supply of, airspace capacity. FAA has made significant progress in addressing weaknesses in its air traffic control modernization. It established a framework for improving system management capabilities, continued to develop an enterprise architecture, implemented a comprehensive investment management process, assessed its human capital challenges, and developed an updated corrective action plan for 2009 to sustain improvement efforts and enhance its ability to address risks, among other things. Because FAA has shown progress in addressing most of the root causes of past problems with the air traffic control modernization effort and is committed to sustaining progress into the future, we removed this area from the high- risk list in January 2009. Nonetheless, we will closely monitor FAA's efforts because the modernization program is still technically complex and costly, and FAA needs to place a high priority on efficient and effective management. FAA's improvement efforts are even more critical because the modernization has been extended to plan for the Next Generation Air Transportation System (NextGen)--a complex and ambitious multiagency undertaking that is intended to transform the current radar-based system to an aircraft-centered, satellite-based system by 2025. As the primary implementer of NextGen, FAA faces several challenges that, if not addressed, could severely compromise NextGen goals and potentially lead to a future gap between the demand for air transportation and available capacity that could cost the U.S. economy billions of dollars annually. Challenges facing FAA include the following: Accelerating the implementation of available NextGen technologies, which, according to some industry stakeholders, are not being implemented fast enough to have NextGen in place by 2025. Working with stakeholders to explore a range of potential options that would provide incentives to aircraft operators to purchase NextGen equipment and to suppliers to develop that equipment. These options could include some combination of mandated deadlines, operational credits, or equipment investment credits. Reconfiguring facilities and enhancing runways to take full advantage of NextGen's benefits. FAA has not developed a comprehensive reconfiguration plan, but intends to report on the cost implications of reconfiguration this year. Sustaining the current air traffic control system and maintaining facilities during the transition to NextGen. More and longer unscheduled outages of existing equipment and support systems indicate more frequent system failures. These systems will be the core of the national airspace system for a number of years and, in some cases, become part of NextGen. To implement NextGen, the department is undertaking several initiatives. For example, FAA has formed partnerships with industry to accelerate the availability of NextGen capabilities. These partnerships include (1) entering into agreements with private sector firms to conduct NextGen technology demonstration projects; (2) working with industry and the local community on their plans to build an aviation research and technology park where FAA can work with industry on the research and development, integration, and testing of NextGen technologies; and (3) establishing a NextGen midterm task force to forge a consensus on operational improvements and planned benefits for 2013 to 2018. In addition, to increase the capacity of existing runways at busy airports, FAA has begun implementing the High-Density Terminal and Airport Operations initiative that changes requirements for aircraft separation and spacing, among other things. One step for moving forward with the NextGen transition was proposed in the 2009 House reauthorization bill, which directed FAA to establish a working group to develop criteria and make recommendations for the realignment of services and facilities--considering safety, potential cost savings, and other criteria, in concert with stakeholders, including employee groups. Until FAA establishes this working group and the group develops recommendations, the configurations needed for NextGen cannot be implemented and potential savings that could help offset the cost of NextGen will not be realized. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee might have. For further information on this statement, please contact Katherine Siggerud at (202) 512-2834 or [email protected]. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. Individuals making key contributions to this testimony were Sara Vermillion, Assistant Director; Steve Cohen, Matthew Cook, Heather Krause, Nancy Lueke, James Ratzenberger, and Teresa Spisak. National Airspace System: FAA Reauthorization Issues Are Critical to System Transformation and Operations. GAO-09-377T. Washington, D.C.: February 11, 2009. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009. FAA Airspace Redesign: An Analysis of the New York/New Jersey/Philadelphia Project. GAO-08-786. Washington, D.C.: July 31, 2008. Surface Transportation Programs: Proposals Highlight Key Issues and Challenges in Restructuring the Programs. GAO-08-843R. Washington, D.C.: July 29, 2008. Traffic Safety Programs: Progress, States' Challenges, and Issues for Reauthorization. GAO-08-990T. Washington, D.C.: July 16, 2008. Physical Infrastructure: Challenges and Investment Options for the Nation's Infrastructure. GAO-08-763T. Washington, D.C.: May 8, 2008. Surface Transportation: Restructured Federal Approach Needed for More Focused, Performance-Based, and Sustainable Programs. GAO-08-400. Washington, D.C.: March 6, 2008. Federal Aviation Administration: Challenges Facing the Agency in Fiscal Year 2009 and Beyond. GAO-08-460T. Washington, D.C.: February 7, 2008. Federal-Aid Highways: Increased Reliance on Contractors Can Pose Oversight Challenges for Federal and State Officials. GAO-08-198. Washington, D.C.: January 8, 2008. Freight Transportation: National Policy and Strategies Can Help Improve Freight Mobility. GAO-08-287. Washington, D.C.: January 7, 2008. Highlights of a Forum: Transforming Transportation Policy for the 21st Century. GAO-07-1210SP. Washington, D.C.: September 19, 2007. Surface Transportation: Strategies Are Available for Making Existing Road Infrastructure Perform Better. GAO-07-920. Washington, D.C.: July 26, 2007. Performance and Accountability: Transportation Challenges Facing Congress and the Department of Transportation. GAO-07-545T. Washington, D.C.: March 6, 2007. Highway Trust Fund: Overview of Highway Trust Fund Estimates. GAO-06-572T. Washington, D.C.: April 4, 2006. Highlights of an Expert Panel: The Benefits and Costs of Highway and Transit Investments. GAO-05-423SP. Washington, D.C.: May 6, 2005. Federal-Aid Highways: FHWA Needs a Comprehensive Approach to Improving Project Oversight. GAO-05-173. Washington, D.C.: January 31, 2005. Federal-Aid Highways: Trends, Effect on State Spending, and Options for Future Program Design. GAO-04-802. Washington, D.C.: August 31, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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A safe, efficient, and convenient transportation system is integral to the health of our economy and quality of life. Our nation's vast transportation system of airways, railways, roads, transit systems, and waterways has served this need, yet is under considerable pressure due to increasing congestion and costs to maintain and improve the system. Calls for increased investment come at a time when traditional funding for transportation projects is increasingly strained. The authorizing legislation supporting transportation programs will soon expire. The Department of Transportation (DOT) implements national transportation policy and administers most federal transportation programs. DOT received funds for transportation infrastructure projects through the American Recovery and Reinvestment Act of 2009 to aid in economic recovery. DOT also requested $72.5 billion to carry out its activities for fiscal year 2010. This statement presents GAO's views on major challenges facing DOT and Congress as they work to administer recovery funds and reauthorize surface transportation and aviation programs. It is based on work GAO has completed over the last several years. GAO has made recommendations to DOT to improve transportation programs; the agency has generally agreed with these recommendations. To supplement this existing work, GAO obtained information on the recovery funds provided to DOT. The Department of Transportation received about $48 billion of recovery funds for investments in transportation infrastructure from the American Recovery and Reinvestment Act of 2009. As with other executive agencies, DOT is faced with the challenges of using these funds in ways that will aid economic recovery, making wise funding choices while spending the money quickly, and ensuring accountability for results. GAO will report to Congress bimonthly on how states and localities use the recovery funds received from DOT. DOT and Congress will also be faced with numerous challenges as they work to reauthorize surface transportation and aviation programs. Funding the nation's transportation system. Revenues to support the Highway Trust Fund are not keeping pace with spending levels and the Highway Account was nearly depleted last summer. In addition, the excise taxes that fund Airport and Airway Trust Fund revenues have been lower than previously forecasted, and forecasts of future revenues have declined. Declining revenues in both trust funds may adversely affect DOT's ability to continue to fund surface transportation and aviation programs at levels previously assumed. Improving transportation safety. Although the number of traffic crashes and the associated fatality rate has decreased over the last 10 years, the number of fatalities has remained at about 42,000 annually. The continued high level of fatalities and difficulties experienced by states in implementing grant programs raise issues for Congress to consider in restructuring these programs during reauthorization. While the U.S. commercial aviation industry is among the safest in the world, accidents can have catastrophic consequences. The lack of performance measures and complete data limit DOT's ability to improve safety and manage safety risks. Improving transportation mobility. Despite large increases in transportation spending, congestion on our nation's highways has increased over the last 10 years and increased demand will further strain the system. Flight delays and cancellations at congested airports continue to plague the U.S. aviation system. For example, almost one in four flights either arrived late or was canceled in 2008, and the average flight delay increased despite a 6 percent annual decline in the total number of operations through December 2008. Congestion poses serious economic as well as environmental and health concerns for the nation. Transforming the nation's air traffic control system. The air traffic control modernization program is technically complex and costly. The Federal Aviation Administration will need to accelerate the implementation of new and existing technologies, consider incentives for aircraft operators to acquire those technologies, and sustain the current system while transitioning to the new one, among other things.
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FmHA, a lending agency within the U.S. Department of Agriculture (USDA), provides direct government-funded loans to farmers who are unable to obtain financing elsewhere at reasonable rates and terms. FmHA's assistance is intended to be temporary. Once farmers have become financially viable, they are to "graduate" to commercial sources of credit. FmHA provides loan services through a highly decentralized organization consisting of a national program office in Washington, D.C.; a finance office in St. Louis, Missouri; and a nationwide structure of field offices comprising 47 state offices, about 250 district offices, and about 1,700 county offices. As we reported in April 1992, FmHA has lost billions of dollars through its farm loan program and billions more is at risk. Our report noted that, as of September 1990, about 70 percent of the agency's direct loan portfolio of almost $20 billion was held by borrowers who were delinquent or whose loans had been restructured as a result of or to avoid delinquency. We concluded that FmHA and the Congress shared responsibility for these problems, which stem from (1) ineffective implementation of standards for loan making, loan servicing, and property management and (2) loan and property management policies, some congressionally directed, that conflict with fiscal controls designed to minimize risk. We also reported that FmHA's problems will continue until the Congress tells the agency how to better balance its mission of assisting financially troubled farmers with its obligation to provide that assistance in a businesslike and fiscally responsible manner. Although our previous work examined certain types of loan-servicing actions that result in FmHA's reducing portions of a borrower's debt, we have not, until this report, specifically examined the debt relief provided through the agency's debt settlement process. Under this process, which essentially represents the final resolution of unpaid loans, FmHA county office officials try to identify and evaluate the financial resources a borrower may have that could be used to offset loan losses. Final approval of debt relief is granted by officials in either FmHA's state or national offices. As table 1 shows, FmHA has four options for settling debts, each of which results in writing off debt. FmHA forgave billions of dollars in loans through debt settlements without always taking aggressive action to protect the government's interests. More specifically, although FmHA has procedures and policies intended to produce fair recoveries, FmHA's compliance reviews of a limited number of debt settlement cases indicate that field office officials often do not follow these procedures. FmHA officials we spoke with noted that problems in adhering to the procedures stemmed from, among other things, (1) competing program objectives that create incentives to write off large amounts of delinquent loans in an attempt to "clean up" the loan portfolio and (2) limited staff resources. During fiscal years 1991 through 1993, FmHA wrote off about $3.4 billion worth of outstanding direct farm loans through debt settlements. Table 2, which summarizes the amount of debt written off by settlement type, shows that most of the debt--about $2.9 billion--was canceled or charged off with no payments to FmHA by the borrowers. The amount already written off through debt settlements may be just the tip of the iceberg because FmHA continues to have a large number of problem loans that may eventually be subject to settlement. Specifically, as of January 1994, FmHA classified $7.6 billion--about 45 percent of its $16.7 billion in outstanding principal and interest--as at risk because the loans were held by borrowers with questionable repayment ability and/or inadequate loan security. FmHA has established procedures for its field office officials to use when settling debts. These procedures, intended to reduce losses during the process, include verifying a borrower's income and searching for undisclosed assets. However, FmHA's internal control reviews, as well as our work, indicate that field office officials often do not follow these procedures and thus do not fully protect the government's interests. FmHA's Coordinated Assessment Review, referred to as CAR, is a key internal control review that includes assessing field office officials' compliance with debt settlement policies and procedures. CARs of debt settlements consist of reviewing a small sample of completed cases, usually five per state. During fiscal years 1993 and 1994 (through May 1994), FmHA completed CARs of debt settlement cases in 15 states. As table 3 shows, the rates of noncompliance ranged from 18 to 39 percent on five key standards intended to protect the government's interests during debt settlements. Our review of fiscal year 1993 debt settlement cases at six FmHA county offices in three states also disclosed (1) problems with adherence to these five key debt settlement standards and (2) a lack of aggressive efforts to minimize loan losses--that is, FmHA did not pursue information indicating that additional collections could have been possible during the debt settlement process. In summary, of the 57 debt settlement cases we reviewed that resulted in large losses, the federal investment may not have been adequately protected in 16, or about 28 percent. In settling these debts, FmHA recovered a total of $5,800 from these 16 borrowers and wrote off $3.7 million. The following cases illustrate these findings: Case 1. FmHA officials in Louisiana canceled $393,000 in debt with no payment by the borrower without having conducted a record search. As a result, FmHA was unaware of an inheritance of approximately 160 acres in real estate and $61,000 in certificates of deposit that possibly could have been used to offset the loan losses. The lack of a record search was particularly puzzling because the county office's file contained a notation that the inheritance had occurred and a payment to FmHA was possible. County office officials could not explain the note, and state officials said that the failure to protect federal interests had been an oversight. Case 2. Because of what FmHA state and county officials in Texas described as an oversight, a deceased borrower's $131,000 debt was canceled without the county office's filing a claim with a local probate court. Our review of this case--which included reviewing the probate court's records, comparing the amount of outstanding debt with the value of real and personal property owned by the borrower's estate, and consulting with USDA's Office of General Counsel--disclosed that about $47,000 was available for payment on the debt if the claim had been filed. Case 3. FmHA officials in Mississippi canceled a $202,000 debt without a payment offer from a partnership consisting of two brothers who reported a total annual income of $123,000 (about $64,500 and $58,500, respectively). Both borrowers submitted documentation claiming that they were unable to repay any part of their FmHA debt because their expenses exceeded their income. Their expense statements included the following information: Both brothers claimed over $15,000 in annual payments to other creditors and expensive gifts to charities; one brother claimed the cost of operating three automobiles, while the other claimed the cost of operating two; and one brother claimed college education costs for his son and daughter-in-law as well as living expenses for that son and his family. FmHA state officials told us that they did not consider these expenses to be excessive, and the supervisor of FmHA's county office questioned whether the agency should require borrowers to lower their standard of living in order to repay their debt. Case 4. FmHA officials in Louisiana canceled $509,000 in debt without offsetting payments that the borrower had received from USDA's Agricultural Stabilization and Conservation Service. These payments averaged $30,000 per year. FmHA made this decision knowing that (1) the borrower's loan defaults could be partially attributed to excessive spending and poor management and (2) the borrower had been referred to USDA for legal action because he had failed to properly dispose of property he had pledged as security for the debt. FmHA state and county officials told us that they had chosen not to use the payments from the Agricultural Stabilization and Conservation Service to offset the loan losses because they did not want to create undue hardship for the borrower. FmHA has placed little emphasis on minimizing losses during debt settlements. FmHA's approach is illustrated in part by internal performance goals that create work priorities and incentives that are counter to aggressive protection of the government's interests. Specifically, FmHA's field office staff have annual performance goals for resolving delinquent loan accounts, but they do not have balancing goals that would encourage recoveries through the debt settlement process. As a result, several officials at FmHA's state and county offices noted that protecting the government's interests is not a high priority among staff. Also, officials at FmHA's national and field offices said that debt settlements are used primarily to "clean up" the loan portfolio by writing off delinquent debt. FmHA's management has also placed little emphasis on overseeing field offices' implementation of the agency's policies and practices for ensuring maximum recoveries. In fact, the debt settlement process was not part of internal control review through CARs until 1993. Also, 13 of the 34 CARs of debt settlements scheduled for fiscal years 1993 and 1994 were not performed because of other higher-priority work. According to several officials in FmHA's state and county offices, insufficient staff resources also inhibit implementing the agency's policies and procedures on debt settlements. We did not verify the extent to which staffing was a problem. However, an official in one state office said that county offices do not always have adequate staff to complete all assigned duties and, as a result, are unable to give proper attention to some activities, including protecting the government's interests when settling debts. Also, the supervisor of a county office said that the office's limited staff resources are targeted more toward eliminating delinquent accounts than toward protecting the government's interests during debt settlements. The lending criteria that FmHA follows in making farm loans expose the agency to potential losses. Specifically, the Consolidated Farm and Rural Development Act of 1961, as amended (P.L. 87-128, Aug. 8, 1961), which provides FmHA's basic authority for making and servicing farm loans, does not prohibit borrowers who receive debt relief through debt settlements from obtaining additional farm loans. We identified borrowers who obtained new FmHA farm loans after benefiting from debt relief through debt settlements. Specifically, during fiscal years 1991-93, 86 borrowers, who had received about $20 million in debt relief when their accounts with FmHA were settled, obtained about $13 million in new direct or guaranteed loans. For example, one borrower who went through debt settlement in April 1991, receiving $500,351 in debt relief, subsequently received a direct loan of $25,100 in April 1993. Our review showed that some borrowers who obtained additional loans after receiving debt relief through debt settlements became delinquent again. Specifically, although their loans were relatively new--1 to 3 years old--six of the 86 borrowers had already become delinquent again. The following examples illustrate this cycle of delinquency. A borrower who received $278,318 in debt relief in December 1990 obtained two new direct farm loans totaling $65,000 in February 1992; he was $4,087 behind on payments in September 1993. Another borrower, after receiving $1.9 million in debt relief in March 1991, obtained a $120,000 guaranteed loan in September 1991; he was $9,467 behind on payments in September 1993. Concerns over providing new loans to borrowers who have defaulted on previous FmHA loans are not new. For example, in our December 1992 report, we pointed out that FmHA made about $93 million in loans to borrowers who had received large amounts of debt relief under loan-servicing actions other than debt settlements. Such lending practices have been justified on the basis of the agency's responsibility to help financially strapped farmers remain in farming. However, as we have also previously reported, FmHA has another, sometimes conflicting responsibility--to be fiscally prudent and protect the taxpayers' dollars. Lending to borrowers who have defaulted on previous loans undermines the agency's responsibility in this area. These lending practices can also detract from FmHA's overall mission of assistance because they encourage farmers to rely on FmHA as a continuous source of credit rather than a temporary one. Billions of dollars in FmHA loans has been written off with little or no recovery under debt settlements. In some respects, these losses are not totally unexpected because FmHA's loans are targeted to borrowers who are financially stressed. By the time a borrower's financial situation has deteriorated to the point that debt settlement may be an option, the borrower may have few resources that could be used to offset potential loan losses. However, FmHA does not take sufficient action to identify and recover payments from those with the resources to reduce their debts. FmHA's internal control reviews as well as our own work indicate that FmHA's field offices often do not implement the agency's procedures and policies intended to protect federal interests during debt settlements. FmHA's management has provided few incentives for the field offices to aggressively implement debt settlement procedures. The agency does not have performance goals that would encourage the field offices to maximize recoveries during the debt settlement process. However, it does have goals for reducing the levels of delinquent debt. As a result, field offices may view debt settlements more as a means of cleaning up their loan portfolios than as a final opportunity to minimize loan losses. Additionally, we question the reasonableness of FmHA's making new direct loans and providing loan guarantees to individuals whose past performance resulted in significant losses through debt settlements. We recognize that some borrowers may find themselves subject to the debt settlement process for reasons beyond their control (e.g., crop losses due to a natural disaster). Our concern is not with these borrowers but rather with those whose own action or inaction resulted in their failure to repay loans. Overall, the problems we found with debt settlements are symptomatic of a much larger, more fundamental problem that we highlighted in our April and December 1992 reports: The agency's congressionally defined mission--to lend money to farmers who cannot obtain loans elsewhere--often conflicts with normal fiscal controls and policies designed to minimize risk and reduce losses. Until the Congress clarifies how FmHA should better balance these conflicting missions, problems similar to the ones we describe in this report will continue. To provide FmHA's field office officials with incentives to better protect the federal government's interests during the debt settlement process, we recommend that the Secretary of Agriculture direct the FmHA Administrator to establish goals for maximizing recoveries on outstanding loans being resolved through debt settlements. To strengthen FmHA's loan-making standards, we recommend that the Congress amend the Consolidated Farm and Rural Development Act to prohibit direct loans and loan guarantees to borrowers whose accounts were previously settled through debt settlements except in cases in which these borrowers were unable to repay their loans through no fault of their own. The Congress should require the Secretary to (1) establish guidance describing the circumstances under which the exception would apply, (2) closely supervise the borrowers who receive new loans under this exception, and (3) require these borrowers to move to commercial credit within a specified time period. In commenting on a draft of this report, FmHA pointed out that we had reviewed a very small sample of debt settlement cases and that conclusions based on such a sample may be questionable. We appreciate the limitations of conclusions drawn from small samples. However, our conclusions are not based solely on information obtained through the cases we reviewed. Rather, these cases are only one of several indications of the problems that form the basis for our concerns about the debt settlement process. For example, FmHA's own internal control reviews identified problems similar to those found in the cases we examined. Limited recoveries under debt settlements are another reason for concern--almost $3 billion has been written off in recent years without any payments being made by the borrowers. In short, we believe that there is sufficient reason to raise questions about how well the federal government's interests are protected in debt settlements. FmHA generally agreed with our recommendation to establish goals for maximizing recoveries during debt settlements but was not clear about how this recommendation will be implemented. In line with the intent of the recommendation, FmHA noted that USDA's Loan Resolution Task Force, established to resolve delinquent loans, has developed a process designed to ensure that debt settlements are properly implemented through centralized management. This process was scheduled to go into effect in October 1994. FmHA also stated that it is working on a new internal review system that will cover debt settlements. It is too early to determine the extent to which these and other proposed actions will address the problems discussed in this report. An earlier draft of this report contained a recommendation that FmHA prohibit loans to all borrowers who received debt relief through debt settlements. FmHA noted that this prohibition might unnecessarily penalize those individuals who failed to repay their loans for reasons beyond their control. We have revised the recommendation to accommodate such exceptions. However, we would caution against having the exception become the standard mode of operation. Furthermore, as indicated in the revised recommendation, we believe any borrower receiving a new loan under this exception should be closely supervised and required to move to commercial credit within a specified period of time. We recognize that implementing our recommendation to generally prohibit additional loans to borrowers whose past debts have been settled may require trade-offs concerning the program's goal of assisting farm borrowers. Ultimately, the Congress will have to weigh these difficult trade-offs and determine the direction that FmHA should go. FmHA's specific comments and our evaluation of them are presented in appendix I. We performed our work between July 1993 and July 1994 in accordance with generally accepted government auditing standards. Our objectives, scope, and methodology are discussed in appendix II. We are sending copies of this report to the appropriate congressional committees; interested Members of Congress; the Secretary of Agriculture; the Administrator, FmHA; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. This work was performed under the direction of John W. Harman, Director, Food and Agriculture Issues, who may be reached at (202) 512-5138 if you or your staff have any questions. Other major contributors to this report are listed in appendix III. The following are GAO's comments on the July 28, 1994, letter from the Farmers Home Administration. 1. As discussed in the agency comments section of our report, these cases are only one of several indications of the problems that form the basis for our concerns about the debt settlement process. 2. We updated the report to recognize the Secretary's reorganization plan. 3. FmHA expressed its concern that prohibiting loans to borrowers whose accounts are resolved through debt settlement could eliminate the use of its leaseback/buyback and homestead protection programs. In these programs, borrowers who default on FmHA loans are given preference in reacquiring the farms that they had pledged as security for those loans. FmHA may finance these transactions. Implementing our recommendation would not eliminate these loan-servicing programs--former owners would still retain preference for reacquiring their farms. However, we recognize that it would be difficult for some former owners to take advantage of this preference without FmHA financing. 4. As discussed in the agency comments section of our report, we revised our draft recommendation to accommodate borrowers who fail to repay loans because of circumstances beyond their control. This review was undertaken as part of a special effort to address federal programs subject to a high risk of waste, abuse, and mismanagement. To gain a complete understanding of FmHA's debt settlement process, we reviewed FmHA's regulations, operating instructions, and other guidance to field offices. We also interviewed officials at the agency's Office of Farmer Programs in Washington, D.C., and at state and county field offices. Computerized program records were provided by FmHA's Finance Office in St. Louis, Missouri, and information on CARs was obtained in the form of summaries of state performance reviews from FmHA's Washington, D.C., headquarters. For our review of individual debt settlement cases, we used records from FmHA's Finance Office to identify the three states--Louisiana, Mississippi, and Texas--with the largest dollar amounts of debt written off through debt settlements during fiscal year 1993. We then used detailed statistics on borrowers from these states to select the two counties in each state with the highest number of debt settlements. Finally, for the two selected counties, we eliminated all the cases settled through bankruptcy or resulting in a debt write-off of less than $100,000. We reviewed the remaining 57 cases by making field visits to the six county offices to examine files on borrowers, search public records, and discuss debt settlements with county officials to evaluate whether the federal government's interests were adequately protected. We then discussed the results of our case reviews and general debt settlement issues with FmHA state officials and, where necessary, with USDA's Office of General Counsel. To evaluate the extent of new loans to borrowers whose past debts had been settled, we matched information on debt settlements and loan obligations in data bases provided by the St. Louis Finance Office. Reid H. Jones, Evaluator-in-Charge The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO reviewed the Farmers Home Administration's (FmHA) debt settlements, focusing on: (1) how well FmHA protects government interests during debt settlements; and (2) additional FmHA loans to borrowers whose previous debts were forgiven. GAO found that: (1) FmHA is not adequately protecting government interests during debt settlements; (2) FmHA wrote off about $3.4 billion in outstanding farm loans during fiscal years (FY) 1991 through 1993 without receiving any payments from borrowers on most of the loans; (3) FmHA has $7.6 billion in problem loans that may be subject to future settlements; (4) FmHA officials do not always follow FmHA debt settlement procedures such as developing a complete inventory of borrowers' financial resources, using the borrowers' resources to offset loan losses, or offsetting loans with other government payments; (5) FmHA does not emphasize minimizing loan losses during debt settlements; (6) problems in implementing debt settlement procedures include competing work priorities and limited staff resources; (7) borrowers in default are not prohibited from receiving new loans; (8) in FY 1991 through 1993, FmHA approved new loans worth $13 billion to 86 borrowers who had $20 million in debts forgiven; and (9) some of these borrowers became delinquent on their new loans.
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Fiscal year 2002 was a year of challenges, not just for GAO but also for the Congress and the nation. The nation's vulnerabilities were exposed in a series of events--America's vulnerability to sophisticated terrorist networks, bioterrorism waged through mechanisms as mundane as the daily mail, and corporate misconduct capable of wiping out jobs, pensions, and investments virtually overnight. As the Congress's priorities changed to meet these crises, GAO's challenge was to respond quickly and effectively to our congressional clients' changing needs. With work already underway across a spectrum of critical policy and performance issues, we had a head start toward meeting the Congress' needs in a year of unexpected and often tumultuous events. For example, in fiscal year 2002 GAO's work informed the debate over national preparedness strategy, helping the Congress determine how best to organize and manage major new departments, assess key vulnerabilities to homeland defense, and respond to the events of September 11 in areas such as terrorism insurance and airline security. GAO's input also was a major factor in shaping the Sarbanes-Oxley Act, which created the Public Company Accounting Oversight Board, as well as new rules to strengthen corporate governance and ensure auditor independence. Further, GAO's work helped the Congress develop and enact election reform legislation in the form of the Help America Vote Act of 2002 to help restore voter confidence. In fiscal year 2002, GAO also served the Congress and the American people by helping to: Contribute to a national preparedness strategy at the federal, state, and local levels that will make Americans safer from terrorism Protect investors through better oversight of the securities industry and Ensure a safer national food supply Expose the inadequacy of nursing home care Make income tax collection fair, effective, and less painful to taxpayers Strengthen public schools' accountability for educating children Keep sensitive American technologies out of the wrong hands Protect American armed forces confronting chemical or biological weapons Identify the risks to employees in private pension programs Identify factors causing the shortage of children's vaccines Assist the postal system in addressing anthrax and various management challenges Identify security risks at ports, airports, and transit systems Save billions by bringing sound business practices to the Department of Foster human capital strategic management to create a capable, effective, Ensure that the armed forces are trained and equipped to meet the nation's defense commitments Enhance the safety of Americans and foreign nationals at U.S. Assess ways of improving border security through biometric technologies Reduce the international debt problems faced by poor countries Reform the way federal agencies manage their finances Protect government computer systems from security threats Enhance the transition of e-government--the new "electronic connection" between government and the public During fiscal year 2002, GAO's analyses and recommendations contributed to a wide range of legislation considered by the Congress, as shown in the following table. By year's end, we had testified 216 times before the Congress, sometimes on as little as 24 hours' notice, on a range of issues. We had responded to hundreds of urgent requests for information. We had developed 1,950 recommendations for improving the government's operations, including, for example, those we made to the Secretary of State calling for the development of a governmentwide plan to help other countries combat nuclear smuggling and those we made to the Chairman of the Federal Energy Regulatory Commission calling for his agency to develop an action plan for overseeing competitive energy markets. We also had continued to track the recommendations we had made in past years, checking to see that they had been implemented and, if not, whether we needed to do follow-up work on problem areas. We found, in fact, that 79 percent of the recommendations we had made in fiscal year 1998 had been implemented, a significant step when the work we have done for the Congress becomes a catalyst for creating tangible benefits for the American people. Table 2 highlights, by GAO's three external strategic goals, examples of issues on which we testified before Congress during fiscal year 2002. Congress and the executive agencies took a wide range of actions in fiscal year 2002 to improve government operations, reduce costs, or better target budget authority based on GAO analyses and recommendations, as highlighted in the following sections. Federal action on GAO's findings or recommendations produced financial benefits for the American people: a total of $37.7 billion was achieved by making government services more efficient, improving the budgeting and spending of tax dollars, and strengthening the management of federal resources (see fig. 1). For example, increased funding for improved safeguards against fraud and abuse helped the Medicare program to better control improper payments of $8.1 billion over 2 years, and better policies and controls reduced losses from farm loan programs by about $4.8 billion across 5 years. In fiscal year 2002, we also recorded 906 instances in which our work led to improvements in government operations or programs (see fig. 2). For example, by acting on GAO's findings or recommendations, the federal government has taken important steps toward enhancing aviation safety, improving pediatric drug labeling based on research, better targeting of funds to high-poverty school districts, greater accountability in the federal acquisition process, and more effective delivery of disaster recovery assistance to other nations, among other achievements. As shown in table 3, we met all of our annual performance targets except our timeliness target. While we provided 96 percent of our products to their congressional requesters by the date promised, we missed this measure's target of 98 percent on-time delivery. The year's turbulent events played a part in our missing the target, causing us to delay work in progress when higher-priority requests came in from the Congress. We know we will continue to face factors beyond our control as we strive to improve our performance in this area. We believe the agency protocols we are piloting will help clarify aspects of our interactions with the agencies we evaluate and audit and, thus, expedite our work in ways that could improve the timeliness of our final products. We also believe that our continuing investments in human capital and information technology will improve our timeliness while allowing us to maintain our high level of productivity and performance overall. The results of our work were possible, in part, because of changes we have made to maximize the value of GAO. We had already realigned GAO's structure and resources to better serve the Congress in its legislative, oversight, appropriations, and investigative roles. Over the past year, we cultivated and fostered congressional and agency relations, better refined our strategic and annual planning and reporting processes, and enhanced our information technology infrastructure. We also continued to provide priority attention to our management challenges of human capital, information security, and physical security. Changes we made in each of these areas helped enable us to operate in a constantly changing environment. Over the course of the year, we cultivated and fostered congressional and agency relations in several ways. On October 23, 2001, in response to the anthrax incident on Capitol Hill, we opened our doors to 435 members of the House of Representatives and their staffs. Later in the year, we continued with our traditional hill outreach meetings and completed a 7- month pilot test of a system for obtaining clients' views on the quality of our testimonies and reports. We also developed agency protocols to provide clearly defined, consistently applied, well-documented, and transparent policies for conducting our work with federal agencies. We have implemented our new reporting product line entitled Highlights--a one-page summary that provides the key findings and recommendations from a GAO engagement. We continued our policy of outreach to our congressional clients, the public, and the press to enhance the accessibility of GAO products. Our external web site now logs about 100,000 visitors each day and more than 1 million GAO products are downloaded every month by our congressional clients, the public, and the press. In light of certain records access challenges during the past few years and with concerns about national and homeland security unusually high at home and abroad, it may become more difficult for us to obtain information from the Executive Branch and report on certain issues. If this were to occur, it would hamper our ability to complete congressional requests in a timely manner. We are updating GAO's engagement acceptance policies and practices to address this issue and may recommend legislative changes that will help to assure that we have reasonable and appropriate information that we need to conduct our work for the Congress and the country. GAO's strategic planning process serves as a model for the federal government. Our plan aligns GAO's resources to meet the needs of the Congress, address emerging challenges and achieve positive results. Following the spirit of the Government Performance and Results Act, we established a process that provides for updates with each new Congress, ongoing analysis of emerging conditions and trends, extensive consultations with congressional clients and outside experts, and assessments of our internal capacities and needs. At the beginning of fiscal year 2002, we updated our strategic plan for serving the Congress based on substantial congressional input--extending the plan's perspective out to fiscal year 2007 and factoring in developments that had occurred since we first issued it in fiscal year 2000. The updated plan carries forward the four strategic goals we had already established as the organizing principles for a body of work that is as wide- ranging as the interests and concerns of the Congress itself. Using the plan as a blueprint, we lay out the areas in which we expect to conduct research, audits, analyses, and evaluations to meet our clients' needs, and we allocate the resources we receive from the Congress accordingly. Following is our strategic plan framework. Appendix I of this statement delineates in a bit more detail our strategic objectives and our qualitative performance goals for fiscal years 2002 and 2003. We issued our 2001 Performance and Accountability Report that combines information on our past year's accomplishments and progress in meeting our strategic goals with our plans for achieving our fiscal year 2003 performance goals. The report earned a Certificate of Excellence in Accountability Reporting from the Association of Government Accountants. We issued our fiscal year 2002 Performance and Accountability Report in January 2003. Our financial statements, which are integral to our performance and accountability, received an unqualified opinion for the sixteenth consecutive year. Furthermore, our external auditors did not identify any material control weaknesses or compliance issues relating to GAO's operations. During the past year, we acquired new hardware and software and developed user-friendly systems that enhanced our productivity and responsiveness to the Congress and helped meet our initial information technology goals. For example, we replaced aging desktop workstations with notebook computers that provide greater computing power, speed, and mobility. In addition, we upgraded key desktop applications, the Windows desktop operating system, and telecommunications systems to ensure that GAO staff have modern technology tools to assist them in carrying out their work. We also developed new, integrated, user-friendly Web-based systems that eliminate duplicate data entry while ensuring the reusability of existing data. As the Clinger-Cohen Act requires, GAO has an enterprise architecture program in place to guide its information technology planning and decision making. In designing and developing systems, as well as in acquiring technology tools and services, we have applied enterprise architecture principles and concepts to ensure sound information technology investments and the interoperability of systems. Given GAO's role as a key provider of information and analyses to the Congress, maintaining the right mix of technical knowledge and expertise as well as general analytical skills is vital to achieving our mission. We spend about 80 percent of our resources on our people, but without excellent human capital management, we could still run the risk of being unable to deliver what the Congress and the nation expect from us. At the beginning of my term in early fiscal year 1999, we completed a self- assessment that profiled our human capital workforce and identified a number of serious challenges facing our workforce, including significant issues involving succession planning and imbalances in the structure, shape, and skills of our workforce. As presented below, through a number of strategically planned human capital initiatives over the past few years, we have made significant progress in addressing these issues. For example, as illustrated in figure 3, by the end of fiscal year 2002, we had almost a 60 percent increase in the percentage of staff at the entry-level (Band I) as compared with fiscal year 1998. Also, the proportion of our workforce at the mid-level (Band II) decreased by about 8 percent. Our fiscal year 2002 human capital initiatives included the following: In fiscal year 2002, we hired nearly 430 permanent staff and 140 interns. We also developed and implemented a strategy to place more emphasis on diversity in campus recruiting. In fiscal years 2002 and 2003, to help meet our workforce planning objectives, we offered voluntary early retirement under authority established in our October 2000 human capital legislation. Early retirement was granted to 52 employees in fiscal year 2002 and 24 employees in fiscal year 2003. To retain staff with critical skills and staff with less than 3 years of GAO experience, we implemented legislation authorizing federal agencies to offer student loan repayments in exchange for certain federal service commitments. In fiscal year 2002, GAO implemented a new, modern, effective, and credible performance appraisal system for analysts and specialists, adapted the system for attorneys, and began modifying the system for administrative professional and support staff. We began developing a new core training curriculum for managers and staff to provide additional training on the key competencies required to perform GAO's work. We also took steps to achieve a fully democratically-elected Employee Advisory Council to work with GAO's Executive Committee in addressing issues of mutual interest and concern. The above represent just a few of many accomplishments in the human capital area. GAO is the clear leader in the federal government in designating and implementing 21st century human capital policies and practices. We also are taking steps to work with the Congress, the Office of Management and Budget, and the Office of Personnel Management, and others to "help others help themselves" in the human capital area. Ensuring information systems security and disaster recovery systems that allow for continuity of operations is a critical requirement for GAO, particularly in light of the events of September 11 and the anthrax incidents. The risk is that our information could be compromised and that we would be unable to respond to the needs of the Congress in an emergency. In light of this risk and in keeping with our goal of being a model federal agency, we are implementing an information security program consistent with the requirements in the Government Information Security Reform provisions (commonly referred to as "GISRA") enacted in the Floyd D. Spence National Defense Authorization Act for fiscal year 2001. We have made progress through our efforts to, among other things, implement a risk-based, agencywide security program; provide security training and awareness; and develop and implement an enterprise disaster recovery solution. In the aftermath of the September 11 terrorist attacks and subsequent anthrax incidents, our ability to provide a safe and secure workplace emerged as a challenge for our agency. Protecting our people and our assets is critical to our ability to meet our mission. We devoted additional resources to this area and implemented measures such as reinforcing vehicle and pedestrian entry points, installing an additional x-ray machine, adding more security guards, and reinforcing windows. GAO is requesting budget authority of $473 million for fiscal year 2004 to maintain current operations for serving the Congress as outlined in our strategic plan and to continue initiatives to enhance our human capital, support business processes, and ensure the safety and security of GAO staff, facilities, and information systems. This funding level will allow us to fund up to 3,269 full-time equivalent personnel. Our request includes $466.6 million in direct appropriations and authority to use estimated revenues of $6 million from reimbursable audit work and rental income. Our requested increase of $18.4 million in direct appropriations represents a modest 4.1 percent increase, primarily for mandatory pay and uncontrollable costs. Our budget request also includes savings from nonrecurring fiscal year 2003 investments in fiscal year 2004 that we propose to use to fund further one-time investments in critical areas, such as security and human capital. We have submitted a request for $4.8 million in supplemental fiscal year 2003 funds to allow us to accelerate implementation of important security enhancements. Our fiscal year 2004 budget includes $4.8 million for safety and security needs that are also included in the supplemental. If the requested fiscal year 2003 supplemental funds are provided, our fiscal year 2004 budget could be reduced by $4.8 million. Table 4 presents our fiscal year 2003 and requested fiscal year 2004 resources by funding source. During fiscal year 2004, we plan to sustain our investments in maximizing the productivity of our workforce by continuing to address the key management challenges of human capital, and both information and physical security. We will continue to take steps to "lead by example" within the federal government in connection with these and other critical management areas. Over the next several years, we need to continue to address skill gaps, maximize staff productivity and effectiveness, and reengineer our human capital processes to make them more user-friendly. We plan to address skill gaps by further refining our recruitment and hiring strategies to target gaps identified through our workforce planning efforts, while taking into account the significant percentage of our workforce eligible for retirement. We will continue to take steps to reengineer our human capital systems and practices to increase their efficiency and to take full advantage of technology. We will also ensure that our staff have the needed skills and training to function in this reengineered environment. In addition, we are developing competency-based performance appraisal and broad-banding pay systems for our mission support employees. To ensure our ability to attract, retain, and reward high-quality staff, we plan to devote additional resources to our employee training and development program. We will target resources to continue initiatives to address skill gaps, maximize staff productivity, and increase staff effectiveness by updating our training curriculum to address organizational and technical needs and training new staff. Also, to enhance our recruitment and retention of staff, we will continue to offer a student loan repayment program and transit subsidy benefit established in fiscal year 2002. In addition, we will continue to focus our hiring efforts in fiscal year 2004 on recruiting talented entry-level staff. To build on the human capital flexibilities provided by the Congress in 2000, we plan to recommend legislation that would, among other things, facilitate GAO's continuing efforts to recruit and retain top talent, develop a more performance-based compensation system, realign our workforce, and facilitate our succession planning and knowledge transfer efforts. In addition, to help attract new recruits, address certain "expectation gaps" within and outside of the government, and better describe the modern audit and evaluation entity GAO has become, we will work with the Congress to explore the possibility of changing the agency's name while retaining our well-known acronym and global brand name of "GAO." On the information security front, we need to complete certain key actions to be better able to detect intruders in our systems, identify our users, and recover in the event of a disaster. Among our current efforts and plans for these areas are completing the installation of software that helps us detect intruders on all our internal servers, completing the implementation of a secure user authentication process, and refining the disaster recover plan we developed last year. We will need the Congress' help to address these remaining challenges. We also are continuing to make the investments necessary to enhance the safety and security of our people, facilities, and other assets for the mutual benefit of GAO and the Congress. With our fiscal year 2003 supplemental funding, if provided, or if not, with fiscal year 2004 funds, we plan to complete installation of our building access control and intrusion detection system and supporting infrastructure, and obtain an offsite facility for use by essential personnel in emergency situations. With the help of the Congress, we plan to implement these projects over the next several years. As a result of the support and resources we have received from this Subcommittee and the Congress over the past several years, we have been able to make a difference in government, not only in terms of financial benefits and improvements in federal programs and operations that have resulted from our work, but also in strengthening and increasing the productivity of GAO, and making a real difference for our country and its citizens. Our budget request for fiscal year 2004 is modest, but necessary to sustain our current operations, continue key human capital and information technology initiatives, and ensure the safety and security of our most valuable asset--our people. We seek your continued support so that we will be able to effectively and efficiently conduct our work on behalf of the Congress and the American people. This appendix lists GAO's strategic goals and the strategic objectives for each goal. They are part of our updated draft strategic plan (for fiscal years 2002 through 2007). Organized below each strategic objective are its qualitative performance goals. The performance goals lay out the work we plan to do in fiscal years 2002 and 2003 to help achieve our strategic goals and objectives. We will evaluate our performance at the end of fiscal year 2003. Provide Timely, Quality Service to the Congress and the Federal Government to Address Current and Emerging Challenges to the Well- Being and Financial Security of the American People To achieve this goal, we will provide information and recommendations on the following: the Health Care Needs of an Aging and Diverse Population evaluate Medicare reform, financing, and operations; assess trends and issues in private health insurance coverage; assess actions and options for improving the Department of Veterans Affairs' and the Department of Defense's (DOD) health care services; evaluate the effectiveness of federal programs to promote and protect the public health; evaluate the effectiveness of federal programs to improve the nation's preparedness for the public health and medical consequences of bioterrorism; evaluate federal and state program strategies for financing and overseeing chronic and long-term health care; and assess states' experiences in providing health insurance coverage for low- income populations. the Education and Protection of the Nation's Children analyze the effectiveness and efficiency of early childhood education and care programs in serving their target populations; assess options for federal programs to effectively address the educational and nutritional needs of elementary and secondary students and their schools; determine the effectiveness and efficiency of child support enforcement and child welfare programs in serving their target populations; and identify opportunities to better manage postsecondary, vocational, and adult education programs and deliver more effective services. the Promotion of Work Opportunities and the Protection of Workers assess the effectiveness of federal efforts to help adults enter the workforce and to assist low-income workers; analyze the impact of programs designed to maintain a skilled workforce and ensure employers have the workers they need; assess the success of various enforcement strategies to protect workers while minimizing employers' burden in the changing environment of work; and identify ways to improve federal support for people with disabilities. a Secure Retirement for Older Americans assess the implications of various Social Security reform proposals; identify opportunities to foster greater pension coverage, increase personal saving, and ensure adequate and secure retirement income; and identify opportunities to improve the ability of federal agencies to administer and protect workers' retirement benefits. an Effective System of Justice identify ways to improve federal agencies' ability to prevent and respond to major crimes, including terrorism; assess the effectiveness of federal programs to control illegal drug use; identify ways to administer the nation's immigration laws to better secure the nation's borders and promote appropriate treatment of legal residents; and assess the administrative efficiency and effectiveness of the federal court and prison systems. the Promotion of Viable Communities assess federal economic development assistance and its impact on communities; assess how the federal government can balance the promotion of home ownership with financial risk; assess the effectiveness of federal initiatives to assist small and minority- owned businesses; assess federal efforts to enhance national preparedness and capacity to respond to and recover from natural and man-made disasters; and assess how well federally supported housing programs meet their objectives and affect the well-being of recipient households and communities. Responsible Stewardship of Natural Resources and the Environment assess the nation's ability to ensure reliable and environmentally sound energy for current and future generations; assess federal strategies for managing land and water resources in a sustainable fashion for multiple uses; assess federal programs' ability to ensure a plentiful and safe food supply, provide economic security for farmers, and minimize agricultural environmental damage; assess federal pollution prevention and control strategies; and assess efforts to reduce the threats posed by hazardous and nuclear wastes. a Secure and Effective National Physical Infrastructure assess strategies for identifying, evaluating, prioritizing, financing, and implementing integrated solutions to the nation's infrastructure needs; assess the impact of transportation and telecommunications policies and practices on competition and consumers; assess efforts to improve safety and security in all transportation modes; assess the U.S. Postal Service's transformation efforts to ensure its viability and accomplish its mission; and assess federal efforts to plan for, acquire, manage, maintain, secure, and dispose of the government's real property assets. Provide Timely, Quality Service to the Congress and the Federal Government to Respond to Changing Security Threats and the Challenges of Global Interdependence To achieve this goal, we will provide information and recommendations on the following: Respond to Diffuse Threats to National and Global Security analyze the effectiveness of the federal government's approach to providing for homeland security; assess U.S. efforts to protect computer and telecommunications systems supporting critical infrastructures in business and government; and assess the effectiveness of U.S. and international efforts to prevent the proliferation of nuclear, biological, chemical, and conventional weapons and sensitive technologies. Ensure Military Capabilities and Readiness assess the ability of DOD to maintain adequate readiness levels while addressing the force structure changes needed in the 21st century; assess overall human capital management practices to ensure a high- quality total force; identify ways to improve the economy, efficiency, and effectiveness of DOD's support infrastructure and business systems and processes; assess the National Nuclear Security Administration's efforts to maintain a safe and reliable nuclear weapons stockpile; analyze and support DOD's efforts to improve budget analyses and performance management; assess whether DOD and the services have developed integrated procedures and systems to operate effectively together on the battlefield; and assess the ability of weapon system acquisition programs and processes to achieve desired outcomes. Advance and Protect U.S. International Interests analyze the plans, strategies, costs, and results of the U.S. role in conflict interventions; analyze the effectiveness and management of foreign aid programs and the tools used to carry them out; analyze the costs and implications of changing U.S. strategic interests; evaluate the efficiency and accountability of multilateral organizations and the extent to which they are serving U.S. interests; and assess the strategies and management practices for U.S. foreign affairs functions and activities. Respond to the Impact of Global Market Forces on U.S. Economic and Security Interests analyze how trade agreements and programs serve U.S. interests; improve understanding of the effects of defense industry globalization; assess how the United States can influence improvements in the world financial system; assess the ability of the financial services industry and its regulators to maintain a stable and efficient global financial system; evaluate how prepared financial regulators are to respond to change and innovation; and assess the effectiveness of regulatory programs and policies in ensuring access to financial services and deterring fraud and abuse in financial markets. Help Transform the Government's Role and How It Does Business to Meet 21st Century Challenges To achieve this goal, we will provide information and recommendations on the following: Analyze the Implications of the Increased Role of Public and Private Parties in Achieving Federal Objectives analyze the modern service-delivery system environment and the complexity and interaction of service-delivery mechanisms; assess how involvement of state and local governments and nongovernmental organizations affect federal program implementation and achievement of national goals; and assess the effectiveness of regulatory administration and reforms in achieving government objectives. Assess the Government's Human Capital and Other Capacity for Serving the Public identify and facilitate the implementation of human capital practices that will improve federal economy, efficiency, and effectiveness; identify ways to improve the financial management infrastructure capacity to provide useful information to manage for results and costs day to day; assess the government's capacity to manage information technology to improve performance; assess efforts to manage the collection, use, and dissemination of government information in an era of rapidly changing technology; assess the effectiveness of the Federal Statistical System in providing relevant, reliable, and timely information that meets federal program needs; and identify more businesslike approaches that can be used by federal agencies in acquiring goods and services. Support Congressional Oversight of the Federal Government's Progress toward Being More Results-Oriented, Accountable, and Relevant to Society's Needs analyze and support efforts to instill results-oriented management across the government; highlight the federal programs and operations at highest risk and the major performance and management challenges confronting agencies; identify ways to strengthen accountability for the federal government's assets and operations; promote accountability in the federal acquisition process; assess the management and results of the federal investment in science and technology and the effectiveness of efforts to protect intellectual property; and identify ways to improve the quality of evaluative information. develop new resources and approaches that can be used in measuring performance and progress on the nations 21st century challenges Analyze the Government's Fiscal Position and Approaches for Financing the Government analyze the long-term fiscal position of the federal government; analyze the structure and information for budgetary choices and explore alternatives for improvement; contribute to congressional deliberations on tax policy; support congressional oversight of the Internal Revenue Service's modernization and reform efforts; and assess the reliability of financial information on the government's fiscal position and financing sources. Maximize the Value of GAO by Being a Model Federal Agency and a World-Class Professional Services Organization To achieve this goal, we will do the following: Sharpen GAO's Focus on Clients' and Customers' Requirements continuously update client requirements; develop and implement stakeholder protocols and refine client protocols; and identify and refine customer requirements and measures.
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GAO is a key source of objective information and analyses and, as such, plays a crucial role in supporting congressional decision-making and helping improve government for the benefit of the American people. This testimony focuses on GAO's (1) fiscal year 2002 performance and results, (2) efforts to maximize our effectiveness, responsiveness and value, and (3) our budget request for fiscal year 2004 to support the Congress and serve the American public. In fiscal year 2002, GAO's work informed the national debate on a broad spectrum of issues including helping the Congress answer questions about the associated costs and program tradeoffs of the national preparedness strategy, including providing perspectives on how best to organize and manage the new Transportation Security Administration and Department of Homeland Security. GAO's efforts helped the Congress and government leaders achieve $37.7 billion in financial benefits--an $88 return on every dollar invested in GAO. The return on the public's investment in GAO extends beyond dollar savings to improvements in how the government serves its citizens. This includes a range of accomplishments that serve to improve safety, enhance security, protect privacy, and increase the effectiveness of a range of federal programs and activities. The results of our work in fiscal year 2002 were possible, in part, because of changes we have made to transform GAO in order to meet our goal of being a model federal agency and a world-class professional services organization. We had already realigned GAO's structure and resources to better serve the Congress in its legislative, oversight, appropriations, and investigative roles. Over the past year, we cultivated and fostered congressional and agency relations, better refined our strategic and annual planning and reporting processes, and enhanced our information technology infrastructure. We also continued to provide priority attention to our management challenges of human capital, information security, and physical security. We have made progress in addressing each of these challenges, but we still have work to do and plan to ask for legislation to help address some of these issues. GAO is requesting budget authority of $473 million for fiscal year 2004. Our request represents a modest 4.1 percent increase in direct appropriations, primarily for mandatory pay and uncontrollable costs. This budget will allow us to maintain current operations for serving the Congress as outlined in our strategic plan and continue initiatives to enhance our human capital, support business processes, and ensure the safety and security of GAO staff, facilities, and information systems. Approximately $4.8 million, or about 1 percent, of our request relates to several safety and security items that are included in our fiscal year 2003 supplemental request. If this supplemental request is granted, our fiscal year 2004 request could be reduced accordingly.
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Each year, OMB and federal agencies work together to determine how much the government plans to spend for IT and how these funds are to be allocated. Federal IT spending has risen to an estimated $64 billion in fiscal year 2007. OMB plays a key role in overseeing federal IT investments and how they are managed. To drive improvement in the implementation and management of IT projects, Congress enacted the Clinger-Cohen Act in 1996 to further expand the responsibilities of OMB and the agencies under the Paperwork Reduction Act. In particular, the act requires agency heads, acting through agency chief information officers (CIOs), to, among other things, better link their IT planning and investment decisions to program missions and goals and to implement and enforce IT management policies, procedures, standards, and guidelines. The Clinger-Cohen Act requires that agencies engage in capital planning and performance and results- based management. The act also requires OMB to establish processes to analyze, track, and evaluate the risks and results of major capital investments in information systems made by executive agencies. OMB is also required to report to Congress on the net program performance benefits achieved as a result of major capital investments in information systems that are made by executive agencies. In response to the Clinger-Cohen Act and other statutes, OMB developed policy for planning, budgeting, acquisition, and management of federal capital assets. This policy is set forth in OMB Circular A-11 (section 300) and in OMB's Capital Programming Guide (supplement to Part 7 of Circular A-11), which directs agencies to develop, implement, and use a capital programming process to build their capital asset portfolios. Among other things, OMB's Capital Programming Guide directs agencies to * evaluate and select capital asset investments that will support core mission functions that must be performed by the federal government and demonstrate projected returns on investment that are clearly equal to or better than alternative uses of available public resources; institute performance measures and management processes that monitor actual performance and compare to planned results; and * establish oversight mechanisms that require periodic review of operational capital assets to determine how mission requirements might have changed and whether the asset continues to fulfill mission requirements and deliver intended benefits to the agency and customers. To further support the implementation of IT capital planning practices, we have developed an IT investment management framework that agencies can use in developing a stable and effective capital planning process, as required by statute and directed in OMB's Capital Programming Guide. Consistent with the statutory focus on selecting, controlling, and evaluating investments, this framework focuses on these processes in relation to IT investments specifically. It is a tool that can be used to determine both the status of an agency's current IT investment management capabilities and the additional steps that are needed to establish more effective processes. Mature and effective management of IT investments can vastly improve government performance and accountability. Without good management, such investments can result in wasteful spending and lost opportunities for improving delivery of services to the public. Only by effectively and efficiently managing their IT resources through a robust investment management process can agencies gain opportunities to make better allocation decisions among many investment alternatives and further leverage their investments. However, the federal government faces enduring IT challenges in this area. For example, in January 2004 we reported on mixed results of federal agencies' use of IT investment management practices. Specifically, we reported that although most of the agencies had IT investment boards responsible for defining and implementing the agencies' IT investment management processes, agencies did not always have important mechanisms in place for these boards to effectively control investments, including decision- making rules for project oversight, early warning mechanisms, and/or requirements that corrective actions for underperforming projects be agreed upon and tracked. Executive-level oversight of project-level management activities provides organizations with increased assurance that each investment will achieve the desired cost, benefit, and schedule results. Accordingly, we made several recommendations to agencies to improve their practices. In previous work using our investment management framework, we reported that the use of IT investment management practices by agencies was mixed. For example, a few agencies that have followed the framework in implementing capital planning processes have made significant improvements. In contrast, however, we and others have continued to identify weaknesses at agencies in many areas, including immature management processes to support both the selection and oversight of major IT investments and the measurement of actual versus expected performance in meeting established performance measures. In helping to ensure that investments of public resources are justified and that public resources are wisely invested, OMB began using the Management Watch List, in the President's fiscal year 2004 budget request, as a means to oversee the justification for and planning of agencies' IT investments. This list was derived based on a detailed review of the investments' Capital Asset Plan and Business Case, also known as the exhibit 300. The exhibit 300 is a reporting mechanism intended to enable an agency to demonstrate to its own management, as well as OMB, that a major project is well planned in that it has employed the disciplines of good project management; developed a strong business case for the investment; and met other Administration priorities in defining the cost, schedule, and performance goals proposed for the investment. We reported in 2005 that OMB analysts evaluate agency exhibit 300s by assigning scores to each exhibit 300 based on guidance presented in OMB Circular A-11. As described in this circular, the scoring of a business case consists of individual scoring for 10 categories, as well as a total composite score of all the categories. The 10 categories are * project (investment) management, * security and privacy, * performance-based management system (including the earned value management system), life-cycle costs formulation, and * support of the President's Management Agenda. Using these scores, projects were placed on the Management Watch List if their exhibit 300 business case received a total composite score of 3 or less, or if it received a score of 3 or less in the areas of performance goals, performance-based management systems, or security and privacy, even if its overall score was a 4 or 5. To derive the total number of projects on the list that were reported for fiscal year 2005, OMB polled the individual analysts and compiled the numbers. According to OMB, agencies with weaknesses in these three areas were to submit remediation plans addressing the weaknesses. OMB officials also stated that decisions on follow-up and monitoring the progress were typically made by staff with responsibility for reviewing individual agency budget submissions, depending on the staff's insights into agency operations and objectives. According to OMB officials, those Management Watch List projects that did receive specific follow-up attention received feedback through the passback process, through targeted evaluation of remediation plans designed to address weaknesses, and through the apportioning of funds so that the use of budgeted dollars was conditional on appropriate remediation plans being in place, and through the quarterly e-Gov Scorecards. To improve IT project execution, OMB issued a memorandum in August 2005 to all federal CIOs, directing them to begin taking steps to identify IT projects that are high risk and to report quarterly on their performance. As originally defined in OMB Circular A-11 and subsequently reiterated in the August 2005 memorandum, high risk projects are those that require special attention from oversight authorities and the highest levels of agency management because of one or more of the following four reasons: * The agency has not consistently demonstrated the ability to manage complex projects. * The project has exceptionally high development, operating, or maintenance costs, either in absolute terms or as a percentage of the agency's total IT portfolio. * The project is being undertaken to correct recognized deficiencies in the adequate performance of an essential mission program or function of the agency, a component of the agency, or another organization. * Delay or failure of the project would introduce for the first time unacceptable or inadequate performance or failure of an essential mission function of the agency, a component of the agency, or another organization. As directed in the memorandum, agencies are to work with OMB to identify their high risk IT projects using these criteria. Most agencies reported that, to identify high risk projects, CIO office staff compared the criteria against their current portfolio to determine which projects met OMB's definition. They then submitted the list to OMB for review. According to OMB and agency officials, after the submission of the initial list, examiners at OMB worked with individual agencies to identify or remove projects as appropriate. According to most agencies, the final list was then approved by their CIO. For the identified high risk projects, beginning September 15, 2005, and quarterly thereafter, CIOs were to assess, confirm, and document projects' performance. Specifically, agencies were required to determine, for each of their high risk projects, whether the project was meeting one or more of four performance evaluation criteria: (1) establishing baselines with clear cost, schedule, and performance goals; (2) maintaining the project's cost and schedule variances within 10 percent; (3) assigning a qualified project manager; and (4) avoiding duplication by leveraging inter-agency and governmentwide investments. If a high risk project met any of these four performance evaluation criteria, agencies were instructed to document this using a standard template provided by OMB and provide this template to oversight authorities (e.g., OMB, agency inspectors general, agency management, and GAO) on request. Upon submission, according to OMB staff, individual analysts review the quarterly performance reports of projects with shortfalls to determine how well the projects are progressing and whether the actions described in the planned improvement efforts are adequate using other performance data already received on IT projects such as the e-Gov Scorecards, earned value management data, and the exhibit 300. About 300 projects totaling about $12 billion in estimated IT expenditures for fiscal year 2007 have been placed on OMB's Management Watch List or as a high risk project with performance shortfalls. Specifically, the President's budget for fiscal year 2007 included 857 major IT projects, totaling approximately $64 billion. Of this, OMB reported that there were 263 proposed major projects that were poorly planned, totaling $10 billion. In addition, agencies reported that 79 of the 226 high-risk projects identified as of March 2006, collectively totaling about $2.2 billion had a performance shortfall primarily associated with cost and schedule variances that exceeded 10 percent. OMB first reported on the Management Watch List in the President's budget request for 2004. While the number of projects and their associated budget have decreased since then, they still represent a significant percentage of the total IT budget. Table 1 shows the budget information for projects on the Management Watch List for fiscal years 2004, 2005, 2006, and 2007. Table 2 provides the number of projects on the Management Watch List for fiscal years 2004, 2005, 2006, and 2007. In addition, in response to OMB's August 2005 memorandum, the 24 major agencies identified 226 IT projects as high risk, totaling about $6.4 billion in funding requested for fiscal year 2007. Agencies identified most projects as high risk because their delay or failure would impact the essential business functions of the agency. In addition, agencies reported that about 35 percent of the high risk projects--or 79 investments, collectively totaling about $2.2 billion in fiscal year 2007--had a performance shortfall, primarily associated with cost and schedule variances that exceeded 10 percent. Figure 1 illustrates the number of agency high risk projects as of March 2006 with and without shortfalls. The majority of the agencies reported that their high risk projects did not have performance shortfalls in any of the four areas identified by OMB. In addition, six agencies--the departments of Commerce, Energy, Housing and Urban Development, and Labor, and the National Aeronautics and Space Administration and the National Science Foundation-- reported that none of their high risk projects experienced any performance shortfalls. While the Management Watch List and high risk processes serve to highlight poorly planned and performing projects and focus attention on them, our reviews identified opportunities to strengthen the identification and oversight of projects for each. OMB's Management Watch List may be undermined by inaccurate and unreliable data. While OMB uses the exhibit 300s as the basis for designating projects as poorly planned, we have recently reported that the underlying support was often inadequate for information provided in the exhibit 300s GAO reviewed. Three general types of weaknesses were evident: * All exhibit 300s had documentation weaknesses. Documentation either did not exist or did not fully agree with specific areas of the exhibit 300. * Agencies did not always demonstrate that they complied with federal or departmental requirements or policies with regard to management and reporting processes. Also, none had cost analyses that fully complied with OMB requirements for cost-benefit and cost-effectiveness analyses. In contrast, most investments did demonstrate compliance with information security planning and training requirements. * In sections that required actual cost data, these data were unreliable because they were not derived from cost-accounting systems with adequate controls. In the absence of such systems, agencies generally derived cost information from ad hoc processes. Moreover, although agencies, with OMB's assistance, generally identified their high risk projects using criteria specified by OMB, these criteria were not always consistently applied. * In several cases, agencies did not use OMB's criteria to identify high risk projects. Some agencies reported using other reasons to identify a total of 31 high risk projects. For example, the Department of Homeland Security reported investments that were high risk because they had weaknesses associated with their business cases based on the evaluation by OMB. The Department of Transportation reported projects as high risk because two did not have approved baselines, and four had incomplete or poor earned value management assessments. * Regarding the criterion for high risk designation that the agency has not consistently demonstrated the ability to manage complex projects, only three agencies reported having projects meeting this criterion. This appears to be somewhat low, considering that we and others have previously reported on weaknesses in numerous agencies' ability to manage complex projects. For example, we have reported in our high risk series on major programs and operations that need urgent attention and transformation in order to ensure that our national government functions in the most economical, efficient, and effective manner possible. Specifically, the Department of Defense's efforts to modernize its business systems have been hampered because of weaknesses in practices for (1) developing and using an enterprise architecture, (2) instituting effective investment management processes, and (3) establishing and implementing effective systems acquisition processes. We concluded that the Department of Defense, as a whole, remains far from where it needs to be to effectively and efficiently manage an undertaking with the size, complexity, and significance of its departmentwide business systems modernization. We also reported that, after almost 25 years and $41 billion, efforts to modernize the air traffic control program of the Federal Aviation Administration, the Department of Transportation's largest component, are far from complete and that projects continue to face challenges in meeting cost, schedule, and performance expectations. However, neither the Department of Defense nor the Department of Transportation cited the "inability to consistently manage complex projects" criteria for any projects as being high risk. * Finally, while agencies have reported a significant number of IT projects as high risk, we identified other projects on which we have reported and testified that appear to meet one or more of OMB's criteria for high risk designation including high development or operating costs and recognized deficiencies in the adequate performance but were not identified as high risk. Examples we have recently reported include the following projects: * The Decennial Response Integration System of the Census Bureau, is intended to integrate paper, Internet, and telephone responses. Its high development and operating costs are expected to make up a large portion of the $1.8 billion program to develop, test, and implement decennial census systems. In March 2006, we testified that the component agency has established baseline requirements for the acquisition, but the bureau has not yet validated them or implemented a process for managing the requirements. We concluded that, until these and other basic contract management activities are fully implemented, this project faced increased risks that the system would experience cost overruns, schedule delays, and performance shortfalls. System--an initiative managed by the Department of Commerce, the Department of Defense, and the National Aeronautics and Space Administration--is to converge two satellite programs into a single satellite program capable of satisfying both civilian and military requirements. In November 2005, we reported that the system was a troubled program because of technical problems on critical sensors, escalating costs, poor management at multiple levels, and the lack of a decision on how to proceed with the program. Over the last several years, this system has experienced continual cost increases to about $10 billion and schedule delays, requiring difficult decisions about the program's direction and capabilities. More recently, we testified that the program is still in trouble and that its future direction is not yet known. While the program office has corrective actions under way, we concluded that, as the project continues, it will be critical to ensure that the management issues of the past are not repeated. * Rescue 21, is a planned coastal communications system of the Department of Homeland Security. We recently reported that inadequacies in several areas contributed to Rescue 21 cost overruns and schedule delays. These inadequacies occurred in requirements management, project monitoring, risk management, contractor cost and schedule estimation and delivery, and executive level oversight. Accordingly, the estimated total acquisition cost has increased from $250 million in 1999 to $710.5 million in 2005, and the timeline for achieving full operating capability has been extended from 2006 to 2011. For the projects we identified as appearing to meet OMB's criteria for high risk, the responsible agencies reported that they did not consider these investments to be high risk projects for such reasons as (1) the project was not a major investment; (2) agency management is experienced in overseeing projects; or (3) the project did not have weaknesses in its business case. In particular, one agency stated that their list does not include all high risk projects, only those that are the highest priority of the high risk investments. However, none of the reasons provided are associated with OMB's high risk definition. Without consistent application of the criteria, OMB and executives cannot have the assurance that all projects that require special attention have been identified. While OMB's Management Watch List identified opportunities to strengthen investments and promote improvements in IT management, OMB did not develop a single, aggregate list identifying the projects and their weaknesses. According to OMB officials, they did not construct a single list of projects meeting their watch list criteria because they did not see such an activity as necessary in performing OMB's predominant mission: to assist in overseeing the preparation of the federal budget and to supervise agency budget administration. Thus, OMB did not exploit the opportunity to use the list as a tool for analyzing IT investments on a govermentwide basis, limiting its ability to identify and report on the full set of IT investments requiring corrective actions. In addition, while OMB asked agencies to take corrective actions to address weaknesses associated with projects on the Management Watch List, it did not develop a structured, consistent process or criteria for deciding how to follow up on these actions. We also reported that because it did not consistently monitor the follow-up performed, OMB could not tell us which of the 621 projects identified on the fiscal year 2005 list received follow-up attention, and it did not know whether the specific project risks that it identified through its Management Watch List were being managed effectively. This approach could leave resources at risk of being committed to poorly planned and managed projects. Thus, OMB was not using its Management Watch List as a tool for improving IT investments on a governmentwide basis and focusing attention where it was most needed. Similar to the Management Watch List, we reported in June 2006 that while OMB analysts review the quarterly performance reports on high risk projects, they did not compile a single aggregate list of high risk projects. According to OMB staff they did not see such an activity as necessary in achieving the intent of the guidance--to improve project planning and execution. Consistent with our Management Watch list observations and recommendations, we believe that by not having a single list, OMB is limiting its ability to identity and report on the full set of IT investments across the federal government that require special oversight and greater agency management attention. To address our key findings, we made several recommendations to the Director of OMB. For example, to improve how the Management Watch List projects are identified, we have made several recommendations to improve the accuracy and validity of exhibit 300s for major IT investments, including that the Director require agencies to determine the extent to which the information contained in each exhibit 300 is accurate and reliable, and, where weaknesses in accuracy and reliability are identified, disclose them and explain the agency's approach to mitigating them. We also recommended that the Director provide for training of agency personnel responsible for completing exhibit 300s, and specified that, in developing the training, OMB consult with agencies to identify deficiencies that the training should address. Likewise, to improve how high risk projects are identified, we recommended that the Director direct federal agency CIOs to ensure that they are consistently applying the high risk criteria defined by OMB. To improve how the Management Watch List is provided oversight, in our April 2005 report, we recommended that the Director of OMB develop a central list of projects and their deficiencies and report to Congress on progress made in addressing risks of major IT investments and management areas needing attention. In addition, to fully realize the potential benefits of using the Management Watch List, we recommended that OMB use the list as the basis for selecting projects for follow-up, tracking follow-up activities and analyze the prioritized list to develop governmentwide and agency assessments of the progress and risks of IT investments, identifying opportunities for continued improvement. We also made similar recommendations to the Director of OMB regarding high risk projects. Specifically, we recommended that OMB develop a single aggregate list of high risk projects and their deficiencies and use that list to report to Congress progress made in correcting high risk problems, actions under way, and further actions that may be needed. OMB generally disagreed with our recommendations for strengthening the Management Watch List and high risk projects processes. Specifically, OMB's Administrator of the Office of E- Government and Information Technology stated that the ultimate responsibility to improve the accuracy and reliability of the exhibit 300s lies with the agencies. While this is true, OMB also has statutory responsibility for providing IT guidance governmentwide, especially when it involves an OMB-required budget document. Regarding the consistent application of the high risk criteria, the Administrator stated that some flexibility in the application of the criteria is essential. While some flexibility may be appropriate, we believe that these criteria should be more consistently applied so that projects that clearly meet them are identified and provided oversight. The Administrator also disagreed with our recommendations that an aggregated governmentwide Management Watch List and high risk project list is necessary to perform adequate oversight. However, we continue to believe that these lists are needed to facilitate OMB's ability to track progress. Addressing these recommendations would provide increased assurance that poorly planned and performing projects are accurately identified and more effectively provided oversight. ------------------------------- In summary, the Management Watch List and High Risk processes play important roles in improving the management of federal IT investments by helping to identify poorly planned and performing projects totaling at least $12 billion that require management attention. However, the number of projects identified on both lists is likely understated because the Management Watch List is derived from budgetary documents that are not always accurate and reliable and the high risk projects are not always identified consistently using OMB criteria. In addition, we noted areas where oversight of both sets of projects could be strengthened primarily by reporting the results in the aggregate so that governmentwide analyses can be performed, progress can be tracked, and Congress can be informed. The recommendations we made to agencies and OMB to address these issues are aimed at providing greater assurance that poorly planned and performing projects are more accurately identified and receiving adequate oversight, and ultimately ensuring that potentially billions of taxpayers dollars are not wasted. If you should have any questions about this testimony, please contact me at (202) 512-9286 or by e-mail at [email protected]. Other individuals who made key contributions to this testimony are Sabine Paul and Niti Tandon. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Office of Management and Budget (OMB) plays a key role in overseeing federal IT investments. The Clinger-Cohen Act, among other things, requires OMB to establish processes to analyze, track, and evaluate the risks and results of major capital investments in information systems made by agencies and to report to Congress on the net program performance benefits achieved as a result of these investments. OMB has developed several processes to help carry out its role. For example, OMB began using a Management Watch List several years ago as a means of identifying poorly planned projects based on its evaluation of agencies' funding justifications for major projects, known as exhibit 300s. In addition, in August 2005, OMB established a process for agencies to identify high risk projects, i.e., projects requiring special attention because of one or more reasons specified by OMB, and to report on those that are poorly performing or not meeting performance criteria. GAO recently issued reports on the Management Watch List, high risk projects, and agencies' exhibit 300s. GAO was asked to summarize (1) the number of projects and the fiscal year 2007 dollar value of Management Watch List and high risk projects, (2) previously reported results on how these projects are identified and provided oversight, and (3) recommendations it made to improve these processes. As a result of the Management Watch List and high risk projects processes, about 300 projects totaling about $12 billion in estimated IT expenditures for fiscal year 2007 have been identified as being either poorly planned or poorly performing. Specifically, of the 857 major IT projects in the President's budget for fiscal year 2007, OMB placed 263 projects, representing about $10 billion on its Management Watch List. In addition, in response to OMB's memorandum, agencies reported that 79 of 226 high risk projects, collectively totaling about $2.2 billion, had a performance shortfall. While this information helps to focus both agency and OMB management attention on these poorly planned and poorly performing projects, GAO identified opportunities to strengthen how these projects are identified and provided oversight. The Management Watch List may be undermined by inaccurate and unreliable data. OMB uses scoring criteria to evaluate agencies' exhibit 300s to derive the projects on its Management Watch List. GAO's detailed evaluation of exhibit 300s showed that the information reported in them is not always accurate or supported by documentation. The criteria for identifying high risk projects were not always consistently applied and projects that appeared to meet the criteria were not identified as high risk. Without consistent application of the high risk criteria, OMB and agency executives cannot have the assurance that all projects that require special attention have been identified. For both sets of projects, OMB did not develop a central list of projects and deficiencies that could facilitate tracking progress and reporting to Congress. Without such lists, OMB is not fully exploiting the opportunity to analyze and track these projects on a governmentwide basis and not involving Congress in the oversight of these projects with risks. To improve the way the Management Watch List and high risk projects are identified and provided oversight, GAO has made a number of recommendations to the Director of OMB. These recommendations include directing agencies to improve the accuracy and reliability of exhibit 300 information and to consistently apply the high risk criteria defined by OMB. In addition, GAO recommended that the Director develop a single, aggregate list for both the Management Watch List and high risk projects to facilitate tracking progress, performing governmentwide analysis, and reporting the results to Congress. OMB generally disagreed with these recommendations. However, GAO believes that they are needed to provide greater assurance that poorly planned and poorly performing projects are more accurately identified and provided oversight, and ultimately ensure that potentially billions of taxpayer dollars are not wasted.
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The U.S. Army Corps of Engineers, made up of approximately 34,600 civilian and 650 military personnel, has both military and civil works missions. The Corps' military mission includes managing and executing engineering, construction, and real estate programs for DOD components, other federal agencies, state and local governments, and foreign governments. The Corps also provides military support by managing and executing Army installation support programs and by developing and maintaining the capability to mobilize in response to national security emergencies. The Corps' civil works program involves investigating, developing, and maintaining the nation's water and related environmental resources; constructing and operating projects for navigation; developing hydroelectric power; and conserving fish and wildlife. The Corps is organized geographically into eight divisions in the United States and 41 subordinate districts throughout the United States, Asia, and Europe. The districts oversee project offices throughout the world. The Corps also has eight research laboratories and two data processing centers. Further, the Corps conducts business with numerous external customers, including the military departments and various federal government agencies. External customers require access to the Corps' systems for such things as posting and retrieval of information for water management functions. The Corps' Finance Center has centralized responsibility for issuing checks and electronic funds transfers for the various Corps sites and external customers. During fiscal year 2000, CEFMS made about $11 billion in disbursements for Corps (civil works and military fund) activities. The Corps acquired and owns the Corps of Engineers Enterprise Information System (CEEIS) wide area network, which supports multiple unclassified Corps systems, including its key financial management system, CEFMS. The CEEIS interconnects Corps sites worldwide, providing for the exchange of traffic between sites in support of engineering, financial management, E-mail, and real-time data collection. External customers access Corps systems via the Internet and DOD's Unclassified (but Sensitive) Internet Protocol Router Network (NIPRNet) gateways at selected sites. CEFMS processes financial and other data at two data processing centers. Each Corps site maintains its own database and provides its financial data input to one of the two processing centers. Corps users enter data and update financial transactions in CEFMS via workstations at the various organizational elements. Our objective was to evaluate the design and test the effectiveness of selected general and application controls over CEFMS. Our work included assessing (1) the corrective actions taken by the Corps to address the weaknesses that we identified during our fiscal year 1999 general and application control review of CEFMS; and (2) the effectiveness of the Corps' computer controls to help ensure the reliability, availability, and confidentiality of financial and sensitive data contained in CEFMS. We contracted with an independent public accounting firm, PricewaterhouseCoopers (PwC), LLP, to assist in the evaluation and testing of CEFMS computer controls. We determined the scope of our contractor's audit work, monitored its progress, attended key meetings between PwC and Corps personnel, and reviewed the related working papers. PwC used our Federal Information System Controls Audit Manual (FISCAM) to guide the general controls testing. This testing included four of the six FISCAM general control areas: (1) access controls, (2) application software development and change control, (3) systems software, and (4) segregation of duties. PwC used a proprietary methodology tailored to CEFMS to evaluate and test application controls over selected CEFMS modules. The Army Audit Agency evaluated the two remaining FISCAM areas: entitywide security management and service continuity. Working with the Army Audit Agency for these two FISCAM areas, we analyzed DOD, Department of the Army, and Corps information assurance documents; interviewed key personnel to document responsibilities, actions, and plans for Corps-wide information security management, information technology, and operations management; and evaluated Corps security program elements against GAO, DOD, Army, and other federal criteria. The Army Audit Agency plans to issue a report on these two FISCAM areas in fiscal year 2002. Our fiscal year 2001 review also included a network vulnerability assessment of a critical path between two Corps network segments. During the course of our work, we communicated our findings to Corps officials, who informed us of the corrective actions they planned or had taken to address many of the weaknesses we identified. Our review was performed from January to October 2001 at the two Corps data processing centers; the Corps Finance Center; the CEFMS Development Center; and 3 of the 41 Corps districts. These districts were chosen because of the significance of their processing volumes. We also held interviews with Corps officials at the Corps Headquarters in Washington, D.C. Our work was performed in accordance with generally accepted government auditing standards. General controls--the structures, policies, and procedures that apply to an entity's overall computer operations--establish the environment in which application systems and controls operate. An effective general controls environment would (1) ensure that an adequate computer security management program is in place; (2) protect data, files, and programs from unauthorized access, modification, and destruction; (3) limit and monitor access to programs and files that protect applications and control computer hardware; (4) prevent unauthorized changes to systems and applications software; (5) prevent any one individual from controlling key aspects of computer-related operations; (6) ensure the recovery of computer processing operations in case of a disaster or other unexpected interruption; and (7) ensure that only authorized individuals can gain network access to sensitive and critical agency data. Of the 75 recommendations that we made on general controls in our fiscal year 1999 audit, the Corps had completed action on 41 and had partially completed or was implementing action plans to correct the remaining 34. Among the actions taken, the Corps had (for example) reconfigured its network, including implementing firewalls and deploying intrusion detection systems; deleted certain unneeded/vulnerable services operating on CEFMS performed auditing on changes made to the CEFMS access control enforced monitoring of system log files on the CEFMS servers; formalized Corps policies and procedures for making and documenting CEFMS changes and for obtaining approvals on user acceptance tests resulting from software changes; and updated job descriptions at data centers to better address the concept of segregation of duties. Although the Corps made substantial progress in correcting vulnerabilities, continuing and newly identified vulnerabilities in general computer controls continue to impair the Corps' ability to ensure the reliability, confidentiality, and availability of financial and sensitive data. In addition to the results of our review, Corps records indicate that from October 2000 through June 2001 vulnerabilities in Corps systems resulted in several serious compromises. The numbers in table 1 reflect open recommendations on general controls, including both recommendations remaining from our fiscal year 1999 review and additional recommendations arising from our fiscal year 2001 review. The foundation of an entity's security control structure is an entitywide program for security management, which should establish a framework for continually (1) assessing risk, (2) developing and implementing effective security procedures, and (3) monitoring and evaluating the effectiveness of security procedures. A well-designed entitywide security management program helps to ensure that security controls are adequate, properly implemented, and applied consistently across the entity and that responsibilities are clearly understood. In our May 1998 best practices guide on information security management at leading nonfederal organizations, we reported that leading organizations successfully managed their information security risks through an ongoing cycle of risk management activities. As we discussed in our fiscal year 1999 report, an underlying cause for the Corps' computer control weaknesses was that it did not yet have an effective security management program. The lack of an effective security management program increases the risk that computer control weaknesses could exist and not be detected promptly so that losses or disruptions could be prevented. For fiscal year 1999, the Army Audit Agency identified four weaknesses in the Corps' security management program and issued five recommendations to address the weaknesses. The Army Audit Agency reported that key elements of an entitywide security program were needed, including a more comprehensive program definition in an entitywide security plan, updated network accreditation and risk assessments, and complete and documented background investigations. Also, the Army Audit Agency reported that other key elements were immature, including assignment of security responsibilities, a formal incident response team, computer security training, and security policy assessment and compliance verification. Since our fiscal year 1999 audit, the Corps has taken several steps to define and develop an agencywide security program. It has established a central focal point for information assurance at Corps Headquarters, consisting of an information assurance program manager and staff reporting to the Architecture Branch of Information Technology Services under the chief information officer. The staff includes a coordinator for Corps security accreditation activities. A 5-year budget has been developed for Corps-wide investments in information security technologies and services, and several agencywide information assurance initiatives are planned, including public key infrastructure, risk assessment, and automated system vulnerability updates. The Corps has appointed information assurance managers and officers throughout its functional units and assigned them responsibility for implementing the Army's security regulations. It has also identified training requirements for these and other positions. In addition, the Corps has established processes for notification and reporting on DOD's information assurance vulnerability alerts and has begun updating system security accreditations under DOD's Defense Information Technology Security Certification and Accreditation Program. These elements are necessary to meet federal guidance and DOD and Army requirements for protection of automated information systems. Although the Corps has identified and addressed some near-term security priorities, it has not yet developed a comprehensive management program to ensure that its information security policies and practices are fully defined, consistent, and continuously effective across all systems, facilities, and organizational levels. Specifically, the Corps has not yet developed a comprehensive information assurance program plan that ensures appropriate security posture and adequate security resources for all systems, facilities, and programs, and supports agency-level monitoring of progress toward security objectives; information security policy, plans, and procedures are incomplete in areas such as risk assessment, cyber incident management, and personnel security, and limited guidance has been provided to functional units for implementing policy and plans; current mechanisms for identifying system vulnerabilities and ensuring appropriate corrective actions are limited, and as a result, systems remain vulnerable to inappropriate access, inadequate physical security, and users with incomplete and missing background investigations; processes for monitoring and evaluating security measures throughout the Corps (such as command staff inspections, vulnerability assessments, and reviews of the effectiveness of corrective actions taken) have not been sufficiently frequent or rigorous to be fully effective in identifying security policy violations, system vulnerabilities, and weaknesses in operational controls; and an agencywide incident response capability has not been fully implemented in areas such as centralized incident tracking, follow-up, and evidence controls. The Army Audit Agency plans to issue a report in fiscal year 2002 providing additional discussion on these weaknesses. Access controls should be designed to limit or detect unauthorized access to computer programs, data, equipment, and facilities, so that these resources are protected from unauthorized modification, disclosure, loss, or impairment. Such controls include both logical access controls and physical security controls. Logical access controls involve the protection of data supporting critical operations from unauthorized access. Organizations can protect these data by requiring users to input unique user identifications, passwords, or other identifiers that are linked to predetermined access privileges and by providing a log of security events. Logical access controls prevent unauthorized user access to computing resources and restrict the access of legitimate users to the specific systems, programs, and files they need to conduct their work. Physical security controls include surveillance personnel and equipment, locks, guards, ID badges, alarms, and similar measures that limit access to the buildings and rooms where computer facilities and resources are housed, thus helping to safeguard them from intentional or unintentional loss or impairment. A key weakness in Corps' controls was that it had not appropriately limited user access. Although the Corps developed a security audit script to assist database administrators (DBAs) in identifying security practices that are inconsistent with user management principles, we found instances of inappropriate user access and weaknesses in user management, including those described below. Weak password management. Sensitive CEFMS administrative-level accounts had passwords that could be easily guessed, which could allow unauthorized access to CEFMS data. Inadequate management of user IDs. CEFMS users were assigned sensitive administrative-level privileges that either could not be justified by the DBAs or were not needed to perform the users' job functions. As a result, the risk is increased that CEFMS data could be compromised without detection. Inappropriate access privileges. All CEFMS users, regardless of their job functions, had access privileges to certain tables on their local databases that allowed them to make changes to CEFMS data outside the CEFMS application. As a result, the risk is increased that CEFMS users could make inappropriate changes to CEFMS data. Command line access. CEFMS users continued to have the ability to log in directly to the operating system, giving users the ability to execute many commands that are not necessary to access CEFMS, as well as the opportunity to take advantage of vulnerable programs, files, and directories. Further, since user commands were not audited, there was no method to identify whether users were attempting to issue unauthorized commands. Inadequate monitoring of audit logs. Audit logs were not used to detect and monitor security violations, thereby increasing the risk that violations could occur undetected. Informal procedures for access requests. Access request procedures for privileged or dial-in access to the CEFMS servers were not adequately enforced, thereby increasing the risk that employees without a legitimate or authorized need could gain such access. Weak passwords on Corps dial-in servers. Corps dial-in modems at one site (non-CEFMS) contained easily guessed usernames and passwords. Such access places Corps network assets at risk. Lack of monitoring of Web server activity. The Corps was not monitoring CEFMS Web server activity or reviewing and analyzing log files, thereby increasing the risk that attempted intrusion or potential degradation of service could go unnoticed. To protect the overall integrity and reliability of information systems, it is essential to control access to and modifications of system software. System software controls, which limit and monitor access to the powerful programs and sensitive files associated with computer operations, are important in providing reasonable assurance that access controls are not compromised and that the operating system will not be impaired. To protect system software, a standard computer control practice is to (1) configure system software to protect against security vulnerabilities, (2) periodically review sensitive software to identify potential security weaknesses, and (3) ensure that only authorized and fully tested system software is placed in operation. While the Corps had corrected many of the system software weaknesses that we identified in our fiscal year 1999 audit, we identified other weaknesses where the Corps was not adequately controlling system software. These weaknesses included the following. Unencrypted usernames and passwords over the network. Corps usernames and passwords continued to be sent unencrypted over the network. Consequently, an individual with physical access to a site's local network could capture usernames and passwords and then use that information to gain unauthorized access to the database. The attacker might also be able to use this information to gain additional privileges on the local network. Ineffective authentication controls over Corps servers. Corps servers continued to allow unauthenticated connections, thereby increasing the risk that an attacker could gather information to gain further access to the system or that other DOD networks could be attacked via the Corps' network. Lack of formal test plans and procedures for validating operating system upgrades. The Corps had no formal test plans and procedures to ensure system integrity after operating system software upgrades were performed, thereby increasing the risk that some processing functions might not operate properly after a system upgrade. Controls over the design, development, and modification of application software help to ensure that all programs and program modifications are properly authorized, tested, and approved before they are placed in operation and that access to and distribution of programs are carefully controlled. These controls also help prevent security features from being inadvertently or deliberately turned off, audit logs from being modified, and processing irregularities or malicious code from being introduced. Changes to application software programs were not adequately documented or controlled. Described below are some examples of the application change control weaknesses that we identified. Lack of documented test plans and results. The Corps did not formally document test plans and test results for CEFMS software changes, increasing the risk that developers might unknowingly introduce processing anomalies or make unauthorized changes. Informal Web server change management. At one data processing center, a Web server change management program was not documented or formalized, nor did the center have a lead Web administrator to coordinate changes. Also, the other data processing center did not have a current change control program for its Web server. Without a strong change management process, unauthorized changes could be made to the Web server application. Demonstration files on production Web servers. CEFMS production Web servers contained vendor demonstration files with known vulnerabilities that are easily exploitable, increasing the risk that an attacker could gain unauthorized access to CEFMS. A key control for safeguarding programs and data is to ensure that staff duties and responsibilities for authorizing, processing, recording, and reviewing data, as well as for initiating, modifying, migrating, and testing programs, are separated to reduce the risk that errors or fraud will occur and go undetected. Incompatible duties that should be segregated include application and system programming, production control, database administration, computer operations, and data security. Once policies and job descriptions supporting the principles of segregation of duties have been developed, it is important to ensure that adequate supervision is provided and adequate access controls are in place to ensure that employees perform only compatible functions. Although computer duties were generally properly segregated, we identified instances where controls did not enforce segregation of duties principles, as in the following examples. Lack of reviews and training regarding segregation of duties concepts. We found that training at the data processing centers did not address segregation of duties principles. If employees are not properly trained in segregation of duties principles, managers may find it difficult to hold employees accountable if they perform incompatible duties. Also, the data processing centers had not performed reviews to determine whether incompatible duties were appropriately segregated. Without periodically reviewing individuals' roles and responsibilities, management cannot be assured that appropriate segregation of duties is being maintained. They may also find it difficult to hold employees accountable for using their access privileges to carry out inappropriate activity. Development staff given access to production systems. CEFMS developers had inappropriate access to the CEFMS production databases. We identified several instances in which developers had excessive privileges. Allowing application development staff access to the production environment increases the likelihood that unauthorized changes could be made to the production environment. An organization's ability to accomplish its mission can be significantly affected if it loses the ability to process, retrieve, and protect information that is maintained electronically. For this reason, organizations should have established (1) procedures for protecting information resources and minimizing the risk of unplanned interruptions and (2) plans for recovering critical operations should interruptions occur. A contingency and disaster recovery plan specifies backup operations, emergency response, and postdisaster recovery procedures to ensure the availability of critical resources and facilitate the continuity of operations in an emergency. Such a plan addresses how an organization will deal with a full range of contingencies, from electrical power failures to catastrophic events such as earthquakes, floods, and fires. The plan also identifies essential business functions and ranks resources in order of criticality. To be most effective, a contingency plan should be periodically tested in disaster simulation exercises, and employees should be trained in and familiar with its use. For fiscal year 1999, the Army Audit Agency identified three control weaknesses related to service continuity and issued corresponding recommendations to address them. The agency reported that the continuity of operations plan for the CEEIS was out of date, and that periodic testing would be needed to identify planning and training deficiencies. It also found that backup tape storage facilities were too close to primary operations centers. Since the fiscal year 1999 audit, the Directorate of Corporate Information has assumed responsibility for development of service continuity plans for agencywide information systems. A program plan has been drafted for analyzing, defining, and coordinating continuity of operations for the CEEIS. In addition, the Corps is gathering information from functional units to develop a continuity of operations plan that would address the roles of CEFMS and CEEIS in headquarters emergency operations and disaster recovery. Nevertheless, the weaknesses noted from 1999 in the continuity plans and activities of Corps functional units remained unresolved. The Corps still lacks an overall continuity of operations plan for the CEEIS, and plans for its major processing centers were not yet developed or were incomplete and did not meet federal guidance. Furthermore, the draft program plan to establish a CEEIS continuity of operations plan did not identify the full set of activities required for effective management of this program or establish milestones and performance measures based on recognized federal directives and best practices. The Corps thus lacks effective mechanisms to track the CEEIS service continuity improvement efforts and ensure establishment of integrated plans. In addition, new weaknesses indicated that the Corps had not effectively managed this area of federal requirements across its functional units. CEFMS obtained interim approval to operate under the Corps' system certification and accreditation process, without detailing the central role of CEEIS in CEFMS service continuity. The Corps' Office of Internal Review found that at least 10 facilities that depend on CEEIS and CEFMS lacked continuity plans for their operations, and 10 more had outdated plans. For example, the Corps did not meet its schedule for obtaining Headquarters service continuity planning information from functional units such as the Directorate of Corporate Information, and it had not yet taken follow-up actions to address this delay to its program. Persistent weaknesses in service continuity testing are related to inadequacies in continuity of operations plans. No service continuity testing has been conducted for the CEEIS network or for CEFMS, which both lack viable continuity of operations plans. In addition, some existing continuity of operations plans for facilities that rely on CEEIS and CEFMS had not been tested, and no training programs were in place, to ensure that plans could be reliably executed. Finally, the Army Audit Agency's fiscal year 1999 recommendation to relocate the CEEIS backup storage centers farther away from primary facilities had not been addressed. Corps officials told us, and these weaknesses confirm, that the Corps lacks a strong focal point for continuity of Corps business operations. Such a focal point is needed to provide agencywide guidance, coordination, integration, and oversight for CEFMS and CEEIS service continuity and disaster recovery planning and preparation. Agencywide management is required to ensure that individual site plans will operate effectively together and to verify that the Corps' response to disruptions will be adequate to support its mission. The Army Audit Agency plans to issue a report in fiscal year 2002 providing further discussion on these weaknesses. Network security controls are key to ensuring that only authorized individuals can gain access to sensitive and critical agency data. These controls include a variety of tools, such as user IDs and passwords, that are intended to authenticate and allow authorized users access to the network. In addition, network controls should provide for safeguards to ensure that system software is configured to prevent users from bypassing network access controls or causing network failures. During our review, we performed preannounced network vulnerability testing, during which we were able to gain access to the Corps' internal network and perform some probing of Corps systems. The access obtained allowed us to map the network, but it did not allow us to gain access to any of the CEFMS production systems. The Corps' intrusion detection team detected our activity and blocked this access once we employed more intrusive techniques. Our review identified network security weaknesses that could allow unauthorized access to Corps systems; these weaknesses included the following: Weak logical access controls at the Finance Center. Logical access controls were not adequately implemented to prevent or detect unauthorized individuals with physical access to the facility from gathering sensitive information, such as user IDs and passwords. Extensive "trust" relationships. The Corps has established trust relationships between network segments to conduct Corps business (CEFMS and non-CEFMS related); however, additional restrictions could be implemented to more effectively control access. Inadequate restrictions on internal network traffic. The Corps' security model does not employ the control capabilities of certain critical network components to restrict internal network traffic. Consequently, the risk is increased that users could potentially gain unauthorized access to Corps systems. Application controls relate directly to the individual computer programs that are used to perform transactions (such as recording journal entries in the general ledger). In an effective general controls environment, application controls help to ensure that transactions are valid, properly authorized, and completely and accurately processed and reported. Of the 18 recommendations that we made on application controls in our fiscal year 1999 audit, the Corps had completed action on 13 and had partially completed or was implementing action plans to correct 5. Among the actions taken, the Corps had (for example) required electronic signature on updates to the CEFMS access control changed the CEFMS database design to prevent the same user from paying, certifying, and authorizing certain disbursements and to prevent users from creating and certifying the same invoice for payment; and required weekly authorization of disbursing terminals by the Finance Center. Although the Corps made substantial progress in correcting vulnerabilities, continuing and newly identified vulnerabilities in application computer controls continue to impair the Corps' ability to ensure the reliability, confidentiality, and availability of financial and sensitive data. The numbers in table 2 reflect open recommendations on application controls, including both recommendations remaining from our fiscal year 1999 review and additional recommendations arising from our fiscal year 2001 review. Like general access controls, access controls for specific applications should be established to ensure that (1) only authorized transactions are entered into the application, (2) duties are properly segregated and individuals can be held accountable, and (3) modifications to user access permissions are authorized and audited. In some instances, proper authorization controls were not enforced, as in the following examples. User access permissions in CEFMS did not match authorized access request forms, thereby increasing the risk that a user could process CEFMS transactions that were not authorized or consistent with management's intent. Electronic signature header records were still not being routinely reviewed and analyzed to detect whether individuals were performing incompatible duties associated with critical transactions; this increased the risk that unauthorized transactions would go undetected. CEFMS development personnel had user IDs allowing them to generate invoices at other locations, thereby increasing the risk of inappropriate activity. User transactions processed on the disbursing terminals were not subject to postpayment audits. This situation increases the risk that a malicious user could input fraudulent transactions without detection. For an application system to produce reliable results, the data input to the system must be valid and accurate. Input controls include data validation and editing to identify and correct erroneous data, automatic reporting of erroneous data, and review and reconciliation of output. CEFMS user manuals pertaining to the work management module do not reflect current information, including up-to-date input controls. The Corps has determined the manual to be obsolete and is performing a functional review. Outdated manuals increase the risk that employees may follow input procedures that are inadequate or improper. To identify users associated with certain types of transactions, CEFMS uses an electronic signature system. The Corps requires the use of the electronic signature system for CEFMS transactions that lead to an obligation, collection, or disbursement of government funds. The electronic signature system consists of a smartcard, smartcard reader, cryptographic module, and central database containing all system user IDs. The electronic signature system was designed to provide assurance that a document signed by an authorized person has not been altered. This assurance relies on Corps policy, which assumes that the electronic signature smartcard has only been used by the individual to whom it was issued. We previously reported that the Corps had not adequately used CEFMS electronic signature capabilities to help ensure data integrity for certain transactions. For the 35 percent of CEFMS functions for which electronic signature verification is required, alterations of data would be detected during transaction processing. However, for some sensitive functions, use of the electronic signature system was not required, including some functions that were financial transactions (such as general ledger journal authority). Such "unsigned" records could be added, modified, or deleted without detection. The Corps had not reevaluated the CEFMS functions to determine whether other sensitive transactions should require electronic signature. During the fiscal year 2001 audit, several instances were identified of CEFMS users sharing their CEFMS electronic signature smartcards with other Corps employees. One critical requirement in implementing the electronic signature system was that each smartcard be under the sole control of an individual smartcard holder. However, according to tests performed by the Army Audit Agency at one Corps site, card sharing had occurred. As a result, authentication controls were not effective to provide reasonable assurance that users' electronic signatures are valid. Consequently, the Corps cannot ensure that its electronic signature system authenticates transactions and mitigates other computer control weaknesses identified in CEFMS. To help maintain the integrity and security of CEFMS, the Corps issued a memorandum on January 17, 2002, reinforcing the need to comply with Army and Corps policies that prohibit sharing of electronic signature cards and passwords. The Army Audit Agency is continuing to review the effectiveness of authentication controls over CEFMS electronic signature card users. The agency plans to issue a separate report to Corps management during fiscal year 2002. Information system general and application controls are critical to the Corps' ability to manage its computer security and to ensure the reliability, confidentiality, and availability of its financial and sensitive data. While the Corps has made substantial progress in resolving many of the fiscal year 1999 weaknesses that we identified and has taken other steps to improve security, continuing and newly identified weaknesses were identified in the Corps' information system control environment. Specifically, at the general controls level, the Corps had not adequately (1) limited user access; (2) developed adequate system software controls to protect programs and sensitive files; (3) documented software changes; (4) segregated incompatible duties; (5) addressed service continuity needs; and (6) secured network access. At the application control level, the Corps had not maintained current and accurate CEFMS access authorizations and maintained CEFMS current user manuals. The weaknesses that we identified at the two data processing centers and other sites placed the Corps' computer resources, programs, and files at risk from inappropriate disclosure of financial and sensitive data and programs, modification of data, misuse of or damage to computer resources, or disruption of critical operations. A primary reason for the Corps' information system control weaknesses was that it had not yet fully developed and implemented a comprehensive security management program. A comprehensive program for computer security management is essential for achieving an effective general and application controls environment. Effective implementation of such a program provides for (1) periodically assessing risks, (2) implementing effective controls for restricting access based on job requirements and actively reviewing access activities, (3) communicating the established policies and controls to those who are responsible for their implementation, and (4) evaluating the effectiveness of policies and controls to ensure that they remain appropriate and accomplish their intended purpose. In our March 15, 2002, "Limited Official Use Only" report, we recommended that you instruct the chief information officer and the deputy chief of staff for resource management to implement corrective actions to resolve the general and application computer control weaknesses that we identified in that report. In its report on the Corps' entitywide security management and service continuity, planned for fiscal year 2002, the Army Audit Agency plans to address recommendations in these areas. In providing written comments on a draft of this report, the commanding general of the U.S. Army Corps of Engineers agreed with our findings and recommendations and stated that the numerous working meetings concerning the information security weaknesses that we identified will help expedite their corrective actions. His comments are reprinted in appendix I of this report. The commanding general also stated that the Corps has already completed corrective action on 11 of the open fiscal year 1999 and the new fiscal year 2001 recommendations. The Corps has developed an action plan to correct all but 12 of the remaining recommendations by September 30, 2002, and stated that these 12 recommendations would be completed by fiscal year 2003 or beyond. We are sending copies of this report to the Senate Committee on Armed Services; the Senate Committee on Governmental Affairs; the Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, House Committee on Government Reform; the House Armed Services Committee; the under secretary of defense (comptroller/chief financial officer); the assistant secretary of defense (command, control, communications & intelligence); the deputy inspector general, Department of Defense; the assistant secretary of the army (financial management and comptroller); the director of information systems for command, control, communication, and computers; army auditor general; the deputy chief of staff operations and plans; the deputy chief of staff for intelligence; and the commander, U.S. Army Intelligence and Security Command. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions regarding this report, please contact me at (202) 512-3317. Key contributors to this assignment were Lon Chin, Barbara Collier, Edward M. Glagola, Jr., David Hayes, Harold Lewis, Paula Moore, Duc Ngo, Eugene Stevens, Crawford L. Thompson, and Jenniffer F. Wilson. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. 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GAO tested selected general and application controls of the Corps of Engineers Financial Management System (CEFMS). The Corps relies on CEFMS to perform key financial management functions supporting the Corps' military and civil works missions. The Corps has made substantial progress in improving computer controls at each of its data processing centers and other Corps sites. The Corps had completed action on 54 of GAO's 93 previous recommendations and partially completed or had action plans to correct the remainder. During the current review, nine new weaknesses were identified and corrected. Nevertheless, continuing and newly identified vulnerabilities involving general and application computer controls continue to impair the Corps' ability to ensure the reliability, confidentiality, and availability of financial and sensitive data. Such vulnerabilities increase risks to other Department of Defense networks and systems to which the Corps' network is linked. Weaknesses in general controls impaired the Corps' ability to ensure that (1) computer risks are adequately assessed, and security policies and procedures within the organization are effective and consistent with overall organizational policies and procedures; (2) users have only the access needed to perform their duties; (3) system software changes are properly documented before being placed in operation; (4) test plans and results for application changes are formally documented; (5) duties and responsibilities are adequately segregated; (6) critical applications are properly restored in the case of a disaster or interruption; and (7) the Corps has adequately protected its network from unauthorized traffic. Application control weaknesses impaired the Corps' ability to ensure that (1) current and accurate CEFMS access authorizations were maintained, (2) user manuals reflect the current CEFMS environment, and (3) the Corps is effectively using electronic signature capabilities.
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The extent of foodborne illness in the United States and its associated costs are significant. CDC estimates that unsafe foods cause as many as 76 million illnesses, 325,000 hospitalizations, and 5,000 deaths annually. In terms of medical costs and productivity losses, foodborne illnesses associated with seven major pathogens cost the nation between $7 billion and $37 billion annually, according to USDA's estimates. The National School Lunch Program and the School Breakfast Program share the goals of improving children's nutrition, increasing lower-income children's access to nutritious meals, and supporting the agricultural economy. The school lunch program is available in almost all public schools and in many private schools. About 70 percent of those schools also participate in the breakfast program. Schools participating in the school lunch or breakfast programs receive a per-meal federal cash reimbursement for all meals they serve to children, as long as the meals meet federal nutrition standards. In fiscal year 2001, school meal programs provided lunch, breakfast, and snacks to over 27 million school children daily. At the federal level, FNS administers the school meal programs. At the state level, the program is usually administered by state education agencies, which operate them through agreements with local school food authorities. Overall, USDA donates about 17 percent of the dollar value of food that goes on the table in school lunch programs through its Food Distribution Program. USDA purchases and distributes commodities to remove surpluses from the marketplace and to provide nutritious foods to the nation's children. Schools purchase the remaining 83 percent of the dollar value of food served using USDA's cash reimbursement and their own funds. In fiscal year 2001, the total cost of the school meal programs--including cash reimbursements to schools, USDA purchases of donated foods, and program administration--was nearly $8 billion. By far the largest component of the school meal programs is the school lunch program. In fiscal year 2001, the school lunch program cost about $5.7 billion. The procurement process for foods served in school lunch program differs depending on whether federal or state/local food authorities procure the foods (see figure 1). USDA's Agricultural Marketing Service (AMS) and Farm Service Agency (FSA) are responsible for procuring USDA-donated foods. The Agricultural Marketing Service purchases meat, poultry, fish, and fruits and vegetables for donation; the Farm Service Agency purchases grains, oils, peanut products, dairy products, and other foods. USDA contracts for the purchase of these products with manufacturers that are selected through a formally advertised competitive bidding process. FNS, through its Food Distribution Division, provides the donated foods to state agencies for distribution to schools. Schools then purchase the remainder of food for school meals independently using their own procurement practices, either purchasing foods directly from manufacturers or distributors, or contracting with food service management companies that procure the foods for them. USDA provides little guidance to promote safety in school food procurements. FNS' guidance to schools emphasizes safe food handling because, according to USDA officials, most cases of foodborne illness at schools are due to poor food storage, handling, and serving practices. Therefore, the priority is on guidance to ensure food safety through proper handling and preparation of foods at schools. For example, manuals are provided that address appropriate temperatures for reheating ready-to-eat foods and for hot-holding potentially hazardous foods. Similarly, FNS provides information on employee personal hygiene and how it relates to cross-contamination of foods. CDC's outbreak data shows an increase in the number of school-related outbreaks since 1990. Between 1990 and 1999 (the most recent year for which complete outbreak data is available from CDC), 292 school-related outbreaks were reported to CDC, averaging 17 outbreaks in the first 4 years of the decade, 28 in the next 4 years, and 57 in the final 2 years (see table 1). In total, approximately 16,000 individuals, mostly children, were affected. For those outbreaks with a known cause, the most commonly identified cause of the illnesses were foods contaminated with salmonella or Norwalk-like viruses. According to CDC officials, some unknown portion of the increase in reported outbreaks extends from CDC's transition from a completely passive surveillance data collection method to a more active surveillance methodology in early 1998. In effect, CDC went from accepting data from the states to actively soliciting states for more comprehensive information and having the states verify the information that they submit. As a result, states began to report more of all types of foodborne outbreaks, including school outbreaks, to CDC beginning in 1998. Moreover, CDC suggests that increased resources for outbreak investigations and greater awareness among the general public about foodborne disease might also account for the increased number of reported outbreaks. To evaluate the trend in the number of school outbreaks, and in their number relative to non-school outbreaks, we compared the observed numbers to the estimated numbers of school and non-school outbreaks.This analysis shows that there is an upward trend in foodborne illness outbreaks reported in schools between 1990 and 1999 and that not all of this increasing trend is attributable to changes that took place when CDC began a more active data collection effort. Outbreaks in the general population have increased by a comparable amount over the same period; therefore, there is no statistically significant difference between increased outbreaks in schools and increased outbreaks in general. As figure 2 shows, our analysis of CDC's data indicates that, even after adjusting for CDC's improved data collection, the number of school-related foodborne outbreaks increased, on average, about 10 percent per year between 1990 and 1999. We also analyzed trends in participation in the school meal programs over this same time period and found that the changes in school outbreaks reported did not simply mirror changes in the number of students participating in the school meal programs. While the number of reported school outbreaks doubled over the decade, and generally increased by an average of about 10 percent from one year to the next, the number of school lunch participants increased by only 12 percent over the entire decade, or by just over 1 percent per year. Thus, the increase in school outbreaks reported is not explained by the increase in children's participation in the school meal programs. One should exercise caution, however, when analyzing school outbreak data. CDC's data must be supplemented with more detailed state or local information to determine the extent of foodborne illness outbreaks actually associated with the school meal programs in any given year. We gathered additional state and local health department information for the 20 largest school outbreaks in CDC's database for 1998 and 1999, each of which resulted in 100 or more illnesses. We determined that 13 of the 20 outbreaks (65 percent) were associated with foods served in the school meal programs. Three of the 13 outbreaks were linked to tainted burritos that were distributed to schools nationwide and are thought to have caused approximately 1,700 illnesses. The other 7 outbreaks were not linked to foods served in the school meal programs, but with foods brought to schools from home or other sources. Therefore, data limitations make it difficult to assert with complete certainty to what extent the foods served in the school meal programs are the cause of the reported outbreaks from 1990 to 1999. USDA has, for the most part, been responsive to the two recommendations we made in our February 2000 report. First, we recommended that USDA develop a database to track the actions it takes to hold or recall donated foods when safety concerns arise regarding foods donated to the school meal programs. Second, we recommended that the agency revise its school food service manual to include guidance regarding food safety procurement contract provisions, which could be used by state and local school authorities. We made our first recommendation because, without comprehensive records of such safety actions, USDA had no reliable basis for identifying problematic foods or suppliers, or for documenting the agency's responsiveness to concerns over the safety of USDA-donated foods. In response to our February 2000 recommendation, USDA implemented its food safety action database in April 2000. The database identifies and tracks key hold and recall information starting in October 1998. As of April 2002, the database lists 11 food safety actions, including, for example, the recall of 114,000 pounds of chicken that was contaminated with listeria in February 2000. Because of the limited number of actions recorded thus far, USDA has not conducted any analysis of the information contained in the database, but plans to continue maintaining it for future use. We made our second recommendation because, although USDA has established procurement policies and procedures to ensure the safety of foods donated to schools, these policies and procedures do not apply to foods purchased independently by schools. For example, contracts for donated foods may specify pathogen testing for every lot of certain products that are highly susceptible to contamination, or may contain contract provisions that establish specific temperature requirements for chilled and frozen products during processing and storage at the plant, transportation between processing plants, upon shipment from the plant, and upon arrival at final destination. However, there is no requirement that state and local authorities include similar food safety provisions in their procurement contracts. According to USDA's regulations for schools participating in the school meal programs, the responsible school food authority may use its own procurement procedures, which reflect applicable state and local laws and regulations. Therefore, the extent to which schools address safety in their food procurement contracts may vary depending on state and local laws and procurement guidance that is available to them. To assist state and local authorities, we recommended that USDA provide them guidance on food safety provisions that could be included in their procurement contracts. USDA officials told us that they plan to address our recommendation by revising the school procurement guidance to include an example that addresses safety concerns. We believe, however, that USDA should include more information that would be useful to schools. Specifically, providing a list of the specific food safety provisions found in USDA- donated food contracts would help schools in preparing their own food procurement contracts. While USDA officials contend that local school districts have little negotiating power to require safety provisions because their purchases are mainly low-volume from commercial sources, USDA's own data indicates that in the 1996-1997 school year, the latest year for which this data was available, 37 percent of school food authorities participated in cooperative arrangements that purchase in larger volume. Therefore, we believe that more detailed information on contract safety provisions could enhance the safety of foods purchased directly by schools. In particular, since local school authorities purchase 83 percent of the dollar value of school meals, it is important that they receive guidance from FNS on how best to achieve a comparable level of safety precautions through their procurement process. Based on limited work conducted in preparation for this testimony, we offer two additional observations that, if validated by further study, may contribute to greater safety for school children at minimal cost. First, USDA's procurement officials told us that they have routine access to federal inspection and compliance records of potential suppliers and that they consider this information when they review bids before contracting. However, there is currently no established mechanism for state and local authorities in charge of purchasing food for schools to easily and routinely access such information. It may be desirable for USDA to consider whether it should provide state and local school officials with access to information collected through FDA's and USDA's inspections of school lunch food suppliers, potentially enabling them to make more informed purchasing decisions. USDA officials stated that this idea would have to be explored further to address potential legal impediments to such information sharing. FDA officials commented that this idea is worth considering. Second, FNS has developed a process for holding foods suspected of contamination that applies exclusively to food commodities that USDA purchases for donation to schools. The hold allows time for additional testing and inspection prior to asking for a recall of donated foods when safety concerns arise. Because FNS is the single common point of contact for all schools participating in the school meal programs, and because it does provide guidance to the schools on food nutrition and quality, an extension of FNS' hold and recall procedures to include non-donated (school-purchased) foods would seem logical. USDA officials agreed with this concept and indicated that they intend to share the hold and recall procedures with schools in fiscal year 2003. USDA and FDA have not developed any specific security provisions to help protect food served through the school meal programs from potential deliberate contamination. But, according to USDA and FDA officials, actions designed to enhance the security of the federal food safety system as a whole would also enhance the security of meals served at schools. As we testified in October 2001, however, recent events have raised the specter of bioterrorism as an emerging risk factor for our food safety system.. We further stated that under the current structure, there are questions about the system's ability to detect and quickly respond to any such event. Since our October 2001 testimony, both FDA and USDA have stated that they are better prepared to detect and respond to such an event. Both agencies are in the process of conducting risk assessments to determine where in the farm-to-table food continuum there is a critical need to provide additional resources. In addition, FDA staffing has already increased inspections of imported foods, added more inspections of domestic producers, and more laboratory testing of food products. Further, FDA has issued voluntary security guidelines to the sector of the food industry that it regulates on the need to (1) ensure physical security of processing and storage facilities, (2) ensure that chemical and biological agents that may be kept in their facilities or at in-house laboratories are under appropriate controls, and (3) verify the background of plant employees. Currently, the agency is receiving public comments and expects to revise the guidelines. USDA is also working on a similar set of guidelines that meat, poultry, and egg products processors could voluntarily adopt. Finally, agency officials told us that they have generally asked their field personnel to be on heightened alert for potential security concerns. We are initiating a review to determine how these guidelines are being implemented and how federal agencies plan to monitor their implementation. As we reported in February 2000, while no federal agency monitors the safety of school meals, USDA's Food Safety and Inspection Service (FSIS) and FDA are responsible for enforcing regulations that ensure the safety of the nation's food supply. FSIS is responsible for the safety of meat, poultry, and some eggs and egg products, while the FDA is responsible for all other foods, including fish, fruit, vegetables, milk, and grain products. However, as we stated most recently in our October 2001 testimony, the existing food safety system is a patchwork structure that hampers efforts to adequately address existing and emerging food safety risks whether those risks involve inadvertent or deliberate contamination. The food safety system is also affected by other overarching problems, such as the challenge of effectively coordinating the food safety activities of multiple agencies including coordinating multi-state outbreaks. For example, the current organizational and legal structure of our federal food safety system has given responsibility for specific food commodities to different agencies and provided them with significantly different regulatory authorities and responsibilities. As a result, we have inefficient use of resources and inconsistencies in oversight and enforcement. USDA and FDA oversee recalls when the foods they regulate are contaminated or adulterated. If a USDA-regulated company does not voluntarily conduct the recall, USDA can detain the product for up to 20 days. On the other hand, FDA, which currently does not have administrative detention authority for food under the Federal Food, Drug, and Cosmetic Act, must seek a court order to seize the food. Moreover, as we reported in August 2000, neither USDA nor FDA had provided guidance to industry on how to quickly initiate and carry out food recalls that involve potentially serious adverse health risk. We recommended that such guidelines instruct companies on time frames for quickly initiating and carrying out recalls, including procedures that expeditiously notify distribution chains and alert the public. USDA has revised its guidelines, and FDA is in the process of revising its guidance and expects to reissue the guidance in September 2002. Finally, Mr. Chairmen, in working on food safety issues over the past decade, we have reviewed USDA's and FDA's inspection systems and identified weaknesses in both. The agencies agreed with most of our recommendations and have either taken steps or are taking steps to improve inspections. We have also focused on specific products, many of which are included in school meals. For example, because of concerns about the risk of salmonella in eggs, we reviewed the adequacy of the federal system for ensuring egg safety. Our work shows that the current regulatory and organizational framework for egg safety makes it difficult to ensure that resources are directed to areas of highest risk. Similarly, we evaluated the seafood and shellfish safety program and determined that theses programs do not sufficiently protect consumers because of weaknesses in FDA's implementation of the new science-based inspection system. FDA agreed with most of our recommendations. We also reviewed USDA's oversight of meat and poultry products and concluded that, in order to better ensure safety, USDA needed to ensure that inspectors are properly trained on the new science-based system. USDA agreed with our recommendation and is providing enhanced training. In January 2002, our report on mad cow disease concluded that, although bovine spongiform encephalopathy (BSE) has not been found in the United States, federal actions do not sufficiently ensure that all BSE-infected animals or products are kept out of the country or that if BSE were found, it would be detected promptly and not spread. FDA, USDA, and Customs generally agreed with the report's recommendations.
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The national school lunch and breakfast programs provide inexpensive or free meals to more than 27 million children each day. During the 1990s, nearly 300 outbreaks of foodborne illness at the nation's schools sickened 16,000 students. The rise in the number of school outbreaks mirrors a rise in the number of outbreaks in the overall population, according to the Centers for Disease Control and Prevention (CDC). Because the CDC data include outbreaks attributable to food brought from home or other sources, GAO could not determine the extent to which food served in the school meal programs caused reported outbreaks. Data from 1998 and 1999 do show, however, that most of the outbreaks during those years were caused by foods served through the school meal program. Foods contaminated with salmonella and Norwalk-like viruses were the most common causes of outbreaks. GAO found that the Department of Agriculture has not developed security measures to protect foods served at schools from deliberate contamination. The existing food safety system is a patchwork of protections that fall short in addressing existing and emerging food safety threats.
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Mr. Chairman and Members of the Subcommittee: We are pleased to be here today to discuss the proposed creation of a new Federal Statistical Service, which would be formed by consolidating the Bureau of the Census and the Bureau of Economic Analysis (BEA) from the Department of Commerce and the Bureau of Labor Statistics (BLS) from the Department of Labor. H.R. 2521 would bring these agencies together into a new independent agency to be headed by an Administrator appointed by the President and confirmed by the Senate. Our testimony today applies five key principles that the Comptroller General has identified as useful for consideration in efforts to reorganize or streamline government agencies. These principles are: Reorganization demands a coordinated approach. Reorganization plans should be designed to achieve specific, identifiable goals. Once the goals are identified, the right vehicle or vehicles must be chosen for accomplishing them, including organizational structure and tools. Implementation is critical to the success of any reorganization. Oversight is needed to ensure effective implementation. In applying these principles to the proposed bill to create the Federal Statistical Service, we have drawn on our previous work on the statistical agencies (see appendix) as well as ongoing work requested by the Chairman of the House Committee on the Budget, who raised no objection to our discussing the preliminary results from this work on statistical agency funding, legal mandates, and the organization of the Canadian statistical system. Statistical activities are spread throughout the federal government. The mission of the agencies forming the federal statistical system is, in general, to collect, produce, and disseminate statistical information that is relevant to the needs of data users both within and outside the government itself. The agencies are to ensure that the information is accurate, reliable, and free from political interference and are to impose the least possible burden on individuals, businesses, and others responding to data collection requests. The Office of Management and Budget (OMB) has identified 72 agencies as comprising the federal statistical system. Its criterion in identifying these agencies was that each spend at least $500,000 annually on statistical activities. Together, these 72 agencies requested over $2.7 billion for fiscal year 1996. Of the 72 agencies, 11 are considered to be the principal statistical agencies. These 11 agencies, which include Census, BEA, and BLS, together spend approximately $1.1 billion. Census, BEA, and BLS accounted for $796.6 million of this total. Meeting the government's needs for information in an efficient manner is a complex undertaking that requires coordination among the different statistical agencies. H.R. 2521 takes note of this, finding that "improved coordination and planning among the statistical programs of the Government is necessary to strengthen and improve the quality and utility of federal statistics and to reduce duplication and waste in information collected for statistical purposes." The needs for statistical information for government decisionmaking and administration are extensive. Some of these needs are well known, such as the use of the Consumer Price Index (CPI) to adjust individual income tax brackets and Social Security payments to offset inflation or the use of Census data in formula grants to states and to apportion congressional and other legislative representation. There are many others. Work that we are doing at the request of the Chairman of the House Committee on the Budget has identified over 200 statutory references to uses of statistical information and reporting requirements relative to the 11 principal statistical agencies. it also would be useful if the bill were to more explicitly describe the relationship that Congress envisions between OMB and the proposed Federal Statistical Service, which would be the dominant statistical agency. It would also be instructive to consider whether the protections the bill contains to ensure that the new Service would be free from political interference might also complicate OMB's task of coordinating the federal statistical system. Coordination within the federal statistical system has also been limited by statutes that restrict data sharing among statistical agencies in order to protect the confidentiality of individuals, businesses, and organizations that provide data. Sharing data would allow statistical agencies to meet the needs of data users without imposing added burdens on data providers. We would expect that consolidating Census, BEA, and BLS is intended to enable these three agencies to share data more efficiently than they can today and to coordinate their data collection and analysis activities more effectively. However, H.R. 2521 does not specifically authorize the three agencies to share data or specify any revision to current confidentiality limitations. Nor does it authorize data sharing among or between the other 69 agencies in the rest of the federal statistical system. Without the explicit authority to share data, the three agencies may not be able to realize the coordinative benefits H.R. 2521 aims to achieve. As the Comptroller General has noted, the key to any successful reorganization plan--and the key to building a broad consensus supporting it--is the delineation of specific, identifiable goals the reorganization is intended to achieve. By designing the proposed consolidation with such goals in mind, there is a greater chance of a shared understanding among decisionmakers of what changes will be sought in a reorganization or consolidation. Focusing on these goals would then provide the Administrator of the proposed Federal Statistical Service with guidance on how to balance competing objectives, such as cutting costs or ensuring better quality of services, and how to create not only short-term advantages but sustained, long-term gains. Specific, identifiable goals will also help Congress and the President hold the new agency accountable for meeting them. enhancing the efficiency of operations, enhancing adherence to professional standards, establishing clear national priorities for statistical programs, and ensuring the quality of data. In a time of declining budgets, making government operations more efficient is a constant goal. Eliminating duplication of government operations through a consolidation presents opportunities for increasing such efficiency. Two potential sources of greater efficiency and cost savings are the avoidance of duplicative data collection by agencies and the use by one agency of another agency's staff to collect data when that use would be more economical. Our work has shown significant areas in which these three agencies have avoided duplication by relying on one another for data collection, on both a reimbursable and nonreimbursable basis. For example, Census now conducts the Consumer Expenditure Survey for BLS; data from this survey are used in developing the market baskets that underlie the Consumer Price Index. Thus, some of the savings that might be sought in a consolidation may have already been realized. However, the statistical agencies' inability to share data has led to a duplication in data collection efforts; such duplication can increase both the cost of operating the statistical activities and the burdens on data providers. While we do not know how much might be saved if these three agencies had a greater ability to share data, we have identified instances where duplication of effort exists between Census and the other agencies included in the proposed consolidation. For example, because of an inability to share data, both Census and BLS survey businesses, and each has had to compile its own list of businesses. rules or legal requirements, the guidelines are intended to be consistent with current laws and statistical theory and practice. Our review concluded that the agencies generally adhered to the guidelines, although in some cases individual agencies had not sufficiently communicated to data users the procedures that they had in place to ensure their independence from political interference. We also concluded that laws intended to protect confidentiality had limited agency efforts to coordinate their activities and share data, contrary to the committee's guidelines. Our work as well as work done by others has shown that the United States lacks an effective means for setting national priorities for the use of funds for statistical activities. This is due, in part, to the independent manner in which each agency in the federal statistical system decides how to use its funds and, in part, to the limits on OMB's ability to influence decisions on allocating funds by other agencies. The proposed bill should resolve this issue for the three agencies to be consolidated to the extent that the head of the proposed Service would be able to set priorities for the use of its funds. Although H.R. 2521 would create a Federal Council on Statistical Policy, the proposed bill does not directly address the issue of setting funding priorities for the other 69 federal statistical agencies. were funded, and the funding levels varied considerably among the different agencies producing economic statistics. Agency consolidation alone would not address the problems with the quality of data. Accordingly, the Subcommittee may want to include provisions in the bill to address these issues of quality, such as a requirement for an action plan for fixing them. In considering any change in the organizational structure of the federal statistical system, an important question is whether consolidation is the most effective way of ensuring that the system produces the high-quality statistical information needed by decisionmakers and that it does so in a cost-effective manner that avoids needlessly burdening individuals and businesses. At least four options, viewed independently or in some combination, seem conceivable for addressing problems associated with the federal statistical system. Understanding these options, we believe, will provide a conceptual framework useful for considering the merits of H.R. 2521. One option would be to consider alternatives to the dominant paradigm of having federal employees collect, analyze, and disseminate information through the use of appropriated funds. Alternatives include the privatization of at least some aspects of data collection, analysis, or dissemination; additional contracting out; or the imposition of user fees. We have not explored these alternatives for the federal statistical system and are, therefore, not in a position to elaborate on them. However, we believe that the Subcommittee should consider charging the proposed consolidated agency with exploring the best tools for accomplishing the goals desired from consolidation. resources, including staff, easily. OMB previously played a stronger role in setting priorities for use of statistical agency funding when it had more staff assigned to this function. A third option would be to consolidate the three major agencies as proposed in H.R. 2521. Potential advantages of such a consolidation seem to include better quality data through such means as the use of common data collection methods and more efficient survey designs; a better use of funds through clearer priorities; and cost savings and reduced burden on data providers through a greater sharing of data and agency resources, thereby avoiding duplication. Potential disadvantages could include the possible lessening of the responsiveness of the consolidated agencies to the needs of their current parent departments and their constituencies, the possibility of breaches of confidentiality by housing so much information about individuals and businesses in one agency, and the possible power such an agency might have, given its possession of so much information. A fourth option would be to consolidate more than the three agencies covered in H.R. 2521. In exploring this option, it might be helpful to consider models in other countries. Because Canada has long had a single statistical agency, Statistics Canada, it is often used as a reference point for considering proposed consolidations in the United States. We are currently preparing a report for the Chairman of the House Committee on the Budget that describes the Canadian statistical system. While this report is not yet complete and we did not evaluate the effectiveness of the Canadian system, we did identify several clear differences between the Canadian and the U.S. systems. The Canadian system is much more centralized, with Statistics Canada containing many of the activities currently divided among the 11 principal U.S. statistical agencies and being responsible for the majority of the government's statistical information. The head of Statistics Canada has a higher level position than that of the U.S. Chief Statistician, has direct control over the agency's budget, and can set and change priorities and shift resources easily. Statistics Canada also (1) has access to all of the government's administrative records, (2) can share survey and other data among its components and other government agencies and nongovernmental organizations, and (3) is subject to strict and uniform privacy requirements. According to Statistics Canada officials, these privacy requirements also help ensure a high voluntary response rate to data collection efforts. While Canada's centralized system may appear to offer several advantages over the U.S. system, several factors need to be considered as part of the comparison. These factors include the following: Canada's parliamentary system of government may lead to a clearer definition of government policy and priorities and the ensuing needs for statistical information than our system, which contains different branches of government sharing power. The United States is a much larger nation and has a larger and more complex economy than Canada. Canada, with a population of 29 million people, is also much smaller than the United States, which has a population of 264 million. The task facing the federal statistical system in the United States thus is larger and more complex than that facing Statistics Canada. For example, financial markets in the United States involve greater reliance on sophisticated financial products, such as futures and other derivatives, than their Canadian counterparts. The volume of transactions conducted in the United States using derivatives and similar financial products is difficult to measure for statistical purposes. The Canadian statistical system is much smaller than the U.S. system. For example, the fiscal year 1996 budget for Statistics Canada was about $210 (in U.S. dollars) million compared to the nearly $800 million combined budget for BEA, BLS, and Census; the approximately $1.1 billion budget for the 11 principal agencies; and the $2.7 billion budget for the entire federal statistical system. The Canadian public has accepted that a government agency will have broad access to all government records for statistical purposes. Statistics Canada officials attribute this acceptance to strong controls designed to ensure confidentiality of individual data and to the Canadian policy of identifying the intended uses of data to data providers. While similar confidentiality controls exist in the United States, proposals that would allow data sharing and broaden statistical agency access to other data have not been approved. reorganization. The problems that the new agencies experienced included delays in (1) obtaining the participation of key agency officials and adequate staffing and office space and (2) establishing support functions, such as accounting and payroll systems. In our 1981 report, we recommended that future reorganization plans establish a high-level task force or other mechanism to facilitate implementation of the reorganization. In particular, we said that agencies that would lose or gain resources or functions and support agencies, such as OMB, the General Services Administration, and the Office of Personnel Management, should be represented on the task force. In our view, reorganizing statistical agencies would impose similar requirements for successful implementation. Under the proposed bill, staff and responsibilities would be moved out of two cabinet departments and into a newly created Federal Statistical Service. This Service would need to provide the supporting systems, such as personnel, payroll, and accounting, required for continued operation of Census, BEA, and BLS functions. Requiring that the heads of these agencies, appropriate personnel from the Departments of Labor and Commerce, and representatives from OMB and other support agencies participate in planning the consolidation should increase the chances that the proposed reorganization would occur while minimizing disruption of the work of the consolidated agencies and their current parent departments. Similarly, we have frequently noted that government financial systems need to be strengthened to provide agency leadership with the timely and accurate information needed to control costs, measure performance, and achieve needed management improvements. In too many cases, however, weaknesses in these systems prevented the achievement of these goals. Again, ensuring that an effective and reliable financial system is in place should enhance the ability of the proposed Administrator of the Federal Statistical Service and other managers of the new agency to accomplish their missions. Such a system will be essential if the new Service is to be able to comply with standards established by the Government Performance and Results Act, the Government Management Reform Act, and the Chief Financial Officers Act. These three laws are intended to establish a framework for enhancing the management, performance, and operations of federal agencies. In this regard, the Subcommittee may wish to require that a Chief Financial Officer be appointed for the Federal Statistical Service. Finally, as part of planning for the implementation of the proposed consolidation, it would be important to identify the operating efficiencies and cost savings anticipated, the specific areas from which the savings are to be achieved, the specific steps that need to be taken to produce the desired savings, and the individuals responsible for achieving them. In our opinion, the likelihood of actually making operations more efficient and capturing savings is critically dependent on careful and comprehensive implementation planning. This planning must also take into account the resulting need for realignment of support functions at the Departments of Commerce and Labor. Such realignment could be significant. Census and BEA together account for 22 percent of the full-time equivalent staff of Commerce, and BLS accounts for nearly 15 percent of Labor's total staff. Sustained congressional oversight will be needed to ensure the effective implementation of the reorganization envisioned under H.R. 2521. Congress may need to realign its committee jurisdictions and budget account structure if it is to provide coherent direction to and consistent oversight of the new Federal Statistical Service. In earlier statements on principles for government reorganizations, we also have suggested that one key step would be for congressional committees of jurisdiction to hold comprehensive oversight hearings, annually or once during each Congress. In the case of the proposed Service, such hearings should examine performance information that the Service would be required to generate to comply with the Government Performance and Results Act. Such hearings should also examine the audited financial statements that are to be developed to comply with the Government Management Reform Act. Additional information from congressional support agencies including us; Inspector General reports; performance evaluations of the proposed Service's operations, which it would conduct; and expert assessments of its operations and the quality of its statistical products should be key components of such hearings. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or Members of the Subcommittee may have. Decennial Census: Fundamental Design Decisions Merit Congressional Attention (GAO/T-GGD-96-37, Oct. 25, 1995). Commerce Dismantlement: Observations on Proposed Implementation Mechanism (GAO/GGD-95-233, Sept, 6, 1995). Statistical Agencies: Adherence to Guidelines and Coordination of Budgets (GAO/GGD-95-65, Aug. 9, 1995) Government Reorganization: Observations on the Department of Commerce (GAO/T-GGD/RCED/AIMD-95-248, July 25, 1995) Economic Statistics: Status Report on the Economics Statistics Initiative (GAO/GGD-95-98, July 7, 1995). Government Reorganization: Issues and Principles (GAO/T-GGD/AIMD-95-166, May 17, 1995) Economic Statistics: Measurement Problems Can Affect the Budget and Economic Policymaking (GAO/GGD-95-99, May 2, 1995). Measuring U.S.-Canada Trade: Shifting Trade Winds May Threaten Recent Progress (GAO/GGD-94-4, Jan. 19, 1994) Bureau of the Census: Legislative Proposal to Share Address List Data Has Benefits and Risks (GAO/T-GGD-94-184, July 21, 1994) Decennial Census: Focused Action Needed Soon to Achieve Fundamental Breakthroughs (T-GAO-GGD-93-32, May 27, 1993) Gross Domestic Product: No Evidence of Manipulation in First Quarter 1991 Estimates (GAO/GGD-93-58, Mar. 10, 1993) Census Reform: Major Expansion in Use of Administrative Records for 2000 is Doubtful (T-GAO-92-54, June 26, 1992) Decennial Census: 1990 Results Show Need for Fundamental Reform (GAO/GGD-92-94, June 9, 1992) Formula Programs: Adjusted Census Data Would Redistribute Small Percentage of Funds to States (GAO/GGD-92-12, Nov. 7, 1991). 1990 Census: Reported Net Undercount Obscured Magnitude of Error (GAO/GGD-91-113, Aug. 22, 1991). Expanding the Role of Local Governments: An Important Element of Census Reform (GAO/T-GGD-91-46, June 15, 1991). 1990 Census Adjustment: Estimating Census Accuracy - A Complex Task (GAO/GGD-91-42, Mar. 11, 1991). The Decennial Census: Potential Risks to Data Quality Resulting From Budget Reductions and Cost Increases (GAO/T-GGD-90-30, Mar. 27, 1990). 1990 Census: Overview of Key Issues (GAO/GGD-89-77BR, July 3, 1989). Status of the Statistical Community After Sustaining Budget Reductions (GAO/IMTEC-84-17, July 18, 1984) The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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GAO discussed proposed legislation that would create a Federal Statistical Service by consolidating the Census Bureau, the Bureau of Economic Analysis (BEA), and the Bureau of Labor Statistics (BLS). GAO noted that: (1) any reorganization of these agencies should consider the principles of coordination, goal orientation, organization, implementation, and oversight; (2) coordination among statistical agencies is limited by statues that restrict data sharing, and the proposed legislation would not specifically remove those restrictions or restrictions affecting other statistical agencies; (3) goals to consider in establishing the new agency could include enhanced operational efficiency, adherence to professional standards, national priorities for statistical programs, and enhanced data quality; (4) alternatives for addressing problems in the federal statistical system include privatization, improving the current decentralized system by increasing data sharing, consolidating Census, BEA, and BLS, or consolidating additional federal statistical agencies; (5) while Canada's centralized statistics agency appears to offer advantages over the U.S. system, the United States is a much larger and more complex nation than Canada, the Canadian statistical system is much smaller, and the Canadian public has accepted that a government agency will have broad access to statistical information; (6) adequate planning will be necessary for successful implementation of a consolidated statistical agency; and (7) sustained congressional oversight will be required to ensure successful implementation of a consolidated agency.
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IRS has made a concerted effort to implement the Restructuring Act's taxpayer rights and protections mandates. Not surprisingly, given the magnitude of change required by these provisions, work remains in completing, and in some instances expanding on, current implementation efforts. To manage Restructuring Act implementation, IRS delegated lead responsibility for each of the provisions to the affected organizational unit and required those units to develop detailed implementation plans. For example, IRS assigned to its Collections unit the lead responsibility for implementing the 22 collection-related taxpayer protection provisions in title III of the act. Our review of each of these plans identified numerous action items, such as developing tax regulations, forms, instructions, and procedures, as well as milestones for completing the actions. According to IRS officials, although IRS has met all of the legal requirements of the provisions whose effective dates have passed, it is still in the process of completing several actions or implementation steps. For example, in order to meet the effective dates of some provisions, IRS issued temporary procedures until the final rulemaking could be completed. insufficient controls to establish accountability and control over assets. Accordingly, we made a number of recommendations to IRS regarding these problems and are awaiting a final response concerning its plans to implement the recommendations. In another instance, IRS has made changes to meet the Restructuring Act's mandate but does not have information necessary to determine whether the implementation steps have been sufficient. The act prohibits IRS from using enforcement statistics to impose or suggest production quotas or goals for any employee, or to evaluate an employee based on such enforcement quotas. IRS has taken a number of actions to implement this mandate, such as issuing a handbook on the appropriate use of performance measures and conducting agencywide training sessions. IRS has also taken action on our recommendations, such as by clarifying the requirements for IRS managers to certify that they have not used enforcement statistics inappropriately. In its spring 1999 survey, IRS found that about 7 percent of Collections employees and 9 percent of Examination employees reported that their supervisors had either discussed enforcement statistics with them or used statistics to evaluate their performance. Until it has more recent comparison data, IRS will not know if its actions were sufficient to fulfill the Restructuring Act's mandate. IRS has also experienced some difficulty in implementing the Restructuring Act. Two notable examples are the decline in enforcement actions, particularly liens, levies, and seizures and the backlog of "innocent spouse" cases. IRS' use of enforcement actions to collect delinquent taxes has declined significantly since passage of the act. Comparing pre-Restructuring Act data on IRS' use of liens, levies and seizures, with fiscal 1999 data shows that lien filings were down about 69 percent, levies down about 86 percent, and seizures down about 98 percent. Moreover, according to IRS, collections from delinquent taxpayers were down about $2 billion from fiscal year 1996 levels. fiscal year 1997, the last full year before passage of the Restructuring Act, about 42 percent of seizures resulted in the tax debt being fully resolved. In most cases, the debt was resolved when the taxpayers produced funds to fully pay their tax liabilities and have their assets returned. Prior to the seizures, the involved taxpayers had been unresponsive to other IRS collection efforts, including letters, phone calls, personal collection visits, and levies of bank accounts and wages. We concluded from these observations that there was little likelihood that the tax debts would have been paid without the seizure actions. At the conclusion of our seizure work in 1999, it was clear to us that neither IRS management officials nor front line employees believed that seizure authority was being used when appropriate. Front line employees expressed concerns about the lack of guidance on when to make seizures in light of Restructuring Act changes. Accordingly, we made recommendations aimed at (1) clarifying when seizures ought to be made, (2) preventing departures from process requirements established to protect taxpayer interests, and (3) delineating senior managers' responsibilities for ensuring that seizures are made when justified. Effective use of tax collection enforcement authority, such as seizing delinquents' property to resolve their tax debts, plays an important role in ensuring voluntary compliance---a practice dependent on taxpayers having confidence that their neighbors or competitors are complying with the tax law. A second example of IRS difficulty in implementing the Restructuring Act is related to "innocent spouse" cases. The Restructuring Act expanded innocent spouses' right to seek relief from tax liabilities assessed on jointly filed returns. IRS published forms and temporary guidance to implement this provision and has just recently issued permanent guidance on equitable relief provisions. However, as Commissioner Rossotti has acknowledged, IRS was administratively unprepared to deal with the volume of requests for relief because its data systems did not allow the separation of single tax liability for spouses into multiple liabilities. Thus, IRS established manual processes and controls to deal with the requests, a measure requiring about 330 additional staff. As of October 1999, of the 41,000 relief requests received, only about 12 percent had been processed to the point where at least a preliminary determination had been reached. IRS considers the remaining relief requests to be a significant backlog that will require an average of about 12 staff hours per case to resolve. Underlying the Commissioner's modernization strategy is the understanding that fulfilling the Restructuring Act's mandate to place greater emphasis on taxpayer rights and needs while ensuring compliance depends on two key factors. First, IRS must make material improvements in the processes and procedures through which it interacts with taxpayers and collects taxes due. Second, IRS must make efficiency improvements that will allow reallocation of its limited resources. Historically, however, IRS has not had much success designing and implementing these kinds of process changes. The Commissioner has argued, and we agree, that this difficulty is due in large part to systemic barriers in IRS' organization, management, and information systems. Accordingly, and in compliance with the Restructuring Act, the Commissioner has begun to implement a multifaceted modernization strategy, the first stages of which are designed to address these systemic barriers. Notwithstanding a reduction in the number of its field offices, IRS' organizational structure has not changed significantly in almost 50 years. Under this structure, authority for serving taxpayers and administering the tax code is decentralized to 33 districts and 10 service centers, with each of these geographic units organized along functional lines--such as collection, examination, and taxpayer service. This has resulted in convoluted lines of authority. In the collection area, for example, IRS has three separate kinds of organizations spread over all 43 operational units that use four separate computer systems to collect taxes from all types of taxpayers. This decentralized structure has also allowed disparity among districts in their compliance approaches and, as a result, inconsistent treatment of taxpayers. To illustrate, in our review of IRS' use of its seizure authority, we found that seizures were as much as 17 times more likely for delinquent individual taxpayers in some district offices than in others. Similar variations exist in other IRS programs as well. and tax issues. Through its new taxpayer-focused operating divisions, IRS is centralizing management of key functions and creating narrower scopes of responsibility. For example, IRS estimates that individual taxpayers account for 75 percent of all filers, yet only 17 percent of the tax code is ordinarily relevant to them. By creating a division devoted solely to individual taxpayers, IRS is creating a situation in which managers and employees in that division will be able to focus on compliance and service issues related to individual taxpayers and will need expertise in a much smaller body of tax law. Creating a simpler, more coherent organization and management structure is an important step, but it does not guarantee good management. IRS' managers, at all levels, need to be skilled in results-oriented management, including planning, performance measurement, and the use of performance data in decisionmaking. Without these skills, IRS cannot be assured that its employees and the agency as a whole are performing as expected with regard to both taxpayer rights and enforcement. Our work has shown that ensuring that IRS has the capacity it needs in this area will be a challenge. For example, in our recent work on IRS seizures, we found that IRS did not generate information sufficient for senior managers to use in monitoring the program. IRS did not have a fully developed capability to monitor the quality of seizure work in terms of the appropriateness of seizure decisionmaking or the conduct of asset management and sales activity. In addition, collection managers were not systematically provided with information on the type of problems experienced by taxpayers involved in a seizure or on the resolution of those problems. We concluded that IRS managers were not collecting the information needed to effectively oversee the program and made recommendations to improve oversight. Our point today, however, is that generating and using basic management information needs to be routine among IRS managers at all levels and across all taxpayer groups and functions. The organizational and management changes I've described, while significant, will not be sufficient to achieve IRS' mission. As an agency still dealing with the repercussions of a performance system that was, for many years, based on enforcement statistics, IRS well knows that performance measures can create powerful incentives to influence both organizational and individual behavior. Consequently, IRS needs to develop an integrated performance management system that aligns employee, program, and strategic performance measures and creates incentives for behavior supporting agency goals, including that of giving due recognition to taxpayers' rights and interests. Developing and implementing performance measures are difficult tasks for any organization, but especially for an organization like IRS that must ensure both quality taxpayer service and tax law compliance. At the operational level, IRS is measuring its progress toward these goals through customer satisfaction surveys and through the business results measures of quality and quantity. Mindful of concerns that the Service had focused on revenue production as an end in itself, IRS established what it believes are outcome-neutral quantity measures. For example, instead of measuring the revenue generated by compliance employees, IRS is generally monitoring the total number of cases closed, regardless of how those cases were closed. We have reported in the past that IRS employees' performance focused more on IRS' objectives of revenue production and efficiency than on taxpayer service. Guided by these concerns and the Restructuring Act's explicit prohibitions against using enforcement statistics to evaluate employees, IRS now recognizes that employees must have a clearer line of sight between their day-to-day activities, their resulting performance evaluations, and the agency's broader goals. IRS is still exploring several different approaches for revising its employee evaluation system to make the relationship between employee performance and agency performance more transparent. accessing comprehensive information about individual taxpayer accounts or summary data on groups of taxpayers. Without this type of data, IRS managers will continue to have a difficult time monitoring and managing program outcomes--including identifying taxpayer needs and evaluating the effectiveness of programs to meet those needs. In doing our work on small business compliance issues, for example, we found that IRS could not reliably provide data on the extent to which small businesses filed various required forms, when they made tax deposits, or the extent to which they were involved in a variety of enforcement processes. For years, IRS has struggled to modernize its information systems to support high quality taxpayer service and management information needs. In 1995, we made over a dozen recommendations to correct management and technical weaknesses that jeopardized the modernization process. In February 1998, we made additional recommendations to ensure, among other things, that IRS develops a complete systems architectural blueprint for modernizing its information systems. Subsequently, in fiscal years 1998 and 1999, Congress provided IRS funds for systems modernization and limited their obligation until certain conditions, similar to our recommendations, were met. While IRS has made progress in addressing our recommendations and complying with the legislative conditions, the Service has not yet fully implemented our recommendations. As a result, at the direction of the Senate and House appropriation subcommittees responsible for IRS' appropriation, we have continued to monitor and report on IRS' system modernization efforts. gains to allow IRS to better target its resources to promote compliance and taxpayer service. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you or other Members of the Committee may have. For future contacts regarding this testimony, please contact James R. White at 202-512-9110. Thomas M. Richards, Deborah Parker Junod, Charlie Daniel, and Ralph Block made key contributions to this testimony.
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Pursuant to a congressional request, GAO discussed the Internal Revenue Service's (IRS) progress in implementing the taxpayer rights and protection mandates of the IRS Restructuring and Reform Act of 1998 and IRS' ongoing efforts to modernize its organizational structure, performance management system, and information systems. GAO noted that: (1) IRS has embarked on a concerted effort to implement the taxpayer rights and protection provisions; (2) in some instances, implementation is not complete, and in some others, it is too early to tell if implementation is successful; (3) IRS has experienced difficulties in implementing some aspects of the mandates; (4) these difficulties included determining when enforced collection actions, such as the seizure of delinquent taxpayers' assets, are appropriate and dealing with requests for relief under the innocent spouse provisions; (5) to streamline its management structure and create a more taxpayer-focused organization, IRS is in the midst of instituting a major reorganization; (6) IRS' new organization structure is built around four operating units, each with end-to-end responsibility for serving a group of taxpayers with similar needs; (7) through its new taxpayer-focused divisions, IRS is centralizing management of key functions and creating narrower scopes of responsibility; (8) IRS needs to develop an integrated performance management system that aligns employee, program, and strategic performance measures and creates incentives for behavior supporting agency goals; (9) at the operating level, IRS is measuring its progress toward these goals through customer satisfaction surveys and through business results measures of quality and quantity; (10) IRS' system difficulties hinder, and will continue to hinder, efforts to better serve taxpayer segments; (11) IRS has dozens of discrete databases that are function specific and are designed to reflect transactions at different points in the life of a return or information report--from its receipt to disposition; (12) as a consequence, IRS does not have any easy means of accessing comprehensive information about individual taxpayer accounts or summary data on groups of taxpayers; (13) GAO made over a dozen recommendations to correct management and technical weaknesses that jeopardized IRS' information systems modernization process; (14) in fiscal years 1998 to 1999, Congress provided IRS funds for systems modernization and limited their obligation until certain conditions, similar to GAO's recommendations, were met; (15) while IRS made progress in addressing GAO's recommendations and complying with the legislative conditions, IRS has not yet fully implemented GAO's recommendations; and (16) GAO believes that IRS' ongoing efforts to modernize its organizational structure, performance management system, and information systems are heading the agency in the right direction.
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FRA enforces federal railroad safety statutes under a delegation of authority from the Secretary of Transportation. FRA's mission is to protect railroad employees and the public by ensuring the safe operation of freight and passenger trains. FRA has three major safety-related activities: (1) administering safety statutes, regulations, and programs, including the development and promulgation of standards and procedures, technical training, administration of postaccident and random testing of railroad employees, and management of rail-highway grade-crossing projects; (2) conducting research on railroad safety and national transportation policy; and (3) enforcing federal safety statutes, regulations, and standards by inspecting railroad track, equipment, signals, and railroad operating practices. FRA also enforces the provisions of the Hazardous Materials Transportation Act as it applies to rail. The Staggers Rail Act of 1980 prompted many changes in the composition and operations of the freight industry. The act provided the railroads with greater flexibility to negotiate freight rates and respond to market conditions. It established a federal policy that freight railroads would rely, where possible, on competition and the demand for services, rather than on regulation, to establish reasonable rates. As a result, the freight railroad industry has changed substantially over the past 20 years. Today's freight rail industry has fewer large railroads; hauls more tonnage over fewer miles of track; and employs fewer people, locomotives, and railcars. Specifically, Mergers and acquisitions have reduced the number of class I railroads from 88 in 1976 to 10 in 1998: Amtrak and 9 class I freight railroads--Burlington Northern and Santa Fe Railway Company; Consolidated Rail Corporation (Conrail), CSX Transportation; Grand Trunk Western Railroad, Inc.; Illinois Central Railroad Company; Kansas City Southern Railway Company; Norfolk Southern Corporation; Soo Line Railroad Company; and Union Pacific Railroad Company. The number of large railroads could decline further if the Surface Transportation Board approves the acquisition of Conrail by CSX Transportation and Norfolk Southern Corporation, and Canadian National Railway's purchase of Illinois Central Railroad. Class I freight railroads are carrying more tonnage over longer distances. In 1996, each train hauled an average of 2,912 tons, up from 1,954 tons in 1976, and the average length of the haul was 842 miles, up from 564 miles in 1976. Class I freight railroad employment declined by 62 percent between 1976 and 1996--from 483,000 to 182,000 employees--and is forecast to continue to decline over the next 10 years. Class I freight railroads have eliminated, abandoned, or sold 42 percent of their trackage between 1976 and 1996. According to FRA officials, the total rail network is projected to decline slightly each year. While deregulation and improvements in rail technology have facilitated operational and economic changes, the level of railroad safety has also changed over the past 20 years. In general, railroad safety has improved--railroad accident and fatality rates are down from their 1976 levels. As shown in figure 1, the number of train accidents declined from 10,248 in 1976 to 2,584 in 1996--a 75-percent reduction. While the number of accidents declined rapidly prior to 1987, progress continued at a slower rate from 1987 to 1996. During this time, class I freight railroads--which account for most of the industry's freight revenue and more than three-quarters of its train miles--had begun to use fewer people and equipment to haul more tonnage over fewer miles of track. The number of rail-related fatalities also declined during this period. As figure 2 shows, rail-related fatalities declined from 1,630 in 1976 to 1,039 in 1996--a 36-percent reduction. Nonetheless, this progress is tempered by the more than 1,000 deaths that occur each year on the nation's rail lines. Nine out of ten rail-related deaths are the result of either collisions between cars and trains at highway grade crossings or trespassers killed by trains while on railroad property. Beginning in 1993, FRA reassessed its safety program to leverage the agency's resources and establish a cooperative approach that focuses on results to improve railroad safety. With rail traffic expected to continue to grow, FRA anticipated the need for new approaches to enhance its site-specific inspections. As a result, FRA formalized this shift from inspection to collaboration with three initiatives. First, in 1994, FRA took the lead responsibility for coordinating the Department of Transportation's (DOT) multiagency plans to reduce fatalities at rail-highway crossings. Second, in 1995, FRA formally established a Safety Assurance and Compliance Program through which the agency would work cooperatively with railroad labor and management to identify and solve the root causes of systemic safety problems facing the railroads. Third, in 1996, FRA established the Railroad Safety Advisory Committee to develop recommendations for the agency's more complex or contentious rulemakings by seeking consensus among the affected parties. While 1996 data and preliminary data for 1997 show improvements in some key indicators, it is still to early to determine whether FRA's new approach will sustain a long-term decline in accidents and fatalities. About 94 percent of railroad fatalities occur as a result of either collisions between cars and trains at highway grade crossings or trespassers killed by trains while on railroad property. In 1994, FRA took the lead role in DOT's Rail-Highway Crossing Safety Action Plan--an effort targeting federal, state, and industry actions to improve rail-highway crossing safety and reduce fatalities among trespassers. To successfully implement the plan, FRA is working with other federal agencies, the states, and the railroads to strengthen education and research activities; enhance federal, state, and local enforcement efforts; and increase or preserve federal rail-highway crossing safety funds. In 1994, DOT established a 10-year goal of reducing the number of rail-highway grade-crossing accidents and fatalities by 50 percent. In 1996, the number of rail-related fatalities declined to 1,039--the lowest level in 10 years. (See fig. 2.) FRA attributed the improved statistics to its safety initiatives, including the rail-highway crossing program. Whether the plan contributed to the decline is uncertain: Past trends indicate the total number of railroad fatalities declined by 34 percent from 1976 to 1983 (from 1,630 to 1,073) but then fluctuated within a range of 1,036 and 1,324 deaths between 1983 and 1996. While preliminary data for 1997 show a continued downward trend for accidents, fatalities were projected to increase from 1,039 in 1996 to 1,048 in 1997. In 1994, FRA began the Safety Assurance and Compliance Program (SACP) with the Chicago and Northwestern Railroad and Southern Pacific Railroad. FRA initiated the program in response to a period of little decline in accident statistics, the belief that a continuation of existing approaches would not produce any further declines, and President Clinton's directive to federal regulatory agencies that their inspection and enforcement programs be designed to achieve results, not punishment. As of April 1998, FRA had conducted initial SACP meetings with senior management at 55 railroads and planned to initiate SACPs at approximately 12 additional smaller railroads by the end of fiscal year 1998. FRA does not plan to conduct SACP assessments of all of the more than 600 railroads in the United States. Instead, FRA inspectors are expected to look for systemic problems at smaller railroads through FRA's traditional site-specific inspections. FRA cites improvements in safety statistics since 1993 as evidence that SACP is improving safety throughout the nation's railroad system. From 1993 through 1996, rail-related fatalities declined by 19 percent, employee injuries declined by about 40 percent, and train accidents declined by 7 percent. However, accidents involving Union Pacific and CSX trains during 1997 have raised questions about the effectiveness of FRA's SACP. Despite FRA's intensive safety reviews of both of these railroads during 1995 and 1996, the railroads had 10 accidents and collisions in the summer of 1997 that resulted in eight deaths. In response, FRA sent teams of 75 to 80 inspectors to each railroad to document safety problems and ensure that the railroads had addressed problems found in earlier reviews. FRA found a number of safety deficiencies at both railroads and made several recommendations targeted to improving railroad operations. For example, FRA found that Union Pacific supervisors' workloads prevented them from effectively monitoring and evaluating their employees' performance and recommended that Union Pacific provide affected employees with additional training to ensure compliance with safety regulations; FRA's review of CSX revealed inadequate track maintenance and recommended that CSX evaluate its staffing levels and hire additional employees where needed. FRA plans to continue to monitor each railroad's progress. In March 1996, FRA established a Railroad Safety Advisory Committee consisting of representatives from railroad management, labor unions, and others to provide FRA with recommendations on important rail safety issues through a consensus-based process. According to FRA, it uses the Advisory Committee to obtain the views of those most affected by regulatory decisions, improve the quality of rules, reduce the time required to complete them, and reduce the likelihood of litigation after they are promulgated. However, the committee's participation supplements rather than eliminates required steps in the rulemaking process. Since the inception of the Advisory Committee, the FRA Administrator has referred 14 rulemaking tasks to it. (See app. I.) Several of the tasks referred to the committee concern complex or controversial matters that FRA had been working on for several years. For example, FRA had been working on the Locomotive Crashworthiness, Track Safety, Railroad Communication, and Freight Power Brake rules for 4 years before referring them to the Advisory Committee. In two cases, FRA had missed the statutorily mandated issuance date. FRA has not yet issued any final rules developed by the committee. The collaborative approach that FRA has adopted for obtaining voluntary compliance with railroad safety rules has shifted some of FRA's resources away from site-specific inspections, which have historically served as FRA's primary means of ensuring compliance with safety regulations. This shift is most evident in the 23-percent decline in the number of inspections conducted between 1994 and 1997. In addition, the agency's partnering or inspection efforts do not systematically address improving the workplace safety of railroad employees and ensuring that railroad bridges receive inspection oversight that is comparable to other railroad areas. FRA has chosen not to issue regulations addressing many workplace safety issues, although illnesses and injuries to railroad employees accounted for most of the 12,558 rail-related injuries and illnesses that occurred in 1996. In addition, FRA's 1995 decision not to promulgate bridge safety regulations requires FRA personnel to rely primarily on the railroads' voluntary correction of bridge safety problems. FRA's efforts to increase cooperation with the railroad industry add new responsibilities for its 270 inspectors. Nearly all inspectors participate in SACP by conducting formal discussions with labor, participating in senior management meetings, or focusing on SACP-related issues when conducting routine site-specific inspections. In addition, inspectors participate in the Advisory Committee's working groups and task forces. As a result of their additional responsibilities, FRA inspectors have been conducting fewer site-specific inspections. These inspections have served an important oversight function. After increasing slightly between 1985 and 1992, the number of inspections conducted by FRA began to decline in 1993 and declined further by 1997. The number of inspections conducted in 1997 (52,742) was 23 percent below the 68,715 inspections conducted in 1994. This lower number of inspections reflects the fact that a greater number of railroads have not received inspections, and inspectors conduct fewer reviews of the railroads' own inspection efforts. The number of rail-related injuries and illnesses has declined from 65,331 in 1976 to 12,558 in 1996. As figure 3 shows, most of these injuries and illnesses involved railroad employees. Preliminary data for 1997 show a continued decline, with rail-related injuries and illnesses decreasing to 11,540. Railroads must report injuries that require medical treatment or result in work restrictions and lost work days. Efforts to reduce injuries to workers must rely on the combined efforts of FRA and the Occupational Safety and Health Administration (OSHA). FRA generally oversees workplace safety issues intrinsic to railroad operations, while OSHA is responsible for issues that would be associated with any industrial workplace. However, FRA's and OSHA's presence on railroad property varies greatly. For example, in 1997, FRA conducted over 52,000 inspections of track, railroad equipment, and operating practices related to train operations. In contrast, OSHA inspectors normally visit railroad properties only in response to an employee or union complaint about working conditions or when investigating a workplace accident that resulted in the injury of three or more employees. FRA inspectors have no authority to cite railroads for workplace safety problems that fall under OSHA's jurisdiction. However, if FRA inspectors observe unsafe work practices, such as an employee welding without proper eye protection, they can point out the problem to railroad supervisory personnel for voluntary compliance. Labor representatives expressed concern that because of OSHA's limited resources, certain workplace safety and health issues are not adequately addressed under the split responsibility. FRA relies on the voluntary cooperation of the railroads, rather than regulations, to ensure the structural integrity of the nation's 100,700 railroad bridges. A 1995 FRA policy statement provides railroads with advisory guidelines to use in implementing their own bridge inspection programs. FRA expects its track inspectors to observe structural problems on bridges as they perform their routine inspections and seek cooperative resolutions with the railroad. FRA states that the railroads have generally taken corrective action in response to inspectors' observations. However, unlike safety problems with track, signals, or equipment, for which inspectors can cite defects or recommend violations, inspectors have no such discretion when dealing with potentially serious bridge problems. Their only recourse is to close the bridge if conditions present an imminent hazard of death or personal injury. FRA officials said that developing railroad bridge regulations will dilute the agency's capacity to address issues that the agency believes are more important. While railroad management agrees with FRA's policy that regulations are not needed, railroad labor officials disagree and note that bridge safety is equally as important as track safety, for which FRA has promulgated regulations. In our July 1997 report, we recommended that FRA use injury data collected under recently revised reporting requirements to consider developing regulations to address workplace safety and use appropriate mechanisms, including SACP, to ensure that findings of potential structural problems on bridges are properly addressed by the bridges' owners. In response, FRA agreed to issue new employee workplace rules when railroad operations are involved if the railroads' voluntary corrective measures are not effective. In addition, FRA concurred with our recommendation regarding structural bridge safety problems but said it will continue to pursue nonregulatory guidance and monitoring to ensure the safety and integrity of bridges. Mr. Chairman, this concludes my testimony. I would be happy to respond to any questions that you or Members of the Subcommittee may have. Rail Safety Enforcement and Review Act - 9/3/92 Rail Safety Enforcement and Review Act - 9/3/92FRA initiative, Regulatory Flexibility ActPetition to reconsider aspects of an existing rule Petition to develop a rule (Table notes on next page) 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 operational and safety trends in the rail industry over the past 20 years and how the Federal Railroad Administration (FRA) has revised its rail safety program to address these trends. GAO noted that: (1) the railroad industry has changed significantly since the Staggers Rail Act of 1980 made it federal policy that railroads would rely, where possible, on competition and the demand for services, rather than on regulation, to establish reasonable rates; (2) from 1976 to 1998, mergers and acquisitions have significantly reduced the number of class I freight railroads; (3) these larger railroads have cut costs, increased the tonnage their trains carry, downsized their workforces, and eliminated, sold, or abandoned thousands of miles of unprofitable or little-used track; (4) during this same period, overall railroad safety has improved; (5) reported accident and fatality rates are down 75 and 36 percent, respectively, from 1976 levels; (6) despite this progress, each year about 1,000 people die as a result of grade-crossing accidents and trespassing, at least 9,000 railroad employees are injured, and thousands of people are evacuated from their homes because of hazardous materials released during train accidents; (7) FRA instituted an important shift in its safety program in 1993 to address safety problems in the rail industry; (8) rather than continuing to use violations and civil penalties as the primary means to obtain compliance with railroad safety regulations, FRA decided to emphasize cooperative partnerships with other federal agencies, railroad management, labor unions, and the states; (9) the partnering efforts generally focus on the nation's larger railroads and have resulted in FRA inspectors' conducting fewer site-specific inspections of the railroad industry overall; (10) while 1996 and preliminary 1997 data, the latest data available, show improvements in safety, it is too early to determine if FRA's new approach will sustain a long-term decline in accidents and fatalities; and (11) in addition, FRA's new partnering efforts do not systematically respond to concerns about the level of workplace injuries for railroad employees and about the safety of railroad bridges.
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When the United States and its coalition allies invaded Iraq on March 17, 2003, and the Iraqi government no longer functioned, many areas experienced widespread looting and the breakdown of public services, such as electricity and water in the cities. U.S. and coalition forces were then confronted with the challenges of restoring public order and infrastructure even before combat operations ceased. Given the extensive looting, as we reported in 2005, DOD could not assume that facilities and items within the facilities would remain intact or in place for later collection without being secured. Many facilities, such as abandoned government research facilities and industrial complexes, were no longer under the control of the former regime and had been looted. For example, hundreds of tons of explosive materials that had been documented by the International Atomic Energy Agency prior to March 2003 at the Al Qa Qaa explosives and munitions facility in Iraq were lost after April 9, 2003, through the theft and looting of the unsecured installations. We also reported that regarding radiological sources in Iraq, DOD was not ready to collect and secure radiological sources when the war began in March 2003 and for about 6 months thereafter. According to knowledgeable DOD officials, field unit reports, lessons learned reports, and intelligence information, U.S. and coalition forces were unable to adequately secure conventional munitions storage sites in Iraq, resulting in widespread looting of munitions. These sources indicated that U.S. and coalition forces were overwhelmed by the number and size of conventional munitions storage sites, and DOD had insufficient troop levels to secure these sites because of prewar planning priorities and certain assumptions that proved to be invalid. Despite war plan and intelligence estimates of large quantities of munitions in Iraq, knowledgeable DOD officials reported that DOD did not plan for or set up a program to centrally manage and destroy enemy munitions until August 2003, well after the completion of major combat operations in May 2003. The costs of not securing these conventional munitions storage sites have been high, as looted explosives and ammunition from these sites have been used to construct IEDs that have killed and maimed people. Furthermore, estimates indicate such munitions are likely to continue to support terrorist attacks in the region. U.S. forces were overwhelmed by the number and size of conventional munitions storage sites in Iraq and they did not adequately secure these sites during and immediately after the conclusion of major combat operations, according to senior-level military officials, field unit reports, lessons learned reports, and intelligence reports. Pre-OIF estimates of Iraq's conventional munitions varied significantly with the higher estimate being five times greater than the lower estimate. The commander of CENTCOM testified before the U.S. Senate Committee on Appropriations on September 24, 2003, that "there is more ammunition in Iraq than any place I've ever been in my life, and it is all not securable." Furthermore, the sites remained vulnerable from April 2003 through the time of our review. For example, an assessment conducted from April 2003 through June 2003 indicated that most military garrisons associated with Iraq's former republican guard had been extensively looted and vandalized after the military campaign phase of OIF ended. It concluded that the most prized areas for looting were the depots or storage areas. The assessment further concluded that the thorough nature of the looting and the seemingly targeted concentration on storage areas suggested that much of the looting in the areas assessed was conducted by organized elements that were likely aided or spearheaded by Iraqi military personnel. Moreover, in early 2004, 401 Iraqi sites--including fixed garrisons, field sites, and ammunition production facilities--were reviewed to assess their vulnerability and the likelihood that anticoalition forces were obtaining munitions from those sites. Of the 401 sites, a small number of sites were considered highly vulnerable because of the large quantity of munitions, inadequate security, and a high level of looting. The majority of the sites were assessed as having low vulnerability--not because they had been secured, but because they had been abandoned or totally looted. The review considered virtually all the sites to be partially secured at best and concluded that U.S. and coalition troops were able to guard only a very small percentage of the sites. DOD senior-level officials and lessons learned reports stated that U.S. forces did not have sufficient troop levels to provide adequate security for conventional munitions storage sites in Iraq because of OIF planning priorities and certain assumptions that proved to be invalid. According to DOD officials, ground commanders had two top priorities during major combat operations that were set forth in the February 2003 OIF war plan. First, to overthrow the regime, DOD planned for and successfully executed a rapid march on Baghdad that relied on surprise and speed rather than massive troop buildup, such as was used in 1991 during the first Gulf War. This rapid march to Baghdad successfully resulted in the removal of the regime. Another critical planning priority was finding and securing the regime's stockpiles of WMD, which the administration believed were a threat to coalition forces and other countries in the region. The OIF war plan assumed that there was a high probability that the regime would use WMD against U.S. and coalition forces in a final effort to survive when those forces reached Baghdad. As a result, a CENTCOM planner for OIF stated that ground commanders had to prioritize limited available resources against the volume of tasks, both stated and implied, contained in the war plan. Several critical planning assumptions upon which the February 2003 OIF war plan was based also contributed to the number of U.S. troops being insufficient for the mission of securing conventional munitions storage sites, including the following: The Iraqi regular army would "capitulate and provide security." The OIF war plan assumed that large numbers of Iraqi military and security forces would opt for unit capitulation over individual surrender or desertion. As stated in the OIF war plan, the U.S. Commander, CENTCOM, intended to preserve, as much as possible, the Iraqi military to maintain internal security and protect Iraq's borders during and after major combat operations. According to a study prepared by the Center for Army Lessons Learned, this assumption was central to the decision to limit the amount of combat power deployed to Iraq. On May 23, 2003, the Coalition Provisional Authority dissolved the Iraqi Army, which the CENTCOM commander assumed would provide internal security. Iraqi resistance was unlikely. Although the OIF war plan laid out the probability of several courses of action that the regime might take in response to an invasion, the plan did not consider the possibility of protracted, organized Iraqi resistance to U.S. and coalition forces after the conclusion of major combat operations. As a result, DOD officials stated that the regime's conventional munitions storage sites were not considered a significant risk. Postwar Iraq would not be a U.S. military responsibility. The OIF war planning, according to a Joint Forces Command lessons learned report, was based on the assumption that the bulk of the Iraqi government would remain in place after major combat operations and therefore civil functions, including rebuilding and humanitarian assistance, could be shifted from military forces to U.S. and international organizations and, ultimately, the Iraqis, within about 18 months after the end of major combat operations. Therefore, DOD initially did not plan for an extended occupation of the country or the level of troops that would be needed to secure conventional munitions storage sites in particular or the country in general. Joint assessments further showed that OIF planning assumptions contributed to security challenges in Iraq. According to a 2006 report by the Joint Center for Operational Analysis, OIF planning did not examine the consequences of those assumptions proving wrong, further contributing to insufficient force levels to prevent the breakdown of civil order in Iraq. The Joint Staff strategic-level lessons learned report also discussed the effect inaccurate planning assumptions had on force levels. According to this report, overemphasis on planning assumptions that could not be validated prior to critical decision points resulted in a force structure plan that did not consider several missions requiring troops, such as providing security for enemy conventional munitions storage sites. Despite prewar intelligence assessments of large amounts of conventional munitions, knowledgeable DOD officials stated that DOD did not set up a central office until July 2003 or set up a program to centrally manage and destroy Iraqi munitions until after August 2003. These steps were taken well after major combat operations were completed in May 2003, because the department did not perceive conventional munitions storage sites as a threat. The central office was initially set up to address operational problems found during an assessment of nine Iraqi sites. This assessment found that DOD lacked priorities for securing the sites and uniform procedures and practices for securing and disposing of munitions. It also uncovered serious safety problems in the handling, transportation, storage, and disposal of munitions. In August 2003, the Engineering and Support Center awarded contracts for the Coalition Munitions Clearance Program, and the first demolition of munitions under the program was conducted in September 2003. The program's initial goals were to destroy the stockpiles at six depots and to have all enemy ammunition outside the depots destroyed or transported to the depots. The program also was tasked with assisting in the establishment, management, and transfer of depots to the new Iraqi army. According to the Engineering and Support Center, the program has received more than $1 billion and has destroyed or secured more than 324,000 tons of munitions. This number, combined with military disposal operations, has accounted for more than 417,000 tons of munitions, leaving an unknown amount of conventional munitions in the hands of resistance groups or unsecured. This unknown amount could range significantly, from thousands to millions of tons of unaccounted conventional munitions. According to Multi-National Coalition-Iraq officials, unsecured conventional munitions from the former regime continue to pose a risk to U.S. forces and others. For example, some conventional munitions storage sites in remote locations have not been assessed recently to verify whether they pose any residual risk. These officials also stated that smaller caches of weapons, munitions, and equipment as well as remaining unexploded ordnance, scattered across Iraq, represent a more pressing and continuing risk. These officials said that the coalition is working to reduce this risk by searching for and finding a growing number of caches, but it will be some time before it can clean up all the munitions in Iraq. The extent of the threat from smaller caches, however, is difficult to quantify because the location or amount of munitions hidden or scattered around the country is unknown. As reported by DOD and key government agencies, the human, strategic, and financial costs of not securing conventional munitions storage sites have been high. Estimates indicate that the weapons and explosives looted from unsecured conventional munitions storage sites will likely continue to support terrorist attacks throughout the region. Government agencies also have assessed that looted munitions are being used in the construction of IEDs. IEDs have proven to be an effective tactic because they are inexpensive, relatively simple to employ, deadly, anonymous, and have great strategic value. To illustrate, the Congressional Research Service reported in 2005 that IEDs caused about half of all U.S. combat fatalities and casualties in Iraq and are killing hundreds of Iraqis. Moreover, Multinational Forces in Iraq reported that the attacks against the coalition and its Iraqi partners continued to increase through July 2006, representing at least 40 percent of all attacks on coalition forces. While DOD has taken many actions in response to OIF lessons learned, we found that to date DOD has not taken action to incorporate the security of an adversary's conventional munitions storage sites as a strategic planning and priority-setting consideration during planning for future operations. A critical OIF lesson learned is that unsecured conventional munitions storage sites can be an asymmetric threat to U.S. forces, as illustrated by intelligence assessments that show one potential adversary, for example, also has considerable munitions stockpiles that would require a sizable occupying force to secure or destroy. Despite the strategic implications regarding unsecured conventional munitions storage sites, our analysis shows that securing those sites generally is not explicitly addressed in military policy and guidance, particularly at the joint level. We reviewed 17 DOD publications--which Joint Staff officials told us were relevant to our review--to determine the extent to which each of those publications contained guidance on the security of conventional munitions storage sites. A list of these publications can be found in our March 2007 report. In reviewing these documents, we found little evidence of guidance regarding conventional munitions storage site security. Although several publications addressed defeating IEDs during an insurgency after major combat operations have ended or provided tactical-level guidance on how to dispose of explosive hazards, including munitions, or make those hazards safe, none explicitly addressed the security of conventional munitions storage sites during or after major combat operations as a tactical, operational, or strategic risk. Because of DOD's understandable focus on current operations, the department's actions in response to OIF lessons learned generally have emphasized countering the use of IEDs by an insurgency or terrorists during posthostility operations. The specific actions DOD has taken are discussed in our report. These actions are good first steps toward broadening DOD's focus beyond the ongoing tactical and operational counter-IED efforts used against Saddam loyalists, rejectionists, or external terrorist groups in Iraq to planning and executing strategic counter-IED campaigns for future operations. However, the actions do not directly address the strategic importance of securing conventional munitions storage sites during major combat operations so that they do not become the source of materials for making IEDs during an occupation or become used for other forms of armed resistance. Based on our work, a critical OIF lesson learned is that unsecured conventional munitions storage sites can represent an asymmetric threat to U.S. forces during future operations. Furthermore, other potential adversaries are also learning lessons from the United States' experiences in Iraq and will likely use asymmetric warfare against U.S. invading forces. We believe these potential adversaries will likely develop military doctrine to avoid direct military confrontation with the United States if possible and try to undermine the United States' political commitment with unconventional warfare. Therefore, the number, size, and geographic separation of an adversary's munitions storage sites could pose a significant security challenge during an occupying force's follow-on operations. A large amount of munitions in such an adversary's country could require an occupying force to dedicate significant manpower to secure or destroy the contents of the major munitions storage sites. Furthermore, the remnants of an adversary's forces, insurgents, or terrorists could draw from any large conventional munitions storage network left unsecured by an occupying force. In our report, we concluded that a fundamental gap existed between the OIF war plan assumptions and the experiences of U.S. and coalition forces in Iraq, contributing to insufficient troops being on the ground to prevent widespread looting of conventional munitions storage sites and resulting in looted munitions being a continuing asymmetric threat to U.S. and coalition forces. The human, strategic, and financial costs of this failure to provide sufficient troops have been high, with IEDs made with looted munitions causing about half of all U.S. combat fatalities and casualties in Iraq and killing hundreds of Iraqis and contributing to increasing instability, challenging U.S. strategic goals in Iraq. Further, DOD does not appear to have conducted a theaterwide survey and assessed the risk associated with unsecured conventional munitions storage sites to U.S. forces and others. Such a survey and assessment combined with associated risk mitigation strategies--such as providing more troops or other security measures--could assist DOD in conserving lives and in meeting its strategic goal to leave a stable nation behind when U.S. forces ultimately leave Iraq. We recommended that the Joint Chief of Staff conduct a theaterwide survey and risk assessment regarding unsecured conventional munitions in Iraq and report ensuing risk mitigation strategies and the results of those strategies to Congress. We also concluded that in preparing for future operations DOD's actions in response to OIF lessons learned primarily have focused on countering IEDs and not on the security of conventional munitions storage sites as a strategic planning and priority-setting consideration for future operations. Although good first steps, these actions do not address what we believe is a critical OIF lesson learned, the strategic importance of securing conventional munitions storage sites during and after major combat operations. Unsecured conventional munitions storage sites can represent an asymmetric threat to U.S. forces that would require significant manpower or other resources during and after major combat operations to secure. Therefore, since joint doctrine is to present fundamental principles as well as contemporary lessons that guide the employment of forces, we believe that it is important that DOD clearly and explicitly address the security of conventional munitions storage sites in revisions to joint doctrine. Therefore we recommended that the Joint Chiefs of Staff incorporate conventional munitions storage site security as a strategic planning factor into all levels of planning policy and guidance, including joint doctrine, instructions, manuals, and other directives. DOD partially concurred with our first recommendation that the department conduct a theaterwide survey and risk assessment regarding unsecured conventional munitions in Iraq. DOD stated that while it is imperative that a complete and thorough assessment of conventional munitions storage sites be conducted, military commanders in theater are aware of the significant risk posed by the sites, and similar studies and assessments have been conducted over the past 3 years. DOD also stated that from a manpower perspective, an in-depth, theaterwide survey is not feasible without significantly degrading ongoing efforts in Iraq and the region. As the evidence in our report clearly supports, we made this recommendation because we did not see any evidence of a strategic-level survey or an effective, theaterwide risk mitigation strategy to address the commanders' awareness of this significant risk or the findings of the studies and assessments regarding security of conventional munitions storage sites. Accordingly, the intent behind our recommendation is to have DOD assess the risks associated with unsecured conventional munitions sites on a strategic, theaterwide basis to develop an effective risk mitigation strategy. DOD partially concurred with our second recommendation that the department report ensuing risk mitigation strategies and the results of those strategies to Congress. In commenting on this recommendation, DOD stated that risk mitigation is doctrinally sound; however, the department and Joint Staff recommend that these briefings to Congress remain at the strategic level. In making this recommendation, it was not our intention to detract tactical units from the current warfighting mission or to suggest congressional oversight is needed for each tactical unit. Instead, we are recommending that DOD alert Congress of its assessment and the actions being taken to mitigate the strategic risk associated with unsecured conventional munitions in Iraq. DOD partially concurred with our third recommendation that the department incorporate the security of conventional munitions storage sites as a strategic planning factor into all levels of planning policy and guidance and stated that the Joint Staff will incorporate the appropriate language in joint doctrine, manuals, and instructions. DOD stated that (1) Iraq is a separate case and should not be considered the standard for all future operations and (2) war plans must reflect proper prioritization based on desired operational effects and resources available as it may not always be possible or desirable in a resource- and time-constrained environment to secure all sites or destroy all munitions. We agree with these statements. The purpose of this report was not to suggest that Iraq be the standard for all future conflicts or to restrict commanders' planning prerogatives. Instead, the report suggests that as DOD incorporates OIF lessons learned into joint doctrine, it includes what is a key OIF lesson learned--an adversary's stockpile of conventional munitions can be an asymmetric threat to U.S. forces. Mr. Chairman and members of the subcommittee, this concludes my prepared remarks. I would be happy to answer any questions you may have. For questions about this statement, please contact Davi D'Agostino at (202) 512-5431. Other individuals making key contributions to this statement include: Mike Kennedy, Assistant Director, Renee Brown, Donna Byers, John Van Schiak, and Nicole Volchko. 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 is releasing a report today on lessons learned concerning the need for security over conventional munitions storage sites which provides the basis for this testimony. Following the invasion of Iraq in March 2003--known as Operation Iraqi Freedom (OIF)--concerns were raised about how the Department of Defense (DOD) secured Iraqi conventional munitions storage sites during and after major combat operations. This testimony addresses (1) the security provided by U.S. forces over Iraqi conventional munitions storage sites and (2) DOD actions to mitigate risks associated with an adversary's conventional munitions storage sites for future operations on the basis of OIF lessons learned. To address these objectives, GAO reviewed OIF war plans, joint doctrine and policy, intelligence reports, and interviewed senior-level DOD officials. The overwhelming size and number of conventional munitions storage sites in Iraq combined with certain prewar planning assumptions that proved to be invalid, resulted in U.S. forces not adequately securing these sites and widespread looting, according to field unit, lessons learned, and intelligence reports. Pre-OIF estimates of Iraq's conventional munitions varied significantly, with the higher estimate being 5 times greater than the lower estimate. Conventional munitions storage sites were looted after major combat operations and some remained vulnerable as of October 2006. According to lessons learned reports and senior-level DOD officials, the widespread looting occurred because DOD had insufficient troop levels to secure conventional munitions storage sites due to several OIF planning priorities and assumptions. DOD's OIF planning priorities included quickly taking Baghdad on a surprise basis rather than using an overwhelming force. The plan also assumed that the regular Iraqi army units would "capitulate and provide internal security." According to an Army lessons learned study, this assumption was central to the decision to limit the amount of combat power deployed to Iraq. GAO analysis showed that the war plan did not document risk mitigation strategies in case assumptions were proven wrong. Furthermore, DOD did not have a centrally managed program for the disposition of enemy munitions until August 2003, after widespread looting had already occurred. According to officials from Multi-National Coalition-Iraq, unsecured conventional munitions continue to pose a threat to U.S. forces and others. Not securing these conventional munitions storage sites has been costly, as government reports indicated that looted munitions are being used to make improvised explosive devices (IED) that have killed or maimed many people, and will likely continue to support terrorist attacks in the region. As of October 2006, the Multi-National Coalition-Iraq stated that some remote sites have not been revisited to verify if they pose any residual risk nor have they been physically secured. DOD has taken many actions in response to OIF lessons learned, however, DOD has given little focus to mitigating the risks to U.S. forces posed by an adversary's conventional munitions storage sites in future operations planning. DOD's actions generally have emphasized countering the use of IEDs by resistance groups during post-hostility operations. GAO concludes that U.S. forces will face increased risk from this emerging asymmetric threat when an adversary uses unconventional means to counter U.S. military strengths. For example, potential adversaries are estimated to have a significant amount of munitions that would require significant manpower to secure or destroy. GAO concludes that this situation shows both that Iraqi stockpiles of munitions may not be an anomaly and that information on the amount and location of an adversary's munitions can represent a strategic planning consideration for future operations. However, without joint guidance, DOD cannot ensure that OIF lessons learned about the security of an adversary's conventional munitions storage sites will be integrated into future operations planning and execution.
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As we described in our July 2014 testimony, the federal Marketplace approved subsidized coverage for 11 of 12 fictitious applicants who initially applied online or by telephone. For the 11 approved applications, we paid the required premiums to put health-insurance policies into force. We obtained the advance premium tax credit (APTC) in all cases, totaling about $2,500 monthly or about $30,000 annually for all 11 applicants. After receiving these premium subsidies, our 11 fictitious applicants paid premiums at a total annual rate of about $12,000. We also obtained eligibility for cost-sharing reduction (CSR) subsidies. The APTC and CSR subsidies are not paid directly to enrolled consumers; instead, the federal government pays them to issuers of health-care policies on consumers' behalf. However, they represent a benefit to consumers--and a cost to the government--by reducing out-of-pocket costs for medical coverage. To receive advance payment of the premium tax credit, applicants agree they will file a tax return for the coverage year, and must indicate they understand that the premium tax credits paid in advance are subject to reconciliation on their federal tax return. According to CMS, the purpose of identity proofing is to prevent someone from creating an account and applying for health coverage based on someone else's identity and without their knowledge. Although intended to counter such identity theft involving others, identity proofing thus also serves as an enrollment control for those applying online. only the applicant is believed likely to know. If an applicant's identity cannot be verified online, applicants are directed to call the credit reporting agency for assistance.cannot verify identity, applicants are typically told to contact the federal Marketplace or their state-based exchange, credit-reporting agency officials told us. If the credit reporting agency then We subsequently were able to obtain coverage for all six of these applications that we began online by completing them by phone. By following instructions to make telephone contact with the Marketplace, we circumvented the initial identity-proofing control that had stopped our online applications. When we later asked CMS officials about this difference between online and telephone applications, they told us that unlike with online applications, the Marketplace allows phone applications to be made on the basis of verbal attestations by applicants, given under penalty of perjury, who are directed to provide supporting documentation. For our 6 phone applications, we successfully completed the application process, with the exception of one applicant who declined to provide a After being Social Security number and was not allowed to proceed.approved for coverage, we received enrollment material from insurers for each of our 11 successful fictitious applicants. Appendix I summarizes outcomes for all 12 of our phone and online applications. The Marketplace is required to seek postapproval documentation in the case of certain application "inconsistencies." Inconsistencies occur in instances in which information an applicant has provided does not match information contained in data sources that the Marketplace uses for eligibility verification at time of application, or such information is not available. For example, an applicant might state income at a particular amount, but his or her federal tax return lists a different amount, or the applicant has no tax return on file. Likewise, the applicant may provide a Social Security number, but it does not match information on file with the SSA. If there is such an application inconsistency, the Marketplace is to determine eligibility using attestations of the applicant, and ensure that subsidies are provided on behalf of the applicant, if he or she is eligible to receive them, while the inconsistency is being resolved using "back-end" controls. Thus, the Marketplace was required to approve eligibility to enroll in health-care coverage and to receive subsidies for each of our 11 fictitious applicants while the inconsistencies were being addressed. At the time of our July 2014 testimony, we had begun to receive notifications from the Marketplace on the outcomes of our fictitious document submissions. As discussed later in this statement, we continued to receive additional notices about our applicants through 2014 and into 2015. According to CMS officials, the federal Marketplace makes eligibility determinations. Private insurers, also called "issuers," provide coverage. applicant may be affected by something, and then leaving it to the applicant to parse through details to see if they were indeed affected. Inaccurate guidance. The Marketplace directed 8 of our 11 successful applicants to submit additional documentation to prove citizenship and identity--but an accompanying list of suitable documents that could be sent in response consisted of items for proving income. Lack of Marketplace notice on document submissions. In five cases, we did not receive any indication on whether information sent in response to Marketplace directives was acceptable. As a result, we had to call the Marketplace to obtain status information. According to CMS, after documents are processed, consumers will receive a written notice. Lack of written notice. In one case, the Marketplace did not provide us with any written correspondence directing we submit additional documentation. The Marketplace only requested documentation for the initial enrollment during our phone application for coverage. According to the Marketplace, applicants are to receive written notice of documentation required. CMS officials told us they are working to improve communication with consumers, and will make improvements in consumer notices. According to the officials, they are soliciting feedback from consumer advocates, call-center representatives, and application assisters to improve such communications. According to the officials, CMS has already made significant improvements that include adding a complete list of acceptable documents to resolve citizenship and immigration status inconsistencies, and consolidating warning notices to include all inconsistency issues. CMS is currently working on further improvements in notices, including those for eligibility and instances of insufficient documentation, according to the officials. As part of our testing, and in response to Marketplace directives, we provided follow-up documentation, albeit fictitious. Overall, as shown in appendix II, we varied what we submitted by application--providing all, none, or only some of the material we were told to send--in order to test controls and note any differences in outcomes. Among the 11 applications for which we were directed to send documentation, we submitted all requested documentation for four applications, partial documentation for four applications, and no documentation for the remaining three applications. Although our documentation was fictitious, and in some cases we submitted none, or only some, of the documentation we were directed to send, we retained our coverage for all 11 applicants through the end of the 2014 coverage year. As described earlier, APTC subsidies our applicants received totaled about $30,000 annually, and further financial benefit would have been available through CSR subsidies if we had obtained qualifying medical services. Following our document submissions, the Marketplace told us, either in writing or in response to phone calls, that the required documentation for all our approved applicants had been received and was satisfactory. In one case, when we called the Marketplace to inquire about the status of our documentation submission--but where we had not actually submitted any documents--a representative told our applicant that documents had been reviewed and processed, and, "There is nothing else to do at this time." Figure 1 shows a portion of a call in which a Marketplace representative said our documentation was complete, even though we did not submit any documents. For one applicant, the Marketplace did subsequently state in a November 2014 letter that we would lose our subsidies, beginning in December 2014. However, there was no follow-up communication regarding the loss of our subsidies, and the subsidies were not terminated in December 2014. On the basis of applicant data we obtained from CMS, the Marketplace cleared inconsistencies for some of our 11 fictitious applications in instances where we submitted bogus documents.a summary of our document requests and submissions. We also noted instances where the Marketplace either did not accurately capture all inconsistencies, or resolved inconsistencies based on suspect documentation, including the following: Did not capture all inconsistencies. For 3 of the 11 applicants, while the Marketplace at the outset directed our applicants to provide documentation of citizenship/immigration status, the CMS applicant data we later received for these applicants do not reflect inconsistencies for the items initially identified. Disqualifying income. For 2 of the 11 applicants, we reported income substantially higher than the amount we initially stated on our applications, and at levels that should have disqualified our applications from receiving subsidies. However, according to the CMS data, the Marketplace resolved our income inconsistencies and, as noted, our APTC and CSR subsidies for both applicants continued. In addition to having fictitious documentation approved, two of our applicants also received notices in early 2015 acknowledging receipt of documents recently submitted, when we had not sent any such documents. We do not know why we received these notices. We found that the CMS document-processing contractor is not required to seek to detect fraud. It is only required to inspect for documents that have obviously been altered. According to contractor executives we spoke with, the contractor personnel involved in the document-verification process are not trained as fraud experts and do not perform antifraud duties. In particular, the executives told us, the contractor does not certify the authenticity of submitted documents, does not engage in fraud detection, and does not undertake investigative activities. In the contractor's standard operating procedures for its work for CMS, document-review workers are directed to "determine if the document image is legible and appears unaltered by visually inspecting it." Further, according to the contractor, it is not equipped to attempt to identify fraud, and does not have the means to judge whether documents submitted might be fraudulent. CMS officials told us there have been no cases of fraudulent applications or documentation referred to the U.S. Department of Justice or the HHS Office of Inspector General, because its document-processing contractor has not identified any fraud cases to CMS. However, as noted earlier, the contractor is not required to detect fraud, nor is it equipped to do so. According to the CMS officials, there has been "no indication of a meaningful level of fraud." According to CMS officials, it would not be practical to have applicants show original documents at time of application. With the HealthCare.gov website, the agency decided to move away from in-person authentication, in order to avoid burden on consumers, the officials told us. They also said in-person presentation of documentation is not possible in the current structure, as there are insufficient resources to establish a system to do so. Overall, according to CMS officials, the agency has limited ability to respond to attempts at fraud. They told us CMS must balance consumers' ability to "effectively and efficiently" select Marketplace coverage with "program-integrity concerns." CMS places a strong emphasis on program integrity and builds program integrity features into all aspects of implementation of the law, according to CMS officials. In any case, the CMS officials said the design of the program does not allow for direct consumer profit from fraud, because APTC and CSR subsidies are paid to policy issuers, not consumers. We note, however, that even so, the subsidies nevertheless can produce direct financial benefits to consumers. For example, if consumers elect to receive the premium tax credit in advance, that lowers the cost of monthly coverage. A consumer could also receive the advance premium tax credit and not file a federal tax return, as required to ensure proper treatment of the credit. Likewise, CSR subsidies mean smaller out-of-pocket expenses when obtaining medical services. Accordingly, although subsidies may be paid directly to issuers, they still result in a cost to the government and a benefit to enrollees. CMS officials told us the agency plans to conduct an assessment of the Marketplace's eligibility determination process, including the application process and the inconsistency resolution process. They did not provide a firm date for completion, saying the review would depend on obtaining IRS information for use as a reference. According to the applicant data we obtained from CMS, most of our applications had unresolved inconsistencies--indicating either that the Marketplace did not receive requested documentation or the documentation was not satisfactory. Specifically, as shown in appendix III, the CMS data indicate that, as of April 2015, 7 of our 11 applications had at least one inconsistency that remained unresolved. Because we did not disclose the specific identities of our fictitious applicants, CMS officials said they could not explain our findings on handling of inconsistencies for our applications. However, in general, they said our subsidized policies may have remained in effect during 2014 because CMS waived certain document filing requirements. Specifically, CMS directed its document contractor not to terminate policies or subsidies if an applicant submitted any documentation to the Marketplace. That is, if an applicant submitted at least one document, whether it resolved an inconsistency or not, that would be deemed sufficient so that the Marketplace would not terminate either the policy or subsidies of the applicant, even if other documentation had initially been required. For example, for one of our applicants, the Marketplace requested citizenship, income, and identity documents, but our applicant submitted only identity information. Under the CMS directive, the applicant's policy and subsidies continued through 2014 because our applicant submitted at least one document to the Marketplace, but not all documents required. Thus, in the case of our four applicants that submitted partial documentation to the Marketplace, we likely were relieved of the obligation for submitting all documents for the 2014 plan year. For the 2014 plan year, PPACA authorized CMS to extend the period for applicants to resolve inconsistencies unrelated to citizenship or lawful presence. Additionally, regulations state that CMS may extend the period for an applicant to resolve any type of inconsistency when the applicant demonstrates a "good faith effort" to submit documentation. CMS officials told us they relied upon these authorities to make a policy decision to broadly extend the period for resolving all types of inconsistencies in 2014. Under the policy, the officials told us, the submission of a single document served as evidence of a good faith effort by the applicant to resolve all inconsistencies, and therefore extended the resolution period through the end of 2014. As such, CMS did not terminate any applicant who "demonstrated a good faith effort" in 2014. The officials told us that CMS is enforcing the full submission requirement for 2015, and that any good-faith extensions granted in 2015 would be decided on a case-by-case basis and be limited in length. All consumers, regardless of whether they benefitted from the good-faith effort extension in 2014, will still be subject to deadlines for filing sufficient documentation, they said. In particular, according to the officials, those who made a good- faith effort by submitting documentation, but failed to clear their inconsistencies in 2014, were among the first terminations in 2015, which they said took place in February and early March. We are continuing to seek further information from CMS officials on their good-faith effort policy, as well as any 2015 terminations, as part of ongoing work. Although the good-faith effort policy could explain the handling of some of our applications, CMS officials could not provide a general explanation for the three applications for which we submitted no documentation but our subsidized coverage remained. However, based on our examination of applicant files at the CMS document contractor, this could be due to an error in the CMS enrollment system. Specifically, we found instances in which records we reviewed showed that applicants had not enrolled in a plan, when they actually had done so. Contractor officials told us that in such cases, they did not terminate the plans or subsidies because the applicants were shown as not enrolled. We plan to address this issue of tracking of inconsistencies in our ongoing work. Also included among the unresolved inconsistencies for our applicants were four for Social Security numbers. According to CMS officials, inconsistencies for Social Security numbers occur when an applicant's name, date of birth, and Social Security number cannot be validated in an automated check with SSA. The officials told us that systems capability has not allowed CMS's document contractor to make terminations for such inconsistencies. They also said the agency has done no analysis of the fiscal effect of not making such terminations. We plan to address this issue in ongoing work. In addition, CMS officials told us that although it checks applicants or enrollees against SSA's Death Master File, it currently does not have the systems capability to change coverage if a death is indicated. Instead, the officials told us, the Marketplace has established a self-reporting procedure for individuals to report a consumer's death in order to remove the consumer from coverage. The number of reported deaths from SSA is "very minimal," according to CMS officials. The coverage we obtained for our 11 fictitious applicants contained an automatic reenrollment feature--both insurers and the Marketplace notified us that if we took no action, we would automatically be enrolled in the new coverage year (2015). In all 11 of our cases, we took no action and our coverage was automatically reenrolled in January 2015. We continued to make premium payments, in order to demonstrate continuation of subsidized coverage, which meant continuing costs for the federal government. Appendix IV summarizes our automatic reenrollments. Although we obtained automatic reenrollments, we found communications from the Marketplace leading up to the end of 2014 to be contradictory or erroneous. Examples include the following: As noted earlier, our applicants were notified they would automatically be reenrolled for the new coverage year. But most of the applicants also received, to varying degrees, notices to reapply or to take some type of action. For example, we received notices stating: "Official Notice: Your 2015 application is ready," "Action Needed: Your 2015 health coverage," and "Follow these steps to re-enroll by December 15." The message and frequency of these notices could create uncertainty among applicants who believed they need not take any action to remain enrolled. In correspondence to our applicants, the Marketplace referred to things that could not have happened. In four cases in the latter part of 2014, Marketplace correspondence referred to the filing of federal tax returns of our applicants, even though our applicants never filed a tax return. In four cases, our enrollees received notices directing them to send additional information in order to continue coverage, saying they could lose coverage if they did not--but the deadline for submission was a date that had passed months earlier. For example, one enrollee received such a notice in December 2014, advising that coverage might be lost six months earlier, in June 2014. As mentioned previously, CMS officials told us they are working to improve communication with consumers, and will make improvements in consumer notices. Under PPACA, an applicant's filing of a federal income-tax return is a key element of back-end controls. When applicants apply for coverage, they report family size and the amount of projected income. Based, in part, on that information, the Marketplace will calculate the maximum allowable amount of advance premium tax credit. An applicant can then decide if he or she wants all, some, or none of the estimated credit paid in advance, in the form of payment to the applicant's insurer that reduces the applicant's monthly premium payment. If an applicant chooses to have all or some of his or her credit paid in advance, the applicant is required to "reconcile" on his or her federal tax return the amount of advance payments the government sent to the applicant's insurer on the applicant's behalf with the tax credit for which the applicant qualifies based on actual reported income and family size. To facilitate this reconciliation process, the Marketplace sends enrollees Form 1095-A, which reports, among other things, the amount of advance premium tax credit paid on behalf of the enrollee. This information is necessary for enrollees to complete their tax returns. The accuracy of information reported on this form, then, is important for determining an applicant's tax liability, and ultimately, government revenues. We found errors with the information reported on 1095-A forms for 3 of our 11 fictitious applicants.containing different information for the same applicant. In all three cases, the forms did not accurately reflect the number of months of coverage, thus misstating the advance premium tax credits received. In one of the cases, for instance, the form did not include a couple of months of advance premium tax credit that was received and, as a result, understated the advance premium tax credit received by more than $600. Appendix V shows complete results for tax forms we received. Because we did not provide CMS with detailed information about the specific cases, CMS officials said they could not conduct research and explain In two cases, we received multiple forms why these errors occurred. In general, CMS officials told us the agency made quality checks on tax information before mailings to consumers. During our testing work, we also identified that unlike advance premium tax credits, CSR subsidies are not subject to a recapture process such as reconciliation on the taxpayer's federal income-tax return. In discussions with CMS and IRS officials, we found that the federal government has not established a process to identify and recover the value of CSR subsidies that have been provided to our fictitious enrollees improperly. These subsidies increase government costs; and, according to IRS, excess CSR payments, if not recovered by CMS, would be taxable income to the individual for whom the payment was made. We are continuing to seek information from CMS on any efforts to recover costs associated with subsidy reductions or eliminations due to unresolved inconsistencies. In December 2014, the Marketplace sent notifications to 5 of our 11 applicants, indicating that we had filed new applications for subsidized coverage. In four of these notices, the Marketplace stated our subsidies or coverage, or both, would be terminated if we failed to provide supporting documentation. However, we had not filed any such applications, nor, as described earlier, had we sought any redetermination of subsidies. Because each of our fictitious applicants earlier received either written or verbal assurances from the Marketplace that documentation had been received and no further action was necessary, we did not respond to these requests to submit supporting documentation. A few months later, the Marketplace terminated coverage or subsidies for six applicants, including four applicants who had received notice of new applications in December 2014, and two applicants who had not received notice of a new application. The termination notices cited failure to respond to requests to submit documentation in support of what were claimed to be the new applications we submitted. Our remaining five applicants continued receiving subsidized coverage without interruption. Following the termination notices, we elected to pursue continued coverage for the six cases as part of our testing, even though we had not filed the claimed new applications. Each of our six fictitious applicants that lost coverage or subsidies made phone inquiries to the Marketplace for an explanation of the terminations. In three of these inquiries, the Marketplace representatives told our applicants that they were required to file a new application or supporting documentation each year. However, as described earlier, notifications we received earlier from the Marketplace and insurers told us that no actions were needed to automatically reenroll in our plans other than to continue to pay premiums. In addition, as noted, other applicants did not receive notices of new applications being filed. We are continuing to seek from CMS information on this treatment of our applicants. Next, for each of these six fictitious applicants, we requested in Marketplace phone conversations reinstatement of coverage or subsidies. For five of the six applicants, the Marketplace approved reinstatement of subsidized coverage, while in the process also increasing total premium tax credit subsidies for all these applicants combined by a total of more than $1,000 annually. For the sixth applicant, a Marketplace representative said a caseworker must evaluate our situation. We were told we could not speak with the caseworker, and it could take the caseworker up to 30 days to resolve the issue. This applicant's case was still pending at the time we concluded our undercover activity in April 2015. Appendix VI summarizes outcomes for the unknown applications and terminations that followed for six of our applicants. For three of the five applicants for whom we obtained reinstatement of subsidized coverage, we had open inconsistencies related to citizenship/immigration status remaining from our initial applications for 2014, according to CMS data. For each of these three applications, we had never submitted any citizenship or immigration documentation to the Marketplace for resolution. Nonetheless, we had subsidized coverage restored. We are continuing to seek from CMS any information on whether procedures allow repeated applications as a way to avoid document-filing requirements. As described earlier, CMS has awarded grants for "Navigators," which are to provide free, impartial health-insurance information to consumers. In addition, such aid is also to be available from other in-person assisters ("non-Navigators") who generally perform the same functions as Navigators, but are funded through separate grants or contracts. As described in our July 2014 statement, in addition to the 12 online and telephone applications, we also attempted an additional 6 in-person applications, seeking to test income-verification controls only. During our testing, we visited one in-person assister and obtained information on whether our stated income would qualify for subsidy. In that case, as shown in Figure 2, a Navigator correctly told us that our income would not qualify for subsidy. However, for the remaining five in-person applications, we were unable to obtain such assistance. We encountered a variety of situations that prevented us from testing our planned scenarios.later returned to the locations, seeking explanations on why we could not We obtain the advertised assistance, which are also shown in figure 2. Representatives of these organizations generally acknowledged the issues we raised in handling of our application inquiries. We shared these results with CMS officials, who said they could not comment on the specifics of our cases without knowing details of our undercover applications. CMS officials said Navigators are required to accept all applicants, even if an organization's mission is to work with specific populations. If Navigators cannot provide timely help themselves, they must refer applicants to someone who can give assistance. CMS officials also said that they can terminate grant agreements, among other enforcement actions, if Navigators do not comply with terms of their awards. They cited as an example a corrective action taken in March 2015 against a Navigator grantee operating in several states for not providing the full range of activities it promised. CMS officials stressed to us Navigator training and experience from the first open-enrollment period helped improve training for the second enrollment period ending in February 2015. As noted earlier, our review of in-person assistance was limited to the extent we encountered Navigators and non-Navigators as part of our enrollment control testing. A full examination of in-person assistance was beyond the scope of our work. CMS officials told us there is no formal policy or specific guidance for situations such as the one we encountered in a case described in figure 2, in which an applicant is asked if he or she wishes to perform a service, such as volunteering for union activities, at the time the applicant seeks assistance. Still, CMS officials said Navigators would be discouraged from such activities while applicants seek help. CMS officials told us it is reasonable for consumers to think that if an assister is listed on the federal website as providing help--as were the assisters we selected--that assistance should be available as indicated. CMS officials told us the agency recognizes challenges with its online tool to find local assistance, and has been working to make changes. We are continuing to seek written documentation on these planned improvements. Chairman Hatch, Ranking Member Wyden, and Members of the Committee, this concludes my statement. I would be pleased to respond to any questions that you may have. For questions about this statement, please contact Seto J. Bagdoyan 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. Individuals making key contributions to this statement, or our 2014 statement reporting preliminary results, include: Matthew Valenta and Gary Bianchi, Assistant Directors; Maurice Belding; Mariana Calderon; Marcus Corbin; Carrie Davidson; Paul Desaulniers; Colin Fallon; Suellen Foth; Sandra George; Robert Graves; Barbara Lewis; Maria McMullen; James Murphy; George Ogilvie; Shelley Rao; Ramon Rodriguez; Christopher H. Schmitt; Julie Spetz; Helina Wong; and Elizabeth Wood. Figure 3 summarizes outcomes for all 12 of the undercover phone and online applications we made for coverage to the Health Insurance Marketplace (Marketplace) under the Patient Protection and Affordable Care Act, as part of our testing of eligibility and enrollment controls. Figure 4 shows, by application, the documentation we submitted in support of the 11 undercover applications that were successful. As part of our eligibility- and enrollment-controls testing, we varied what we submitted by application--providing all, none, or only some of the material we were told to send. Figure 5 shows, by application, a summary of our document requests and submissions, with Marketplace communications on adequacy of the submissions, for the 11 undercover applications that were successful. Figure 6 summarizes automatic reenrollment activity at the end of the 2014 coverage year for the 11 undercover applications that were successful. Figure 7 summarizes receipt of Forms 1095-A, for reconciliation of advance premium tax credits received, for the 11 undercover applications that were successful. Figure 8 summarizes outcomes for the six applicants for whom the Marketplace terminated subsidies or coverage in early 2015. Prior to termination, four of these applicants had received notices of new applications filed, although we did not file any such applications. Following notice of the terminations, we restored subsidized coverage in five of six cases, with one case pending at the time we concluded our undercover activity.
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PPACA provides for the establishment of health-insurance exchanges, or marketplaces, where consumers can compare and select private health-insurance plans. The act also expands the availability of subsidized health-care coverage. The Congressional Budget Office estimates the cost of subsidies and related spending under the act at $28 billion for fiscal year 2015. PPACA requires verification of applicant information to determine eligibility for enrollment or subsidies. GAO was asked to examine controls for application and enrollment for coverage through the federal Marketplace. This testimony describes (1) the results of GAO's undercover testing of the Marketplace's eligibility and enrollment controls, including opportunities for potential enrollment fraud, for the act's first open-enrollment period; and (2) additional undercover testing in which GAO sought in-person application assistance. This statement is based on GAO undercover testing of the Marketplace application, enrollment, and eligibility-verification controls using 18 fictitious identities. GAO submitted or attempted to submit applications through the Marketplace in several states by telephone, online, and in-person. Details of the target areas are not disclosed, to protect GAO's undercover identities. GAO's tests were intended to identify potential control issues and inform possible further work. The results, while illustrative, cannot be generalized to the full population of applicants or enrollees. GAO provided details to CMS for comment, and made technical changes as appropriate. To assess the enrollment controls of the federal Health Insurance Marketplace (Marketplace), GAO performed 18 undercover tests, 12 of which focused on phone or online applications. During these tests, the Marketplace approved subsidized coverage under the Patient Protection and Affordable Care Act (PPACA) for 11 of the 12 fictitious GAO applicants for 2014. The GAO applicants obtained a total of about $30,000 in annual advance premium tax credits, plus eligibility for lower costs due at time of service. For 7 of the 11 successful fictitious applicants, GAO intentionally did not submit all required verification documentation to the Marketplace, but the Marketplace did not cancel subsidized coverage for these applicants. While these subsidies, including those granted to GAO's fictitious applicants, are paid to health-care insurers, and not directly to enrolled consumers, they nevertheless represent a benefit to consumers and a cost to the government. GAO's undercover testing, while illustrative, cannot be generalized to the population of all applicants or enrollees. GAO shared details of its observations with the Centers for Medicare & Medicaid Services (CMS) during the course of its testing, to seek agency responses to the issues raised. Other observations included the following: The Marketplace did not accurately record all inconsistencies. Inconsistencies occur when applicant information does not match information available from Marketplace verification sources. Also, the Marketplace resolved inconsistencies from GAO's fictitious applications based on fictitious documentation that GAO submitted. Overall, according to CMS officials, the Marketplace did not terminate any coverage for several types of inconsistencies, including Social Security data or incarceration status. Under PPACA, filing a federal income-tax return is a key control element, designed to ensure that premium subsidies granted at time of application are appropriate based on reported applicant earnings during the coverage year. GAO, however, found errors in information reported by the Marketplace for tax filing purposes for 3 of its 11 fictitious enrollees, such as incorrect coverage periods and subsidy amounts. The Marketplace automatically reenrolled coverage for all 11 fictitious enrollees for 2015. Later, based on what it said were new applications GAO's fictional enrollees had filed--but which GAO did not itself make--the Marketplace terminated coverage for 6 of the 11 enrollees, saying the fictitious enrollees had not provided necessary documentation. However, for five of the six terminations, GAO subsequently obtained reinstatements, including increases in premium tax-credit subsidies. For an additional six applicants, GAO sought to test the extent to which, if any, in-person assisters would encourage applicants to misstate income in order to qualify for income-based subsidies during coverage year 2014. However, GAO was unable to obtain in-person assistance in 5 of the 6 undercover attempts. For example, an assister told GAO that it only provided help for those applying for Medicaid and not health-care insurance applications. Representatives of these organizations acknowledged the issues GAO raised in handling of the inquiries. CMS officials said that their experience from the first open-enrollment period helped improve training for the 2015 enrollment period.
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Passenger screening is a process by which screeners inspect individuals and their property to deter and prevent an act of violence or air piracy, such as the carrying of any unauthorized explosive, incendiary, weapon, or other prohibited item on board an aircraft or into a sterile area. Screeners inspect individuals for prohibited items at designated screening locations. TSA developed standard operating procedures for screening passengers at airport checkpoints. Primary screening is conducted on all airline passengers before they enter the sterile area of an airport and involves passengers walking through a metal detector, and carry-on items being subjected to X-ray screening. Passengers who alarm the walk-through metal detector or are designated as selectees--that is, passengers selected for additional screening--must then undergo secondary screening, as well as passengers whose carry-on items have been identified by the X-ray machine as potentially containing prohibited items. Secondary screening involves additional means for screening passengers, such as by hand wand; physical pat down; or other screening methods such as the AIT. Within DHS, both the Science and Technology Directorate (S&T) and TSA have responsibilities for researching, developing, and testing and evaluating new technologies, including airport checkpoint screening technologies. Specifically, S&T is responsible for the basic and applied research and advanced development of new technologies, while TSA, through its Passenger Screening Program (PSP), identifies the need for new checkpoint screening technologies and provides input to S&T during the research and development of new technologies, which TSA then procures and deploys. Because S&T and TSA share responsibilities related to the research, development, test and evaluation (RDT&E), procurement, and deployment of checkpoint screening technologies, the two organizations must coordinate with each other and external stakeholders, such as airport operators and technology vendors. Air cargo can be shipped in various forms, including unit load devices (ULD) that allow many packages to be consolidated into one container or pallet; wooden crates; or individually wrapped/boxed pieces, known as loose or break-bulk cargo. Participants in the air cargo shipping process include shippers, such as manufacturers; freight forwarders, who consolidate cargo from shippers and take it to air carriers for transport; air cargo handling agents, who process and load cargo onto aircraft on behalf of air carriers; and air carriers that load and transport cargo. TSA's responsibilities include, among other things, establishing security requirements governing domestic and foreign passenger air carriers that transport cargo and domestic freight forwarders. Airport perimeter and access control security is intended to prevent unauthorized access into secured airport areas, either from outside the airport complex or from within. Airport operators generally have direct day-to-day responsibility for maintaining and improving perimeter and access control security, as well as implementing measures to reduce worker risk. However, TSA has primary responsibility for establishing and implementing measures to improve security operations at U.S. commercial airports--that is, TSA-regulated airports--including overseeing airport operator efforts to maintain perimeter and access control security. Airport workers may access sterile areas through TSA security checkpoints or through other access points that are secured by the airport operator. The airport operator is also responsible, in accordance with its security program, for securing access to secured airport areas where passengers are not permitted. Airport methods used to control access vary, but all access controls must meet minimum performance standards in accordance with TSA requirements. In response to the December 2009 attempted terrorist attack, TSA has revised its procurement and deployment strategy for the AIT, increasing the number of AITs it plans to procure and deploy. In contrast with its prior strategy, the agency now plans to acquire and deploy 1,800 AITs (instead of the 878 units it had previously planned to acquire) and to use them as a primary screening measure where feasible rather than solely as a secondary screening measure. According to a senior TSA official, the agency is taking these actions in response to the Christmas Day 2009 terrorist incident. These officials stated that they anticipate the AIT will provide enhanced security benefits compared to walk-through metal detectors, such as enhanced detection capabilities for identifying nonmetallic threat objects and liquids. TSA officials also stated that the AIT offers greater efficiencies because it allows TSA to more rigorously screen a greater number of passengers in a shorter amount of time while providing a detection capability equivalent to a pat down. For example, the AIT requires about 20 seconds to produce and interpret a passenger's image as compared with 2 minutes required for a physical pat down. A senior official also stated that TSA intends to continue to offer an alternative but comparable screening method, such as a physical pat down, for passengers who prefer not to be screened using the AIT. The AIT produces an image of a passenger's body that a screener interprets. The image identifies objects, or anomalies, on the outside of the physical body but does not reveal items beneath the surface of the skin, such as implants. TSA plans to procure two types of AIT units: one type uses millimeter-wave and the other type uses backscatter X-ray technology. Millimeter-wave technology beams millimeter-wave radio- frequency energy over the body's surface at high speed from two antennas simultaneously as they rotate around the body. The energy reflected back from the body or other objects on the body is used to construct a three- dimensional image. Millimeter wave technology produces an image that resembles a fuzzy photo negative. Backscatter X-ray technology uses a low-level X-ray to create a two-sided image of the person. Backscatter technology produces an image that resembles a chalk etching. As of February 24, 2010, according to a senior TSA official, the agency has deployed 40 of the millimeter-wave AITs and procured 150 backscatter X- ray units in fiscal year 2009. In early March 2010, TSA initiated the deployment of these backscatter units starting with two airports, Logan International Airport in Boston, Massachusetts, and Chicago O'Hare International Airport in Des Plaines, Illinois. TSA officials stated that they do not expect these units to be fully operational, however, until the second or third week of March due to time needed to hire and train additional personnel. TSA estimates that the remaining backscatter X-ray units will be installed at airports by the end of calendar year 2010. In addition, TSA plans to procure an additional 300 AIT units in fiscal year 2010, some of which it plans to purchase with funds from the American Recovery and Reinvestment Act of 2009. In fiscal year 2011, TSA plans to procure 503 AIT units. TSA projects that a total of about 1,000 AIT systems will be deployed to airports by the end of December 2011. In fiscal year 2014 TSA plans to reach full operating capacity, having procured a total of 1,800 units and deployed them to 60 percent of the checkpoint lanes at Category X, I, and II airports. The current projected full operating capacity of 1,800 machines represents a more than two-fold increase from 878 units that TSA had previously planned. TSA officials stated that the cost of the AIT is about $170,000 per unit, excluding training, installation, and maintenance costs. In addition, in the fiscal year 2011 President's budget submission, TSA has requested $218.9 million for 3,550 additional full-time equivalents (FTE) to help staff the AITs deployed in that time frame. From 2012 through 2014, as TSA deploys additional units to reach full operating capacity, additional staff will be needed to operate these units; such staffing costs will recur on an annual basis. TSA officials told us that three FTEs are needed to operate each unit. Because the AIT presents a full body image of a person during the screening process, concerns have been expressed that the image is an invasion of privacy. According to TSA, to protect passenger privacy and ensure anonymity, strict privacy safeguards are built into the procedures for use of the AIT. For example, the officer who assists the passenger does not see the image that the technology produces, and the officer who views the image is remotely located in a secure resolution room and does not see the passenger. Officers evaluating images are not permitted to take cameras, cell phones, or photo-enabled devices into the resolution room. To further protect passengers' privacy, ways have been introduced to blur the passengers' images. The millimeter-wave technology blurs all facial features, and the backscatter X-ray technology has an algorithm applied to the entire image to protect privacy. Further, TSA has stated that the AIT's capability to store, print, transmit, or save the image will be disabled at the factory before the machines are delivered to airports, and each image is automatically deleted from the system after it is cleared by the remotely located security officer. Once the remotely located officer determines that threat items are not present, that officer communicates wirelessly to the officer assisting the passenger. The passenger may then continue through the security process. Potential threat items are resolved through a directed physical pat down before the passenger is cleared to enter the sterile area. In addition to privacy concerns, the AITs are large machines, and adding them to the checkpoint areas will require additional space, especially since the operators are physically segregated from the checkpoint to help ensure passenger privacy. Adding a significant number of additional AITs to the existing airport infrastructure could impose additional challenges on airport operators. In October 2009, we reported that TSA had relied on a screening technology in day-to-day airport operations that had not been proven to meet its functional requirements through operational testing and evaluation, contrary to TSA's acquisition guidance and a knowledge-based acquisition approach. We also reported that TSA had not operationally tested the AITs at the time of our review, and we recommended that TSA operationally test and evaluate technologies prior to deploying them. In commenting on our report, TSA agreed with this recommendation. Although TSA does not yet have a written policy requiring operational testing prior to deployment, a senior TSA official stated that TSA has made efforts to strengthen its operational test and evaluation process and that TSA is now complying with DHS's current acquisition directive that requires operational testing and evaluation be completed prior to deployment. According to officials, TSA is now requiring that AIT are to successfully complete both laboratory tests and operational tests prior to deployment. As we previously reported, TSA's experience with the explosives trace portal (ETP), or "puffers," demonstrates the importance of testing and evaluation in an operational environment. The ETP detects traces of explosives on a passenger by using puffs of air to dislodge particles from the passenger's body and clothing that the machine analyzes for traces of explosives. TSA procured 207 ETPs and in 2006 deployed 101 ETPs to 36 airports, the first deployment of a checkpoint technology initiated by the agency. TSA deployed the ETPs even though tests conducted during 2004 and 2005 on earlier ETP models suggested that they did not demonstrate reliable performance. Furthermore, the ETP models that were subsequently deployed were not tested to prove their effective performance in an operational environment, contrary to TSA's acquisition guidance, which recommends such testing. As a result, TSA procured and deployed ETPs without assurance that they would perform as intended in an operational environment. TSA officials stated that they deployed the machines without resolving these issues to respond quickly to the threat of suicide bombers. In June 2006 TSA halted further deployment of the ETP because of performance, maintenance, and installation issues. According to a senior TSA official, as of December 31, 2009, all but 9 ETPs have been withdrawn from airports, and 18 ETPs remain in inventory. Following the completion of our review, TSA officials told us that the AIT successfully completed operational testing at the end of calendar year 2009 before its deployment was fully initiated. The official also stated that the AIT test results were provided and reviewed by DHS's Acquisition Review Board prior to the board approving the AIT deployment. According to TSA's threat assessment, terrorists have various techniques for concealing explosives on their persons, as was evident in Mr. Abdulmutallab's attempted attack on December 25, when he concealed an explosive in his underwear. While TSA officials stated that the laboratory and operational testing of the AIT included placing explosive material in different locations on the body, it remains unclear whether the AIT would have been able to detect the weapon Mr. Abdulmutallab used in his attempted attack based on the preliminary TSA information we have received. We are in the process of reviewing these operational tests to assess the AIT's detection capabilities and to verify that TSA successfully completed operational testing of the AIT. In addition, while TSA officials stated that the AITs performed as well as physical pat downs in operational testing, TSA officials also reported they have not conducted a cost-benefit analysis of the original or revised AIT deployment strategy. We reported in October 2009 that TSA had not conducted a cost-benefit analysis of checkpoint technologies being researched and developed, procured, and deployed and recommended that it do so. DHS concurred with our recommendation. Cost-benefit analyses are important because they help decision makers determine which protective measures, for instance, investments in technologies or in other security programs, will provide the greatest mitigation of risk for the resources that are available. TSA officials stated that a cost-benefit analysis was not completed for the AIT because one is not required under DHS acquisition guidance. However, these officials reported that they had completed, earlier in the program, a life-cycle cost estimate and an analysis of alternatives for the AIT as required by DHS, which, according to agency officials, provides equivalent information to a cost-benefit analysis. We are in the process of reviewing the alternatives analysis that was completed in 2008 and life-cycle cost estimates which TSA provided to us on March 12, 2010, to determine the extent to which these estimates reflect the additional costs to staff these units. We estimate that, based on TSA's fiscal year 2011 budget request and current AIT deployment strategy, increases in staffing costs due to doubling the number of AITs that TSA plans to deploy could add up to $2.4 billion over the expected service life of this investment. While we recognize that TSA is taking action to address a vulnerability of the passenger checkpoint exposed by the December 25, 2009, attempted attack, we continue to believe that, given TSA's expanded deployment strategy, conducting a cost-benefit analysis of TSA's AIT deployment is important. An updated cost-benefit analysis would help inform TSA's judgment about the optimal deployment strategy for the AITs, as well as provide information to inform the best path forward, considering all elements of the screening system, for addressing the vulnerability identified by this attempted terrorist attack. As we previously reported in March 2009, based on preliminary observations from ongoing work, TSA has taken several key steps to meet the statutory mandate to screen 100 percent of air cargo transported on passenger aircraft by August 2010. Among the steps that TSA has taken to address domestic air cargo screening, the agency has revised its security programs to require more cargo to be screened; created the Certified Cargo Screening Program (CCSP), a voluntary program to allow screening to take place earlier in the shipping process and at various points in the air cargo supply chain--including before the cargo is consolidated; issued an interim final rule, effective November 16, 2009, that, among other things, codifies the statutory air cargo screening requirements of the 9/11 Commission Act and establishes requirements for entities participating in the CCSP; established a technology pilot progra to operationally test explosives trace detection (ETD) and X-ray technology; and expanded its explosives detection canine program. m While these steps are encouraging, TSA faces several challenges in meeting the air cargo screening mandate. First, although industry participation in the CCSP is vital to TSA's approach to move screening responsibilities across the U.S. supply chain, the voluntary nature of the program may make it difficult to attract program participants needed to screen the required levels of domestic cargo. Second, while TSA has taken steps to test technologies for screening and securing air cargo, it has not yet completed assessments of the various technologies it plans to allow air carriers and program participants to use in meeting the August 2010 screening mandate. According to TSA officials, several X-ray and explosives detection systems (EDS) technologies successfully passed laboratory testing, and TSA placed them on a December 2009 list of qualified products that industry can use to screen cargo after August 2010. TSA plans to conduct field testing and evaluation of these technologies in an operational environment. In addition, TSA plans to begin laboratory testing for ETD, Electronic Metal Detection (EMD), and additional X-ray technologies in early 2010, and anticipates including these technologies on the list of qualified products the industry can use by the summer of 2010, before proceeding with operational testing. As we previously reported, based on preliminary observations from ongoing work, X-ray and ETD technologies, which have not yet been fully tested for effectiveness, are currently being used by industry participants to meet air cargo screening requirements. We are examining this issue in more detail as part of our ongoing review of TSA's air cargo security efforts, to be issued later this year. Third, TSA faces challenges overseeing compliance with the CCSP due to the size of its current Transportation Security Inspector (TSI) workforce. Under the CCSP, in addition to performing inspections of air carriers and freight forwarders, TSIs are to also perform compliance inspections of new regulated entities that voluntarily become certified cargo screening facilities (CCSF), as well as conduct additional CCSF inspections of existing freight forwarders. TSA officials have stated that the agency is evaluating the required number of TSIs to fully implement and oversee the program. Completing its staffing study may help TSA determine whether it has the necessary staffing resources to ensure that entities involved in the CCSP are meeting TSA requirements to screen and secure air cargo. As part of our ongoing work, we are exploring to what extent TSA is undertaking a staffing study. Finally, TSA has taken some steps to meet the screening mandate as it applies to inbound cargo but does not expect to achieve 100 percent screening of inbound cargo by the August 2010 deadline. TSA revised its requirements to, in general, require carriers to screen 50 percent of nonexempt inbound cargo. TSA also began harmonization of security standards with other nations through bilateral and quadrilateral discussions. In addition, TSA continues to work with Customs and Border Protection (CBP) to leverage an existing CBP system to identify and target high-risk air cargo. However, TSA does not expect to meet the mandated 100 percent screening level by August 2010. This is due, in part, to challenges TSA faces in harmonizing the agency's air cargo security standards with those of other nations. Moreover, TSA's international inspection resources are limited. We will continue to explore these issues as part of our ongoing review of TSA's air cargo security efforts, to be issued later this year. In our September 2009 report on airport security, we reported that TSA has implemented a variety of programs and protective actions to strengthen the security of commercial airports. For example, in March 2007, TSA implemented a random worker screening program--the Aviation Direct Access Screening Program (ADASP)--nationwide to enforce access procedures, such as ensuring that workers do not possess unauthorized items when entering secured areas. In addition, TSA has expanded requirements for background checks and for the population of individuals who are subject to these checks, and has established a statutorily directed pilot program to assess airport security technology. As we reported in September 2009, while TSA has taken numerous steps to enhance airport security, it continues to face challenges in several areas, such as assessing risk, evaluating worker screening methods, addressing airport technology needs, and developing a unified national strategy for airport security. For example, while TSA has taken steps to assess risk related to airport security, it has not conducted a comprehensive risk assessment based on assessments of threats, vulnerabilities, and consequences, as required by DHS's National Infrastructure Protection Plan. To address these issues, we recommended, among other things, that TSA develop a comprehensive risk assessment of airport security and milestones for its completion, and evaluate whether the current approach to conducting vulnerability assessments appropriately assesses vulnerabilities. DHS concurred with these recommendations and stated that TSA is taking actions to implement them. Our September 2009 report also reported the results of TSA efforts to help identify the potential costs and benefits of 100 percent worker screening and other worker screening methods. In July 2009 TSA issued a final report on the results and concluded that random screening is a more cost- effective approach because it appears "roughly" as effective in identifying contraband items at less cost than 100 percent worker screening. However, the report also identified limitations in the design and evaluation of the program and in the estimation of costs, such as the limited number of participating airports, the limited evaluation of certain screening techniques, the approximate nature of the cost estimates, and the limited amount of information available regarding operational effects and other costs. Given the significance of these limitations, we reported in September 2009 that it is unclear whether random worker screening is more or less cost effective than 100 percent worker screening. In addition, TSA did not document key aspects of the pilot's design, methodology, and evaluation, such as a data analysis plan, limiting the usefulness of these efforts. To address this, we recommended that TSA ensure that future airport security pilot program evaluation efforts include a well-developed and well-documented evaluation plan, to which DHS concurred. Moreover, although TSA has taken steps to develop biometric worker credentialing, it is unclear to what extent TSA plans to address statutory requirements regarding biometric technology, such as developing or requiring biometric access controls at airports, establishing comprehensive standards, and determining the best way to incorporate these decisions into airports' existing systems. To address this issue, we have recommended that TSA develop milestones for meeting statutory requirements for, among other things, performance standards for biometric airport access control systems. DHS concurred with this recommendation. Finally, TSA's efforts to enhance the security of the nation's airports have not been guided by a national strategy that identifies key elements, such as goals, priorities, performance measures, and required resources. To better ensure that airport stakeholders take a unified approach to airport security, we recommended that TSA develop a national strategy that incorporates key characteristics of effective security strategies, such as measurable goals and priorities, to which DHS concurred and stated that TSA is taking action to implement it. As we discussed in our October 2009 report, TSA and the DHS Science and Technology Directorate (S&T) are pursuing an effort--known as Project Newton--which uses computer modeling to determine the effects of explosives on aircraft and develop new requirements to respond to emerging threats from explosives. Specifically, TSA and S&T are reviewing the scientific basis of their current detection standards for explosives detection technologies to screen passengers, carry-on items, and checked baggage. As part of this work, TSA and S&T are conducting studies to update their understanding of the effects that explosives may have on aircraft, such as the consequences of detonating explosives on board an in-flight aircraft. Senior TSA and DHS S&T officials stated that the two agencies decided to initiate this review because they could not fully identify or validate the scientific support requiring explosives detection technologies to identify increasingly smaller amounts of some explosives over time as required by TSA policy. Officials stated that they used the best available information to originally develop detection standards for explosives detection technologies. According to these officials, TSA's understanding of how explosives affect aircraft has largely been based on data obtained from live-fire explosive tests on aircraft hulls at ground level. Officials further stated that due to the expense and complexity of live-fire tests, the Federal Aviation Administration, TSA, and DHS collectively have conducted only a limited number of tests on retired aircraft, which limited the amount of data available for analysis. As part of this ongoing review, TSA and S&T are simulating the complex dynamics of explosive blast effects on an in-flight aircraft by using a computer model based on advanced software developed by the national laboratories. TSA believes that the computer model will be able to accurately simulate hundreds of explosives tests by simulating the effects that explosives will have when placed in different locations within various aircraft models. As discussed in our October 2009 report, TSA and S&T officials expect that the results of this work will provide a much fuller understanding of the explosive detection requirements and the threat posed by various amounts of different explosives, and will use this information to determine whether any modifications to existing detection standards should be made moving forward. We are currently reviewing Project Newton and will report on it at a later date. Madame Chairwoman, that concludes my statement and I would be happy to answer any questions. For additional information about this statement, please contact Stephen M. Lord at (202) 512-4379 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. In addition to the contact named above, staff who made key contributions to this statement were E. Anne Laffoon and Steve D. Morris, Assistant Directors; Nabajyoti Barkakati, Carissa Bryant, Frances Cook, Joseph E. Dewechter, Amy Frazier, Barbara Guffy, David K. Hooper, Richard B. Hung, Lori Kmetz, Linda S. Miller, Timothy M. Persons, Yanina Golburt Samuels, Emily Suarez-Harris, and Rebecca Kuhlmann Taylor. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The attempted bombing of Northwest flight 253 highlighted the importance of detecting improvised explosive devices on passengers. This testimony focuses on (1) the Transportation Security Administration's (TSA) efforts to procure and deploy advanced imaging technology (AIT), and related challenges; and (2) TSA's efforts to strengthen screening procedures and technology in other areas of aviation security, and related challenges. This testimony is based on related products GAO issued from March 2009 through January 2010, selected updates conducted from December 2009 through March 2010 on the AIT procurement, and ongoing work on air cargo security. For the ongoing work and updates, GAO obtained information from the Department of Homeland Security (DHS) and TSA and interviewed senior TSA officials regarding air cargo security and the procurement, deployment, operational testing, and assessment of costs and benefits of the AIT. In response to the December 25, 2009, attempted attack on Northwest flight 253, TSA revised the AIT procurement and deployment strategy, increasing the planned deployment of AITs from 878 to 1,800 units and using AITs as a primary--instead of a secondary--screening measure where feasible; however, challenges remain. In October 2009, GAO reported on the challenges TSA faced deploying new technologies such as the explosives trace portal (ETP) without fully testing them in an operational environment, and recommended such testing prior to future deployments. TSA officials concurred and stated that, unlike the ETP, operational testing for the AIT was successfully completed late in 2009 before its deployment was fully initiated. While officials said AITs performed as well as physical pat downs in operational tests, it remains unclear whether the AIT would have detected the weapon used in the December 2009 incident based on the preliminary information GAO has received. GAO is verifying that TSA successfully completed operational testing of the AIT. In October 2009, GAO also recommended that TSA complete cost-benefit analyses for new passenger screening technologies. While TSA conducted a life-cycle cost estimate and an alternatives analysis for the AIT, it reported that it has not conducted a cost-benefit analysis of the original deployment strategy or the revised AIT deployment strategy, which proposes a more than twofold increase in the number of machines to be procured. GAO estimates increases in staffing costs alone due to doubling the number of AITs that TSA plans to deploy could add up to $2.4 billion over its expected service life. While GAO recognizes that TSA is attempting to address a vulnerability exposed by the December 2009 attempted attack, a cost-benefit analysis is important as it would help inform TSA's judgment about the optimal deployment strategy for the AITs, and how best to address this vulnerability considering all elements of the screening system. TSA has also taken actions towards strengthening other areas of aviation security but continues to face challenges. For example, TSA has taken steps to meet the statutory mandate to screen 100 percent of air cargo transported on passenger aircraft by August 2010, including developing a program to share screening responsibilities across the air cargo supply chain. However, as GAO reported in March 2009, a number of challenges to this effort exist, including attracting participants to the TSA screening program, completing technology assessments, and overseeing additional entities that it expects to participate in the program. GAO is exploring these issues as part of an ongoing review of TSA's air cargo security program which GAO plans to issue later this year. Further, while TSA has taken a variety of actions to strengthen the security of commercial airports, GAO reported in September 2009 that TSA continues to face challenges in several areas, such as assessing risk and evaluating worker screening methods. In September 2009, GAO also recommended that TSA develop a national strategy to guide stakeholder efforts to strengthen airport perimeter and access control security, to which DHS concurred.
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According to the Institute of Medicine, health care delivery in the United States has long-standing problems with medical errors and inefficiencies that increase health care costs. The U.S. health care delivery system is an information-intensive industry that is complex and highly fragmented, with estimated spending of $1.7 trillion in 2003. Hence, the uses of IT--in delivering clinical care, performing administrative functions, and supporting the public health infrastructure--have the potential to yield both cost savings and improvements in the care itself. Information technologies such as electronic health records (EHR) have been shown to save money and reduce medical errors. IT standards, including data standards, enable the interoperability and portability of systems within and across organizations. Many different standards are required to develop interoperable health information systems. This reflects the complex nature of health care delivery in the United States. Vocabulary standards, which provide common definitions and codes for medical terms and determine how information will be documented for diagnoses and procedures, are an important type of data standard. These standards are intended to lead to consistent descriptions of a patient's medical condition by all practitioners. The use of common terminology helps in the clinical care delivery process, enables consistent data analysis from organization to organization, and facilitates transmission of information. Without such standards, the terms used to describe the same diagnoses and procedures sometimes vary. For example, the condition known as hepatitis may also be described as a liver inflammation. The use of different terms to indicate the same condition or treatment complicates retrieval and reduces the reliability and consistency of data. In addition to vocabulary standards, messaging standards are important because they provide for the uniform and predictable electronic exchange of data by establishing the order and sequence of data during transmission. These standards dictate the segments in a specific medical transmission. For example, they might require the first segment to include the patient's name, hospital number, and birth date. A series of subsequent segments might transmit the results of a complete blood count, dictating one result (e.g., iron content) per segment. Messaging standards can be adopted to enable intelligible communication between organizations via the Internet or some other communications pathway. Without them, the interoperability of federal agencies' systems may be limited and may limit the exchange of data that are available for information sharing. In addition to vocabulary and messaging standards, there is also the need for a high degree of security and confidentiality to protect medical information from unauthorized disclosure. The need for heath care standards has been recognized for a number of years. The development, approval, and adoption of standards for health IT is an ongoing, long-term process and includes federally mandated standards requirements and a voluntary consensus process within a market-based health care industry. The use of some standards, such as those defined by the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Medicare Prescription Drug and Modernization Act of 2003, is mandated by the federal government, while others are defined by standards development organizations such as the American Association of Medical Instrumentation and the National Council for Prescription Drug Programs. HHS identifies and researches standards defined by the organizations that develop them, and determines which of the approved ones are appropriate for use in federal agencies' health IT systems. In August 1996, Congress recognized the need for standards to improve the Medicare and Medicaid programs in particular and the efficiency and effectiveness of the health care system in general. It passed HIPAA, which calls for the industry to control the distribution and exchange of health care data and begin to adopt electronic data exchange standards to uniformly and securely exchange patient information. According to the National Committee on Vital and Health Statistics (NCVHS), significant progress has occurred on several HIPAA standards, however, the full economic benefits of administrative simplification will be realized only when all of them are in place. In 2000 and 2001, the NCVHS reported on the need for standards, highlighting the need for uniform standards for patient medical record information, and outlining a strategy that included their development and use. The Institute of Medicine and others had also reported on the lack of national standards for the coding and classification of clinical and other health care data, and for the secure transmission and sharing of such data. In 2001, the Office of Management and Budget created the Consolidated Health Informatics (CHI) initiative as one of its e-government projects to facilitate the adoption of data standards for, among others, health care systems within the federal government. The CHI initiative was an interagency work group led by HHS and composed of representatives from the Departments of Defense and Veterans Affairs, as well as other agencies. Recognizing the need to incorporate standards across federal health care systems, the group announced in March 2003 the adoption of 5, and in May 2004 the adoption of another 15. Once federal agencies adopted the recommended standards, they were expected to incorporate them into their architectures and build systems accordingly. This expectation applied to all new systems acquisition and development projects. In April 2004, the President issued an executive order that called for the establishment of a National Coordinator for Health IT and the issuance of a strategic plan to guide the nationwide implementation of interoperable health information systems. The National Coordinator for Health IT was appointed in May 2004; in July 2004, HHS released a framework for strategic action--the first step toward a national strategy. The framework defines goals and strategies that are to be implemented in three phases. Phase I focuses on the development of market institutions to lower the risk of health IT procurement, phase II involves investment in clinical management tools and capabilities, and phase III supports the transition of the market to robust quality and performance accountability. The framework includes a commitment to standards and reiterates that a key component of progress towards interoperable health information systems is the development of technically sound interoperability standards. In May 2003, we reported that federal agencies recognized the need for health care standards and were making efforts to strengthen and increase their use. However, while they had made progress in defining standards, the identification and implementation of data standards necessary to support interoperability were incomplete across the health care sector. First, agencies lacked mechanisms that could coordinate their various efforts so as to accelerate the completion of standards development and ensure consensus among stakeholders. The process of developing health care data standards involves many diverse entities, such as individual and group practices, software developers, domain-specific professional associations, and allied health services. This fragmentation slowed the dissemination and adoption of standards by making it difficult to convene all of the relevant stakeholders and subject matter experts in standards development meetings and to reach consensus within a reasonable period of time. Second, not all of the federal government's standard setting initiatives had milestones associated with efforts to define and implement standards. For example, while the CHI initiative--the primary initiative to establish standards for federal health programs--had announced several standards and implementation requirements for health care information exchange, it had not yet established milestones for future announcements. Finally, there was no mechanism to monitor the implementation of standards throughout the health care industry. NCVHS had reported on a need for a mechanism, such as compliance testing, to ensure that health care standards were uniformly adopted as part of a national strategy, but without an implementation mechanism and leadership at the national level, problems associated with systems' incompatibility and lack of interoperability would persist throughout the different levels of government and the private sector and, consequently, throughout the health care sector. We stated that until these challenges were addressed, agencies risked promulgating piecemeal and disparate systems unable to exchange data with each other when needed, and that this could hinder the prompt and accurate detection of public health threats. We recommended that the Secretary of HHS define activities for ensuring that the various standards-setting organizations coordinate their efforts and reach further consensus on the definition and use of standards; establish milestones for defining and implementing standards; and create a mechanism to monitor the implementation of standards through the health care industry. Following up on our recommendations, we testified in July 2004 on HHS's efforts to identify applicable standards throughout the health care industry and across federal health care programs. Progress was continuing with the establishment of the National Coordinator for Health IT, who, among other things, assumed federal leadership to expedite the standards development process in order to accelerate the use of EHRs. The Coordinator also assumed responsibility for identifying standards for federal health programs as part of the CHI initiative. While plans for the CHI initiative called for it to be incorporated into HHS's Federal Health Architecture by September 2004, many issues--such as coordination of the various standards-setting efforts and implementation of the standards that had been identified--were still works in progress. We reiterated our conclusions that unless these standards were more fully implemented, federal agencies and others throughout the health care industry could not ensure that their systems would be capable of exchanging data with other systems when needed. Further, we concluded that as federal health IT initiatives moved forward, it would be essential to have continued leadership, clear direction, measurable goals, and mechanisms to monitor progress. In June of this year, we issued a report to this committee on the challenges faced by federal agencies in implementing the public health infrastructure. We reported that, among others, HHS's Centers for Disease Control and Prevention and the Department of Homeland Security faced challenges developing and adopting consistent standards to encourage interoperability of public health initiatives. Following up on our recommendations, we reported in May 2005 that HHS was working towards a national strategy for health IT that called for a sustained set of actions to help to further define standards for the health care industry. The Office of the National Coordinator for Health IT is now responsible for the FHA program, which is to provide the structure or "architecture" for collaboration and interoperability among federal health efforts. FHA partners are responsible for improving coordination and collaboration on federal health IT investments and improving efficiency, standardization, reliability, and availability of comprehensive health information solutions. This fall, HHS plans to produce the first release of an information architecture for the federal health enterprise. This release will contain foundational elements to support the development and evolution of the full architecture, which will occur over several years. In addition, the CHI activities are now moving forward under the FHA. HHS, through the CHI initiative, is encouraging the implementation of standards within the federal government to order to catalyze private sector action in this area. Progress towards achieving standards and policies is a key component of progress toward the implementation of a national strategy that provides interoperable health IT systems. The framework also builds upon already existing work in HHS divisions and includes plans to identify and learn from agencies' experiences. HHS divisions have been and continue to be responsible for selecting and adopting standards. Among other activities: The Agency for Healthcare Research and Quality is working to identify and establish clinical standards and research to help accelerate the adoption of interoperable health IT systems, including industry clinical messaging and terminology standards, national standard nomenclature for drugs and biological products, and standards related to clinical terminology. The Centers for Medicare and Medicaid are responsible for identifying and adopting standards for e-prescribing and for implementing the administrative simplification provisions of HIPAA, including electronic transactions and code sets, security, and identifiers. The National Institutes of Health's National Library of Medicine is working on the implementation of standard clinical vocabularies, including support for and development of selected standard clinical vocabularies to enable ongoing maintenance and free use within the United States' health communities, both private and public. In 2003, the National Library of Medicine obtained a perpetual license for the Systematized Nomenclature of Medicine (SNOMED) standard and ongoing updates, making SNOMED available to U.S. users. Other efforts at the National Library of Medicine include the uniform distribution and mapping of HIPAA code sets, standard vocabularies, and Health Level 7 code sets. The Centers for Disease Control and Prevention, through its Public Health Information Network initiative, is working on the development of shared data models, data standards, and controlled vocabularies for electronic laboratory reporting and public health information exchange that are compatible with federal standards activities such as CHI. The Food and Drug Administration and the National Institutes of Health, together with the Clinical Data Interchange Standards Consortium (a group of over 40 pharmaceutical companies and clinical research organizations), have developed a standard for representing observations made in clinical trials--the Study Data Tabulation Model. HHS expects to award a contract to develop and evaluate a process to unify and harmonize industry-wide information standards. In June 2005, HHS issued four requests for proposals (RFPs). The department also expects to award contracts based on these proposals by October 2005. The proposals focus on four areas, including the development of a process to unify and harmonize industry-wide health information standards development, maintenance and refinements over time. The standards-focused RFP states that the current landscape of standards does not ensure interoperability due to many factors such as conflicting and incomplete standards. The other RFPs include (1) the development of a certification process for health IT to assure consistency with standards, (2) the development of prototypes for a nationwide health information network architecture for widespread health information exchange, and (3) an assessment of variations in organization-level business policies and state laws that affect privacy and security practices. In addition, in July of this year, HHS announced plans for a public- private committee--known as the American Health Information Community--to help transition the nation to electronic health records and to provide input and recommendations on standards. Chaired by the Secretary of HHS, it will provide input and recommendations on use of common standards and how interoperability among EHRs can be achieved while assuring that the privacy and security of those records are protected. HHS is also working with other private sector groups to develop standards and certification requirements for EHR functionality in order to reduce the risk of implementation failure. The importance of a national health information network that integrates interoperable databases was just recently highlighted when the Office of the National Coordinator for Health IT facilitated the rapid development of a Web-base portal to access prescription information for Katrina evacuees. This online service is to allow authorized health professionals to access medication and dosage information from anywhere in the country. A broad group of commercial pharmacies, government health insurance programs such as Medicaid, private insurers, and others compiled and made accessible the prescription data. Although the scope of this effort is much smaller than the national network and comprehensive EHRs (which contain much more than prescription information) envisioned, it demonstrates the need called for by the President. In summary, identifying and implementing health IT standards is essential to achieving interoperable systems and data in the health care industry and is critical in the pursuit of effective EHRs and public health systems. Although federal leadership has been established and plans and several actions have positioned HHS to further define and implement relevant standards, consensus on the definition and use of standards still needs to occur. Otherwise, the health care industry will continue to be plagued with incompatible systems that are incapable of exchanging key data that is critical to delivering care and responding to public health emergencies. HHS needs to provide continued leadership, sustained focus and attention, and mechanisms to monitor progress in order to bring about measurable improvements and achieve the President's goals. Mr. Chairman, this concludes my statement. I would be happy to answer any questions that you or members of the committee may have at this time. If you should have any questions about this testimony, please contact me at (202) 512-9286 or by e-mail at [email protected]. Other individuals who made key contributions to this testimony are M. Yvonne Sanchez, Assistant Director, and Amos Tevelow. 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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Health care delivery in the United States has long-standing problems with medical errors and inefficiencies that increase costs. Hence, health information technology (IT) has great potential to improve the quality of care, bolster preparedness of our public health infrastructure, and save money on administrative costs. The threats of natural disasters and terrorist attacks further underscore the need for interoperable information systems, and the critical importance of defining and implementing standards that would enable such interoperability. GAO has reported on the quality of care benefits derived by using IT, federal agencies' existing and planned information systems to support national preparedness for public health emergencies, and the status of health IT standards settings initiatives. The House Committee on Government Reform asked GAO to summarize (1) its previously issued reports and recommendations on health IT standards and (2) recent actions taken by HHS to facilitate the development of health IT standards. As GAO reported in 2003, health care data, communications, and security standards are necessary to support interoperability between IT systems; however, the identification and implementation of such standards at that time was incomplete across the health care industry. Further, while several standard setting initiatives were underway, GAO raised concerns about coordinating and implementing these initiatives. To address these coordination and implementation challenges, it recommended that the Secretary of Health and Human Services (HHS), among other things, reach further consensus across the health care industry on the definition and use of standards, establish milestones for defining and implementing these standards, and create a mechanism to monitor their implementation throughout the health care industry. Last summer, GAO testified before the House Committee on Government Reform's technology subcommittee, highlighting progress made in announcing additional standards and plans to incorporate standard setting initiatives into the Federal Health Architecture. GAO reported that progress in assuming leadership had occurred with the President's establishment of the National Coordinator for Health IT to guide the nationwide implementation of interoperable health information systems, but noted that as health IT initiatives were pursued, it would be essential to have continued leadership, clear direction, measurable goals, and mechanisms to monitor progress. In following up on these recommendations, GAO determined that HHS has taken several actions that should help to further define standards for the health care industry. First, the coordinator has assumed responsibility for the Federal Health Architecture that is expected to establish standards for interoperability and communication throughout the federal health community. Second, several HHS agencies continue their efforts to define standards as part of the department's Framework for Strategic Action. For example, the Agency for Healthcare Research and Quality is working with the private sector to identify standards for clinical messaging, drugs, and biological products. Third, HHS expects to award a contract to develop and evaluate a process to unify and harmonize industry-wide information standards. Fourth, in July of this year, HHS announced plans for a public-private committee to help transition the nation to electronic health records and to provide input and recommendations on standards. All of these are positive steps, however, much work remains to reach further consensus across the health care sector on the definition and use of standards. Until this occurs, federal agencies and others throughout the health care industry will not be able to ensure that their systems are capable of exchanging data when needed, and consequently will not be able to reap the cost, clinical care, and public health benefits associated with interoperability.
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In February 2014, DOD began mailing notices to TRICARE for Life beneficiaries eligible for the pilot informing them of the pilot requirements for filling covered medications through mail order or MTF pharmacies, rather than retail pharmacies. In its contract with DOD, ESI is responsible for implementing the mail-order component of the pilot, which includes operating a call center through which beneficiaries may ask questions about the pilot and transfer prescriptions from a retail pharmacy to mail order. According to DOD officials, individual MTF pharmacies are responsible for implementing the MTF pharmacy component of the pilot. DOD's Defense Health Agency's Pharmacy Operations Division is responsible for monitoring both the mail-order and MTF-pharmacy components of the pilot. After receiving DOD's notice, beneficiaries are allowed two 30-day supply refills at a retail pharmacy as a courtesy. The courtesy refills give beneficiaries time to transfer their prescriptions to mail order or an MTF pharmacy, according to DOD officials. After each of these two refills, ESI contacts the beneficiary by letter to remind them about the options for obtaining future refills--either through mail order, through an MTF pharmacy, or by paying 100 percent of the cost at a retail network pharmacy. Requests for coverage for a third refill at a retail pharmacy are denied. Eligible beneficiaries may waive participation in the pilot. Specifically, beneficiaries may obtain blanket waivers for medications needed for acute care or covered by other health insurance. Beneficiaries may also qualify for waivers in certain special circumstances, such as living in a nursing home. These waivers are granted on a case-by-case basis. Additionally, under the law and implementing regulations, beneficiaries may opt out of the pilot after participating for 1 year. ESI reported to DOD that there were about 317,000 TRICARE for Life beneficiaries eligible to participate in the pilot from February 15, 2014 through February 28, 2015. Of those beneficiaries who were eligible, about 186,000 (59 percent) transferred their prescriptions from a retail pharmacy to mail order for medications covered for the pilot. DOD did not have data on the number of eligible pilot beneficiaries who transferred their prescriptions from a retail pharmacy to an MTF pharmacy. Beneficiaries who did not participate in the pilot did so for reasons such as obtaining an override, which is an approval to refill a prescription for a covered medication at a network retail pharmacy when not available through mail order. ESI reports these numbers at the end of each month to DOD and updates them as prescriptions are processed for the pilot. The numbers shown were reported as of March 2015. The NDAA for Fiscal Year 2013 included a provision for the pilot to run for 5 years expiring by December 31, 2017. However, the NDAA for Fiscal Year 2015 terminated the pilot effective September 30, 2015 and expanded the requirements for the pilot to all eligible TRICARE beneficiaries beginning October 1, 2015. For the expansion, the requirements for filling prescriptions through mail order and MTF pharmacies are to generally remain the same as for the pilot; however, the option to opt out after participating for 1 year will not be permitted, according to DOD officials. Although the NDAA for Fiscal Year 2015 also increased the copayments for all TRICARE prescriptions filled at retail pharmacies and through mail order, they continue to be less through mail order than at retail pharmacies. Additionally, there continues to be no copayment for prescriptions filled at MTF pharmacies. DOD has monitored the availability of covered medications, but has not separately tracked the timeliness and accuracy of prescriptions filled for the pilot through mail order. DOD also has not systematically tracked any of this information for the pilot across MTF pharmacies. In the contract in effect at the start of the pilot, DOD required ESI to monitor the availability of covered medications for the pilot through mail order. According to DOD officials, there have been some overall issues with availability in mail order due to a medication being out of stock because of a manufacturer shortage. For the pilot, when a covered medication is not available through mail order, the affected beneficiary may receive an override to obtain the medication from a retail pharmacy. ESI officials told us that the affected beneficiary must receive an override for each prescription for a covered medication that is out of stock. From March 2014 through February 2015, these officials told us that 5,069 pilot beneficiaries (approximately 3 percent of those that participated) received 5,611 overrides. This represented less than 1 percent of the prescriptions filled through mail order for the pilot, and was comparable to the availability experience of the entire TRICARE mail-order program. ESI officials said that of the 5,611 total overrides approved, only 1,448 were actually used by beneficiaries to obtain covered medications from a retail pharmacy. DOD officials offered possible explanations for this low use, including that the physician may have changed the medication or that the beneficiary may have decided to fill the prescription at an MTF pharmacy instead of a retail pharmacy. Another potential explanation for not using the override may be the higher copayment to fill a covered medication at a retail pharmacy. In the contract in effect at the start of the pilot, DOD required ESI to report monthly on the timeliness and accuracy of all TRICARE prescriptions filled through mail order, but not separately for the pilot. Prescriptions filled by pilot beneficiaries represented about 3 percent--about 785,000 prescriptions--of the approximately 25 million total prescriptions filled through mail order from February 2014 through February 2015. DOD officials said that since they expected the performance standards and the process for the mail-order program to be the same for the pilot, they did not require separate reports to monitor the timeliness and accuracy of prescriptions filled for the pilot. Absent such separately tracked data for the pilot, however, it may not be clear to what extent any issues identified through DOD's monitoring efforts may have affected prescriptions filled for the pilot differently than for all TRICARE prescriptions. Federal internal control standards suggest that agencies should monitor performance data to assess the quality of performance over time. Monitoring is particularly important during transitions of care, such as for medications. Without monitoring performance data separately for the pilot, DOD does not know what, if any, problems beneficiaries may have experienced filling their prescriptions. As a result, DOD lacks potentially important information to help inform the upcoming expansion of the pilot requirements, which is slated for October 1, 2015. Because separate reports on the pilot's performance were not available, we reviewed the monthly timeliness and accuracy reports that ESI provided to DOD for all TRICARE mail-order prescriptions from February 2014 through February 2015. We found that ESI did not meet one of the four timeliness performance standards--shipping 95 percent of prescriptions within 2 calendar days if a clarification or intervention, such as a consultation from a pharmacist, is not required--for June and July 2014. During these 2 months, some pilot beneficiaries may have reached their limit of two courtesy refills at a retail pharmacy and may have been in the process of transferring their prescriptions to mail order. Therefore, to determine if there were any differences in meeting the timeliness performance standards for the pilot compared to all mail-order prescriptions, we requested ESI create separate reports specifically for the pilot. However, the information ESI provided was for all prescriptions filled by pilot beneficiaries, not just those for covered medications. The information ESI provided to us showed that, similar to performance results for all mail-order prescriptions, for 2 months of the pilot ESI did not meet one of the four timeliness standards. As with all mail-order prescriptions, ESI did not meet the standard that 95 percent of prescriptions be shipped within 2 calendar days of receipt if a clarification or intervention is not required. For June and July 2014, ESI shipped 84 percent of all prescriptions filled by pilot beneficiaries within 2 days, compared to 86 percent for the entire mail-order program. DOD reported that in June 2014, ESI experienced a system-wide issue--not specific to the pilot--with an automatic refill process that was operating improperly and was not processing prescriptions, which caused a backlog during June and July 2014. However, because data were not separately tracked for the pilot, DOD does not know whether pilot beneficiaries were disproportionately affected for covered medications. For the accuracy of prescriptions filled, ESI reported meeting the performance standard of 100 percent accuracy each month for all TRICARE prescriptions, including those for the pilot, for the entire period from February 2014 through February 2015. DOD officials said ESI has an internal process to identify potential errors during the prescription- filling process, such as a pharmacist checking after a technician enters prescription information into its data system; or weighing the contents of a prescription to verify that the correct number of units was dispensed. Once a prescription is dispensed to a beneficiary, DOD officials told us that prescription accuracy is measured as the percent of prescriptions dispensed that did not have a validated error, such as a shipping error, having two different medications mixed in a bottle, or incorrect drug, strength, form, patient name, or address. ESI is notified of dispensing errors when a beneficiary contacts them regarding the error and shipping errors are identified when the medication is returned through the mail. For the pilot, DOD has not systematically monitored the availability of covered medications, or the timeliness and accuracy of prescriptions filled across MTF pharmacies. According to the standards for internal control in the federal government, agencies should establish and review performance standards, and then monitor these data to assess the quality of performance over time. DOD has not established performance standards across MTF pharmacies for ensuring that covered medications are available and prescriptions are filled in a timely and accurate manner for pilot beneficiaries. Additionally, while some individual MTF pharmacies may collect and monitor performance data on their own, DOD has not systematically collected and monitored this information for the pilot because the department does not have a central data system for doing so. As a result, DOD is unable to assess the availability of covered medications and whether these prescriptions were filled in a timely and accurate manner across MTF pharmacies. DOD also does not know if beneficiaries encountered difficulties in obtaining covered medications. This information would be beneficial in assisting DOD with the expansion of the pilot requirements. DOD has not monitored the extent to which beneficiaries who participated in the pilot were satisfied with the transfer of prescriptions to mail order or MTF pharmacies. Federal internal control standards suggest that agencies obtain information from external stakeholders who may have a significant impact on the agency achieving its goals. Communications-- such as through a survey--with pilot beneficiaries regarding their satisfaction with obtaining medications through mail order and MTF pharmacies are mechanisms that may have assisted DOD in assessing whether it was achieving its goal for beneficiaries to transfer prescriptions from retail to mail order and MTF pharmacies. Additionally, a satisfaction survey of pilot beneficiaries may have provided information about how well the pilot is being implemented, served as a tool for DOD to assess the performance of ESI and individual MTF pharmacies, and provided senior management information to determine what they could do to improve the pilot's effectiveness. Federal internal control standards also require agencies to monitor and assess the quality of performance over time in order to ensure that findings are promptly resolved. By not separately surveying pilot beneficiaries' satisfaction with mail order or MTF pharmacies, DOD does not know whether beneficiaries faced any difficulties obtaining their covered medications, which is particularly important to monitor during transitions of care. Consequently, DOD lacks assurance that the pilot is working for participating beneficiaries as intended, and is missing important information that may be useful to help inform the expansion of the pilot's requirements to all eligible TRICARE beneficiaries. For mail order, DOD officials who monitor the pilot told us they have relied on the results from a quarterly survey of all TRICARE mail-order pharmacy users-- the TRICARE Mail-Order Pharmacy Satisfaction Survey--to assess the satisfaction of pilot beneficiaries. DOD has not separately monitored beneficiary satisfaction for the pilot through mail order because DOD officials said the mail-order process is the same for pilot and non-pilot beneficiaries, and therefore the results of the TRICARE Mail-Order Pharmacy Satisfaction Survey would also be applicable to pilot beneficiaries. However, other DOD officials who monitor the survey results said they do not recommend generalizing the survey results to the overall TRICARE mail-order population or to pilot beneficiaries, thus making the use of these data for this purpose questionable. These officials said they do not know how representative the survey respondents are of the TRICARE mail-order population or pilot beneficiaries.beneficiaries may have different characteristics than those of all mail- order beneficiaries. Officials told us that DOD does not collect demographic information of survey respondents (e.g., age, regional information) and has never compared the information on the survey respondents to the overall mail-order population to assess similarities Pilot between the two groups. Moreover, DOD has not compared the characteristics of beneficiaries who responded to the survey to those that did not, and consequently, is therefore unable to determine representativeness and how these characteristics may be related to satisfaction. DOD also has not monitored beneficiary satisfaction with the pilot based on calls to ESI's call center. DOD officials told us that beneficiaries could use the call center to express complaints with the pilot. ESI reported at least two significant increases in call volume during March and May of 2014, which DOD and ESI officials said they thought was due largely to beneficiaries seeking assistance in transferring prescriptions from a retail pharmacy to mail order. For example, according to DOD and ESI officials, the increase in call volume in March 2014 could have been due to eligible beneficiaries having received their initial letters to transfer their prescriptions for the pilot. In May 2014, beneficiaries who used courtesy refills may have started to reach their two-refill limit at a retail pharmacy and would therefore need to transfer prescriptions to mail order or MTF pharmacies. However, DOD officials told us that ESI is not required to track the details of these calls, including whether beneficiaries expressed any complaints with the pilot. According to these officials, ESI provided general feedback about the pilot during monthly meetings with DOD. Additionally, DOD officials told us they have not monitored beneficiary satisfaction with the pilot across MTF pharmacies. DOD officials said because they do not have a central data system to track pilot beneficiaries that transferred prescriptions from a retail pharmacy to an MTF pharmacy, they are unable to assess beneficiary satisfaction for the pilot. However, DOD officials said that individual MTF pharmacies may assess beneficiary satisfaction. Although DOD did not assess pilot beneficiary satisfaction, two military service organizations--the Military Officers Association of America (MOAA) and The Retired Enlisted Association (TREA)--reported informally collecting information from members about their experience with the pilot. A TREA representative told us that some of their members reported having problems with the initial enrollment, but said that once the pilot started the organization stopped receiving complaint calls and surmised the pilot was working well. Similarly, a MOAA representative reported their members having an issue with the "roll out" of the pilot. This representative also reported contacting members who participated in the pilot, and found that a little more than half of 40 members contacted indicated they were better off having received their medications through the pilot, thus illustrating that while some are satisfied with the pilot, there may be varying levels of satisfaction among participating beneficiaries. As of February 2015, ESI estimated that DOD saved approximately $123 million based on prescriptions processed through mail order for the first year of the pilot. This number was comparable to DOD's projected cost savings of approximately $120 million that was estimated prior to the start of the pilot (see table 1). The estimated cost savings for the first year of the pilot did not reflect prescriptions transferred to MTF pharmacies because DOD has not tracked these prescriptions for the pilot, according to DOD officials. Rather, these officials said they expected that most beneficiaries participating in the pilot would transfer their prescriptions from retail pharmacies to mail order rather than to MTF pharmacies based on a model the department developed. This model examines workload at retail, mail order, and MTF pharmacies, and shows that most prescriptions have moved from retail to mail order over time. Cost savings may have been greater than the estimated $123 million had prescription transfers from retail pharmacies to MTF pharmacies been included because MTF pharmacies are a lower-cost option than retail pharmacies. As of August 6, 2015, DOD issued an interim final rule implementing the expansion of the pilot requirements to all eligible TRICARE beneficiaries.developing planning documents for the expansion of the pilot requirements to all eligible TRICARE beneficiaries, but have not finalized these documents. Officials explained that they will use planning documents prepared for the pilot (e.g., a plan to communicate the requirements of the program) to guide them in developing these documents for the expansion. Similarly, officials said that they generally plan to follow the same processes used for the pilot. For example, they will mail notices to eligible beneficiaries that they are required to obtain their covered medications through mail order or from an MTF pharmacy. DOD officials told us that they are in the process of DOD officials also stated that they are drafting contractual requirements for the expansion that will be added to the current pharmacy contract with ESI. Officials said these contract requirements will likely model those that were developed for the pilot, including requiring ESI to report monthly cost savings estimates. While not specific to the expansion, DOD also added in new requirements to ESI's current pharmacy contract including assisting with the transfer of prescriptions from a select number of MTF pharmacies to mail order, a service that ESI previously did not provide. A DOD official told us that the ability to transfer a prescription from a retail pharmacy to mail order has been helpful for beneficiaries and key to expanding TRICARE's mail-order program. The official added that these new requirements will give ESI the ability to provide the same support to beneficiaries who want to transfer prescriptions from MTF pharmacies to mail order. DOD officials told us that they do not have plans to conduct a systematic evaluation of the pilot to prepare for the expansion. Officials explained that because the NDAA for Fiscal Year 2015 required that the pilot end 2 years earlier than expected, there is not enough time to conduct an evaluation prior to the expansion of the requirements to all eligible TRICARE beneficiaries. They also told us that the NDAA for Fiscal Year 2013, which established the pilot, did not require that they conduct such an evaluation. However, officials said they have performed ongoing assessments during the pilot and identified some lessons learned that will be incorporated during the implementation of the expansion, such as ensuring that beneficiaries have sufficient time to transfer their covered medications so as to not disrupt their medication regimens. Additionally, DOD does not know how the expected increase in the number of beneficiaries with the expansion may affect the capacity of mail order and MTF pharmacies. As of March 2015, ESI estimated that about 416,000 additional beneficiaries will be required to transfer prescriptions from retail to mail order or MTF pharmacies when the expansion is implemented. DOD officials told us that ESI officials verbally assured them that the company has sufficient capacity to handle the increased volume when the expansion is implemented. DOD did not conduct its own assessment of ESI's ability to handle the additional capacity because DOD officials said they expect ESI to meet the contractual requirements related to availability, timeliness and accuracy for all mail order prescriptions, including the additional prescriptions resulting from the expansion. DOD officials also stated that MTF pharmacies should be able to handle the additional capacity for the expansion because they expect most prescriptions to be transferred to mail order based on the workload model previously discussed. However, according to DOD officials, this model is not specific to the pilot and does not track pilot beneficiaries' use of MTF pharmacies to predict how the expansion could affect MTF pharmacies' workload. Additionally, because DOD has not monitored the availability, timeliness or accuracy of prescriptions filled for covered medications, beneficiary satisfaction, or cost savings for the pilot across MTF pharmacies, it does not know how the expansion may impact the capacity of MTF pharmacies. We recognize that NDAA for Fiscal Year 2015 shortened the period of the pilot; however, the lack of systematic monitoring that we identified and discussed earlier in the report suggests that DOD, in planning for the expansion of the pilot requirements, would benefit from enhanced emphasis on the monitoring of the availability of covered medications, the timeliness and accuracy of prescriptions filled through mail order and MTF pharmacies, and beneficiary satisfaction. This would be consistent with federal standards for internal controls, which supports monitoring to be performed continually and ingrained in an agency's operations. While DOD's monitoring of the effects of the pilot on participating beneficiaries has been limited, the pilot appears to have yielded substantial cost savings for the government and lower copayments for beneficiaries during its first year. These savings are expected to grow once the requirements of the pilot are expanded to all eligible TRICARE beneficiaries. As DOD implements the expansion of pilot requirements, the agency would benefit from improved monitoring of affected beneficiaries, including the availability of covered medications, the timeliness and accuracy of prescriptions filled, and satisfaction. Particularly in light of the absence of a systematic evaluation of the pilot and its implications for the full expansion, such monitoring is important in identifying and addressing problems that may occur as beneficiaries transition their covered medications from retail to mail order or MTF pharmacies. To be able to identify and address problems that may occur and thus help ensure a smooth transition, we recommend that the Secretary of Defense require the Defense Health Agency ensure that planning documents for the expansion include specific requirements to continuously monitor affected beneficiaries, including whether covered medications are available and filled in a timely and accurate manner through mail order and across MTF pharmacies; and beneficiaries are satisfied with the transition to mail order and MTF pharmacies. In commenting on a draft of this report, DOD concurred with our audit findings and conclusions, as well as our recommendation that planning documents for the expansion should include requirements to monitor affected beneficiaries, including the availability of covered medications, the timeliness and accuracy of prescriptions filled, and the satisfaction of beneficiaries with mail order and MTF pharmacies. DOD's comments are reprinted in Appendix II. DOD commented that the experience and lessons learned from the pilot were included in developing the pharmacy contract requirements to expand the program. Subsequent to sending the draft report to DOD for comment, the pharmacy contract was modified on September 3, 2015 to include requirements for the expansion. Upon our review of the modified contract, we found that the requirements related to the expansion did not require the separate monitoring of the timeliness and accuracy of prescriptions filled for beneficiaries directly affected by the expansion who are transitioning from retail to mail order. We maintain that DOD would benefit from monitoring performance separately for these affected beneficiaries. This population, which takes maintenance medications for chronic conditions, may represent a different profile of prescriptions than for all mail-order beneficiaries. Therefore, this population may experience timeliness and accuracy differently than do all mail-order beneficiaries. Without monitoring performance data separately, it may not be clear to what extent any issues identified through DOD's monitoring efforts may be different for this population, especially during the initial transition from retail to mail order. DOD also commented that after the expansion occurs beneficiary satisfaction with mail order will continue to be measured as it was done previously through a survey of all TRICARE mail-order pharmacy users. However, as we reported, the results of this survey of all TRICARE mail- order pharmacy users may not represent well the satisfaction of sub- populations, such as affected beneficiaries. Also, as we reported, DOD officials who monitor this satisfaction survey said they do not recommend generalizing the survey results for multiple reasons, such as being unable to determine representativeness of the survey respondents. We maintain that DOD should separately survey the satisfaction of affected beneficiaries with mail order given that this population may have different characteristics than those of all mail-order beneficiaries generally, and those differences may be associated with satisfaction. Without assessing the satisfaction of affected beneficiaries, DOD will not know whether these beneficiaries faced any difficulties in obtaining their covered medications, which is important to know during transitions of care. Finally, DOD commented, that there is no indication based on workload data, that affected beneficiaries will choose to use MTF pharmacies once the expansion occurs. In addition, DOD commented that MTF pharmacies will continue to individually monitor their own performance and beneficiary satisfaction according to individual performance standards. However, as we discuss in the report, DOD officials told us that the workload model does not specifically track pilot beneficiaries' use of MTF pharmacies to predict how the expansion could affect MTF pharmacies' workload. Given that there are 416,000 additional beneficiaries expected to be affected by the expansion and that their use of MTF pharmacies could be different than the use for all TRICARE beneficiaries generally, we maintain that DOD would benefit from systematically monitoring affected beneficiaries, including across MTF pharmacies. Without doing so, DOD will not know if affected beneficiaries encountered difficulties in obtaining covered medications. We are sending copies of this report to the appropriate congressional committees, 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 have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. The estimated cost savings for the first year of the pilot of $123 million were generally comparable to the projected cost savings of approximately $120 million that the Department of Defense (DOD) reported prior to the start of the pilot. The $120 million estimate represented projected cost savings from the transfer of prescriptions for brand maintenance medications from retail pharmacies to either TRICARE's mail-order pharmacy program or a military treatment facility (MTF) pharmacy. The $123 million estimate represented cost savings from the transfer of prescriptions for covered brand maintenance medications (hereafter referred to as covered medications) from retail pharmacies to TRICARE's mail-order program for the period February 15, 2014 through February 28, 2015. DOD's projected cost savings for the pilot. DOD officials told us that they made some assumptions about the transfer of prescriptions for brand maintenance medications from retail pharmacies to mail order or MTF pharmacies in calculating the projected cost savings of $120 million for a calendar year. DOD assumed that cost savings would be the same if they repriced these retail prescriptions to reflect the cost at mail order or at MTF pharmacies because the average cost of a brand maintenance medication was about the same at both, based on a model that DOD developed. For the purposes of calculating projected cost savings, DOD officials told us that they assumed that 100 percent of the retail prescriptions would transfer to mail order, but told us the projected cost savings would have been about the same if they assumed that less than 100 percent of retail prescriptions were transferred to mail order (e.g., if 90 percent were transferred to mail order and 10 percent were transferred to MTF pharmacies). To develop the projected cost savings of $120 million, DOD officials explained that they used data from the fourth quarter of 2012 to determine that approximately 800,000 prescriptions for brand maintenance medications were filled by beneficiaries aged 65 years and older at retail pharmacies, determined the retail cost for each of these prescriptions, typically filled for a 30-day supply, including ingredient cost, dispensing fees and administrative fees, converted the retail cost of these prescriptions from a 30-day supply to the cost for a 90-day supply (e.g., the ingredient cost for a 30-day supply at a retail pharmacy of $10 would have been $30 for a 90-day supply at a retail pharmacy), determined what the cost would have been for these prescriptions if they had been filled through mail order, typically filled for a 90-day supply, calculated the difference in the copayment that a beneficiary paid at a retail pharmacy to the copayment for mail order, calculated the total cost savings for filling these 800,000 prescriptions at mail order instead of at retail pharmacies: retail cost less mail-order cost and copayment difference. Any manufacturer refunds for brand maintenance medications filled through retail pharmacies also were taken into account. This yielded a savings of about $40 million per quarter. DOD officials explained that after accounting for factors such as beneficiaries using the courtesy refills at retail and receiving waivers to not participate in the pilot, they assumed that about 75 percent of the $40 million quarterly savings would be achieved. Therefore, they projected that the pilot would save about $30 million per quarter, or $120 million for a calendar year. Express Scripts Inc.'s estimate of cost savings for the first year of the pilot. DOD requires Express Scripts, Inc. (ESI)--the pharmacy benefits manager that DOD contracts with to manage its network of retail pharmacies and mail-order program--to calculate and report a monthly cost savings estimate for mail-order prescriptions specific to the pilot. To develop the cost savings estimate of $123 million for the first year of the pilot (February 15, 2014 through February 28, 2015), ESI officials explained that they used data from February 15, 2014 through February 28, 2015 to determine that approximately 785,000 prescriptions for covered medications were filled through mail order for the pilot, determined the mail-order cost of these prescriptions, typically filled for a 90-day supply, including ingredient cost, dispensing fees, and administrative fees, converted the mail-order cost of each of these prescriptions from a 90-day supply to the cost for a 30-day supply (e.g., the ingredient cost for a 90-day supply at mail order of $30 would have been $10 for a 30-day supply at a retail pharmacy), determined what the cost would have been for these prescriptions if they had been filled at a retail pharmacy, typically filled for a 30-day supply, calculated the difference between the copayments at mail order to the copayments that beneficiaries would pay at retail pharmacies, calculated the total cost savings for filling these 785,000 prescriptions through mail order instead of at retail pharmacy: total ingredient cost difference plus dispensing fee difference plus administrative fee difference less copayment difference. Any manufacturer refunds for brand maintenance medications filled through retail pharmacies were also taken into account. This resulted in a savings of about $132 million. subtracted an administrative fee DOD pays ESI to transfer each prescription from retail pharmacy to mail order through its call center. According to a DOD official, the administrative fee to transfer prescriptions from retail pharmacies to mail order is an initial discretionary cost that DOD chose to incur to ensure a smooth transition for beneficiaries. After subtracting the $9 million administrative fee related to the transfer of prescriptions through ESI's call center, the net cost savings for the pilot through mail order was $123 million. Debra A. Draper, (202) 512-7114 or [email protected]. In addition to the contact name above, Rashmi Agarwal, Assistant Director; Jennie F. Apter; Jacquelyn Hamilton; Deitra H. Lee; Eric Wedum; and Joanna Wu made key contributions to this report. Compounded Drugs: TRICARE's Payment Practices Should Be More Consistent with Regulations. GAO-15-64. Washington, D.C.: October 2, 2014. Prescription Drugs: Comparison of DOD, Medicaid, and Medicare Part D Retail Reimbursement Prices. GAO-14-578. Washington, D.C.: June 30, 2014. Defense Health Care: Evaluation of TRICARE Pharmacy Services Contract Structure Is Warranted. GAO-13-808. Washington. D.C.: September 30, 2013. Prescription Drugs: Overview of Approaches to Control Prescription Drug Spending in Federal Programs. GAO-09-819T. Washington, D.C.: June 24, 2009. DOD Pharmacy Program: Continued Efforts Needed to Reduce Growth in Spending at Retail Pharmacies. GAO-08-327. Washington, D.C.: April 4, 2008. DOD Pharmacy Benefits Program: Reduced Pharmacy Costs Resulting from the Uniform Formulary and Manufacturer Rebates. GAO-08-172R. Washington, D.C.: October 31, 2007. TRICARE: Enrollment of the Department of Defense's TRICARE Beneficiaries in Medicare Part B. GAO-06-489R. Washington, D.C.: June 30, 2006. Mail Order Pharmacies: DOD's Use of VA's Mail Pharmacy Could Produce Savings and Other Benefits. GAO-05-555. Washington, D.C.: June 22, 2005. Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy Programs. GAO/T-HEHS-99-75. Washington, D.C.: March 10, 1999. Defense Health Care: Fully Integrated Pharmacy System Would Improve Service and Cost-Effectiveness. GAO/HEHS-98-176. Washington, D.C.: June 12, 1998.
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DOD offers a pharmacy benefit to TRICARE beneficiaries who may obtain prescriptions from TRICARE's mail-order program, MTF pharmacies, or retail pharmacies. In 2013, the DOD Inspector General reported it was more cost efficient to fill prescriptions through mail order than retail pharmacies. To reduce costs, the National Defense Authorization Act (NDAA) for Fiscal Year 2013 required DOD to implement a pilot for certain TRICARE beneficiaries to obtain covered brand maintenance medications through mail order or MTF pharmacies. Under NDAA 2015, the pilot terminates at the end of fiscal year 2015, after which the pilot requirements are to be expanded to all eligible TRICARE beneficiaries. The NDAA 2015 included a provision for GAO to examine the pilot. This report examines the extent to which DOD has (1) monitored whether covered brand maintenance medications were available, and prescriptions were filled on time and accurately, (2) monitored the satisfaction of participating beneficiaries, (3) achieved expected cost savings, and (4) prepared for the expansion. GAO reviewed and analyzed pilot performance and beneficiary satisfaction data, and cost savings estimates, and interviewed DOD officials and other stakeholders. For covered brand maintenance medications--those medications that are taken on a regular and recurring basis--the Department of Defense (DOD) has not fully monitored availability or the timeliness and accuracy of prescriptions filled for the TRICARE for Life Pharmacy Pilot. Specifically, GAO found that for the mail-order program: DOD has monitored the availability of medications. It has also established and monitored performance standards on the timeliness and accuracy of prescriptions filled through mail order for all of TRICARE, but has not separately monitored performance through mail order for the pilot. military-treatment-facility (MTF) pharmacies: DOD has not established or systematically monitored performance standards for the pilot on the availability of covered medications, or the timeliness and accuracy of prescriptions filled across MTF pharmacies. Federal internal control standards suggest that agencies establish and review performance standards and monitor performance data to assess the quality of performance over time. Without fully monitoring the pilot's performance, DOD does not know whether it is working as intended, information that would be beneficial given the upcoming expansion of its requirements to all eligible TRICARE beneficiaries. DOD has not monitored the extent to which beneficiaries were satisfied with the transfer of prescriptions to mail order or MTF pharmacies for the pilot. DOD officials said they relied on the results from a quarterly survey of TRICARE mail-order users to assess the satisfaction of pilot beneficiaries. However, other DOD officials who monitor the survey data said they do not know how representative the respondents are of pilot beneficiaries making the use of these data for this purpose questionable. Moreover, DOD has not monitored satisfaction of pilot beneficiaries across MTF pharmacies. Federal internal control standards require agencies to obtain information from external stakeholders to assess if they are achieving their goals, and to monitor and assess the quality of performance over time to ensure that issues are resolved. Without this stakeholder input, DOD lacks important information as to whether pilot beneficiaries faced any difficulties, including with obtaining their medications. DOD appears to have achieved its expected cost savings based on estimates GAO reviewed. For the first year of the pilot, DOD's estimated cost savings were approximately $123 million based on the prescriptions for covered medications filled through mail order. This was comparable to DOD's projected cost savings of $120 million, an estimate that DOD developed prior to the start of the pilot. DOD has issued regulations, but not finalized planning documents for the expansion of the pilot requirements. Officials said that they are in the process of developing planning documents, which will generally model those that were developed for the pilot. Given the limited monitoring conducted during the pilot, as it finalizes its planning documents for the expansion of the pilot to all eligible TRICARE beneficiaries, DOD would benefit from developing a robust monitoring process of affected beneficiaries, including the availability of medications, the timeliness and accuracy of prescriptions filled, and beneficiary satisfaction. GAO recommends that DOD develop a monitoring plan as part of its expansion planning documents. DOD concurred with GAO's recommendation.
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We, the Bureau, and others have observed that some of the information the Bureau collects during the census has already been gathered by other government agencies in the course of administering their programs. Accessing that information could provide the Bureau with data to help conduct the census and, in some cases, complete census forms that have missing data. Such uses of administrative records have the potential to reduce the cost of the decennial census because, for example, the Bureau would need to hire fewer temporary workers and acquire less office space and equipment to support fieldwork. Moreover, some of the information collected through administrative records could be more accurate than information the Bureau collects through traditional door-to- door follow-up methods, such as when the Bureau's enumerators need to interview neighbors or other "proxy" respondents because they cannot reach a household member to collect needed information. While the Bureau has made some limited use of administrative records during past decennials, it plans to use them much more extensively in 2020. In its first operational plan for the 2020 Census (released October 6, 2015), the Bureau reported design decisions including the use of administrative records to identify vacant addresses in advance of follow- up field work and to enumerate nonresponding households when possible in order to reduce the need for repeated contact attempts during its nonresponse follow-up operation (NRFU). The Bureau also updated the life-cycle cost estimate for the 2020 Census to $12.5 billion (in constant 2020 dollars). This is slightly lower than the Bureau's prior life-cycle cost estimate of $12.7 billion. We plan to assess the reliability of the new cost estimate and examine the practices the Bureau used to produce it after the Bureau makes the model and its supporting documentation available. As part of the operational plan, the Bureau also released an update of how much its fundamental redesign of the census would reduce costs in four major design areas compared to the cost of a 2020 Census conducted using the methods of the 2010 Census. Table 1 below compares the cost reduction in those four areas. The operational plan describes over 100 other preliminary design decisions related to the Bureau's efforts to build an address list and collect census responses. Its release marks a critical turning point in the decade-long countdown to the next decennial, as the Bureau completes its early research and testing plan, and pivots toward developing operations and systems and testing them to refine the census design. Bureau officials have said they hope to use administrative records to reduce the field work involved in the most expensive census operation-- NRFU, when Bureau staff traditionally knock on doors across the country at homes of people who did not respond to the census, or who were missed by census mailings. The Bureau has reported that the following three uses are key to potentially saving up to $1.4 billion compared to using traditional census methods. Identify vacant housing units. The Bureau incurs a large part of its census cost while following up at residences that did not return a census questionnaire. However, during the 2010 Census, of the 48 million housing units enumerators visited for follow up, about 14 million were vacant. One of the largest efficiency gains to the census may come simply from using administrative records to remove these vacant units from the follow-up workload. In a test in Arizona earlier this year, this use of administrative records enabled the Bureau to reduce the NRFU workload by 11 percent. Since we completed our audit work, the Bureau announced that it would still send a reminder post card to units it identified as vacant, which will cost more, but will provide any missed household one more opportunity to respond to the census. Identify and enumerate occupied nonresponding housing units. During the 2015 Census Test, the Bureau demonstrated it could use administrative records to accurately count some nonresponding occupied households if the household had administrative records meeting a certain quality threshold, without attempting any visits. In the test, the Bureau used this approach to reduce the NRFU workload by about 20 percent. Since we completed our audit work, the Bureau announced that before using administrative records to enumerate such households in 2020, it will still attempt one visit to the household. Attempting a visit will add costs, but will also provide the household one more opportunity to respond to the census. Predict the best times to complete NRFU. One of the challenges the Bureau faces when knocking on doors is reaching a household when someone is home. In the 2015 Census Test, the Bureau used demographic information, such as age, from administrative records sources in addition to information about how households had responded to other Bureau surveys in order to help determine the contact strategy for deciding if and when to interview a household. The Bureau tested each of these uses during its 2015 Census Test and plans further testing of them to refine the methods, but the Bureau has already decided to use them. In addition to the three uses the Bureau has committed to, the Bureau has identified nine additional uses of administrative records that may help further reduce cost or improve the quality of the census (see figure 1). The Bureau has not separately estimated cost savings for these nine uses, but has begun researching the feasibility of most of them. As shown in the figure, these uses would occur during various points relative to data collection. Before data collection. The Bureau is already using administrative records to validate and update the address list. The Bureau is drawing on address lists and map information from state, local, and tribal governments, in addition to information obtained from commercial sources, to update its own address list continuously throughout the decade, reducing the need for a more costly door-to-door canvassing during the 2 years prior to the census, as was done for the 2010 Census. In addition, Bureau officials reported research is about to begin on how to better use records to identify group quarters, such as dormitories, prisons, nursing homes, and homeless shelters, and to target outreach, that is, encourage cooperation of staff at these locations with the census. The Bureau historically uses special procedures to enumerate at these places, and administrative records could potentially jump start the time and effort spent getting ready for them. During data collection. The Bureau is considering using administrative records in lieu of some follow-up visits for the purpose of quality control of field work. In past decennials, the Bureau has called or sent enumerators to re-interview some respondents. Relying on administrative records could reduce fieldwork and respondent burden, or enable the Bureau to better target re-interviews of respondents. The Bureau is also researching how administrative records can be used to help process responses that do not have a census ID number on them (this activity is called non-ID processing). The Bureau may receive such responses from households that lost or never received mailings or other advance communication with an ID number from the Bureau. A test in 2015 in the Savannah, Georgia, media market area demonstrated that a large collation of administrative records from many sources was effective in helping the Bureau correct or fill in missing address information. This enabled the Bureau to better locate where those responses should be counted. The Bureau is also researching how other records may help it validate responses or the identities of those who submit responses as part of this processing. After data collection. When the Bureau still does not have information on a housing unit after collecting data during field operations, it will attempt to impute the data--as it has done since 1970. According to Bureau officials, in 2020 the Bureau will use administrative records to help improve how it imputes three related types of data: (1) whether or not a unit is occupied, (2) how many people live in the unit, and (3) the residents' demographic characteristics, such as sex, race, and ethnicity. Finally, the Bureau is considering how administrative records might help it evaluate census accuracy. The Bureau has identified and obtained access to nearly all of the sources that it believes it needs in order to leverage all of the opportunities it has identified (see figure 2). In addition to the records already obtained, the Bureau is working to gain access to the National Directory of New Hires (NDNH), a national database of wage and employment information used for child support enforcement, and KidLink, a database from the Social Security Administration that links parent and child Social Security numbers for children born after 1998 in U.S. hospitals. Both of these databases would help the Bureau improve its ability to find historically "hard-to-count" groups, such as certain minority groups or young children. Bureau officials stated that they are examining ways to quantify the potential effect that their access to these additional sources could have on the 2020 Census. But they point out that there is value in accessing these records for the Bureau's other statistical surveys as well, and that even if they are unable to obtain the additional records in time for the 2020 Census, they would continue pursuing them for these other purposes, as well as for use in future censuses. While the Bureau is to be commended for its efforts to expand its use of administrative records to control costs and increase accuracy, we identified actions the Bureau could take to increase its chances of success. First, as of August 2015, the Bureau had not set deadlines to determine which of its identified uses of administrative records it will or will not implement for the 2020 Census, nor had it set deadlines for determining exactly which records from which sources it will tap in support of each use it implements. Moreover, the Bureau had no deadlines against which to measure progress for obtaining access to additional sources or scheduled milestones for when key steps may need to be taken in order to integrate them within 2020 preparations. For example, the Bureau will need time to review files in order to ensure their fitness for use before the Bureau can integrate them into the census design. Earlier in October the Bureau announced time frames for several decisions related to uses of administrative records and explained that the decisions are not yet included in its integrated schedule of activities. According to our scheduling guide, assurance of program success can be increased when management relies on credible schedules containing the complete scope of activities necessary to achieve established program objectives. Bureau officials have stated that final decisions on the use of administrative records are needed by the end of fiscal year 2017 in order to be included in the Bureau's 2018 full end-to-end test. However, these deadlines do not appear in schedule documents. We recommended that the Census Director ensure that resources focus on activities with promise to reduce cost by documenting milestones related to deciding which records to use, particularly for purposes not yet demonstrated as feasible or involving records it does not already have access to, such as NDNH and KidLink. The Department of Commerce--the Bureau's parent agency--concurred with our recommendation. Deadlines for deciding on all potential uses--either committing to move forward with them or abandoning them as possibilities for 2020--and for deciding how all other records will be used would help to ensure the Bureau is using its resources cost-effectively. The Bureau is taking steps to address challenges it faces in using administrative records to control costs and improve the quality of the 2020 Census. One challenge facing the Bureau is ensuring the quality of the records it receives from other agencies and levels of government. To meet this challenge, the Bureau has processes in place and is conducting research and testing to ensure quality of records. For example, to ensure accuracy, the Bureau routinely screens address and map files provided by state, local, and tribal governments to determine if they satisfy preset minimum quality standards for completeness of address information. This helps to improve the master list of addresses. The Bureau plans comprehensive testing of all records during an end-to-end test of its 2020 Census design (to be conducted in 2018). The Bureau plans additional testing of administrative records for the 2016 Census Test in the Los Angeles and Houston metro areas, a large test of address canvassing for 2016, and an additional site test in 2017 at an undetermined location. The Bureau reported it will review imputation models it used during prior censuses to determine how it can integrate information from administrative records into them in fiscal year 2016. Tests will be included in the 2016 Census Test. A second challenge involves protecting confidential data. We have previously reported that until the Bureau implements a complete and comprehensive security program, it will have limited assurance that its information and systems are being adequately protected against unauthorized access, use, disclosure, modification, disruption, or loss. In January 2013, we made over 100 recommendations aimed at addressing weaknesses in that program. The Bureau agreed and Bureau officials state that the Bureau has taken action on all 115 of our recommendations to improve its security program. In assessing the Bureau's reported actions, we have reviewed documentation pertaining to 97 of the recommendations--66 of which we have confirmed have been addressed and 31 that require additional actions and/or documentation from the Bureau. We are currently analyzing the extent to which the remaining 18 recommendations have been addressed by the Bureau and expect to complete that review by the end of 2015. My colleague is further addressing the security challenge in her statement. Bureau officials pointed out that the Bureau is well positioned to prevent disclosure of administrative records, as it has long-standing experience in collecting data from other agencies and reporting on them. Furthermore, the Bureau and the agency providing the data agree to data safeguards during negotiations for access. A third challenge concerns public acceptance and attitudes about sharing of personal data across government agencies for the purposes of the census. We have previously reported on the need within the federal statistical system for broader public discussion on balancing trade-offs among competing values, such as quality, cost, timeliness, privacy, and confidentiality. The public has related concerns involving trust in the government and perceptions about the burden on respondents as well the social benefits of agencies sharing data. We recommended in 2012 that the Bureau develop and implement an effective congressional outreach strategy, particularly on new design elements the Bureau is researching and considering as well the cost-quality trade-offs of potential design decisions. The Bureau agreed with the recommendation and, in November 2014, it provided us with a congressional engagement plan. The four-page plan brings together in one place a summary of the Bureau's ongoing activity in this area, yet, by itself, lacks goals or strategies for attaining them, or accountability for who will work to implement them or when. We will continue monitoring the Bureau's efforts to address this recommendation, particularly as these efforts may depend on scheduling of activities the Bureau may yet set related to making final decisions about administrative records. As part of our recently released review, we determined that key assumptions in the Bureau's administrative records cost area made sense. Table 2 shows the results of our analysis. While we were reviewing these cost assumptions, the Bureau did not always have documentation readily available, and Bureau reporting on one of the assumptions needed to be corrected. We were able to identify the needed support, and Bureau staff said that they will change the methodology for future reporting on the cost estimate to involve more factors and variables, such as the ratio of field workers to supervisors they would need in 2020 in addition to the NRFU workload assumption. This change will help demonstrate the reliability of the estimates as well as ensure effective communication with others about them. Since we released our report, the Bureau provided an updated estimate of the total 2020 Census life-cycle cost of $12.5 billion, as well as updated estimates of how much less in four major cost areas its 2020 plan would cost compared to a cost of the a 2020 Census conducted using the 2010 Census approaches and methods. We expect soon to begin reviewing the Bureau's new cost model and its assumption. Bureau officials have told us that although the model has been updated, the key assumptions within the administrative records cost area are largely the same. Bureau officials told us that the revised life-cycle cost estimate the Bureau released on October 6, 2015 was developed with leading practices from our cost estimating and assessment guide. After the Bureau releases the underlying model, methodology, and supporting documents for the estimate, we anticipate reviewing them to assess their reliability. Continued oversight efforts, such as this hearing, will be helpful to ensure that the Bureau's efforts remain on track and focused on those most promising to result in a cost-effective 2020 Census. If you have any questions on matters discussed in this statement, please contact Robert Goldenkoff at (202) 512-2757 or by e-mail at [email protected]. Other key contributors to this testimony include Ty Mitchell, Assistant Director; Brett Caloia; Robert Gebhart; Richard Hung; Andrea Levine; Donna Miller; Tamara Stenzel; and Timothy Wexler. 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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With a life-cycle cost of about $13 billion, the 2010 Census was the most expensive U.S. census in history and was 56 percent more costly than the $8.1 billion 2000 Census (in constant 2010 dollars). The Bureau estimates that its use of administrative records in the 2020 Census will reduce the cost compared to traditional census methods by $1.4 billion. Given the potential cost savings associated with the use of administrative records, this testimony, which is based on a report GAO released last month, focuses on (1) the Bureau's plans for using administrative records, and the opportunities and challenges the Bureau faces going forward; and (2) the key assumptions supporting estimates of expected cost savings. To meet these objectives, GAO reviewed Bureau planning documents and test plans, and interviewed Bureau officials. GAO also relied on its Schedule Assessment Guide. The U.S. Census Bureau (Bureau) estimates that it can save around $1.4 billion using administrative records, compared to relying solely on traditional enumeration methods. While the Bureau has made some limited use of administrative records during past decennials, it plans to use them much more extensively in 2020 to achieve these savings. For example, the Bureau plans to use administrative records to reduce the field work required for its most expensive census operation--nonresponse follow-up--when temporary Bureau employees knock on doors across the country to obtain information from people who did not respond to the census, or who were missed by census mailings. According to the Bureau, using administrative records to (1) identify vacant housing units; (2) identify and enumerate occupied nonresponding housing units when the records meet a certain quality threshold; and (3) predict the best times to visit a household can generate substantial cost savings. The Bureau is also exploring the feasibility of nine additional uses of administrative records that could reduce costs and improve the quality of the census still further. The Bureau already has access to nearly all of the data sources it needs to achieve the desired cost savings. It is also working to gain access to additional databases that could help improve its ability to find historically hard-to-count populations, such as certain minority groups and young children. While the Bureau is to be commended for its efforts to expand its use of administrative records, going forward, it will be important to set deadlines to help ensure it makes timely decisions on these other databases and uses of administrative records. According to Bureau officials, final decisions on the use of administrative records are needed by the end of fiscal year 2017 so the records can be adequately tested in the Bureau's full end-to-end test in 2018. However, these deadlines do not appear in schedule documents. It will also be important for the Bureau to address key challenges to using administrative records, including (1) ensuring the quality of the records it receives from other government agencies; (2) protecting confidential data; and (3) ensuring congressional and public acceptance of the Bureau's plan to share personal data across government agencies. The Bureau's ongoing research and testing efforts can help with the first challenge. Fully implementing our prior recommendations to strengthen the security of its information systems and to develop a congressional outreach strategy could help address the second and third challenges. Key assumptions the Bureau used in estimating potential cost savings from administrative records are logical, and the Bureau plans to provide additional support for them. For example, the Bureau's assumption that it could reduce its follow-up workload follows clearly from the Bureau's use of administrative records to remove vacant units from among those housing units needing follow-up because people did not respond to the census, reducing that workload by 11.6 percent. The Bureau released an updated life-cycle cost estimate in October 2015, and GAO anticipates reviewing its reliability after the Bureau makes support for the estimate available. In its report issued last month GAO recommended that the Census Director set deadlines for making final decisions about which records to use, and for what purpose. This will help ensure the Bureau's resources focus on those activities that show the most promise for reducing enumeration costs. The Department of Commerce--the Bureau's parent agency--concurred with GAO's findings and recommendation.
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In late 1992, about 13 million workers and retirees participated in state and local government pension plans. Eighty-seven percent of state and local full-time employees participated in defined benefit plans, while 9 percent participated in defined contribution plans. Some employees participated in both; 93 percent participated in one or the other. In a defined benefit plan, benefits are established by a formula that is generally based on such factors as years of employment, age at retirement, and salary level. Employers and employees in most state and local plans contribute to a fund from which these defined benefits will be paid. Actuaries calculate the size of the fund that will be needed to pay these benefits on the basis of projections of fund investment earnings, mortality, and other factors. If the fund's assets are less than the projected liabilities, the plan is generally considered to be underfunded. Actuaries also calculate the contribution amount needed to cover the liability that accrues each year and to pay an installment on any unfunded liability. Thus, if a plan sponsor is making these actuarially required contributions, the plan can be underfunded yet still on track toward full funding. In contrast, a defined contribution plan, such as a 401(k) or 457 supplemental retirement account, sets the amount contributed to individual worker accounts. The balance in such an account at retirement, reflecting total contributions and investment earnings, determines the worker's retirement benefit. Thus, by definition, such a plan cannot be underfunded in an actuarial sense. For private-sector pension plans, the Employee Retirement Income Security Act of 1974 (ERISA) ensures that most promised employee benefits will be paid. If a company goes out of business and leaves its defined benefit pension plan without adequate funds, the business no longer has earnings with which to make further contributions to cover its pension obligations. Among other things, ERISA insures pension benefits against insufficient funding; the Pension Benefit Guaranty Corporation (PBGC) assumes the liability and assets of terminated private pension plans and pays the retirement benefits, subject to certain limits. ERISA also requires that plan investments be diversified and funded on a sound actuarial basis and that plan fiduciaries adhere to certain standards of conduct. Further, ERISA establishes a framework for enforcing its provisions involving three federal agencies: the Department of Labor, the Internal Revenue Service, and the PBGC. ERISA does not apply, however, to state and local pension plans, nor does federal law impose funding requirements on them. Instead, state and local pension plans are created and governed by laws of their respective governments, which specify any funding or other requirements. These laws, their administration by state and local government agencies, and ultimately their enforcement by the courts provide any protections the beneficiaries may have. For example, in all 50 states, statutes include provisions for fiduciary standards; in about half of the states, these provisions are similar to ERISA's. Also, about half restrict the types of investments that can be made. In addition, annual contributions to 56 percent of state and local pension plans are required to be actuarially based; for 40 percent of these plans, statutes set a specific contribution level, which in most cases is periodically adjusted to achieve actuarial balance, according to a state pension official. In addition, the plans are subject to review by state and local governmental audit agencies and legislative oversight committees. Moreover, the Governmental Accounting Standards Board (GASB) sets accounting and reporting standards for state and local governmental entities, including pension plans. Most state and local governments adhere to these standards. GASB will soon require the reporting of a 6-year funding and contribution history for pension plans and, for plan sponsors, the reporting of a measure of the difference between actuarially required and actual contributions. According to a PPCC analyst, such reporting should provide further impetus to improve funding and contributions. At times, perceptions arise that a state or local government is redirecting funds from a pension plan to meet other budgetary needs. For example, since 1992 California has attempted to delay its annual contributions of roughly $500 million by more than a year, costing its Public Employees' Retirement System as much as $50 million per year in interest. In other states, such as New York and New Jersey, the legislatures have attempted to change certain actuarial assumptions to lower contributions. Also, several state legislatures have encouraged pension managers to invest some portion of plan assets in ways that will promote economic development as long as these investments are sound. Some critics raise concerns that such targeted investments often are not sound, citing certain bad investments that lost millions. For example, in 1990, Connecticut's pension plan invested about $25 million in Colt Industries, which in 1992 declared bankruptcy; the pension plan lost $21 million. State and local government plans nevertheless operate in public view, and some plan fiduciaries and others have filed suits against plan sponsors. For example, according to pension officials and trade publications, in the California case, a superior court judge ordered the state to make the delayed contribution with accrued interest; the case is pending on appeal. Similarly, New York's highest court ruled that the New York law changing the actuarial methodology for the public employees' retirement system violated the New York State Constitution, and the state has agreed to a payment schedule that will make full restitution of missed contributions by 1999. As of this writing, the other cases involving New York and New Jersey are still pending in their respective courts. Regarding targeted pension investments, while some such investments do not earn competitive returns, others do. Although incidents of insolvency or termination of state and local pension plans are rare, underfunding of such plans may present governments with difficult budget decisions in the future. If the actuarial value of a pension plan's liabilities exceeds its assets, a plan may still have enough funds to pay benefits for many years. If such underfunding persists, however, eventually--perhaps years in the future--the plan may lack enough funds to pay benefits. At that time, the sponsoring government will need to have made additional contributions to the pension fund. Or, a government may change the law to reduce benefits or postpone benefit increases that offset inflation, depending on the law that created the plan and the state constitution or municipal charter that governs lawmaking. Thus, the ability of state and local governments with underfunded plans to meet their pension obligations at some future date will depend on balancing competing budgetary demands and possibly on the willingness of their taxpayers to meet the cost. Moreover, if pension benefits are not fully funded, the fiscal burden of providing for them can grow quickly as a share of the budget under various circumstances. Benefit costs can increase rapidly if the number of retirees surges. Also, government revenues can grow slowly if the tax base decreases or tax rates are cut, even though promised benefits have already been determined for years to come. In fact, the ratio of active workers to retirees is declining in the state and local sector, which means that the cost of paying benefits for previous years' employees is growing relative to the cost of paying current employees. If benefits are not fully funded, the relative fiscal burden of providing for them will grow as well. Also, the prospect of such budgetary pressures can significantly affect the sponsoring government's bond ratings. In addition to concerns that full benefits might not be paid as promised or that the fiscal burden of doing so might be excessive, underfunding of state and local plans implies that the cost of government has been partially shifted from one generation of taxpayers to another. This year's cost of government includes the cost of pension benefits that employees earn with this year's work. Underfunding can arise when pension contributions do not fully cover the cost of pension benefits that workers earn in a given year. Underfunding can also arise for other reasons, however, such as pension plan investments' not earning as high a return as projected. Actuarially required contributions include an installment on the amount needed to amortize the underfunded amount. Thus, undercontributing arises when the sponsoring government is not paying enough either to cover the pension liability incurred this year or to amortize this year's share of the unfunded liability or both. A number of federal pension plans also have unfunded liabilities;however, arrangements have been made to fund the liabilities in the future. More importantly, the funding status of federal pension plans does not have the same implications as that of state and local plans. Unlike state and local pension assets, the vast majority of federal pension assets must by law be invested in nonmarketable U.S. Treasury securities. In effect, federal pension assets largely represent government promises to pay benefits, rather than investments that can be converted to cash. When the Treasury pays benefits now or in the future, it must obtain the money either from tax revenues or borrowing, regardless of the plans' technical funding status. Although underfunding of state and local pensions has decreased considerably since the mid-1970s, underfunded plans remain. The unfunded liabilities of all state and local government pension funds then totaled $150 to $175 billion, according to the U.S. House of Representatives Pension Task Force; adjusting for inflation, this equals about $400 billion in 1992 dollars. In 1992, unfunded liabilities totaled roughly $200 billion, according to our estimate from the PPCC sample. Thus, the unfunded liability has decreased by about half in constant dollars. Also, in the mid-1970s, the funding ratio was roughly 50 percent. The 1992 funding ratio for plans in the PPCC sample was 82 percent (see table 1). (The funding ratio is the proportion of pension liability covered by the value of plan assets.) Funding ratios vary widely, however. Of the plans that were underfunded in 1992, 38 percent were less than 80-percent funded (see fig. 1). For underfunded plans alone in the PPCC sample, total assets equaled 77 percent of liabilities. In 1992, state and local government contributions to their pension funds fell short of the actuarially required amounts; the contribution ratio was 88 percent for all plans in the sample with complete contribution data.The contribution ratio is the proportion of the actuarially required contribution covered by actual contributions. (See table 2.) Underfunding of state and local government plans will not likely improve if contributions fall short of actuarially required amounts, which are calculated to cover currently accruing liabilities and also to help pay off any existing unfunded liability. Inadequate contributions over the long term could seriously erode the financial status of some plans, especially those underfunded by large amounts. Contribution ratios also varied widely in 1992. While 57 percent of plans received full contributions, the remaining 43 percent had a combined contribution ratio of just 69 percent, or nearly $4 billion less than the actuarially required amount. About 15 percent of plans received less than 60 percent of required amounts. For state plans alone, over half received less than full contributions, with nearly one-fourth below 60 percent of required amounts. Examining only the plans that were underfunded, 44 percent received less than full contributions and 16 percent received less than 60 percent of the required amount. About 55 percent of underfunded state plans received less than full contributions, compared with 40 percent of underfunded local plans. (See table 3.) According to our analysis of the PPCC survey data, the funding status of state and local pension plans improved between 1990 and 1992. The contribution status of these plans worsened slightly, however, and a significant share of plans underfunded in both years also received less than full contributions in both years. Although the survey had complete data for both years for only a subset of all survey respondents, this analysis illustrates the plans' varied experience and what can happen in the worst cases. For the plans with complete funding data for both years, the funding ratio increased from 80 to 83 percent. For underfunded plans alone, the funding ratio increased from 72 to 78 percent. For plans with complete contribution data for both years, the contribution ratio decreased from 93 to 85 percent. For plans receiving less than full contributions, the contribution ratio decreased from 62 to 60 percent. Examining the distribution of plans by funding and contribution status better reveals the potential for funding problems since each pension fund must meet its own obligations. Of the 156 plans with complete funding data for both years, 97 plans increased their funding ratios, and the number of underfunded plans dropped from 122 to 118. For the 143 plans with complete contribution data for both years, the number of plans receiving less than full contributions increased from 53 to 57. Still, it may be perfectly appropriate for an overfunded plan to undercontribute; underfunded plans that do so are the primary concern. Of the 117 plans that had complete data for both years, 90 were underfunded in both years. Sponsors undercontributed to 28 of these in one of the two years but not both and undercontributed to 25 in both years. (See table 4.) Of the 25, 8 plans had funding ratios that decreased between 1990 and 1992. Another three had level funding ratios. Thus, nearly half of the 25 showed no improvement in their funding status. Even with undercontributing, funding ratios may improve for various reasons, including strong returns on pension fund investments. Also, while most of the underfunded plans without full contributions nevertheless improved their funding status, their sponsors may not have been paying off the unfunded liability exactly on schedule. Conversely, making the full actuarially required contribution, including partial payment of the unfunded liability, may not have been sufficient to improve funding ratios; for example, investments may have returned less than estimated. Of the 37 plans that were underfunded yet fully contributing in both years, 9 nevertheless had decreasing funding ratios. This illustrates the value of full funding in buffering against poor investment returns or other temporary strains on the pension fund. The funding status of state and local government pension funds has improved substantially in the past 15 years. More than half of underfunded plan sponsors are contributing enough to reduce their unfunded liability, while the other plans are not. Most significantly, one-third of state and local pension plans were both underfunded in 1992 and receiving less than the actuarially required sponsor contributions. Sponsors of underfunded plans who consistently undercontribute will leave their plans with little buffer against possible deterioration in the plans' financial status. Such a deterioration could arise, for example, from an increase in the number of retirees or poor investment performance. As a result, sponsors create the potential for difficult budget choices in the future and may implicitly shift to future taxpayers part of the burden for paying today's government workers. The Chair of the PPCC's Survey Committee and the administrator of the PPCC database provided comments on a draft of this report. The PPCC represents associations of finance and retirement officials from state and local government. (See app. I for more detail.) Neither individual disputed the accuracy of the data we presented, but both disagreed with some of our specific conclusions. The Survey Committee Chair commented that the report's tone is not balanced and would likely lead readers to think that public pension underfunding is a larger problem than it really is. We do not agree that this report is biased in tone or content. We clearly acknowledge that on the whole funding has improved substantially. However, we also attempt to focus attention on those underfunded state and local plans that may face problems if undercontributing persists. The administrator of the PPCC database suggested that only contribution ratios of less than 90 percent be considered significant undercontributing. He feels that relatively small levels of undercontributing often may reflect differences between actual experience and actuarial projections and that sponsors may compensate with overcontributions in other years. We acknowledge that a small level of undercontributing in one year may not significantly erode funding levels for a given plan, but we do not believe we can arbitrarily specify a numerical value at which undercontributing becomes significant in isolation from other factors. Ultimately, the critical question is whether undercontributing for a given plan persists from year to year and whether its funding level improves or worsens. Our 2-year analysis attempts to address this question, but, unfortunately, the PPCC Survey does not yet have complete data for enough plans for enough years to draw firm conclusions. Regarding this analysis, PPCC's database administrator also commented that it is not appropriate to generalize from the relatively small number of plans that had complete data for both years. We agree and, in fact, were careful not to generalize from this 2-year analysis; we presented this analysis only to illustrate and focus on the implications of persistent undercontributing. In general, both commenters stated their view that the funding status of state and local pensions is improving. One noted that GASB reporting rules may provide further impetus to improve state and local plan funding and contributions. Both commenters also had some technical comments, which we have 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, copies will be made available to others upon request. If you have questions concerning this letter, please call me on (202) 512-7215. Other GAO contacts and staff acknowledgments are listed in appendix II. To analyze the current status of state and local pension plan funding and contributions, we used data from the Public Pension Coordinating Council (PPCC). Members of the PPCC include the Government Finance Officers Association, National Association of State Retirement Administrators, National Conference on Public Employee Retirement Systems, and National Council on Teacher Retirement. The most recently available PPCC data were from their 1993 survey representing the financial status primarily for fiscal year 1992. We compared these data with a similar survey PPCC conducted in 1991, representing the financial status primarily for fiscal year 1990. Despite some limitations, the PPCC data are the best available, and respondents to the 1993 survey represent 83 percent of the assets of all state and local government plans and 76 percent of active plan members. Following are the data limitations: (1) survey responses represent the financial status for the fiscal year with the most recent actuarial valuation and thus do not all represent the same fiscal year's financial status; (2) the samples are not random and therefore limit any generalization of results to nonrespondents; (3) many responses lack complete funding or contribution information; (4) the 1991 survey had fewer respondents than the 1993 survey; and (5) the data represent the plans' own estimates using varied actuarial cost methods and assumptions. For the 1991 survey, 73 percent of responses had data from fiscal year 1990, 18 percent from 1989, and the remainder from other years. For the 1993 survey, 68 percent of responses had data from fiscal year 1992, 19 percent from 1991, 8 percent from 1993, and the remainder from other years. PPCC sent its survey to all members of two of its member associations and to a representative sample of members of the other two associations. PPCC reported that one of its associations was especially helpful in ensuring responses. Due to the nonrandom nature of this sample and the resulting potential for bias, no analysis can offer any generalizations about nonrespondents. Nor can confidence intervals be calculated. Nevertheless, the survey covered a substantial majority of pension plan members and assets. Thus the analysis describes the funding status of a large and important portion of all plans and members. As noted in footnotes throughout the report, many respondents did not provide complete funding data or contribution data or both. We can calculate the number of employees represented by plans with complete data, but we cannot generalize anything about the plans with incomplete answers or assess any resulting bias in the results. Still, as the footnotes detail, the plans with complete data generally represented a substantial share of the employees in responding plans. The limitations of incomplete data were greatest for comparisons between 1990 and 1992. Therefore, we present this analysis primarily for illustration. We did not adjust the PPCC data to standardize actuarial cost methods and assumptions. State and local governments may have many legitimate reasons for choosing various cost methods and assumptions, and we did not evaluate their choices. For example, among various investment restrictions, some plans are not allowed to invest in stocks while others are; therefore, plans' assumed rate of return on investments should differ. In our previous analysis of this database, we used a measure called projected benefit obligation (PBO) for the pension plans' liabilities. At the time, the Governmental Accounting Standards Board (GASB) required that state and local plans report this measure. In 1994, GASB changed its policy to require a measure called actuarial accrued liability (AAL), primarily responding to many requests from plans that did not use the PBO measure. Also, many officials felt that the PBO underestimates plan liabilities. In accordance with GASB's change in policy, our current analysis also used the AAL measure; the PPCC database includes both PBO and AAL data, when reported. Our analysis confirmed that PBO generally yields higher funding ratios and therefore suggests a lower degree of underfunding. Since our previous analysis used the PBO measure and our current analysis used the AAL measure, funding ratios and related statistics should not be compared between the two reports. The trend analysis in this report, however, does make a valid comparison over time, using AAL for both the 1990 and 1992 data. The following individuals made major contributions to this report: Dea M. Crittenden, Evaluator-in-Charge; Kenneth C. Stockbridge, Evaluator; Lawrence Charron, Evaluator; and Sharon Fucinari, Computer Specialist. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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Pursuant to a congressional request, GAO reviewed the status of public pension plan funding, focusing on the basic pension plans of state and local governments. GAO found that: (1) states and localities with underfunded pension plans run the risk of reducing future pension benefits to taxpayers or raising revenues; (2) unfunded liabilities for all state and local pension plans totalled $200 billion in 1992; (3) contributions to pension funds in 1992 fell short of the actuarially required amounts by 60 percent; (4) 75 percent of state and local pension plans involved in a Public Pension Coordinating Council (PPCC) survey were underfunded; (5) more than half of the pension plan sponsors surveyed continued to make payments to pay off their unfunded liabilities; (6) between 1990 and 1992, 20 percent of the plans were both underfunded and not receiving required sponsor contributions; and (7) of 117 plans with complete data in 1990 and 1992, 90 were underfunded.
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The Hunter is a pilotless aircraft resembling a small airplane that is controlled from a ground station. (See fig. 1.) It is intended to perform reconnaissance, target acquisition, and other military missions by flying over enemy territory and transmitting video imagery back to ground stations for use by military commanders. The Hunter program (formerly called the Short-Range UAV program) began in 1989 as a joint-service effort in response to congressional concern over the proliferation of UAVs by the different services and the need to acquire UAVs that could meet the requirements of more than one service. DOD started the program by procuring two candidate systems for competitive testing. In early 1993, after the Hunter was selected as the winning system, DOD approved its low-rate initial production of seven systems and awarded a $171-million contract. Each system includes eight UAVs with payloads, a launch and recovery station, ground stations for controlling flight and processing information from the UAVs, and other related equipment. (See fig. 2.) DOD plans to buy 24 systems for the Army, 18 for the Navy, 5 for the Marine Corps, and 3 for training, for a total of 50 systems. DOD Instruction 5000.2 requires that efforts to develop a system's logistical supportability begin early in the acquisition process to assure that it can be successfully operated and maintained when deployed. These efforts include developing the proper procedures for maintaining the system and for training military personnel to operate and repair the system. Accordingly, the contract for the Hunter UAV system required that the contractor develop logistic support information and deliver it when the low-rate production contract option was awarded in February 1993. Such logistic support information is supposed to identify and document (1) functions that personnel must perform to operate and maintain a system in its operational environment; (2) the types of military personnel, such as air vehicle pilots and maintenance technicians, best suited to perform the operations and maintenance functions; (3) all training, including training curriculums and training materials, required to prepare personnel to operate and maintain the system; (4) all equipment required to maintain the system, such as mechanical tools used to repair trucks, and computer hardware and software used to test and repair faulty electronic equipment; and (5) the system maintenance schedule. As of December 1994, the contractor had not delivered adequate logistic support information. In 1993, the Joint Tactical UAV Project Office conducted a logistics demonstration to evaluate the adequacy of the logistic support information provided by the contractor. For the logistics demonstration, the contractor trained military personnel to conduct system maintenance and developed system manuals describing 3,107 maintenance tasks. The trained military personnel attempted all of the maintenance tasks, but they completed only 56 maintenance tasks on the first attempt. After government analysis, and extensive revisions by the contractor, military personnel were able to complete 1,526 more tasks. Government testers informed us that 1,347 of the 3,107 maintenance tasks were so ill-defined in the contractor-supplied manuals that revisions were not practical. In a letter dated January 1994 to the contractor, the Hunter contracting officer stated that the results of the logistic demonstration reflected a system that was not yet sustainable and did not have a support structure in place. The contracting officer identified logistic support information as the primary area of deficiency. He informed the contractor that the system manuals were grossly inadequate to either operate or maintain the system and that the training curriculum was insufficiently defined. According to the logistics demonstration final report, the system manuals contained insufficient references, incorrect or vague cautions and warnings, and conflicting equipment terminology. The testers concluded that these deficiencies caused the manuals to be difficult to use and error prone and that the system manuals could lead to equipment damage and injury to personnel. The Joint Tactical UAV Project Office revised the contract delivery schedule to allow additional time for the contractor to deliver adequate logistic support information. The revised schedule delayed the delivery of logistic support information from February 1993 until October 1994 for unit maintenance and until June 1995 for depot maintenance. Analysts at the U.S. Army Missile Command, the Hunter program's lead logistics agency, reviewed all available logistic support information in May 1994. They concluded that, based on the contractor's past history of not developing logistic support information in accordance with DOD policy and the sheer magnitude of the work remaining, the contractor would not be able to provide complete logistic support information before June 1995. Missile Command logistics analysts said that without adequate logistic support information, DOD would have to rely on the contractor for logistic support. Based on DOD's experience with other programs, Missile Command officials expect contractor logistic support to be more expensive than the support originally planned to be provided by the services. For example, government cost estimates of service-provided operations and maintenance for a Hunter system was set at $2.9 million a year for peace-time operations. However, the contractor has already proposed billing the government about $1.7 million to provide logistic support for one system for 300 flight hours in a 3-month operational exercise. This equates to about $5,666 per flight hour and $6.8 million a year for one system. As we have seen on other systems such as the Pioneer UAV and the SLQ-32 shipboard electronic warfare system, insufficient logistic support information can also lower system readiness. For example, the Pioneer's readiness has been degraded because faulty maintenance manuals caused maintenance personnel to order the wrong replacement parts, and logistics assessment reports on the SLQ-32 show that inadequate technical manuals increased operations costs and lowered readiness levels. DOD policy requires that operational test and evaluation be structured to determine (1) the operational effectiveness and suitability of a system under realistic combat conditions and (2) whether the minimum acceptable operational performance requirements have been satisfied. As stated in our December 1993 report, results of the limited user testing conducted during 1992 revealed significant performance deficiencies in the Hunter system. While some actions have been taken or are planned that are designed to correct problems, our review indicates that serious deficiencies remain unresolved. We also found that none of the fixes had been operationally tested to ensure that the system meets minimum acceptable operational requirements. In addition, acceptance testing on the first low-rate production system, which began in May 1994, disclosed new problems. As of October 1994, the delivered system had not been accepted. Furthermore, during acceptance testing in late October 1994, an air vehicle was almost totally destroyed when it went out of control. Consequently, DOD grounded the Hunter system. Limited user testing conducted in 1992 showed that the Hunter system was unreliable in several critical areas. The system required frequent unanticipated repairs, the air vehicle engine performance was unsatisfactory, and the built-in-test equipment was inadequate. These problems have yet to be resolved. To ensure that the Hunter is reliable and does not create an excessive maintenance burden, system requirements specify that it require no more than one unanticipated repair every 4 hours. However, limited user tests showed that the Hunter required unanticipated repairs every 1.2 hours. DOD acknowledges that the system failed to meet this requirement but has taken no further action to demonstrate that the system can perform as required. Instead, DOD has relied on contractor estimates, which state that the requirement for unanticipated repairs is achievable. The importance of system reliability was demonstrated during Operation Desert Storm. According to DOD's lessons learned, the frequent failure of the Pioneer showed that UAV systems must be reliable to adequately support combat operations. Limited user tests conducted in June 1992 disclosed that the two engines used in each air vehicle, which were designed for a motorcycle, were particularly unreliable and had a short life. The engines experienced recurring problems with valve seizures. Because of the repeated engine failures during testing, the project manager directed the contractor to replace all engines with modified versions. Although the purchase price of the motorcycle is under $8,000, DOD has contracted not-to-exceed prices as high as $53,000 each for the engines. The replacements showed some improvements, however, failures continued. Army test officials concluded that each UAV unit equipped with 2 Hunter systems could be required to replace from 3 to 10 engines a week. Furthermore, the frequent engine replacements could overburden the services' logistics systems. According to program officials, these engine problems have been corrected and the original systems procured have been retrofitted with the changes. Program officials also plan to incorporate the modifications in the systems being produced. Program officials also said the air vehicle engines demonstrated acceptable performance during subsequent verification testing. However, valve seizures reappeared during more recent testing. In fact, during July 1994, while testing the first low-rate production system delivered, the problems with push rods and valve seizures continued. Test officials have refused to accept delivery of this system until these problems are resolved. In addition, at least two earlier crashes, which resulted in significant damage to the air vehicles, have been partially attributed to other engine-related failures. Hunter's built-in-test is supposed to identify system faults needing repair. However, following limited user testing, test officials concluded that the built-in-test equipment consistently failed to meet requirements and required redesign to correct the deficiencies. The built-in-test detected only 11 of 154 problems during the tests and isolated the cause of only 2 of the 11 faults detected. The test agency concluded that the inadequate built-in-test design significantly hampered system maintenance and increased the time to correct problems. In 1993, logistics demonstration testing disclosed that while some software modifications had been made, Hunter's built-in-test equipment still did not meet requirements. Currently, DOD plans no further testing of the Hunter built-in-test equipment until February 1995. Most Army and Marine Corps units planning to use the Hunter need UAVs that operate at ranges greater than that at which the ground station can directly control the Hunter. DOD plans to extend the range of the Hunter through a process called "relay operations." Relay operations involve controlling one UAV at long range through a second UAV operating at a closer range, as shown in figure 3. Establishing a relay is to be accomplished by the ground station transmitting commands to and receiving video imagery from the air vehicle operating at long ranges through relay equipment on the UAV operating at a closer range. Most of the limited user tests planned to demonstrate this capability failed because of engine failures or other problems with the air vehicle and relay component. The test agency concluded that the system's ability to transmit video imagery during relay operations was unacceptable for a fielded system. DOD has incorporated some modifications intended to improve the system's relay capability and overcome past poor video quality. However, according to an official of the Defense Contract Management Command, subsequent testing has determined that the quality of the video imagery from the low-rate production system that has been delivered, but not accepted, is worse than that demonstrated during the limited user tests. The contractor has replaced system components in an attempt to solve the problem. However, the adequacy of the changes has not been verified in flight testing because the system has remained grounded. The Hunter system is supposed to locate and identify targets so that they can be engaged by artillery fire. The system is also expected to detect where artillery lands in relation to the target so that the artillery can be adjusted. To be effective, these tasks must be done quickly so that the targets can be hit before they are able to take cover or move. During the limited user tests conducted in 1992, the Hunter failed to meet requirements. Army testers concluded that the system was not sufficiently timely and may never meet Army standards. Even though the system demonstrated unsatisfactory performance during the 1992 testing, DOD's current plans do not include any corrective action to resolve this deficiency. DOD officials stated that this is because the system operational requirements documents do not establish specific time frames in which the Hunter must be able to support artillery operations. However, the mission needs statement that justified procurement of the Hunter states that the system is intended to acquire targets that would then be engaged by artillery or other means. We believe that a requirement to adjust artillery fire in a timely fashion is inherent in missions whose objective is to engage targets. The Defense Contract Management Command is responsible for accepting delivery of the system hardware and began acceptance testing of the first low-rate production system in May 1994. On June 14, 1994, the Command recommended that the UAV program office terminate acceptance testing because extensive software changes were needed and the air vehicle flew in a circle even when programmed for straight and level flight. Acceptance testers also noted that air vehicle engines continue to have valve seizures. However, the Joint Tactical UAV Project Office ignored the recommendation and acceptance testing continued. In July 1994, the Command reported to the UAV program office that several problems needed to be resolved prior to system acceptance. The Command identified software as the most critical problem with the system and pointed out that the existing software was not acceptable for field use. In addition, test results continued to show that the air vehicles pulled to the left during takeoff and flight. On some air vehicles, this condition was severe and could affect safety of flight. Therefore, tests of the system's speed and altitude capability were performed by flying the air vehicle in a circle; the air vehicle could not meet contractual requirements when it was flying straight and level. DOD officials believe that subsequent system modifications have resolved this problem. However, the adequacy of the modifications has not been fully tested because the system remains grounded. The acceptance testing of the first low-rate production system delivered also showed a significant increase in the loss of data link connections between the ground station and the air vehicle when compared to the results of the 1992 limited user test. DOD currently plans to begin full-rate production of the Hunter system for the Army and the Marine Corps before verifying that the system will meet the Navy's needs. If subsequent testing of a Navy version of the Hunter were to show the system to be unsuitable for naval use, DOD would already be fully committed to a system that did not meet the need of all services, as called for by Congress. As a result, the congressional call for DOD to develop a joint-service system is at risk. Although DOD plans call for operational testing before full-rate production, the testing will not include an evaluation of the system's ability to meet the Navy's operational requirements. Operational testing of the Navy requirements is not scheduled until after DOD plans to commit to full-rate production of the land-based Hunter. According to the Commanding General of U.S. Army Operational Test and Evaluation Command, the DOD Director of Operational Test and Evaluation has expressed concern that the operational testing of the Navy variant will not occur until after the full-rate production decision for the land-based system. Hunter program officials maintain that the contractor showed that the Hunter can be operated from a ship during a maritime demonstration. However, according to a Navy official, this demonstration did not reflect realistic operational conditions. For example, during the shipboard demonstration, the contractor removed all aircraft from the flight deck. According to the Navy official, under realistic conditions, other aircraft would remain on the deck of the ship during operation of the Hunter system. In addition, there have been at least five air vehicle crashes involving the tail hook recovery system that would be used to land the Hunter aboard ship. Under the Defense Acquisition Board (DAB) approved program schedule (see fig. 4), DOD has seven systems under contract with deliveries scheduled through April 1995 and operational testing from November 1994 to May 1995. This schedule allows a 23-month break, from April 1995 to March 1997, in the delivery of UAV systems. The UAV Joint Project Office asserts that it must award a second low-rate production contract for four additional systems to reduce the 23-month break in production deliveries and keep skilled contractor employees on the job. However, as indicated in figure 5, the level of contractor employees will still be significantly reduced even with the additional production because the second production contract award is not anticipated to be made before June 1995. Furthermore, a sizable break in production deliveries of over one year would still exist. Therefore, the impact of a second procurement on labor force stability would be marginal at best because at that point in time less than 50 employees would be retained. In addition, not awarding the second production contract reduces the risk from further commitment to a potentially unsuitable system. We recommend that the Secretary of Defense prohibit award of a second low-rate production contract until the Hunter system satisfactorily demonstrates that it is operationally effective and operationally suitable and will satisfactorily meet the requirements of the Army, the Marine Corps, and the Navy. We did not obtain written agency comments on this report. However, we discussed its contents with officials from the Office of the Secretary of Defense, the Assistant Secretary of the Navy, the Defense Airborne Reconnaissance Office, the UAV Joint Project Office, and the Joint Tactical UAV Program Office and incorporated their comments as appropriate. The officials maintained that award of a second low-rate production contract is warranted to prevent a prolonged break in production deliveries and retain skilled contractor employees. Our review indicated that even with a second production contract, a significant break in production deliveries and a significant reduction in contractor employees would still occur. Because of the risks involved in further committing to an unproven system, we believe that further production should be deferred until the system demonstrates that its problems are solved and its performance is satisfactory. The officials pointed out that operational testing of the Navy variant is to be done before a commitment is made to its production. By that time, however, DOD will have already made the full-rate production decision on the Army and the Marine Corps version jeopardizing the goal of a common-service system. To accomplish our objectives, we focused primarily on the results of system testing, including logistics and shipboard demonstrations and limited user testing. We also examined the results of technical tests that assessed some other aspects of the system's performance. In addition, we reviewed (1) test plans and schedules, (2) performance requirements documents, (3) acquisition plans, (4) the original contract and all modifications, and (5) other records bearing on the Hunter UAV status and potential suitability and effectiveness. We obtained information from officials of the Program Executive Office for Cruise Missiles and UAV Joint Project Office, Naval Air Systems Command, Arlington, Va.; Hunter Joint Tactical UAV Program Office and Integrated Material Management Center, U.S. Army Missile Command, Huntsville, Ala.; U.S. Army Training and Doctrine Command, Fort Huachuca, Ariz.; DOD Contract Management Command, Sierra Vista, Ariz.; Marine Corps Combat Development Command, Quantico, Va., and 1st Remotely Piloted Vehicle Company, Twenty-Nine Palms, Calif.; Aviation Requirements Branch, Commander, Naval Surface Forces Atlantic, Norfolk, Va.; and Weapons Support Improvement Group, Assistant Secretary of Defense for Production and Logistics, Office of the Secretary of Defense, Washington, D.C. We performed our work from October 1993 to November 1994 in accordance with generally accepted government auditing standards. As you know, 31 U.S.C. 720 requires the head of a federal agency to submit a written statement on 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 the report. A written statement must also be submitted to the Senate and House Committees on Appropriations with an 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 appropriate congressional committees; the Secretaries of the Army and the Navy; and the Director, Office of Management and Budget. We will make copies available 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 Jack Guin, Assistant Director; Pam Greenleaf, Evaluator-in-Charge; John S. Warren, Evaluator; and Charles A. Ward, Evaluator. Louis J. Rodrigues Director, Systems Development and Production Issues The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO reviewed the Department of Defense's (DOD) acquisition of the Hunter Short-Range Unmanned Aerial Vehicle (UAV), focusing on whether: (1) the system is logistically supportable; (2) previously identified performance deficiencies have been corrected; and (3) the system represents a valid joint-service effort. GAO found that: (1) the Hunter UAV system is not logistically supportable and has serious unresolved performance deficiencies; (2) the contractor had not delivered required logistical support information as of December 1994; (3) the system may be unsuitable for theater operations and may require costly contractor maintenance and support; (4) the vehicle is grounded because of a number of crashes during testing; (5) DOD plans to go into full production before determining whether the land-based vehicle is suitable for naval operations, which jeopardizes the joint-service system; (6) although DOD recently restructured the Hunter program, the program faces further delays and curtailment of critical testing while allowing for the procurement of defective systems; and (7) the planned award of a second low-rate production contract will have a minimal effect on preserving the contractor's skilled labor pool.
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VA and DOD have a long-standing history of sharing health care resources to provide services to their beneficiaries. However, the FHCC is unique among VA and DOD collaborations to deliver health care services in several ways, notably its level of integration, the way it is funded, and its governance structure. The Executive Agreement, signed by the Secretaries of both departments, contains provisions to be met in 12 integration areas regarding specific aspects of FHCC operations, including establishing a governance structure and combining VA and DOD staff into a single, joint workforce. The FHCC's leadership remains directly accountable to VA and DOD individually, through formal reporting relationships, and jointly, through oversight and advisory entities comprising VA and DOD officials. VA and DOD have been authorized since the 1980s to enter into sharing agreements with each other to improve access to, and the quality and cost-effectiveness of, health care provided by the two departments. Since that time, VA and DOD have entered into a number of sharing agreements to provide services--such as emergency, specialty, inpatient, and outpatient care--to VA and DOD beneficiaries and to reimburse one another for the cost of such services. Starting in the 1990s, VA and DOD expanded their sharing efforts to include "joint ventures"--locations where sharing agreements are in place that encompass multiple health care services for VA and DOD beneficiaries. The FHCC is one of 10 joint venture locations across the country. The October 2010 launch of the FHCC demonstration established a new level of sharing and integration for VA and DOD. Specifically, the FHCC is unique among other VA and DOD joint ventures in three key ways: 1. The FHCC's integration of the provision of care and operations represents the highest level of collaboration among the 10 VA and DOD joint ventures. For example, the FHCC has a more integrated staffing structure than any other joint venture site. 2. The FHCC has a joint funding source, to which VA and DOD contribute, unlike the other joint venture sites, which each have separate VA and DOD funding sources. NDAA 2010 established the Joint DOD-VA Medical Facility Demonstration Fund (Joint Fund) as the funding mechanism for the FHCC, with VA and DOD both making transfers to the Joint Fund from their respective appropriations. 3. The FHCC operates under a single line of governance to manage medical and dental care, and has an integrated workforce of approximately 3,100 civilian and active duty military employees from both VA and DOD.integrated governance structures; rather, they maintain separate VA and DOD lines of authority. In April 2010, the Secretaries of VA and Defense signed the Executive Agreement that established the FHCC and defined the relationship between VA and DOD for operating the new, integrated facility, in accordance with NDAA 2010. The Executive Agreement contained provisions in 12 integration areas regarding specific aspects of FHCC operations (see table 1). Each of the 12 integration areas contains a number of specific provisions describing how the FHCC should be jointly operated by VA and DOD. Some provisions have designated deadlines, while others do not. For example, within the IT integration area, the Executive Agreement included provisions identifying three specific IT capabilities that VA and DOD were to have in place by opening day of the FHCC, October 1, 2010 (for example, medical single sign-on, which would allow staff to use one screen to access both the VA and DOD electronic health record systems) while other provisions (such as those for financial management and outpatient appointment enhancement solutions) had no scheduled due dates. As established in the Executive Agreement, the FHCC's leadership and workforce remain directly accountable to both VA and DOD (see fig. 1). The FHCC Director, a VA executive, is accountable to VA for the fulfillment of the FHCC mission, while the Deputy Director and Commanding Officer, a Navy Captain, is accountable to DOD. In addition, the Joint Executive Council (JEC) and the Health Executive Council (HEC) provide oversight for all of the joint ventures, including the FHCC. The JEC is made up of senior VA and DOD officials and provides broad strategic direction for collaboration and resource sharing between the two departments. The HEC, a sub-council of the JEC, provides oversight for the specific cooperative efforts of each department's health care organizations--VA's Veterans Health Administration and DOD's Military Health System. The HEC has organized itself into a number of work groups to carry out its work and focus on specific high-priority areas of national interest. The FHCC Advisory Board, a HEC workgroup co-chaired by and comprising senior officials from VA and DOD, was created specifically to provide guidance and support to FHCC leaders and to resolve issues that arise at the FHCC. The Advisory Board provides guidance for the integration and operations of the facility, including monitoring the FHCC's performance and advising on issues related to strategic direction, mission, vision, and policy. It also serves as a communication link between the FHCC and VA and DOD executive leadership by reporting on FHCC activities to the HEC. FHCC issues that are not able to be resolved by the Advisory Board are elevated to the HEC for final resolution. The Stakeholders Advisory Council also provides feedback on how well the FHCC is meeting customers' needs and VA and DOD missions. The Stakeholders Advisory Council is made up of members from various regional and local organizations representing FHCC interests, including representation from local government, TRICARE, and two nearby VA medical facilities. Eleven of 12 integration areas are now either "implemented" or "in progress." The remaining integration area, IT, remains "delayed," as it was at our last review, resulting in costly and time-consuming workarounds. DOD's decision not to seek an MTF designation for the FHCC, as we had recommended in our July 2011 report, has resulted in continued implementation challenges. FHCC officials have implemented or made progress implementing 11 of the 12 Executive Agreement integration areas. Specifically, FHCC officials have implemented 6 integration areas, meaning all associated provisions in the Executive Agreement have been met. Five of the integration areas are in progress, meaning some, but not all, associated provisions have been met, with FHCC officials maintaining or making additional progress meeting the provisions in each integration area. The 1 integration area not implemented or in progress is IT, which is delayed, meaning at least one provision had a deadline provided in the Executive Agreement that was not met. This integration area is discussed in more detail later in this report. (See fig. 2.) FHCC officials have implemented all provisions in 6 of the 12 Executive Agreement integration areas. Of these 6, 4 were integration areas we previously reported as implemented: (1) governance structure, (2) access to health care at the FHCC, (3) research, and (4) contracting. The two other implemented integration areas, quality assurance and contingency planning, moved from in progress at the time of our last review to implemented in this review. Integration areas we previously reported as implemented have remained in that status by maintaining activities or policies that meet the associated provisions in the Executive Agreement. For example, in the area of governance structure, the Stakeholders Advisory Council meets quarterly as required by the Executive Agreement and in another integration area, research, existing policies remain in place. Since our 2011 report, the FHCC met two additional required provisions for the quality assurance integration area: (1) officials obtained accreditation for the integrated facility by relevant external accrediting bodies--the Commission on Accreditation of Rehabilitation Facilities, and The Joint Commission--and (2) FHCC officials reviewed the FHCC's policy on professional practices. In addition, FHCC officials have established a formal agreement to outline the jurisdiction of VA and DOD related to the security program for the FHCC campus, as the Executive Agreement requires. (See table 2.) Five other integration areas in the Executive Agreement remain in progress: (1) integration benchmarks, (2) property, (3) reporting requirements, (4) workforce management and personnel, and (5) fiscal authority. Each of these integration areas was also in progress at the time of our first report in July of 2011. FHCC officials have actively maintained past progress while continuing to work toward implementation of the provisions in the Executive Agreement associated with these integration areas. Some integration areas cannot be met until a certain point in the integration or depend on other conditions being met. For example, for the integration benchmarks area and the property area, the Executive Agreement specifies that in accordance with NDAA 2010, property transfer may occur upon the earlier of (1) completion of the 15 integration benchmarks or (2) 5 years from the date the Executive Agreement was executed. Thus, the FHCC may address the property integration area prior to the end of the demonstration, in 2015, but it is not required to do so. FHCC officials also are in the process of addressing other integration areas with provisions that do not have specific deadlines associated with them. For example, for the fiscal authority integration area, FHCC officials continue to make progress implementing the provisions, although they have experienced some challenges. Since our last review, the Joint Fund, into which both VA and DOD contribute, has become operational. However, the provision of the Executive Agreement in the fiscal authority integration area that requires the FHCC to develop an operating plan by month that includes workload data has not yet been met. Specifically, the FHCC's operating plan does not include workload data, which officials reported is because the current VA and DOD IT systems calculate workload data differently. (See table 3.) Despite some progress, the FHCC continues to face costly delays in the IT integration area. The Executive Agreement specified three key IT capabilities that VA and DOD were required to have in place on opening day, in October 2010, to facilitate interoperability of VA and DOD electronic health record systems. In our 2011 report, we found that all three of these IT components were delayed; some of them continue to remain so. As a result of these delays, the FHCC has had to implement costly workarounds to address the needs these capabilities were intended to serve. In addition to delays in developing these specific IT capabilities, other IT capabilities required by the Executive Agreement have not been well defined and implementation plans for them have not been established. Specifically, in our 2011 report, we noted that none of the following three IT capabilities required by the Executive Agreement to be in operation by October 2010 were implemented by that time: (1) medical single sign-on, which would allow staff to use one screen to access both the VA and DOD electronic health record systems; (2) single patient registration, which would allow staff to register patients in both systems simultaneously; and (3) orders portability, which would allow VA and DOD clinicians to place, manage, and update clinical orders from either VA or DOD electronic health records systems for radiology, laboratory, consults (specialty referrals), and pharmacy services. Although none of these capabilities were in place at the time of the FHCC's opening, FHCC officials reported that subsequently, in December 2010, medical single sign-on and single patient registration became operational, as we noted in our 2011 report. Two orders portability components--pharmacy and consults--remain delayed as of May 2012. While orders portability for pharmacy remains delayed, VA and DOD officials have estimated completion of the consults component by March 2013. Since our last review, orders portability for radiology became operational in June 2011 and for laboratory in March 2012. Officials report that as of March 2012, VA and DOD have spent more than $122 million on IT capabilities at the FHCC. VA and DOD officials reported several reasons for the delays in each of the orders portability components and described the workarounds implemented as a result of these delays. Pharmacy component: Officials have said that they no longer plan to develop a FHCC-specific capability that will allow VA's and DOD's electronic health record systems to exchange information for pharmacy orders, as required by the Executive Agreement, until a more long-term effort to merge the departments' electronic health record systems into a single system is complete. In March 2011, the Secretaries of VA and Defense announced that the two departments had committed to this broader effort, but the departments have not determined when this single electronic health record system will be completed. Officials reported that they have assigned a project team to address this requirement and estimate that they will award a contract for the pharmacy solution by November 2012. Meanwhile, the FHCC continues to maintain the interim orders portability workaround that we previously reported on, which includes five dedicated, full-time pharmacists to conduct manual checks of patient records to reconcile allergy information and identify possible interactions between drugs prescribed in VA and DOD systems. Additionally, FHCC officials reported that they have also hired a full-time pharmacy technician to assist in this process. FHCC officials reported that as of March 2012, they have spent close to $1 million to institute this workaround and that they anticipate spending an additional $750,000 to fund this process from April 2012 through April 2013. Consults component: VA and DOD officials reported that this component, which will allow VA's and DOD's electronic health record systems to exchange information for consult orders, remains delayed because of changes to the requirements for this component in response to lessons learned since the FHCC opened. Officials reported that they completed the process of documenting changes to the requirements in February 2012 and will use that information to develop the consults component. Until this IT component is implemented, the FHCC staff in the specialty care clinics manage the consult orders manually by reviewing daily all consult requests to determine if care could be provided at the FHCC, in which case the order is manually entered into the appropriate system. Radiology component: Officials told us that this area was delayed in part because they underestimated the amount of work required to allow VA's and DOD's electronic health record systems to exchange information for radiology orders, and they needed additional time to resolve software defects related to the work. Laboratory component: Officials reported that there were delays in delivering a capability that would allow the VA and DOD systems to exchange information for laboratory orders because they needed to address software differences between the VA and DOD systems, such as how the systems detect and combine duplicate orders. In addition, they acknowledged that they underestimated the time and effort required to address such differences. Before the laboratory component was implemented, the FHCC instituted a workaround that required health care providers to review both VA and DOD systems for notifications of laboratory results. Although they were unable to quantify the total cost for all the workarounds resulting from delayed IT capabilities, FHCC officials reported that staff time equivalent to 23 full-time employees is being used to manage the workarounds as a result of delays in IT capabilities to support pharmacy, consults, radiology, and laboratory as well as delays to the other IT components not delivered on time. In addition to the three delayed IT capabilities that were to be in operation by opening day, implementation of three other IT capabilities required, but not defined, by the Executive Agreement--documentation of patient care to support medical and dental operational readiness, financial management solutions, and outpatient appointment enhancements--also have not been implemented, and in some cases work on them has not begun. The Executive Agreement does not provide clear and specific definitions of these three capabilities, nor does it outline deadlines or specific deliverables. Officials reported that as of May 2012, they had not begun to address the requirements for two of the three capabilities-- documentation of patient care to support medical and dental operational readiness and outpatient appointment enhancements--nor had they developed plans or time frames for doing so. VA and DOD officials reported that they have determined the requirements for and have begun the technical development of the financial management solutions, such as automated financial reconciliation and billing processes, and they estimate that testing of the initial capability for the financial reconciliation requirement will occur in July 2012. FHCC officials continue to experience implementation challenges related to the FHCC's lack of an MTF designation. In our July 2011 report, we noted several challenges associated with the lack of an MTF designation at the FHCC, including limits on its ability to access DOD's drug pricing arrangements for DOD beneficiaries and to use personal services contracts to meet staffing needs, as had been done by DOD prior to the As a result, we recommended that DOD seek a legislative integration.change to designate the FHCC as an MTF to facilitate sharing of all DOD authorities and privileges for the facility. Although DOD concurred with our assessment of challenges based on the lack of an MTF designation, the department has opted not to pursue our recommendation. DOD stated that it anticipates that as the FHCC stabilizes and matures, the confusion caused by the lack of an MTF designation will dissipate and that the challenges we noted in the last report have been addressed by workarounds. However, we have found that some of the integration implementation challenges that could be solved with such a designation remain. In particular, officials told us the FHCC has been denied access to DOD's drug pricing arrangements for its DOD beneficiaries, which has resulted in the FHCC paying higher prices for certain drugs for DOD beneficiaries than would be the case if it were an MTF, although FHCC officials were unable to quantify the added expense. DOD officials told us that the department continues to explore ways to access DOD's drug pricing arrangements, despite the lack of an MTF designation, but that so far these efforts have not been successful. In addition, FHCC officials have instituted a workaround to enable them to fulfill staffing needs using personal services contracts--a preferred method for accommodating fluctuations in medical and dental workloads resulting from increases in the number of Navy recruits on-site at any given time. If the FHCC was designated as an MTF, it would have the authority to use personal services contracts, making such a workaround unnecessary. We continue to believe that an MTF designation is important to address the challenges the FHCC faces based on the lack of such a designation, and because it would set a precedent for future VA and DOD integrations to help make the integration process smoother. Although they are required by NDAA 2010 to conduct a comprehensive evaluation of the FHCC at the end of the 5-year demonstration and submit a report on this evaluation to the House and Senate Committees on Armed Services and Veterans' Affairs, VA and DOD officials said the departments have not yet established an evaluation plan. We have previously found that developing a sound evaluation plan before a demonstration program is implemented can increase confidence in results and facilitate decision making about broader applications of the demonstration. Without such a plan in place during the demonstration-- including well-defined measures and standards, such as target scores, for determining performance on each measure--FHCC leadership cannot track progress and make adjustments to improve performance in areas that VA and DOD determine are necessary for the FHCC's success.addition, we have previously found that joint agreement on commonly desired outcomes, such as those established as performance measures and standards in an evaluation plan, is important for collaborating agencies, such as VA and DOD, to successfully overcome differences in In their agency missions, cultures, and established ways of doing business. The 15 integration benchmarks comprise 38 individual performance measures. For example, the patient satisfaction benchmark is measured using 2 performance measures--a VA measure and a DOD measure based on separate surveys that assess beneficiaries' experience with care at the FHCC. integrated FHCC meet or exceed those of NCVAMC and NHCGL as separate facilities prior to the integration; an evaluation of whether the services available at the FHCC are appropriate for the needs of its beneficiary population (for example, whether the pediatrics workload is sufficient to maintain a pediatrics department at the FHCC or whether it would be more cost-effective to contract for pediatrics care in the local community); personnel-related factors, such as whether corpsmen are able to be used at their full capacity at the FHCC and develop the medical skills needed for deployment; and FHCC costs. Furthermore, VA and DOD have not set specific target scores for determining successful performance for the existing 15 integration benchmarks. Officials told us they do not expect to establish these scores until the end of the 5-year FHCC demonstration. Although federal financial accounting standards, VA and DOD departmental priorities, and the Executive Agreement--which lays out the purpose of the FHCC--indicate that reliable cost information is important for evaluating the FHCC, VA and DOD officials have not determined what cost measures, if any, will be used in the FHCC's evaluation. In particular, federal financial accounting standards state that Congress and federal executives need reliable cost information to compare alternative courses of action and evaluate program performance.Veterans Health Administration's vision statement and the Military Health System's core values statement highlight the importance of cost or value of health care to VA and DOD. Furthermore, VA and DOD jointly agreed through the Executive Agreement that the FHCC itself was designed to In addition, both the improve cost-effectiveness of health care delivery, along with access and quality, for the beneficiaries of NHCGL and NCVAMC. Prior to the integration, FHCC officials reported that cost savings, mainly one-time construction savings, were one of the original considerations in deciding to integrate the two facilities, but FHCC officials told us that they are unable to determine whether these savings were actually realized. We have previously reported that cost-effectiveness information is important for ensuring that a program produces sufficient benefits in relation to its costs. Although the existing FHCC integration benchmarks include measures related to access and quality, they do not include any measures related to cost-effectiveness, and while VA and DOD officials said they are considering incorporating cost into the evaluation, they still have not determined whether to do so or what cost measures will be used. The FHCC is a 5-year demonstration that has the potential to be a model for future VA and DOD collaborations to deliver high-quality and cost- effective integrated health care services. However, the demonstration has notable problems. The lack of an MTF designation; costly delays in IT implementation and the lack of clear definitions, deliverables, and time frames for certain IT capabilities; and the lack of an overall evaluation plan for the demonstration pose challenges to VA, DOD, and FHCC officials. Because the FHCC does not have an MTF designation, FHCC officials continue to experience additional costs and administrative burden. The FHCC is unable to use DOD drug pricing arrangements for DOD beneficiaries, which has resulted in additional costs for the FHCC, and also cannot use personal services contracts without the need for a workaround. Because of these ongoing problems, we continue to believe that the Secretary of Defense should seek a legislative change to designate the FHCC as an MTF, even if only for the period of the 5-year demonstration. Delays in the implementation of key IT components required by the Executive Agreement to be in place by October 2010 have resulted in the FHCC establishing workarounds in an effort to maintain patient care and safety. In some cases, these workarounds have been costly and inefficient, necessitating the hiring of additional staff or using additional staff time to do manually what the IT systems are intended to automate. After spending more than $122 million on IT capabilities needed for the FHCC, key deliverables remain delayed, resulting in additional costs to the FHCC. For example, officials have spent more than $1 million as of May 2012 on workarounds for the pharmacy component alone, with an additional $750,000 of spending expected through April 2013. Having a clear understanding of the costs associated with workarounds needed when IT systems are not in place is essential in planning any future VA and DOD integration efforts. In addition, the lack of clarity for time frames and deliverables for two other IT requirements included in the Executive Agreement may pose challenges for implementing them during the demonstration. Despite the fact that the demonstration is in its second of 5 years, DOD and VA have yet to develop and implement an overall evaluation plan. Without such a plan, decision makers at all levels lack the information needed to evaluate the FHCC in a transparent way that ensures confidence in the results. Establishing an evaluation plan, including relevant measures and standards, such as target scores for the benchmarks, as early as possible during the demonstration also provides FHCC officials the opportunity to make informed midcourse changes to better ensure the delivery of high-quality and cost-effective care. It also will better facilitate decision making about whether replicating the model in other locations is prudent. Finally, without assessing the cost- effectiveness of the FHCC, VA and DOD decision makers, as well as Congress, will be unable to adequately assess whether the integrated health care delivery model of the FHCC produces sufficient benefits in relation to its costs. To clarify IT requirements within the Executive Agreement, to enable VA and DOD to make an informed recommendation about whether the FHCC should continue after the end of the demonstration, and to provide useful information for other integrations that may be considered in the future, we recommend that the Secretaries of Veterans Affairs and Defense take the following four actions: determine the costs associated with the workarounds required because of delayed IT capabilities at the FHCC for each year of the demonstration, including the costs of hiring additional staff and of managing the administrative burden caused by the workarounds; develop plans with clear definitions and specific deliverables, including time frames for two IT capabilities--documentation of patient care to support medical and dental operational readiness and outpatient appointment enhancements--and formalize these plans, for example, by incorporating them into the Executive Agreement; expeditiously develop and agree to an evaluation plan, including the performance measures and standards, such as target scores, to be used to evaluate the FHCC demonstration, and formalize the plan, for example, by incorporating it into the Executive Agreement; and establish measures related to the cost-effectiveness of the FHCC's care and operations to be included as a part of the evaluation plan. DOD and VA each provided comments on a draft of this report. In their comments, both agencies generally concurred with each of the four recommendations to the Secretaries of Defense and Veterans Affairs. (DOD's comments are reprinted in app. II; VA's comments are reprinted in app. III.) In addition, both VA and DOD provided technical comments which we have incorporated as appropriate. The agencies' specific responses to each of our recommendations are as follows: To determine the costs associated with the workarounds required because of delayed IT capabilities at the FHCC, DOD indicated that it will collaborate with VA to determine these costs. VA stated the FHCC will convene a workgroup to review these costs and to identify any additional needs associated with IT development delays. VA suggested changing "workaround" to "impacts and changes to business practices." We maintain that "workaround" is used appropriately in the context of this report because we use it to describe processes that are temporarily in place for the purpose of mitigating IT delays rather than permanent changes to business practices. To develop plans with clear definitions and specific deliverables, including time frames for two IT capabilities, both VA and DOD stated that they are working together through their joint Interagency Program Office to develop and formalize these plans. DOD added that the Interagency Program Office will also consider how these plans relate to the larger effort to implement an integrated electronic health record. Both agencies noted that formalization of these plans does not require incorporation into the Executive Agreement. We offered amending the Executive Agreement as an example of how plans could be formalized and leave it to the agencies' discretion how best to do so. To expeditiously develop and agree to an evaluation plan, VA and DOD mentioned that although a methodology and framework for a final evaluation have not been determined, they are tracking some measures of performance through the 15 integration benchmarks. In addition, VA stated that the JEC has directed the HEC to outline an evaluation plan to include analysis of personnel, logistics, resources, and regulatory issues. Again, both agencies noted that formalizing of the evaluation plan does not require incorporation into the Executive Agreement. As we noted above, amending the Executive Agreement is one option for how the plan could be formalized and the agencies may determine the most effective way to do so. To establish measures related to the cost-effectiveness of the FHCC's care and operations to be included as a part of the evaluation plan, VA stated that it will develop a process to expedite creation of an evaluation plan. Both agencies concurred with the recommendation to include cost-related measures. VA provided an additional comment regarding the issue of MTF designation at the FHCC. They suggest that VA and DOD agree on the matter of seeking an MTF designation before any action is taken regarding establishing the FHCC as an MTF. We are sending copies of this report to the Secretary of Defense, Secretary of Veterans Affairs, and appropriate congressional committees. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 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 IV. Appendix I: Federal Health Care Center Integration Benchmarks, by Number of Reported Measures Integration benchmarks 1. Patient satisfaction measures meet Federal Health Care Center (FHCC) targets. Number of individual performance measures to be reported 2 3. Health profession trainee satisfaction measures meet FHCC targets. 4. Stakeholders Advisory Council determination that the FHCC meets both Department of Veterans Affairs (VA) and Department of Defense (DOD) missions. 5. Clinical and administrative performance measures meet FHCC targets. 6. Patient access to care meets FHCC targets. 7. Evidence-based health care measures meet FHCC targets. 8. Clinical/dental productivity meets FHCC targets. Information technology solution timeline is met and has no negative impact on patient safety. 10. Pre-FHCC academic and clinical research missions are maintained. 11. Navy servicemember medical readiness for duty meets Navy targets. 12. Navy advancement/retention meets Navy targets. 14. Validation of FHCC fiscal reconciliation model by an annual independent audit. 15. Satisfactory facility and clinical inspection, accreditation, and compliance outcomes from several external oversight/groups, such as VA and DOD Offices of the Inspector General and The Joint Commission. In addition to the contact named above, Marcia A. Mann, Assistant Director; Jill K. Center; Regina Lohr; and Rasanjali Wickrema made key contributions to this report. Lisa A. Motley provided legal support, and Jennie F. Apter assisted in message and report development.
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The NDAA for Fiscal Year 2010 authorized VA and DOD to establish a 5-year demonstration to integrate VA and DOD medical care into a first-of-its-kind FHCC in North Chicago, Illinois. Expectations for the FHCC are outlined in the Executive Agreement signed by VA and DOD in April 2010. The NDAA for Fiscal Year 2010, as amended by the NDAA for Fiscal Year 2012, directed GAO to report on the FHCC demonstration in 2011, 2012, and 2015. This is the second of the three reports and examines (1) to what extent VA and DOD have continued to implement the Executive Agreement to establish and operate the FHCC and (2) what plan, if any, VA and DOD have to assess the provision of care and operations of the FHCC. To conduct its work, GAO reviewed FHCC documents; interviewed VA, DOD, and FHCC officials; and reviewed related GAO work. Officials at the Department of Veterans Affairs (VA) and Department of Defense (DOD) Captain James A. Lovell Federal Health Care Center (FHCC) have continued to make progress implementing provisions of the Executive Agreement's 12 integration areas, but delays in the information technology (IT) area have proven costly. Specifically, for 6 integration areas, all provisions have been implemented. Some of these areas were implemented at the time of GAO's 2011 report, including establishing the facility's governance structure and patient priority system, while 2 areas--quality assurance and contingency planning--were more recently implemented. In addition, 5 integration areas, such as property and fiscal authority, remain in progress. However, as previously reported by GAO, there have been delays implementing 1 of the integration areas--IT--which have resulted in additional costs for the FHCC, although the FHCC has been unable to quantify the total costs resulting from these delays. Despite an investment of more than $122 million for IT capabilities at the FHCC, VA and DOD have not completed work on all components required by the Executive Agreement, which were to have been in place in time for the FHCC's opening in October 2010. These delays have resulted in additional costs and administrative burden for the FHCC because of the need for workarounds to address them. There also are other IT capabilities required by the Executive Agreement that are ill-defined and for which plans have not been established. Although they are required by the National Defense Authorization Act (NDAA) for Fiscal Year 2010 to assess the FHCC at the end of the 5-year demonstration, VA and DOD officials said the departments have not yet established an evaluation plan. Officials told GAO that in addition to the performance data already being collected from 15 integration benchmarks established by the Executive Agreement, the departments also expect to consider other factors; however, these factors, which may include performance measures, have not yet been established. VA and DOD officials also have not yet established the standards, such as target scores for the benchmarks, the departments will use to evaluate FHCC performance. GAO has previously found that well-defined measures and standards are essential to a sound evaluation plan. Furthermore, without VA and DOD agreement on the measures and standards, FHCC leadership is unable to track progress and make any midcourse adjustments to improve performance in areas VA and DOD have determined are necessary for the FHCC's success. Although including measures of FHCC costs in the evaluation would be consistent with the FHCC's purpose, VA and DOD departmental priorities, and federal financial accounting standards, no such cost measures have been established for evaluating the FHCC. GAO recommends that VA and DOD (1) determine the costs associated with the workarounds required because of delays in implementing IT capabilities laid out in the FHCC Executive Agreement; (2) develop plans with clear definitions, specifications, deliverables, and time frames for IT capabilities required by the Executive Agreement but not yet defined; (3) develop and agree to an evaluation plan, to include all performance measures and standards to be used in evaluating the FHCC demonstration; and (4) establish measures related to the cost-effectiveness of the FHCC as part of their evaluation. VA and DOD generally concurred and noted steps to address GAO's recommendations
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The F/A-22 is to be an air superiority and ground attack aircraft with advanced features to make it less detectable to adversaries (stealth characteristics) and capable of high speeds for long ranges. It is designed to have integrated avionics that greatly improve pilots' awareness of the situation surrounding them. The objectives of the F/A-22 development program are to (1) design, fabricate, test, and deliver nine F/A-22 development test aircraft, two non-flying structural test aircraft, six production representative test aircraft, and 37 flight-qualified engines; (2) design, fabricate, integrate, and test the avionics; and (3) design, develop, and test the support and training systems. The F/A-22 is being developed under contracts with Lockheed Martin Corporation, the prime contractor (for the aircraft), and Pratt & Whitney Corporation (for the engine). Following a history of increasing cost estimates to complete the development phase of the F/A-22 program, the National Defense Authorization Act for Fiscal Year 1998 established a cost limitation for both the development and production. Subsequently, the National Defense Authorization Act of 2002 eliminated the cost limitation for the development, but left the cost limit for production cost in place. The production program is now limited to $36.8 billion. The current cost estimate of the development program is $21.9 billion. Currently, the F/A-22 program is in both development and production. Development is in its final stages, and low rate initial production has begun. Since fiscal year 1997, funds have been appropriated to acquire production aircraft, and the F/A-22 acquisition plan calls for steadily increasing annual production rates. The aircraft's development problems and schedule delays have caused congressional concerns, particularly in light of DOD's planned increase in production rates. The National Defense Appropriations Act for Fiscal Year 2003 prohibited the obligation of funds for the acquisition of more than 16 production aircraft in fiscal year 2003, until the Under Secretary of Defense for Acquisition, Technology, and Logistics submits the following to the congressional defense committees: (1) a formal risk assessment that identifies and characterizes the potential cost, technical, schedule, or other significant risks resulting from increasing the F/A-22 production quantities prior to the Dedicated Initial Operational Test and Evaluation (DIOT&E) of the aircraft and (2) either a certification that increasing the F/A-22 production quantity for fiscal year 2003 beyond 16 aircraft involves lower risk and lower total program cost than staying at that quantity or implementing a revised production plan, funding, and test schedule. In December 2002, DOD submitted the risk assessment and certification to Congress. The F/A-22 developmental program did not meet key performance goals established for fiscal year 2002 and continues to confront numerous technical challenges. Major technical problems include instability of the avionics software, violent movement, or "buffeting," of vertical fins, overheating in portions of the aircraft, weakening of materials in the horizontal tail, and the inability to meet airlift support and maintenance requirements. Modifications are being made to some test aircraft to address some of these problems in preparation for operational testing. Nevertheless, these problems continue to restrict the performance and testing of the F/A-22. Software instability has hampered efforts to integrate advanced avionics capabilities into the F/A-22 system. Avionics control and integrated airborne electronics and sensors provide an increased awareness of the situation around the pilot. The Air Force told us that the avionics have failed or shut down during numerous tests of F/A-22 aircraft due to software problems. The shutdowns occur when the pilot attempts to use the radar, communication, navigation, identification, and electronic warfare systems concurrently. Although the plane can still be flown after the avionics have failed, the pilot is unable to successfully demonstrate the performance of the avionics. Therefore, the Air Force has had to extend the test program schedule. The Air Force recognized that the avionics problems pose a high technical risk to the F/A-22 program, and in June 2002 the Air Force convened a special team to address the problem. According to the team, the unpredictable nature of the shutdowns was not surprising considering the complexity of the avionics system. The team recommended that the software be stabilized in the laboratory before releasing it to flight testing. The team further recommended conducting a stress test on the software system architecture to reduce problems and ensure that it is operating properly. The Air Force implemented these recommendations. Further, the Air Force extended the avionics schedule to accommodate avionics stability testing and now plans to complete avionics testing in the first quarter of 2005. However, Air Force officials stated that they do not yet understand the problems associated with the instability of the avionics software well enough to predict when they will be able to resolve this problem. Under some circumstances, the F/A-22 experiences violent movement, or buffeting, of the vertical fins in the tail section of the aircraft. This occurs as air, moving first over the body and the wings of the aircraft, places unequal pressures on the vertical fins and rudders. Unless the violent movement is resolved or the fins strengthened, the vertical fins will break over time because the pressures experienced exceed the strength limits of the fins. In addition, the buffeting problem has restricted the testing of aerial maneuvers of the aircraft. Lockheed Martin has developed several modifications to strengthen the vertical fins and has performed an analysis to test the structural strength of the aircraft. It concluded that no flight restrictions above 10,000 feet are necessary as a result of buffeting. Currently, the Air Force has not begun testing to verify flight operations at or below 10,000 feet; operational limitations at altitudes below 10,000 feet remain in effect, with testing scheduled to begin in June 2003. Overheating in the rear portions of the aircraft has significantly restricted the duration of high-speed flight testing. As the F/A-22 flies, heat builds up inside several areas in of the rear of the aircraft. Continued exposure to high temperatures would weaken these parts of the aircraft. For example, a portion of the airframe that sits between the engines' exhausts experiences the highest temperatures. This intense heat could weaken or damage the airframe. To prevent this heat buildup during flight testing, the aircraft is restricted to flying just over 500 miles per hour, about the same speed as a modern jet liner, and significantly below the supercruise requirement. Currently, the F/A-22 flies with temperature sensors in those areas of the aircraft, and it slows down whenever the temperature approaches a certain level. The Air Force may add copper sheets to the rear of the aircraft to alleviate the problem. The Air Force began these modifications in January 2003 and plans to complete them by July 2003. F/A-22 aircraft have experienced separations of materials in the horizontal tail and the shaft, which allows the tail to pivot. Because the separations reduce tail strength, the Air Force restricted flight testing of some aircraft until it determined that this problem would not affect flight safety during testing. The Air Force and the contractor initially believed that improvements to the aircraft's manufacturing process would solve this problem. However, the Air Force has determined that it could only solve this problem by redesigning the tail of the aircraft. The Air Force plans to conduct flight testing of the redesigned tail between February 2004 and April 2004. The Air Force estimates it will not meet the F/A-22 airlift support requirement despite last year's estimate that it would meet all identified key performance parameters. (Appendix I contains a list of key performance parameters.) The airlift support requirement is that 8 C-141 aircraft or their equivalents would be sufficient to deploy a squadron of 24 F/A-22s for thirty days without resupply. Today the Air Force estimates that 8.8 C-141 equivalents will be necessary. The F/A-22's performance may also be affected by maintenance needs that exceed established objectives. The Air Force estimates that the F/A-22 should, at this point in its development, be able to complete 1.67 flying hours between maintenance actions and 1.95 flying hours by the end of development. However, aircraft are requiring five times the maintenance actions expected at this point in development. As of November 2002, the development test aircraft have been completing only .29 flying hours between maintenance actions. Therefore, the development test aircraft are spending more time than planned on the ground undergoing maintenance. In addition, the F/A-22 program has not completed the testing required to prove the aircraft can be maintained worldwide without unique support equipment. For example, the Air Force planned to fly the F/A-22 a minimum of 650 hours prior to the start of operational testing to establish that special support equipment is not necessary to maintain the materials on the exterior of the aircraft. These materials are critical to the aircraft's low observable, or stealthy, nature. However, as of December 2002, the program has only accomplished 191.6 hours. According to the Air Force, the program will not complete testing for this requirement until the completion of the development program, currently planned for July 2004. In 2002, the F/A-22 development program implemented several modifications to development aircraft to improve performance. The majority of modifications were related to installing the necessary upgrades to complete operational testing. The last three development test aircraft have required an average of 63 modifications. The first two production aircraft have required an average of 50 of these upgrades. In addition, the program repaired problems in the aircraft's arresting gear system that were discovered during development testing. Further, the Air Force has scheduled modifications to address the previously cited problems found with the vertical tail of the aircraft (fin-buffeting). The Air Force included these repairs in its 2002 modification schedule, but did not begin them in 2002. The modifications will begin during fiscal year 2003. Progress in F/A-22 flight testing was slower than expected in 2002 in all test areas, according to Office of the Secretary of Defense (OSD) testing officials. Consequently, the Air Force extended flight test schedules and reduced the number of flight tests. Many tasks originally planned for 2002 were rescheduled for 2003. Further, the Air Force now plans to conduct more developmental flight testing concurrently with operational testing. Continuing technical problems were the primary reasons for the delays in flight testing. In addition, late delivery of development aircraft to the flight test center was a contributing problem; three developmental aircraft were delivered from 9 to 12 months late. Late deliveries were due not only to technical problems, but also to continuing problems associated with the manufacture and assembly of development aircraft by the prime contractor. With the new schedule, the Air Force delayed the beginning of operational testing for 4 months, until the portion of developmental testing required to begin operational testing could be completed. Operational testing is now planned to begin in August 2003. Figure 1 and table 1 show the changes in the FA/-22 flight test schedules. However, according to OSD officials involved in operational testing, there is a high risk of not completing an adequate amount of development flight testing before operational testing is scheduled to begin. Indeed, we believe that it is unlikely that the Air Force will be able to complete all necessary avionics flight testing prior to the planned start of operational testing. Based on F/A-22 flight test accomplishment data and current flight test plans, we project that the start of operational testing might be delayed until January 2004. As a result, operational testing could be delayed by several months beyond the current planned date of August 2003. In December 2002, the Air Force estimated that development costs had increased by $876 million, bringing total development costs to $21.9 billion. This increase was due to the technical problems and schedule delays discussed earlier. In addition, since fiscal year 2001, there have been dramatic increases in planned funding for modernization upgrades that enhance the operational capabilities of the F/A-22, as shown in figure 2. Currently, the Air Force has almost $3.0 billion in funding for modernization projects, which it plans to spend through fiscal year 2009. Most of the recent increase in modernization funding is necessary to provide increased ground attack capability. Other modernization projects include upgrading avionics software, adding an improved short-range missile capability, upgrading instrumentation for testing, and incorporating a classified project. In December 2002, in response to the increase in development costs, the Under Secretary of Defense, Comptroller, approved the restructuring of the F/A-22 program. According to the Comptroller, the cost increase will not require increased funds from Congress. Rather, the estimated $876 million increase for development will be met by a $763 million decrease in production funding and a transfer of $113 million from modernization funds. This restructure eliminates 27 aircraft from the current production program, reducing the total number of aircraft to be acquired from 303 to 276. Despite continuing development problems and challenges, the Air Force plans to continue acquiring production aircraft at increasing annual rates. This is a very risky strategy, because, as we have previously reported, the Air Force may encounter higher production costs as a result of acquiring significant quantities of aircraft before adequate testing. Late testing could identify problems that require costly modifications in order to achieve satisfactory performance. For example, as shown in figure 3, the Air Force plans to acquire 20 aircraft during 2003, rather than the maximum of 16 Congress allowed without DOD's submittal of a risk assessment and certification. DOD justified this strategy in the December 2002 risk assessment and certification it submitted to Congress. In this document, DOD certified that acquiring more than 16 aircraft involved lower risk and lower total program cost than acquiring only 16. DOD identified the costs associated with acquiring more than 16 aircraft per year as between $7 million and $221 million, depending on the number of aircraft in excess of 16. DOD concluded that this additional cost would be less than the potential cost of modifying production aircraft once operational testing has been completed. Figure 3 shows the Air Force's acquisition plan. However, DOD's risk assessment may be overly optimistic because it is grounded in the conclusion that there is a low risk that remaining development and operational testing will identify needs for expensive modifications. The performance capabilities of the F/A-22 and its schedule will remain uncertain until technical problems have been addressed, including testing of modifications or fixes necessary to potentially alleviate these problems. Furthermore, we believe that the amount of development and operational testing and the remaining uncertainties increase the possibility that modifications considered unlikely in DOD's analysis will, indeed, need to be made. For example, the Air Force has still not completely defined the fin-buffet problem described earlier in this report. The remaining 15 percent of flight testing to help characterize the problem is not scheduled to begin until June 2003. Consequently, there is still the possibility that additional modifications and costs may be necessary to correct this problem on production aircraft. DOD's risk assessment acknowledges that additional fin buffet testing is needed, but concludes that modifications are not expected. The optimism of DOD's risk assessment is reflected in the Air Force's general acquisition strategy. As also shown by figure 3, the Air Force is currently committed to acquiring 73 production aircraft (26 percent) before operational and development testing is complete. We believe that-- like the fiscal year 2003 decision to acquire more than 16 aircraft--this is an overly optimistic strategy given the remaining F/A-22 technical problems and the current status of testing. As we have noted, acquiring aircraft before completing adequate testing to resolve significant technical problems increases the risk of costly modifications later. If F/A-22 testing schedules slip further--as we believe is likely--even more aircraft will be acquired before development and operational testing is complete, and the risk of costly modifications will increase still more. Continuing the acquisition of aircraft in increasing quantities when significant development testing and technical problems remain is an acquisition strategy that relies on overly optimistic assumptions regarding the outcome and timing of the remaining testing events. By employing such a strategy, major problems are more likely to be discovered after production has begun when it is either too late or very costly to correct them. At the very least, key decisions are being made without adequate information about the weapon system's demonstrated operational test results. In its certification, DOD quantified the estimated costs associated with a higher production rate. However, the potential advantage was predicated on the assumption that the risks of modifications are low. As we stated last year, by limiting F/A-22 production quantities and completing development testing, the Air Force could gain information that would reduce uncertainties and the risks of increased costs and delays before committing to additional production aircraft. As we discussed earlier in this report, DOD recently decided to reduce production quantities as part of a program restructure to address F/A-22 development problems and associated cost increases. Based on uncertainties about the resolution of problems found in the past year, we continue to maintain the position that production quantities should be limited. In light of continued uncertainties regarding the resolution of problems found in the past year and notwithstanding the December 2, 2002 certification provided by DOD, we recommend that the Secretary of Defense reconsider the Department's decision to increase the annual production rate beyond 16 aircraft until greater knowledge on any need for modifications is established through completion of operational testing, and update the 2002 risk assessment and certification with sufficient detail to allow for verification of the conclusions following the completion of operational testing. In written comments on a draft of this report, DOD stated that it agreed, for the most part, with our description of the current state of the F/A-22 program's content, schedule, and cost. However, DOD did not concur with our recommendation that it not increase its production rate beyond the maximum of 16 aircraft Congress allowed without DOD submitting a risk assessment and certification. DOD said that our recommendation does not sufficiently account for the costs of termination associated with the approval given to funding long-lead items, the manufacturing inefficiencies associated with a reduction in aircraft quantities, or the effects of inflation on the cost of acquiring aircraft at a lower rate. DOD also noted that we had not provided a quantitative assessment to justify limiting production, and it reiterated its reliance on the risk assessment and certification it submitted to Congress in December 2002. DOD also asserted, incorrectly, that our report concludes that minimal cost risk would be realized by slowing production. Following review of DOD's comments, we clarified the recommendation in our draft report by establishing two recommendations. These recommendations are based on the current state of the program-- including the challenges and risks it faces--and on our examination of DOD's risk assessment and certification. DOD acknowledges the challenges faced by the program but believes the risk of modification is low. As we discussed in this report, until testing has been completed and technical problems have been addressed, the performance capabilities of the F/A-22 and its schedule will remain uncertain; thus, it is not possible to predict that expensive modifications will not be required. For example, as we stated earlier in this report, DOD's risk assessment concludes that significant costs associated with a more extensive modification to resolve the fin buffet problem may be required, but the probability is low. DOD arrives at this conclusion even though the last phase of testing to help characterize the fin buffet problem has not yet begun. Furthermore, we continue to believe there is still significant risk that the F/A-22 program will not be able to begin operational testing as scheduled in August 2003. Subsequent to our providing the draft of this report to DOD for comment, OSD's operational test and evaluation office issued a report stating that F/A-22 technical and schedule risk are still high, as is the risk that operational testing will be further delayed. While DOD's December 2002 risk assessment and certification did provide an indication that manufacturing inefficiencies and inflation as a result of lower production rates would increase costs, sufficient detail was not provided in its risk assessment for us to verify DOD's conclusion. We requested additional detailed information to help us evaluate and verify the conclusions. However, the information provided to us was not adequate to verify the conclusions contained in the risk assessment. Regardless, even with such verification, still needing to be resolved are the uncertainties to date regarding when development problems can be fixed and the possibility of finding additional problems prior to the completion of operational testing. As a result, we have little confidence that existing problems can be quickly resolved and will not result in further delays. Our work has shown that continuing the acquisition of aircraft in increasing quantities when significant development testing and technical problems remain is risky. By employing such a strategy, major problems are more likely to be discovered after the program has begun production when it is either too late or very costly to correct them. DOD also provided various technical comments, which we have incorporated as appropriate. One of these comments related to the total number of production aircraft to be acquired. The projected number of production aircraft the Air Force plans to or can actually acquire has historically been fluid and elusive. For example, the President's budget for fiscal year 2003 reflected plans to acquire 333 production aircraft, even though the approved program at the time called for acquiring 295 production aircraft. In its technical comments, DOD stated that the approved program plan is to acquire 295 aircraft. As a result of the recent F/A-22 restructuring to cover development cost increases, the Air Force says that it now plans to acquire 276 aircraft. However, DOD estimates that the cost of production to acquire these 276 aircraft will be $42.2 billion, which exceeds the current production cost limit by $5.4 billion. Consequently, unless the production cost limit is raised or substantial cost reduction plans are achieved, it appears that the number of aircraft that can actually be purchased will have to be lowered from the 276 planned. This is particularly true if production or development costs--or both--continue to rise and no additional funds are provided by the Congress. Last month, we recommended in another report that DOD provide Congress with documentation reflecting the quantity of aircraft that DOD believes can be procured within the existing production cost limit. DOD's explanation in its technical comments to a draft of this report identifies the likelihood that F/A-22 aircraft quantities will continue to fluctuate. This makes our recent recommendation that much more compelling. To determine whether the development program is likely to meet performance goals, we analyzed information on the status of key performance parameters. We compared performance goals established by the Under Secretary of Defense for Acquisition, Technology, and Logistics with the Air Force's estimates of performance for completion of development made in December 2002. To identify the status of F/A-22 modifications, we collected updated information on the status of existing aircraft structural problems that have required aircraft modifications. To determine whether the program is expected to meet schedule goals, we reviewed program and avionics schedules and discussed potential changes to these schedules with F/A-22 program officials. We tracked progress in the flight test program and evaluated schedule variances in the contractors' performance management system and compared planned milestone accomplishment dates with actual dates. We tracked technical problems in manufacturing and assembling the development test aircraft. To determine whether the program is likely to meet the cost goal, we examined (1) the extent to which the development program is likely to be completed within the current cost estimate, (2) the Air Force's plans to fund the program for fiscal year 2003, and (3) the program's funding plan compared to the current cost estimate. In examining DOD's risk assessment, we discussed the various DOD assumptions and approaches used in the assessment with a program official who conducted the assessment. We then analyzed the various DOD assumptions and approaches used to make the assessment conclusions. In making these determinations, assessments, and identifications, we required access to current information about test results, performance estimates, schedule achievements and revisions, costs being incurred, aircraft modifications, and the program's plans for continued development and initial production. The Air Force and contractors gave us access to sufficient information to make informed judgments on the matters covered in this report. In performing our work, we obtained information or interviewed officials from the Office of the Secretary of Defense, Washington, D.C., and the F/A-22 System Program Office, Wright-Patterson Air Force Base, Ohio. We performed our work from September 2002 through December 2002 in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Secretary of the Air Force; and the Director, Office of Management and Budget. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 or Catherine Baltzell at (202) 512-8001 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix III. Margin Favorable 12% favorable 3% favorable 0 NA 15% favorable 5% favorable (0.8) unfavorable 0 0 0 The acceleration parameter is a measure of the time it takes the aircraft to increase speed to a certain level. If the aircraft is able to increase speed to a certain level in less time than expected, this is considered favorable. Therefore, a measure of less than 100 percent is favorable. Catherine Baltzell, Marvin E. Bonner, Edward Browning, Gary Middleton, Sameena Nooruddin, Madhav Panwar, Karen A. Richey, Don M. Springman, and Ralph White made key contributions to this report. Tactical Aircraft: F-22 Delays Indicate Initial Production Rates Should Be Lower to Reduce Risks. GAO-02-298. Washington, D.C.: March 5, 2002. Tactical Aircraft: Continuing Difficulty Keeping F-22 Production Costs Within the Congressional Limitation. GAO-01-782. Washington, D.C.: July 16, 2001. Tactical Aircraft: F-22 Development and Testing Delays Indicate Need for Limit on Low-Rate Production. GAO-01-310. Washington, D.C.: March 15, 2001. Defense Acquisitions: Recent F-22 Production Cost Estimates Exceeded Congressional Limitation. GAO/NSIAD-00-178. Washington, D.C.: August 15, 2000. Defense Acquisitions: Use of Cost Reduction Plans in Estimating F-22 Total Production Costs. GAO/T-NSIAD-00-200. Washington, D.C.: June 15, 2000. Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal Year 2001. GAO/OCG-00-8. Washington, D.C.: March 31, 2000. F-22 Aircraft: Development Cost Goal Achievable If Major Problems Are Avoided. GAO/NSIAD-00-68. Washington, D.C.: March 14, 2000. Defense Acquisitions: Progress in Meeting F-22 Cost and Schedule Goals. GAO/T-NSIAD-00-58. Washington, D.C.: December 7, 1999. Fiscal Year 2000 Budget: DOD's Production and RDT&E Programs. GAO/NSIAD-99-233R. Washington, D.C.: September 23, 1999. Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal Year 2000. GAO/OCG-99-26. Washington, D.C.: April 16, 1999. Defense Acquisitions: Progress of the F-22 and F/A-18E/F Engineering and Manufacturing Development Programs. GAO/T-NSIAD-99-113. Washington, D.C.: March 17, 1999. F-22 Aircraft: Issues in Achieving Engineering and Manufacturing Development Goals. GAO/NSIAD-99-55. Washington, D.C.: March 15, 1999. F-22 Aircraft: Progress of the Engineering and Manufacturing Development Program. GAO/T-NSIAD-98-137. Washington, D.C.: March 25, 1998. F-22 Aircraft: Progress in Achieving Engineering and Manufacturing Development Goals. GAO/NSIAD-98-67. Washington, D.C.: March 10, 1998. Tactical Aircraft: Restructuring of the Air Force F-22 Fighter Program. GAO/NSIAD-97-156. Washington, D.C.: June 4, 1997. Defense Aircraft Investments: Major Program Commitments Based on Optimistic Budget Projections. GAO/T-NSIAD-97-103. Washington, D.C.: March 5, 1997. F-22 Restructuring. GAO/NSIAD-97-100BR. Washington, D.C.: February 28, 1997. Tactical Aircraft: Concurrency in Development and Production of F-22 Aircraft Should Be Reduced. GAO/NSIAD-95-59. Washington, D.C.: April 19, 1995. Tactical Aircraft: F-15 Replacement Issues. GAO/T-NSIAD-94-176. Washington, D.C.: May 5, 1994. Tactical Aircraft: F-15 Replacement Is Premature as Currently Planned. GAO/NSIAD-94-118. Washington, D.C.: March 25, 1994.
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The Air Force is developing the F/A-22 aircraft to fly at higher speeds for longer distances, be less detectable, and improve the pilot's awareness of the surrounding situation. The F/A-22 will replace the Air Force's existing fleet of F-15 aircraft. Over the past several years the program has experienced significant cost overruns and schedule delays. Congress mandated that GAO assess the development program and determine whether the Air Force is meeting key performance, schedule, and cost goals. GAO also assessed the implications of the progress of the development program on production. The F/A-22 development program did not meet key performance, schedule, and cost goals in fiscal year 2002, and delays in the flight test program have led to an increase in the development cost estimate of $876 million. In response to this increase, DOD restructured the development program and reduced production aircraft by 27. If additional delays occur, further changes may be required. The program also continues to address technical problems that have limited the performance of test aircraft, including violent movement or "buffeting" of the vertical fins, overheating in portions of the aircraft, weakening of materials in the horizontal tail, and instability of avionics software. Air Force officials cannot predict when they will resolve these problems. These technical problems, along with the late delivery of aircraft to the flight test center, have delayed the development program. Based on F/A-22 flight test accomplishment data and current flight test plans, we believe that operational testing will likely be delayed several months beyond the planned August 2003 start date. The F/A-22 program is in its final stages of development, and low-rate initial production has begun. Since fiscal year 1997, funds have been appropriated to acquire production aircraft, and the F/A-22 acquisition plan calls for steadily increasing annual production rates. However, GAO considers the Air Force's acquisition strategy at high risk for increases in production costs. In past reports, GAO has reported that acquiring aircraft while significant technical challenges remain does not allow for adequate testing of the aircraft. The uncertainties regarding performance capabilities of the F/A-22 aircraft and its development schedule will persist until technical problems have been addressed, including testing of modifications or fixes necessary to potentially alleviate these problems. In light of those uncertainties, steadily increasing annual production rates could result in the Air Force having to modify a larger quantity of aircraft after they are built.
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When Congress passed the Bank Holding Company Act Amendments of 1970, it prohibited tying practices by banks involving products other than those regarded to be traditional products provided by banks. The prohibition, in Section 106(b) of the 1970 amendments, was based on the unique role banks have in the economy, in particular their important role as a source of credit, which Congress feared could allow them to gain a competitive advantage in other financial markets. Section 106(b) applies only to banks and generally prohibits banks from tying any service or product, except for traditional bank products. The tying provisions also allowed the Federal Reserve Board to make exceptions that are not contrary to the purposes of the tying prohibitions. During the first 20 years after the enactment of the tying provisions, the Board received few requests from banking organizations for exceptions to the tying provisions, and it granted none. More recently, however, the Board has decided to use its exception granting authority to allow banks to offer broader categories of packaging arrangements if in its judgment they benefit consumers and do not impair competition. In 1971, the Board adopted a regulation that applied tying rules to bank holding companies and their nonbank subsidiaries, and at the same time it approved a number of nonbanking activities these entities could engage in under the Bank Holding Company Act. The Board recently relaxed the tying restrictions. Citing the competitive vitality of the markets in which nonbanking companies generally operate, the Board rescinded its regulatory extension of the statutory tying provisions to bank holding companies and their nonbank subsidiaries in February 1997. At the same time, the Board broadened the traditional bank products' exception by expanding it to include those products when offered by the bank's affiliates. The other federal regulator with key responsibilities related to bank practices, such as tying, is the Office of the Comptroller of the Currency (OCC), which regulates U.S. national banks. In recent years, OCC has increasingly allowed banks to expand the number of products and services they offer. Concerns have been raised by some groups that OCC's actions allowing national banks to expand into new financial product markets could lead to increased tying. Many financial institutions that compete with banks and bank holding companies, notably securities firms and insurance companies, are not covered by the tying restrictions. However, they, along with banks and their affiliates, are subject to the more broadly applicable antitrust laws, such as the Sherman Act, which prohibit anticompetitive practices such as tying arrangements. In a tying claim under the antitrust laws, a plaintiff must prove, among other things, that the seller had economic power in the market for the tying product, that the alleged tie had an anticompetitive effect in the tied-product market, and that the arrangement did not have an insubstantial effect on interstate commerce. This burden of proof contrasts with the less stringent evidentiary requirements that apply to the bank tying provisions, which do not require proof of any of the above three elements. Congressional hearing records indicate that policymakers made plaintiffs' burden of proof less stringent for the tying provisions because they believed that proving an antitrust violation involving banks, bank holding companies, and subsidiaries could pose difficulties for plaintiffs. Their reasoning was that few plaintiffs could be presumed able to readily ascertain a bank's economic power in a particular product or service market and its ability to impose a tying arrangement. Since 1980, increased cross-industry competition in the financial services marketplace has altered the position banks occupy in the nation's credit market. Some have argued that this change could reduce a bank's ability to engage in tying activities. Aggregated balance sheet data show that the banking sector's share of the overall assets of U.S. financial intermediaries declined from about 35 percent in 1980 to about 25 percent in 1994, as shown in figure 1. In the same period, several other financial sector participants, including mutual funds and government sponsored enterprises (GSE), increased their share of those assets. However, other changes in the marketplace, including the growth of new types of credit-related activities that do not appear on the balance sheet, may have had an offsetting effect on the banking industry's position in the overall U.S. credit market. Two research papers by Federal Reserve staff have suggested that U.S. banks' share of the credit market is not declining. One paper showed that the proportion of total bank revenues coming from off-balance sheet banking activities, such as backup lines of credit, guarantees to commercial paper issuers, and derivatives, rose from 25.0 percent in 1982 to 36.7 percent in 1995. But a lack of information about the role these new off-balance sheet activities play in the U.S. financial services market complicates attempts to assess recent overall credit market trends or the effect these trends may have on banks' market power. Interest in the tying provisions has been heightened by regulatory actions and Supreme Court decisions, most recently one in March 1996, that have permitted banks to further expand their marketing activities in annuity and insurance sales. These actions and decisions have added to the insurance industry's apprehensions about the banking industry's marketing of annuities and insurance and the possible effect it may have on the banking industry's ability to engage in tying activities. The future impact of the tying provisions may also be affected by the outcome of proposed reforms to the 1933 Glass-Steagall Act that would allow banks to offer a greater range of services and products. Proposed reforms stem from the belief that the separation of banks from securities firms and insurers incorporated in the U.S. bank regulatory framework are out-of-date in today's converging credit and capital markets. Although these proposals are viewed as potentially leading to greater efficiencies in the marketplace, concerns have also been raised about their possible effects on banks' ability to link the services and products they offer by engaging in tying. The objectives of our review were to provide information on (1) evidence of violations of the tying provisions by banks and their affiliates and regulatory efforts to ensure compliance with the provisions, (2) views on the tying provisions expressed by representatives of securities and insurance firms and independent insurance agents, and (3) views expressed by representatives of banks and bank regulators. In addition to reviewing bank regulators' files for evidence of possible tying abuses, we contacted (1) the Securities Industry Association (SIA) to obtain referrals to securities firms that were concerned about tying activities, (2) groups representing insurance companies and agents who may have knowledge of tying activities, and (3) academic experts. Based on referrals from SIA, we spoke with officials at six securities firms and groups representing securities firms in New York; San Francisco; Washington, D.C.; and Richmond, VA, to obtain their views on the continuing need for the tying provisions. Based on insurance industry referrals, we had similar discussions with officials of eight insurance companies and groups representing insurance companies and agents in New York; Washington, D.C.; San Francisco; and Lynchburg, VA. We also interviewed officials representing 11 state financial regulatorsand representatives of 24 local governments or consumer/small business advocates in Texas, California, North Carolina, and Minnesota to determine if any tying complaints had been directed to them. We interviewed consumer/small business organizations in North Carolina and Minnesota, two states that have allowed state-chartered banks to sell insurance, because we were told that instances of insurance product tying were most likely to show up in such states if they were occurring. In addition, we contacted the Securities and Exchange Commission and the Federal Trade Commission to determine whether they had received tying complaints involving banks. We also reviewed studies of private litigation under the tying provisions and updated this information with our own legal research. We conducted our interviews prior to the Board's September 1996 proposal to relax the tying restrictions. To identify possible tying abuses and regulatory practices used to detect and prevent such abuses, we interviewed Federal Reserve and OCC examiners and officials about the results of their routine examinations and about their procedures and practices during routine examinations. We focused on the Federal Reserve and OCC because the banks or bank holding companies they regulate are more likely to offer a broader range of products and services, which are believed to be susceptible to tying.To determine how examiners implemented examination procedures for tying, we also judgmentally selected three examinations conducted in 1994 at a large, medium, and small bank by the OCC Dallas office and three inspections conducted at bank holding companies with insurance or securities activities by the Dallas Federal Reserve Bank. We also reviewed examinations conducted by the San Francisco Federal Reserve during 1993 and 1994 of banks identified as not being in compliance with the tying requirements. We spoke with agency attorneys and examiners about the special joint Federal Reserve and OCC investigation of specific allegations involving tying violations and reviewed related workpapers. We also reviewed complaint files at the Board in Washington, D.C., and OCC headquarters to determine the number and type of complaints received about tying violations. In addition, we interviewed representatives from two corporations and eight local government organizations in California whose transactions were identified as being affected by tying in a complaint to the Federal Reserve. To obtain the banking industries' views on the continued need for the tying provisions, we contacted officials from (1) four banking trade associations located in Washington, D.C., and Austin, TX, and (2) three banks in San Francisco and New York. We also discussed the tying provisions' effects on the industry with regulators from the Federal Reserve and OCC in Washington, D.C., Dallas, San Francisco, and New York. In addition, we spoke with Federal Reserve officials in Richmond, VA. We also spoke with Federal Reserve economists in Washington, D.C., Richmond, VA, and a former Federal Reserve economist in Minneapolis on changes in the credit market. We conducted our work from April 1995 through November 1996 in accordance with generally accepted government auditing standards. We provided a draft of this report for comment to the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Chairman, FDIC. The resulting written comments are discussed on p. 17 and reprinted in appendixes I, II, and III. We found little evidence of tying by banks. Agency officials we interviewed were aware of only one instance of a tying violation identified during regulators' routine examinations of banks or inspections of bank holding companies since 1990. Likewise, they said regulators' investigations of complaints since 1990, including an SIA allegation of tying practices at several banks and bank holding companies, have identified only a few instances of tying. Inquiries with a cross section of state and local officials, academic experts, consumer groups, and small business contacts who we were told were knowledgeable about tying likewise revealed few instances of bank tying. Several bank representatives have argued that the lack of evidence indicates that tying is not occurring, although others believe that it indicates that the tying provisions are having a deterrent effect on such activity. Finally, the limited evidence of tying may be indicative of the difficulty involved in identifying instances of tying or consumers' general hesitance to report such instances due to their reluctance to jeopardize their credit relationships. During routine examinations, both OCC and Federal Reserve examiners are expected to evaluate a banking organization's compliance with the tying provisions. They are also expected to investigate potential tying practices that they become aware of during the course of their work. OCC officials said they were not aware of any instances of tying identified through their routine examinations since 1990. Over the same period, Federal Reserve officials cited one instance of tying identified during a bank examination. Officials at both agencies explained that tying violations are difficult to find during examinations because illegal tying arrangements are not clearly evident in loan documentation, and it is difficult to know where to look for evidence of tying without a specific complaint. OCC procedures require examiners to look for tying arrangements among the various types of loans being reviewed, including commercial, real estate, and construction loans. Examiners are expected to address tying practices along with other credit-related bank practices while reviewing credit and collateral files, especially those relating to loan agreements. Federal Reserve procedures also require examiners to review tying policies and to follow an inspection checklist in their examinations. Examiners are required to review bank holding companies' and state-chartered banks' written policies and procedures, training programs, and audit practices. These reviews are to look at a bank's review of pertinent loans where products or services may be susceptible to improper tying arrangements and to include a review of specific transactions if the banking organization is found to be deficient in its antitying policies and procedures. In addition, procedures call for examiners to assess whether employees are aware of tying and of how to prevent tying violations. Finally, examiners are required to determine whether internal audit departments perform any work to detect or prevent tying violations. In the nine OCC and Federal Reserve examinations or inspections we reviewed, we found that examiners followed required examination procedures for monitoring compliance with the tying provisions. Although the portions of these OCC and Federal Reserve examinations or inspections devoted to tying, which typically involved 1 to 2 days of work, were less extensive than other portions, it appeared that examiners performed the required steps to review the adequacy of an institution's antitying practices. Examiners told us that specific complaints filed with the regulatory agencies were the most effective means of detecting tying violations. However, they said that few complaints have been brought to their attention over the years. Both OCC and the Federal Reserve typically handle complaints from their Washington, D.C., headquarters offices, although consumers can notify the regulators of tying complaints at either the district or headquarters level. From January 1990 through September 1996, records show that the regulators received a total of only 13 tying complaints, of which 7 were handled by OCC and 6 were handled by the Federal Reserve. Records also show that at the time of our review, seven cases were determined to be unfounded, three resulted in actions against the bank or holding company, and the remaining three were unresolved, as shown in table 1. The three cases that resulted in actions against the bank or holding company were resolved through written agreements or orders by the Federal Reserve, one of which included a $10,000 civil penalty. A 1992 complaint by SIA prompted the Federal Reserve and OCC to launch a special investigation of tying abuses that ultimately identified one violation of the tying provisions. The investigation, which represented an extensive joint effort by the two regulators, was undertaken largely as a response to SIA solicitation of its membership that elicited a small number of responses. An SIA official we contacted attributed the low number of responses to members' reluctance to jeopardize their banking relationships. Nevertheless, one large securities firm responded with a list of transactions involving characteristics that might indicate tying abuses. SIA included this list in its complaint to OCC and the Federal Reserve. In response to the complaint, OCC and the Federal Reserve agreed to jointly investigate seven large bank holding companies and four large banks. During the investigation, the regulators reviewed 344 transactions from a universe of 3,213 transactions that included both credit and underwriting components completed between 1987 and 1992. They reviewed transaction fee structures to determine if fee-splitting was prevalent, interviewed selected customers as well as bank holding company and bank officials, and attempted to determine if the bank and nonbank subsidiary referred customers to one another. The investigation found 24 transactions that were regarded as suspicious out of the 344 transactions reviewed. The examiners found that these suspicious transactions generally involved either aggressive marketing by bank officers or discounts offered by a bank to customers who purchased more than one nontraditional bank product or service. In the one instance in which the team concluded regulatory action was required, regulators found three questionable transactions. One involved a loan officer who included on a terms sheet sent to the customer a condition that the bank's affiliate be selected for placement of a revenue bond issue. The case was resolved through an agreement reached by Federal Reserve officials and bank officers that required the bank to strengthen its policies, procedures, and internal compliance program relating to compliance with the tying provisions. Our review of legal literature and cases shows that private claims of unlawful bank tying have been relatively infrequent and that the courts seldom have found violations of the tying provisions. Three studies we identified noted limited use of the tying provisions. For example, one study published in 1993, which identified 44 federal court decisions published since 1972 that involved the tying provisions, reported that the courts found violations in only 4 cases. Our research of cases decided after 1992, reviewing 43 federal court decisions and 9 state court decisions involving bank tying allegations, found no decisions in which a bank was found liable for violating the tying provisions. Our discussions with representatives of various groups, including state regulators, academic experts, small business trade organizations, and firms identified as possible sources by SIA, produced little evidence of tying practices by banks. For these discussions, we selected insurance groups, small business trade organizations, and chambers of commerce that we were told had a close relationship with businesses that might be affected if tying were occurring. Financial regulators in 11 states, representatives of 8 local governments, and 16 consumer or small business groups, were generally not aware of or were unable to provide any details on complaints of tying. In a few instances in which we learned of a complaint, the affected parties would not respond to our inquiry or said that they were concerned that the use of their information would affect their relationship with their bank. Some securities and insurance representatives also claimed to be aware of bank tying activities but said they were unable to obtain permission from their customers to release the information to us. Although the limited evidence of tying may indicate that little tying is actually occurring, other explanations that possibly account for the lack of evidence include consumers' reported reluctance to make formal complaints and the difficulty of detecting tying practices. Some bank representatives maintain that the lack of evidence indicates that tying is not occurring to a significant extent because market forces allow few opportunities, and that the provisions are thus unnecessary. Others, including some regulators and representatives of securities firms, agree that the lack of evidence indicates little tying is occurring but maintain that the absence of tying is a result of the deterrent effects of the tying provisions and the associated regulatory monitoring. It is also possible that the limited evidence of tying may reflect consumers' reluctance to make formal complaints, as in instances we encountered when borrowers were reportedly reluctant to talk with us for fear of jeopardizing their relationship with a bank. Finally, the possibility cannot be ruled out that the shortage of evidence of tying may indicate the difficulty consumers or regulators have identifying tying violations. The extent of concern about tying varied within the insurance and securities industries. Industry groups that were most concerned about tying by banks included independent insurance agents, who expressed the greatest concern, and some insurance and securities firms that viewed banks as a threat to their share of the market. Representatives of firms and agents that expressed concern about tying advocated maintaining or strengthening the tying provisions, which they said help offset banks' competitive advantages and ensure adequate consumer protection. Insurance industry representatives we contacted who said tying was a problem were generally concerned about the ongoing expansion of bank services into insurance. One such representative expressed particular concern about the tying of various common types of insurance policies easily linked to bank customers' preexisting bank-related business. Potential markets she cited included the profitable markets of automobile loans, where she said that banks will likely increasingly take over automobile insurance sales, and mortgages, where she said that banks could be expected to take over title and homeowners insurance sales. She added that basic competitive pressures push banks toward aggressive sales behavior that verges on violating the tying provisions when they influence customers to take products or services or offer discounts. She said that most insurance agents believe that banks at times violate the tying provisions in offering complementary services and products to customers, but that it is difficult to detect such instances. Representatives of a major association of independent insurance agents had initially expressed concerns about OCC actions that have allowed national banks to expand their insurance activities and about court decisions upholding these actions. However, in November 1996, the association changed its position and supported the possible integration of financial services. In doing so, however, it expressed its view that future federal legislation should establish the states as the "functional regulators" responsible for insurance activities along with the continued enforcement of the tying provisions by federal banking regulators. Securities industry representatives have also expressed concern about proposals to eliminate the tying provisions. For instance, a securities firm association and a securities firm we contacted expressed concerns about changes in the laws regarding tying prohibitions in the face of pending reforms to the Glass-Steagall Act. Both said that they opposed any easing of the tying provisions because of their view that such restrictions are necessary for fair competition in the financial market. Proponents of maintaining or strengthening the tying provisions from the insurance and securities industries said that the tying restrictions are needed to offset banks' economic advantages. They argued that such economic advantages derive from banks' access to the Federal Reserve's discount window and their coverage by federal deposit insurance, both of which are perceived as either lowering the cost of funds or reducing the amount of capital banks need to hold as a buffer against risk to satisfy creditors. Although some viewed overall credit market changes occurring since 1980 as an indication that banks may now be less able to engage in anticompetitive tying practices than when the tying provisions were adopted, others, including insurers, securities firms, and academic experts, have suggested that certain specific markets may still be susceptible to the exercise of market power. Instead of focusing on broad measures of banks' share of the overall U.S. credit market, they suggest that the focus should be on the availability of credit to small businesses in certain geographic areas. Recent economic analyses of changes in the banking industry and in the availability of credit provide differing views on the effects these changes may have on small borrowers. Several papers observe that small borrowers in certain local credit markets may be more likely affected by the exercise of market power by banks than those in other localities. While some agree that consolidation of the banking industry may result in a decline in the number of small banks, the main lender to small businesses, they disagree on the effects this decrease will have on the availability of credit to small businesses. For example, one paper suggests that with the likely decline in the number of small banks, the flow of credit to small businesses will likely decline. Another observes that if small businesses are not being served, large banks will have a strong profit motive to expand their small business lending. Banking industry officials we contacted believed that marketplace changes since the passage of the tying provisions over 25 years ago have significantly reduced the original economic justification for the tying provisions. The officials said that the provisions have been made largely unnecessary by increased competition among credit providers in the financial marketplace. This increased competition, they said, makes it more difficult for any particular bank to exert sufficient credit leverage to force a customer into a tying arrangement. Those holding this view point to the reduction in banks' share of the overall U.S. credit market. Several bank representatives we contacted expressed a desire to have Congress remove the tying provisions, particularly since they believed there is limited evidence of tying violations. They noted that banks alone are subject to the tying provisions, which do not prevent other financial institutions from combining products that banks are prohibited from linking. An official from one bank noted that securities firms are subject only to the less restrictive antitrust laws applicable to all businesses, which require, among other things, that a plaintiff demonstrate that the firm charged with tying has sufficient economic power to enable it to tie and that a tying arrangement has a substantial effect on interstate commerce. In contrast, the official noted, the tying provisions do not require the plaintiff to demonstrate the bank's market power. Bank officials we contacted also pointed out that maintaining internal controls to guard against tying within banks adds extra costs that other financial providers do not bear. They said such internal controls limit information, resource, and financial linkages between banks and their holding companies or affiliated entities. According to the officials, the internal control limitations impair economies of scale otherwise possible in the provision of complementary services. In addition, they said customers are adversely affected by banks' inability to reduce overall prices by offering complementary services as a package. Bank industry representatives we contacted disagreed that banks have a competitive advantage that must be offset by requirements, such as the tying provisions. They acknowledged that banks have access to the Federal Reserve's discount window and federal deposit insurance, but they do not view these as advantages. They pointed out that banks pay for deposit insurance through premium assessments and are subject to regulatory restrictions and to oversight of their activities that competing firms in other sectors are not subject to. A banking representative also pointed out that, with the passage of the 1991 Federal Deposit Insurance Corporation Improvement Act, it is now easier for the Federal Reserve to lend directly to all types of financial firms with liquidity needs in a crisis--not just banks. Given the ongoing convergence of credit and capital markets, banking officials expressed concerns about potential adverse effects on their industry if the tying provisions are not relaxed or removed. They felt that the existence of the Sherman Act obviates the need for the tying provisions. They did not feel that the banking industry has special characteristics that necessitate a separate set of provisions. In response to our questions about the need for the tying provisions, OCC's official view emphasized the importance of the provisions that prohibit banks from conditioning the availability of one product on the purchase of another, while the Federal Reserve chose not to provide an official position. OCC observed that the tying provisions increase banks' awareness of their responsibilities to their customers as they expand the array of products and services offered. For example, OCC, in its October 1996 guidance to national banks regarding sales of insurance and annuities, stated that the agency remained committed to enforcing the provisions and emphasized the need for national banks to maintain procedures to prevent violations. Although the Federal Reserve responded that the agency had no official position on our questions about the need for the tying provisions, it likewise has cited the tying provisions in connection with its recent action to ease restrictions on banks' marketing activities. For example, in November 1996, the Federal Reserve noted the role of the tying provisions in preventing banks from gaining unfair competitive advantages by tying or otherwise linking their products together. We also discussed the tying provisions with staff at both agencies. In general, the staff were not surprised that we had found limited evidence of bank tying, but they expressed mixed views on the reasons. Several regulators attributed the lack of evidence to the tying provisions' deterrent effects or to the difficulty involved in finding documentation to support allegations of tying. Other regulators believed that increased competition among credit providers makes it difficult for any particular bank to exert enough economic leverage to force a borrower into a tying arrangement. A Federal Reserve official suggested that the sophistication and price sensitivity of today's consumers limit banks' ability or power to tie products. He explained that, although consumers may not realize that tying is illegal, they are able to recognize a bad deal when they see it. The Federal Reserve, OCC, and FDIC reviewed a draft of this report and either agreed with the information presented or had no formal comments. The comment letters are reprinted in appendixes I, II, and III. In its comments, the Federal Reserve suggested that we had found that it had effective examination procedures to review compliance with the tying provisions. Our review, however, did not assess the effectiveness of the Federal Reserve's examination procedures. As agreed with your office, unless you publicly announce the report's contents earlier, we plan no further distribution of it until 7 days from the date of this report. We will then send copies to the Chairman of the House Commerce Committee, and to the Chairmen and Ranking Minority Members of the Senate and House Banking Committees. We will also send copies to the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Chairman, FDIC. We will also make copies available to others on request. This report was prepared under the direction of Kane A. Wong, Assistant Director, Financial Institutions and Markets Issues. Other major contributors are listed in appendix IV. If you have any questions, please call me on (202) 512-8678. Paul G. Thompson, 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. 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Pursuant to a congressional request, GAO provided information on banks' compliance with the tying provisions of the Bank Holding Company Act Amendments of 1970, focusing on: (1) evidence of tying abuses by banks and their affiliates and regulatory efforts to ensure compliance with the provisions; (2) views on the tying provisions expressed by representatives of securities and insurance firms and independent insurance agents; and (3) views on the tying provisions expressed by representatives of banks and the Federal Reserve and the Office of the Comptroller of the Currency (OCC). GAO noted that: (1) it found limited evidence of tying activity by banks; (2) Federal Reserve and OCC officials GAO interviewed were aware of only one violation identified during routine bank examinations or hold company inspections since 1990; (3) from January 1990 through September 1996, the Federal Reserve and OCC received and investigated 13 tying-related complaints, only 3 of which resulted in actions against the bank or holding company; (4) bank regulators' special investigation of seven large bank holding companies and four large banks in response to a 1992 tying complaint identified only one instance of tying that led to regulatory action; (5) GAO's interviews with state regulators, small business groups, and others identified little evidence of tying violations, although it was suggested that the limited evidence could be based, at least in part, on borrowers' reluctance to report violations for fear of jeopardizing their banking relationships; (6) those representatives of securities and insurance firms and independent insurance agents GAO contacted that expressed concern about tying advocated maintaining or strengthening the tying provisions as a way of offsetting the competitive advantages they believe banks enjoy; (7) some industry representatives and academic experts interviewed said that a more important consideration than the banking industry's share of the credit market is the availability of credit; (8) bank industry representatives viewed the tying provisions as impairing banks' ability to maximize the economic benefits they might otherwise obtain by offering complementary services; (9) some banking representatives also said that banks' evolving role as only one of many providers of credit makes them less able to coerce customers into accepting tied products or services; (10) with regard to banks' access to the discount window and federal deposit insurance, banking representatives pointed out that, with recent legislative changes, it is now easier for the Federal Reserve to lend directly to various financial firms with liquidity needs in a crisis, not just banks; (11) while the Federal Reserve chose not to take an official position on the need for the tying provisions, OCC cited the provisions' importance in making banks aware of their responsibilities to customers as they provide an increasing array of products and services; and (12) some regulatory staff expressed the belief that the tying provisions may have a deterrent effect, but others believed increased competition in the marketplace makes it difficult for banks to force a borrower into a tying arrangement.
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The complexity of the environment in which HCFA 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 spending totaled over $220 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 Medicare's numerous and wide-ranging activities, HCFA must monitor the roughly 50 claims administration contractors that pay claims and set 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, the managed care program component (Medicare+Choice plans), and Medicare supplemental insurance policies (Medigap). The providers billing Medicare create, with program beneficiaries, a vast universe of stakeholders--hospitals, general and specialty physicians, and other providers of health care services--whose interests vary widely. HCFA's responsibility to run the program in a fiscally prudent way has made the agency a lightening rod for those discontented with program policies. In particular, HCFA's administrative pricing of services has often been contentious. However, when Medicare is the dominant payer for services or products, HCFA cannot rely on market prices to determine appropriate payment amounts because Medicare's share of payments distorts the market. Moreover, because Medicare is prevented from excluding some providers to do business with others that offer better prices, it is largely impractical for HCFA to rely on competition to determine prices. Medicare's public sector status also means that any changes require public input. Thus, HCFA is constrained from acting swiftly to reprice services and supplies even when prevailing market rates suggest that payments should be modified. The solicitation of public comment is a necessary part of the federal regulatory process 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 HCFA's work. The Balanced Budget Act of 1997 (BBA) alone has had a substantial impact on HCFA's workload, requiring, among other things, that the agency develop new payment methods for different post-acute-care and ambulatory services within a short time frame and 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 means to adjust plan payments based partially on enrollees' health status. Tasked with administering this highly complex program, HCFA earns mixed reviews in managing Medicare. On one hand, HCFA presides over a program that is very popular with beneficiaries and the general public. It has implemented payment methods that have helped constrain program cost growth and has paid claims quickly at little administrative cost. On the other hand, HCFA has difficulty making needed refinements to payment methods. It has also fallen short in its efforts to ensure accurate claims payments, oversee its Medicare claims administration contractors, and ensure the quality of Medicare services. In recent years, HCFA has taken steps to achieve greater success in these areas. However, the agency now faces criticism for imposing payment safeguards that many providers feel constitute an undue administrative burden. HCFA has been successful in developing payment methods that have helped to contain Medicare cost growth. Generally, over the last 2 decades, Congress has required HCFA to move Medicare away from reimbursing providers based on their costs for every service provided and use payment methods that seek to control spending by rewarding provider efficiency and discouraging excessive service use. Some efforts have been more successful than others, and 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 has 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--as well as for hospital outpatient departments. Prospective payment systems can help to constrain the overall growth of Medicare payments. But as new payments systems affect provider revenues, HCFA often receives criticism about the appropriateness and fairness of its payment rates. HCFA has had mixed success in marshalling the evidence to assess the validity of these criticisms and to make appropriate refinements to these payment methods to ensure that Medicare is paying appropriately and adequately. HCFA has 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 has 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 is 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. Taken together, these findings suggest that an investment in HCFA's administrative functions is a trade-off that could ultimately save program dollars. Moreover, due in part to HCFA's historically uneven oversight, the performance of some Medicare's claims administration contractors has been unsatisfactory. Among its failings, HCFA relied on unverified performance information provided by contractors and limited checking of each contractor's internal management controls. HCFA's performance reviews and treatment of problems identified were not done using consistent criteria across contractors. In the last year, HCFA has taken significant steps to improve its management and oversight of contractors. Nevertheless, key areas needing improvement remain, such as policies to verify contractor-reported data and controls over contractor accountability and financial management, including debt collection activities. A major aspect of contractor performance--the stewardship activities that contractors conduct to safeguard Medicare dollars--is itself a story of mixed results. In the early 1990s, HCFA's contractors decreased certain key safeguard activities to maintain claims processing timeliness under constrained budgets. In order to ensure that program safeguards were strengthened, the Congress created the Medicare Integrity Program (MIP), which gave HCFA a stable source of funding for these activities as part of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). In fiscal year 2000, HCFA used its MIP funding to support a wide range of anti-fraud-and-abuse efforts, including provider and managed care organization audits and targeted medical reviews of claims. These audits and reviews, targeted at providers whose previous billings or cost reports have been questionable, have been a cost-effective approach in identifying overpayments. Based on HCFA's estimates, in fiscal year 2000, MIP saved the Medicare program more than $16 for each dollar spent. As part of its safeguard efforts, HCFA also has begun to measure how accurately its contractors process claims, to determine if individual contractors are effective in safeguarding program payments. Such objective information could provide HCFA with important management information and identify contractors' "best practices" that could serve as a model for others. While HCFA has strengthened its payment safeguard activities, these efforts have raised concerns among providers about the clarity of billing rules and the efforts needed to be in compliance. Providers whose claims are in dispute have complained about the burden of reviews and audits and about the fairness of some specific steps the contractors follow. However, their concerns about fairness may also emanate from the actions of other health care overseers--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. HCFA faces a difficult task in finding an appropriate balance between ensuring that Medicare pays only for services allowed by law while 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 them. In fiscal year 2000, HCFA's contractors conducted complex medical claims reviews of only three-tenths 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 HCFA's auditing and review procedures for physician claims to assess how they might be improved to better serve the program and providers. HCFA's oversight of health care quality, a resource-intensive activity, has significant shortcomings. The agency is responsible for overseeing compliance with federal quality standards for the services delivered to Medicare beneficiaries. As much of the actual inspection of quality is carried out by the states, HCFA must work with the states to ensure that the inspectors of nursing homes, home health agencies, renal dialysis centers, psychiatric hospitals, and certain Medicare-certified acute care hospitals identify significant care problems. Our findings on nursing home quality present a very disturbing picture: in 1999, we reported that an unacceptably high number of the nation's 17,000 nursing homes--an estimated 15 percent--had recurring care problems that caused actual harm to residents or placed them at risk of death or serious injury. Our previous findings showed that complaints by residents, family members, or staff alleging harm to residents remained uninvestigated in some states for weeks or months. HCFA's efforts to oversee state monitoring of nursing home quality were limited in scope and effectiveness, owing, in part, to a lack of expert staff to assess the state inspectors' performance. Even with this record of weak federal oversight, nursing homes get more scrutiny than other health care providers. States survey nursing homes at least yearly, on average, whereas other facilities are surveyed much less frequently. For example, home health agencies were once routinely reviewed annually, but surveys now vary and can be as infrequent as every 3 years. In addition, our work has shown that the number of HCFA-funded inspections of dialysis facilities declined significantly between 1993 and 1999, dropping the proportion reviewed from 52 percent to 11 percent. Yet, in 1999, 15 percent of the facilities surveyed had deficiencies severe enough, if uncorrected, to warrant terminating their participation in Medicare. In addition to the challenges inherent in running Medicare, other factors associated with HCFA's structure and capacity diminish the agency's ability to administer the program effectively. These limitations leave HCFA poorly positioned to operate Medicare as a modern, efficient health care program. HCFA faces several limitations in its efforts to manage Medicare effectively. These include divided management focus, little continuity of leadership, limited capacity, lack of a performance-based management approach, and insufficient flexibility to modernize program operations. HCFA's management focus is divided across multiple programs and responsibilities. Despite Medicare's $220-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 HCFA 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 HIPAA standards 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 interspersing program activities across newly established centers. However, after the reorganization, many stakeholders claimed that they could no longer obtain consistent 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 could improve efforts to more efficiently manage aspects of Medicare. At least two other factors weaken agency focus. First, the frequent turnover of the administrator has complicated the agency's implementation of long-term Medicare initiatives or pursuit of a consistent management strategy. The maximum term of a HCFA administrator is, as a practical matter, only as long as that of the President who appointed him or her. Historically, their actual tenure has been even shorter. In the 24 years since HCFA's inception, there have been 21 administrators or acting administrators, whose tenure has been, on average, about 1 year. Over 15 percent of the time, HCFA has had an acting administrator. These short tenures have not been conducive to carrying out strategic plans or innovations an administrator may have developed for administering Medicare efficiently and effectively. Of equal concern is the sparseness of HCFA's senior ranks. Its corps of senior executives is smaller than that of most other civilian agencies having significantly smaller annual expenditures. In fiscal year 1999, HCFA had 49 senior executive officials to manage Medicare, Medicaid, and SCHIP (among other programmatic responsibilities) and nearly $400 billion in expenditures. While some tasks at HCFA are contracted out-- thus providing HCFA with purchased executive expertise--contractors' objectives may not be fully aligned with those of the agency. Indeed, the critical need to oversee contractors effectively to ensure that they are fulfilling their responsibilities has been repeatedly demonstrated. In addition to leadership constraints, the agency's capacity is limited relative to its multiple, complex responsibilities. Inadequate information systems and human capital hobble HCFA's ability to carry out the volume of claims administration, payment and pricing, and quality oversight activities demanded of the agency. Ideally, program managers should be able to rely on their information systems to create a feedback loop that allows them to monitor performance, use the information to develop policies for improvement, and track the effects of newly implemented policies. In reality, most of the information technology HCFA relies on is too outdated to routinely produce such management information. Despite major advances in information technology in recent years, HCFA relies on outmoded systems, some of which date back to the 1970s, to pay claims and maintain data on beneficiaries' use of services. As a result, HCFA cannot easily query its information systems to obtain prompt answers to basic management questions. Using its current systems, HCFA is not in a position to report promptly to the Congress on the effects of new prospective payment policies 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. It cannot obtain reliable data on beneficiaries enrolled in managed care plans and must reconcile one system's output with data from other systems. Finally, HCFA lacks a set of rules to govern how it will develop, implement, and operate systems to prevent and detect inappropriate access. Staff shortages--in terms of skills and numbers--also beset HCFA. These shortages were brought into sharp focus as the agency 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 the appropriateness of a health plan's denial of services to a beneficiary--and few managed care staff had training or experience in data analysis--key to monitoring internal trends in plan performance over time and assessing plan performance against local and national norms. Staffing constraints have also handicapped HCFA's efforts to ensure quality of care. In recent years, the agency has made negligible use of its most effective oversight technique for assessing state agencies' abilities to identify serious deficiencies in nursing homes--an independent survey performed by HCFA employees following the completion of a state survey. Conducting a sufficient number of these comparisons is important because of concerns that some state agencies may miss significant problems, but HCFA lacked sufficient staff and resources to perform enough of these checks. In 1999, the number of HCFA independent surveys averaged about two per state--a frequency totally inadequate to fairly measure any state's performance. At the same time, HCFA faces the 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 leave HCFA unprepared to handle Medicare's future population growth and medical technology advances. To assess its needs systematically, HCFA 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 and analyzing the gaps between them. 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, HCFA faces the challenge of attracting highly qualified employees with specialty skills. Due to the rapid rate of change in the health care system and HCFA's expanding mission, the agency's existing staff may not possess the needed expertise. While the Congress has granted exemptions from the Office of Personnel Management salary rules for information technology staff, these exemptions do not extend to other skills--such as clinical experience and managed care marketing expertise. While HCFA has many resource-related challenges--including rehabilitating its information systems--the agency has not documented its resource needs well. As early as January 1998, we reported that the agency lacked an approach--consistent with the Government Performance and Results Act of 1993 (GPRA)--to develop a strategic plan for its full range of program objectives. Since then, the agency has developed a plan, but it has not tied global objectives to management performance. Moreover, its workforce planning efforts remain incomplete. To encourage a greater focus on results and improve federal management, the Congress enacted 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. 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, where it ranked second lowest. It should therefore be no surprise that HCFA managers' responses concerning the extent to which they were held accountable for results--42 percent--was significantly lower than the 63 percent reported by the rest of the government. Statutory constraints are another structural issue that at times frustrate HCFA's efforts to manage effectively. One such constraint involves HCFA's authority to contract for claims administration services. 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 gave professional associations of hospitals and certain other institutional providers the right 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 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 declines to renew its Medicare contract, the Association--rather than HCFA--chooses the replacement contractor. This process effectively limits HCFA's flexibility to choose the contractors it considers most effective. HCFA has 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 has been seeking other Medicare contracting reforms, such as giving the agency general authority 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 HCFA's inception, the agency and Medicare, in particular, have not kept pace. Nevertheless, HCFA is expected to make Medicare a prudent purchaser of services using private sector techniques, improve its customer relations, and be prepared to implement benefit and financing reforms. Private insurance has evolved over the last 40 years and now offers comprehensive policies and employs management techniques designed to improve the quality and efficiency of services purchased. 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 because many have detailed data on service use across enrollees and providers, as well as wide latitude in how they run their businesses. In contrast, HCFA's outdated and inadequate information systems, statutory constraints, and the fundamental obligation to be publicly accountable have stymied efforts to incorporate private sector innovations. In a recent study, the National Academy for Social Insurance has concluded that these 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, HCFA would need enhanced capacity to broadly implement many of these innovations. HCFA is also expected to improve its customer service to the provider community. In seeking answers from HCFA headquarters, regional offices, and claims administration contractors, providers contend that the agency does not speak with one voice, adding frustration to complexity. We are currently studying ways in which communication with providers-- including explanations of Medicare rules--could be improved. HCFA has also been expected to improve communications with beneficiaries, particularly as the information pertains to health plan options. As required by the BBA, HCFA began a new National Medicare Education Program. For 3 years the agency has worked to educate beneficiaries and improve their access to Medicare information by annually distributing a Medicare handbook containing comparative health plan information; establishing a telephone help line and an Internet web site with, among other things, comparative information on nursing homes, health plans, and Medigap policies; and sponsoring local education programs. Although funding for these activities previously came largely from user fees collected from Medicare+Choice plans, future funding is less certain. At the same time, such outreach efforts are becoming increasingly important, because in 2002 beneficiaries' options for switching health plans will be more limited than they are today. The future is likely to hold new challenges for CMS. For example, the agency may be expected to oversee a prescription drug benefit administered by third parties. As we reported to this Committee last year, the administration of a drug benefit would entail numerous challenges, as the strategies now used by the private sector are not readily adaptable to Medicare because of its public sector obligations. Those challenges notwithstanding, the capacity issue remains. The number of prescriptions for Medicare beneficiaries could easily approach the current number of claims for all other services, or about 900 million annually. Today's processing and scrutiny of drug claims by pharmacy benefit managers (PBM) is very different from Medicare's handling of claims for other services. PBMs have the ability to provide on-line, real-time drug utilization reviews. These serve a quality- and cost-control function by supplying information to pharmacists regarding such things as whether a drug is appropriate for a person based on his or her age, medical condition, and other medications, as well as whether the drug is covered under the insurer's benefit and what copayments will apply. If the use of PBMs or other entities were an option in administering a Medicare prescription drug benefit, it is not clear how much they or the others would have to increase current capacity or instead use more of the capacity already built into their information and claims processing systems--a consideration that could significantly affect the administrative costs that may be incurred. To administer this benefit through such contracts would require the agency to increase its managerial ranks with the personnel qualified to oversee such an operation. This would include staff with pharmaceutical industry expertise who could structure performance contracts in line with program goals for beneficiary access and fiscal prudence. To meet these and other expectations will require an agency with adequate capacity to manage the Medicare program. The agency will need sufficient flexibility to act prudently, while being held accountable for its results- based decisions and their implementation. It will also need to devote management attention to the fundamentals of day-to-day operations. Medicare is a popular program that millions of Americans depend on for covering their essential health needs. However, the management of the program has fallen short of expectations because it has not always appropriately balanced or satisfied beneficiaries', providers', and taxpayers' needs. For example, stakeholders expect that Medicare will price services prudently; that providers will be treated fairly and paid accurately; and that beneficiaries will clearly understand their program options and will receive services that meet quality standards. In addition, there are expectations that the agency will be prepared to implement restructuring or added benefits in the context of Medicare reform. Today's Medicare agency, while successful in certain areas, may not be able to meet these expectations effectively without further congressional attention to its multiple missions, capacity, and flexibility. The agency will also need to do its part by implementing a performance-based approach that articulates priorities, documents resource needs, and holds managers accountable for accomplishing program goals. 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 or Leslie G. Aronovitz at (312) 220-7600. Other contributors to this statement include Sheila Avruch, Barrett Bader, and Hannah F. Fein.
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Medicare is a popular program that millions of Americans depend on for covering their essential health needs. However, the management of the program has fallen short of expectations because it has not always appropriately balanced or satisfied the needs of beneficiaries, providers, and taxpayers. For example, stakeholders expect that Medicare will price services prudently; that providers will be treated fairly and paid accurately; and that beneficiaries will clearly understand their program options and will receive services that meet quality standards. In addition, there are expectations that the agency will be prepared to implement restructuring or added benefits in the context of Medicare reform. Today's Medicare, although successful in some areas, may not be able to meet these expectations effectively without further congressional attention to its multiple missions, capacity, and flexibility. The program will also need to do its part by implementing a performance-based approach that articulates priorities, documents resource needs, and holds managers accountable for accomplishing program goals.
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Countries can take varying approaches to reducing greenhouse gas emissions. Since energy use is a significant source of greenhouse gas emissions, policies designed to increase energy efficiency or induce a switch to less greenhouse-gas-intensive fuels, such as from coal to natural gas, can reduce emissions in the short term. In the long term, however, major technology changes will be needed to establish a less carbon- intensive energy infrastructure. To that end, a U.S. policy to mitigate climate change may require facilities to achieve specified reductions or employ a market-based mechanism, such as establishing a price on emissions. Several bills to implement emissions pricing in the United States have been introduced in the 110th and 111th Congresses. These bills have included both cap-and-trade and carbon tax proposals. Some of the proposed legislation also include measures intended to limit potentially adverse impacts on the international competitiveness of domestic firms. Estimating the effects of domestic emissions pricing for industries in the United States is complex. For example, if the United States were to regulate greenhouse gas emissions, production costs could rise for many industries and could cause output, profits, or employment to fall. However, the magnitude of these potential effects is likely to depend on the greenhouse gas intensity of industry output and on the domestic emissions price, which is not yet known, among other factors. Additionally, if U.S. climate policy was more stringent than in other countries, some domestic industries could experience a loss in international competitiveness. Within these industries, adverse competitiveness effects could arise through an increase in imports, a decrease in exports, or both. For regulated sources, greenhouse gas emissions pricing would increase the cost of releasing greenhouse gases. As a result, it would encourage some of these sources to reduce their emissions, compared with business- as-usual. Under domestic emissions pricing, production costs for regulated sources could rise as they either take action to reduce their emissions or pay for the greenhouse gases they release. Cost increases are likely to be larger for production that is relatively greenhouse gas-intensive, where greenhouse gas intensity refers to emissions per unit of output. Cost increases may reduce industry profits, or they may be passed on to consumers in the form of higher prices. To the extent that cost increases are passed on to consumers, they could demand fewer goods, and industry output could fall. While emissions pricing would likely cause production costs to rise for certain industries, the extent of this rise and the resulting impact on industry output are less certain due to a number of factors. For example, the U.S. emissions price and the emissions price in other countries are key variables that will help to determine the impact of emissions pricing on domestic industries. However, future emission prices are currently unknown. Additionally, to the extent that emissions pricing encourages technological change that reduces greenhouse gas intensity, potential adverse effects of emissions pricing on profits or output could be mitigated for U.S. industries. Several studies by U.S. agencies and experts have used models of the economy to simulate the effects of emissions pricing policy on output and related economic outcomes. These models generally find that emissions pricing will cause output, profits, or employment to decline in sectors that are described as energy intensive, compared with business-as-usual. In general, these studies conclude that these declines are likely to be greater for these industries, as compared with other sectors in the economy. However, some research suggests that not every industry is likely to suffer adverse effects from emissions pricing. For example, a long-run model estimated by Ho, Morgenstern, and Shih (2008) predicts that some U.S. sectors, such as services, may experience growth in the long run as a result of domestic emissions pricing. This growth would likely be due to changes in consumption patterns in favor of goods and services that are relatively less greenhouse gas-intensive. Potential international competitiveness effects depend in part on the stringency of U.S. climate policy relative to other countries. For example, if domestic greenhouse gas emissions pricing were to make emissions more expensive in the United States than in other countries, production costs for domestic industries would likely increase relative to their international competitors, potentially disadvantaging industries in the United States. As a result, some domestic production could shift abroad, through changes in consumption or investment patterns, to countries where greenhouse gas emissions are less stringently regulated. For example, consumers may substitute some goods made in other countries for some goods made domestically. Similarly, investment patterns could shift more strongly in favor of new capacity in countries where greenhouse gas emissions are regulated less stringently than in the United States. Stakeholders and experts have identified two criteria, among others, that are important in determining potential vulnerability to adverse competitiveness effects: trade intensity and energy intensity. Trade intensity is important because international competitiveness effects arise from changes in trade patterns. For example, if climate policy in the United States were more stringent than in other countries, international competition could limit the ability of domestic firms to pass increases in costs through to consumers. Energy intensity is important because the combustion of fossil fuels for energy is a significant source of greenhouse gas emissions, which may increase production costs under emissions pricing. Legislation passed in June 2009 by the House of Representatives, H.R. 2454, 111th Cong. (2009), uses the criteria of trade intensity and energy intensity or greenhouse gas intensity, among others, to determine eligibility for the Emission Allowance Rebate Program, which is part of the legislation. H.R. 2454 specifies how to calculate the two criteria. Trade intensity is defined as the ratio of the sum of the value of imports and exports within an industry to the sum of the value of shipments and imports within the industry. Energy intensity is defined as the industry's cost of purchased electricity and fuel costs, or energy expenditures, divided by the value of shipments of the industry. Reducing carbon emissions in the United States could result in carbon leakage through two potential mechanisms. First, if domestic production were to shift abroad to countries where greenhouse gas emissions are not regulated, emissions in these countries could grow faster than expected otherwise. Through this mechanism, some of the expected benefits of reducing emissions domestically could be offset by faster growth in emissions elsewhere, according to Aldy and Pizer (2009). Second, carbon leakage may also arise from changes in world prices that are brought about by domestic emissions pricing. For example, U.S. emissions pricing could cause domestic demand for oil to fall. Because the United States is a relatively large consumer of oil worldwide, the world price of oil could fall when the U.S. demand for oil drops. The quantity of oil consumed by other countries would rise in response, increasing greenhouse gas emissions from the rest of the world. These price effects may be a more important source of carbon leakage than the trade effects previously described. Two key indicators of potential vulnerability to adverse competitiveness effects are an industry's energy intensity and trade intensity. Proposed U.S. legislation specifies that (1) either an energy intensity or greenhouse gas intensity of 5 percent or greater; and (2) a trade intensity of 15 percent or greater be used as criteria to identify industries for which trade measures or rebates would apply. Since data on greenhouse gas intensity are less complete, we focused our analysis on industry energy intensity. Most of the industries that meet these criteria fall under 4 industry categories: primary metals, nonmetallic minerals, paper, and chemicals. However, there is significant variation in specified vulnerability characteristics among different product groups ("sub-industries"). Although our report examined the four industry categories, figures 1 through 4 or the following pages illustrate the variation among different sub-industries within the primary metals industry, as well as information on the type of energy used and location of import and export markets. The data shown in these figures are for the latest year available. As shown by sub-industry examples in figure 1, energy and trade intensities differ within primary metals. For example, primary aluminum meets the vulnerability criteria with an energy intensity of 24 percent and a trade intensity of 62 percent. Ferrous metal foundries meets the energy intensity criteria, but not the trade intensity criteria. Steel manufacturing--products made from purchased steel--and aluminum products fall short of both vulnerability criteria. Iron and steel mills has an energy intensity of 7 percent and a trade intensity of 35 percent and is by far the largest sub-industry example, with a 2007 value of output of over $93 billion. The energy and trade intensity for all primary metal products is denoted by the "x" in figure 1. Among the primary metals sub-industry examples shown in figure 2, the types of energy used also vary. Iron and steel mills uses the greatest share of coal and coke, and steel manufacturing and ferrous metal foundries uses the greatest proportion of natural gas. Since coal is more carbon- intensive than natural gas, sub-industries that rely more heavily on coal could also be more vulnerable to competitiveness effects. The carbon intensity of electricity, used heavily in the production of aluminum, will also vary on the basis of the source of energy used to generate it and the market conditions where it is sold. Data shown for "aluminum" include primary aluminum and aluminum products, and net electricity is the sum of net transfers plus purchases and generation minus quantities sold. Industry vulnerability may further vary depending on the share of trade with countries that do not have carbon pricing. To illustrate this variability, figure 3 provides data on the share of imports by source, since imports exceed exports in each of the primary metals examples. As shown, while primary aluminum is among the most trade-intensive, the majority of imports are from Canada, an Annex I country with agreed emission reduction targets. For iron and steel mills, over one-third of imports are from the European Union and other Annex I countries, not including Canada ("EU plus"). However, for iron and steel mills, almost 30 percent of imports are also from the non-Annex I countries of China, Mexico, and Brazil. While less trade-intensive, steel manufacturing and aluminum products each has greater than one-third of imports from China alone. As shown in figure 4, adverse competitiveness effects from emissions pricing could increase the already growing share of Chinese imports that exists in some of the sub-industries. Among the examples, iron and steel mills, steel manufacturing, and aluminum products exhibit a growing trade reliance on Chinese imports since 2002. This trend has largely been driven by lower labor and capital costs in China, and, according to representatives from the steel industry, China has recently been producing 50 percent of the world's steel. Mr. Chairman, this concludes my prepared statement. Thank you for the opportunity to testify before the Committee on some of the issues addressed in our report on the subject of climate change trade measures. I would be happy to answer any questions from you or other members of the Committee. For further information about this statement, please contact Loren Yager at (202) 512-4347 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Christine Broderick (Assistant Director), Etana Finkler, Kendall Helm, Jeremy Latimer, Maria Mercado, and Ardith Spence. 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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Countries can take varying approaches to reducing greenhouse gas emissions. Since energy use is a significant source of greenhouse gas emissions, policies designed to increase energy efficiency or induce a switch to less greenhouse-gas-intensive fuels, such as from coal to natural gas, can reduce emissions in the short term. In the long term, however, major technology changes will be needed to establish a less carbon-intensive energy infrastructure. To that end, a U.S. policy to mitigate climate change may require facilities to achieve specified reductions or employ a market-based mechanism, such as establishing a price on emissions. Several bills to implement emissions pricing in the United States have been introduced in the 110th and 111th Congresses. These bills have included both cap-and-trade and carbon tax proposals. Some of the proposed legislation also include measures intended to limit potentially adverse impacts on the international competitiveness of domestic firms. Estimating the potential effects of domestic emissions pricing for industries in the United States is complex. If the United States were to regulate greenhouse gas emissions, production costs could rise for certain industries and could cause output, profits, or employment to fall. Within these industries, some of these adverse effects could arise through an increase in imports, a decrease in exports, or both. However, the magnitude of these potential effects is likely to depend on the greenhouse gas intensity of industry output and on the domestic emissions price, which is not yet known, among other factors. Estimates of adverse competitiveness effects are generally larger for industries that are both relatively energy- and trade-intensive. In 2007, these industries accounted for about 4.5 percent of domestic output. Estimates of the effects vary because of key assumptions required by economic models. For example, models generally assume a price for U.S. carbon emissions, but do not assume a similar price by other nations. In addition, the models generally do not incorporate all policy provisions, such as legislative proposals related to trade measures and rebates that are based on levels of production. Proposed legislation suggests that industries vulnerable to competitiveness effects should be considered differently. Industries for which competitiveness measures would apply are identified on the basis of their energy and trade intensity. Most of the industries that meet these criteria are in primary metals, nonmetallic minerals, paper, and chemicals, although significant variation exists for product groups (sub-industries) within each industry. Additional variation arises on the basis of the type of energy used and the extent to which foreign competitors' greenhouse gas emissions are regulated. To illustrate variability in characteristics that make industries vulnerable to competitiveness effects, we include illustrations of sub-industries within primary metals that meet both the energy and trade intensity criteria; examples that met only one criterion; and examples that met neither, but had significant imports from countries without greenhouse gas pricing.
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I will briefly review, and in some cases update, our report's findings on progress made in achieving the Bosnia peace operation's four key objectives. These objectives were to (1) provide a secure environment for the people of Bosnia; (2) create a unified, democratic Bosnia that respects the rule of law and internationally recognized human rights, including cooperating with the war crimes tribunal in arresting and bringing those charged with war crimes to trial; (3) ensure the rights of refugees and displaced persons to return to their prewar homes; and (4) rebuild the economy. The Bosnian people are more secure today than before the Dayton Agreement was signed. Bosnia's Serb, Croat, and Bosniak armies have observed the cease-fire, allowed NATO's Implementation Force and later the Stabilization Force, known as SFOR, to monitor their weapons sites and troop movements, and have reduced their force levels by a combined total of 300,000. The U.S.-led "train and equip" program intended to help stabilize the military balance in the region and integrate the Bosniak and Bosnian Croat armies into a unified Federation army is progressing, albeit slower than anticipated. Nonetheless, Bosnian Serb political leaders have not fully lived up to arms reduction agreements. According to a State Department official, the United States could increase assistance under the Federation train and equip program to provide a military balance if the Bosnian Serbs do not comply with the arms control agreements. Bosnian Croat and Bosniak political leaders have made some progress in reforming their civilian police so that they provide security for Bosnians of all ethnic groups and do not commit human rights abuses; however, Bosnian Serb political leaders have refused to cooperate with the International Police Task Force (IPTF) in reforming their police force in accordance with democratic policing standards. Moreover, many international observers, including some in the State Department, believe that keeping an international military force in place is still the only deterrent to major hostilities in Bosnia. A unified, democratic state that respects the rule of law and adheres to international standards of human rights has yet to be achieved. Elections for institutions of Bosnia's national and two entity governments (Republika Srpska and the Federation) were held in September 1996, and many national joint institutions intended to unify Bosnia's ethnic groups have met at least once. However, most of these institutions are not yet functioning; Bosnia's three separate, ethnically-based armies continue to be controlled by their wartime political leaders; and many Bosnian Serbs and Croats and their political leaders retain their wartime goal of establishing ethnically pure states separate from Bosnia. Moreover, the human rights situation worsened in the months after the election, particularly in Bosnian Serb-controlled areas. And ethnic intolerance remains strong throughout Bosnia, in large part because Bosnia's political leaders control the media and use it to discourage reconciliation among the ethnic groups. Additionally, as of July 10, 1997, 66 of the 74 people publicly indicted by the war crimes tribunal remained at large, some openly serving in official positions and/or retaining their political power. While the Bosniaks had surrendered all indicted war criminals in their area of control to the war crimes tribunal, Bosnian Serbs and Croats had not surrendered to the tribunal any indicted war criminals in their areas. U.S. and other officials view progress on this issue as central to the achievement of the Dayton Agreement's objectives. On July 10, 1997, NATO-led troops in Bosnia for the first time attempted to arrest people indicted for war crimes, specifically two Bosnian Serb suspects who had been charged under a sealed indictment for complicity with commitment of genocide. British SFOR soldiers arrested one suspect and, in self-defense, shot and killed the other after he fired at them. U.S. officials have stated that this action does not represent a change in policy regarding SFOR's mandate to apprehend indicted war criminals. The policy remains that SFOR troops will arrest indicted war criminals when they come upon them in the normal course of their duties if the tactical situation allows. Despite guarantees in the Dayton Agreement and extensive international efforts to resolve the issue, the return of refugees and displaced persons to their homes has barely begun in Bosnia. The returns that did take place in 1996 and 1997 were mainly people going back to areas controlled by their own ethnic group because returns across ethnic lines proved nearly impossible. Of the estimated 2 million people who were forced or fled from their homes during the war, in 1996 about 252,000 returned home (88,000 refugees and 164,000 displaced persons), while at the same time over 80,000 others fled or were driven from their homes. Almost all of these people returned to areas in which they would be in the majority ethnic group. For 1997, the United Nations High Commissioner for Refugees (UNHCR) decided to give priority to majority returns and projected that 200,000 refugees would return to their homes, all to majority areas. As of March 1997, the pace of refugee returns exceeded UNHCR's target as about 17,000 refugees returned to Bosnia. In mid-June 1997, however, UNHCR officials in Bosnia told us that this pace had recently fallen off, and, if the current trend continued, the number of refugee returns for 1997 would be lower than projected. A number of factors have combined to hinder returns, such as fear, stemming from lack of personal security; violence triggered by attempted cross-ethnic returns; poor economic prospects; and lack of suitable housing. Further, political leaders of all ethnic groups have used nonviolent means to resist returns, including the retention of existing, discriminatory property laws and continuing other policies that place insurmountable barriers to returns. For example, according to UNHCR officials, Bosnian Croat political leaders, as directed by Croatia, have moved 5,000 to 6,000 displaced persons--including Bosnian Croat army members and their families--into the formerly Serb-populated city of Drvar, a policy designed to prevent Serbs from returning and to cement the ethnic separation of Bosnia. This policy has been implemented by all three ethnic groups during and after the war. Recent efforts to address the return problem involved many aspects of the Bosnia peace operation. For example, in spring 1997 UNHCR, with support from the U.S. government, announced the "Open Cities" project that is designed to provide economic incentives to those areas that welcome and actively integrate refugees and displaced persons into local communities. In April, the Federation refugee minister provided UNHCR with a list of 25 cities and towns for participation in the project. As of mid-June 1997, UNHCR was evaluating the level of commitment of these and other communities that had indicated an interest in the project. According to a U.N. official, in early June the Republika Srpska Minister of Refugees was going to submit a list of nine cities in Republika Srpska that wanted to take part in the project. At the last minute, however, the minister was directed not to participate by Radovan Karadzic, who effectively retains control of Republika Srpska. According to a State Department official, the U.S. embassy and UNHCR in early July 1997 officially recognized the first three communities to receive assistance under the "Open Cities" project. The U.S. government is also funding minority return programs in two other communities. Of these five communities, three are in Bosniak-controlled areas, one is in a Bosnian Croat-controlled area, and one is in Republika Srpska. Economic conditions have improved somewhat since the end of the war, particularly in the Federation. Economic reconstruction has begun, and about $1.1 billion in international assistance was disbursed in 1996 as part of the 3- to 4-year reconstruction program. Most of this money has gone to the Federation. The U.S. government, primarily through the U.S. Agency for International Development (USAID), committed $294.4 million during the program's first year. This money went to, among other things, repair municipal infrastructure and services, provide small business loans, and give technical assistance for the development of national and Federation economic institutions. By the end of 1996, there were many signs of economic recovery, primarily in the Federation. At the end of 1996, however, economic activity was still at a very low level, and much reconstruction work remained to be done. Furthermore, many key national and Federation economic institutions--such as Bosnia's central bank--were not yet fully functioning. The biggest obstacle to progress in economic reconstruction and economic institution building has been the lack of cooperation among Bosnia's political leaders in implementing infrastructure projects and economic institutions that would unite the ethnic groups within the Federation and across the two entities. The international community has made many attempts to use economic assistance to encourage compliance and discourage noncompliance with the Dayton Agreement. For example, during 1996, according to a State Department official, all major bilateral donors had withheld economic assistance from Bosnian Serb-controlled areas because Bosnian Serb political leaders failed to comply with key human rights and other provisions of the Dayton Agreement. Further, on May 30, 1997, the Steering Board of the Peace Implementation Council, the organization that provides political guidance for the civilian aspects of the operation, reiterated previous Council statements on this issue, tied assistance for housing and local infrastructure to acceptance of returns, and gave priority to UNHCR's "Open Cities" project. Moreover, an international donors' conference, originally planned to be held at the end of February 1997, was postponed because Bosnia's council of ministers had not yet adopted key economic laws. On June 19, 1997, the donors' conference was again postponed because the government of Bosnia, although it had made progress in passing economic laws, had not made sufficient progress toward developing an economic program with the International Monetary Fund. As of July 15, 1997, the donors' conference had not been rescheduled. Some international officials in Bosnia have questioned the effectiveness of threatening to withhold economic assistance from Bosnian Serb- and Croat-controlled areas in this conditional manner, partly because these areas have received little international assistance to date. According to a State Department official, when the U.S. government decided on its conditionality policy toward Republika Srpska, it knew from analysis that there would be no quick results from the denial of this assistance. State now believes there is increasing evidence that elected officials of Republika Srpska are under mounting political pressure to make the necessary concessions to qualify for reconstruction assistance. In March 1997, State and USAID officials told us that some Bosnian Serb political leaders, including the President of Republika Srpska, had shown a willingness to accept economic assistance that includes conditions such as employing multiethnic work forces. These leaders, according to State, are willing to accept conditional assistance because they see the growing gap in economic recovery between the Federation and Republika Srpska. As of July 1997, there were no tangible results in this area, primarily because attempts to work with these leaders were blocked by Radovan Karadzic. During our June 1997 visit to Bosnia, numerous U.S. and international officials involved in trying to help implement the Dayton Agreement emphasized four areas as being critically important to the agreement's success: (1) the urgent need to arrest Radovan Karadzic; (2) the upcoming municipal elections, specifically the potentially contentious installation of municipal governments in areas that had a different ethnic composition before the war; (3) the outcome of the arbitration decision over control of Brcko; and (4) the need for a continued international military force, along with a U.S. component, in Bosnia after SFOR's mission ends in June 1998. As we previously reported, in 1996 and 1997 the international community made some attempts to politically isolate Karadzic and remove him from power. For example, under pressure from the Organization for Security and Cooperation in Europe (OSCE) and the international community, Karadzic stepped down as the head of the ruling Bosnian Serb political party on July 18, 1996. According to international observers, however, these efforts to remove Karadzic from power did not work; instead, he has effectively retained his control and grown in popularity among people in Republika Srpska. U.S. Information Agency polls showed that between April 1996 and January 1997, the percentage of Bosnian Serbs who viewed Karadzic very favorably increased from 31 percent to 56 percent, and the percentage who viewed him somewhat favorably or very favorably rose from 68 percent to 85 percent. During our June 1997 fieldwork in Bosnia, many officials with whom we spoke were unequivocal in their opinion that Radovan Karadzic must be arrested or otherwise removed from the scene in Bosnia as soon as possible. They told us that Karadzic, a leader who is not accountable to the electorate, is blocking international efforts to work with the more "moderate" Bosnian Serb political leaders in implementing the Dayton Agreement. For example, he has not allowed other political leaders, including elected ones, to abide by agreements they have made with the international community on small-scale attempts to link the ethnic groups politically or economically. Observers also told us that Karadzic still controls Republika Srpska police and dominates Bosnian Serb political leaders through a "reign of terror." According to a U.S. embassy official, the arrest of Karadzic is a necessary--but insufficient--step to allow Dayton institutions to function effectively and to encourage more moderate Bosnian Serbs to begin implementing some provisions of the Dayton Agreement. Although the arrest alone would not assure full implementation of Dayton, without the arrest Dayton would have almost no chance to succeed. Bosnia's municipal elections are scheduled to be held on September 13 and 14, 1997. OSCE and other officials with whom we spoke were concerned about the volatile environment that will likely surround the installation of some newly elected municipal governments, specifically those in municipalities that had a different ethnic composition before the war. Because people will be able to vote where they lived in 1991, the election results in such municipalities could be very difficult to implement. For example, it is possible that a predominantly Bosniak council could be elected to Srebrenica, a city that had a prewar Bosniak-majority population but was "ethnically cleansed" by Serbs in 1995; and Bosnian Serbs could win the majority on the municipal council of Drvar, a town with a predominantly Serb majority before and during much of the war but now populated in large part by Bosnian Croats. To address these potential "hotspots," an interagency working group led by OSCE is developing an election implementation plan for the municipal elections. An early version of this plan calls for a final certification that confirms which municipal councils have been duly installed by the end of 1997. This plan recognizes that candidates who win office must be able to travel to municipal council meetings and to move about their municipality without fear of physical attack or intimidation. It calls for local police to provide security for council members and for IPTF and SFOR to supervise the development of the security plan and, together with OSCE and other organizations, monitor its implementation. According to OSCE and SFOR officials, SFOR's current force level of 33,000 will be augmented by 4,000-5,000 troops in Bosnia around the time of the municipal elections; it is unclear, however, what SFOR's force levels will be during the potentially contentious installation period. To support the augmentation, as of July 10, 1997, the Department of Defense (DOD) planned to increase the number of U.S. troops in Bosnia from about 8,000to about 10,250 during August and September 1997. According to a DOD official, on October 1, 1997, SFOR troop levels would be drawn down to either the current force level or a lower number, depending on decisions that may be reached before that date. OSCE and other officials in Bosnia told us that a further drawdown of SFOR below its current force level should not occur until the end of the installation process. Many international observers in Bosnia told us that the final arbitration decision on which ethnic group will control Brcko will likely be a major determinant of the ultimate success or failure of the Dayton Agreement. This decision will not be made until March 1998 at the earliest. Without a final decision, an interim supervisory administration will remain in Brcko. In June 1997, the High Representative, the coordinator of the civilian aspects of the peace operation, stated that Brcko will signal to the rest of the world the extent to which progress is being made in the implementation of the Dayton Agreement. First, some background on the Brcko arbitration process. At Dayton, Bosnia's political leaders were unable to agree on which ethnic group would control the strategically important area in and around the city of Brcko. The Dayton Agreement instead called for an arbitration tribunal to decide this issue. At the end of the war, Brcko city was controlled by Bosnian Serb political leaders and populated predominately by Serbs due to "ethnic cleansing" of prewar Muslims and Croats, who had then accounted for about 63 percent of the city's population, and settlement of Serb refugees there. We were told that an arbitration decision that awarded control of the area to either the Bosniaks or Bosnian Serbswould lead to civil unrest and possibly restart the conflict because the location of Brcko makes it vitally important to both parties' respective interests. In February 1997, the arbitration tribunal decided to postpone a final decision as to which of the parties would control Brcko. Instead, the tribunal called for the designation of a supervisor under the auspices of the Office of the High Representative, who would establish an interim supervisory administration for the Brcko area. The tribunal decision noted that (1) the national and entity governments were not sufficiently mature to take on the responsibility of administering the city and (2) Republika Srpska's disregard of its Dayton implementation obligations in the Brcko area had kept tensions and instability at much higher levels than expected. On March 7, 1997, the Peace Implementation Council Steering Board announced that the High Representative had appointed a U.S. official as Brcko supervisor, and the interim supervisory administration began operating on April 11, 1997. The interim administration was designed to supervise the implementation of the civil provisions of the Dayton Agreement in coordination with SFOR, OSCE, IPTF, and other organizations in the Brcko area: specifically, it was to allow former Brcko residents to return to their homes, provide freedom of movement and other human rights throughout the area, give proper police protection to all citizens, encourage economic revitalization, and lay the foundation for local representative democratic government. According to the Brcko supervisor, known as the Deputy High Representative for Brcko, the implementation process has just begun. The Deputy High Representative and his staff have been working hard and are developing a plan to return refugees and displaced persons in a phased and orderly manner, but progress will take a long time and be difficult. From January 1, 1997, through June 17, 1997, only 159 displaced families from the Bosnian Serb-controlled area of Brcko had returned to their prewar homes; all of these homes are located in the zone of separation. We were told that as many as 30,000 Bosniaks and Bosnian Croats were driven from their homes in what is now Serb-controlled Brcko. Further, freedom of movement does not yet exist in the area, primarily due to the fear that Bosniak and Bosnian Serb police have instilled in people from other ethnic groups. As in other parts of Republika Srpska, Bosnian Serb political leaders refuse to cooperate with IPTF in restructuring their police in accordance with democratic policing standards. And the Deputy High Representative told us that he has no "carrots or sticks" either to reward compliance or punish non-compliance of the parties, particularly the Bosnian Serbs. Brcko has also experienced implementation problems related to the upcoming municipal elections that go beyond those of other areas of Bosnia. For example, in June 1997 OSCE took action after it investigated cases of alleged voter registration fraud by Bosnian Serbs in Brcko. After finding that Bosnian Serbs were engaging in wholesale fraud, OSCE attempted to correct the situation by (1) firing the chairmen of the local election commission and voter registration center, (2) reregistering the entire Brcko population and political candidates, and (3) suspending and later reopening and extending voter registration there, which ultimately ran from June 18 to July 12, 1997. The interim supervisory administration is scheduled to operate for at least 1 year. The arbitration tribunal may make a further decision on the status of the Brcko area by March 15, 1998, if the parties request such action between December 1, 1997, and January 15, 1998. In December 1996, the North Atlantic Council, the body that provides political guidance to NATO, concluded that without a continuation of a NATO-led force in Bosnia, fighting would likely resume. Thus, NATO that month authorized a new 18-month mission, SFOR, which is about half the size of the previous Implementation Force. SFOR's mission is scheduled to end in June 1998. According to the SFOR operation plan, the desired NATO end state is an environment adequately secure for the "continued consolidation of the peace" without further need for NATO-led military forces in Bosnia. The plan lists four conditions that must be met for the desired end state objective to be realized: The political leaders of Bosnia's three ethnic groups must demonstrate a commitment to continue negotiations as the means to resolve political and military differences. Bosnia's established civil structures must be sufficiently mature to assume responsibilities for ensuring compliance with the Dayton Agreement. The political leaders of Bosnia's three ethnic groups must adhere on a sustained basis to the military requirements of the Dayton Agreement, including the virtual absence of violations or unauthorized military activities. Conditions must be established for the safe continuation of ongoing, nation-building activities. The SFOR operation plan asserts that these objectives will be achieved by June 1998. However, international officials in Bosnia recently told us that the likelihood of these end-state objectives being met by June 1998 is exceedingly small. They based this projection on their assessments of the current pace of political and social change in Bosnia. In their view, an international military force would be required after June 1998 to deter renewed hostilities after SFOR's mission ends. They said that to be credible and maintain international support, the force must be NATO led and include a U.S. military component, and it must be based in Bosnia rather than "over the horizon" in another country. Many participants of the operation told us that without the security presence provided by such a follow-on force to SFOR, their organizations would be unable to operate in Bosnia; a U.N. official said that IPTF--which consists of unarmed, civilian police monitors--could not function and would leave Bosnia under those conditions. As one international official put it, the follow-on force--including a U.S. military presence--needs to be "around the corner" rather "over the horizon" to provide the general security environment in which the rest of the peace process could move forward. The executive branch initially estimated that U.S. military and civilian participation in Bosnia would cost about $3.2 billion through fiscal year 1997: $2.5 billion in incremental costs for military-related operations and $670 million for the civilian sector. These estimates assumed that U.S. military forces would be withdrawn from Bosnia when the mission of NATO's Implementation Force ended in December 1996. The executive branch's current cost estimate for fiscal years 1996 and 1997 is about $5.9 billion: about $5 billion in incremental costs for military-related operations and about $950 million for the civilian sector. Almost all of the increase was due to the decision to extend the U.S. military presence in and around Bosnia through June 1998. In fiscal year 1998, the United States plans to commit about $1.9 billion for the Bosnia peace operation: about $1.5 billion for military operations and $371 million for civilian activities. Under current estimates, which assume that the U.S. military participation in Bosnia will end by June 1998, the United States will provide a total of about $7.8 billion for military and civilian support to the operation from fiscal year 1996 to 1998. Some State and Defense Department officials agreed that an international military force will likely be required in Bosnia after June 1998. U.S. participation in such an effort could push the final cost significantly higher than the current $7.8 billion estimate. Mr. Chairman and Members of the Subcommittee this concludes my prepared remarks. I would be pleased to respond to any questions you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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GAO discussed international efforts to promote an enduring peace in Bosnia and Herzegovina through the implementation of the 1995 Dayton Agreement. GAO noted that: (1) the internationally-supported peace operation in Bosnia, part of a longer-term peace process, has helped that country take important first steps toward achieving the Dayton Agreement's goals; (2) progress has been made in establishing some political and economic institutions, and economic recovery has started in the Federation; (3) nevertheless, the transition to a unified, democratic government that respects the rule of law has not occurred, due principally to the failure of Bosnia's political leaders to fulfill their obligations under the Dayton Agreement and to promote political and social reconciliation; (4) very few refugees and displaced persons have crossed ethnic lines to return to their prewar homes, primarily due to resistance from political leaders of all three major ethnic groups; (5) virtually all of the limited progress on the civil aspects has resulted from strong international pressure on these often resistant political leaders; (6) during GAO's June 1997 visit, nearly every international and U.S. official with whom GAO spoke, including senior North Atlantic Treaty Organization (NATO) officers, were adamant that Radovan Karadzic, a Bosnian Serb who was indicted by the war crimes tribunal, must be arrested or otherwise removed from Bosnia; (7) most were unequivocal on this matter, and stated that he retains political power and influence over political figures in Republika Srpska, the Bosnian Serb entity; (8) so far, according to these officials, he has seen fit to block every significant move toward reconciliation; (9) other key issues identified as being critically important to the Dayton Agreement's success include the municipal elections scheduled for September 13 and 14, 1997, specifically the potentially contentious installation of some newly-elected municipal governments, the outcome of the arbitration decision concerning which ethnic group will control the strategically important city of Brcko in Republika Srpska, and the issue of whether an international military force, including the U.S. military, should remain in Bosnia after the current NATO-led mission ends in June 1998; (10) however, even if President Plavsic wins the political struggle with more hardline Bosnian Serb political leaders, GAO believes that full implementation of the Dayton Agreement--in other words, full political and social reconciliation in Bosnia--will remain a long and difficult process; and (11) the total estimated cost for U.S. participation in the operation has risen to $7.8 billion.
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Despite a substantial investment in IT, the federal government's management of information resources has produced mixed results. Although agencies have taken constructive steps to implement modern strategies, systems, and management policies and practices, we continue to find that agencies face significant challenges. The CIO position was established by the Congress to serve as the focal point for information and technology management issues within an agency, and CIOs can address these challenges with strong and committed leadership. The Congress has assigned a number of responsibilities to the CIOs of federal agencies. (See app. I for a summary of the legislative evolution of agency CIO responsibilities.) In addition, we have identified other areas of information and technology management that can contribute significantly to the successful implementation of information systems and processes. Altogether, we identified the following 13 major areas of CIO responsibilities as either statutory requirements or critical to effective information and technology management: IT/IRM strategic planning. CIOs are responsible for strategic planning for all information and information technology management functions-- referred to by the term information resources management (IRM) strategic planning . IT capital planning and investment management. CIOs are responsible for IT capital planning and investment management [44 U.S.C. 3506(h) and 40 U.S.C. 11312 & 11313]. Information security. CIOs are responsible for ensuring their agencies' compliance with the requirement to protect information and systems [44 U.S.C. 3506(g) and 3544(a)(3)]. IT/IRM human capital. CIOs have responsibilities for helping their agencies meet their IT/IRM workforce needs [44 U.S.C. 3506(b) and 40 U.S.C. 11315(c)]. Information collection/paperwork reduction. CIOs are responsible for the review of their agencies' information collection proposals to maximize the utility and minimize public paperwork burdens . Information dissemination. CIOs are responsible for ensuring that their agencies' information dissemination activities meet policy goals such as timely and equitable public access to information . Records management. CIOs are responsible for ensuring that their agencies implement and enforce records management policies and procedures under the Federal Records Act . Privacy. CIOs are responsible for their agencies' compliance with the Privacy Act and related laws . Statistical policy and coordination. CIOs are responsible for their agencies' statistical policy and coordination functions, including ensuring the relevance, accuracy, and timeliness of information collected or created for statistical purposes . Information disclosure. CIOs are responsible for information access under the Freedom of Information Act . Enterprise architecture. Federal laws and guidance direct agencies to develop and maintain enterprise architectures as blueprints to define the agency mission and the information and IT needed to perform that mission. Systems acquisition, development, and integration. GAO has found that a critical element of successful IT management is effective control of systems acquisition, development, and integration [44 U.S.C. 3506(h)(5) and 40 U.S.C. 11312]. E-government initiatives. Various laws and guidance direct agencies to undertake initiatives to use IT to improve government services to the public and internal operations [44 U.S.C. 3506(h)(3) and the E-Government Act of 2002]. The agency CIOs were generally responsible for most of the 13 key areas we identified as either required by statute or among those critical to effective information and technology management, and most of these CIOs reported directly to their agency heads. We found that only 2 of these 13 areas were cited as the responsibility of fewer than half of the CIOs, and 19 of the CIOs reported directly to their agency heads. Their median tenure was about 2 years--less than the 3 to 5 years that CIOs and former senior agency IT executives said were necessary for a CIO to be effective; this gap could be problematic because it could inhibit CIOs' efforts to address major challenges, including IT management and human capital. As figure 1 illustrates, CIOs were responsible for key information and technology management areas. In particular, 5 of the 13 areas were assigned to every agency CIO. These areas were capital planning and investment management, enterprise architecture, information security, IT/IRM strategic planning, and IT workforce planning. However, of the other 8 areas, 2 of them--information disclosure and statistics--were the responsibility of fewer than half of the CIOs. Disclosure is a responsibility that has frequently been assigned to offices such as general counsel and public affairs in the agencies we reviewed, while statistical policy is often the responsibility of separate offices that deal with the agency's data analysis, particularly in agencies that contain Principal Statistical Agencies. Nevertheless, even for those areas of responsibility that were not assigned to them, the CIOs generally reported that they contributed to the successful execution of the agency's responsibility. In those cases where the CIOs were not assigned the expected responsibilities, and they expressed an opinion about the situation, more than half of the CIO responses were that the applicable information and technology management areas were appropriately held by some other organizational entity. Moreover, one of the panels of former agency IT executives suggested that not all 13 areas were equally important to CIOs. A few of the former agency IT executives even called some of the areas relating to information management a distraction from the CIO's primary responsibilities. Those sentiments, however, are not consistent with the law, which envisioned that having a single official responsible for the various information and information technology functions would provide integrated management. Specifically, one purpose of the Paperwork Reduction Act of 1980 (PRA) is to coordinate, integrate, and--to the extent practicable and appropriate-- make federal information resources management policies and practices uniform as a means to improve the productivity, efficiency, and effectiveness of government programs by, for example, reducing information collection burdens on the public and improving service delivery to the public. Moreover, the House committee report accompanying the PRA in 1980 asserted that aligning IRM activities under a single authority should provide for both greater coordination among an agency's information activities and higher visibility for these activities within the agency. In addition to specifying areas of responsibility for the CIOs of major departments and agencies, the Clinger-Cohen Act calls for certain CIOs to have IRM as their primary duty. All but a few of the agencies complied with this requirement. The other significant duties reported by some CIOs generally related to other administrative or management areas, such as procurement and human capital. We and Members of Congress have previously expressed concern about agency CIOs having responsibilities beyond information and technology management and have questioned whether dividing time between two or more kinds of duties would allow CIOs to deal effectively with their agencies' IT challenges. Federal law--as well as our guide based on CIOs of leading private sector organizations--generally calls for CIOs to report to their agency heads, forging relationships that ensure high visibility and support for far- reaching information management initiatives. Nineteen of the CIOs in our review stated that they had this reporting relationship. In the other 8 agencies, the CIOs stated that they reported instead to another senior official, such as a deputy secretary, under secretary, or assistant secretary. The views of current CIOs and former agency IT executives about whether it is important for the CIO to report to the agency head were mixed. For example, of the 8 CIOs who did not report directly to their agency heads, (1) 3 stated it was important or critical, (2) 2 stated it was not important, (3) two stated it was generally important but that the current reporting structure at their agencies worked well, and (4) 1 stated it was very important that a CIO report to at least a deputy secretary. In contrast, 15 of the 19 CIOs who reported to their agency heads stated that this reporting relationship was important. However, 8 of the 19 CIOs who said they had a direct reporting relationship with the agency head noted that they also reported to another senior executive, usually the deputy secretary or under secretary for management, on an operational basis. Finally, members of our Executive Council on Information Management and Technology told us that what is most critical is for the CIO to report to a top level official. The members of our panels of former agency IT executives also had a variety of views on whether it was important that the CIO report to the agency head. At the major departments and agencies included in our review, the current CIOs had diverse backgrounds, and since the enactment of the Clinger- Cohen Act, the median tenure of permanent CIOs whose time in office had been completed was about 2 years. Both of these factors can significantly influence whether a CIO is likely to be successful. First, the background of the current CIOs varied in that they had previously worked in the government, the private sector, or academia, and they had a mix of technical and management experience. Virtually all of them had work experience and/or educational backgrounds in IT or IT-related fields. For example, 12 current agency CIOs had previously served in a CIO or deputy CIO capacity. Moreover, most of the CIOs had business knowledge related to their agencies because they had previously worked at the agency or had worked in an area related to the agency's mission. Second, the median time in the position for agencies' permanent CIOs was 23 months. For career CIOs, the median was 32 months; the median for political appointees was 19 months. When asked how long a CIO needed to stay in office to be effective, the most common response of current CIOs and former agency IT executives was 3 to 5 years. Between February 10, l996 and March 1, 2004, only about 35 percent of the permanent CIOs who had completed their time in office reportedly had stayed in office for a minimum of 3 years. The gap between actual time in office and the time needed to be effective is consistent with the views of many agency CIOs, who believed that the turnover rate was high and that the political environment, the pay differentials between the public and private sectors, and the challenges that CIOs face contributed to this rate. Current CIOs reported that they faced major challenges in fulfilling their duties. In particular, two challenges were cited by over 80 percent of the CIOs: implementing effective information technology management and obtaining sufficient and relevant resources. This indicates that CIOs view IT governance processes, funding, and human capital as critical to their success. Other common challenges they cited were communicating and collaborating internally and externally and managing change. Effectively tackling these reported challenges can improve the likelihood of a CIO's success. The challenges the CIOs identified were as follows: IT Management. Leading organizations execute their information technology management responsibilities reliably and efficiently. A little over 80 percent of the CIOs reported that they faced one or more challenges related to implementing effective IT management practices at their agencies. This is not surprising given that, as we have previously reported, the government has not always successfully executed the IT management areas that were most frequently cited as challenges by the CIOs--information security, enterprise architecture, investment management, and e-gov. Sufficient and Relevant Resources. One key element in ensuring an agency's information and technology success is having adequate resources available. Virtually all agency CIOs cited resources, both in dollars and staff, as major challenges. The funding issues cited generally concerned the development and implementation of agency IT budgets and whether certain IT projects, programs, or operations were being adequately funded. We have previously reported that the way agency initiatives are originated can create funding challenges that are not found in the private sector. For example, certain information systems may be mandated or legislated, so the agency does not have the flexibility to decide whether to pursue them. Additionally, there is a great deal of uncertainty about the funding levels that may be available from year to year. The government also faces long- standing and widely recognized challenges in maintaining a high-quality IT workforce. In 1994 and 2001, we reported the importance that leading organizations placed on making sure they had the right mix of skills in their IT workforce. About 70 percent of the agency CIOs reported on a number of substantial IT human capital challenges, including, in some cases, the need for additional staff. Other challenges included recruiting, retention, training and development, and succession planning. Communicating and Collaborating. Our prior work has shown the importance of communication and collaboration, both within an agency and with its external partners. For example, one of the critical success factors we identified in our CIO guide focuses on the CIO's ability to establish his or her organization as a central player in the enterprise. Ten agency CIOs reported that communication and collaboration were challenges. Examples of internal communication and collaboration challenges included (1) cultivating, nurturing, and maintaining partnerships and alliances while producing results in the best interest of the enterprise and (2) establishing supporting governance structures that ensure two-way communication with the agency head and effective communication with the business part of the organization and component entities. Other CIOs cited activities associated with communicating and collaborating with outside entities as challenges, including sharing information with partners and influencing the Congress and the Office of Management and Budget (OMB). Managing Change. Top leadership involvement and clear lines of accountability for making management improvements are critical to overcoming an organization's natural resistance to change, marshaling the resources needed to improve management, and building and maintaining organizationwide commitment to new ways of doing business. Some CIOs reported challenges associated with implementing changes originating both from their own initiative and from outside forces. Implementing major IT changes can involve not only technical risks but also nontechnical risks, such as those associated with people and the organization's culture. Six CIOs cited dealing with the government's culture and bureaucracy as challenges to implementing change. Former agency IT executives also cited the need for cultural changes as a major challenge facing CIOs. Accordingly, in order to effectively implement change, it is important that CIOs build understanding, commitment, and support among those who will be affected by the change. The Congress and agencies can take various actions to assist CIOs in fulfilling their vital roles. With respect to the Congress, hearings such as this, Mr. Chairman, help to raise issues and suggest solutions. Also, the report we are releasing today contains a Matter for Congressional Consideration in which we suggest that, as you hold hearings on and introduce legislation related to information and technology management, you consider whether the existing statutory requirements related to CIO responsibilities and reporting to the agency head reflect the most effective assignment of information and technology management responsibilities and the best reporting relationship. To further assist in your oversight role, as you requested, we are beginning work on the development of a set of CIO best practices, based on the practices of leading organizations in the private sector, to complement the report we are releasing today. Agencies, too, can take action to improve their information and technology management. First, to address concerns about the high CIO turnover rate, agencies may be able to use human capital flexibilities-- which represent the policies and practices that an agency has the authority to implement in managing its workforce--to help retain its CIOs. For example, our model on strategic human capital management notes that recruiting bonuses, retention allowances, and skill-based pay can attract and retain employees who possess the critical skills the agency needs to accomplish its mission. We have also issued several reports that discuss these issues in more depth and provide possible solutions and recommendations. Second, we have issued various guides to assist CIOs in tackling the major challenges that they have cited. This guidance includes (1) information security best practices to help agencies with their information security challenges; (2) an IT investment management framework, including a new version that offers organizations a road map for improving their IT investment management processes in a systematic and organized manner; and (3) a framework that provides agencies with a common benchmarking tool for planning and measuring their efforts to improve their enterprise architecture management. In summary, the report we are issuing today indicates that CIOs generally stated that they had most of the responsibilities and reporting relationships required by law, but that there were notable exceptions. In particular, some agency CIOs reported that, contrary to the requirements in the law, they were not responsible for certain areas, such as records management, and that they did not report to their agency head. However, views were mixed as to whether CIOs could be effective leaders without having responsibility for each individual area. In addition, most CIOs did not stay in office for 3 to 5 years--the response most commonly given when we asked current CIOs and former agency IT executives how long a CIO needed to be in office to be effective. Agencies' use of various mechanisms, such as human capital flexibilities, could help reduce the turnover rate or mitigate its effect. Reducing turnover among CIOs is important because the amount time CIOs are in office can affect their ability to successfully address the major challenges they face. Some of these challenges--such as how IT projects are originated--may not be wholly within their control. Other challenges--such as improved IT management--are more likely to be overcome if a CIO has sufficient time to more effectively address these issues. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions that you or other Members of the Subcommittee may have at this time. For more than 20 years, federal law has structured the management of information technology and information-related activities under the umbrella of information resources management (IRM). Originating in the 1977 recommendations of the Commission on Federal Paperwork, the IRM approach was first enacted into law in the Paperwork Reduction Act of 1980 (PRA). The 1980 act focused primarily on centralizing governmentwide responsibilities in the Office of Management and Budget (OMB). The law gave OMB specific policy-setting and oversight duties with regard to individual IRM areas--for example, records management, privacy, and the acquisition and use of automatic data processing and telecommunications equipment (later renamed information technology). The law also gave agencies the more general responsibility to carry out their IRM activities in an efficient, effective, and economical manner and to comply with OMB policies and guidelines. To assist in this effort, the law required that each agency head designate a senior official who would report directly to the agency head to carry out the agency's responsibilities under the law. Together, these requirements were intended to provide for a coordinated approach to managing federal agencies' information resources. The requirements addressed the entire information life cycle, from collection through disposition, in order to reduce information collection burdens on the public and to improve the efficiency and effectiveness of government. Amendments to the PRA in 1986 and 1995 were designed to strengthen agency and OMB implementation of the law. Most particularly, the PRA of 1995 provided detailed agency requirements for each IRM area, to match the specific OMB provisions. The 1995 act also required for the first time that agencies develop processes to select, control, and evaluate the results of major information systems initiatives. In 1996, the Clinger-Cohen Act supplemented the information technology management provisions of the PRA with detailed Chief Information Officer (CIO) requirements for IT capital planning and investment control and for performance and results-based management. The 1996 act also established the position of agency chief information officer by amending the PRA to rename the senior IRM officials CIOs and by specifying additional responsibilities for them. Among other things, the act required IRM to be the "primary duty" of the CIOs in the 24 major departments and agencies specified in 31 U.S.C. 901. Accordingly, under current law, agency CIOs are required to carry out the responsibilities of their agencies with respect to information resources management, including information collection and the control of paperwork; statistical policy and coordination; privacy, including compliance with the Privacy Act; information security, including compliance with the Federal Information Security Management Act; information disclosure, including compliance with the Freedom of Information Act; and information technology. Together, these legislated roles and responsibilities embody the policy that CIOs should play a key leadership role in ensuring that agencies manage their information functions in a coordinated and integrated fashion in order to improve the efficiency and effectiveness of government programs and operations. 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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Federal agencies rely extensively on information technology (IT) to effectively implement major government programs. To help agencies manage their substantial IT investments, the Congress has established a statutory framework of requirements, roles, and responsibilities relating to IT management. GAO was asked to summarize its report, being issued today, on federal chief information officers' (CIO) responsibilities, reporting relationships, and tenure and on the challenges that CIOs face ( Federal Chief Information Officers: Responsibilities, Reporting Relationships, Tenure, and Challenges, GAO-04-823 , July 21, 2004) and to offer suggestions for actions that both the Congress and the agencies can take in response to these findings. In looking at 27 agencies, GAO found that CIOs generally were responsible for most of the 13 areas that had been identified as either required by statute or critical to effective information and technology management and that about 70 percent reported directly to their agency heads. Among current CIOs and former agency IT executives, views were mixed on whether it was important for the CIO to have responsibility for each of the 13 areas and a direct reporting relationship with the agency head. In addition, current CIOs come from a wide variety of professional and educational backgrounds and, since the enactment of the legislation establishing this position, the permanent CIOs who had completed their time in office had a median tenure of about 2 years. Their average time in office, however, was less than the 3 to 5 years that both current CIOs and former agency IT executives most commonly cited as the amount of time needed for a CIO to be effective. Too short of a tenure can reduce a CIOs' effectiveness and ability to address major challenges, including implementing effective IT management and obtaining sufficient and relevant resources. Both the Congress and the federal agencies can take various actions to address GAO's findings. First, as the Congress holds hearings on and introduces legislation related to information and technology management, there may be an opportunity to consider the results of this review and whether the existing statutory framework offers the most effective structure for CIOs' responsibilities and reporting relationships. Second, agencies can use the guidance GAO has issued over the past few years to address, for example, agencies' IT management and human capital challenges. Finally, agencies can also employ such mechanisms as human capital flexibilities to help reduce CIO turnover or to mitigate its effect.
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As part of its fiscal year 2012 budget request, DOD outlined estimated savings of about $178 billion to be realized over a 5-year time period beginning in fiscal year 2012. According to DOD, these savings included about $154 billion from the Secretary's initiative and about $24 billion from other sources. Specifically, The military departments and SOCOM identified a total of $100 billion in savings as a result of their efforts to support the Secretary's initiative. A majority of the projected savings identified by the military departments and SOCOM (approximately $70 billion, or 70 percent) was planned to be reinvested in high-priority military needs--such as enhancing weapon systems--while the remainder was planned to be used to address operating costs resulting from areas such as health care and training. In addition to the $100 billion from the military departments and SOCOM, DOD proposed a $78 billion reduction in its overall budget plan over a 5-year time period, covering fiscal years 2012 through 2016, which reflected a 2.6 percent reduction from DOD's fiscal year 2011 budget submission over the same time period. Of this amount, $54 billion reflected projected savings identified from a health care policy assessment, government-wide civilian pay freeze, and other specific areas identified by the Secretary where immediate action could be taken department-wide. The remaining $24 billion reflected revised economic assumptions, projected savings from restructuring the Joint Strike Fighter weapon program, and projected savings from reducing the size of the Army and Marine Corps. Information accompanying DOD's fiscal year 2012 budget request catalogued the $100 billion in savings from the military departments and SOCOM under the following four categories: reorganizations, such as restructuring headquarters management and eliminating unneeded task forces; better business practices, such as reducing energy consumption; program reductions and terminations, such as terminating weapon system programs; and reductions in lower priority programs, such as shifting funding requests from military construction projects to base operations. Table 1 shows the specific amounts of projected savings reported for each category and military department. Among other things, the the budget account from which each savings identified will be derived; the number of military personnel and full-time civilian employees of the federal government affected by such savings; the estimated reductions in the number and funding of contractor personnel caused by such savings; a specific description of activities or services that will be affected by such savings, including the locations of such activities or services; and certain information regarding each reinvestment planned to be funded with efficiency initiative savings. In June 2012, DOD submitted its report to the congressional defense committees and provided some information on the categories above. Among other things, at that time, DOD reported that it was on track to meet estimated savings targets for all of its efficiency initiatives. However, the report did not include a comprehensive analysis of reinvestments because, according to DOD, many areas in which reinvestments had occurred due to the efficiency initiatives included in the fiscal year 2012 President's Budget request had been offset by major force structure changes and other reductions in its fiscal year 2013 budget request. In briefings to the Comptroller delivered in February 2013 and March 2013, the military departments and SOCOM reported that they remain, with a few exceptions, on track to meet original savings estimates associated with their individual efficiency initiatives. At the time of our review, DOD had not compiled DOD-level summary information on its progress in achieving its original savings estimate of $100 billion. DOD officials cited various reasons why compiling and reporting on this information may not be feasible. For example, they noted that the need to apply spending reductions in response to sequestration affected funding levels for many programs, including areas targeted for efficiency initiatives. As a result, DOD had to adjust plans for executing programs as well as for implementing initiatives, such as adjusting the scope of initiatives or the timing of actual or planned actions for implementation. Because of the variability in its programs and funding amounts, DOD officials stated that, at a certain point, it becomes difficult to isolate whether savings were achieved solely due to implementing initiatives rather than a combination of factors. We have previously reported on opportunities for DOD to improve tracking and reporting on cost savings and efficiencies. For example, in March 2012, we reported that DOD took steps to examine its headquarters resources for potential efficiencies, but that it faced an underlying challenge of not having complete and reliable headquarters information available to make related assessments and decisions. To improve DOD's ability to identify how many headquarters personnel it has, we recommended that the Secretary of Defense direct the Director of Administration and Management, in consultation with the Under Secretary of Defense for Personnel and Readiness, to revise its DOD Instruction 5100.73, Major DOD Headquarters Activities, to, among other things, include all major DOD headquarters activity organizations. DOD partially concurred with our recommendation and commented that the shortcomings in the instruction have limited impact on the management of the department. In July 2012, we reported that, as part of one of its efficiency initiatives, the Air Force estimated it could save about $1.7 billion in its training program by reducing live flying hours and taking other steps, such as increasing the use of virtual training, but lacked a methodology for determining the costs of virtual training and therefore, did not consider these costs in its estimate.visibility over the costs related to virtual training, we recommended that the Secretary of Defense direct the Secretary of the Air Force to develop a methodology for collecting and tracking cost data for virtual training and use this cost data to help inform future decisions regarding the mix of live and virtual training. DOD concurred with our recommendation and To improve decision makers' identified actions being taken to enhance its ability to capture costs related to virtual training. Additionally, in December 2012, we reported that DOD had developed an approach for the military departments and SOCOM to follow in tracking and reporting on the status of efficiency initiatives; however, DOD's approach had some limitations that resulted in incomplete reporting which could limit the visibility of senior leaders in monitoring progress toward achieving programmatic and financial goals. Specifically, the offices of the Comptroller and DCMO had provided general direction through emails, briefings, and training, and, according to officials, had given the military departments and SOCOM flexibility to report on the efficiency initiatives that they felt were most important. In practice, the Army, Air Force, and SOCOM had reported on all of their efficiency initiatives, while the Navy reported on a subset of its initiatives based on what it deemed to be at medium or high risk of experiencing implementation issues or adversely affecting the Navy's ability to carry out its mission. With respect to realized savings, we reported that the military departments and SOCOM told us they were on track to realize estimated savings, but found some instances where certain costs were not considered. For example, for its initiative to reduce fleet shore command personnel from U.S. Pacific Fleet and U.S. Fleet Forces Command, the Navy did not account for potential increases in relocation costs for moving personnel to other areas within the Navy. We found that the military departments and SOCOM were not reporting consistent information or complete cost information because they had not received written guidance with standardized definitions and methodologies. Rather, the direction provided by the offices of the Comptroller and DCMO did not specify whether all of the costs associated with implementing an efficiency initiative, including costs not initially identified, should be included. To ensure more complete and consistent reporting, we recommended that DOD develop guidance with standardized definitions and methodologies for the military departments and SOCOM to use in reporting. Further, we recommended that guidance should define reporting requirements for such things as the specific types of costs associated with implementing the initiatives, including implementation costs that were not initially identified in calculations of net savings. DOD agreed with the spirit and intent of our recommendation and indicated it planned to issue additional formal guidance in the February 2013 timeframe. The status of DOD's implementation of this recommendation is discussed in more detail later in this report. Since initiating its initial round of initiatives for fiscal year 2012, DOD has continued to identify and implement efficiency initiatives. Specifically, in information accompanying its fiscal years 2013 and 2014 budget requests, DOD identified additional efficiency initiatives, referred to as More Disciplined Use of Resources (MDUR) initiatives. These initiatives are expected to generate $60 billion in savings for the period of fiscal years 2013 through 2017 and an additional $34 billion for the period of fiscal years 2014 through 2018. While savings generated by the Secretary's fiscal year 2012 efficiency initiatives were to be reinvested, savings from the MDUR initiatives were intended to help the department meet reductions to its budget, and therefore will not be reinvested. More recently, on July 31, 2013, as part of DOD's Strategic Choices and Management Review, the Secretary announced his plan to implement an additional round of efficiency initiatives in fiscal year 2015. According to the Secretary, a tenet of the review was the need to maximize savings from reducing DOD's overhead, administrative costs, and other institutional expenses. These initiatives would include management reforms, coupled with consolidations, personnel cuts, and spending reductions that would reduce DOD's overhead and operating costs by some $10 billion over the next 5 years and almost $40 billion over the next decade. DOD has taken steps to further refine its approach to its tracking and reporting on the implementation of its efficiency initiatives. Specifically, DOD issued written guidance that standardizes and expands the type of information on efficiency initiatives that the military departments and SOCOM are expected to report, which may improve visibility on the progress and risks in implementation for DOD decision makers. Moreover, in commenting on a draft of this report, DOD stated that it will cease to track initiatives once they have been implemented and will select for detailed tracking only those initiatives where this information will help it manage more effectively. Following our December 2012 report, the Comptroller issued written guidance in February 2013 establishing a standardized format for reporting on the fiscal year 2012 efficiency initiatives as well as the fiscal year 2013 MDUR initiatives. According to DOD officials, this guidance is also applicable to initiatives identified in fiscal year 2014 and any future initiatives. In contrast to the way they reported before, the military departments and SOCOM were now expected to report consistently and provide the status of their efficiency initiatives, including summary information related to (1) whether original net savings projections across the Future Years Defense Program are being met, (2) risks to program(s), mission(s), or resources associated with the efficiency initiative (characterized as "low", "medium", or "high" risk), and (3) any risks to "milestones" or the implementation status of the efficiency initiative (e.g., characterized as "on track," "off track but can meet major milestones," or "off track and cannot meet major milestones"). Only in instances where the military departments and SOCOM identified programs that were not achieving original net savings estimates or where program or milestone risk had been identified, the guidance requires further detail, including how implementation would be achieved. Further, all of the information was to be reported in a manner that mirrored the descriptions contained in DOD's fiscal year 2012 budget request justification book for the efficiency initiatives, whereby some of the efficiency initiatives were collapsed into broader groups of initiatives referred to by descriptive titles. In February and March 2013, using the new February 2013 guidance, the military departments and SOCOM completed the first round of semi-annual reporting on the fiscal year 2012 efficiency initiatives and fiscal year 2013 MDUR initiatives. In reviewing the military departments' and SOCOM's February 2013 and March 2013 reports, we observed that, consistent with the aforementioned February 2013 guidance, the military departments and SOCOM reported details associated with only those efficiency initiatives that were not achieving original net savings estimates or where program or milestone risk had been identified. As a result, detailed information on the full range of efficiency initiatives and related programs was not included in their reports. For example, the Air Force has as many as 10 individual initiatives that comprise its acquisition management initiative. Absent a requirement in the February 2013 guidance to report on each of those underlying initiatives, DOD decision makers would only receive information on the overall acquisition management initiative. Moreover, as a result of the reporting direction, DOD decision makers would receive detailed information on the overall acquisition management initiative only if the initiative is not meeting original savings estimates, or where program or milestone risk had been identified. Prior to the February 2013 guidance, some departments and SOCOM had previously chosen to report on all their initiatives. In reviewing the reports developed by the military departments and SOCOM in February 2013 and March 2013, we observed that information on all initiatives was now unavailable to DOD decision makers, thus hindering their ability to assess implementation progress across the full range of efficiencies. We discussed with DOD Comptroller officials whether reporting on only those efficiency initiatives not achieving their original estimates or facing risk had provided the Comptroller with sufficient details to oversee all of the initiatives. Comptroller officials agreed that reporting on each of the individual efficiency initiatives would improve DOD decision makers' visibility and therefore provide information needed for their oversight. They also noted that it would facilitate DOD's ability to address any future congressional reporting requirements. As a result, the Comptroller's office subsequently issued guidance in October 2013 that, according to these officials, superseded the February 2013 guidance and expanded the amount of information to be reported. Specifically, this guidance directed the military departments and SOCOM to submit further detail for all efficiency initiatives, rather than merely those not achieving the original estimates or at risk. Beginning in October 2013, the military departments and SOCOM began submitting reports that included this broader set of information. While obtaining this broader set of information, DOD stated in its written comments on a draft of this report, provided on January 6, 2014, that it will narrow the scope of efficiency initiatives that will be tracked due to the period of constrained resources it is experiencing. DOD stated that it will cease tracking initiatives once they have been implemented, and will select for detailed tracking only those initiatives where this information will help it manage more effectively. In clarifying its written comments, DOD officials stated that all of its efficiency initiatives, except those implemented or which strictly call for terminations of programs, such as weapons systems, will be selected for detailed tracking. While the October 2013 guidance, which requires the military departments and SOCOM to report more detailed information on the full range of ongoing efficiency initiatives, does not specify that initiatives that strictly call for program terminations should no longer be tracked, we believe it is reasonable for DOD to cease the tracking of initiatives that strictly call for program terminations. We note that, in issuing additional guidance on its tracking and reporting on efficiency initiatives, DOD did not include any direction as to the specific types of costs that the military departments and SOCOM should consider in determining realized savings associated with implementation, such as costs that were not initially identified in calculations of net savings, as we had recommended in our December 2012 report. According to a Comptroller official, DOD has various guidance on developing cost estimates that the military departments and SOCOM can use in determining savings associated with the implementation of their efficiency initiatives. We reviewed the documents and discussed with the efficiency initiative focal points how, or if, this guidance was applied in developing their cost estimates. Some of the program managers with whom we spoke confirmed that while they were aware of existing guidance on developing cost estimates, they had not been instructed to use this guidance to determine specific types of costs that should be considered in calculating net savings. As a result, we continue to believe that our prior recommendation in our December 2012 report has merit and should be implemented. The military departments and SOCOM have taken steps to evaluate some of their efficiency initiatives, such as establishing performance measures and collecting performance data. However, these efforts have largely occurred on an ad hoc basis and vary by efficiency initiative because DOD has not established a requirement for performing such evaluations. As a result, DOD lacks a systematic basis for evaluating the impact of its efficiency initiatives on improving program efficiency or effectiveness. In setting forth the initial efficiency initiatives, the Secretary of Defense intended for DOD to improve the effectiveness and efficiency of its programs and activities. The Secretary also directed that any efficiency initiative must be specific, actionable, and measurable. Our prior review of federal agencies' efficiency efforts concluded that an improvement in efficiency need not only involve a reduction in costs, but also can be achieved by maintaining federal government services or outcomes with fewer resources (such as time or money), or improving or increasing the quality or quantity of services while maintaining (or reducing) resources. In addition, we and other agencies, such as the Office of Management and Budget (OMB), have documented the need to develop performance measures for evaluating progress toward achieving desired outcomes. For example, as we have previously concluded, performance measures should be measurable, outcome-oriented, and actively tracked and reported. As our prior work has shown, leading organizations that employ result-oriented management use performance information as a basis for decision making and have found this approach improves program results. As previously discussed, the Comptroller's October 2013 guidance provides direction on how the military departments and SOCOM are to approach reporting on the status of their efficiency initiatives, but does not require them to develop approaches for evaluating the impact of initiatives on achieving desired outcomes. In practice, we found that the military departments and SOCOM varied in the extent to which they evaluated individual efficiency initiatives, including whether they had established measures or indicators to gauge the impact on program efficiency or effectiveness beyond savings. The following paragraphs provide examples of the services' and SOCOM's efforts to evaluate certain efficiency initiatives. Air Force's Facility Sustainment Initiative: This initiative is intended to reduce infrastructure maintenance costs by a total of $1.4 billion during the period of fiscal years 2012 through 2016 by performing preventative maintenance before critical failures occur. The Air Force uses a model to predict and prioritize infrastructure most at risk for critical failures and then focuses preventive maintenance efforts on such infrastructure. Furthermore, the Air Force has established measures to track the amount of hours spent performing preventive and corrective maintenance over the course of the initiative to determine whether this effort achieved the intended outcome, which was to reduce the amount of more costly corrective maintenance performed. We have previously concluded that deferring facility sustainment can lead to shortened facility service lives and increased future costs for recapitalization. SOCOM's Information Technology Services Efficiency Initiative: SOCOM established a new approach for its information technology services that is intended to reduce costs by a total of $394 million during the period of fiscal years 2012 through 2016. According to SOCOM officials, the new approach involved a contract framework for information technology services that reduces costs by awarding funds directly to the organizations that provide the services on a competitive basis, rather than through an intermediary that selects the organizations that provide the information technology services. The approach also adopts other best practices for procurement, such as providing performance-based incentives. As part of this initiative, SOCOM established multiple individual measures to assess contractor performance, such as answering a help desk call within a set amount of time or tracking trends on resolving information technology issues such as user access, but does not have measures in place to evaluate how the overall impact of the initiative affects the delivery of information technology services relative to the previous approach. SOCOM officials explained that because the implementation of its Information Technology Services Efficiency Contract occurred prior to it being identified as an efficiency initiative, methods of evaluating its effectiveness or efficiency, other than cost, were not established. Navy's Total Ownership Cost Initiative: This initiative seeks to achieve efficiencies through life cycle management of the Navy's ships and encompasses multiple underlying initiatives, such as the Navy's Revised Virginia Class Drawings Efficiency Initiative. This initiative is intended to reduce costs of $30.3 million during the period of fiscal years 2012 through 2016 by moving away from reliance on paper documents toward an electronic system that allows multiple users to make revisions and access up-to-date documents. The Navy has not yet identified measures to evaluate how increasing the use of the electronic system to process technical documents will maintain or improve work processes. Navy officials indicated the same is true for other fiscal year 2012 initiatives that make up the Navy's Total Ownership Cost initiative and commented that the focus was on tracking savings and not on developing efficiency measures to assess whether its initiatives, once implemented, improve the effectiveness or efficiency of these programs. Army and Air Force Data Center Consolidation Efficiency Initiatives: These initiatives are part of the larger Federal Data Center Consolidation Initiative, directed by OMB, that seeks to consolidate information technology infrastructure and activities to save energy costs, among other goals, and are expected to reduce the Army and Air Force's costs by $490 million and $180 million, respectively, during fiscal years 2012 through 2016. Both the Army and Air Force have taken steps to implement these initiatives. According to Air Force officials, they had begun to establish measures that could be used to evaluate the impact of these initiatives, but faced some challenges due to changing guidance. For example, officials discussed that OMB guidance issued after the initiatives were underway expanded the definition of a data center and effectively increased the scope of the military departments' consolidation effort after these initiatives were submitted in the fiscal year 2012 budget request. This resulted in the reconfiguration of planning and implementation schedules. Air Force officials also stated that they had begun to develop performance measures to assess impact when a new DOD effort to establish a secure, joint information environment was put in place. Therefore, the Air Force had to adjust their implementation plans and postpone the development of their measures to ensure actions taken on this initiative conformed to the new DOD requirement. While the focus of DOD's effort was to quickly identify funds that could be reinvested into other higher priority programs, military department and SOCOM officials explained that because the initial effort to identify efficiency initiatives occurred late at the end of the cycle they used to build their fiscal year 2012 budget submission, their effort focused on tracking savings targets and not on developing measures to evaluate impact. In the subsequent budget cycles that included the MDUR initiatives, the focus remained on identifying areas for reductions in spending. DOD officials agreed that additional measures could be useful to evaluate impacts--beyond savings--of their efficiency initiatives. Our prior work concluded that such measures can assist managers in determining whether desired outcomes were being achieved or if adjustments were needed, such as in the scope of the initiative or to the nature or timing of implementation actions. Without a systematic way to evaluate the impact of its efficiency initiatives, DOD is limited in its ability to assess whether the efficiency initiatives have improved the effectiveness or efficiency of its programs and activities. Over the past few years, in light of mounting fiscal pressures, DOD has continued to identify and implement efficiency initiatives with certain goals in mind, including achieving cost savings and seeking opportunities to enhance the efficiency or effectiveness of its programs and activities. DOD's recent efforts to refine its approach for tracking and reporting on its current efficiency initiatives has the potential for providing greater oversight to decision makers on progress of the military departments and SOCOM on the status of their implementation efforts. However, its efforts to date do not sufficiently ensure that leaders have the information they need to fully assess the impact these initiatives are having on DOD's programs and activities. Having a systematic way to evaluate the impact of its efficiency initiatives beyond cost savings could provide DOD the ability to determine whether or not its initiatives are improving the efficiency and effectiveness of its programs and activities while also achieving savings. Such information could also inform DOD as to whether actions are needed to make adjustments to the scope of any given initiative and related programmatic actions necessary for implementation. To enhance DOD's ability to determine whether its efficiency initiatives are having the desired effect of improving efficiency and effectiveness, we recommend that the Secretary of Defense require the military departments and SOCOM to develop approaches for evaluating the impact of their efficiency initiatives, such as establishing performance measures or other indicators, collecting related performance information, and using this information to measure progress in achieving intended outcomes associated with their initiatives until implemented. In written comments on a draft of this report, DOD concurred with our recommendation and provided additional comment. Specifically, DOD concurred with having the military departments and SOCOM develop performance measures and other indicators for evaluating the impact of its efficiency initiatives, and commented that it has decided to cease tracking initiatives once they have been implemented. DOD also provided technical comments, which were incorporated as appropriate. The full text of DOD's comments is reprinted in appendix II. In its overall comments, DOD stated it intends to continue to refine its procedures, guidance, and oversight in order to achieve its goal of identifying and implementing efficiencies. DOD also stated that during this period of constrained resources, it must avoid creating a costly and redundant oversight process. To that end, DOD stated that it will cease tracking initiatives once they have been implemented, and will select for detailed tracking only those initiatives where this information will help it manage more effectively. We have modified the report to reflect DOD's decision. In clarifying its written comments, DOD officials stated that DOD will select for detailed tracking all of its efficiency initiatives except those implemented or which strictly call for terminations of programs, such as weapons systems. While the October 2013 guidance does not specify that initiatives that strictly call for program terminations should no longer be tracked, in a resource-constrained environment, we believe it is reasonable for DOD to do so. We also expect that DOD will clarify this revised approach in any future guidance to the military departments and SOCOM. In addition, we have modified the recommendation to clarify its intent that DOD should develop an approach for evaluating the impact of its efficiency initiatives until those initiatives have been implemented. We are sending copies of this report to the Secretary of Defense and appropriate congressional committees. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5257 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. To determine the progress DOD has made in adjusting its approach to tracking and reporting on the implementation of its efficiency initiatives since we last reported in December 2012 and to assess the extent to which DOD is evaluating the impact of its efficiency initiatives on DOD programs and activities, we reviewed guidance and documentation issued at the department-wide level as well as within the military departments and SOCOM. We also interviewed officials from the offices of the Comptroller and DCMO, the military departments, and SOCOM who are involved in monitoring the implementation of its efficiency initiatives to discuss their approach to tracking and reporting on the initiatives. Specifically, we obtained available information from each of the military departments and SOCOM, including briefings prepared for senior DOD officials, on the current status of initiatives, how original estimates of savings compared with savings realized to date, and any program or timeline risks associated with implementing the efficiency initiatives. Additionally, we reviewed existing guidance to identify any requirements for evaluation of the efficiency initiatives. We then analyzed information provided by each of the military departments and SOCOM as well as interviewed officials from each of the military services and SOCOM serving as focal points for the efficiency initiatives to determine the expected outcome or impact for individual initiatives, and what steps they have taken to evaluate the impact of efficiency initiatives. We conducted this performance audit from May 2013 through January 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 contact named above, Tina Won Sherman, Assistant Director; Grace Coleman; Susan Langley; Ricardo A. Marquez; Sharon L. Pickup; Mike Silver; Michael Shaughnessy; Susan Tindall; and Sarah Veale made key contributions to this report.
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In May 2010, the Secretary of Defense announced a department-wide initiative with the goal of achieving efficiencies and reducing excess overhead costs while reinvesting those savings in sustaining DOD's force structure and modernizing its weapons portfolio. The Secretary tasked the military departments and SOCOM to find estimated savings of about $100 billion over the period of fiscal years 2012 to 2016. For fiscal years 2013 and 2014, DOD identified additional efficiency initiatives. The National Defense Authorization Act for Fiscal Year 2012 mandated that GAO assess the extent to which DOD has tracked and realized savings proposed pursuant to the initiative to identify $100 billion in efficiencies. As the second report in response to this mandate, this report addresses 1) DOD's progress in adjusting its approach to tracking and reporting on the implementation of its efficiency initiatives since GAO's December 2012 report, and 2) the extent to which DOD is evaluating the impact of its initiatives. GAO reviewed guidance, and analyzed and discussed information developed after December 2012 with DOD officials. The Department of Defense (DOD) has refined its approach for tracking and reporting on the status of efficiency initiatives by establishing specific requirements to standardize and expand the type of information that the military departments (Army, Navy, and Air Force) and U.S. Special Operations Command (SOCOM) report to senior decision makers. Initially, DOD provided general direction through emails, briefings, and training, which gave the military departments and SOCOM flexibility to selectively report on the initiatives that they believed were important, resulting in inconsistencies. For example, prior to February 2013, all but the Navy had chosen to report on all their initiatives. In February 2013, the DOD Comptroller issued written guidance that specified the type of information to be reported, including 1) whether original net savings projections are being met, and 2) any associated program or milestone risks. In instances where original net savings projects were not met or risks were identified, the guidance required further detail such as how implementation would be achieved. As a result, in their March 2013 reports, the military departments and SOCOM only reported details on those initiatives that were not achieving original net savings estimates or where risk had been identified. GAO observed, during this review, that information on all initiatives was now unavailable to DOD decision makers, thus hindering their ability to assess implementation progress across the full range of initiatives. Comptroller officials agreed that such information would enhance DOD's oversight, and in October 2013, the DOD Comptroller issued updated guidance, directing that this information also be reported on initiatives on track to achieve savings or not experiencing risk. The military departments and SOCOM subsequently began submitting reports with this broader set of information. The military departments and SOCOM have taken steps to evaluate the impact of some of their efficiency initiatives, such as establishing performance measures to assess their impact on achieving desired outcomes. However, this has largely occurred on an ad hoc basis and varies by initiative because DOD has not required such evaluations. As a result, DOD lacks a systematic basis for evaluating whether its various initiatives have improved the efficiency or effectiveness of its programs or activities. In setting forth initiatives, the Secretary of Defense intended for DOD to improve the effectiveness and efficiency of its programs and activities, and that related initiatives should be specific, actionable, and measurable. While DOD has provided direction on how the military departments and SOCOM are to report on implementation status, this direction does not require them to develop approaches for evaluating the impact of their initiatives. In practice, the military departments and SOCOM varied in the extent to which they evaluated initiatives, including whether they had established measures or other indicators to assess outcomes. For example, GAO found instances where the military departments and SOCOM had established measures and assessed progress for some but not all initiatives. Developing a more systematic approach to evaluating the impact of its initiatives could provide DOD with more complete information to assess whether the initiatives are accomplishing desired outcomes, beyond achieving savings, and whether adjustments are needed in the scope of implementing the initiatives. GAO recommends that DOD establish a requirement for the military departments and SOCOM to develop approaches for evaluating the impact of their efficiency initiatives, such as developing performance measures or other indicators. DOD concurred with GAO's recommendation, and provided additional comments that it will cease tracking initiatives that strictly call for program terminations. GAO believes this to be a reasonable approach.
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The federal government was unable to demonstrate the reliability of significant portions of the U.S. government's accrual-based consolidated financial statements for fiscal years 2011 and 2010, principally resulting from limitations related to certain material weaknesses in internal control over financial reporting. As a result, we were unable to provide an opinion on such statements. Further, significant uncertainties, primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2011 and 2010 Statements of Social Insurance, prevented us from expressing opinions on those statements, as well as on the 2011 Statement of Changes in Social Insurance Amounts. Given the importance of social insurance programs, such as Medicare and Social Security to the federal government's long-term fiscal outlook, the Statement of Social Insurance is critical to understanding the federal government's financial condition and fiscal sustainability. The federal government did not maintain adequate systems or have sufficient, reliable evidence to support certain material information reported in the U.S. government's accrual-based consolidated financial statements. The underlying long-standing material weaknesses in internal control contributed to our disclaimers of opinion on the U.S. government's accrual-based consolidated financial statements for the fiscal years ended 2011 and 2010. Those material weaknesses relate to the federal government's inability to satisfactorily determine that property, plant, and equipment and inventories and related property, primarily held by the Department of Defense (DOD), were properly reported in the accrual-based consolidated financial statements; reasonably estimate or adequately support amounts reported for certain liabilities, such as environmental and disposal liabilities, or determine whether commitments and contingencies were complete and properly reported; support significant portions of the reported total net cost of operations, most notably related to DOD, and adequately reconcile disbursement activity at certain federal entities; adequately account for and reconcile intragovernmental activity and balances between federal entities; ensure that the federal government's accrual-based consolidated financial statements were (1) consistent with the underlying audited entities' financial statements, (2) properly balanced, and (3) in conformity with U.S. generally accepted accounting principles (GAAP); and identify and either resolve or explain material differences between (1) certain components of the budget deficit reported in Treasury's records that are used to prepare the Reconciliation of Net Operating Cost and Unified Budget Deficit, the Statement of Changes in Cash Balance from Unified Budget and Other Activities, and the Fiscal Projections for the U.S. government (included in the Supplemental Information section of the Financial Report) and (2) related amounts reported in federal entities' financial statements and underlying financial information and records. These material weaknesses continued to (1) hamper the federal government's ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; (2) affect the federal government's ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities; (3) impair the federal government's ability to adequately safeguard significant assets and properly record various transactions; and (4) hinder the federal government from having reliable financial information to operate in an efficient and effective manner. In addition to the material weaknesses that contributed to our disclaimer of opinion on the accrual-based consolidated financial statements, we found the following three other material weaknesses in internal control.These other material weaknesses were the federal government's inability to determine the full extent to which improper payments occur and reasonably assure that appropriate actions are taken to reduce improper payments, identify and resolve information security control deficiencies and manage information security risks on an ongoing basis, and effectively manage its tax collection activities. Three long-standing major impediments continued to prevent us from expressing an opinion on the U.S. government's accrual-based consolidated financial statements: (1) serious financial management problems at DOD that have prevented DOD's financial statements from being auditable, (2) the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal entities, and (3) the federal government's ineffective process for preparing the consolidated financial statements. In addition, while improvements were made, financial management issues at the Department of Homeland Security (DHS) also contributed to our inability to express an opinion on the U.S. government's accrual-based consolidated financial statements. Extensive efforts by DOD and other entity officials and cooperative efforts between entity chief financial officers, Treasury officials, and Office of Management and Budget (OMB) officials will be needed to resolve these obstacles to achieving an opinion on the U.S. government's accrual-based consolidated financial statements. DOD leadership has, with oversight and reinforcement from Congress, committed DOD to the long-term goal of full financial statement auditability. The National Defense Authorization Act for Fiscal Year 2010, as amended, requires that DOD's financial statements be validated as a date that has been DOD's ready for audit by September 30, 2017,stated goal since 2008. DOD's Financial Improvement and Audit Readiness (FIAR) Plan and semiannual status reports define the activities, corrective actions, and interim milestones necessary to achieve auditability and the availability of reliable, useful, and timely information for management decision making. The most recent update of the plan also emphasizes the importance of leadership, including senior leaders and field commanders, to achieving DOD's goals, and it links accountability to performance appraisals. Under its FIAR Plan, DOD is focusing on improving controls and processes relied on to provide financial information in two areas it says are most critical to managing its operations: (1) budgetary information and (2) accountability over its military equipment. With respect to budgetary information, in October 2011, the Secretary of Defense directed the DOD Comptroller to provide him with a plan to achieve audit readiness for the Statement of Budgetary Resources (SBR) by the end of 2014. The SBR is important because it is intended to show the flow of money in and out of DOD consistent with the budgetary information reported in the Budget The Secretary's directive also called of the United States Government.for increased emphasis on accountability for assets, a full review of DOD's financial controls over the next 2 years and the establishment of interim goals, mandatory training for audit and key financial efforts, and establishing a pilot certification program for financial managers by the end of calendar year 2012. DOD recently updated its FIAR Guidance, which provides a standardized methodology for DOD components to follow in planning and carrying out their FIAR efforts aimed at achieving audit readiness. However, as we reported in September 2011, we found that the Air Force and the Navy were not always effectively implementing the FIAR Guidance, presenting Specifically, we found a risk of not achieving DOD's overall FIAR goals. that although the Air Force asserted audit readiness for its military equipment and the Navy asserted audit readiness for its civilian pay, neither of these areas were audit-ready because the Air Force and Navy had not fully carried out FIAR Guidance procedures. We recommended actions for improving the development, implementation, documentation, and oversight of DOD's financial management improvement efforts. In addition, the Marine Corps' attempt to achieve an audit opinion on its SBR is still in process. In that regard, we recently recommended that the Marine Corps develop a risk-based remediation plan and confirm that its actions fully respond to auditor recommendations and that DOD direct other military services to consider key lessons learned in their audit readiness plans as appropriate. GAO, DOD Financial Management: Improvement Needed in DOD Components' Implementation of Audit Readiness Effort, GAO-11-851 (Washington, D.C.: Sept. 13, 2011). checkbook with a bank account.) Because of the fundamental importance of the reconciliation, GAO reviewed the processes used by the Navy, Marine Corps, and the Defense Finance and Accounting Service, which processes much of DOD components' financial data, including transactions that affect FBWT. We recommended that the Navy and Marine Corps improve policies and procedures that guide the FBWT reconciliation process, provide training to communicate these policies and procedures to staff, and resolve system deficiencies. The effective implementation of Enterprise Resource Planning (ERP) systems will be critical to the success of all of DOD's planned long-term financial improvement efforts. ERP systems are integrated, multifunction systems that perform business-related tasks such as general ledger accounting and supply chain management. DOD considers their implementation essential to transforming its business operations. However, DOD continues to encounter difficulties in implementing its planned ERP systems on schedule and within budget. For example, in October 2010, we reported that six of nine critical DOD ERPs We also experienced schedule delays ranging from 2 to 12 years. reported that five of these ERPs incurred cost increases totaling an estimated $6.9 billion. We made eight recommendations to DOD aimed at improving schedule and cost practices and the development of performance measures to evaluate whether the ERPs' intended goals are being accomplished. Another key to effectively transforming DOD's financial management will be its ability to ensure that it has sufficient staff with the appropriate skills necessary to carry out financial and budgetary accounting duties. To that end, DOD is establishing a Financial Management Certification Program to be mandatory for its personnel in financial management positions. However, DOD has not yet performed a competency gap analysis for its Further, financial management workforce as we reported in July 2011. GAO, DOD Business Transformation: Improved Management Oversight of Business System Modernization Efforts Needed, GAO-11-53 (Washington, D.C.: Oct. 7, 2010). the House Armed Services Committee (HASC) Panel on Defense Financial Management and Auditability Reform, which held several hearings on DOD financial management, recently reported that DOD personnel in other functional areas, such as logistics and acquisition, should also have the skills necessary to maintain appropriate controls and ensure that financial-related information is accurately recorded. The HASC Panel made several recommendations about DOD's workforce, including recommending that DOD assess its financial management workforce with respect to existing skills and the critical skills and competencies that will be needed over the next decade. While we are encouraged by DOD's recent plans and efforts to fundamentally transform its financial management operations, several DOD business practices, including financial management, remain on GAO's list of high-risk programs designated as vulnerable to waste, fraud, abuse, and mismanagement or in need of transformation. size, complexity, and interrelated nature of DOD's financial management and other business process control deficiencies, the sustained commitment by DOD's leaders will be critical to effectively building on DOD's initial momentum to transform its financial management operations and ultimately achieve auditability. Further, we agree with the recommendation by the HASC Panel on Defense Financial Management and Auditability Reform that strong congressional oversight must To assist Congress in its oversight efforts, we plan to continue.reassess the FIAR Plan, associated guidance, and DOD's related actions as they continue to evolve. GAO, High-Risk Series: An Update, GAO-11-278 (Washington, D.C.: February 2011). reporting entity as if the entity were a single enterprise. Therefore, when preparing the consolidated financial statements, intragovernmental activity and balances between federal entities and between federal entities and the General Fund should be in agreement and must be subtracted out, or eliminated, from the financial statements. If the two federal entities engaged in an intragovernmental transaction do not both record the same intragovernmental transaction in the same year and for the same amount, the intragovernmental transactions will not be in agreement, resulting in errors in the consolidated financial statements. Treasury has grouped intragovernmental activity and balances into the following five categories and established focus groups to work with federal entity personnel to identify and resolve reported unreconciled differences. Fiduciary activities include investments in Treasury securities with the Bureau of the Public Debt (BPD), borrowing from BPD and the Federal Financing Bank and related interest receivable and payable, interest expense and revenue, and federal loans receivable and payable. Benefit activities include contributions by federal entities into employee benefit programs (retirement, life insurance, workers' compensation, and health benefits) administered by the Office of Personnel Management and the Department of Labor. Buy/Sell activities between entities include buy and sell costs and revenues, accounts receivable and payable, and advances to and from others. Transfers of funds include transfers payable and receivable, and transfers in and out without reimbursement. General Fund transactions and balances include fund balance with Treasury, appropriations received and warrants, and custodial and non-entity collections. The federal government has made progress in reconciling intragovernmental differences and the degree of progress varies by category. However, the federal government continues to be unable to adequately account for and reconcile intragovernmental activity and balances. For both fiscal years 2011 and 2010, amounts reported by federal entity trading partners for certain intragovernmental accounts were not in agreement by significant amounts. OMB and Treasury require the CFOs of 35 significant federal entities to reconcile, on a quarterly basis, selected intragovernmental activity and balances with their trading partners. A substantial number of the entities did not adequately perform the required year-end reconciliations for fiscal years 2011 and 2010. Further, there continue to be hundreds of billions of dollars of unreconciled differences between the General Fund of the U.S. government and federal entity trading partners related to appropriation and other intragovernmental transactions. Currently, federal entities report their activity with the General Fund; however, the General Fund activity is not centrally accounted for, and therefore, there is no existing reporting process for which entities can confirm and reconcile all of their activity and balances with the General Fund. As a result of these circumstances, the federal government's ability to determine the impact of the unreconciled differences between trading partners on the amounts reported in the accrual-based consolidated financial statements is significantly impaired. Over the years, we have identified and reported on numerous intragovernmental activities and balances issues and have made several related recommendations to Treasury. Treasury has taken or plans to take actions to address these recommendations. During fiscal year 2011, Treasury furthered its commitment to resolve differences in intragovernmental activity and balances, which included several short- and long-term initiatives. For example, Treasury expanded focus groups' monitoring and outreach efforts that included quarterly analysis and ongoing collaboration with entities to resolve intragovernmental differences. Such focus groups made significant progress in understanding reasons for material differences and determining corrective actions to be taken, which resulted in adjustments to eliminate certain differences. Also, Treasury identified deficiencies in the intragovernmental process and is planning to develop governmentwide systems to improve intragovernmental transactions data. Further, Treasury is currently working to develop a complete set of financial statements for the General Fund, including intragovernmental transactions that will be audited. Resolving the intragovernmental transactions problem remains a difficult challenge and will require a strong and sustained commitment by federal entities, as well as continued strong leadership by Treasury and OMB. While Treasury, in coordination with OMB, implemented corrective actions during fiscal year 2011 to address certain internal control deficiencies detailed in our previously issued report, the federal government continued to have inadequate systems, controls, and procedures to ensure that the consolidated financial statements are consistent with the underlying audited entity financial statements, properly balanced, and in conformity with GAAP. For example, Treasury's process did not ensure that the information in certain of the accrual-based consolidated financial statements was fully consistent with the underlying information in 35 significant federal entities' audited financial statements and other financial data. To make the fiscal years 2011 and 2010 consolidated financial statements balance, Treasury recorded net increases of $15.6 billion and $0.8 billion, respectively, to net operating cost on the Statement of Operations and Changes in Net Position, which it labeled "Unmatched transactions and balances." Treasury recorded an additional net $6.0 billion and $3.8 billion of unmatched transactions in the Statement of Net Cost for fiscal years 2011 and 2010, respectively. Treasury's reporting of certain financial information required by GAAP continues to be impaired, and will remain so until federal entities, such as DOD, can provide Treasury with complete and reliable information required to be reported in the consolidated financial statements. Until these and other internal control deficienciesaddressed, the federal government's ability to ensure that the consolidated financial statements are consistent with the underlying audited federal entities' financial statements, properly balanced, and in conformity with U.S. GAAP will be impaired. Resolving some of these internal control deficiencies will be a difficult challenge and will require a have been fully strong and sustained commitment from Treasury and OMB as they continue to execute and implement their corrective action plans. Improvements in DHS's financial management during fiscal year 2011 contributed to DHS receiving a qualified opinion on its Balance Sheet and Statement of Custodial Activity for the fiscal year. These statements were qualified because of certain matters related to property, plant, and equipment; environmental liabilities; and other related balances. This qualified opinion represents a significant achievement for DHS. However, the remainder of its financial statements for fiscal year 2011 were not subjected to audit by the agency auditors, and the auditor was unable to form an opinion on DHS's internal control over financial reporting due to pervasive material internal control weaknesses over key financial reporting processes. It will be important that DHS continues to resolve its internal control deficiencies and build upon the progress it has accomplished as it moves forward to expand the audit to all financial statements and achieve its ultimate goal of obtaining a clean audit opinion on the full set of financial statements and on internal control over financial reporting. Significant uncertainties, primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2011 and 2010 Statements of Social Insurance, prevented us from expressing opinions on the 2011 and 2010 Statements of Social Insurance, as well as on the 2011 Statement of Changes in Social Insurance Amounts.Statement of Social Insurance presents the actuarial present value of the federal government's estimated future revenue to be received from or on behalf of participants and estimated future expenditures to be paid to or on behalf of participants, based on benefit formulas in current law and The using a projection period sufficient to illustrate the long-term sustainability of the social insurance programs. The significant uncertainties, discussed in further detail in Note 26 to the consolidated financial statements, include: Medicare projections in the 2011 and 2010 Statements of Social Insurance were based on full implementation of the provisions of the Patient Protection and Affordable Care Act, as amended (PPACA),including a significant decrease in projected Medicare costs from the 2009 Statement of Social Insurance related to (1) reductions in physician payment rates (totaling almost 30 percent in January 2012) and (2) productivity improvements for most other categories of Medicare providers. However, there are significant uncertainties concerning the achievement of these projected decreases in Medicare costs. Management has noted that actual future costs for Medicare are likely to exceed those shown by the current-law projections presented in the 2011 and 2010 Statements of Social Insurance due to the likelihood of modifications to the scheduled reductions. The extent to which actual future costs exceed the projected current-law amounts due to changes to the physician payments and productivity adjustments depends on both the specific changes that might be legislated and on whether legislation would include other provisions to help offset such costs. Management has developed an illustrative alternative projection intended to provide additional context regarding the long-term sustainability of the Medicare program and to illustrate the uncertainties in the Statement of Social Insurance projections. The present value of future estimated expenditures in excess of future estimated revenue for Medicare included in the illustrative alternative projection exceeds the $24.6 trillion estimate in the 2011 Statement of Social Insurance by $12.4 trillion. Projections of Medicare costs are sensitive to assumptions about future decisions by policymakers and about the behavioral responses of consumers, employers, and health care providers as policy, incentives, and the health care sector change over time. For example, behavioral responses of health care providers could affect Medicare beneficiaries' access to care. Such secondary impacts are not reflected in the Statement of Social Insurance projections but could be expected to influence the excess cost growth rate used in the projections. Key drivers of uncertainty about the excess cost growth rate include the future development and deployment of medical technology, the evolution of personal income, and the cost and availability of insurance, as well as federal policy change, such as the PPACA. In August 2010, the Secretary of the Department of Health and Human Services, working on behalf of the Board of Trustees, established an independent panel of expert actuaries and economists to review the assumptions and methods used by the Trustees to make projections of the financial status of the trust funds. The work of the 2010 Technical Review Panel on the Medicare Trustees Report could provide additional guidance to management concerning ways to incorporate secondary impacts into future Statement of Social Insurance projections and related disclosures. As noted in our audit report, in preparing the Statements of Social Insurance, management considers and selects assumptions and data that it believes provide a reasonable basis for the assertions in the statement. The statement is not a forecast or prediction, but is intended to illustrate the potential impact of the continuation of current scheduled benefits and financing. The Financial Report includes a summary of the assumptions used by management and unaudited information concerning how changes in various key assumptions, such as health care cost growth, would affect the Statement of Social Insurance. Both the Statement of Social Insurance projections and the illustrative alternative estimate summarized in Note 26 in the Financial Report indicate that the Social Security and Medicare programs are not sustainable under current financing arrangements. The federal government's financial condition continued to be significantly affected by the last economic recession and the federal government's actions to stabilize financial markets and promote economic recovery, among other factors. For fiscal year 2011, the federal government reported a net operating cost of about $1.3 trillion and a unified budget deficit of approximately $1.3 trillion. In addition, federal debt held by the public increased to about 68 percent of gross domestic product (GDP) as of September 30, 2011. The federal government undertook an array of unprecedented actions to help stabilize the financial markets and promote economic recovery. As of September 30, 2011, the federal government reported assets of over $295 billion, which is net of about $95 billion in valuation losses, as a result of these actions. In addition, the federal government reported incurring significant liabilities resulting from these actions as of September 30, 2011, including approximately $316 billion of liabilities for future payments to the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). Because the valuation of these assets and liabilities is based on assumptions and estimates that are inherently subject to substantial uncertainty arising from the uniqueness of certain transactions and the likelihood of future changes in general economic, regulatory, and market conditions, actual results may be materially different from the reported amounts. Actions taken to stabilize financial markets--including aid to the automotive industry--increased the government's costs and contributed to growing federal debt held by the public. The economic downturn and the nature and magnitude of the actions taken to stabilize the financial markets and to promote economic recovery, as well as challenges in the housing market, will continue to affect the federal government's near-term budget and debt outlook. In addition, the future structure of Fannie Mae and Freddie Mac and the roles they will serve in the mortgage markets may also affect the federal government's financial condition. The ultimate cost of the federal government's actions to stabilize the financial markets and promote economic recovery will not be known for some time as these uncertainties are resolved and further federal government actions are taken in fiscal year 2012 and later. Looking ahead, the federal government will face the challenge of determining the most expeditious manner in which to bring closure to its financial stabilization initiatives while optimizing its investment returns. The 2011 Financial Report includes comprehensive long-term fiscal projections for the U.S. government that, consistent with GAO simulations, show that without changes in current policy, the federal government continues to face an unsustainable fiscal path. Such reporting provides a much needed perspective on the federal government's long-term fiscal position and outlook. The projections included in the Financial Report and our simulations both reflect an improvement resulting from provisions of the Budget Control Act of 2011 (BCA). The BCA set limits on discretionary spending for fiscal years 2012-2021 and created the Joint Select Committee on Deficit Reduction. Under the enacted discretionary spending limits, discretionary spending as a share of the economy in 2021 would be lower than any level seen in the last 50 years. The fact that the Joint Select Committee did not reach agreement on a package triggered automatic procedures that would lead to additional spending reductions. Together, the provisions of the BCA would reduce deficits over the 2012-2021 decade by $2.1 trillion--largely through reductions in discretionary spending. Both the Financial Report and GAO's simulations assume these reductions occur, and that the savings as a share of GDP continue beyond the decade. Even with the reductions from the BCA, the government continues to face a significant structural imbalance between revenues and spending, driven on the spending side largely by rising health care costs and the aging of the U.S. population. We have already begun to see the impact of this structural imbalance--Social Security is now in a negative cash flow position. The growing gap between revenues and spending that is built into the current structure of the budget leads to continued growth in debt held by the public as a share of GDP; this is not sustainable. Changing this path will not be easy, and it will likely require difficult decisions affecting both federal spending and revenue. While delay increases the size of the changes that must be made, it is also important to recognize current economic conditions. Addressing the long-term fiscal imbalance is made more difficult by the need to balance achieving the goals of sustaining economic growth in the near term, while producing a plan to change the federal government's long-term fiscal path. In closing, even though progress has been made in improving federal financial management activities and practices, much work remains given the federal government's long-term fiscal challenges and the need for the Congress, the administration, and federal managers to have reliable, useful, and timely financial and performance information to effectively meet these challenges. Sound decisions on the current and future direction of vital federal government programs and policies are more difficult without reliable, useful, and timely financial and performance information. DOD, in particular, faces many difficult challenges in this area. We are encouraged by DOD's efforts toward addressing its long- standing financial management weaknesses and its efforts to achieve auditability. However, sustained and diligent DOD top management oversight toward achieving financial management capabilities, including audit readiness, will be critical going forward. Moreover, in addition to annual financial statements that can pass the scrutiny of a financial audit, the civilian CFO Act agencies must continue to strive toward routinely producing reliable, useful, and timely financial and performance data to help guide decision makers on a day-to-day basis. Federal entities' improvement of financial management systems will be essential to achieve this goal for their agency and the government as a whole. The last economic recession and the federal government's actions to stabilize financial markets continued to significantly affect the federal government's financial condition. Continued focus and attention is needed to ensure (1) that sufficient internal controls and transparency are established and maintained for all financial stabilization efforts; and (2) that all related financial transactions are reported on time, accurately, and completely. In addition, the federal government will face the challenge of determining the most expeditious manner in which to bring closure to its financial stabilization initiatives while optimizing its investment returns. Further, of utmost concern are the federal government's long-term fiscal challenges that result from large and growing structural deficits that are driven on the spending side primarily by rising health care costs and known demographic trends. This unsustainable path must be addressed by policymakers. Finally, I want to emphasize the value of sustained congressional interest in federal financial management issues, as demonstrated by this Subcommittee's leadership. It will be key that, going forward, the appropriations, budget, authorizing, and oversight committees continue to support improvement efforts and to hold the top leadership of federal entities accountable for resolving the remaining problems. Mr. Chairman and Ranking Member Towns, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the Subcommittee may have at this time. For further information regarding this testimony, please contact Robert F. Dacey, Chief Accountant, or Gary T. Engel, Director, Financial Management and Assurance, at (202) 512-3406. Key contributions to this testimony were also made by staff on our Consolidated Financial Statement audit team. Principal auditor Office of Inspector General (OIG) Reported noncompliance with applicable laws and regulations and/or substantial noncompliance with one or more of the Federal Financial Management Improvement Act requirements. The auditors expressed an unqualified opinion on the Department of Health and Human Services' fiscal year 2011 accrual-based financial statements, but were unable to express opinions on the department's 2011 Statement of Social Insurance and 2011 Statement of Changes in Social Insurance Amounts. For fiscal year 2011, only the Consolidated Balance Sheet and the related Statement of Custodial Activity of the Department of Homeland Security were subject to audit. The auditors expressed a qualified opinion on these two financial statements. The auditors of the Department of State's fiscal year 2011 financial statements issued a qualified opinion because of the effect of certain matters related to after-employment actuarial liabilities and benefit plan assets and net position balances. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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GAO annually audits the consolidated financial statements of the U.S. government. The Congress and the President need reliable, useful, and timely financial and performance information to make sound decisions and conduct effective oversight of federal government programs and policies. However, over the years, certain material weaknesses in internal control over financial reporting have prevented GAO from expressing an opinion on the accrual-based consolidated financial statements. Unless these weaknesses are adequately addressed, they will, among other things, continue to (1) hamper the federal government's ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; and (2) affect the federal government's ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities. This testimony presents the results of GAO's audit for fiscal year 2011 and discusses certain of the federal government's significant long-term fiscal challenges. Three long-standing major impediments continued to prevent GAO from expressing an opinion on the federal government's accrual-based consolidated financial statements: (1) serious financial management problems at the Department of Defense (DOD) that have prevented DOD's financial statements from being audited, (2) federal entities' inability to adequately account for and reconcile intragovernmental activity and balances, and (3) the federal government's ineffective process for preparing the consolidated financial statements. GAO also reported material weaknesses involving billions of dollars in improper payments, information security, and tax collection activities. Also, GAO was prevented from expressing opinions on the 2011 and 2010 Statements of Social Insurance and the 2011 Statement of Changes in Social Insurance Amounts because of significant uncertainties primarily related to the achievement of projected reductions in Medicare cost growth reflected in the statements. GAO is encouraged by the commitment of DOD leaders to improving DOD's financial management and achieving auditiability and by the congressional attention being given to this important matter. The Congress set statutory deadlines for DOD auditability, convened a congressional panel to focus on the issue, and held several hearings on DOD financial management. The Secretary of Defense accelerated the timeline for DOD auditability, setting a 2014 deadline for audit readiness of the Statement of Budgetary Resources, and DOD has issued a plan for meeting that date, which GAO is in the process of reviewing. The plan emphasizes the importance of leadership, including senior leaders and field commanders, to achieving DOD's goals, and it links accountability to performance appraisals. To meet their financial management and auditability goals, DOD and its components will need to overcome significant challenges, including implementation of its financial improvement plan, deployment of supporting automated systems, and assessment and resolution of gaps in workforce skills. The Department of the Treasury (Treasury) furthered its commitment to resolve unreconciled differences between federal entities regarding intragovernmental activity and balances, which included several short- and long-term initiatives. In addition, Treasury, in coordination with the Office of Management and Budget (OMB), implemented corrective actions during 2011 to address certain deficiencies regarding the preparation of the consolidated financial statements. Fully addressing the numerous issues in these areas will require a strong and sustained commitment by federal entities and leadership by Treasury and OMB. The 2011 Financial Report of the United States Government included comprehensive long-term fiscal projections for the U.S. government, which provides a much needed perspective on the federal government's long-term fiscal position and outlook. These, like GAO's simulations, include the savings provided by the Budget Control Act of 2011. While assuming that the savings as a share of gross domestic product continue beyond the decade leads to an improvement in the long-term fiscal path, it does not make the path sustainable. Addressing the long-term fiscal imbalance is made more difficult by the need to balance achieving the goals of sustaining economic growth in the near term, while producing a plan to change the federal government's long-term fiscal path. Over the years, GAO has made numerous recommendations directed at improving federal financial management. The federal government has generally taken or plans to take actions to address GAO's recommendations.
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Today the Social Security program faces a long-range and fundamental financing problem driven largely by known demographic trends. The lack of an immediate solvency crisis affects the nature of the challenge, but it does not eliminate the need for action. Acting soon reduces the likelihood that the Congress will have to choose between imposing severe benefit cuts and unfairly burdening future generations with the program's rising costs. Acting soon would allow changes to be phased in so the individuals who are most likely to be affected, namely younger and future workers, will have time to adjust their retirement planning. Since there is a great deal of confusion about Social Security's current financing arrangements and the nature of its long-term financing problem, I would like to spend some time describing the nature, timing, and extent of the financing problem. As you all know, Social Security has always been largely a pay-as-you-go system. This means that current workers' taxes pay current retirees' benefits. As a result, the relative numbers of workers and beneficiaries has a major impact on the program's financial condition. This ratio, however, is changing. In 1950, before the Social Security system was mature, the ratio was 16.5:1. In the 1960s, the ratio averaged 4.2:1. Today it is 3.3:1 and it is expected to drop to around 2.2:1 by 2030. The retirement of the baby boom generation is not the only demographic challenge facing the system. People are retiring early and living longer. A falling fertility rate is the other principal factor underlying the growth in the elderly's share of the population. In the 1960s, the fertility rate was an average of 3 children per woman. Today it is a little over 2, and by 2030 it is expected to fall to 1.95 --a rate that is below replacement. Taken together, these trends threaten the financial solvency and sustainability of this important program. (See fig. 1.) The combination of these trends means that labor force growth will begin to slow after 2010 and by 2025 is expected to be less than a third of what it is today. (See fig. 2.) Relatively fewer workers will be available to produce the goods and services that all will consume. Without a major increase in productivity, low labor force growth will lead to slower growth in the economy and to slower growth of federal revenues. This in turn will only accentuate the overall pressure on the federal budget. This slowing labor force growth is not always recognized as part of the Social Security debate. Social Security's retirement eligibility dates are often the subject of discussion and debate and can have a direct effect on both labor force growth and the condition of the Social Security retirement program. However, it is also appropriate to consider whether and how changes in pension and/or other government policies could encourage longer workforce participation. To the extent that people choose to work longer as they live longer, the increase in the share of life spent in retirement would be slowed. This could improve the finances of Social Security and mitigate the expected slowdown in labor force growth. Today, the Social Security Trust Funds take in more in taxes than they spend. Largely because of the known demographic trends I have described, this situation will change. Although the Trustees' 2003 intermediate estimates project that the combined Social Security Trust Funds will be solvent until 2042, program spending will constitute a rapidly growing share of the budget and the economy well before that date. In 2008, the first baby boomers will become eligible for Social Security benefits, and the future costs of serving them are already becoming a factor in the Congressional Budget Office's (CBO) 10-year projections. Under the Trustees' 2003 intermediate estimates, Social Security's cash surplus--the difference between program tax income and the costs of paying scheduled benefits--will begin a permanent decline in 2009. To finance the same level of federal spending as in the previous year, additional revenues and/or increased borrowing will be needed. By 2018, Social Security's tax income is projected to be insufficient to pay currently scheduled benefits. At that time, Social Security will join Medicare's Hospital Insurance Trust Fund (whose outlays are projected to begin to exceed revenues in 2013) as a net claimant on the rest of the federal budget. The combined OASDI Trust Funds will begin drawing on the Treasury to cover the cash shortfall, first relying on interest income and eventually drawing down accumulated trust fund assets. The Treasury will need to obtain cash for those redeemed securities either through increased taxes, and/or spending cuts, and/or more borrowing from the public than would have been the case had Social Security's cash flow remained positive. Neither the decline in the cash surpluses nor the cash deficit will affect the payment of benefits. The shift from positive to negative cash flow, however, will place increased pressure on the federal budget to raise the resources necessary to meet the program's ongoing costs. Ultimately, the critical question is not how much a trust fund has in assets, but whether the government as a whole can afford the benefits in the future and at what cost to other claims on scarce resources. As I have said before, the future sustainability of programs is the key issue policymakers should address--i.e., the capacity of the economy and budget to afford the commitment. Fund solvency can help, but only if promoting solvency improves the future sustainability of the program. From the perspective of the federal budget and the economy, the challenge posed by the growth in Social Security spending becomes even more significant in combination with the more rapid expected growth in Medicare and Medicaid spending. This growth in spending on federal entitlements for retirees will become increasingly unsustainable over the longer term, compounding an ongoing decline in budgetary flexibility. Over the past few decades, spending on mandatory programs has consumed an ever-increasing share of the federal budget. In 1963, prior to the creation of the Medicare and Medicaid programs, spending for mandatory programs plus net interest accounted for about 32 percent of total federal spending. By 2003, this share had almost doubled to approximately 61 percent of the budget. (See fig. 4.) In much of the last decade, reductions in defense spending helped accommodate the growth in these entitlement programs. Even before the events of September 11, 2001, however, this ceased to be a viable option. Indeed, spending on defense and homeland security will grow as we seek to combat new threats to our nation's security. GAO prepares long-term budget simulations that seek to illustrate the likely fiscal consequences of the coming demographic tidal wave and rising health care costs. These simulations continue to show that to move into the future with no changes in federal retirement and health programs is to envision a very different role for the federal government. Assuming, for example, that the tax reductions enacted in 2001 do not sunset and discretionary spending keeps pace with the economy, by midcentury federal revenues may only be adequate to pay Social Security and interest on the federal debt. To obtain balance, massive spending cuts, tax increases, or some combination of the two would be necessary. (See fig. 5.) Neither slowing the growth of discretionary spending nor allowing the tax reductions to sunset eliminates the imbalance. Although this figure assumes payment of currently scheduled Social Security benefits, the long-term fiscal imbalance would not be eliminated even if Social Security benefits were to be limited to currently projected trust fund revenues. This is because Medicare (and Medicaid)--spending for which is driven by both demographics and rising health care costs-- present an even greater problem. This testimony is not about the complexities of Medicare, but it is important to note that Medicare presents a much greater, more complex, and more urgent fiscal challenge than does Social Security. Medicare growth rates reflect not only a burgeoning beneficiary population, but also the escalation of health care costs at rates well exceeding general rates of inflation. Increases in the number and quality of health care services have been fueled by the explosive growth of medical technology. Moreover, the actual costs of health care consumption are not transparent. Third-party payers generally insulate consumers from the cost of health care decisions. These factors and others contribute to making Medicare a much greater and more complex fiscal challenge than even Social Security. GAO is developing a health care framework to help focus additional attention on this important area and to help educate key policymakers and the public on the current system and related challenges. Indeed, long-term budget flexibility is about more than Social Security and Medicare. While these programs dominate the long-term outlook, they are not the only federal programs or activities that bind the future. The federal government undertakes a wide range of programs, responsibilities, and activities that obligate it to future spending or create an expectation for spending. A recent GAO report describes the range and measurement of such fiscal exposures--from explicit liabilities such as environmental cleanup requirements to the more implicit obligations presented by life- cycle costs of capital acquisition or disaster assistance. Making government fit the challenges of the future will require not only dealing with the drivers--entitlements for the elderly--but also looking at the range of federal activities. A fundamental review of what the federal government does and how it does it will be needed. At the same time it is important to look beyond the federal budget to the economy as a whole. Figure 6 shows the total future draw on the economy represented by Social Security, Medicare, and Medicaid. Under the 2003 Trustees' intermediate estimates and CBO's long-term Medicaid estimates, spending for these entitlement programs combined will grow to 14 percent of GDP in 2030 from today's 8.4 percent. Taken together, Social Security, Medicare, and Medicaid represent an unsustainable burden on future generations. When Social Security redeems assets to pay benefits, the program will constitute a claim on real resources in the future. As a result, taking action now to increase the future pool of resources is important. To echo Federal Reserve Chairman Greenspan, the crucial issue of saving in our economy relates to our ability to build an adequate capital stock to produce enough goods and services in the future to accommodate both retirees and workers in the future. The most direct way the federal government can raise national saving is by increasing government saving, i.e., as the economy returns to a higher growth path, a much more balanced and disciplined fiscal policy that recognizes our long-term challenges can help provide a strong foundation for future economic growth and can enhance future budgetary flexibility. In the short term, we need to realize that we are already facing a huge fiscal hole (gap). The first thing that we should do is stop digging. Taking action now on Social Security would not only promote increased budgetary flexibility in the future and stronger economic growth but would also make less dramatic action necessary than if we wait. Some of the benefits of early action--and the costs of delay--can be seen in figure 7. This compares what it would take to achieve actuarial balance at different points in time by either raising payroll taxes or reducing benefits. If we did nothing until 2042--the year the Trust Funds are estimated to be exhausted--achieving actuarial balance would require changes in benefits of 31 percent or changes in taxes of 46 percent. As figure 7 shows, earlier action shrinks the size of the adjustment. Thus both sustainability concerns and solvency considerations drive us to act sooner rather than later. Trust Fund exhaustion may be almost 40 years away, but the squeeze on the federal budget will begin as the baby boom generation starts to retire. Actions taken today can ease both these pressures and the pain of future actions. Acting sooner rather than later also provides a more reasonable planning horizon for future retirees. As important as financial stability may be for Social Security, it cannot be the only consideration. As a former public trustee of Social Security and Medicare, I am well aware of the central role these programs play in the lives of millions of Americans. Social Security remains the foundation of the nation's retirement system. It is also much more than just a retirement program; it pays benefits to disabled workers and their dependents, spouses and children of retired workers, and survivors of deceased workers. Last year, Social Security paid almost $454 billion in benefits to more than 46 million people. Since its inception, the program has successfully reduced poverty among the elderly. In 1959, 35 percent of the elderly were poor. In 2000, about 8 percent of beneficiaries aged 65 or older were poor, and 48 percent would have been poor without Social Security. It is precisely because the program is so deeply woven into the fabric of our nation that any proposed reform must consider the program in its entirety, rather than one aspect alone. Thus, GAO has developed a broad framework for evaluating reform proposals that considers not only solvency but other aspects of the program as well. The analytic framework GAO has developed to assess proposals comprises three basic criteria: the extent to which a proposal achieves sustainable solvency and how it would affect the economy and the federal budget; the relative balance struck between the goals of individual equity and income adequacy; and how readily a proposal could be implemented, administered, and explained to the public. The weight that different policymakers may place on different criteria will vary, depending on how they value different attributes. For example, if offering individual choice and control is less important than maintaining replacement rates for low-income workers, then a reform proposal emphasizing adequacy considerations might be preferred. As they fashion a comprehensive proposal, however, policymakers will ultimately have to balance the relative importance they place on each of these criteria. Our sustainable solvency standard encompasses several different ways of looking at the Social Security program's financing needs. While 75-year actuarial balance is generally used in evaluating the long-term financial outlook of the Social Security program and reform proposals, it is not sufficient in gauging the program's solvency after the 75th year. For example, under the Trustees' intermediate assumptions, each year the 75- year actuarial period changes, and a year with a surplus is replaced by a new 75th year that has a significant deficit. As a result, changes made to restore trust fund solvency only for the 75-year period can result in future actuarial imbalances almost immediately. Reform plans that lead to sustainable solvency would be those that consider the broader issues of fiscal sustainability and affordability over the long term. Specifically, a standard of sustainable solvency also involves looking at (1) the balance between program income and cost beyond the 75th year and (2) the share of the budget and economy consumed by Social Security spending. As I have already discussed, reducing the relative future burdens of Social Security and health programs is essential to a sustainable budget policy for the longer term. It is also critical if we are to avoid putting unsupportable financial pressures on future workers. Reforming Social Security and federal health programs is essential to reclaiming our future fiscal flexibility to address other national priorities. The current Social Security system's benefit structure strikes a balance between the goals of retirement income adequacy and individual equity. From the beginning, benefits were set in a way that focused especially on replacing some portion of workers' preretirement earnings. Over time other changes were made that were intended to enhance the program's role in helping ensure adequate incomes. Retirement income adequacy, therefore, is addressed in part through the program's progressive benefit structure, providing proportionately larger benefits to lower earners and certain household types, such as those with dependents. Individual equity refers to the relationship between contributions made and benefits received. This can be thought of as the rate of return on individual contributions. Balancing these seemingly conflicting objectives through the political process has resulted in the design of the current Social Security program and should still be taken into account in any proposed reforms. Policymakers could assess income adequacy, for example, by considering the extent to which proposals ensure benefit levels that are adequate to protect beneficiaries from poverty and ensure higher replacement rates for low-income workers. In addition, policymakers could consider the impact of proposed changes on various subpopulations, such as low-income workers, women, minorities, and people with disabilities. Policymakers could assess equity by considering the extent to which there are reasonable returns on contributions at a reasonable level of risk to the individual, improved intergenerational equity, and increased individual choice and control. Differences in how various proposals balance each of these goals will help determine which proposals will be acceptable to policymakers and the public. Program complexity makes implementation and administration both more difficult and harder to explain to the public. Some degree of implementation and administrative complexity arises in virtually all proposed changes to Social Security, even those that make incremental changes in the already existing structure. However, the greatest potential implementation and administrative challenges are associated with proposals that would create individual accounts. These include, for example, issues concerning the management of the information and money flow needed to maintain such a system, the degree of choice and flexibility individuals would have over investment options and access to their accounts, investment education and transitional efforts, and the mechanisms that would be used to pay out benefits upon retirement. Harmonizing a system that includes individual accounts with the regulatory framework that governs our nation's private pension system would also be a complicated endeavor. However, the complexity of meshing these systems should be weighed against the potential benefits of extending participation in individual accounts to millions of workers who currently lack private pension coverage. Continued public acceptance and confidence in the Social Security program require that any reforms and their implications for benefits be well understood. This means that the American people must understand why change is necessary, what the reforms are, why they are needed, how they are to be implemented and administered, and how they will affect their own retirement income. All reform proposals will require some additional outreach to the public so that future beneficiaries can adjust their retirement planning accordingly. The more transparent the implementation and administration of reform, and the more carefully such reform is phased in, the more likely it will be understood and accepted by the American people. As you requested, we applied our criteria to a scenario of Trust Fund Exhaustion. This scenario dramatically illustrates the need to take action sooner rather than later to address the program's long-term fiscal imbalance. Under this scenario, currently scheduled benefits would be paid in full until the combined OASDI Trust Funds are exhausted. After exhaustion, monthly benefit checks are reduced in proportion to the annual shortfall. In effect, after trust fund exhaustion, all beneficiaries would experience a sharp drop in benefits. Additional reductions in the following years would result in benefits equal to about two-thirds of currently scheduled levels by the end of the 75-year simulation period. (See fig. 8.) We used our long-term economic model in assessing the Trust Fund Exhaustion scenario against the first criterion, that of financing sustainable solvency. To examine how the Commission reform models balance adequacy and equity concerns, we used the GEMINI model, a dynamic microsimulation model for analyzing the lifetime implications of Social Security policies for a large sample of people born in the same year. Our analysis examined the effects of the reform models for the 1955, 1970, and 1985 birth cohorts. For this analysis, as in our report on the Commission reform models, we used the 2001 Trustees' intermediate assumptions. Under these assumptions, the combined trust funds are projected to reach exhaustion in 2038. Our analysis of the scenario used the same three benchmarks as in our January report on the Commission reform models: The "benefit reduction benchmark" assumes a gradual reduction in the currently scheduled Social Security defined benefit beginning with those newly eligible for retirement in 2005. Current tax rates are maintained. The "tax increase benchmark" assumes an increase in the OASDI payroll tax beginning in 2002 sufficient to achieve an actuarial balance over the 75-year period. Currently scheduled benefits are maintained. The "baseline extended benchmark" is a fiscal policy path developed in our earlier long-term model work that assumes payment in full of currently scheduled Social Security benefits and no other changes in current spending or tax policies. The use of our criteria in evaluating the Trust Fund Exhaustion scenario underscores the need to take action sooner rather than later to address Social Security's financing shortfall. In so doing, it illustrates trade-offs that exist between efforts to achieve sustainable solvency for the OASDI Trust Funds and efforts to maintain adequate retirement income for current and future beneficiaries. By definition this scenario would achieve sustainable solvency because after the combined trust funds had run out of assets, benefit payments would be adjusted each year to equal annual tax income. Before 2038, the Trust Fund Exhaustion scenario would result in lower unified surpluses and higher unified deficits compared to the tax increase benchmark by the same amounts as the baseline extended benchmark. Subsequently the Trust Fund Exhaustion scenario would result in unified fiscal results increasingly similar to both the tax increase benchmark and the benefit reduction scenario over the 75-year period. Before 2038, the Trust Fund Exhaustion scenario would require the same amounts of cash as the tax increase or baseline extended benchmarks; subsequently, the Trust Fund Exhaustion scenario would require less cash each year than any of the three benchmarks. Under the Trust Fund Exhaustion scenario, the effect on benefits would differ sharply before and after exhaustion took place. Before exhaustion, benefits would be the same as those currently scheduled, reflected in both the tax increase and baseline extended benchmarks. Once the combined trust funds had run out, benefits for all would be reduced across the board and remain below currently scheduled levels. Accordingly, those receiving benefits at the time of trust fund exhaustion would experience a sharp drop in benefits; under the Trustees' 2001 intermediate estimates, this drop is estimated at 27 percent (to 73 percent of currently scheduled levels) in 2039. Small further reductions would need to be taken in successive years such that by 2076 benefits would be only two-thirds of currently scheduled levels (i.e., to 67 percent of currently scheduled levels). (See fig. 9.) Due to the timing of the reductions under the Trust Fund Exhaustion scenario, younger generations would bear greater benefit reductions. Those born in 1955 would not experience benefit reductions until they reached age 83, while those born in 1985 would receive lower benefits than under either GAO's benefit reduction or tax increase benchmarks in all years of retirement. Consequently, lifetime benefits would be reduced more for younger generations. Under the Trust Fund Exhaustion scenario we used, benefits would be adjusted proportionately for all recipients, increasing the likelihood of hardship for lower income retirees and the disabled. Given a lack of historical precedent and legislative clarity on how SSA would proceed in the event of trust fund exhaustion, the nature and scope of SSA's administrative challenges under the scenario are difficult to describe or assess. At a minimum, a focus on cash management would be needed for SSA to calculate and implement the ongoing benefit adjustments required under the scenario. It is likely that the structural changes required to restore Social Security's long-term viability generally will require some combination of reductions from currently scheduled benefits, revenue increases, and may include the use of some general revenues. The proposals we have examined, both this year and earlier, generally reflect this. Proposals employ possible benefit modifications within the current program structure, including modifying the benefit formula, reconsidering current eligibility criteria, and reducing cost-of-living adjustments. Revenue increases might take the form of increases in the payroll tax rate, expanding coverage to include the relatively few workers who are still not covered under Social Security, or allowing the trust funds to be invested in potentially higher-yielding securities such as stocks. Similarly, some proposals rely on general revenue transfers to increase the amount of money going towards the Social Security program. Reforms that include individual accounts would also involve Social Security benefit reductions and/or revenue increases, and the use of general revenues. Whatever approach is taken to reform, we must be able to continue to finance ongoing benefits to retirees in the short term. The longer we delay reform, the larger the "transition costs" and the more disruptive the actions will be. In evaluating Social Security reform proposals, the choice among various benefit reductions and revenue increases will affect the balance between income adequacy and individual equity. Benefit reductions could pose the risk of diminishing adequacy, especially for specific subpopulations. Both benefit reductions and tax increases that have been proposed could diminish individual equity by reducing the implicit rates of return the workers earn on their contributions to the system. In contrast, increasing revenues by investing retirement funds in the stock market could improve rates of return but potentially expose individuals to investment risk and losses of expected retirement income. Similarly, the choice among various benefit reductions and revenue increases--for example, raising the retirement age--will ultimately determine not just how much income retirees will have but also how long they will be expected to continue working and how long their retirements will be. Reforms will determine how much consumption workers will give up during their working years to provide for more consumption during retirement. The use of our criteria to evaluate approaches to Social Security reform highlights the trade-offs that exist between efforts to achieve sustainable solvency and to maintain adequate retirement income for current and future beneficiaries. These trade-offs can be described as differences in the extent and nature of the risks for individuals and the nation as a whole. At the same time, the defined benefit under the current Social Security system is also uncertain. The primary risk is that a significant funding gap exists between currently scheduled and funded benefits which, although it will not occur for a number of years, is significant and will grow over time. Other risks stem from uncertainty in, for example, future levels of productivity growth, real wage growth, and demographics. The Congress has revised Social Security many times in the past, and future Congresses could decide to revise benefits in ways that leave those affected little time to adjust. As the Congress deliberates various approaches to Social Security, the national debate also needs to include discussion of the various types of risk implicit in each approach and in the timing of reform. Early action to change these programs would yield the highest fiscal dividends for the federal budget and would provide a longer period for prospective beneficiaries to make adjustments in their own planning. Waiting to build economic resources and reform future claims entails risks. First, we lose an important window where today's relatively large workforce can increase saving and enhance productivity, two elements critical to growing the future economy. We lose the opportunity to reduce the burden of interest payments, thereby creating a legacy of higher debt as well as elderly entitlement spending for the relatively smaller workforce of the future. Most critically, we risk losing the opportunity to phase in changes gradually so that all can make the adjustments needed in private and public plans to accommodate this historic shift. Unfortunately, the long-range challenge has become more difficult, and the window of opportunity to address the entitlement challenge is narrowing. As the baby boom generation retires and the numbers of those entitled to these retirement benefits grow, the difficulties of reform will be compounded. Accordingly, it remains more important than ever to deal with these issues over the next several years. In their March 2003 report, the Trustees emphasized the need for action sooner rather than later, stating that the sooner Social Security's financial challenges are addressed, the more varied and less disruptive can be their solutions. Today many retirees and near-retirees fear cuts that will affect them while young people believe they will get little or no Social Security benefits. As I have said before, I believe it is possible to structure a Social Security reform proposal that will exceed the expectations of all generations of Americans. In my view there is a window of opportunity to craft a solution that will protect Social Security benefits for the nation's current and near- term retirees, while ensuring that the system will be there for future generations. However, this window of opportunity will close as the baby boom generation begins to retire. As a result, we must move forward to address Social Security because we have other major challenges confronting us. The fact is, compared to addressing our long-range health care financing problem; reforming Social Security will be easy lifting. It is my hope that we will think about the unprecedented challenge facing future generations in our aging society. Relieving them of some of the burden of today's financing commitments would help fulfill this generation's stewardship responsibility to future generations. It would also preserve some capacity for them to make their own choices by strengthening both the budget and the economy they inherit. We need to act now to address the structural imbalances in Social Security, Medicare, and other entitlement programs before the approaching demographic tidal wave makes the imbalances more difficult, dramatic, and disruptive. We at GAO look forward to continuing to work with this Committee and the Congress in addressing this and other important issues facing our nation. Mr. Chairman, Members of the Committee, that concludes my statement. I'd be happy to answer any questions you may have. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Social Security is an important social insurance program affecting virtually every American family. It is the foundation of the nation's retirement income system and also provides millions of Americans with disability insurance and survivors' benefits. Over the long term, as the baby boom generation retires, Social Security's financing shortfall presents a major program solvency and sustainability challenge. The Chairman of the Senate Special Committee on Aging asked GAO to discuss Social Security's long-term financing challenges and the results of GAO's analysis of an illustrative "Trust Fund Exhaustion" scenario. Under this scenario, benefits are reduced proportionately for all beneficiaries by the shortfall in revenues occurring upon exhaustion of the combined Old-Age and Survivors Insurance and Disability Insurance Trust Funds. This scenario was developed for analytic purposes and is not a legal determination of how benefits would be paid in the event of trust fund exhaustion. GAO's analysis used the framework it has developed to analyze the implications of reform proposals. This framework consists of three criteria: (1) the extent to which the proposal achieves sustainable solvency and how it would affect the U.S. economy and the federal budget, (2) the balance struck between the twin goals of income adequacy and individual equity, and (3) how readily changes could be implemented, administered, and explained to the public. Although the Trustees' 2003 intermediate estimates show that the combined Social Security Trust Funds will be solvent until 2042, program spending will constitute a growing share of the budget and the economy much sooner. Within 5 years, the first baby boomers will become eligible for Social Security. By 2018, Social Security's tax income is projected to be insufficient to pay currently scheduled benefits. This shift from positive to negative cash flow will place increased pressure on the federal budget to raise the resources necessary to meet the program's ongoing costs. In the long term, Social Security, together with rapidly growing federal health programs, will dominate our nation's fiscal outlook. Absent reform, the nation will ultimately have to choose between persistent, escalating federal deficits, significant tax increases, and/or dramatic budget cuts of unprecedented magnitude. The Trust Fund Exhaustion scenario we analyzed dramatically illustrates the need for action sooner rather than later. (See Social Security Reform: Analysis of a Trust Fund Exhaustion Scenario. GAO-03-907 . Washington, D.C.: July 29, 2003.) Under this scenario, after the combined trust funds had been fully depleted, benefit payments would be adjusted each year to equal annual tax income. Under this scenario, after trust fund exhaustion those receiving benefits would experience large and sudden benefit reductions. Additional smaller reductions in the following years would result in benefits equal to about two-thirds of currently scheduled levels by the end of the 75-year simulation period. The Trust Fund Exhaustion scenario raises significant intergenerational equity issues. The timing of the benefit adjustments means the Trust Fund Exhaustion scenario places a much greater burden on younger generations. Lifetime benefits would be reduced much more for younger generations. In addition, under the Trust Fund Exhaustion scenario, benefits would be adjusted proportionately for all recipients, increasing the likelihood of hardship for lower income retirees and the disabled, especially those who rely on Social Security as their primary or sole source of retirement income. Fundamentally, the Trust Fund Exhaustion scenario illustrates trade-offs between achieving sustainable solvency and maintaining benefit adequacy. The longer we wait to take action, the sharper these trade-offs will become. Acting soon would allow changes to be phased in so the individuals who are most likely to be affected, namely younger and future workers, will have time to adjust their retirement planning while helping to avoid related "expectation gaps." Finally, acting soon reduces the likelihood that the Congress will have to choose between imposing severe benefit cuts and unfairly burdening future generations with the program's rising costs.
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MSHA's Coal Mine Safety and Health Administration is responsible for carrying out enforcement activities related to surface and underground coal mines. As of January 2007, MSHA employed approximately 550 underground coal inspectors in its 11 coal districts. MSHA's principal enforcement responsibility for underground coal mines is fulfilled by conducting a minimum of four comprehensive inspections of every underground coal mine each year. When MSHA inspectors observe violations of federal health and safety standards, they are required to issue a citation to the coal mine operator. Even if an operator does not agree with the violation or the penalty amount, the operator must resolve the problems within the time frame set by the inspector. In assessing penalties, the Mine Act requires both the Commission and MSHA to consider six statutory factors: 1. the mine operator's history of previous violations, 2. the appropriateness of the penalty to the size of the mine, 3. whether the mine operator was negligent, 4. the effect on the operator's ability to continue in business, 5. the gravity of the violation, and 6. the demonstrated good faith of the mine operator charged in quickly remedying the situation after being notified of a violation. Underground coal mine operators face significant challenges preparing for emergencies, including ensuring that miners receive realistic training and organizing mine rescue teams that satisfy new requirements. MSHA issued new requirements in March 2006 that direct mine operators to conduct mine emergency evacuation drills every 90 days, including drills that simulate actual emergency conditions; install directional lifelines to help miners find their way out of a dark mine; and instruct miners in the procedures for evacuating the mine in emergencies, such as those involving fires or explosions. Based on our survey completed in February 2007, almost all mines had conducted evacuation drills and installed lifelines, but we estimate that half of the mines had not conducted drills in environments that simulated actual emergency situations. According to the survey, simulated mine emergency training presents the greatest challenge in preparing miners for and responding to mine emergencies. Specifically, the most common challenges were the availability of training centers that can simulate an emergency situation, the availability of training in a simulated mine emergency situation, and the cost associated with providing simulated mine emergency training (see fig. 1). Although MSHA has materials that mine operators can use to provide hands-on training on specific topics, it does not provide all mine operators with information and tools for training under simulated emergency conditions. MSHA has a catalog of various training tools, including classroom exercises, that mine operators can obtain upon request. For example, to support the new standards issued in March that require miners to train with breathing devices, MSHA distributed a training packet to all underground coal mines and appropriate state grantees. However, MSHA does not provide all mine operators with critical information on how to provide training in simulated emergency environments such as smoke- filled mines or information on resources that are available for providing such training. Some mine operators use a number of techniques to simulate emergency conditions, but other mine operators may be unaware of them. Based on our survey, cost concerns and opportunities for conducting simulated training with all stakeholders are the greatest challenges in preparing rescue teams for mine emergencies (see fig. 2). Mine operators also reported that they anticipated further challenges stemming from new requirements in the MINER Act. We estimate that half of underground coal mines anticipate changing the composition of at least one of their designated mine rescue teams as a result of the MINER Act. Specifically, mine operators pointed to the requirement that teams train at least annually at the mines they are responsible for covering. This change could present a particular challenge for mine rescue teams in several key coal mining states that serve many or all of the states' mines. According to respective state officials, all mines in Kentucky and many in Virginia and Pennsylvania rely on the state to provide or arrange for mine rescue services. In Kentucky, for example, mines receive rescue services from state teams composed of state mine inspectors whose primary duties are to inspect coal mines. According to a state official, a Kentucky team would be required to conduct 120 training exercises annually under the MINER Act, compared to the 12 exercises it currently conducts. Depending on the final regulations developed by MSHA to implement the requirements of the MINER Act, officials in Kentucky said they might stop offering mine rescue services because of the amount of time that will be needed to meet the training requirements. Some mine operators have already started making changes to their mine rescue teams based on the MINER Act, while others are taking a more cautious approach, given the costs of training and equipping new rescue teams. For example, one company that operates multiple mines reported that it was creating new backup mine rescue teams to satisfy the new requirement that rescue teams be within 1 hour travel time from the mines they serve. In other cases, however, according to mine and industry officials, mines were waiting to see how MSHA implements the new mine rescue requirements before changing their team designations. For example, the extent of the required training at each mine could affect how mine operators designate rescue teams. MSHA has the authority to oversee certain aspects of miner training to help ensure that miners work safely and are prepared for potential emergencies, but its oversight of training is hindered by several factors. To become an approved instructor, MSHA requires that an applicant prove his or her mining and teaching experience in one of three ways: by (1) submitting written qualifications, (2) attending new instructor training, or (3) teaching a class monitored by MSHA under provisional approval from an MSHA district manager. MSHA suggests factors that district managers may use in determining an applicant's skills, but it does not have firm criteria that new instructors must meet. In addition, the approval procedures are not standardized across MSHA's 11 coal districts, according to MSHA officials. For example, some districts grant provisional authority to new instructors only if they can be monitored by MSHA staff. Other districts grant provisional approval for individuals to teach specific courses but, according to MSHA officials, may not monitor these instructors' teaching skills. According to MSHA officials, staff resources limit districts' ability to monitor applicants' teaching skills. Lack of up-to-date information on approved instructors MSHA maintains a database of approved instructors that includes contact information for each instructor, the courses they are approved to teach, and whether they have full or provisional authority to teach the courses. But according to MSHA officials, the database contains outdated contact information because some instructors move without notifying MSHA. Without accurate information on its instructors, MSHA cannot ensure that instructors receive training policy updates and cannot determine whether there are enough qualified instructors to meet mine operators' needs. No continuing education requirements for approved instructors Once instructors are approved, according to an MSHA official, they are not required to demonstrate that they are staying current on emerging mining issues. As a result, MSHA cannot ensure that instructors are keeping their mining knowledge and skills up to date, including their knowledge of emerging safety and health issues and new training tools. Limited monitoring and evaluation of training sessions According to MSHA officials, the agency monitors few miner training sessions relative to the number conducted, and instructor evaluations occur on an ad hoc basis. According to mine operators and trainers, MSHA rarely oversees training, and it monitors sessions primarily for enforcement purposes rather than to enhance instructors' knowledge and abilities. In addition, many of the training sessions occur on the weekends, when MSHA staff do not normally work, limiting their ability to monitor training. MSHA does not collect or analyze training evaluations obtained from miners to help gauge whether learning objectives are taught effectively, and an estimate of 80 percent of mines do not seek feedback on training sessions from their workers. As a result, MSHA cannot determine how well miners are learning the skills taught by MSHA- approved trainers and recommend corrective measures as necessary. MSHA and NIOSH have complementary roles in improving the safety and health of coal miners, but coordination between the two agencies is largely informal and inconsistent due to a lack of a formal agreement or policies to guide their efforts. MSHA is primarily involved in setting health and safety standards and enforcing them through mine inspections that can result in citations and penalties, whereas NIOSH's mining program is focused on research into the causes of and ways to prevent the safety and health hazards miners face. MSHA and NIOSH currently lack a formal agreement, such as a memorandum of understanding or other policy to guide their coordination efforts, a practice we have identified as effective in prior work. In 1978, NIOSH's predecessor and MSHA had a signed memorandum of understanding that specified how they would coordinate to ensure that technology resulting from mine safety research would be used to the fullest extent. The memorandum embodied many of the key practices identified in prior GAO work that can help federal agencies enhance and sustain their collaborative efforts, such as defining roles and responsibilities and developing joint strategies. However, the memorandum is no longer used, and MSHA officials were unaware of any plan to update the document. As a result of not having a formal agreement or policies to guide their activities, coordination between MSHA and NIOSH is primarily driven by informal relationships between staff at both agencies. Officials from both agencies and labor union representatives told us that coordination has been primarily at the initiative of individuals at both agencies and, as such has not always been consistent across the agencies. NIOSH and MSHA face a potentially large workforce turnover in coming years, and informal coordination based on working relationships between staff members may not continue when the individuals leave. As at many federal agencies, MSHA and NIOSH have a large proportion of employees, including many engineers and scientists, who are eligible to retire over the next several years. MSHA data show that more than 50 percent of its 140 engineers and scientists will be eligible for retirement within the next 10 years, with 31 percent eligible within 5 years. Similarly, about half of NIOSH's employees--most of whom are scientists and engineers--are eligible to retire in 5 years. In addition, MSHA and NIOSH face other challenges that require them to work more closely together, particularly in developing and approving safety technologies under tight time frames. An influx of new and inexperienced miners brought on due to the increased demand for coal and the aging of the workforce, rising dangers as miners go deeper underground to mine coal, and recent mine disasters have heightened interest in promising new safety technology. The MINER Act addresses some of these issues and underscores NIOSH's and MSHA's roles in developing and approving safety technologies. For example, the act requires NIOSH to study the use of refuge chambers for miners and requires MSHA to review the results of NIOSH's work to determine what actions, such as making regulatory changes, are appropriate. Both agencies must take action within a relatively short period of time. While MSHA has taken significant steps to improve its hiring process, the agency's human capital plan does not include a strategic approach for addressing the large number of retirements expected over the next 5 years. In 2004, MSHA began using the Federal Career Intern Program (FCIP) to hire new mine inspectors, which has resulted in a number of improvements to the hiring and recruitment process, such as hiring new inspectors more quickly. Since it began using the program, MSHA has hired 301 interns, 236 of whom are coal mine inspector trainees. Through the FCIP, MSHA developed a process for assessing applicants' skills, conducting interviews, and providing applicants with immediate feedback on their aptitude during 1-day job fairs held in locations around the country. As of October 2004, all applicants for inspector positions must attend job fairs and pass a test on basic math and writing skills before interviewing with MSHA. MSHA reported that this screening process has helped the agency maximize its resources, since the exams identify applicants who do not have the basic skills needed to become a successful inspector at an early stage of the hiring process. For example, of the 1,256 applicants tested in 2005 and 2006, 49 percent failed either the math or written exam, or both. MSHA's previous hiring process considered experience over basic skills, and officials told us that this resulted in some new hires with significant mining experience but weak reading and writing skills. As a result, MSHA spent time during new mine inspector training teaching these basic skills. MSHA officials reported that this new approach has reduced the amount of time it takes to hire a new mine inspector from up to 180 days to 45 days or less. In addition, the Office of Personnel Management approved MSHA's request to hire mine inspectors through the FCIP under a broader range of pay scale levels, which allows the agency to hire individuals with different experiences. For example, an applicant might have little experience in mining but possess relevant experience in construction and electrical engineering. This applicant would be hired as a mine inspector trainee at the lower end of the pay scale and be given additional training in areas specific to mine health and safety. Further, MSHA officials commented that the job fairs have helped the agency reduce the number of interagency transfers that occurred under its old hiring process, which was a significant problem. Since job fairs are held in the locations where applicants are being sought and applicants must attend the job fairs in person, they tend to live in those communities and are less likely to request a transfer to another location once they are hired. Appointments to the FCIP are generally for 2 years, at which point the intern may be offered a permanent position. During the internship, new hires are required to participate in a formal training program, which consists of training provided by the Mine Academy and structured on-the- job training. However, district managers and Mine Academy officials agreed that, realistically, new inspectors can take up to 5 years to become fully competent and confident in their roles as underground coal mine inspectors. While the improvements MSHA has made to its recruiting process are an important part of addressing impending retirements, the agency has not developed a long-term strategy for replacing mine inspectors. MSHA estimates that over 40 percent of its inspectors will be eligible for retirement by 2012 (see table 1), and agency officials told us that in the last 3 years, between 32 and 47 percent of the coal mine enforcement employees eligible to retire actually did so in the first year of eligibility. District officials expressed concern over loss of highly experienced coal mine inspectors and the impact such retirements can have on achieving the goals of the agency. For example, one district official told us that recent retirements have left the district short-handed and expressed concern over the inspectors' ability to complete the required annual mine inspections on time. While MSHA human resources officials told us about steps they are taking to mitigate the turnover, the agency has not developed a strategic plan that clearly links measurable outcomes to the mission and goals of the agency. In our review of the plan and discussions with MSHA officials, the agency has not yet demonstrated how it is planning for its future needs, what targets and goals are established to meet those needs, and how the goals will be monitored. For example, given the amount of time needed to train new inspectors, it is not clear how the agency will take into account the potential increases in future hiring and the time necessary to fully train replacements. GAO has reported on effective strategies for workforce planning that require a more strategic approach to meeting the challenges of the future. Among other elements, strategic planning serves as a tool to help agencies address challenges in a manner that is clearly linked to achieving their mission and goals. For example, by using data to make long-term projections, an agency can design a transition program to ensure that experienced employees are available in critical areas of the agency and that the institutional knowledge would not be lost because of turnover. Further, the agency can revisit the projections on a regular basis and use the information to address broader agency goals for improvement. Most of the penalties proposed by MSHA are paid by mine operators without opposition, but a small percentage of more serious and higher- dollar penalties are appealed, and many of those appealed are reduced significantly. In order to determine the amount of a proposed penalty, MSHA uses a standard formula that generally results in larger penalties being proposed for more serious violations. MSHA assigns point values to each of the six broad factors outlined in the Mine Act, and two of these factors--whether the operator was negligent and the gravity of the violation--carry the greatest weight in deciding the amount of the proposed penalty. MSHA inspectors are responsible for making an initial determination regarding the magnitude of these two elements during their inspections. After an inspector issues a citation and makes an initial finding regarding the gravity and negligence of the violation, MSHA determines the magnitude of the remaining four factors and tallies the points to determine the proposed penalty amount. Between 1996 and 2006, MSHA proposed 506,707 penalties for safety and health violations, and the average penalty was $234 per violation. Table 2 details the range of average penalties, by degree of gravity and negligence, proposed by MSHA from 1996 through 2006. MSHA recently changed its regulations governing civil penalty assessments to update them and increase proposed penalty amounts, and to implement the new civil penalty requirement of the MINER Act. The new regulations will increase the points for most of the six statutory factors, and MSHA officials predicted that the new penalty structure will increase total proposed penalties by 234 percent. For example, these changes will increase the maximum points allotted for gravity from 30 to 88 points. MSHA officials asserted that these changes will likely lead to greater rates of compliance and subsequently a safer working environment for the nation's miners. Between 1996 and 2006, approximately 6 percent (31,589) of the penalties proposed by MSHA for violations of underground coal mine safety and health standards were contested by mine operators, and about half of the contested penalties were reduced. The average amount of a contested penalty was $1,107, compared to an average of $176 for a noncontested penalty, and more than half of all contested penalties were for the most serious violations. Almost half of all penalties contested by underground coal mine operators are reduced through the appeals process, even those involving the highest levels of gravity and negligence. From 1996 to 2006, 47 percent of all contested penalties (14,723 penalties) were decreased from the amount originally proposed by MSHA. On average, these penalties were reduced by about half of the amount initially proposed by MSHA using its standard formula. While all of the entities involved in the appeals process--the Labor's Solicitor's Office, MSHA's conference litigation representatives (CLR), and the Commission's administrative law judges (ALJ)--are required by law to apply the six statutory factors specified in the Mine Act, they are not legally obligated to use any particular method to determine a final penalty amount when they determine that a reduction from MSHA's proposed penalty is appropriate. As a result, they have considerable discretion in deciding on the final penalty amount. Officials from all three of the entities involved in the appeals process told us that in determining the size of a final penalty, they apply the six statutory factors on a case-by- case basis and use their professional judgment. For example, officials from the Solicitor's Office and CLRs told us that, when appropriate, the Department of Labor generally views penalty settlements as being in the best interest of both the agency and the mine operators because settlements allow them to avoid costly litigation. Attorneys from the Solicitor's Office also told us that they analyze the evidence presented by MSHA inspectors and mine operators and assess their chances of winning the case in deciding whether to settle a case or go to trial. Prior decisions by the Commission require ALJ decisions to be sufficiently explained. However, in some cases we reviewed, while the reasons supporting a reduction from MSHA's proposed penalty are clearly explained, the rationale for the final penalty amount is not always well documented. For example, in one case decided in October 2005, the ALJ reduced MSHA's proposed penalty from $50,000 to $10,000. Although the judge concluded that the gravity of the violation was less than MSHA had originally found, thereby supporting a penalty reduction, he appeared to agree with MSHA's assessment regarding the other five statutory factors, including MSHA's finding that the operator's degree of negligence was high. In conclusion, the events of the last year heightened interest in protecting miners and preparing them for the perils in their workplace. While Congress, federal and state officials, mine operators, miners and their representatives have taken important steps to improve safety in mines, more can be done in several areas. First, without assistance for mine operators in providing training under simulated emergency conditions and adequate monitoring of instructors and the training miners receive, miners may not be able to safely and confidently escape a mine. Further, the high rates of retirement eligibility among MSHA and NIOSH scientists and engineers as well as the need to work together under tight time frames may render current informal coordination ineffective, thus hampering the agencies' efforts to speed the implementation of new safety technology in mines. Similarly, the expected high attrition among MSHA's inspector corps, coupled with the amount of time needed to train new inspectors to become proficient at their duties, calls for a more strategic approach. Absent a clear plan to address expected turnover, MSHA could jeopardize its success to date in reforming the inspector recruitment and hiring process. Finally, given the trends over the past 10 years, the higher proposed penalties under MSHA's new penalty structure will likely lead more operators to appeal. As a result, it is important that decisions on contested penalties are transparent and contain the necessary information to understand how final penalty amounts are determined. Without such information, it will be difficult to monitor their decisions over time to ensure that all of the entities involved in the appeals process are appropriately and consistently applying the six statutory factors in altering penalty amounts and that the impact of penalties in protecting miners' safety through greater compliance by mine operators is not diminished. In the reports, we made recommendations to the Secretaries of Labor and Health and Human Services, and the Chairman of the Federal Mine Safety and Health Review Commission. These recommendations are designed to strengthen the efforts of Labor, MSHA, NIOSH, and the Commission by improving mine operators' access to information and tools for training their workers, strengthening MSHA's oversight of training, improving the effectiveness of information sharing between MSHA and NIOSH, strengthening MSHA' s human capital strategic planning efforts, and ensuring that there is transparency in final penalty amounts for appealed cases. Each agency generally agreed with the recommendations after reviewing a draft of the reports. Mr. Chairman, this concludes my statement. I will be pleased to respond to any questions you or other members of the committee may have. For further information, please contact Daniel Bertoni at (202) 512-7215. Individuals making key contributions to this testimony include Revae Moran, Sara L. Schibanoff, and Rachael C. Valliere. 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 Mine Safety and Health Administration (MSHA), the National Institute for Occupational Safety and Health (NIOSH), the Federal Mine Safety and Health Review Commission, the Department of Labor's Office of the Solicitor, the states, and the mining industry share responsibility for ensuring mine safety. In two reports released today, GAO examined the challenges underground coal mines face in preparing for emergencies, how well MSHA oversees mine operators' training efforts, how well MSHA and NIOSH coordinate to enhance the development and approval of mine safety technology, MSHA's coal mine inspector recruiting efforts, and how civil penalties are assessed. Underground coal mine operators reported facing significant challenges in preparing for emergencies, including ensuring that miners receive realistic training and organizing mine rescue teams that satisfy new requirements. While mine operators recognize the importance of providing training in an environment that simulates an emergency, many of them reported challenges such as limited access to special training facilities and the cost of providing such training. In addition, mine operators reported that they anticipate challenges in implementing new mine rescue team requirements, such as conducting training annually at each mine the rescue team services. MSHA approves mine operators' training plans and inspects their training records, but its oversight of miner training is hampered by several factors. For example, MSHA does not have current information on its instructors and does not ensure that they keep their knowledge and skills up to date. In addition, MSHA does not adequately monitor instructors or evaluate training sessions, and does not assess how well miners are learning the skills being taught. MSHA and NIOSH have a common mission to improve the safety and health of coal miners, but they do not have a current memorandum of understanding to guide their coordination efforts. As a result, most of the coordination that occurs is initiated by individual staff members or by outside parties. Such informal coordination may not be sufficient given the pending retirements of many MSHA and NIOSH engineers and scientists and other challenges both agencies face. In 2004, MSHA began a new process for hiring mine inspectors, which has led to a number of improvements, such as being able to identify applicants who possess the basic skills needed to be successful inspectors and decreasing the time it takes to hire new inspectors. However, MSHA's human capital plan does not include a strategic approach for addressing the large number of retirements expected in the next 5 years. While most of the penalties proposed by MSHA are paid by mine operators without opposition, a small percentage of the cases involving more serious and higher dollar penalties are appealed, and those appealed are often reduced significantly. MSHA uses a standard formula to propose penalties, but the other entities involved in the appeals process use considerable discretion in deciding on the final penalty amount. Approximately 6 percent of the 506,707 penalties proposed by MSHA between 1996 and 2006 were appealed by mine operators. About half of the penalties for the appealed violations were reduced by an average of 49 percent, regardless of the level of gravity of the violation initially cited by MSHA or the degree of the mine operator's negligence initially cited.
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NASA and its international partners (Canada, Europe, Japan, and Russia) are building the space station as a permanently orbiting laboratory to conduct materials and life sciences research and earth observations and to provide for commercial utilization and related uses under nearly weightless conditions. Each partner is providing hardware and crewmembers and each is expected to share operating costs and use of the station. The program's highest-priority goals are to (1) maintain a permanent human presence in space, (2) conduct world-class research in space, and (3) enhance international cooperation and U.S. leadership through international development and operations of the space station. The technical achievements of the station program have been exceptional. Assembly of the space station began in November 1998 with the launch of the U.S.-funded, Russian-built Zarya module, followed by the launch of the U.S. Unity module in December 1998. The station's occupancy began in October 2000 with the launch of the Expedition I crew. Since then, four other three-person crews have occupied the station while assembly continues. In addition, the crews have been conducting hands-on scientific research. Figure 1 shows the International Space Station on-orbit. Since its inception in 1984, the space station has undergone a number of redesigns and has been mired by cost growth and schedule slips. In January 2001, NASA announced that an additional $4 billion in funding over the next 5 years would be required to complete the station's assembly and fund its operation. By May 2001 the estimated cost growth had increased to $4.8 billion. In response to the announcement, the administration directed NASA to take a number of actions, including terminating the propulsion module, deferring the habitation module, deferring the crew return vehicle, and reducing funding for scientific research to stay within the President's budget projections. The President's fiscal year 2002 budget blueprint and budget request for the space station lay out a strategy for containing cost growth that ensures the completion of the U.S. core station and deploys the elements of the program's international partners. To achieve this strategy, NASA was required to construct a plan of action that addressed institutional and program reforms to establish processes for executing the baseline program. In July 2001, the NASA Administrator appointed the International Space Station Management and Cost Evaluation Task Force to conduct an independent external review and assessment of the station's cost, budget, and management. The Administrator also asked the task force to provide recommendations that could provide maximum benefit to the U.S. taxpayers and the international partners within the President's budget request. The task force reported its findings to the NASA Advisory Council in November 2001. In response to the task force's recommendations, NASA is undertaking a number of initiatives to restore credibility to the station program. In addition, the Office of Management and Budget (OMB), with input from NASA, is developing criteria that are to be used for measuring progress toward achieving a credible program. OMB has imposed a 2-year "probation" period on NASA to provide time to reestablish the space station program's credibility. Activities that are to take place during this period include establishing a technical baseline and a life-cycle cost estimate for the remainder of the program, prioritizing the core complete science program, and reaching an agreement with the international partners on the station's final configuration and capabilities. NASA is working toward completing these activities by September 2002 in order to include results in its budget request for fiscal year 2004. Over the past 8 years, we have performed a body of work that highlighted the space station program's cost growth and weaknesses in cost control. In addition, we have pointed out weaknesses in the agency's financial management system as well as inadequate contract management oversight. Appendix II lists prior GAO reports and testimonies related to the space station program. According to NASA officials, as a consequence of the inadequate definition of requirements, changes in program content, schedule delays, and inadequate program oversight, the estimated development cost of the space station has grown by about $13 billion since 1995 of which about $5 billion is attributable to growth since the fiscal year 2001 estimate. However, the agency could not associate specific amounts of the estimated growth with the reasons cited. The program did not utilize available cost control tools to monitor and contain the growth and ignored NASA's guidance in many cases. In addition, because of its focus on managing annual budgets, NASA failed to heed indicators of future cost growth that contributed to the uncertainty regarding the ultimate cost of the space station. One of the major reasons for the cost growth was NASA's inadequate definition of requirements. For example, NASA originally estimated that 500,000 source-lines-of-code of space flight software would be required for the station's operations. However, that estimate has now tripled to 1.5 million lines of code. In addition, NASA assumed that it could rely on computer simulations as opposed to rigorous ground testing to integrate the hardware and software of the various elements. However, program schedule slips permitted additional ground testing, which discovered significant integration problems that escaped notice during the computer simulations. As a result, the program established a more rigorous multielement integrated testing program. Changes in program content also contributed to the cost growth. A significant item of cost was introduced to the program in 1997 through the addition of the requirement for a crew return vehicle. NASA had planned to use two Russian Soyuz vehicles, each with a maximum capacity of three crewmembers, attached to the station for emergency crew return after achieving permanent six-person crew capability. However, NASA later determined that the Soyuz vehicle did not meet the requirements necessary to return an ill or injured crewmember. Thus, the program was modified to require a U.S.-built crew rescue capability for returning seven crewmembers at an estimated total cost of about $1.5 billion. Also, because of Russian funding problems that delayed the service module's launch, NASA took on an additional development effort in fiscal year 1997 to guard against Russian nonperformance. The actions became collectively known as Russian Program Assurance and included an interim control module and a U.S. propulsion module in the event the Russians could not supply the service module and propellant logistics flights. By February 2001, Russian Program Assurance had added $1.3 billion in total estimated cost through fiscal year 2006. Schedule delays increased costs because, at a minimum, fixed costs such as salaries, contractor overhead, and sustaining engineering continued for a longer period than planned. When the space station was redesigned in 1993, NASA established May 1997 as the launch date for the first element and June 2002 as the assembly's completion date. However, the first element was not launched until November 1998. By August 2000, the assembly complete date had slipped to April 2006--a total slip of 46 months. On the basis of NASA's projected spending rate, the program incurred an additional cost of about $100 million for every month of schedule slippage. The magnitude of the cost growth began to surface in the spring of 2000 during program operating plan reviews in preparation of the fiscal year 2002 budget request. Following the program operating plan reviews, the program manager ordered a detailed assessment of costs to more specifically determine funding requirements through fiscal year 2006. Table 1 shows some of the major events leading up to the identification of the space station's cost growth. The table illustrates that the program office did not have a credible cost-estimating capability, as the cost estimate changed and grew as the office continued to uncover additional growth areas. NASA has controls in place that should have alerted management to the growing cost problem and the need for mitigating action. These include guidance requiring cost management on a project, and cost and risk modeling capabilities. However, the management and cost evaluation task force and the supporting studies found that NASA did not utilize or ignored many cost control mechanisms because of its focus on fiscal year budget management rather than on total program cost management. NASA guidance requires that life-cycle cost be estimated, assessed, and controlled throughout a program's life cycle. The estimates are to be prepared to support major program reviews and the development of budget submissions. A handbook instructs cost estimators in selecting a cost model for use in the estimating process and on the proper documentation of the results of the cost analysis. NASA has considerable cost-modeling capability, including several cost models and information related to the type of costing situations for which they would be appropriate. A study performed by the Rand Corporation for the Office of Science and Technology Policy, which supported the management and cost evaluation task force, noted that NASA has "very good" cost and risk modeling capabilities. However, the study found that the in-house capabilities were not well integrated into the program's planning and management. Because of its short-term budget focus, the program had been reluctant to integrate cost estimation and control practices sufficiently robust to yield confidence in its budget estimates. The management and cost evaluation task force found that the final space station's cost estimate at completion had not been a management criterion within NASA. According to the task force, because of NASA's focus on executing the program within annual budgets, total cost and schedule became variables. To stay within the annual budget limits, the program's basic content slipped, and total program cost grew. In addition, the cost analysis team that supported the task force cited NASA's culture of managing the program to its annual budgets as perhaps the single greatest factor in the program's cost growth. The management and cost evaluation task force made recommendations aimed at restoring cost credibility to the program. Some of those recommendations mirror requirements already contained in NASA guidance, as follows: Develop a life-cycle technical baseline to use as the basis for a formal cost estimate. Develop a full space station cost estimate using the Department of Defense's (DOD) cost assessment approach, including the use of a cost- analysis requirements document to document the assumptions and results of the cost analysis. Prepare an integrated program management plan delineating the work to be accomplished, the work breakdown structure, required resources, and schedules. In an effort to mitigate the effects of the large cost growth, NASA reduced planned funding for space station research by about $1 billion for fiscal years 2002 through 2006. The mitigation actions resulted in significant and perhaps long-term reductions in the scope and capability of the station for conducting scientific research. NASA proposed major changes in the station's design for fiscal year 2001 that resulted in fewer on-orbit scientific facilities, and less research, and limited the crew available for conducting research. The research communities, international partners, and recent studies have raised concerns about the viability of the space station's science program. The restructured science program will provide fewer facilities needed for conducting scientific research on board the space station. The station's baseline for fiscal year 2001 supported a crew of six to seven astronauts and provided for the outfitting of 27 U.S. research facilities and experiment modules for research in a range of science disciplines. Following the announced cost growth, NASA's Office of Biological and Physical Research, Office of Space Flight, and the space station's Payloads Office at the Johnson Space Center initiated a program restructuring activity to align the research program with the on-orbit capabilities and resources available. This activity slowed down selected fiscal year 2001 expenditures to better match the availability of resources for fiscal year 2002 and optimized the scientific utilization of the reduced on-orbit capability. The reduction of content to the revised baseline was not reconciled against standing agreements with the program's international partners. The budget content for fiscal years 2002 and 2003 for the core-complete station provides for the outfitting of 20 research facilities, known as "racks," leaving about one fourth of the previously planned racks and their utilization unfunded. Some research disciplines were severely affected by the fiscal year 2002 reduction. For example, significant experiments planned to conduct research on materials such as metals, alloys, glasses, and ceramics, and in biotechnology were canceled. In addition to less hardware for research, there are constraints to utilization of the science facilities principally because the station's crew size will be reduced from a planned seven to three. This will limit the crewmember hours that can be devoted to research. For example, astronauts will have limited time to be used as subjects in research on the effects of space flight on humans. According to NASA officials, crew research hours will be a major limiting factor on the number and complexity of experiments after the arrival of the international partner modules in 2004-2005, particularly constraining research that requires the crew's interaction. NASA officials stated that some crew interaction is required for nearly all space station investigations. These activities include testing, monitoring, sampling, instrument readings, completing questionnaires, and recording results. NASA currently estimates that a minimum of 2.5 crewmembers will be required for maintaining the station, exclusive of their science-related duties during assembly. NASA had planned that crew time for scientific research would be 100 + hours per week, but the crewmember reduction would limit time to a minimum of 20 hours per week. The 20-hour minimum threshold was established by the space station program manager but has not been met. Table 2 shows NASA's calculation of how the 20 research hours per week would be allocated among the station partners. NASA is looking at ways to mitigate the impact of this reduction. In addition to the funding-driven research cuts cited above, the United States would receive less research capability from an existing major barter arrangement with the Japanese. In return for NASA's launch of the Japanese Experiment Module, Japan is providing the centrifuge accommodation module and centrifuge rotor, which are essential for conducting controlled biological experiments. As a result of technical risk and cost issues associated with the proposed design, NASA accepted a Japanese Space Agency request to reduce the number of science habitats supported from eight to four. The research communities and international partners are not satisfied with reductions in the space station's capabilities. In the fall of 2000, Congress directed the National Research Council and the National Academy of Public Administration to organize a joint study of the status of microgravity research in the life and physical sciences as it relates to the station. In a late 2001 report, the team concluded that the viability of the overall science program in microgravity would be seriously jeopardized if the space station's capabilities were reduced below fiscal year 2001 levels and there were no annual microgravity research dedicated shuttle flights. The study found that the U.S. scientific community is ready now to use the space station but that this readiness cannot be sustained if (1) proposed reductions in the scientific capabilities occur, (2) slippage continues in both the development and science utilization schedules for the space station, or (3) uncertainties continue in funding for science facilities and flight experiments on the space station. The study observed that readiness is beginning to deteriorate and that it will continue to erode with further delays in the completion of the space station. NASA officials stated that the station's international partners have major concerns regarding the uncertainty that NASA will meet its international commitments for the habitation function and crew rescue capability. According to NASA, the partners have stated that a station configuration that provides for only three crewmembers is unacceptable. NASA plans to develop an optional space station configuration and hopefully obtain appropriate U.S. and partner concurrence by November/December 2002. Several recent studies and NASA's actions highlight concerns regarding the space station's science program. The November 2001 report of the management and cost evaluation task force found that the U.S. core complete configuration as an end-state would not achieve the unique research potential of the space station. A December 2001 NASA Independent Implementation Review found that budget reductions, crew hour limitations, and the realization of other resource constraints have all significantly reduced the anticipated space station research content in terms of quality and quantity. For example, there are fewer flight investigations and tests, and some science disciplines cannot achieve planned program goals. In addition, the scientific community and the international partners have raised concerns. The research reductions, if not mitigated, may jeopardize the scientific community/partner's capacity for conducting high value research. NASA has several institutional and program reforms under way to respond to the management and cost evaluation task force's recommendations and to bring cost-estimating credibility to the space station program. Specifically, the agency is preparing a life-cycle cost estimate, developing a plan to strengthen program management and controls, and reprioritizing the station's science program. NASA is attempting to complete many of these tasks by September 2002 to influence its fiscal year 2004 budget submission. In July 2001, NASA developed a plan that described the actions that the agency believed were required to respond to the President's budget blueprint requirements, defined conditions for closing the actions, and provided for OMB to monitor NASA's progress in implementing the reforms. The plan called for measures to improve cost-management and cost-estimating accuracy, such as metrics designed to alert management to pending problems, including an early warning system for potential cost growth, and the establishment of a cost-estimating capability to take advantage of the latest estimating and management tools and techniques. To strengthen the cost-estimating and control function, the program office is also establishing a management information system and hiring cost estimators. An interim management information system will be used initially, and the permanent system is to be available by March 2003 during the implementation of a key component of the Integrated Financial Management Program at the Johnson Space Center. The program office has the authority to hire 10 estimators, which it plans to use to establish a cost- estimating capability in the station's program office. NASA is in the process of preparing its life-cycle cost estimate using the DOD cost assessment approach and plans to have it completed in early August 2002. An independent team headed by a DOD Cost Analysis Improvement Group official will prepare an independent cost estimate, also scheduled for completion in August 2002. The in-house and independent cost estimates will then be reconciled. The program office is also developing a plan to strengthen program management and controls. According to NASA officials, cost, schedule, and technical reviews will be implemented to provide the program manager with an early warning of potential problems, such as cost growth and budget overruns. The program will also develop risk analysis tools and improve risk system and cost integration. NASA is also taking steps to reprioritize the science to be performed on the space station. In consultation with the White House Office of Science and Technology Policy and OMB, NASA has assembled an ad-hoc external advisory committee to assist the agency in prioritizing its entire research program, including both station-based research as well as nonstation-based research. Consistent with recommendations from the management and cost evaluation task force, NASA is attempting to place the highest priority on investigations requiring access to the space environment. The scientific community will have representation on the ad-hoc committee and will therefore be involved in helping to reestablish science objectives and improving scientific productivity. The research advisory committee's charter is to evaluate and validate high- priority science and technology research that will maximize the research returns within the available resources. It plans to (1) assess the degree to which key research objectives can or should be addressed by the space station, (2) identify and assess how options among the key research objectives would change if the station remains at the U.S. core-complete configuration or evolves with additional funding, and (3) recommend modification or addition to the Office of Biological and Physical Research's goals and objectives. In addition, the advisory committee will also identify and recommend criteria that can be used to implement specific research activities and programs on the basis of priorities. According to a NASA official, the agency plans to report the advisory committee's findings to OMB in August 2002. The report is to include the prioritized research program and the roadmap to getting there. NASA's goal is to reflect the science research priorities in its fiscal year 2004 budget submission. Successfully completing these initiatives is vitally important, since they are integral to providing Congress and agency decision makers with the information they need to make decisions on the future of the space station. But there are significant challenges facing NASA in completing them. NASA's milestones provide for almost no slippage. Specifically, the preparation of a reliable life-cycle cost estimate may be difficult because NASA currently lacks a modern integrated financial management system to track and maintain data needed for estimating and controlling costs. Such a system was not available when NASA prepared the $4.8 billion cost growth estimate and thus the accuracy of that estimate is questionable. The NASA Administrator has established the integrated financial management program as one of his top priorities. The successful implementation of the first major component, the core financial system, by June 2003 is critical to the agency's ability to control costs. In addition, many tasks and studies being undertaken will not be completed until September 2002, leaving NASA with a very short time frame to incorporate its results into the 2004 budget. These include NASA's study and independent validation of life- cycle costs, its assessment of long-and short-term options for increasing the station's crew complement, and its assessment of how research can be maximized with limited deliveries of samples and equipment. (Deliveries would be limited because NASA plans to reduce space shuttle flights from seven to four per year.) Lastly, NASA has not yet reached agreements with its international partners on an acceptable on-orbit configuration as well as how research facilities and costs should be shared. Such agreements are important not only to reach a decision on the end-state of the space station but also to strengthen support of the program's international partners. NASA is at a critical juncture with the space station program. Because of the cost growth, the program is essentially unable to carry out the full intent of its original objectives. This has raised concerns from NASA's international partners. To begin working through this dilemma, NASA must first develop a credible budget for the core-complete station, define a station configuration that will be acceptable to the international partners, and obtain OMB's approval. This is a difficult endeavor in itself, since NASA is facing a highly compressed schedule and does not have an integrated system for estimating and controlling costs. The agency is attempting to use the latest estimating and management tools and techniques but needs accurate, detailed cost data and the ability to compare resulting estimates with actual costs. If NASA cannot succeed with a viable budget for fiscal year 2004, it will jeopardize the opportunity for Congress and the administration to regain confidence in the program. If NASA does succeed with the fiscal year 2004 budget, it still faces considerable challenges with the space station program. In the short run, it must successfully work with its international partners to decide how to best use the resources that remain available to the program. This is a significant challenge because it involves prioritizing research programs for which partners already have a vested interest. Moreover, in the long run, NASA must find ways to make sure that the restructured program stays on track. This not only means making sure that the root causes of problems that have plagued the program are sufficiently addressed, but that any schedule slippage or cost growth is immediately addressed and that oversight mechanisms already in place are vigilantly adhered to. In written comments on a draft of this report, NASA's Associate Deputy Administrator for Institutions said that the report represents the issues and actions taken to address cost growth. He also stated that other external reviews are scheduled for September 2002 and that continued evaluations by GAO would be appreciated. To determine the reasons for the cost growth, we evaluated previous internal and independent analyses of the space station's cost growth. We also interviewed NASA officials regarding cost estimates and the process by which cost information is studied and communicated throughout NASA. To assess program oversight mechanisms, we reviewed NASA's policies and procedures governing program management. We also interviewed procurement and program management officials to identify specific tools used in the program's oversight and assessed the extent to which the program relies on contractor inputs to perform its internal cost analyses. To assess the impacts of cost reduction proposals on the space station's utility, we evaluated the minutes from Space Station Utilization Advisory Subcommittee meetings, along with internal and external studies on the effects of cost reduction proposals on station research activities. In addition, we reviewed a report by the National Research Council related to the research capabilities of the space station. We also interviewed cognizant program officials and officials within the research community. To accomplish our work, we visited NASA headquarters, Washington, D.C; Johnson Space Center, Texas; and Marshall Space Flight Center, Alabama. We also coordinated our work with independent and NASA-internal teams performing space station program reviews. We conducted our work from June 2001 through April 2002 in accordance with generally accepted government standards. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies to the NASA Administrator; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 if you or your staffs have any questions about this report. Major contributors to this report are listed in appendix III. NASA: Compliance With Cost Limits Cannot Be Verified. GAO-02-504R. Washington, D.C.: Apr. 10, 2002. NASA: Leadership and Systems Needed to Effect Financial Management Improvements. GAO-02-551T. Washington, D.C.: Mar. 20, 2002. NASA: International Space Station and Shuttle Support Cost Limits. GAO-01-100R. Washington, D.C.: Aug. 31, 2001. Space Station: Inadequate Planning and Design Led to Propulsion Module Project Failure. GAO-01-633. Washington, D.C.: June 20, 2001. Space Station: Russian-Built Zarya and Service Module Compliance With Safety Requirements. GAO/NSIAD-00-96R. Washington, D.C.: Apr. 28, 2000. Space Station: Russian Compliance with Safety Requirements. GAO/T- NSIAD-00-128. Washington, D.C.: Mar. 16, 2000. Space Station: Russian Commitment and Cost Control Problems. GAO/NSIAD-99-175. Washington, D.C.: Aug. 17, 1999. Space Station: Cost to Operate After Assembly Is Uncertain. GAO/NSIAD- 99-177. Washington, D.C.: Aug. 6, 1999. Space Station: Status of Russian Involvement and Cost Control Efforts. GAO/T-NSIAD-99-117. Washington, D.C.: Apr. 29, 1999. Space Station: U.S. Life-Cycle Funding Requirements. GAO/T-NSIAD-98- 212. Washington, D.C.: June 24, 1998. International Space Station: U.S. Life-Cycle Funding Requirements. GAO/NSIAD-98-147. Washington, D.C.: May 22, 1998. Space Station: Cost Control Problems. GAO/T-NSIAD-98-54. Washington, D.C.: Nov. 5, 1997. Space Station: Deteriorating Cost and Schedule Performance Under the Prime Contract. GAO/T-NSIAD-97-262. Washington, D.C.: Sept. 18, 1997. Space Station: Cost Control Problems Are Worsening. GAO/NSIAD-97-213. Washington, D.C.: Sept. 16, 1997. NASA: Major Management Challenges. GAO/T-NSIAD-97-178. Washington, D.C.: July 24, 1997. Space Station: Cost Control Problems Continue to Worsen. GAO/T-NSIAD- 97-177. Washington, D.C.: June 18, 1997. Space Station: Cost Control Difficulties Continue. GAO/T-NSIAD-96-210. Washington, D.C.: July 24, 1996. Space Station: Cost Control Difficulties Continue. GAO/NSIAD-96-135. Washington, D.C.: July 17, 1996. Space Station: Estimated Total U.S. Funding Requirements. GAO/NSIAD- 95-163. Washington, D.C.: June 12, 1995. Space Station: Update on the Impact of the Expanded Russian Role. GAO/NSIAD-94-248. Washington, D.C.: July 29, 1994. Space Station: Impact of the Expanded Russian Role on Funding and Research. GAO/NSIAD-94-220. Washington, D.C.: June 21, 1994. Jerry Herley, James Beard, Fred Felder, Erin Baker, Cristina Chaplain, Belinda LaValle, and John Gilchrist made key contributions to this report. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO's Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as "Today's Reports," on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select "Subscribe to daily E-mail alert for newly released products" under the GAO Reports heading.
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The National Aeronautics and Space Administration (NASA) revealed that the cost to complete assembly of the international space station has risen from $25 billion to $30 billion. Much of that cost growth is due to inadequate definition of requirements, changes in program content, schedule delays, and poor program oversight. Weaknesses in the program's cost-estimating process call into question the credibility of NASA's plans to carry out its budget through fiscal year 2006. The cost growth has also severely affected the space station's ability to conduct scientific research. NASA has instituted several management and cost-estimating reforms, including a life-cycle cost estimate, a program management plan, and a reprioritized science program. However, significant challenges remain. Preparation of the life-cycle cost estimate may be difficult because NASA's financial management system is unable to adequately track space station costs. Many tasks and studies being undertaken will not be completed until September 2002, leaving NASA with little time to incorporate its results into its budget for fiscal year 2004. Finally, NASA has yet to reach an agreement with its international partners on an acceptable on-orbit configuration, the sharing of research facilities, and cost sharing.
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The strategic objective of USAID's Cuba Program--part of the agency's Bureau for Latin America and the Caribbean--is to help build civil society in Cuba by increasing the flow of accurate information on democracy, human rights, and free enterprise to, from, and within Cuba. The responsibilities of the Cuba Program office include cochairing an interagency working group, developing assistance strategies and programs, recommending Cuba democracy assistance awards, and monitoring the implementation of USAID grants. Because of the absence of diplomatic relations between the United States and Cuba, USAID does not have staff in Cuba and its Washington-based staff have been unable to obtain visas to visit the island since 2002. State's U.S. Interests Section (USINT) in Havana plays a key role in implementing USAID's Cuba democracy assistance. From 1996 through 2005, USAID's Cuba Program awarded about $67 million in democracy assistance grants to NGOs and universities to support numerous activities related to promoting democracy and developing Cuba's civil society. In 2005, for example, Cuba Program grantees reported providing humanitarian and material assistance, training for independent civil society groups, and uncensored information. Several grantees also worked to increase international awareness of the Cuban regime's human rights record through activities such as sponsoring conferences and publishing studies, while one grantee focused primarily on planning for a democratic transition in Cuba. USAID records show that Cuba Program grantees provided this assistance to, among others, human rights activists, political dissidents, independent librarians, journalists, and political prisoners and their families. From 2006 through 2008, USAID's Cuba Program awarded 10 new democracy assistance grants totaling about $16.3 million, bringing the total value of grants since the Cuba Program's inception to about $83 million. As of October 2008, the Cuba program had 13 grants totaling about $32 million; these grants ranged in size from $500,000 to nearly $11 million. Congress appropriated $45 million for U.S. democracy assistance for Cuba in 2008; USAID has been allocated about $30 million of the 2008 appropriation, with the remainder allocated to State. (Fig. 1 shows the funding for U.S. democracy assistance for Cuba for 1996-2008.) The administration has requested $20 million for 2009; agency allocations for these funds have not yet been established. Increased funding for democracy assistance was a recommendation of the interagency Commission for Assistance to a Free Cuba (CAFC). USAID's Cuba Program plans other substantial awards over the next few years. The following summarizes our November 2006 report's findings of problems with the USAID Cuba Program's awards and oversight of its Cuba democracy assistance from 1996 through 2005. Awards. USAID's Cuba Program relied on unsolicited proposals to award about 95 percent (about $62 million) of its democracy assistance, although agency policy generally encourages competition for such awards. USAID's Cuba Program also frequently modified the amounts and length of existing grants, increasing the aggregate value of these initial agreements from about $6 million to about $50 million. In contrast, federal law and agency policy generally favor a competitive process; moreover, closing grants and initiating new ones has recognized advantages. Oversight. Weaknesses in USAID's oversight of its assistance grants during the preaward, award, implementation, and closeout phases increased the risk of grantees' improper use of grant funds and noncompliance with applicable laws and regulations. Preaward audits of some grantees were not always completed before grant award, and USAID did not follow up adequately to correct deficiencies identified by these audits. Standardized language in grant agreements lacked the detail necessary to support program accountability and the correction of grantee deficiencies identified during preaward reviews. Moreover, the Cuba Program office did not adequately identify, prioritize, or manage at-risk grantees and did not have critical review or oversight procedures in place to monitor grantee activities or cost sharing. Additionally, USAID did not appear to routinely follow prescribed closeout processes to identify and recover inappropriate expenditures or unexpended funds. Our limited review of 10 grantees' financial records identified questionable expenditures and significant internal control weaknesses, which USAID had not detected, at 3 of the grantees; we referred these problems to the USAID Office of Inspector General. Figure 2 shows our 2006 recommendations to strengthen USAID's oversight of the Cuba Program's democracy grants. In 2006 and 2007, USAID said that it was taking steps to address our recommendations and improve its oversight of democracy assistance for Cuba. Since 2006, USAID has taken steps to improve the Cuba Program's award and oversight of democracy assistance. To address identified problems with awards, since 2006, the Cuba Program has competitively awarded all democracy assistance grants and discontinued its use of funded grant extensions. To improve its oversight of the grants, USAID has provided additional resources to manage and oversee the Cuba Program's aid and implemented specific improvements in grant oversight to address our recommendations. (See app. II, table 2, for a summary of our November 2006 findings and recommendations regarding the Cuba Program's awards and oversight of democracy assistance as well as USAID's proposed or reported corrective actions and the status of these actions.) However, as of November 2008, USAID had not yet achieved the staffing level it assessed as needed for appropriate oversight. Moreover, because many of USAID's actions to improve oversight were taken recently, their impact on the risk of Cuba Program grantees' misusing funds and failing to comply with U.S. laws and regulations is not yet evident. USAID's Cuba Program has competitively awarded all $16 million (10 grants) of democracy assistance since 2006. In comparison, during its first 10 years, the Cuba Program competitively awarded only 5 percent (about $4 million, 5 grants) of its democracy assistance. The increased use of competition reflects the USAID Cuba Program's implementation, in 2007 and 2008, of a policy of using competitive solicitation as the principal method for awarding its democracy assistance grants. Further, since 2006, USAID's Cuba Program has discontinued its practice of modifying existing grants to provide substantial additional funding rather than awarding new grants and has implemented a policy that requires grantees to submit interim evaluations in conjunction with any future requests for additional funding. In 2006-2008, the Cuba Program approved a limited number of no-cost grant extensions but did not consider funded modifications to expand the program. Additionally, in 2007, the Cuba Program notified grantees that they would be required to submit interim program evaluations when requesting significant increases in funding or extensions; as of November 2008, the Cuba Program had received no such requests. Subsequent to these changes in the USAID Cuba Program's practices and policy, the percentage of its grantees that are worldwide or regional NGOs increased while the percentage of grantees that are Cuba-specific NGOs declined (see fig. 3). According to the Cuba Program Director, the shift in grantee type reflects the more formal requirements for submitting a grant proposal contained in the Cuba Program's 2007 and 2008 annual program statements, such as the requirement that proposals include a detailed implementation plan. In addition, the shift reflects a decision, starting with the 2008 program statement, to fund grants that incorporate capacity building for subgrantees as an important element of program activity. The Director noted that building subgrantee capacity supports the goal of improving grant oversight, as well as the program goal of developing civil society organizations that will be effective in assisting Cuba's transition to democratic governance and a free market economy. USAID has recently taken, or plans to take, actions to increase the Cuba Program's resources for oversight. In addition, USAID has recently taken actions aimed at improving specific aspects of the Cuba Program's grant oversight. However, staffing of the Cuba Program has not reached the level that USAID has determined is needed to ensure adequate oversight. In addition, in some cases the impact of these actions on the risk of Cuba Program grantees' misusing funds and failing to comply with U.S. laws and regulations is not yet apparent. To increase resources aimed at improving the management and oversight of Cuba Program democracy assistance, USAID established a Cuba project committee comprising key USAID and State senior managers in December 2006; has hired more staff for the Cuba Program office since January 2008; and contracted for financial services--including reviews of grantee internal controls, procurement practices, and expenditures--to enhance oversight of grantees in April 2008. In addition, the USAID Cuba Program plans to use contract services to provide technical assistance and build the capacity of its grantees, particularly smaller organizations. Cuba project committee. USAID established a project committee in December 2006 to lead the agency's efforts to improve its management and oversight of Cuba Program democracy assistance and provide greater attention from senior management. This committee consisted of senior officials from USAID's Bureau of Management (which includes the Office of Acquisition and Assistance) and General Counsel and State's Bureau of Western Hemisphere Affairs (including the Cuba Transition Coordinator), in addition to the USAID Cuba Program Director. The committee met at least quarterly to address Cuba assistance planning, preaward reviews, and grantee monitoring and evaluation. According to USAID records, topics of discussion have included (1) identifying high-risk grantees, including outstanding audit issues, the need for follow-on reviews, and review of grantees' monitoring and implementation plans; (2) issuing a communication to reinforce USAID guidance on preaward reviews and stress the importance of timely follow-up to identified findings; (3) reviewing standard grant provisions to ensure that grantees were provided clear guidance on how to access referenced regulatory materials; (4) obtaining and approving updated and expanded implementation plans from certain grantees; and (5) obtaining detailed cost-share records from contributing grantees and submitting them to the Office of Acquisition and Assistance for review. In late 2007, USAID divided the project committee's responsibilities between two new committees. Cuba Program staffing. Since January 2008, to improve its implementation of Cuba democracy assistance, USAID has increased staffing in the program office from two to five persons; however, staffing remains short of the 11 persons recommended in USAID assessments. In December 2007, in response to concerns expressed in our November 2006 report and a recommendation in a September 2007 report by USAID's Office of Inspector General, a formal USAID assessment recommended staffing the program office with a director and eight staff to ensure successful implementation of the program as well as appropriate monitoring and oversight of grantees and grant funds. Subsequently, a more informal assessment by the USAID Cuba Program office identified the need for two additional staff. Based on these assessments, the Cuba Program has hired three new staff members since January 2008, bringing the total staff to five persons as of October 2008. According to the Cuba Program Director, the program plans to hire two more staff members by January 2009 and a third by July 2009 at the earliest. Financial services contract. To strengthen grantee oversight and better manage program risks, USAID's Cuba Program contracted in April 2008 with a firm headquartered in Washington, D.C., to conduct 10 to 12 financial reviews annually over 2 years, at an estimated cost of $1 million. USAID procured these services to strengthen program management and provide grantees--particularly smaller, less experienced organizations-- needed guidance and technical support as recommended in our 2006 report. According to the contract statement of work and related documents, the contractor will (1) conduct annual financial reviews of grantees, including grantees' internal controls, procurement practices, and expenditures; (2) follow up on the findings and recommendations of preaward reviews and other audits to advise whether grantees have corrected any weaknesses that were identified; and (3) conduct other special reviews as needed. The contracting officer and the Contract Audit Management Division within USAID's Office of Acquisition and Assistance review and approve all work plans (including research design, data collection instruments, and analysis plans) and draft and final reports. In June 2008, the contractor began reviews of Cuba Program grantees' procurement systems, starting with three Miami-based grantees. Program to build grantee capacity. To help improve the management and oversight of Cuba democracy assistance, USAID's Cuba Program has taken initial steps to establish a means to provide essential training and additional oversight of smaller grants using a "grants under contract" mechanism. The decision to fund this program was based on USAID's assessment of grantee risk, particularly the risks posed by smaller, less experienced grantees. USAID expects to start implementing this program in 2009. USAID has taken a number of actions specifically aimed at strengthening oversight by ensuring preaward reviews and follow-up; improving grantee internal controls and implementation plans; providing guidance and monitoring for assistance and cost sharing; and developing structured approaches for site visits and other monitoring. Preaward reviews and follow-up. USAID has taken several actions to ensure that preaward reviews are completed prior to grant awards. The agency also has taken several actions to improve follow-up on issues identified during preaward reviews. Since January 2007, the Cuba Program, working though the Cuba project and internal management committees, has worked to provide sufficient lead time for preaward reviews and tracked the resolution of preaward review issues. In March 2007, USAID's Office of Acquisition and Assistance issued an agencywide bulletin that stressed the importance of (1) providing sufficient lead time for the completion of preaward reviews and (2) timely follow-up and resolution of deficiencies identified in those reviews. In 2007, USAID also developed revised grant agreement language linking resolution of issues and findings of preaward reviews and follow-up reviews to the obligation of incremental grantee funding; to date, this language has been used in grant agreements as appropriate. According to the Chief of the Contract Audit Management Division within USAID's Office of Acquisition and Assistance, the Cuba Program's planned use of the new financial review services contract will help ensure timely follow-up on the results of preaward reviews. Previously, competing demands on the division for preaward and follow-up reviews by other USAID bureaus and offices had delayed reviews for some Cuba grantees. Grantee internal controls and implementation plans. USAID has taken several actions to require that grantees establish and maintain adequate internal control frameworks and develop approved grant implementation plans. Internal controls. The Cuba Program office provided grantees guidance for accessing reference materials to relevant policies and procedures on several occasions. This guidance included an addendum for grant agreements, linked to relevant policies and procedures, that USAID developed in March 2007 and that USAID records show was provided to all grantees at, for example, grantee quarterly coordination meetings and by e-mail. Grantees also were e-mailed a list of Internet links for all statutory, regulatory, and legal references in their USAID grant agreements. Additionally, in 2007, the Cuba Program office developed a briefing outline to be used in explaining internal control and other requirements to new grantees. Implementation plans. In January 2007, the Cuba project committee recommended that the Cuba Program (1) review grantees' existing implementation plans to ensure that such plans were documented and adequate and (2) request that grantees with significant remaining grant funding update and expand their implementation plans. The Cuba Program completed its initial round of reviews in May 2007; follow-up on recommended changes was completed April 2008. The approved plans provide a monthly summary of anticipated activities to assist in monitoring grantees and are to be updated annually. Further, in 2007, the Cuba project committee recommended that the Cuba Program and the Office of Acquisition and Assistance develop and include a new provision in grant agreements to require that grantees submit written implementation, monitoring, and evaluation plans for approval within 30 days of the award's start date. In 2008, USAID officials agreed on the grant provision, which has been included in agreements for new awards. Guidance and monitoring for assistance and cost sharing. USAID has taken several steps to provide grantees specific guidance on permitted types of assistance and on cost sharing and to ensure monitoring of grantee expenditures for these items. Permitted assistance. To prevent the use of grant funds for inappropriate expenditures, as identified in our 2006 report, USAID has provided grantees clearer, more detailed guidance regarding items that may be provided as humanitarian or material assistance. In addition, in early 2007, the Cuba Program required existing grantees to include detailed lists of proposed items in their updated implementation plans and requires such lists in the implementation plans required to be submitted with new grant proposals. USAID reports that these lists enhance oversight and monitoring of grantee activities. In addition, the financial services contractor will verify whether grantee assistance costs were allowable. Cost sharing. USAID has provided agencywide guidance on cost sharing and reviewed grantees' cost-share contributions. In January 2007, as recommended by the Cuba project committee, USAID's Office of Acquisition and Assistance issued an agencywide bulletin that reemphasized the restrictions and limits on cost sharing for grants and clarified that USAID does not permit funds obtained from the National Endowment for Democracy to be counted toward grantee cost-share requirements. The cost-share policy is reflected in Cuba democracy grant agreements. In January 2007, the Cuba project committee recommended that the Cuba Program obtain detailed cost-share records from grantees and submit these records to the Office of Acquisition and Assistance for review. As of mid-June 2008, USAID had completed its review of the cost-share records for all nine then-current grantees with cost-share obligations and had found that three grantees had not met a substantial share of their cost-share obligations. USAID reduced one grantee's cost-share obligation from $1,065,860 to $523,450 and was following up with the other two grantees regarding their failure to meet their cost-share obligations. During two site (monitoring) visits that we observed in June 2008, USAID staff reviewed the types of cost sharing permitted and emphasized the importance of keeping adequate records to support cost-share claims. In addition, the new financial services contractor will review grantee support for cost-share claims. Structured approach for site visits and other monitoring. USAID has taken, or plans to take, several actions to develop and implement a more formal, structured approach for site visits and other grant monitoring activities. These actions taken included the following: The USAID Cuba Program has developed and used a formal, structured approach for its quarterly site visits to grantees. To facilitate and ensure consistency in these visits, program staff use a form to describe grantee activities, evaluate grantee accomplishments, and assess compliance with grant internal control and other requirements. During our observation of two site visits, we noted that USAID sent copies of these forms to grantees via e-mail in advance of the visits so that grantees could confirm the accuracy of basic data. USAID reports taking initial steps to use information gathered to identify at-risk grantees and prioritize monitoring. For example, in May 2007, after noting poor grantee record keeping during several site visits, the former program Director e-mailed grantees to emphasize the need to maintain adequate documentation in their offices of labor costs, rent expenses, and telephone costs, as well as other records needed to demonstrate that U.S. funds were being spent for the grants' authorized purposes. USAID also has emphasized this requirement during quarterly grantee coordination meetings and site visits. The current Cuba Program Director told us that, using new staff resources, she plans to develop and implement a formal system for performing detailed analyses of the site visit results to identify at-risk grantees and prioritize monitoring. As a first step, the Cuba Program recently initiated quarterly reviews of the program's portfolio of grantees to identify at-risk grantees and other issues. Because many of USAID's actions to improve its oversight of the Cuba democracy grants were implemented recently, in 2007 and 2008, their impact on the risk of grantees' misusing grant funds or failing to comply with U.S. laws and regulations is not yet evident. In mid-June 2008, USAID's financial services contractor's review of financial records for three Cuba Program grants found that one of the grantees--GAD--lacked adequate support for some purchases. In late June 2008, we confirmed the USAID contractor's finding during our limited review of financial and other records at 5 of the 10 grantees examined for our November 2006 report (see app. I for more information about this limited review). Specifically, we identified several cases where substantial charges to GAD's credit card were not supported by receipts listing the items purchased. In response to reports of fraud at organizations that had received the USAID Cuba Program's two largest democracy aid grants--CFC and GAD--USAID suspended both grants pending the results of USAID Inspector General investigations. Additionally, in mid-July 2008, USAID decided to accelerate planned reviews of Cuba democracy grantees' procurement systems under the April 2008 financial review services contract and to conduct audits of grantees' incurred cost under the Inspector General; pending the results of those reviews and audits, USAID partially suspended two more grants. The procurement reviews, which were completed in August 2008, identified weaknesses at three grantees; USAID is working with the grantees to correct these weaknesses. USAID expects the incurred cost audits to be completed by November 2008 under a contract with another firm. CFC. In March 2008, USAID suspended its $7.2 million grant to CFC, awarded in 2005, after the CFC's Executive Director informed USAID that the organization's former Chief of Staff had misused USAID grant funds. CFC's grant expired on June 30, 2008, while it was suspended. In July 2008, auditors from USAID's Contract Audit Management Division within the Office of Acquisitions and Assistance confirmed CFC's estimate of the amount of funds stolen and concluded that the grantee had taken action to strengthen its system of internal control. On September 22, 2008, USAID reinstated the grant for 6 months. GAD. In July 2008, USAID suspended its $10.95 million grant to GAD, which was awarded in September 2000. On June 30, 2008, GAD's Executive Director had informed USAID that, in following up on deficiencies that USAID's financial services contractor and we had identified earlier that month, he had determined that one of GAD's employees had used the organization's credit card to make unauthorized purchases for his personal use; the employee had signed a statement admitting to these actions and had promised to repay the cost of these items and had been fired. USAID suspended the grant on July 2 and referred the matter to the USAID Inspector General for investigation; as of November 2008, the grant remained suspended, pending conclusion of the Inspector General's investigation and the results of a financial system review by the financial review services contractor. The grant was scheduled to expire on September 30, 2008, but USAID extended the grant to March 31, 2009, to permit completion of the investigation and review. On July 18, 2008, USAID announced that, to determine whether financial vulnerabilities exist at grantees and how best to address them, it would initiate reviews of the Cuba Program grantees' procurement systems under the April 2008 contract and subsequently conduct audits of grantees' incurred cost under the USAID Inspector General. In addition, USAID reported that it had partially suspended two smaller grants pending the outcomes of the procurement reviews. The program's other grants remained active, based on USAID's review of the grantees' A-133 audits and other relevant information, but pending the results of the procurement reviews and incurred cost audits announced in July 2008. Reviews of grantees' procurement systems. In July 2008, USAID instructed the financial services contractor hired in April 2008 to accelerate planned reviews of current grantees' procurement systems. The procurement reviews, completed in August 2008, identified internal control, financial management, and procurement weaknesses at three grantees. On September 24, 2008, USAID lifted one of the two partial suspensions after the grantee agreed to take several corrective actions. USAID is assessing whether to lift the other partial suspension based on grantee corrective actions, a change in grantee management, and other factors. GAD, the third grantee where the review found weaknesses, remains suspended. As of October 2008, the acceleration of the procurement reviews had used nearly half (about $450,000) of the $1 million set aside for the 2-year financial services contract signed in April. Further, USAID had not committed the additional funds needed to continue the planned reviews of grantees' internal controls, procurement practices, and expenditures--key elements of the program's approach to reducing grantee risks--over the contract's remaining 18 months. Audits of grantees' incurred cost. The USAID Inspector General will oversee the audits of grantees' incurred cost, to be conducted under a separate contract with another firm. Initial work on the first three of these audits began in mid-September 2008; the Inspector General expects to complete nine audits by November 2008. USAID officials said that they would take steps, as appropriate, to address weaknesses identified by these audits. USAID estimated the total cost of these audits at about $300,000 to $340,000. Table 1 summarizes the status of USAID's Cuba democracy grants as of October 2008. USAID has taken numerous actions since 2006 to improve the Cuba Program's award processes and oversight of grantees. However, some planned actions have not yet been implemented. As recommended in our November 2006 report, USAID took steps to improve the timeliness of preaward reviews and resolve issues identified during those reviews and has provided more specific guidance on permitted types of humanitarian assistance and cost sharing. To provide resources and expertise, USAID also contracted with a financial review services firm to follow up on audit findings; review grantees' internal controls, procurement practices, expenditures, and cost sharing; and provide grantees needed technical assistance. In addition, the Cuba Program now requires grantees to develop implementation plans and has developed a structured approach to monitoring grantees. However, staffing of the program office has not reached the level USAID determined is needed for effective grant oversight and, as a result, the office has taken only preliminary steps to implement a key part of its risk management approach--that is, to systematically analyze site visit and other grantee data to identify at-risk grantees and prioritize its monitoring. Moreover, the impact of USAID's actions to improve the Cuba Program's risk management on grantee risk is uncertain because most of the actions were taken recently. This uncertainty is underscored by the recent findings--similar to those we reported in 2006--of grantees' misusing funds and of weaknesses in grantees' internal control, financial management, and procurement systems that have not yet been resolved. Until the current audits of individual grantees' incurred cost are completed and the Cuba Program takes steps to address any known risks and prevent their recurrence, the program's ability to ensure the appropriate use of grant funds remains in question. To strengthen oversight of USAID's Cuba Program grants and the program's ability to ensure the appropriate use of grant funds, we recommend that the USAID Administrator take the following two actions: ensure that the Cuba Program office is staffed at the level that is needed to fully implement planned monitoring activities, such as the systematic analysis of grantee data to identify at-risk grantees, and that the agency has determined is necessary for effective oversight; and periodically assess the Cuba Program's overall efforts to address and reduce grantee risks, particularly with regard to grantees' internal controls, procurement practices, expenditures, and compliance with laws and regulations. USAID provided written comments on a draft of this report, which are reprinted in appendix III, as well as technical comments that we incorporated as appropriate. In its written comments, USAID concurred with our recommendation to staff the Cuba Program at levels needed to implement planned monitoring activities. The agency said that it was working to ensure that the Cuba Program has adequate staffing for strong program oversight and noted that it had temporarily assigned three staff to the program while implementing plans to recruit and hire additional permanent staff. USAID also concurred with our recommendation to periodically assess the Cuba Program's overall efforts to address and reduce grantee risk. The agency said that the Bureau for Latin America and the Caribbean would take specific steps to assess the risks associated with the Cuba Program's grantee pool in its ongoing risk assessment work. USAID noted that the bureau's assessment would incorporate results from grantee monitoring and site visits, reviews by the financial services contractor hired in April 2008, preaward reviews, and results from audits by the agency's Inspector General. We are sending copies of this report to the USAID Administrator, appropriate congressional committees, 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 have any questions about this report, please contact me at (202) 512-3149 or [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. To review the actions that U.S. Agency for International Development (USAID) has taken since 2006 to improve its award and oversight of the Cuba Program's grants as well as actions taken in response to the recently detected misuses of program grant funds, we analyzed USAID and Department of State (State) records, including agendas and minutes for meetings of USAID's Cuba project committee, draft and final changes to agency policy and guidance, and audit and financial reports of grantee activities. We reviewed and analyzed USAID budget, staffing, and procurement records. With regard to staffing, for example, we analyzed agency staffing assessments and related records; with regard to USAID Cuba Program awards and modifications, we analyzed agency grant documents and related records. We verified our analysis of these records with agency officials. In June 2008, we observed two quarterly grantee monitoring visits and one orientation visit to a grantee with a new award conducted by Cuba Program office staff. In addition, we conducted limited follow-up reviews of financial and other records at 5 of the 10 grantees that we had analyzed in our November 2006 report. In conducting these follow-up reviews, we employed the same methodology that we had used for our 2006 report. We also reviewed audit reports issued by the State and USAID Inspectors General in July and September 2007, respectively. We interviewed agency officials, including the current and former Cuba Program Directors, contracting officials, and auditors, about the actions taken in response to our report and actions taken in response to reported misuse of grant funds at two grantees. Additionally, we interviewed officials from the DMP Group, to which USAID awarded a contract in April 2008 to conduct a range of financial reviews of its Cuba Program grantees, and we reviewed DMP's work papers and draft and final reports. We did not examine USAID's selection of this firm or the reasonableness of the contractor's fees. We conducted this performance audit from May through July 2007 and from May through November 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. Table 2 summarizes our November 2006 findings and recommendations regarding USAID's awards and oversight of democracy assistance for Cuba as well as USAID's proposed or reported corrective actions, as of September 2008, and our assessment of the status of these actions. In addition to the individual named above, Jeanette M. Franzel, Director, Financial Management and Assurance; Emil Friberg, Jr.; Michael Rohrback; Bonnie Derby; Todd M. Anderson; Sunny Chang; Lisa M. Galvan-Trevino; and Reid Lowe made key contributions to this report.
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The U.S. Agency for International Development's (USAID)Cuba Program provides assistance to support human rights and promote nonviolent democratic change in Cuba. From 1996 through 2008, the program awarded $83 million in grants to nongovernmental organizations and universities. In 2006, GAO found weaknesses in program oversight that increased the risk of grantees' improperly using grant funds and failing to comply with U.S. laws. In 2008, misuse of grant funds at organizations with the program's two largest grants was detected. GAO was asked to examine (1) actions that USAID has taken since 2006, or plans to take, to improve its award and oversight of the Cuba Program's grants and (2) actions that USAID has taken in response to the recently detected misuses of grant funds. GAO analyzed USAID and grantee records, conducted limited reviews at five grantees, and interviewed agency and grantee officials. Since 2006, USAID has taken a number of steps to address identified problems with the Cuba Program's awards of democracy assistance and improve oversight of the assistance. For example, USAID has competitively awarded all Cuba Program grants since 2006, compared with 5 percent of grants awarded in 1995-2006; has hired more staff for the program office since January 2008; and contracted in April 2008 for financial services--such as reviews of grantee internal controls and procurement systems--to enhance oversight of grantees. USAID also has worked to strengthen program oversight by, for instance, ensuring preaward and follow-up reviews, improving grantee internal controls and implementation plans, and providing guidance and monitoring about permitted types of assistance and cost sharing. However, USAID has not staffed the Cuba Program at the level the agency has determined is needed for appropriate oversight; as of October 2008, the program office had five staff, compared with the 11 recommended in two USAID assessments. Further, because many of USAID's actions to improve oversight were initiated recently, their impact on the risk of the program grantees misusing grant funds or failing to comply with U.S. laws and regulations is not yet evident. In June 2008, for example, USAID's new financial services contractor found unsupported purchases at the organization with the program's largest grant. In response to the misuse of funds at organizations with the two largest Cuba Program grants, USAID suspended the two grantees in March and July 2008, respectively, pending the results of criminal investigations. To detect financial vulnerabilities at other grantees, USAID announced in mid-July 2008 that it would accelerate planned reviews of program grantees' procurement systems and initiate audits of their incurred cost, and it partially suspended two additional grantees pending the results of the procurement reviews. The program's other grants remained active pending the results of these reviews and audits. The procurement reviews--completed in August 2008 by the new financial services contractor--identified internal control, financial management, and procurement weaknesses at three grantees; USAID is working with the grantees to correct these weaknesses. The USAID Inspector General will oversee the incurred cost audits, which USAID expects to be completed by November 2008 under a separate contract with another firm.
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The U.S. export control system for items with military applications is divided into two regimes. State licenses munitions items, which are designed, developed, configured, adapted, or modified for military applications, and Commerce licenses most dual-use items, which are items that have both commercial and military applications. Although the Commerce licensing system is the primary vehicle to control dual-use items, some dual-use items--those of such military sensitivity that stronger control is merited--are controlled under the State system. Commercial communications satellites are intended to facilitate civil communication functions through various media, such as voice, data, and video, but they often carry military data as well. In contrast, military communications satellites are used exclusively to transfer information related to national security and have one or more of nine characteristics that allow the satellites to be used for such purposes as providing real-time battlefield data and relaying intelligence data for specific military needs. There are similarities in the technologies used to integrate a satellite to its launch vehicle and ballistic missiles. In March 1996, the executive branch announced a change in licensing jurisdiction transferring two items--commercial jet engine hot section technologies and commercial communications satellites--from State to Commerce. In October and November 1996, Commerce and State published regulations implementing this change, with Commerce defining enhanced export controls to apply when licensing these two items. State and Commerce's export control systems are based on fundamentally different premises. The Arms Export Control Act gives the State Department the authority to use export controls to further national security and foreign policy interests, without regard to economic or commercial interests. In contrast, the Commerce Department, as the overseer of the system created by the Export Administration Act, is charged with weighing U.S. economic and trade interests along with national security and foreign policy interests. Differences in the underlying purposes of the control system are manifested in the systems' structure. Key differences reflect who participates in licensing decisions, scope of controls, time frame for the decision, coverage by sanctions, and requirements for congressional notification. Participants. Commerce's process involves five agencies--the Departments of Commerce, State, Defense, Energy, and the Arms Control and Disarmament Agency. Other agencies can be asked to review specific license applications. For most items, Commerce approves the license if there is no disagreement from reviewing agencies. When there is a disagreement, the chair of an interagency group known as the Operating Committee, a Commerce official, makes the initial decision after receiving input from the reviewing agencies. This decision can be appealed to the Advisory Committee on Export Policy, a sub-cabinet level group comprised of officials from the same five agencies, and from there to the cabinet-level Export Administration Review Board, and then to the President. In contrast, the State system commonly involves only Defense and State. Other agencies, such as the Arms Control and Disarmament Agency, can be asked to review specific license applications. No formal multi-level process exists. Day-to-day licensing decisions are made by the Director, Office of Defense Trade Controls, but disagreements could be discussed through organizational levels up to the Secretary of State. This difference in who makes licensing decisions underscores the weight the two systems assign to economic and commercial interests relative to national security concerns. Commerce, as the advocate for commercial interests, is the focal point for the process and makes the initial determination. Under States' system, Commerce is not involved, underscoring the primacy of national security and foreign policy concern. We should note that the intelligence community is brought into the licensing process in different ways. Under both systems, Defense could refer license requests to the National Security Agency, the Defense Intelligence Agency, and other components. According to Defense, license requests for commercial communication satellites are frequently referred to these agencies. Communications satellites that are exported under State-approved technical assistance agreements (including launch technology) are also referred to the interagency Missile Technology Export Committee, which includes the intelligence community. The executive order governing the Commerce system provides for participation by the Director of Central Intelligence as a non-voting member on the Export Administration Review Board and for participation by representatives of the Central Intelligence Agency in the Advisory Committee on Export Policy and the Operating Committee. Scope of controls. The two systems also differ in the scope of controls. Commerce controls items to specific destinations for specific reasons. Some items are subject to controls targeted to former communist countries while others are controlled to prevent them from reaching countries for reasons that include antiterrorism, regional stability, and nonproliferation. In contrast, munitions items are controlled to all destinations, and State has broad authority to deny a license; it can deny a request simply with the explanation that it is against U.S. national security or foreign policy interests. Time frames. Commerce's system is more transparent to the license applicant than State's system. Time frames are clearly established, the review process is more predictable, and more information is shared with the exporter on the reasons for denials or conditions on the license. Congressional notification. Exports under State's system that exceed certain dollar thresholds (including all satellites) require notification to the Congress. Licenses for Commerce-controlled items are not subject to congressional notification, with the exception of items controlled for antiterrorism. Sanctions. The applicability of sanctions may also differ under the two export control systems. Commercial communication satellites are subject to two important types of sanctions: (1) Missile Technology Control Regime and (2) Tiananmen Square sanctions. Under Missile Technology sanctions, both State and Commerce are required to deny the export of identified, missile-related goods and technologies. Communication satellites are not so identified but contain components that are identified as missile-related. The National Security Council left the decision of how to treat such exports to Commerce and State. When the United States imposed Missile Technology sanctions on China in 1993, exports of communication satellites controlled by State were not approved while exports of satellites controlled by Commerce were permitted. Under Tiananmen Square sanctions, satellites licensed by State and Commerce have identical treatment. These sanctions prohibit the export of satellites for launch from launch vehicles owned by China. However, the President can waive this prohibition if such a waiver is in the national interest. Export control of commercial communications satellites has been a matter of contention over the years among U.S. satellite manufacturers and the agencies involved in their export licensing jurisdiction--the Departments of Commerce, Defense, State, and the intelligence community. To put their views in context, we would now like to provide a brief chronology of key events in the transfer of commercial communications satellites to the Commerce Control List. As the demand for satellite launch capabilities grew, U.S. satellite manufacturers looked abroad to supplement domestic facilities. In 1988, President Reagan proposed that China be allowed to launch U.S. origin commercial satellites. The United States and China signed an agreement in January 1989 under which China agreed to charge prices for commercial launch services similar to those charged by other competitors for launch services and to launch nine U.S.-built satellites through 1994. Following the June 1989 crackdown by the Chinese government on peaceful political demonstrations on Tiananmen Square in Beijing, President Bush imposed export sanctions on China. President Bush subsequently waived these sanctions for the export of three U.S.-origin satellites for launch from China. In February 1990, the Congress passed the Tiananmen Square sanctions law (P.L. 101-246) to suspend certain programs and activities relating to the Peoples Republic of China. This law also suspends the export of U.S. satellites for launch from Chinese-owned vehicles. In November 1990, the President ordered the removal of dual-use items from State's munitions list unless significant U.S. national security interests would be jeopardized. This action was designed to bring U.S. controls in line with the industrial (dual-use) list maintained by the Coordinating Committee for Multilateral Export Controls, a multilateral export control arrangement. Commercial communications satellites were contained on the industrial list. Pursuant to this order, State led an interagency review, including officials from Defense, Commerce, and other agencies to determine which dual-use items should be removed from State's munitions list and transferred to Commerce's jurisdiction. The review was conducted between December 1990 and April 1992. As part of this review, a working group identified and established performance parameters for the militarily sensitive characteristics of communications satellites. During the review period, industry groups supported moving commercial communications satellites, ground stations, and associated technical data to the Commerce Control List. In October 1992, State issued regulations transferring jurisdiction of some commercial communications satellites to Commerce. These regulations also defined what satellites remained under its control by listing nine militarily sensitive characteristics that, if included in non-military satellites, warranted their control on State's munitions list. (These characteristics are discussed in appendix I.) The regulations noted that parts, components, accessories, attachments, and associated equipment (including ground support equipment) remained on the munitions list, but could be included on a Commerce license application if the equipment was needed for a specific launch of a commercial communications satellite controlled by Commerce. After the transfer, Commerce noted that this limited transfer only partially fulfilled the President's 1990 directive. Export controls over commercial communication satellites were again taken up in September 1993. The Trade Promotion Coordinating Committee, an interagency body composed of representatives from most government agencies, issued a report in which it committed the administration to review dual-use items on the munitions list, such as commercial communication satellites, to expedite moving them to the Commerce Control List. Industry continued to support the move of commercial communications satellites, ground stations, and associated technical data from State to Commerce control. In April 1995, the Chairman of the President's Export Council met with the Secretary of State to discuss issues related to the jurisdiction of commercial communications satellites and the impact of sanctions that affected the export and launch of satellites to China. Also in April 1995, State formed the Comsat Technical Working Group to examine export controls over commercial communications satellites and to recommend whether the militarily sensitive characteristics of satellites could be more narrowly defined consistent with national security and intelligence interests. This interagency group included representatives from State, Defense, the National Security Agency, Commerce, the National Aeronautics and Space Agency, and the intelligence community. The interagency group reported its findings in October 1995. Consistent with the findings of the Comsat Technical Working Group and with the input from industry through the Defense Trade Advisory Group, the Secretary of State denied the transfer of commercial communications satellites to Commerce in October 1995 and approved a plan to narrow, but not eliminate, State's jurisdiction over these satellites. Unhappy with State's decision to retain jurisdiction of commercial communications satellites, Commerce appealed it to the National Security Council and the President. In March 1996, the President, after additional interagency meetings on this issue, decided to transfer export control authority for all commercial communications satellites from State to Commerce. A key part of these discussions was the issuance of an executive order in December 1995 that modified Commerce's procedures for processing licenses. This executive order required Commerce to refer all licenses to State, Defense, Energy, and the Arms Control and Disarmament Agency. This change addressed a key shortcoming that we had reported on in several prior reviews. In response to the concerns of Defense and State officials about this transfer, Commerce agreed to add additional controls to exports of satellites designed to mirror the stronger controls already applied to items on State's munitions list. Changes included the establishment of a new control, the significant item control, for the export of sensitive satellites to all destinations. The policy objective of this control--consistency with U.S. national security and foreign policy interests--is broadly stated. The functioning of the Operating Committee, the interagency group that makes the initial licensing determination, was also modified. This change required that the licensing decision for these satellites be made by majority vote of the five agencies, rather than by the chair of the Committee. Satellites were also exempted from other provisions governing the licensing of most items on Commerce's Control List. In October and November 1996, Commerce and State published changes to their respective regulations, formally transferring licensing jurisdiction for commercial communications satellites with militarily sensitive characteristics from State to Commerce. Additional procedural changes were implemented through an executive order and a presidential decision directive issued in October 1996. According to Commerce officials, the President's March 1996 decision reflected Commerce's long-held position that all commercial communications satellites should be under its jurisdiction. Commerce argued that these satellites are intended for commercial end use and are therefore not munitions. Commerce maintained that transferring jurisdiction to the dual-use list would also make U.S. controls consistent with treatment of these items under multilateral export control regimes. Manufacturers of satellites supported the transfer of commercial communications satellites to the Commerce Control List. They believed that such satellites are intended for commercial end use and are therefore not munitions subject to State's licensing process. They also believed that the Commerce process was more responsive to business due to its clearly established time frames and predictability of the licensing process. Under State's jurisdiction, the satellites were subject to Missile Technology sanctions requiring denial of exports and to congressional notifications. Satellite manufacturers also expressed the view that some of the militarily sensitive characteristics of communications satellites are no longer unique to military satellites. State and Defense point out that the basis for including items on the munitions list is the sensitivity of the item and whether it has been specifically designed for military applications, not how the item will be used. These officials have expressed concern about the potential for improvements in missile capabilities through disclosure of technical data to integrate the satellite with the launch vehicle and the operational capability that specific satellite characteristics could give a potential adversary. The process of planning a satellite launch takes several months, and there is concern that technical discussions between U.S. and foreign representatives may lead to the transfer of information on militarily sensitive components. Defense and State officials said they were particularly concerned about the technologies to integrate the satellite to the launch vehicle because this technology can also be applied to launch ballistic missiles to improve their performance and reliability. Accelerometers, kick motors, separation mechanisms, and attitude control systems are examples of equipment used in both satellites and ballistic missiles. State officials said that such equipment and technology merit control for national security reasons. They also expressed concern about the operational capability that specific characteristics, in particular, antijam capability, crosslinks, and baseband processing, could give a potential adversary. No export license application for a satellite launch has been denied under either the State or Commerce systems. Therefore, the conditions attached to the license are particularly significant. Exports of U.S. satellites for launch in China are governed by a government-to-government agreement addressing technology safeguards. This agreement establishes the basic authorities for the U.S. government to institute controls intended to ensure that sensitive technology is not inadvertently transferred to China. This agreement is one of three government-to-government agreements with China on satellites. The others address pricing and liability issues. During our 1997 review and in recent discussions, officials pointed to two principal safeguard mechanisms to protect technologies. These safeguard mechanisms include technology transfer control plans and the presence of Defense Department monitors during the launch of the satellites. State or Commerce may choose to include these safeguards as conditions to licenses. Technology transfer control plans are prepared by the exporter and approved by Defense. The plans outline the internal control procedures the company will follow to prevent the disclosure of technology except as authorized for the integration and launch of the satellite. These plans typically include requirements for the presence of Defense monitors at technical meetings with Chinese officials as well as procedures to ensure that Defense reviews and clears the release of any technical data provided by the company. Defense monitors at the launch help ensure that the physical security over the satellite is maintained and monitor any on-site technical meetings between the company and Chinese officials. Authority for these monitors to perform this work in China is granted under the terms of the government-to-government safeguards agreement. Additional government control may be exercised on technology transfers through State's licensing of technical assistance and technical data. State technical assistance agreements detail the types of information that can be provided and give Defense an opportunity to scrutinize the type of information being considered for export. Technical assistance agreements, however, are not always required for satellite exports to China. While such licenses were required for satellites licensed for export by State, Commerce licensed satellites do not have a separate technical assistance licensing requirement. The addition of new controls over satellites transferred to Commerce's jurisdiction in 1996 addressed some of the key areas where the Commerce procedures are less stringent than those at State. There remain, however, differences in how the export of satellites are controlled under these new procedures. Congressional notification requirements no longer apply, although the Congress is currently notified because of the Tiananmen waiver process. Sanctions do not always apply to items under Commerce's jurisdiction. For example, under the 1993 Missile Technology sanctions, sanctions were not imposed on satellites that include missile-related components. Defense's power to influence the decision-making process has diminished since the transfer. When under State jurisdiction, State and Defense officials stated that State would routinely defer to the recommendations of Defense if national security concerns are raised. Under Commerce jurisdiction, Defense must now either persuade a majority of other agencies to agree with its position to stop an export or escalate their objection to the cabinet-level Export Administration Review Board, an event that has not occurred in recent years. Technical information may not be as clearly controlled under the Commerce system. Unlike State, Commerce does not require a company to obtain an export license to market a satellite. Commerce regulations also do not have a separate export commodity control category for technical data, leaving it unclear how this information is licensed. Commerce has informed one large satellite maker that some of this technical data does not require an individual license. Without clear licensing requirements for technical information, Defense does not have an opportunity to review the need for monitors and safeguards or attend technical meetings to ensure that sensitive information is not inadvertently disclosed. The additional controls applied to the militarily sensitive commercial communications satellites transferred to Commerce's control in 1996 were not applied to the satellites transferred in 1993. These satellites are reviewed under the normal interagency process and are subject to more limited controls. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions you or other Members of the Committee may have. Antennas and/or antenna systems with the ability to respond to incoming interference by adaptively reducing antenna gain in the direction of the interference. Ensures that communications remain open during crises. Allows a satellite to receive incoming signals. An antenna aimed at a spot roughly 200 nautical miles in diameter or less can become a sensitive radio listening device and is very effective against ground-based interception efforts. Provide the capability to transmit data from one satellite to another without going through a ground station. Permits the expansion of regional satellite communication coverage to global coverage and provides source-to-destination connectivity that can span the globe. It is very difficult to intercept and permits very secure communications. Allows a satellite to switch from one frequency to another with an on-board processor. On-board switching can provide resistance to jamming of signals. Scramble signals and data transmitted to and from a satellite. Allows telemetry and control of a satellite, which provides positive control and denies unauthorized access. Certain encryption capabilities have significant intelligence features important to the National Security Agency. Provide protection from natural and man-made radiation environment in space, which can be harmful to electronic circuits. Permit a satellite to operate in nuclear war environments and may enable its electronic components to survive a nuclear explosion. (continued) Allows rapid changes when the satellite is in orbit. Military maneuvers require that a satellite have the capability to accelerate faster than a certain speed to cover new areas of interest. Provides a low probability that a signal will be intercepted. High performance pointing capabilities provide superior intelligence-gathering capabilities. Used to deliver satellites to their proper orbital slots. If the motors can be restarted, the satellite can execute military maneuvers because it can move to cover new areas. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed the military sensitivity of commercial communications satellites and the implications of the 1996 change in export licensing jurisdiction, focusing on: (1) key elements in the export control systems of the Departments of Commerce and State; (2) how export controls for commercial satellites have evolved over the years; (3) concerns and issues debated over the transfer of commercial communications satellites to the export licensing jurisdiction of Commerce; (4) safeguards that may be applied to commercial satellite exports; and (5) observations on the current export control system. GAO noted that: (1) the U.S. export control system--comprised of both the Commerce and State systems--is about managing risk; (2) exports to some countries involve less risk than to other countries and exports of some items involve less risk than others; (3) the planning of a satellite launch with technical discussions and exchanges of information taking place over several months, involves risk no matter which agency is the licensing authority; (4) recently, events have focused concern on the appropriateness of Commerce jurisdiction over communication satellites; (5) this is a difficult judgment; (6) by design, Commerce's system gives greater weight to economic and commercial concerns, implicitly accepting greater security risks; (7) by design, State's system gives primacy to national security and foreign policy concerns, lessening--but not eliminating--the risk of damage to U.S. national security interests; (8) the addition of new controls over satellites transferred to Commerce's jurisdiction in 1996 addressed some of the key areas where the Commerce procedures are less stringent than those of State; (9) there remain, however, differences in how the export of satellites is controlled under these new procedures; (10) Congress notification requirements no longer apply; (11) sanctions do not always apply to items under Commerce's jurisdiction; (12) the Department of Defense's power to influence the decisionmaking process has diminished since the transfer; (13) technical information may not be as clearly controlled under the Commerce system; and (14) the additional controls applied to the militarily sensitive commercial communications satellites transferred to Commerce's control in 1996 were not applied to the satellites transferred in 1993.
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Since the attacks of September 11, 2001, there has been concern that another terrorist attack on U.S. soil could occur involving biological, chemical, radiological, or nuclear weapons. Concerns like these have prompted increased federal attention to and investment in national emergency preparedness--that is, the nation's ability to prevent, protect against, respond to, and recover from large-scale emergency events. Effective preparation for, detection of, and response to a major biological event requires effective pre- and postdisaster coordination and cooperation among different federal agencies, levels of government, nongovernmental organizations, and the private sector. In the case of biological threats, detection of biological agents is a first step in an effective response to a natural, accidental, or intentional outbreak of a biologically caused disease. In August 2007, the 9/11 Commission Act required DHS to establish NBIC to detect, as early as possible, a biological event of national concern that presents a risk to the United States, or the infrastructure or key assets of the United States. The 9/11 Commission Act provides that the mission of NBIC is to enhance the capability of the federal government to: rapidly identify, characterize, localize, and track a biological event of national concern; integrate and analyze data relating to human health, animal, plant, food, and environmental monitoring systems; and disseminate alerts to member agencies, and state, local, and tribal governments. The 9/11 Commission Act also requires NBIC to be fully operational by September 30, 2008. Prior to the passage of the 9/11 Commission Act, two presidential directives charged federal agencies to coordinate federal efforts and create a new biological threat awareness capacity to enhance detection and characterization of a biological attack. In response to these presidential directives, DHS began the National Biosurveillance Integration System (NBIS) program in 2004 as a means of integrating information across government agencies regarding biological events. The NBIS program developed an IT system, also known as NBIS, to bring together various data used for human, animal, and plant health surveillance; environmental monitoring data; and intelligence and threat analysis. Subsequently, the 9/11 Commission Act established NBIC as the entity responsible for, among other things, developing and running the IT system, still known as NBIS. Since it was created in March 2007, OHA has overseen NBIS and now the NBIC program office. DHS, in cooperation with other federal agencies, created the BioWatch program in 2003 to detect the release of airborne biological agents. The BioWatch program deploys detectors which collect data that, when analyzed, can be used to identify biological agents on the BioWatch threat list. Current BioWatch detection technology contains filters that collect air samples, but the filters must be collected manually, and testing of the samples is carried out in state and local public health laboratories. Using this manual process, results are usually obtained within 10 to 34 hours of an agent's detection. BioWatch detectors are currently deployed in 30 cities, and local jurisdictions are responsible for the public health response to positive findings in the BioWatch program. OHA has responsibility for managing the operations of the BioWatch program. S&T, which is the primary research and development arm of DHS, is responsible for developing detectors for the BioWatch program. DHS has made progress making NBIC fully operational by September 30, 2008, as required by the 9/11 Commission Act, but has faced difficulties completing some key tasks, such as defining what capabilities the center will provide once fully operational, formalizing agreements to obtain interagency coordination, and fully implementing its IT system. NBIC has not yet defined what capabilities the center should have in place in order to be fully operational. According to NBIC officials, NBIC has drafted, but not finalized, planning documents to define these capabilities. In addition, NBIC has initiated coordination with member agencies through memoranda of understanding (MOUs) and interagency working groups. NBIC is working to establish additional coordination efforts to enhance NBIC's integration capabilities. Further, a contractor DHS hired to enhance NBIC's IT system delivered an upgrade to the system on April 1, 2008, but more work remains to be done. For example, member agencies will not have full access to the IT system until NBIC employees have been trained to use the system. Additionally, NBIC reports that it continues to negotiate agreements with member agencies on the data they are to provide for the IT system. DHS has made progress making NBIC fully operational by the mandated September 30, 2008, deadline; however, it is unclear what operations the center will be capable of carrying out at that point. NBIC has acquired a facility that accommodates office space, a 24-hour watch center, as well as secure areas to handle classified materials. Additionally, in January 2008 NBIC hired a permanent Director to oversee NBIC operations. As of July 2008, NBIC has also filled 26 of 37, or 70 percent, of NBIC's available staff positions, and according to NBIC officials, NBIC is in the process of hiring four additional staff members, including a Deputy Director. NBIC officials are planning to use contractors to fill the remaining 7 positions. Furthermore, NBIC has also acquired one detailee from a member agency, the Department of Health and Human Services, and is working to acquire additional detailees. NBIC has drafted a concept of operations; a finalized version is pending comments from NBIC's member agencies. Officials have also drafted, but not finalized, standard operating procedures. In fiscal year 2008, $8 million were available to NBIC officials to establish the center; officials told us that they recently requested an additional $4.2 million in a reprogramming that DHS has not yet approved. NBIC has not yet defined the capabilities the center should have in order to be considered fully operational. The 9/11 Commission Act does not define fully operational or what capabilities NBIC needs to have in place by the statutorily mandated September 30, 2008, deadline. NBIC officials told us that they are currently trying to define "fully operational" and are drafting detailed plans for the final 90 days of planning before the deadline. Officials told us that these documents describe the details of NBIC's expected operational capabilities and functions, such as the state of their IT system, personnel expectations, analytic capabilities, and include specific goals, objectives, milestones, and cost estimates. DHS did not provide us with these planning documents because the documents are in draft form. NBIC has initiated coordination efforts with 11 federal agencies but faces difficulties completing formal agreements to obtain their cooperation. Since the new NBIC Director started in January 2008, NBIC has organized interagency working groups and has finalized MOUs with 6 of the 11 agencies that NBIC identified as important to the operational needs of the center. NBIC has an interagency working group consisting of these 11 agencies, in addition to DHS, that first met under the direction of the new Director in March 2008. As part of the interagency working group, DHS officials stated, NBIC has created a sub-working group that meets on a weekly basis to discuss issues such as the daily operations of NBIC, reporting requirements, and data-sharing issues. NBIC also organized an interagency oversight council, which includes representatives from member agencies, private-sector organizations, and academia, to provide technical oversight and guidance in the development and implementation of NBIC's operations. The oversight council plans to meet for the first time in August 2008. NBIC has begun facilitating interagency coordination while continuing to implement additional elements of the program. For example, NBIC officials told us that they helped coordinate the federal government's efforts to deal with the recent national salmonella outbreak, while simultaneously continuing to work on making NBIC fully operational to meet the September 30, 2008, deadline. As part of its efforts to establish interagency coordination, NBIC is seeking to formalize its relationship with federal agencies through three types of documents: MOUs, interagency security agreements (ISAs), and interagency agreements (IAAs). First, DHS is asking federal agencies to sign MOUs to confirm the agency or department's initial agreement to participate in NBIC as a member agency. Second, DHS is asking agencies to sign ISAs that formalize the technical exchange of information, such as data on human health, between NBIC and these agencies. Finally, DHS is asking agencies to sign IAAs that define programmatic, financial, and staffing arrangements between NBIC and these agencies. As part of the IAAs, agencies are to agree to provide detailees to work at NBIC. These detailees will provide subject-matter expertise and facilitate NBIC coordination with their respective home department or agency. To date, NBIC and potential member agencies have finalized 6 of 11 MOUs; however, they have not finalized any ISAs or IAAs. DHS has signed MOUs with the Departments of Defense, Agriculture, Health and Human Services, Interior, State, and Transportation. DHS is still working to finalize MOUs with another 5 agencies to formalize their membership in NBIC. NBIC does not have ISAs or IAAs in place with any of its current and potential member agencies. According to NBIC officials, one difficulty in finalizing the ISAs is due, in part, to defining the data-sharing arrangements with member agencies given the constraints on arrangements for sharing data imposed by the traditional roles of these agencies. For example, interagency coordination for the purposes of characterizing a biological event may require data that NBIC member agencies have not previously shared with other agencies. In addition, DHS faces difficulty finalizing IAAs, the formal mechanisms through which NBIC obtains detailees from federal agencies. In the absence of IAAs, according to NBIC's draft concept of operations, the center cannot effectively perform its integration and analytical mission without the subject-matter knowledge from interagency detailees. As of July 2008, NBIC has been able to secure one detailee from a member agency. Officials were unable to predict how many additional MOUs, ISAs, IAAs, or detailees NBIC will have in place by September 30, 2008. A contractor DHS hired to enhance NBIC's IT system delivered an upgrade to the system in April 2008; however, NBIC officials stated that they need to complete additional work before granting member agencies full access to the system. The system, known as NBIS, provides tools to enhance NBIC's data integration capabilities and collaboration with member agencies. Such tools include a worldwide geographical map displaying emergent and ongoing adverse health events, an assessment of the homeland security implications of those events, a library of all referenced data, and general disease and situational reports. NBIC officials told us that additional work needs to be done before giving member agencies full access to the system. For example, NBIC does not have interagency security agreements in place with member agencies that specify the data that agencies will share with the system. In addition, as NBIC officials work with the NBIS system, they are identifying additional improvements that need to be made to the system. Furthermore, while member agencies will have access to some of the individual tools that are a part of NBIS, until NBIC analysts have been trained to use NBIS, member agencies will not have full access to all of the system's interagency collaboration functions. Officials estimate that training will not be completed until at least early 2009. DHS has two ongoing efforts to improve the detection technology used by the BioWatch program. S&T is developing a new technology. OHA is developing an interim solution to enhance the detectors currently in use. S&T is developing new detection technology known as Generation 3.0 which would replace the existing technology used by the BioWatch program. This new technology is to provide a fully automated detector which not only collects air samples but also analyzes them for threats. The current technology collects air samples which are periodically manually removed from the equipment and taken to a laboratory for analysis, a process that could take 10 to 34 hours. Officials stated that automating analysis of air samples could reduce the elapsed time between air sampling and testing it for threats from the current 10 to 34 hours to 4 to 6 hours, reducing detection time by at least 4 hours and possibly as much as 30 hours. In addition to the automated detection capability, Generation 3.0 is to detect a broader range of identified biological agents to eventually cover all the biological agents on the BioWatch threat list--a list of specific biological agents that could pose a health threat if aerosolized and released to the environment. The estimated cost for acquiring these detectors is $80,000 to $90,000 per unit, with yearly operation and maintenance costs of $12,000 to $41,000 per unit. Operational testing and evaluation of this technology is scheduled for April 2009, about a year later than initially planned because OHA provided S&T with revised functional requirements about 4 months before S&T was scheduled to complete the Generation 3.0 prototype detector. S&T developed the original requirements for the Generation 3.0 technology, which required the automatic detectors to, among other things, operate continuously, detect more biological threats, be less expensive to operate, and be deployed in both indoor and outdoor environments. S&T planned to complete the development of the hardware and software and conduct field tests of its prototype Generation 3.0 detectors by April 2008, at which point OHA was to take responsibility for final operational testing and evaluation of the detectors. However, OHA provided S&T with new requirements for the Generation 3.0 detector in January 2008, which delayed operational testing and evaluation by 1 year, from April 2008 to April 2009. The new requirements included additional requirements and provided additional details for some of the original requirements. For example, OHA's new requirements contain restrictions for the size and weight of the Generation 3.0 detector which were not specified in the original requirements. As a result of the 1-year delay, S&T also designed an additional field test for the Generation 3.0 prototypes, scheduled to begin in the first quarter of fiscal year 2009, which will occur in an urban environment and allow for the prototypes to be tested in real-world conditions. According to S&T and OHA officials, the Generation 3.0 detector will ultimately replace all current BioWatch detectors by 2013, with initial deployment beginning in 2010. While S&T is completing is work on the Generation 3.0 detectors, OHA is developing an interim solution to enhance the detectors currently in use by adding the capability to automatically analyze air samples for some biological agents. OHA's interim technology, known as Generation 2.5, is intended to add the capability to automatically analyze air samples for the same number of biological agents currently monitored by the existing BioWatch detector technology. However, the enhanced detectors will not have the capability to identify additional biological agents listed on the BioWatch threat list. According to OHA officials, Generation 2.5 detectors will, like Generation 3.0 detectors, reduce the elapsed time between sampling the air and detecting a biological agent by at least 4 hours and possibly as much as 30 hours. Further, OHA officials stated that they plan to operationally test and evaluate new prototype detectors beginning in November 2008 and to acquire over 100 of these new detectors, contingent on successful completion of operational testing and evaluation. The estimated cost for acquiring and testing these detectors is $120,000 per unit, with yearly maintenance costs of $65,000 to $72,000 per unit. According to DHS officials, OHA plans to deploy these new detectors both indoors and outdoors; however, no procedural guidance exists for responding to positive results from detectors placed indoors. According to OHA officials, they plan to develop this guidance by October 2008 and apply it to all future BioWatch detectors deployed indoors. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information regarding this testimony, please contact me or E. Anne Laffoon, Assistant Director, at (202) 512-4199. Michelle Cooper, Jessica Gerrard-Gough, Tracey King, Amanda Krause, Juan Tapia-Videla, John Vocino, and Sally Williamson made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The United States faces potentially dangerous biological threats that occur naturally or may be the result of a terrorist attack. The Department of Homeland Security (DHS) is developing two major initiatives to provide early detection and warning of biological threats: the National Biosurveillance Integration Center (NBIC), a center for integrating and coordinating information on biological events of national significance, and the BioWatch program that operates systems used to test the air for biological agents. The Implementing Recommendations of the 9/11 Commission Act of 2007 requires DHS to establish a fully operational NBIC by September 30, 2008. This statement discusses the status of DHS's efforts to (1) make NBIC fully operational by the mandated deadline, and (2) improve the BioWatch program's technology. GAO's preliminary observations of these two programs are based on our ongoing work mandated by the Implementing Recommendations of the 9/11 Commission Act of 2007 to review U.S. biosurveillance efforts. To conduct this work, GAO reviewed related statutes; federal directives; and DHS planning, development, and implementation documents on these two initiatives. We also interviewed DHS program officials to obtain additional information about NBIC and BioWatch. DHS reviewed a draft of this testimony and provided technical comments, which were incorporated as appropriate. DHS has made progress making NBIC fully operational by September 30, 2008, as required by the Implementing Recommendations of the 9/11 Commission Act of 2007, but it is unclear what operations the center will be capable of carrying out at that point. DHS has acquired facilities and hired staff for the center but has not yet defined what capabilities the center will have in order to be considered fully operational. DHS has also started to coordinate biosurveillance efforts with other agencies, but DHS has not yet formalized some key agreements to fulfill NBIC's integration mission. For example, DHS has signed memoranda of understanding with 6 of 11 agencies DHS identified to support the operations of NBIC. However, DHS has not yet completed other key agreements to, for example, facilitate the technical exchange of information, such as data on human health, between NBIC and the agencies. In addition, a contractor DHS hired to enhance NBIC's information technology system delivered an upgrade to the system on April 1, 2008, intended to enhance data integration capabilities. However, before this upgrade can be used effectively, DHS officials said that NBIC will need to train its employees to use the system and negotiate interagency agreements to define the data that the agencies using the system will provide. DHS officials expect that NBIC will complete the training in early 2009. DHS has two ongoing efforts to improve the detection technology used by the BioWatch program, which deploys detectors to collect data that are then analyzed to detect the presence of specific biological agents. First, the Directorate for Science and Technology (S&T) within DHS is developing next-generation detectors for the BioWatch program. DHS plans for this new technology to collect air samples and automatically test the samples for a broader range of biological agents than the current technology. Under the current system, samples are manually collected and taken to a laboratory for analysis. DHS plans to operationally test and evaluate the new automatic technology in April 2009 and to begin replacing its existing detection technology in 2010. Operational testing and evaluation of the new technology is planned to take place in April 2009, about 1 year later than DHS initially planned, because S&T officials received revised requirements for the new system about 4 months before S&T was scheduled to complete development of the system. Second, while S&T is completing its work on the new detection technology, DHS is developing an interim solution, managed by the Office of Health Affairs, to enhance its current detection technology. This interim solution is intended to automatically analyze air samples for the same number of biological agents currently monitored by the BioWatch program. Contingent on successful operational testing and evaluation that is to start in November 2008, DHS plans to decide whether to acquire over 100 of these enhanced detectors.
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While about half of all employers are aware of their local one-stops, awareness increases with employer size, with about half of small, two- thirds of medium, and three-quarters of large employers knowing about their local one-stops. Similarly, of all employers aware of the one-stops, about three-quarters of large employers are likely to use one-stop services, while approximately one-half of medium and one-quarter of small employers are likely to do so. Employers of all sizes primarily use one-stop services to help fill job vacancies. About three-quarters of employers that used one-stops said that they are satisfied with the services they received, and 83 percent would consider using them again in the future. Labor has taken steps to support employer awareness and use of the system. However, it lacks data on employer usage. Because Labor collects little information on employers' use of the one-stops, the extent to which these services help employers is unknown, as is how these services could be more effectively targeted to meet employers' workforce needs. In this report, we are making a recommendation to the Secretary of Labor to require states to collect and report on employer use of the workforce system. In its comments on a draft of this report, Labor agreed with our recommendation and provided technical comments, which we included as appropriate. While about half of all employers are aware of their local one-stops, awareness levels increase with employer size, with about half of small, two-thirds of medium, and three-quarters of large employers knowing about their local one-stops. (See fig. 1.) Regardless of size, most employers learn about one-stops through word of mouth in the private sector. Moreover, large and medium employers are more likely than small employers to learn about one-stops from a one-stop official or government representatives. This may be because larger employers are more likely to hire workers. Large and medium employers who know about one-stops are more likely than small employers to use their services. Of all employers aware of the one-stops, approximately three-quarters of large employers are likely to use one-stop services, while about one-half of medium and one-quarter of small employers are likely to do so. As shown in figure 2, employers of all sizes generally use one-stop services to help fill job vacancies through posting job announcements and screening job applicants, with large employers being three to four times more likely than small employers to use these services. (See app. III for more information.) Small employers' lower rate of usage could be associated with their lower likelihood of hiring. Small employers are less likely than large and medium employers to have hired an employee in the previous year. In addition, few employers of any size are likely to access training services through one-stops. This is consistent with what most employers we interviewed on our site visits told us--they said they did the majority of their training internally. Awareness and use of two other resources of the workforce system-- America's Job Bank and labor market information funded by Labor--also vary by size of employer, with larger employers more likely than small employers to use them. While 56 percent of large employers are aware of the America's Job Bank Web site, 17 percent of small employers are aware of this resource. Likewise, large employers are about twice as likely as small employers to be aware of labor market information funded by Labor (74 percent versus 40 percent). In addition, large and medium employers are significantly more likely than small employers to use both of these resources. According to Labor, employers use the America's Job Bank Web site to find prospective employees, and they use labor market information to learn about employment trends and wages. Several employers we interviewed on our site visits said they used labor market information on current wage rates in order to comply with wage laws or to set compensation rates. The vast majority of employers who use one-stop services are satisfied with them; particularly, they express satisfaction with the timeliness of services and the extent to which services address their needs. In addition, most employers who use one-stop services would likely use them again, and about one-third of employers who are aware of one-stop services but do not use them would consider using them in the future. Among employers who are aware of one-stop services, very few decline to use them because of concerns about the quality of services. Instead, many of these employers choose not to use one-stops because they rely on other resources to hire and train workers or do not have enough information about the services one-stops offer. Overall, about 78 percent of employers in the United States who have used one-stops are satisfied with the services they received. These employers are most satisfied with one-stop efforts to provide timely services and respond to their needs. Most employers we interviewed on our site visits also expressed satisfaction with one-stop services, and some pointed to cost and time savings as the primary benefit of using one-stops. For example, one employer said that because one-stop staff selected qualified applicants using the company's own screening criteria, the company saved a lot of time. Furthermore, our survey showed that the majority of employers who use one-stop services would consider using them in the future, and a majority would also recommend one-stop services to another businessperson. Eighty-three percent of employers who use one-stops said they are willing to consider using one-stops in the future, and this proportion does not vary much by employer size. Similarly, about three- quarters of employers who use one-stops are willing to recommend one- stop services to other businesses. Furthermore, about one-third of employers who are aware of one-stop services but have not used them would consider using them in the future. Of those employers who are aware of but not using one-stop services, very few (3 percent), had concerns about service quality. The most common reason employers did not use one-stop services was that they primarily use other resources to hire and train workers--this was true for all employer size categories. About 21 percent of employers chose not to use one-stops because they lacked information about their services. In addition, several employers we interviewed on our site visits said that although they were aware of one-stops, they did not know about the breadth of services they offered. Nearly all employers we interviewed on our site visits thought that one-stops should try to increase general awareness of one-stops among employers. Labor has initiatives to support employer awareness and use of the one- stop system but does not know the extent to which employers use the system. Labor has developed partnerships with businesses and industry to provide employers easier access to the resources of the one-stop system. To measure how the one-stop system is meeting the needs of employers, Labor requires states to collect information on employer satisfaction with the one-stop system but not on employer use of the system. Labor's employer satisfaction measure provides a high-level indicator of whether employers are satisfied with the one-stop services they receive. It does not, however, provide enough information on the services employers use to help Labor manage its resources. Labor has developed a number of initiatives to support employer awareness and use of the one-stop system but has limited information about the extent to which employers use the system. Labor established its Partnerships for Jobs Initiative with 23 large, multistate employers, including the Home Depot and Citigroup, to provide better access to the resources of the approximately 1,900 one-stops nationwide. This initiative helps employers learn about state and local workforce resources provided through the one-stop system. Through its ongoing High-Growth Training Initiative, Labor has also directed more than $92 million, as of June 2004, to public-private partnerships in which growing industries work with education and training providers to ensure that workers get the skills they need to compete in growing fields like biotechnology and high-tech manufacturing. In addition, Labor provided a $1.6 million grant to a seven- state consortium to develop model outreach strategies for marketing one- stop services to employers. Labor has identified various ways to measure the success of these initiatives, such as hiring rates and expansion of services. For example, through its Partnership for Jobs initiative, the 23 national employers have hired approximately 15,000 individuals through the one-stop system as of June 2004. Through its High-Growth Job Training Initiative, Labor has identified workforce solutions, such as expanding the pipeline of youth entering high-growth industries and enhancing the capacity of educational institutions to train students in industry-defined competencies. To measure the success of the one-stops in meeting employer workforce needs, Labor requires states to report on employers' overall satisfaction with one-stop services, but not on their use of these services. Labor requires that states conduct quarterly telephone surveys of employers to obtain information on their overall satisfaction with the services provided by the one-stops. Each state negotiates with Labor to set its own goal for employer customer satisfaction. Because of the general nature of the employer satisfaction measure, it has limited usefulness to Labor for management of its one-stop system resources. Moreover, usage information, such as the number of employers using one-stop services, is not available to Labor because it does not require that states collect information on employers' use of one-stop services. Labor recognizes that the satisfaction measure provides only general information and that there is a need for more information than the employer satisfaction measure provides. Labor's Employment and Training Administration (ETA) has proposed a new data collection and reporting system called the ETA Management Information and Longitudinal Evaluation (EMILE) to, among other things, obtain more detailed information about employers' use of one-stop services. Labor's proposed reporting system would require states to collect specific employer-related information, such as the characteristics of the employers and the services they use. However, Labor is in the process of responding to public comments on the proposal and has not yet finalized its implementation plans. While many local areas track their own measures of how one-stops serve employers, this information is not reported to most states or Labor. At least half of the local areas track such measures as the number of employers that use one-stop services, the type of services that employers use, and the number of employers that hire one-stop job seekers. While this type of information allows local areas to better manage their resources to respond to the changing needs of their employer clients, information on employer usage is not communicated to most states or Labor. Relatively few states require local workforce areas to report on employer measures, such as the number of employers they serve and the number that hire one-stop job seekers. For example, about one-third of all states require local areas to report on the number of employers that use their services, while 11 states track the type of one-stop services that employers use. Because states are currently not required by Labor to collect this type of information, it is unavailable at the state and federal level to help them manage federal workforce resources. The federal government currently invests in a workforce system with multiple programs to help workers find jobs, and to help employers find the workers they need. We found that large numbers of employers know about, use, and are satisfied with their local one-stops. While Labor has taken steps to support employer awareness and use of the system, it collects little information on employers' use of the workforce system. Although many local areas and some states collect information on employer use of the one-stop system to manage their resources, this information is not reported to Labor. Collecting employer information involves additional effort for states and local areas but enhances their ability to manage their resources. Without this information on employer use of the one-stop system, Labor cannot identify whether or not state and local programs are responding to the needs of employers and what types of services best meet employers' workforce needs. As a result, Labor does not have the information necessary to identify areas where additional employer assistance may be needed or to design a strategy for effectively targeting limited workforce funds. To ensure that Labor has a better understanding of the degree to which the publicly funded workforce system meets employers' needs, we recommend that the Secretary of Labor require states to collect and report on employer use of the one-stop system in addition to continuing to collect general employer satisfaction information. We provided officials at the Department of Labor an opportunity to comment on a draft of this report. Formal comments appear in appendix IV. Labor agreed with our findings and recommendation that the Secretary of Labor require states to collect and report on employer use of the one-stop system to better understand the degree to which the system is meeting the needs of employers. Labor stated that one component of its proposed revised reporting system would collect information on employers' use of one-stop services. However, the agency continues to reconcile comments on its proposed reporting system and to determine its feasibility. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its date. At that time, we will send copies of this report to the Secretary of Labor, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. A list of related GAO products is included at the end of this report. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or Joan Mahagan, Assistant Director, at (617) 788-0521. You may also reach us by e-mail at [email protected] or [email protected]. Other contacts and staff acknowledgments are listed in appendix V. To what extent are employers, including small businesses, aware of and using the one-stop system? To what degree do employers who use one-stop services report satisfaction, and what factors cause employers not to use them? What has the Department of Labor (Labor) done to support employer awareness and use of the workforce system and how does Labor measure its success in meeting the needs of employers? two employees. A business establishment is the physical location of a certain economic activity, such as a factory, mine, store, or office. For example, the Home Depot is a large national business with multiple store locations nationwide. For our study, each store counted separately as an employer. We chose to survey personnel at individual business establishments rather than corporate headquarters because these employers are more likely than headquarters staff to be responsible for local hiring and training practices, such as use of one-stops. We defined the size of employers by their number of employees: small: 2-49, medium: 50-499, and large: 500 or more. one-stop centers: all services provided to employers through one-stop career centers, including services such as applicant screening, skills assessment, and training; America's Job Bank (AJB): an employment Web site; and labor market information funded by Labor, such as current wage rates. large private sector employers from a nationwide database of businesses and generalized our survey results to all private sector business establishments in the United States. We achieved a 54 percent response rate after adjusting for cases that were ineligible for our study or whose eligibility could not be determined. We interviewed some of those that did not respond to our survey and found that their views did not differ substantially from the views of those that responded to our survey. We surveyed employers between June and October 2004. We report on their use of one-stop services during the 12 months prior to the period when we surveyed them. For more details about our survey methods and the limitations to the survey, see appendix II. their collection of information on services to employers. We received responses from all 50 states and 463 of the 568 local workforce investment areas (81.5 percent). employment growth rates: Florida, Michigan, Oklahoma, and Wyoming. In each state, we visited urban and rural areas and interviewed workforce officials and employers of various size that had either used or not used their local one-stops. We interviewed Labor officials about their efforts to support employer awareness and use of the workforce system and reviewed related documentation. We interviewed representatives from employer associations, such as the U.S. Chamber of Commerce and others. awareness and use increases with employer size. Of all employers aware of the one-stops, about one-quarter of small employers are likely to use one-stop services, while approximately one-half of medium and three-quarters of large employers are likely to do so. About three-quarters of employers that used one-stops said that they are satisfied with the services they received, and 83 percent would consider using them again in the future. Labor has taken steps to support employer awareness and use of the system. However, it lacks data on employer usage. Because Labor collects little information on employers' use of the one-stops, the extent to which these services help employers is unknown. errors for estimates presented on this page do not exceed 6 percentage points. (in percentages) one-stop system. Labor requires states to collect information on overall employer satisfaction with one-stop services, but not on employer use of one- stop services. Many local areas collect information on employer use of one-stop services, but most states do not track this type of information. Labor requires states to report on employer satisfaction with one-stop services, but not on their use of these services. The general employer satisfaction measure has limited usefulness as a management tool because it lacks detailed information about employers and the services they use. Labor has proposed a new data collection and reporting system, called the ETA Management Information and Longitudinal Evaluation (EMILE), which would, among other things, provide more detailed information about employers' use of one-stop services. Implementation of the EMILE system has been delayed as Labor responds to public comments on its proposal. At least half of all local areas track some information on employers, such as the number of employers that use one-stop services, the number that hire one-stop jobseekers, and the types of one-stop services they use. Currently, about one-third of states require local workforce areas to report on the number of employers that use their services, while 11 states track the type of services that employers use. Number of employers that use one-stop services Number of employers that hire one-stop job seekers Type of one-stop services that employers use Number of employers that repeatedly use one-stop services Characteristics of employers (size, industry sector, etc.) programs to help workers find jobs, and to help employers find the workers they need. We found that about half of all employers are aware of their local one-stops, and large and medium-sized employers are more likely than small employers to use one-stop services. The vast majority of employers that use the one-stops report satisfaction with the services they receive, and the most common reasons employers aware of one-stops do not use them is because they use other resources to hire workers or do not know enough about one-stop services. Although most local areas collect information on employer use of the one-stop system to manage their resources, this information is not reported to Labor. Without this information on employer use of the one-stop system, Labor cannot identify whether or not state and local programs are responding to the needs of employers and what types of services best meet employers' workforce needs. As a result, Labor does not have the information necessary to identify areas where additional employer assistance may be needed or to design a strategy for effectively targeting limited workforce funds. To ensure that Labor has a better understanding of the degree to which the publicly funded workforce system meets employers' needs, we recommend that the Secretary of Labor require states to collect and report on employer use of the workforce system in addition to continuing to collect general employer satisfaction information. We examined (1) the extent to which employers, including small businesses, are aware of and using the one-stop system; (2) the degree to which employers who use one-stop services report satisfaction and what factors cause employers not to use them; and (3) what Labor has done to support employer awareness and use of the workforce system and how Labor measures its success in meeting the needs of employers. To address these questions, we surveyed a nationally representative sample of private sector employers, surveyed states and local areas, interviewed officials from the Department of Labor and employer associations, reviewed relevant studies, and visited four states and two local areas within each state. To determine the extent to which employers are aware of and using the workforce system and their satisfaction with the one-stop services they received, we surveyed a nationally representative sample of employers. We developed a questionnaire and contracted with Opinion Research Corporation, a national public opinion research firm, to conduct a telephone survey of a stratified random sample of all sizes of private sector business establishments in the United States. We divided these business establishments into groups depending on their number of employees (small: 2-49 employees, medium: 50-499 employees, and large: 500 or more employees). Before calling began, an independent reviewer within GAO reviewed the questionnaire, and we pretested the survey with two businesses. Opinion Research Corporation attempted to contact 3,232 business establishments between July and October 2004 and completed 1,356 interviews. The overall response rate to the survey was 54 percent after taking into account out-of-scope cases and cases whose eligibility could not be determined. The response rate for each employer size category is as follows: small and unknowns, 50 percent; medium, 53 percent; and large, 60 percent. Response rates were calculated using the American Association for Public Opinion Research (AAPOR) response rate three method of calculation. Although we do not know the views of all the remaining business establishments that did not respond to our survey, we did some limited interviewing and found that their views did not differ substantially from the views of those that responded to our survey. We attempted to contact 183 of these nonrespondents and completed a short interview with 27 of them. We purchased the sample from infoUSA, a national provider of business addresses and phone numbers. InfoUSA's database contained approximately 11.3 million relevant business establishments. We conducted routine steps, such as document review and interviews with officials, to examine the reliability of the infoUSA data for our purposes. To provide us with the sample, infoUSA conducted a stratified random sample selection process that we specified. InfoUSA completed this process in two phases. This process allowed for a sample of all sizes of private sector business establishments in the United States. We forwarded contact information for 3,232 of these sampled business establishments to Opinion Research Corporation for the survey. (See table 2.) We chose to survey business establishments (as opposed to corporate headquarters) because personnel at the establishments are more likely than headquarters staff to be responsible for their business' local hiring and training practices, such as use of one-stops. We used the Bureau of Labor Statistics (BLS) definition of business establishment: the physical location of a certain economic activity, for example, a factory, mine, store, or office. To qualify for inclusion in our sample, the establishment must have had at least two or more employees and must also have been engaged in a commercial enterprise. Using four-digit Standard Industrial Classification (SIC) code designations, we excluded religious, governmental, and academic institutions from the sample because they are not primarily engaged in commercial enterprise. We noted that religious organizations that have a primary business as a nonprofit enterprise (such as a social service provider) would be identified as such on the basis of the SIC code associated with the listing. We noted that the schools and universities were classified as public sector for some of Labor's BLS employment reports and decided to use this approach for our employer sample. We excluded single-employee businesses, assuming they have not hired additional employees. In addition to survey nonresponse, the practical difficulties of conducting any survey may introduce other types of errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted, the sources of information available to respondents in answering a question, or the types of people who do not respond can introduce unwanted bias into the survey results. We included steps in the development of the survey, the collection of data, and the editing and analysis of data for the purpose of minimizing such nonsampling error. For example, in cases where an employer gave an answer other than the choices provided, we reviewed, verified, and then categorized each answer. Another type of nonsampling error that exists in this survey is coverage error. The infoUSA listing was used as a proxy listing for private sector business establishments. We are aware that coverage error exists in this database but we cannot quantify the amount of this error. To determine what information states and local areas collect on services to employers, we surveyed all 50 states and all 568 local workforce investment areas. We conducted both surveys using the Internet. We received responses from all 50 states and 463 local areas (81.5 percent). Because these were not sample surveys, there are no sampling errors. However, the practical difficulties of conducting any survey may introduce nonsampling errors. We took steps in the development of the questionnaires, the data collection, and data analysis to minimize these nonsampling errors. For example, we pretested the questionnaires to ensure that questions were clear and understandable. In that these were Web-based surveys whereby respondents entered their responses directly into our database, there was little possibility of data entry error. In addition, we verified that the computer programs used to analyze the data were written correctly. We selected four states--Florida, Michigan, Oklahoma, and Wyoming-- and traveled to at least two local areas in each of these states. We selected these states based on their geographic dispersion and the diversity of their employment growth rates. We chose two states that had relatively high employment growth rates (Florida and Wyoming) and two states that had relatively high employment loss rates (Oklahoma and Michigan). In each state we visited two local areas, one urban and one rural, and interviewed workforce officials and local employers. We interviewed local employers of various sizes based on their number of employees: small (2-49), medium (50-499), and large (500 or more). See table 3 for a list of the states and local areas in our study. Information that we gathered on our site visits represents only the conditions present in the local areas at the time of our site visits, from May 2004 through August 2004. Furthermore, our fieldwork focused on in- depth analysis of only a few selected states and local areas or sites. On the basis of our site visit information, we cannot generalize our findings beyond the local areas we visited. Appendix III: Additional Employer Survey Data Obtain information on employee supports (e.g., child care or transportation) Obtain financial information (e.g., loans, grants, or tax benefits) Susan Pachikara and Paul Schearf made significant contributions to this report in all aspects of the work, and Chris Moriarity and Walter Vance provided methodological assistance throughout the assignment. In addition, Stefanie Bzdusek, Cathy Hurley, and Art James contributed to the administration of our employer survey, and Nitin Rao and Blake Walters assisted in the data collection and analysis phase of this assignment. Jessica Botsford and Richard Burkard provided legal support. Workforce Investment Act: Labor Has Taken Several Actions to Facilitate Access to One-Stops for Persons with Disabilities, but These Efforts May Not Be Sufficient. GAO-05-54. Washington, D.C.: December 14, 2004 Public Community Colleges and Technical Schools: Most Schools Use Both Credit and Noncredit Programs for Workforce Development. GAO-05-4. Washington, D.C.: October 18, 2004 Workforce Investment Act: States and Local Areas Have Developed Strategies to Assess Performance, but Labor Could Do More to Help. GAO-04-657. Washington, D.C.: June 1, 2004. Workforce Investment Act: One-Stop Centers Implemented Strategies to Strengthen Services and Partnerships, but More Research and Information Sharing Is Needed. GAO-03-725 and related testimony GAO-03-884T. Washington, D.C.: June 18, 2003. Workforce Training: Employed Worker Programs Focus on Business Needs, but Revised Performance Measures Could Improve Access for Some Workers. GAO-03-353. Washington, D.C.: February 14, 2003. Older Workers: Employment Assistance Focuses on Subsidized Jobs and Job Search, but Revised Performance Measures Could Improve Access to Other Services. GAO-03-350. Washington, D.C.: January 24, 2003. Workforce Investment Act: States and Localities Increasingly Coordinate Services for TANF Clients, but Better Information Needed on Effective Approaches. GAO-02-696. Washington, D.C.: July 3, 2002 Workforce Investment Act: Improvements Needed in Performance Measures to Provide a More Accurate Picture of WIA's Effectiveness. GAO-02-275. Washington, D.C.: February 1, 2002. Workforce Investment Act: Better Guidance Needed to Address Concerns over New Requirements. GAO-02-72 and related testimony GAO-02-94T. Washington, D.C.: October 4, 2001.
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The economy of the United States is fueled by 8 million private sector businesses that employ 106 million of the nation's 137 million workers. Employers are seeking better ways to meet their workforce needs as they compete in the global economy. This report examines (1) the extent to which employers, including small businesses, are aware of and using the one-stop system; (2) the degree to which employers who use one-stop services report satisfaction and what factors cause employers not to use them; and (3) what Labor has done to support employer awareness and use of the workforce system and how Labor measures its success in meeting the needs of employers. While about half of all employers are aware of their local one-stops, awareness increases with employer size, with about half of small, two-thirds of medium, and three-quarters of large employers knowing about their local one-stops. Similarly, of all employers aware of the one-stops, about three-quarters of large employers are likely to use one-stop services, while approximately one-half of medium and one-quarter of small employers are likely to do so. Employers of all sizes primarily use one-stop services to help fill job vacancies. Overall, about three-quarters of employers who use one-stop services are satisfied with the services they receive. These employers are most satisfied with one-stop efforts to provide timely services and respond to their needs. In addition, most employers who have used one-stop services would likely use them again, and about one-third of employers who are aware of one-stop services, but have not used them, would consider using them in the future. Among employers who are aware of one-stop services, very few decline to use them because of concerns about the quality of services. Instead, many of these employers choose not to use one-stops because they rely on other resources to hire and train workers or do not have enough information about the services one-stops offer. Labor has initiatives to support employer awareness and use of the one-stop system but does not know the extent to which employers use the system. Labor has developed partnerships with businesses and industry to provide employers easier access to the resources of the one-stop system. To measure how the one-stop system is meeting the needs of employers, Labor requires states to collect information on employer satisfaction with the one-stop system, but not on employer use of the system. Labor's employer satisfaction measure provides a high-level indicator of whether employers are satisfied with the one-stop services they receive; it does not, however, provide enough information on the services employers use to help Labor manage its resources.
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Fiscal year 2011 marked the eighth year of implementation of the Improper Payments Information Act of 2002 (IPIA), as well as the first year of implementation for the Improper Payments Elimination and Recovery Act of 2010 (IPERA). IPIA requires executive branch agencies to annually review all programs and activities to identify those that are susceptible to significant improper payments, estimate the annual amount of improper payments for such programs and activities, and report these estimates along with actions taken to reduce improper payments for programs with estimates that exceed $10 million. IPERA, enacted July 22, 2010, amended IPIA by expanding on the previous requirements for identifying, estimating, and reporting on programs and activities susceptible to significant improper payments and expanding requirements for recovering overpayments across a broad range of federal programs. IPERA included a new, broader requirement for agencies to conduct recovery audits, where cost effective, for each program and activity with at least $1 million in annual program outlays. This IPERA provision significantly lowers the threshold for required recovery audits from $500 millionall programs and activities. Another IPERA provision calls for federal agencies' inspectors general to annually determine whether their respective agencies are in compliance with key IPERA requirements and to report on their determinations. Under Office of Management and Budget (OMB) implementing guidance, federal agencies are required to complete these reports within 120 days of the publication of their annual PARs or AFRs, with the fiscal year 2011 reports for most agencies due on March 15, 2012. to $1 million and expands the scope for recovery audits to OMB continues to play a key role in the oversight of the governmentwide improper payments issue. OMB has established guidance for federal agencies on reporting, reducing, and recovering improper paymentshas established various work groups responsible for developing recommendations aimed at improving federal financial management activities related to reducing improper payments. Each year, hundreds of thousands of our nation's most vulnerable children are removed from their homes and placed in foster care, often because of abuse or neglect. While states are primarily responsible for providing safe and stable out-of-home care for these children until they are returned safely home, placed with adoptive families, or placed in other arrangements, Title IV-E of the Social Security Act provides states some ACF under HHS is responsible for federal financial support in this area.administering this program and overseeing Title IV-E funds. HHS's reported fiscal year 2010 outlays to states for their Foster Care programs under Title IV-E totaled more than $4.5 billion, serving over 408,000 children, as of September 30, 2010, the most recent data available at the time of our study. Past work by the HHS Office of Inspector General (OIG), GAO, and others have identified numerous deficiencies in state claims associated with the Title IV-E Foster Care program. In particular, the HHS OIG found hundreds of millions of dollars in unallowable claims associated with Title IV-E funding. A 2006 GAO report also found variations in costs states claimed under the Title IV-E program and recommended a number of actions HHS should take to better safeguard federal resources. In addition, annual state-level audits have identified weaknesses in states' use of federal funds, such as spending on unallowed activities or costs and inadequate state monitoring of federal funding. As required under IPIA, as amended, HHS has identified the Foster Care program as susceptible to significant improper payments, and has reported annually on estimated improper payment amounts for the program since 2005. For fiscal year 2010, HHS reported estimated improper payments for Foster Care of about $73 million. The reported estimate slightly decreased to about $72 million for fiscal year 2011. Federal agencies reported improper payment estimates totaling $115.3 billion in fiscal year 2011, a decrease of $5.3 billion from the revised prior year reported estimate of $120.6 billion. Based on the agencies' estimates, OMB estimated that improper payments comprised about 4.7 percent of the $2.5 trillion in fiscal year 2011 total spending for the agencies' related programs (i.e., a 4.7 percent error rate). The decrease in the fiscal year 2011 estimate--when compared to fiscal year 2010--is attributed primarily to decreases in program outlays for the Department of Labor's (Labor) Unemployment Insurance program, and decreases in reported error rates for fiscal year 2011 for the Department of the Treasury's (Treasury) Earned Income Tax Credit program, and HHS's Medicare Advantage program. According to OMB, the $115.3 billion in estimated federal improper payments reported for fiscal year 2011 was attributable to 79 programs spread among 17 agencies. Ten of these 79 programs account for most of the $115.3 billion of reported improper payments. Specifically, these 10 programs accounted for about $107 billion or 93 percent of the total estimated improper payments agencies reported for fiscal year 2011. Table 1 shows the reported improper payment estimates and the reported primary cause(s) for the estimated improper payments for these 10 programs. While the programs identified in the table above represented the largest dollar amounts of improper payments, 4 of these programs also had some of the highest program improper payment error rates.table 2, the 10 programs with the highest error rates accounted for $45 billion, or 39 percent of the total estimated improper payments, and had rates ranging from 11.0 percent to 28.4 percent for fiscal year 2011. Despite reported progress in reducing estimated improper payment amounts and error rates for some programs and activities during fiscal year 2011, the federal government continues to face challenges in determining the full extent of improper payments. Specifically, some agencies have not yet reported estimates for all risk-susceptible programs, and some agencies' estimating methodologies need to be refined. Until federal agencies are able to implement effective processes to completely and accurately identify the full extent of improper payments and implement appropriate corrective actions to effectively reduce improper payments, the federal government will not have reasonable assurance that the use of taxpayer funds is adequately safeguarded. In this regard, at the request of this Subcommittee, we recently completed our review of the improper payment estimation methodology used by HHS's Foster Care program. As discussed in our report released today, we found that the Foster Care program's improper payment estimation methodology was deficient in all three key areas--planning, selection, and evaluation--and consequently did not result in a reasonably accurate estimate of the extent of Foster Care improper payments. Further, the validity of the reporting of reduced Foster Care program error rates was questionable, and we found that several weaknesses impaired ACF's ability to assess the effectiveness of corrective actions to reduce improper payments. We found that not all agencies have developed improper payment estimates for all of the programs and activities they identified as susceptible to significant improper payments. Specifically, three federal entities did not report fiscal year 2011 estimated improper payment amounts for four risk-susceptible programs. In one example, HHS's fiscal year 2011 reporting cited statutory limitations for its state- administered Temporary Assistance for Needy Families (TANF) program, that prohibited it from requiring states to participate in developing an improper payment estimate for the TANF program. Despite these limitations, HHS officials stated that they will continue to work with states and explore options to allow for future estimates for the program. For fiscal year 2011, the TANF program reported outlays of about $17 billion. For another program, HHS cited the Children's Health Insurance Program Reauthorization Act of 2009 as prohibiting HHS from calculating or publishing any national or state-specific payment error rates for the Children's Health Insurance Program (CHIP) until 6 months after the new payment error rate measurement rule became effective on September 10, 2010. According to its fiscal year 2011 agency financial report, HHS plans to report estimated improper payment amounts for CHIP in fiscal year 2012. For fiscal year 2011, HHS reported federal outlays of about $9 billion for CHIP. As previously mentioned, OMB excluded estimated improper payment amounts for two DOD programs from the governmentwide total because those programs were still developing their estimating methodologies-- Defense Finance and Accounting Service (DFAS) Commercial Pay, with fiscal year 2011 outlays of $368.5 billion, and U.S. Army Corps of Engineers Commercial Pay, with fiscal year 2011 outlays of $30.5 billion. In DOD's fiscal year 2011 agency financial report, DOD reported that improper payment estimates for these programs were based on improper payments detected through various pre-payment and post-payment review processes rather than using methodologies similar to those used for DOD's other programs, including statistically valid random sampling or reviewing 100 percent of payments. GAO, DOD Financial Management: Weaknesses in Controls over the Use of Public Funds and Related Improper Payments, GAO-11-950T (Washington, D.C.: Sept. 22, 2011), and Improper Payments: Significant Improvements Needed in DOD's Efforts to Address Improper Payment and Recovery Auditing Requirements, GAO-09-442 (Washington, D.C.: July 29, 2009). improper payments.statistically valid estimating process for its commercial payments and addresses the known control deficiencies in its commercial payment processes, the governmentwide improper payment estimates will continue to be incomplete. We are currently working on an engagement related to improper payment reporting at DOD. Until DOD fully and effectively implements a For fiscal year 2011, two agency auditors reported on compliance issues with IPIA and IPERA as part of their 2011 financial statement audits. Specifically, the Department of Agriculture (USDA) auditors identified noncompliance with the requirements of IPERA regarding the design of program internal controls related to improper payments. In the other noncompliance issue, while for fiscal year 2011 HHS estimated an annual amount of improper payments for some of its risk-susceptible programs, a key requirement of IPIA, it did not report an improper payment estimate for its TANF program and CHIP. Fiscal year 2011 marked the eighth consecutive year that auditors for HHS reported noncompliance issues with IPIA. We recognize that measuring improper payments for federal programs and designing and implementing actions to reduce or eliminate them are not simple tasks, particularly for grant programs that rely on administration efforts at the state level. The estimation methodologies for these types of programs may vary considerably because of differences in program designs across the states. For example, as I will discuss in more detail later in this statement, the Foster Care program leveraged an existing process to estimate improper payments that included a review of a child's eligibility for Title IV-E federal funding as claimed by the states administering the program. In another example, the improper payment estimate for HHS's Medicaid program is based on the results of three different reviews--eligibility, fee-for-service, and managed care--of claims payments made by states to health care providers. The fee-for- service and managed care reviews both include a data processing review to validate that claims were processed correctly. The fee-for-service review also includes a medical necessity determination. The eligibility review identifies payments made for services to beneficiaries that were improperly paid because of erroneous eligibility decisions. We are currently working on an engagement related to improper payment reporting for the Medicaid program. Because of these state differences and complexities within programs, as we previously reported, communication, coordination, and cooperation among federal agencies and the states will be critical to effectively estimate national improper payment rates and meet IPIA reporting requirements for state- administered programs. The results of our recently completed study of the improper payment estimation methodology used by HHS's Foster Care program serve to provide a more detailed perspective on the challenges one federal agency faced in attempting to develop a complete and accurate nationwide estimate for a program largely administered at the state level. Further, this case study provides an example of the types of problems that may exist but go undetected because of the lack of independent assessments of the reported information. As we previously testified before this Subcommittee,auditors provide a valuable independent validation of agencies' efforts to report reliable information under IPIA. Independent assessments can also enhance an agency's ability to identify sound performance measures, monitor progress against those measures, and help establish performance and results expectations. Without this type of validation or other types of reviews performed by GAO or agency OIGs, it is difficult to reliably determine the full magnitude of deficiencies that may exist governmentwide in agencies' IPIA implementation efforts. For example, our case study of the Foster Care program found that although ACF had established a process to calculate a national improper payment estimate, the estimate was not based on a statistically valid methodology and consequently did not reflect a reasonably accurate estimate of the extent of Foster Care improper payments. Further, without accurate data, the separate assessments conducted by agency validity of the Foster Care program's reported reductions in improper payments was questionable, and ACF's ability to reliably assess the effectiveness of its corrective actions was impaired. For programs administered at the state level such as Foster Care, OMB guidance provides that statistically valid annual estimates of improper payments may be based on either data for all states or on statistical data from a sample to generate a national dollar estimate and improper payment rate. In this case, ACF took its existing Title IV-E Foster Care program eligibility review process, already in place under the Social Security Act, and also used it for IPIA estimation. ACF provides a national estimated error rate based on a rolling average of error rates identified in states examined on a 3-year cycle. As a result, ACF's IPIA reporting for each year is based on new data for about one-third of the states and previous years' data for the remaining two-thirds of the states. To calculate a national estimate of improper payments, ACF uses error rates that span a 3-year period of Title IV-E eligibility reviews in the 50 states, the District of Columbia, and Puerto Rico. ACF applies the percentage dollar error rate from the sample to the total payments for the period under review for each state. ACF's methodology for estimating Foster Care improper payments was approved by OMB in 2004 with the understanding that continuing efforts would be taken to improve the accuracy of ACF's estimates of improper payments in the ensuing years. ACF, however, has since continued to generally follow its initial 2004 methodology. When compared to federal statistical guidance and internal control standards, we found it to be deficient in all three phases of its fiscal year 2010 estimation methodology--planning, selection, and evaluation--as summarized in table 3. These deficiencies impaired the accuracy and completeness of the Foster Care program improper payment estimate of $73 million reported for fiscal year 2010. Planning. ACF's annual IPIA reporting for the Foster Care program did not include about two-thirds of program expenditures, as shown in figure 1. Specifically, the estimate included improper payments for only one type of program payment activity--maintenance payments--which, for fiscal year 2010, represented 34 percent of the total federal share of expenditures for the Foster Care program. Administrative and other payments, such as those related to the operation and development of the Statewide Automated Child Welfare Information System (SACWIS), were not considered in ACF's IPIA estimation process and thus were not included in the Foster Care program improper payment estimate. OMB's December 2004 approval of ACF's proposed methodology included an expectation that ACF would develop a plan and timetable to test administrative expenses by April 2005. ACF has conducted various pilots in this area since 2007 with the goal of ensuring that improper payment data for administrative costs are sufficiently reliable and valid without imposing undue burden on states. Although ACF expects to estimate for administrative improper payments and recognizes the importance of doing so, it has not yet taken action to augment its existing methodology. Selection. The population of data from which ACF selected its sample-- the Adoption and Foster Care Analysis and Reporting System (AFCARS)--were not reliable because ACF's sampling methodology did not provide for up-front data quality control procedures to (1) ensure that the population of cases was complete prior to its sample selection and (2) identify inaccuracies in the data field used for sample selection. Specifically, ACF had to replace a high percentage of cases sampled from the database of Foster Care cases for the fiscal year 2010 reporting period because of inaccurate information in AFCARS. Of the original 4,570 sample cases ACF selected for testing in its primary and secondary reviews for fiscal year 2010, 298 cases (almost 7 percent) had to be replaced with substitutes because the selected cases had not received Title IV-E Foster Care maintenance payments during the period under review. Of the 298 over-sampled cases used to replace the cases initially selected, 63 cases (more than 21 percent) then had to be replaced again because those cases had also not received Title IV-E Foster Care maintenance payments during the period under review. Further, although we were able to determine how many sampled (or over-sampled) cases had to be replaced because available records showed no Title IV-E payment was received during the reporting period, neither GAO nor ACF were able to determine the extent to which the opposite occurred--cases that had received a payment (and therefore should have been included in the sample population) had not been coded as receiving Title IV-E payments. Without developing a statistically valid sampling methodology that incorporates up-front data quality controls to ensure complete and accurate information on the population, including payment data, ACF cannot provide assurance that its reported improper payment estimate accurately and completely represents the extent of improper maintenance payments in the Foster Care program. Evaluation. Although ACF's methodology identified some errors related to underpayments and duplicate or excessive payments, it did not include procedures to reliably determine the full extent of such errors. In its fiscal year 2010 agency financial report, ACF reported that underpayments and duplicate or excessive payments represented 19 percent and 6 percent, respectively, or 25 percent of the errors that caused improper payments. However, the extent of underpayments and duplicate or excessive payment errors identified varied widely by state, and in some instances were not identified at all. For example, ACF did not identify underpayments in 31 of 51 state eligibility reviews and did not identify duplicate or excessive payments in 36 of 51 state eligibility reviews.did not assess the validity of the reported data. However, the absence of such errors for some states seems inconsistent with the general distribution of errors reported elsewhere. Further, the lack of detailed We procedures for identifying any such payment errors may have contributed to the variation or to whether the teams found any errors. The purpose of the eligibility reviews is to validate the accuracy of a state's claim for reimbursement of payments made on behalf of eligible children or the accuracy of federal financial assistance provided to states. Without detailed procedures to guide review teams in the identification of underpayments and duplicate or excessive payments, ACF cannot provide assurance that it has identified the full extent of any such errors in its Foster Care program. The weaknesses we identified in ACF's methodology to estimate improper payments in the Foster Care program also impaired its ability to reliably assess the extent to which its corrective actions reduced Foster Care program improper payments. For example, although ACF has reported significantly reduced estimated improper maintenance payments, from a baseline error rate of 10.33 percent for 2004 to a 4.9 percent error rate for 2010, the validity of ACF's reporting of reduced improper payment error rates is questionable because the previously discussed weaknesses in its estimation methodology impaired the accuracy and completeness of the reported estimate and error rate. In addition, we found that ACF's ability to reliably assess the extent to which its corrective actions reduced improper payments was impaired by weaknesses in its requirements for state-level corrective actions. For example, ACF used the number of cases found in error rather than the dollar amount of improper payments identified to determine whether a state was required to implement corrective actions. ACF required states to implement corrective actions through a program improvement plan, if during the Title IV-E primary eligibility review, a state was found to have an error rate exceeding 5 percent of the number of cases reviewed. We identified six states that were found substantially compliant in their primary eligibility reviews as their case error rates were below the established 5 percent threshold. However, the dollar-based improper payment rates for those six states ranged from 5.1 percent to 19.8 percent--based on the percentage of improper payment dollars found in the sample. Because dollar-based improper payment rates are not used in applying the corrective action strategy, ACF's method cannot effectively measure states' progress over time in reducing improper payments. It also cannot effectively help determine whether further action is needed to minimize future improper payments. This limits the extent to which states are held accountable for the reduction of improper payments in the Foster Care program. Our report released today includes seven recommendations to help improve ACF's methodology for estimating improper payments for the Foster Care program and its corrective action process. In commenting on our draft report, HHS agreed that its improper payment estimation efforts can and should be improved, generally concurred with four of our recommendations, and agreed to continue to study the remaining three recommendations. We reaffirm the need for all seven recommendations. A number of actions are under way across the federal government to help advance improper payment reduction goals. Completing these initiatives, as well as designing and implementing enhanced strategies in the future, will be needed to effectively reduce the federal government's improper payments. Identifying and analyzing the root causes of improper payments is key to developing effective corrective actions and implementing the controls needed to reduce and prevent improper payments. In this regard, implementing strong preventive controls are particularly important as these controls can serve as the front-line defense against improper payments. Proactively preventing improper payments increases public confidence in the administration of benefit programs and avoids the difficulties associated with the "pay and chase"aspects of recovering improper payments. For example, addressing program design issues that are a factor in causing improper payments may be an effective preventive strategy. Effective monitoring and reporting will also be important to help detect any emerging improper payment issues. In addition, agencies' actions to enhance detective controls to identify and recover overpayments could help increase the attention to preventing, identifying, and recovering improper payments. For instance, agency strategies to enhance incentives for grantees, such as state and local governments, will be important. Agencies cited a number of causes for the estimated $115.3 billion in reported improper payments, including insufficient documentation; incorrect computations; changes in program requirements; and, in some cases, fraud. Beginning in fiscal year 2011, according to OMB's guidance, agencies were required to classify the root causes of estimated improper payments into three general categories for reporting purposes: (1) documentation and administrative errors, (2) authentication and medical necessity errors, and (3) verification errors.information on the root causes of the current improper payment estimates is necessary for agencies to target effective corrective actions and implement preventive measures. While agencies generally reported some description of the causes of improper payments for their respective programs in their fiscal year 2011 reports, many agencies did not use the three categories prescribed by OMB to classify the types of errors and quantify how many errors can be attributed to that category. Of the 79 programs with improper payment estimates in fiscal year 2011, we found that agencies reported the root cause information using the required categories for 42 programs in their fiscal year 2011 PARs and AFRs. Together, these programs represented about $46 billion, or 40 percent of the total reported $115.3 billion in improper payment estimates for fiscal year 2011. Of the $46 billion, the estimated improper payments amounts were spread across the three categories, with documentation and administrative errors being cited most often. We could not calculate the dollar amounts associated with each category because the narratives included in some of the agencies' reporting of identified causes were not sufficiently detailed or documented. Thorough and properly documented analysis regarding the root causes is critical if federal agencies are to effectively identify and implement corrective and preventive actions across their various programs. Many agencies and programs are in the process of implementing preventive controls to avoid improper payments, including overpayments and underpayments. Preventive controls may involve a variety of activities, such as up-front validation of eligibility, predictive analytic tests, training programs, and timely resolution of audit findings, as described below. Further, addressing program design deficiencies that have caused improper payments may be considered as part of an effective preventive strategy. Up-front eligibility validation through data sharing. Data sharing allows entities that make payments--to contractors, vendors, participants in benefit programs, and others--to compare information from different sources to help ensure that payments are appropriate. When effectively implemented, data sharing can be particularly useful in confirming initial or continuing eligibility of participants in benefit programs and in identifying any improper payments that have already been made. Also, in June 2010, the President issued a presidential memorandum, titled Enhancing Payment Accuracy Through a "Do Not Pay List", to help prevent improper payments to ineligible recipients. This memorandum also directs agencies to review prepayment and reward procedures and ensure that a thorough review of available databases with relevant information on eligibility occurs before the release of any federal funds. Analyses and reporting on the extent to which agencies are participating in data sharing activities, and additional data sharing efforts that agencies are currently pursuing or would like to pursue, are other important elements that merit consideration as part of future strategies to advance the federal government's efforts to reduce improper payments. For example, Labor reported that its Unemployment Insurance program utilizes HHS's National Directory of New Hires database to improve the ability to detect overpayments caused by individuals who claim benefits after returning to work--the largest single cause of overpayments reported in the program. In June 2011, Labor established the mandatory use of the database for state benefit payment control no later than December 2011. Labor also recommended operating procedures for cross-matching activity for national and state directories of new hires. GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C: November 1999). identifying opportunities for streamlining or changing the eligibility or other program control requirements. Although strong preventive controls remain the frontline defense against improper payments, agencies' improper payment reduction strategies could also consider actions to establish additional effective detection techniques to quickly identify and recover those improper payments that do occur. Detection activities play a significant role not only in identifying improper payments, but also in providing data on why these payments were made and, in turn, highlighting areas that could benefit from strengthened prevention controls. The following are examples of key detection activities to be considered. Data mining. Data mining is a computer-based control activity that analyzes diverse data for relationships that have not previously been discovered. The central repository of data commonly used to perform data mining is called a data warehouse. Data warehouses store tables of historical and current information that are logically grouped. As a tool in detecting improper payments, data mining of a data warehouse can enable an organization to efficiently identify potential improper payments, such as multiple payments for an individual invoice to an individual recipient on the same date, or to the same address. For example, in the Medicare and Medicaid program, data on claims are stored in geographically disbursed systems and databases that are not readily available to CMS's program integrity analysts. Over the past decade, CMS has been working to consolidate program integrity data and analytical tools for detecting fraud, waste, and abuse. The agency's efforts led to the initiation of the Integrated Data Repository (IDR) program, which is intended to provide CMS and its program integrity contractors with a centralized source that contains Medicaid and Medicare data from the many disparate and dispersed legacy systems and databases. CMS subsequently developed the One Program Integrity (One PI) program,analytical tools by which these data can be accessed and analyzed to a web-based portal and set of help identify any cases of fraudulent, wasteful, and abusive payments based on patterns of paid claims. Recovery auditing. While internal control should be maintained to help prevent improper payments, recovery auditing could be included as a part of agencies' strategy for identifying and recovering contractor overpayments. The Tax Relief and Health Care Act of 2006 required CMS to implement a national Medicare recovery audit contractor (RAC) program by January 1, 2010. HHS reported that the Medicare Fee-for-Service recovery audit program identified $961 million in overpayments and recovered $797 million nationwide. Further, the Medicaid RAC program was established by the Patient Protection and Affordable Care Act. Under this program, each state is to contract with a RAC to identify and recover Medicaid overpayments and identify any underpayments. The final regulations provided that state Medicaid RACs were to be implemented by January 1, 2012. Similar to the Medicare RACs, Medicaid RACs will be paid on a contingency fee basis--a percentage of any recovered overpayments plus incentive payments for the detection of underpayments. Pub. L. No. 109-432, div. B., title III, SS 302, 120 Stat. 2922, 2991-92 (Dec. 20, 2006), codified at 42 U.S.C. SS 1395ddd(h). drafted language to address the issue and is working to publish a notice of proposed rule making to amend its regulation. In another instance, USDA reported that Section 281 of the Department of Agriculture Reorganization Act of 1994 precluded the use of recovery auditing techniques because Section 281 provides that 90 days after the decision of a state, county, or an area committee is final, no action may be taken to recover the amounts found to have been erroneously disbursed as a result of the decision unless the participant had reason to believe that the decision was erroneous. This statute is commonly referred to as the Finality Rule. As part of its annual improper payments reporting, USDA did not cite an alternative approach for implementing a recovery auditing strategy. Federal-state incentives. Another area for further exploration for agencies' improper payment reduction strategies is the broader use of incentives for states to implement effective detective controls. Agencies have applied limited incentives and penalties for encouraging improved state administration to reduce improper payments. Incentives and penalties can be helpful to create management reform and to ensure adherence to performance standards. 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. If you or your staff have any questions about this testimony, 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 testimony. Individuals making key contributions to this testimony included Carla Lewis, Assistant Director; Sophie Brown; Francine DelVecchio; Gabrielle Fagan; and Kerry Porter. Foster Care Program: Improved Processes Needed to Estimate Improper Payments and Evaluate Related Corrective Actions. GAO-12-312. Washington, D.C.: March 7, 2012. Improper Payments: Moving Forward with Governmentwide Reduction Strategies. GAO-12-405T. Washington, D.C.: February 7, 2012. For our report on the U.S. government's consolidated financial statements for fiscal year 2011, see Department of the Treasury. 2011 Financial Report of the United States Government. Washington, D.C.: December 23, 2011, pp. 211-231. Medicaid Program Integrity: Expanded Federal Role Presents Challenges to and Opportunities for Assisting States. GAO-12-288T. Washington, D.C.: December 7, 2011. DOD Financial Management: Weaknesses in Controls over the Use of Public Funds and Related Improper Payments. GAO-11-950T. Washington, D.C.: September 22, 2011. Improper Payments: Reported Medicare Estimates and Key Remediation Strategies. GAO-11-842T. Washington, D.C.: July 28, 2011. Fraud Detection Systems: Centers for Medicare and Medicaid Services Needs to Ensure More Widespread Use. GAO-11-475. Washington, D.C.: June 30, 2011. Improper Payments: Recent Efforts to Address Improper Payments and Remaining Challenges. GAO-11-575T. Washington, D.C.: April 15, 2011. Status of Fiscal Year 2010 Federal Improper Payments Reporting. GAO-11-443R. Washington, D.C.: March 25, 2011. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Improper Payments: Significant Improvements Needed in DOD's Efforts to Address Improper Payment and Recovery Auditing Requirements. GAO-09-442. Washington, D.C.: July 29, 2009. Improper Payments: Progress Made but Challenges Remain in Estimating and Reducing Improper Payments. GAO-09-628T. Washington, D.C.: April 22, 2009. Improper Payments: Status of Agencies' Efforts to Address Improper Payment and Recovery Auditing Requirements. GAO-08-438T. Washington, D.C.: January 31, 2008. Improper Payments: Federal Executive Branch Agencies' Fiscal Year 2007 Improper Payment Estimate Reporting. GAO-08-377R. Washington, D.C.: January 23, 2008. Improper Payments: Weaknesses in USAID's and NASA's Implementation of the Improper Payments Information Act and Recovery Auditing. GAO-08-77. Washington, D.C.: November 9, 2007. Improper Payments: Agencies' Efforts to Address Improper Payment and Recovery Auditing Requirements Continue. GAO-07-635T. Washington, D.C.: March 29, 2007. Improper Payments: Incomplete Reporting under the Improper Payments Information Act Masks the Extent of the Problem. GAO-07-254T. Washington, D.C.: December 5, 2006. Improper Payments: Agencies' Fiscal Year 2005 Reporting under the Improper Payments Information Act Remains Incomplete. GAO-07-92. Washington, D.C.: November 14, 2006. Improper Payments: Federal and State Coordination Needed to Report National Improper Payment Estimates on Federal Programs. GAO-06-347. Washington, D.C.: April 14, 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 decade, GAO has issued numerous reports and testimonies highlighting improper payment issues across the federal government as well as at specific agencies. Fiscal year 2011 marked the eighth year of implementation of the Improper Payments Information Act of 2002 (IPIA), as well as the first year of implementation for the Improper Payments Elimination and Recovery Act of 2010 (IPERA). IPIA requires executive branch agencies to annually identify programs and activities susceptible to significant improper payments, estimate the amount of improper payments for such programs and activities, and report these estimates along with actions taken to reduce them. IPERA amended IPIA and expanded requirements for recovering overpayments across a broad range of federal programs. This testimony addresses (1) federal agencies' reported progress in estimating and reducing improper payments; (2) challenges in meeting current requirements to estimate and evaluate improper payments, including the results of GAO's case study of the estimation methodology and corrective actions for the Foster Care program; and (3) possible strategies that can be taken to move forward in reducing improper payments. This testimony is primarily based on prior GAO reports, including the report released today on improper payment estimates in the Foster Care program. It also includes unaudited improper payment information recently presented in federal entities' fiscal year 2011 performance and accountability reports and agency financial reports. Federal agencies reported an estimated $115.3 billion in improper payments in fiscal year 2011, a decrease of $5.3 billion from the prior year reported estimate of $120.6 billion. According to the Office of Management and Budget (OMB), the $115.3 billion estimate was attributable to 79 programs spread among 17 agencies. Ten programs accounted for about $107 billion or 93 percent of the total estimated improper payments agencies reported. The reported decrease in fiscal year 2011 was primarily related to 3 programs--decreases in program outlays for the Unemployment Insurance program, and decreases in reported error rates for the Earned Income Tax Credit program and the Medicare Advantage program. Further, OMB reported that agencies recaptured $1.25 billion in improper payments to contractors and vendors. The federal government continues to face challenges in determining the full extent of improper payments. Some agencies have not reported estimates for all risk-susceptible programs, while other agencies' estimation methodologies were found to be not statistically valid. For example, GAO's recently completed study of Foster Care improper payments found that the Administration for Children and Families (ACF) had established a process to calculate a national improper payment estimate for the Foster Care program, which totaled about $73 million for fiscal year 2010, the year covered by GAO's review. However, the estimate was not based on a statistically valid methodology and consequently did not provide a reasonably accurate estimate of the extent of Foster Care improper payments. Further, GAO found that ACF could not reliably assess the extent to which corrective actions reduced Foster Care improper payments. A number of strategies are under way across government to help advance improper payment reduction goals. For example, Additional information and analysis on the root causes of improper payment estimates will assist agencies in targeting effective corrective actions and implementing preventive measures. Although agencies were required to report the root causes of improper payments in three categories beginning in fiscal year 2011, of the 79 programs with improper payment estimates that year, 42 programs reported the root cause information using the required categories. Implementing strong preventive controls can help defend against improper payments, increasing public confidence and avoiding the difficult "pay and chase" aspects of recovering improper payments. Preventive controls involve activities such as up-front validation of eligibility using data sharing, predictive analytic technologies, and training programs. Further, addressing program design issues, such as complex eligibility requirements, may also warrant further consideration. Effective detection techniques to quickly identify and recover improper payments are also important to a successful reduction strategy. Detection activities include data mining and recovery auditing. Another area for further exploration is the broader use of incentives to encourage states in efforts to implement effective detective controls. Continuing work to implement and enhance these strategies will be needed to effectively reduce federal government improper payments.
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Through the budget system, the President and Congress determine the allocation of resources among the agencies of the federal government. OMB, as part of the Executive Office of the President, guides the annual budget process, makes decisions on executive agencies' budgets, aggregates submissions for departmental components, and submits the consolidated document for the executive branch as the President's Budget Request to Congress. OMB issues guidance to federal agencies through OMB Circular A-11, which provides instructions for submitting budget data and materials, as well as criteria for developing budget justifications. Within DOJ, the Justice Management Division issues additional annual budget development guidance to DOJ's components, including BOP, usually about 1.5 years before the fiscal year begins for the budget cycle. JMD budget staff (1) collect and analyze all of the components' budget requests, taking into consideration department-wide policy priorities and OMB guidance; (2) coordinate with DOJ policy offices; and (3) secure approval and submit the Attorney General's budget submission to OMB. Key steps in this process are shown in figure 1. When developing its budget justification, BOP estimates costs for budget accounts using three steps, as described below. First, BOP estimates cost increases for maintaining the current level of services for operations as provided in the prior year's enacted budget. These include costs to address mandatory staff pay raises and benefit increases, inmate medical care, and utilities. BOP analyzes historical obligations from the past 5 years to identify average annual operating cost increases. BOP records its obligations in FMIS--one of DOJ's financial accounting and reporting systems. According to BOP officials, FMIS is BOP's primary tool for cost reporting and budget execution. BOP also considers economic indicator information to estimate general inflationary cost increases using data from the Bureau of Labor Statistics' Consumer Price Index, among other sources. Second, BOP projects inmate population changes for the budget year For example, for the fiscal year 2014 and for 9 years into the future. budget justification, BOP projected a net growth in its inmate population of 5,400 (2.4 percent) for fiscal years 2013 and 2014. Third, BOP estimates costs to house the projected number of new inmates, including building and facility requirements. According to BOP, the increasing inmate population is the primary driver of new service costs. BOP also identifies and estimates costs for new initiatives, such as the opening of a new BOP facility, by reviewing the proposals submitted by its divisions and regional offices, as well as historical data on costs for implementing such initiatives. In November 2009, we found that BOP's methods for cost estimation largely reflected best practices outlined in the GAO Cost Estimating and Assessment Guide. We concluded that for fiscal year 2008, BOP followed a well-defined process for developing a mostly comprehensive, well-documented, accurate, and credible cost estimate, and we made recommendations to further improve BOP's process. Specifically, we recommended that BOP (1) analyze the extent to which operations costs could vary because of changes in key cost assumptions and (2) improve documentation of calculations used to estimate its costs. BOP concurred with the recommendations and took appropriate actions to address them as noted above. In November 2009, we also reported on various challenges that BOP faced, including prison crowding levels. For example, we found that from fiscal years 2000 through 2009, BOP's total inmate population level increased by 44 percent--from 145,125 to 209,027. In November 2009, we also reported that BOP estimated its total inmate population would continue to increase by about 4,500 inmates per year over the next decade. In September 2012, we reviewed the growth in BOP's population and found that the 9.5 percent population growth from fiscal years 2006 through 2011 exceeded the 7 percent increase in its inmate capacity, and reported that BOP projects continued population growth. In our work related to budget reviews across the federal government, we have reported that an agency's budget justification may be the single most important policy document because it depicts and reconciles policy objectives, and we have identified the potential to enhance the transparency of agencies' budget justifications by providing additional details and information. the U.S. Department of Veterans Affairs' (VA) health care budget, we concluded that federal agencies' congressional budget justifications should be transparent--that is, they should be clear and easy to understand--in part because Congress relies on this information to make resource allocation decisions and conduct oversight. GAO-10-687R. concluded that in order to facilitate decision making, information needs to be clear and organized in a way that is meaningful to decision makers. We recommended, among other things, that VA further consult with congressional decision makers to determine what detailed information related to its appropriations accounts should be included--and how--in its congressional budget justification. VA concurred with the recommendations and has begun taking actions to address them. BOP's largest account--its S&E account-- is composed mainly of costs associated with Inmate Care and Programs and Institution Security and Administration, both of which have grown steadily since 2008, predominantly because of increases in prison populations, which are the primary cost driver of BOP's budget. The other two PPAs in the S&E account are associated with the care and custody of federal offenders in contract facilities and maintenance and administration. BOP's budget justification for fiscal year 2014 reflected the President's budget request of a total of $6.9 billion, including $6.8 billion for its S&E account. Figure 2 shows that the President's budget request for BOP's S&E account has increased from fiscal years 2008 through 2014. BOP's budget justification includes its proposed use of funds for each account by PPA. BOP's budget for S&E costs consists of four PPAs, and as shown in figure 3, the Inmate Care and Programs PPA, and Institution Security and Administration PPA, and Contract Confinement PPA accounted for about 97 percent of the President's 2014 budget request for BOP's S&E account, according to BOP's budget justification. Below is a description of the four PPAs that compose BOP's S&E account. The Inmate Care and Programs PPA covers the operational costs of functions directly related to providing inmate care, including inmate food, medical care, drug treatment, and psychological services; education and vocational training; institutional and release clothing; welfare service; and transportation. For example, the budget justification for fiscal year 2014 proposes the use of funds to help address increases in chronic medical care for inmates. Additionally, the budget justification for fiscal year 2014 proposes the use of funds to expand evidence-based treatment practices to treat drug offenders and reduce recidivism. The Institution Security and Administration PPA covers costs associated with institution security, administration, maintenance, and staff training. These costs include salaries for correctional officers assigned to every BOP institution and expenses for facility maintenance and utilities. The Contract Confinement PPA covers costs associated with BOP inmates in contract care and costs associated with management and oversight of contract facilities and residential reentry centers as well as the National Institute of Corrections. The Management and Administration PPA covers costs associated with general administration and provides funding for the executive staff as well as headquarters and regional office program managers in the areas of budget development and execution, financial management, procurement and property management, human resource management, inmate systems management, safety, legal counsel, research and evaluation, and systems support. As shown in figure 4, while the amounts reflected for BOP's Management and Administration PPA have remained relatively constant, the Inmate Care and Programs and Institution Security and Administration PPAs, and to a lesser extent the Contract Confinement PPA, have grown steadily since 2008, predominantly because of increases in prison populations which are the primary cost driver of BOP's budget. In addition to the budget justification broken down by PPA dollar amounts, the budget justification provides a summary of increases (i.e., improvements) and decreases (i.e., offsets) to the current year's appropriation.2014, BOP described the $35.1 million net increase (1.2 percent) in the Institution Security and Administration PPA from fiscal year 2013 in terms of three increases and two decreases, as shown in table 1. Further, BOP described the dollar amounts associated with the $1.7 million (0.07 percent) net increase in the Inmate Care and Programs PPA from fiscal year 2013 in terms of five increases and two decreases. We found that BOP is collecting more detailed quantitative cost data on the components that constitute each PPA, which could be useful to congressional decision makers when reviewing BOP's budget justification. In accordance with departmental and OMB guidance, BOP's budget justifications summarize amounts by PPA, so BOP is not required to provide additional funding data below the PPA level in its budget justification. Providing more comprehensive information could help clarify BOP's proposed spending on specific categories and subcategories reflected in its budget justification. For example, BOP's budget justification for fiscal year 2014 included $2.5 billion for the Inmate Care and Programs PPA element and included narrative information for categories such as Medical Services, Food Service, Education and Occupational Training, Psychology Services, and Religious Services, as well as narrative summaries for various subcategories, but did not include proposed funding amounts for these categories. Our analysis shows that this additional information can be useful in identifying trends and cost drivers that may affect future costs, which could be particularly helpful given the 33 percent growth in BOP's budget request from fiscal years 2008 through 2014. Our prior work has identified factors driving BOP's cost increases in specific categories that constitute each PPA. For example, in July 2013, we found that per capita mental health services costs have increased in BOP-operated institutions since fiscal year 2008 and are expected to continue to increase. Further, we found that these increases were generally due to three factors--inmate population increases, general inflationary increases, and increased inmate participation rates in psychology treatment programs. As we reported in July 2013, BOP's expanded inmate participation in its Residential Drug Abuse Program, which helped reduce waiting lists for the program, had increased overall program costs. In addition, the Congressional Research Service (CRS) reported in January 2013 that BOP's expenditures on utilities, food, and medical care have generally increased each fiscal year since 2000, although the per capita increase in the cost of food and utilities has not been as pronounced as the increase in the per capita cost of inmate medical care.diabetes, hypertension, and infectious diseases have a slightly higher rate of incidence in the incarcerated population. Thus, understanding the differences in costs for medical care, food services, and drug programs-- three of the cost components within the Inmate Care PPA--could help congressional decision makers evaluate how these trends may affect future costs. Pub. L. No. 111-117, 123 Stat. 3034 (2009). FMIS to inform their budget development process, the FMIS cost component data fields are not always directly linked to specific narrative categories in the budget justification for BOP because they use their judgment to identify categories that they consider to be of specific interest to congressional decision makers (e.g., dollar amounts, trends, or policy concerns) rather than standardized cost components. For example, BOP includes narrative in the budget justification to describe costs related to categories such as Medical Services and Food Service, among others. As figure 6 shows, there are similarities in the FMIS data fields for which BOP captures detailed cost information and those categories BOP uses to describe its budget justifications. This additional information could provide congressional decision makers with additional insights into factors driving BOP's budget. While BOP does not provide in its budget justifications information on the cost components composing each PPA, BOP officials already capture this information, using data from FMIS, as part of their annual budget development process. We requested specific, quantitative information below the PPA level and BOP provided us with dollar amounts associated with the data fields in FMIS that constitute Inmate Care and Programs, Institution Security and Administration, and Contract Confinement PPAs for fiscal years 2008 through 2014. Using the additional detailed information from DOJ's FMIS provided by BOP budget officials, we were able to identify changes over time in the cost components composing each PPA, which is information congressional decision makers could use when reviewing BOP's budget justification. For example, we analyzed changes in the dollar amounts associated with FMIS cost component data fields that make up the Inmate Care and Programs PPA element over time. The results of our analysis show that BOP's proposed spending for the Inmate Care and Programs PPA has continually increased from fiscal years 2008 through 2013; however, BOP's FMIS data showed variations in the dollar amounts associated with the cost components that constitute the PPA. For example, changes in dollar amounts for medical services have increased by about 50 percent from fiscal years 2008 to 2014, and decreased slightly for the 2 most recent fiscal years--2013 and 2014. According to officials, the changes in dollar amounts reflect changes in the prison population and implementation of policy initiatives intended to lower costs. The results of our analysis are presented in figure 7. The specific dollar amounts by fiscal year for the cost components composing the Inmate Care and Program PPA element are provided in appendix I. In addition, using the additional cost component information, our analysis of BOP's FMIS data fields showed that changes in dollars associated with the budget justification for drug abuse treatment have increased by over 70 percent from fiscal years 2008 to 2014, and from fiscal years 2010 through 2012 increased by more than 15 percent each year--which reflects BOP's efforts to expand its drug treatment services. While trends in the dollar amounts associated with medical care and drug treatment reflect a relatively significant increase from fiscal years 2008 to 2014, changes in the dollar amounts associated with food and religious services remained relatively constant for this same time frame. Our analysis of BOP's FMIS data also showed the proportion of dollars associated with the FMIS data fields that compose each PPA element. For example, we found that for fiscal year 2014, institution security constituted over 50 percent of the funding based on cost components that compose the Institution Security and Administration PPA element. (See fig. 8.) In addition, we found that for this same time frame, medical program composed 40 percent of the funding for the Inmate Care and Programs PPA element, and private prison contracts made up over 60 percent of funding for the Contract Confinement PPA element. (See figs. 9 and 10) For additional details on each of the narrative categories, see appendix II. In an era of scarce federal resources and given BOP's projected growth in inmate population and substantial increased costs in recent years, this additional detail could be helpful to congressional decision makers when reviewing BOP's budget justification and making determinations about where to increase or decrease BOP funding. According to DOJ's Fiscal Years 2012-2016 Strategic Plan, one of the department's guiding principles is to promote transparency, performance, and accountability, including budget transparency. According to the plan, the department and its components will continue to promote budget transparency, performance, and accessibility by coordinating with leadership and regularly reporting accomplishments, among other actions. Further, according to federal financial accounting standards, cost information can be used by Congress in making policy decisions about allocating federal resources among programs, authorizing and modifying programs, evaluating program performance, and making program authorization decisions by assessing costs and benefits. BOP officials stated that they use historical cost information that BOP maintains in DOJ's FMIS for budget execution and monitoring as an input to inform the annual budget development process. Specifically, budget development staff use data from the previous 3-year period for cost components in FMIS and adjust the funding levels based on projected changes in prison population and other factors to help them estimate the total funding needs for the future fiscal year by PPA. BOP officials further stated that they regularly provide additional information upon request on the budget justification to staff from congressional appropriations and congressional authorizing committees. For example, they said that JMD officials provide appropriators with funding information in response to requests for various congressional reports and hearings, as well as written responses to congressional inquiries related to the budget justification. To further clarify their budget justification to Congress and OMB, they said they have taken other steps, such as conducting tours of prison facilities with congressional and OMB stakeholders to demonstrate conditions and the basis for the President's budget request. BOP's efforts to provide information upon request may meet some congressional committee needs; however, the additional information on projected costs would provide more detail on the cost drivers affecting the President's request for BOP and therefore facilitate congressional decision making. BOP officials reported spending a total of 40 staff hours to compile and analyze the quantitative information below the PPA level in order to recreate the historical quantitative information for the prior fiscal years. Thus, given that BOP already captures and has readily available this quantitative information below the PPA level as part of its annual budget development process, providing this more detailed information to congressional decision makers could facilitate congressional decision making by providing a more comprehensive understanding of the factors affecting BOP's budget and driving budget increases below the PPA elements. Consulting with congressional decision makers to determine if it would be helpful to include this information in its annual budget justification would help provide reasonable assurance that BOP is fully meeting congressional stakeholders' needs. According to BOP officials, BOP's biggest challenges are managing the continually increasing federal inmate population while providing for inmates' care and safety, as well as the safety of BOP staff and surrounding communities, within budgeted levels. BOP officials project continuing inmate population growth and estimate increases in funding needs for the foreseeable future. Consultation with congressional decision makers could help BOP identify what additional information, if any, is needed, such as providing more comprehensive detailed information on projected costs using data already gathered by BOP. This could enhance the transparency of BOP's budget justification and the President's budget request and better inform congressional decision making. To enhance the transparency of BOP's cost information as presented in DOJ's annual congressional budget justifications, we recommend that the Attorney General consult with congressional decision makers on providing additional BOP funding detail below the PPA level in future budget justifications, and in conjunction with BOP, provide the data as appropriate. We provided a draft of the report to DOJ for comment. The department did not provide official written comments to include in our report. However, in an e-mail on November 21, the DOJ liaison stated that DOJ concurred with our recommendation. DOJ and BOP also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the selected congressional committees, the Attorney General, and the Director of BOP, and other interested parties. 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 further questions about this report, please contact me at (202) 512-9627 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. BOP officials stated that they maintain funding data for laundry services using the Inmate Services FMIS data field. Narrative summaries Each inmate is tracked through BOP's Sentry Information System. Offenders are assigned a security and custody status, which relates to the degree of supervision needed and ensures that offenders are placed in the least restrictive and least costly correctional environment appropriate to their custody and security-level needs. The result is a grouping of offenders with similar custodial needs in an institution, and a relative reduction in the mixing of aggressive and nonaggressive offenders. Within each institution, correctional officers are assigned to security posts that are primarily established on the basis of structural/visual considerations. The two basic categories of security are external security and internal security. External security consists of a walled or fenced perimeter supplemented by staffed security towers and armed mobile perimeter patrols. There is also razor wire strung between a double fence with high mast lighting to illuminate the perimeter and highly technical equipment such as alarm systems and video surveillance. Entrances through the perimeter are controlled by a series of gates, both electrical and manual, supplemented by metal detection systems and search procedures for weapon and contraband control. BOP has fully incorporated closed circuit television technology in its higher-security facilities, which has enhanced supervision and provides valuable intelligence in the management of federal inmates. For practical purposes, all other security measures, processes, and activities can be called internal security, commencing when an inmate is admitted and terminating upon his or her release. Staff supervise inmates in living units, work areas, visiting areas, dining halls, and any other area where inmates may be located or have access. Regularly scheduled counts are conducted several times a day (five on weekdays, six on weekends) in all institutions to monitor the whereabouts of inmates. Work supervisors and program personnel are held strictly accountable for all inmates under their supervision. Violations of institution regulations are dealt with through the Inmate Disciplinary Process. Correctional staff members conduct investigations of the alleged misconduct and forward the findings to the Unit Discipline Committee. Depending on the seriousness of the charge, the Unit Discipline Committee will make a finding, or refer the report to the Discipline Hearing Officer for disposition. When practical, inmates are afforded the opportunity to participate in, and present evidence at a due process hearing before findings are made. Inmates may appeal these decisions utilizing the administrative remedy process. The Administrative Segregation program provides for the separation of inmates who require closer supervision and monitoring from those in the general population. Such cases include, but are not limited to, protective custody, serious escape risks, threats to the security and orderly running of the institution. The Disciplinary Segregation program provides for segregation of offenders who have been found guilty of violations of rules through the Inmate Disciplinary Process. The Facility Maintenance program is designed to adequately maintain and continue to safely operate the physical plants of BOP institutions. Facilities vary in age from those recently constructed to those 100 or more years old. Thirty-four of the BOP facilities are over 50 years old. As of January 2013, BOP facilities are situated on 46,030 acres of land and contain approximately 63.4 million square feet of floor area, all of which must be maintained and furnished with utility services. Each institution maintains communication systems including complete private automatic branch exchange telephone systems, radio systems including base station and mobile units, and several electronic detection and control systems. Complex heating and air conditioning systems, high-pressure steam power plants, sophisticated hospital equipment, emergency electrical power systems and fire protection, and life safety systems all require regular maintenance. Despite energy-saving initiatives, discussed earlier in the budget, the growing inmate population and inflationary factors have significantly increased utility costs. Narrative summaries Physical plant requirements are identified through regular inspections conducted in the ongoing preventive maintenance program, formal semiannual inspections, and requests for specific needs identified by institution staff members. This program finances maintenance and minor improvement projects that normally cost $10,000 or less. However, there are policy guidelines that allow funding of maintenance projects (work requests) costing more than $10,000 in certain circumstances. Some exceptions would include emergencies or security threats such as hurricanes or disturbances. Maintenance and repair requirements in excess of $10,000 are normally included in the Modernization and Repair program of the Buildings and Facilities budget. The work within the maintenance program is accomplished almost entirely by inmate crews under staff supervision. Each work crew consists of a staff foreman and 10 to 20 inmates. Each institution must have highly skilled staff with experience and training in every phase of construction and maintenance work including steam fitting, air conditioning, mechanics, or electronics repair. A few specific jobs are contracted out because special skills or equipment items are required, or because the work may be extremely dangerous. Examples of these jobs include elevator inspection and repair, radio frequency alignment, and water tower painting. The Staff Training Academy (STA) at the Federal Law Enforcement Training Center (FLETC) in Glynco, Georgia, provides introductory and advanced correctional training for BOP law enforcement staff. The Introduction to Correctional Techniques (ICT) program is a 5-week program for a total of 159 hours of instruction that is taught in two phases. Phase I consists of 2-weeks of training at the institution, and Phase II consists of a 3-week training program at the STA. The STA oversees the curriculum development and administration of the 2-week (56-hour) ICT Phase I course provided at all institutions for new employees prior to attending the ICT Phase II course at the STA. The ICT Phase II is a 3-week (103-hour) program of instruction that covers hostage situations, ethics, interpersonal communication skills, special offenders, diversity, inmate discipline, legal procedures, and so forth. Successful completion of this program (academics, firearms, and the Physical Ability Test) is required for continued employment of newly hired staff entering into law enforcement positions. In fiscal year 2012, 2,279 new employees participated in 60 classes of the ICT program. The STA provided advanced correctional skills training for trainers in disturbance control, firearms, bus operations, self-defense, and side-handle baton in fiscal year 2012. The STA also provides advanced correctional training for Marksman/Observer and Witness Security Escort. The majority of the advanced training programs are conducted at BOP institutions, resulting in substantial cost avoidance in training costs. All BOP institutions operate outpatient ambulatory care clinics. These clinics provide a range of outpatient services to inmates similar to those provided by ambulatory clinics found in most communities, that is, primary health care. The clinics serve as the first level of diagnostic and treatment services to sentenced and presentenced inmates. New institutions are typically given 2 years after activation to obtain accreditation from the Joint Commission. Care Level I institutions are not required to achieve or maintain this accreditation because they predominantly house healthy inmate populations. All Health Services programs and operations are subject to internal review (Program Review) and must maintain accreditation by the American Correctional Association. Each institution is also required to provide data to the Health Services Division (HSD) in the form of outcome measures for a variety of clinical conditions (HIV, hypertension, diabetes, and so forth). These evaluative and accreditation activities provide HSD with valuable data regarding the quality and appropriateness of health care in BOP. The majority of BOP medical staff are civil service clinical and support professionals, and the remaining staff are U.S. Public Health Service (USPHS) Commissions Corps Officers serving in a wide variety of clinical and specialty professions. USPHS provides these clinicians and administrators via an interagency agreement. Narrative summaries BOP provides daily meals with consideration to the Dietary Reference Intakes (DRI) for groups published by the Food and Nutrition Board of the National Academy of Sciences, for identified macro- and micronutrients. Meal preparation is accomplished primarily by inmate workers (about 12 percent of the population) under the supervision of staff. Food preparation and recipe and menu management are maintained by the use of a standardized national menu and a computerized Food Service management software system. United States Penitentiary Lompoc, California, and Federal Correction Institution El Reno, Oklahoma, utilize available land resources in limited production of beef and milk. Farm products are consumed at the producing institutions and are also shipped to nearby institutions to offset their need to purchase some products on the open market. During fiscal year 2014, BOP estimates serving over 206 million meals, which is nearly 566,000 meals per day and over 3.9 million meals per week. Despite cost containment measures, the annual costs have risen because of the growing inmate population and inflationary factors. Inmate education programs include literacy, English as a Second Language (ESL), occupational education, advanced occupational education (AOE), parenting, release preparation courses, and a wide range of adult continuing, wellness, and structured and unstructured leisure time activities. Education programming provides inmates with an opportunity to learn the functional skills that support their reintegration into the community. At the end of fiscal year 2012, 35 percent of the designated inmate population was enrolled in one of more education/recreation program. BOP's Office of Research has found that participation in education programs leads to a 16 percent reduction in recidivism by inmates who participate in these programs. Psychology Services staff are an integral part of correctional treatment, as they administer programs of group and individual psychotherapy, crisis intervention, prosocial skill building, and staff consultation and training. BOP policy requires that every inmate admitted to a BOP facility be given an initial psychological screening, which consists of psychological interviews, social history reviews, and behavioral observation. The purposes of the screening are to identify special treatment or referral needs, provide information useful in future crisis counseling situations, identify strengths as well as potential adjustment problems to imprisonment, and discuss possible program needs with the inmates and provide information about these programs. In addition, BOP psychologists have traditionally provided the courts, parole officials, and prison administrators with comprehensive psychological evaluations of offenders. Inmates with mental health needs are offered a range of services, including crisis counseling, individual and group psychotherapy, clinical case management, psychiatric treatment, and specialized residential treatment programs. Acutely mentally ill inmates may receive these services within BOP's Psychiatric Referral Centers. However, most mental health treatment is provided in regular institutions. In addition to the treatment of mental illnesses, Psychology Services provides specialized drug abuse treatment and sex offender treatment programs. BOP psychologists also offer treatment services designed to develop inmates' life skills, such as anger management, problem solving, social skills training, and stress management. In response to the rapid growth of federal inmates with a diagnosis of a drug disorder (40 percent of inmates entering BOP), BOP continues to develop evidence-based treatment practices to manage and treat drug-using offenders. BOP's strategy includes early identification through a psychology screening, drug education, nonresidential drug abuse treatment, intensive residential drug abuse treatment, and community transition treatment. The Violent Crime Control and Law Enforcement Act (VCCLEA) of 1994 requires BOP, subject to the availability of appropriations, to provide appropriate substance abuse treatment for 100 percent of inmates who have a diagnosis of substance abuse or dependence and who volunteer for treatment. In fiscal year 2012, BOP was able to provide appropriate substance abuse treatment for 100 percent of eligible inmates. Narrative summaries BOP employs full-time chaplains in all institutions to accommodate the constitutional right to the free exercise of religion, manage religious programs, and provide pastoral care to inmates. Chaplains routinely evaluate the needs of inmates in the institution and facilitate programs that address those needs. Religious Services departments offer programs directly related to spiritual development, community reentry, family relationships, personal responsibility, and basic religious instruction. Chaplains provide spiritual programs across the spectrum of faiths represented in the inmate population. Chaplains also train and familiarize staff regarding diverse religious beliefs and practices of inmates while providing guidance for institution compliance with the First Amendment and legal standard established by the Religious Freedom Restoration Act and the Second Chance Act of 2007. The passage of the Second Chance Act of 2007 ushered in the opportunity to utilize mentors in the delivery of pastoral care. Policy is being developed to expand the use of mentors; 23 mentor coordinator positions have been approved at Life Connections and Threshold Program sites. Responsible for the general program and policy development for BOP's network of approximately 250 contract residential reentry centers. Community Corrections and Detention (CCD) also works with community corrections contracting (CCC) to offer technical assistance in the acquisition process for Residential Reentry Centers services. CCD provides technical assistance to BOP's 22 community corrections offices in the areas of contract oversight, case management, inmate systems management, and financial management. Responsibility for BOP's network of contract confinement facilities for federal juvenile offenders and short-term detention facilities also rests with CCD. Responsible for coordinating BOP's efforts in managing a growing population of nearly 29,000 inmates located in contractor-operated secure correctional facilities. Staff from this branch oversee the management and operation of facilities, develop new requirements, establish policy and procedures, develop and manage contract budgets, and serve as liaisons among the contractors and BOP and other members of the federal family. National Institute of Corrections Also included in this decision unit is the National Institute of Corrections (NIC), a federal entity that is authorized by statute 18 U.S.C. SS4351 to provide training, technical assistance, and information services to federal, state, and local correctional agencies, including BOP. NIC provides technical assistance by sending a technical resource provider or staff to the requesting agency, or an individual or team of individuals from the requesting system visits another agency to gain expertise and experience in the specific area of concern. In fiscal year 2012, NIC delivered 244 technical assistance training events to federal, state, and local justice agencies. NIC is also responsible for the National Corrections Academy (NCA), which serves as the training division that provides training and related services for federal, state, and local correctional practitioners. By developing and delivering training to prisons, jails and community corrections practitioners, the academy enhances interaction among correctional agencies, other components of the criminal justice system, public policymakers, and public and private stakeholder organizations, thus improving correctional programming throughout the country. David C. Maurer, (202) 512-9627 or [email protected]. In addition to the contact named above, Chris Keisling (Assistant Director), Carol Henn (Assistant Director), Melissa Wolfe (Assistant Director), Kristen Kociolek (Assistant Director), Vanessa D. Dillard, John Vocino, Billy Commons, Pedro Almoguera, Lara Miklozek, Linda Miller, Mary Catherine Hult, and Eric Hauswirth made key contributions to this report.
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BOP, a component of DOJ, is responsible for the custody and care of over 219,000 federal inmates--a population that has grown by 27 percent over the past decade. BOP had a fiscal year 2013 operating budget of about $6.5 billion, and BOP projects that its costs will increase as the federal prison population grows. According to officials, BOP's biggest challenge is managing the increasing federal inmate population, and related responsibilities, within budgeted levels. Generally, BOP is appropriated funds through two accounts: S&E and B&F. To prepare its annual congressional budget justification for DOJ, BOP estimates its costs and resource requirements and sends its requested amounts to DOJ. GAO was asked to review BOP's budget justifications. This report (1) identifies the types of costs that compose BOP's budget accounts as presented in its budget justifications, and (2) assesses the extent to which opportunities exist to enhance the transparency of information in BOP's budget justifications for congressional stakeholders and decision makers. GAO analyzed DOJ and BOP budget justification documents for fiscal years 2008 through 2014 and interviewed officials to determine how they develop budget justifications. The largest account in the Department of Justice's (DOJ) Bureau of Prisons (BOP) budget justification--its Salaries and Expenses (S&E) account-- is composed mainly of costs associated with Inmate Care and Programs and Institution Security and Administration, both of which have grown steadily since 2008. This growth is due predominantly to increases in prison populations, which are the primary cost driver of BOP's budget. The other two program, project and activity (PPA) elements in the S&E account are associated with the care and custody of federal offenders in contract facilities and maintenance and administration. BOP's Buildings and Facilities (B&F) account, which makes up on average less than 3 percent of its budget, pays for costs associated with site planning; acquisition; and construction of new facilities and costs of remodeling and renovating existing facilities, and related costs. In fiscal year 2014, the budget justification reflected a total of $6.9 billion; of which over 95 percent ($6.8 billion) was for BOP's S&E account. GAO found that BOP is collecting more detailed quantitative cost data on the components that constitute each PPA, which could be useful to congressional decision makers when reviewing BOP's budget justification. In accordance with departmental and Office of Management and Budget guidance, BOP's budget justifications summarize amounts by PPA, so BOP is not required to provide additional funding data below the PPA level in its budget justification. Providing this information to Congress could help clarify what BOP proposes to spend on specific categories and subcategories reflected in its budget justification. For example, BOP's budget justification for fiscal year 2014 included $2.5 billion for the Inmate Care and Programs PPA element and included narrative information for categories such as Medical Services, Food Service, Education and Vocational Training, Psychology Services, and Religious Services, as well as narrative summaries for various subcategories. However the budget justification did not include proposed funding amounts for each of these categories. GAO's analysis shows that this additional information can be useful in identifying trends and cost drivers that may affect future costs. For example, GAO's analysis identified variations in the dollar amounts associated with the cost components that constitute the PPA, such as drug abuse treatment and education, which could affect decision making for that PPA. However, BOP's current budget justification does not include this detail. Congressional decision makers have previously requested additional information about BOP's budget presentations and data below the PPA level. BOP's budget requests for its S&E account have increased 33 percent since fiscal year 2008, which makes transparency in its budget justifications even more crucial. Consulting with congressional decision makers to determine if it would be helpful to include in its budget justifications the additional cost information that DOJ already collects would help provide reasonable assurance that BOP is fully meeting congressional decision makers' needs and would enhance the transparency of its budget justifications. BOP also provides narrative summaries of its initiatives, services, and organizational units in categories and subcategories under each PPA. BOP officials said that they include these narrative descriptions to provide additional information to congressional decision makers. GAO recommends that the Attorney General consult with congressional decision makers on providing additional BOP funding detail in future budget justifications, and in conjunction with BOP, take action as appropriate. DOJ concurred.
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Although there are numerous disclaimers indicating that the tests we purchased do not diagnose disease, the 14 results we received predicted that our fictitious consumers were at risk of developing a myriad of medical conditions. These predictions were similar for all of our fictitious consumers, no matter which DNA or lifestyle description we used. Results from the tests we purchased from Web site 4 also stated that our fictitious consumers were at below average risk for developing certain diseases. However, after consulting with outside experts, we determined that these predictions cannot be medically proven at this time. Even if the predictions could be medically proven, the results use ambiguous language to describe the supposed health risks, rendering them meaningless. As shown in table 1, the results we received from the tests we purchased from all four Web sites contain statements indicating that the information they provide is not intended to diagnose disease or predisposition to disease. The results also contain language stressing that the tests do not screen for genetic disorders and advising consumers to consult with a physician if they feel that they might be ill. Despite these statements, the results we received from the tests we purchased from all four Web sites do contain medical predictions that a consumer may interpret as diagnoses. The overriding impression from all the results is that the 14 fictitious consumers we created are at risk for developing a variety of medical conditions, as shown in figure 2. Furthermore, the results from the tests we purchased from Web site 4 even suggested that our fictitious consumers with the female DNA were at below average risk for developing certain conditions. As comparison, the 2 results we received from Web sites 1 and 3 for the fictitious consumers with the male DNA contained similar predictions, despite having different DNA variants from the female sample. Specific predictions from each test are discussed in further detail below. With regard to the tests we purchased from Web site 1, the 3 results we received stated that the DNA sample from the female displayed an "increased risk of reduced calcium and Vitamin D absorption," meaning that she "may be at increased risk of developing osteoporosis." Results from the same tests contained similar predictions with regard to risks for developing high blood pressure, type 2 diabetes, and heart disease. The DNA sample from the male that we submitted for this test showed the exact same risks, despite having different DNA variants from the female, as shown in figure 3. As shown in figure 4, the 3 results from the tests we purchased from Web site 2 stated that the DNA sample from the female showed "gene variations that may alter the body's ability to metabolize cholesterol" and variations that may affect "mineral absorption and bone metabolism." These results also suggested that "certain protective systems" in the body "may have altered activity." Of the 5 tests we purchased from Web site 3, 3 focused on detoxification, 1 focused on heart health, and 1 focused on bone health. The 5 results thus showed a range of predictions, including that the DNA from the female contained gene variations that "may lead to a reduced ability to clear toxins" and that her "natural antioxidant defenses are less efficient at the removal of free radical damage." The results also showed increased risk of high blood pressure and osteoporosis. The DNA we submitted from the male showed similar risks with regard to toxins and removal of free radicals, despite having different DNA variants from the female sample. See figure 5. As shown in figure 6, the 3 results from the tests we purchased from Web site 4 showed that the DNA sample from the female revealed "faulty methylation patterns" which may lead to "an above average risk for developing cardiac aging, brain aging, and cancer" and "sub-optimal glycation," which can lead to diabetes and increased body fat. These same results also stated that the DNA displayed a "significant risk of developing the age related conditions associated with elevated levels of DNA damage." Results from the tests we purchased from Web site 4 also contain predictions that the DNA sample from the female shows relatively low risk for developing some diseases. For example, all the results from these tests note that the DNA displayed a "below average risk" of developing "the age related" conditions associated with "oxidation" and "inflammation." According to the results, oxidation can lead to diabetes, heart disorders, and Alzheimer's disease and inflammation can lead to diabetes, heart failure, and fragile bones. Despite the implication that these predictions are based on the DNA submitted, none of the results we received contained scientific support to assist the consumer in evaluating their credibility, and there is no evidence to suggest that the tests have been evaluated by independent experts. Furthermore, the genetic experts we spoke with informed us that even though it is possible to make a definitive diagnosis of disease by looking at certain genes, none of the predictions contained in any of the results we received can be medically proven at this time. According to the experts, cystic fibrosis and Huntington's disease are examples of illnesses that can be diagnosed based on an analysis of only one gene. In contrast, the diseases and conditions identified in the test results we received involve complex bodily processes. According to the experts we spoke with, although genes are known to be associated with these processes, scientists have very limited understanding about the functional significance of any particular gene, how it interacts with other genes, and the role of environmental factors in causing disease. With regard to the specific predictions of heart disease, diabetes, osteoporosis, cancer, altered ability to metabolize cholesterol, and reduced ability to clear toxins, the experts informed us that research proving a genetic connection to the development of these conditions is at a very early stage and there are many issues yet to be resolved. In addition, the experts we spoke with also stated that the types of tests we purchased cannot be used to confirm that an individual has a reduced risk of developing these types of diseases. Therefore, the claims that a person may be at "below average risk" of developing certain "age related conditions" based on the analysis of a few genetic variants is misleading. There could be other genetic variants not tested for that confer risk or other environmental factors not assessed. Even if the predictions could be medically proven, the way the results are presented--using ambiguous language--renders them meaningless. For example, it is unclear what is meant by a "damaged" gene. According to the experts we spoke with, although a specific gene can be "damaged" in that it contains a variation that causes a loss of function or impaired function, the results do not clearly explain what this means. The experts also told us that informing someone that they may be at increased risk for heart disease or that they have "high levels of DNA damage," "faulty methylation patterns," or "altered activity" in certain genes are all statements that are so ambiguous as to be meaningless. In fact, these types of predictions could apply to any human that submitted DNA. For example, according to the experts, many people "may" be "at increased risk" for developing heart disease because of known and unknown genetic risk factors; environmental and behavioral risk factors such as obesity, smoking, and high cholesterol; and the interaction between these genetic, environmental, and behavioral factors. Results from the tests that we purchased from Web sites 1 and 4 further mislead the consumer by recommending expensive supplements. The 3 results we received from the tests we purchased from Web site 1 recommend a supplement that is supposedly based on an individual's unique DNA; in reality, the supplements are not unique and are simply a grossly overpriced version of a typical multivitamin. The 3 results we received from the tests we purchased from Web site 4 similarly recommend expensive supplements that are supposedly unique to the consumer; these results also contain medical claims about the supplements that cannot be proven at this time. Finally, the experts we consulted informed us that, in some instances, taking certain supplements may be harmful. The results from the tests we purchased from Web site 1 recommended a 90-day supply of a "personalized, custom" nutritional formula for $295, or approximately $1,200 per year. According to the product information, this formula is based on "what your genetic profile reveals as areas in your body that may need special support." Despite this claim, when we examined the listed ingredients, we found that we were recommended the same product for all 3 of the fictitious consumers we created for this test--2 of these consumers actually had the DNA from the female, 1 had the DNA from the male, and all 3 had different lifestyle descriptions, as previously shown in figure 1. However, when we compared the contents of the supplements recommended for the 2 fictitious consumers with DNA from the female with the supplement recommended for the fictitious consumer with DNA from the male, we found that the ingredients were the same. Moreover, the experts we spoke with confirmed that the supplements themselves are not unique; they contain vitamins that can be found in any pharmacy or grocery store. To find a comparable product, we went to a local drug store and found a generic multivitamin with the same ingredients, though with different amounts, as those in the recommended supplement. In contrast to the exorbitant price requested for the supplement, we paid just under $10 for a 100-day supply of this multivitamin--or about $35 per year, as shown below. Although these products are not identical, the experts we spoke with said that both the supplement and the generic vitamin would probably provide the same nutritional benefits for most people. However, they also cautioned that the elevated amounts of certain vitamins in the supplement may be harmful, as discussed later in this testimony. The results from the tests we purchased from Web site 4 recommended a "personalized" supplement "regimen" costing over $1,880 per year. According to the results, these supplements are personalized based on the DNA submitted and lifestyle descriptions provided on the questionnaires, and they are supposed to help "compensate" for "genetic deficiencies." Specifically, the product information accompanying the test results claims that the regimen will repair damaged DNA through the consumption of 7 pills per day, including 4 tablets per day of a supplement containing over "70 vitamins, minerals, and enzymes combined with "CAEs", a proprietary extract from the Tropical Rainforest botanical Uncaria tomentosa, known as Cat's Claw, which has been clinically shown to promote DNA repair in the body." A 60-day supply costs $160. 1 tablet per day of a supplement designed to "enhance the body's ability to repair damaged DNA." A 60-day supply costs $50. 1 tablet per day of a supplement to control blood sugar and body fat. A 60-day supply costs $50. 1 tablet per day of a supplement designed to manage the process "whereby certain genes are activated and deactivated." A 60-day supply costs $50. As with the other products we were recommended, these supplements are not unique to the consumer. Although the 3 fictitious consumers we created for this site in reality all had the female DNA, they all had varying lifestyle descriptions, as previously shown in figure 1. However, we received the same product recommendation for all 3 consumers. For example, our fictitious 72-year-old female nonsmoker with a diet high in protein was recommended the same supplement regimen as our fictitious 45-year-old male smoker with a diet high in fats, which seems illogical given that the supplements are supposedly developed based in part on the submitted lifestyle information. Furthermore, although the regimen touts "Cat's Claw" as being the ingredient primarily responsible for DNA repair, the experts we spoke with told us that these claims are not medically proven at this time. According to the experts, Cat's Claw is a plant whose pharmacological properties are being studied for a wide variety of biological effects, but the experts were aware of no reports in peer-reviewed scientific literature that have demonstrated the ability of Cat's Claw to repair DNA. Furthermore, although there is some research indicating that taking antioxidants may help with DNA repair, no pill has yet been proven to repair damaged DNA. In fact, manufacturers of supplements are prohibited from claiming that their products can treat, cure, or prevent disease; products that make these claims are considered drugs and must be approved by the FDA before they can be sold. The FDA has already sent Warning Letters to several dietary supplement manufacturers who explicitly claimed that Cat's Claw could help treat cancer and arthritis. However, we do not know whether the FDA would consider a claim of "DNA repair" to render Cat's Claw an unapproved drug. Regarding safety, the nutritionists we spoke with said that it is possible that improper use of dietary supplements can be harmful. For example, the nutritionists said that taking levels of some vitamins and nutrients that far exceed the recommended daily allowance may promote cancers and chronic diseases. A recent statement issued by the National Institutes of Health also notes that taking more than the recommended daily intake of certain vitamins and minerals may cause adverse health effects. For example, smokers who consume excessive amounts of beta-carotene may be at increased risk for developing lung cancer, while consumption of excessive amounts of vitamin D and calcium may increase the risk of kidney stones. Furthermore, we were told that all nutrients or "food components" can be toxic if provided in sufficient quantities, but the susceptibility to toxicity varies among the population. For example, there is evidence that some people may be at risk because of excessive intakes of vitamin E, folic acid, calcium, or selenium. When we asked the nutritionists about the safety of specific ingredients in the supplements recommended for our fictitious consumers, they generally believed that the supplements were comparable to typical multivitamins, as previously stated. However, they also expressed a variety of concerns. For example, one of the nutritionists we consulted characterized the levels of vitamin B-6 in both products as "disturbing." Another felt that the levels of Vitamin A in both were "high," and that the supplements from Web site 1 contained excessive amounts of iron, because iron stays in the blood and could become toxic. Other experts told us that the supplements could be harmful if taken in combination with certain medications. For example, Cat's Claw may have an adverse interaction with a medication prescribed for people who are at increased risk for forming blood clots, and individuals taking this medication are advised to avoid all supplements unless a physician approves. Results from the tests that we purchased from Web sites 1, 2, and 3 promise recommendations based on the consumer's unique genetic profile. However, the 11 results we received from these three sites suggest that the DNA submitted was not a factor in determining the recommendations. Rather, the results simply provide a number of common sense health recommendations based on information we submitted on the lifestyle questionnaires. Although Web sites 1, 2, and 3 acknowledge that information submitted on the questionnaires is taken into consideration when determining diet and lifestyle recommendations, the overall implication to the consumer is that the information derived from the DNA analysis is the most important factor, as shown in table 2. Despite these claims, the recommendations we received are simply common sense regimens directly linked to the information we submitted on the questionnaires included with each test. For example, 9 of the 11 consumers we created for Web sites 1, 2, and 3 had the female DNA. If the recommendations were truly based on the consumer's unique genetic profile, then these 9 consumers should have received the same recommendations because their DNA came from the same source. Instead, they received a variety of different recommendations, depending on the fictitious lifestyles we provided for them. For example, when we said that a fictitious consumer with the female DNA smoked and ate a lot of fatty foods, we received recommendations to stop smoking and eat fewer fatty foods. In contrast, when we said that another fictitious consumer with the female DNA never smoked and did not eat a lot of fatty foods, we received recommendations to continue to avoid both smoking and eating foods high in fat. Similarly, when we said that fictitious consumers with the female DNA did not eat a lot of fruits and vegetables, we received recommendations to eat more of these foods. However, if we said that the consumer had a diet rich in fruits and vegetables, we were told to continue this high level of consumption. We received similar recommendations with regard to the 2 remaining consumers we created using the male DNA. For example, for one of the fictitious consumers with this DNA, we provided a lifestyle description stating that the consumer ate only moderate levels of leafy green vegetables, cantaloupe, and eggs--foods that are rich in antioxidants. In this case, the consumer was told to eat more foods rich in antioxidants. In contrast, we said that the other consumer with the male DNA ate a lot of antioxidant-rich foods. This time, we received recommendations to continue high consumption of these foods. Figure 8 provides further examples of the relationship between the lifestyle information we submitted on the questionnaires and the recommendations we received. These results lead us to conclude that we could have invented any type of lifestyle description for the DNA we submitted and the recommendations would simply echo this information. Although these recommendations may be beneficial to consumers in that they constitute common sense health and dietary guidance, DNA analysis is not needed to generate this advice. During the course of our investigation, we found other information that raises concerns for consumers purchasing these tests. For example, we discovered that Web sites 1, 2, and 3 were in fact selling the same genetic test developed by the same company and that this company was pressured by consumer groups in the United Kingdom to stop selling the test in that country. The company now sells the same type of test in the United States. In addition, we found evidence suggesting a lack of quality control by the laboratory actually conducting the DNA analysis for Web sites 1, 2, and 3. For example, even though all of the genetic information contained in the test results based on a single source should be identical, we received disparate results from the tests we purchased from Web site 1. We also found that the laboratory used by Web site 4 is not approved under CLIA. Nutrigentic Testing in the United Kingdom: The company that manufactures the tests used by Web sites 1, 2, and 3 used to sell the same type of test in the United Kingdom--consumers provided DNA samples and filled out a lifestyle questionnaire, and the company provided advice on what consumers should do to improve their health with diet and lifestyle changes. The Human Genetics Commission, the U.K.'s strategic advisory body on developments in human genetics, and GeneWatch UK, a consumer protection group, alleged that the company's tests were misleading because no scientific evidence validated their clinical claims. Other scientists and consumer protection groups also cited numerous problems with the tests, including that the claims were exaggerated, the service should not be offered without adequate counseling, and that they provided advice which differed little from standard guidance on diet and exercise. Eventually, the tests were subjected to assessment by a team of three experts--a clinical geneticist, a scientist leading a program of research in nutritional genomics, and the chief dietitian of a leading teaching hospital. They published the findings in a detailed report that concluded that there was no value in the genetic tests being offered. Subsequently, GeneWatch U.K. raised these concerns with major retail chains and pharmacies carrying the tests and urged them to stop selling the tests. By July 2002, the company was no longer attempting to sell their test directly to the consumer in the United Kingdom, either over the Internet or through retailers. In 2003, the company moved its operations from the United Kingdom to the United States. Despite the findings of the British experts, the company now sells the same type of test to American consumers. Contradictory DNA Analysis: The results we received from the tests we purchased from Web site 1 appear to be contradictory and reflect inaccurate lab results. Specifically, the results we received from these tests contained a listing of the genes being analyzed and any "variations" found in those genes. When we compared the two results we received based on the DNA from the female, we found that the gene variations listed were not exactly the same: one result said that the DNA showed a variation in the "eNOS" gene, but the other result said that there was no variation in this gene. According to the experts we spoke with, because the DNA sample was taken from the same individual, any gene variations should be identical. The experts also stated that a competent laboratory should reliably be able to detect the presence or absence of a particular gene variant. Consequently, concerns exist about whether this laboratory has basic quality control procedures in place to identify and prevent mistakes. Lack of CLIA Approval: As noted in the introduction to our testimony, laboratories performing genetic tests for medical purposes must be approved under the Clinical Laboratory Improvement Amendments of 1988 (CLIA). In general, CLIA regulations address personnel qualifications, quality control and assurance, recordkeeping requirements, and also require laboratories to conduct proficiency testing. All laboratory tests performed to provide information about an individual's health must be conducted by law in approved laboratories. During the course of our work, when we interviewed a representative from a laboratory conducting tests for Web site 4, we were told that this lab is not approved under CLIA. The current regulatory environment provides only limited oversight to those developing and marketing new types of genetic tests. Consequently, companies that sell nutrigenetic tests like the ones we purchased may mislead consumers by promising results they cannot deliver. Further, the unproven medical predictions these companies can include in their test results may needlessly alarm consumers into thinking that they have an illness or that they need to buy a costly supplement in order to prevent an illness. Perhaps even more troubling, the test results may falsely assure consumers that they are healthy when this may not be the case. With further advances in science, nutrigenetic tests like those we purchased may in the future be valid, allowing consumers to use DNA- based analysis to make diet and lifestyle changes that will actually prevent the development of disease. However, as demand for these new tests continues to rise, it will become increasingly important for consumers to have reliable information in order to determine which tests are accurate and useful. Mr. Chairman and Members of the Committee, this concludes my statement. I would be pleased to answer any questions that you or other members of the committee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-7455 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Scientists increasingly believe that most, if not all, diseases have a genetic component. Consequently, genetic testing is becoming an integral part of health care with great potential for future test development and use. Some genetic tests are sold directly to the consumer via the Internet or retail stores, and purport to use genetic information to deliver personalized nutrition and lifestyle guidance. These tests require consumers to self-collect a sample of genetic material, usually from a cheek swab, and then forward the sample to a laboratory for analysis. Companies that market this type of test claim to provide consumers with the information needed to tailor their diet and exercise programs to address their genetically determined health risks. GAO was asked to investigate the "legitimacy" of these claims. This testimony reflects the findings of GAO's investigation of a nonrepresentative selection of genetic tests. Specifically, GAO purchased tests from four Web sites and created "fictitious consumers" by submitting for analysis 12 DNA samples from a female and 2 samples from an unrelated male, and describing this DNA as coming from adults of various ages, weights, and lifestyle descriptions. GAO also consulted with experts in genetics and nutrition. The results from all the tests GAO purchased mislead consumers by making predictions that are medically unproven and so ambiguous that they do not provide meaningful information to consumers. Although there are numerous disclaimers indicating that the tests are not intended to diagnose disease, all 14 results predict that the fictitious consumers are at risk for developing a range of conditions, as shown in the figure below. However, although some types of diseases, such as cystic fibrosis, can be definitively diagnosed by looking at certain genes, the experts GAO spoke with said that the medical predictions in the tests results can not be medically proven at this time. Even if the predictions could be medically proven, the way the results are presented renders them meaningless. For example, many people "may" be "at increased risk" for developing heart disease, so such an ambiguous statement could relate to any human that submitted DNA. Results from the tests that GAO purchased from Web sites 1 and 4 further mislead the consumer by recommending costly dietary supplements. The results from the tests from Web site 1 suggested "personalized" supplements costing approximately $1,200 per year. However, after examining the list of ingredients, GAO found that they were substantially the same as typical vitamins and antioxidants that can be found in any grocery store for about $35 per year. Results from the tests from Web site 4 suggested expensive products that claimed to repair damaged DNA. However, the experts GAO spoke with stated that there is no "pill" currently available that has been proven to do so. The experts also told us that, in some circumstances, taking supplements such as those recommended may be harmful. In addition, results from the tests that GAO purchased from Web sites 1, 2, and 3 do not provide recommendations based on a unique genetic profile as promised, but instead provide a number of common sense health recommendations. If the recommendations were truly based on genetic analysis, then the 9 fictitious consumers that GAO created for these sites using the female DNA should have received the same recommendations because their DNA came from the same source. Instead, they received a variety of different recommendations, depending on their fictitious lifestyles. For example, when GAO created lifestyle descriptions stating that the consumers smoked, they received recommendations to stop smoking. In contrast, if GAO said the consumers never smoked, they received recommendations to continue to avoid smoking.
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Addressing the Year 2000 problem in time will be a formidable challenge for the District of Columbia. The District government is composed of approximately 80 entities, responsible for carrying out a vast array of services for a diverse group of stakeholders. These services include municipal, state, and federal functions, such as street maintenance and repairs, economic development and regulation, trash pick-up, water and sewer services, educational institutions, hospital and health care, public safety, and correctional institutions. Each of these services is susceptible to the Year 2000 problem. The Year 2000 problem is rooted in the way dates are recorded and computed in automated information systems. For the past several decades, systems have typically used two digits to represent the year, such as "97" representing 1997, in order to conserve on electronic data storage and reduce operating costs. With this two-digit format, however, the year 2000 is indistinguishable from 1900, or 2001 from 1901. As a result of this ambiguity, system or application programs that use dates to perform calculations, comparisons, or sorting may generate incorrect results. The District has a widespread and complex data processing environment, including a myriad of organizations and functions. There are four major data centers located throughout the city, each serving divergent groups of users, running multiple applications, and using various types of computer platforms and systems. Most of the District's computer systems were not designed to recognize dates beyond 1999 and will thus need to be remediated, retired, or replaced before 2000. To complicate matters, each District agency must also consider computer systems belonging to other city agencies, other governments, and private sector contractors that interface with their systems. For example, the Social Security Administration exchanges data files with the District to determine the eligibility of disabled persons for disability benefits. Even more important, the District houses the most critical elements of the federal government. The ability of the District to perform critical government services after the century date change is not only essential to District residents but also important to the continuity of operations of the executive, congressional, and judicial offices housed here. In addition, the Year 2000 could cause problems for the many facilities used by the District of Columbia that were built or renovated within the last 20 years and contain embedded computer systems to control, monitor, or assist in operations. For example, water and sewer systems, building security systems, elevators, telecommunications systems, and air conditioning and heating equipment could malfunction or cease to operate. The District cannot afford to neglect any of these issues. If it does, the impact of Year 2000 failures could potentially be disruptive to vital city operations and harmful to the local economy. For example: Critical service agencies, such as the District's fire and police departments, may be unable to provide adequate and prompt responses to emergencies due to malfunctions or failures of computer reliant equipment and communications systems. The city's unemployment insurance benefit system may be unable to accurately process benefit checks as early as January 4, 1999. The city's tax and business systems may not be able to effectively process tax bills, licenses, and building permits. Such problems could hamper local businesses as well as revenue collection. Payroll and retirement systems may be unable to accurately calculate pay and retirement checks. Security systems, including alarm systems, automatic door locking and opening systems and identification systems, could operate erratically or not all, putting people and goods at risk and disabling authorized access to important functions. To address these Year 2000 challenges, we issued our Year 2000 Assessment Guide to help federal agencies plan, manage, and evaluate their efforts. This guide provides a structured approach to planning and managing five delineated phases of an effective Year 2000 program. The phases include (1) raising awareness of the problem, (2) assessing the complexity and impact the problem can have on systems, (3) renovating, or correcting, systems, (4) validating, or testing, corrections, and (5) implementing corrected systems. We have also identified other dimensions to solving the Year 2000 problem, such as identifying interfaces with outside organizations specifying how data will be exchanged in the year 2000 and beyond and developing business continuity and contingency plans to ensure that core business functions can continue to be performed even if systems have not been made Year 2000 compliant. Based on the limited data available on the status of local and state governments, we believe that the District's Year 2000 status is not atypical. For example, a survey conducted by Public Technology, Inc. and the International City/County Management Association in the fall and winter of 1997, found that of about 1,650 cities that acknowledged an impact from Year 2000, nearly a quarter had not begun to address the problem. In addition, state governments are also reporting areas where they are behind in fixing Year 2000 problems. For example, as we recently testified before the Subcommittee on Government Management, Information and Technology, House Committee on Government Reform and Oversight, a June 1998 survey conducted by the Department of Agriculture's Food and Nutrition Service, found that only 3 states reported that their Food Stamp Program systems were Year 2000 compliant and only 14 states reported that their Women, Infants, and Children program were compliant. Moreover, four states reported that their Food Stamp Program systems would not be compliant until the last quarter of calendar year 1999, and five states reported a similar compliance time frame for the Women, Infants, and Children program. Until June 1998, the District had made very little progress in addressing the Year 2000 problem. It had not identified all of its mission-critical systems, established reporting mechanisms to evaluate the progress of remediation efforts, or developed detailed plans for remediation and testing. In addition, it lacked the basic tools necessary to move its program forward. For example, it had not assigned a full-time executive to lead its Year 2000 effort, established an executive council or committee to help set priorities and mobilize its agencies, or identified management points-of-contact in business areas. Since this past June, the District has recognized the severity of its situation and taken a number of actions to strengthen program management and to develop a strategy that is designed to help the city compensate for its late start. For example, to improve program management, the District has hired a new chief technology officer, appointed a full-time Year 2000 program manager, established a Year 2000 program office, and continued to use its chief technology officer council to help coordinate and prioritize efforts. The District also contracted with an information technology firm to assist in completing the remediation effort. To accomplish this in the short time remaining, the District and the contractor plan to concurrently (1) remediate and test system applications, (2) assess and fix the information technology (IT) infrastructure, including the data centers, hardware, operating systems, and telecommunications equipment, (3) assess and correct noninformation technology assets, and (4) develop contingency plans. So far, the District has done the following. Developed an inventory of information technology applications. Of the 336 applications identified, the District and its contractor determined that 84 are deemed Year 2000 compliant, 135 have already been remediated but still need to be tested, and 117 need to be remediated and tested. According to the District, over 9 million lines of code still need to be remediated. Initiated pilot remediation and test efforts with the pension and payroll system. The system has been converted and the conversion results are being readied for system users to review. The District expects to complete the pilot by December 31, 1998. Adopted a contingency planning methodology that it is now piloting on the 911 system, the water and sewer system, and the lottery board system. It expects to complete the first two pilots by October 31, 1998, and the remaining one during the first quarter of fiscal year 1999. Developed a strategy for remediating non-IT assets that is now being tested on the water and sewer system. This is also expected to be done by October 31, 1998. After this effort is completed, the District and the contractor will begin to assess and remediate non-IT equipment at agencies providing critical safety, health, and environmental services. The District's recent actions reflect a commitment on the part of the city to address the Year 2000 problem and to make up for the lack of progress. However, the District is still significantly behind in addressing the problem. As illustrated in the following figure, our Assessment Guide recommends that organizations should now be testing their systems in order to have enough time to implement them. They should also have business continuity and contingency plans in place for mission-critical systems to ensure the continuity of core business operations if critical systems are not corrected in time. By contrast, the District is still in the assessment process--more than 1 year behind our recommended timetable. For example, it has not identified all of its essential business functions that must continue to operate, finished assessing its IT infrastructure and its non-IT assets, provided guidance to its agencies on testing, and identified resources that will be needed to complete remediation and testing. Until the District completes the assessment phase, it will not have reliable estimates of how long it will take to renovate and test mission-critical systems and processes and to develop business continuity and contingency plans. The District will also be unable to provide a reliable estimate of the costs to implement an effective Year 2000 program. Further, the District has had some problems in completing the assessment phase. For example, according to program office officials, three agencies--the Court System, Superior Court, and Housing Authority--have refused to participate in the program office's assessment activities. Agencies also do not consistently attend program office meetings and do not always follow though on their assessment commitments, such as ensuring that program office and contractor teams have access to agency personnel and data. Program office officials attributed these problems to the office's limited authority and the lack of mandatory requirements to participate in the Year 2000 program. Failure to fully engage in the Year 2000 program can only increase the risks the District faces in trying to ensure continuity of service in key business process areas. District officials acknowledge that the city is not able to provide assurance that all critical systems will be remediated on time. We agree. Therefore, to minimize disruptions to vital city services, it will be essential for the District to effectively manage risks over the next 15 months. First, because it is likely that there will not be enough time to remediate all systems, the District must identify and prioritize its most critical operations. This decision must collectively reside with the key stakeholders involved in providing District services and must represent a consensus of the key processes and their relative priority. The results of this decision should drive remediation, testing, and business continuity and contingency planning and should provide increased focus to the efforts of the Year 2000 office and its contractor. To this end, we recommend that the District, along with its current Year 2000 efforts, identify and rank the most critical business operations and systems by October 31, 1998. The District should use this ranking to determine by November 30, 1998, the priority in which supporting systems will be renovated and tested. Continuity of operations and contingency plans for these processes and systems should also be initiated at this time if such action is not already underway. Second, for systems that may not complete remediation but that are still important to city operations, managers will need to develop contingency plans for continued operations. It is essential that such plans be developed early to provide stakeholders as much time as possible to provide resources, develop "workarounds," or secure legislative or administrative approvals as necessary to execute the plans. Third, because of the dependencies between the District and the surrounding local and federal government entities, the District will need to work closely with those bodies to both identify and prepare appropriate remedial steps and contingency plans to accommodate those dependencies. We recommend that the District immediately develop an outreach program to first identify its dependencies and then determine the remediation required to minimize the risk of Year 2000 failure. Finally, efforts to address this problem must have continued top-level commitment from the Chief Management Officer and the department and agency heads, the Mayor's office, and the control board. Establishing a program office and hiring a contractor with significant expertise is a good first step. However, the key stakeholders need to "own" the process, i.e., participate in critical decision-making on program direction, provide resources and support for the program, and ensure that all District agencies and offices fully participate in the process. To conclude, we believe the District's Year 2000 program needs an absolute commitment from its leadership to make the most of the short time remaining. By addressing the steps outlined above, the District can better ensure a shared understanding of the key business processes that must be remediated, a shared understanding of the risks being assumed in establishing priorities for remediation, testing, and business continuity and contingency planning, and a shared commitment to provide the resources required to address those priorities. Mrs. Chairwoman and Mr. Chairmen, this concludes my statement. 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GAO discussed the year 2000 risks facing the District of Columbia, focusing on: (1) its progress to date in fixing its systems; and (2) the District's remediation strategy. GAO noted that: (1) until June 1998, the District had made very little progress in addressing the year 2000 problem; (2) to compensate for its late start, the District has hired a new chief technology officer, appointed a full-time year 2000 program manager, established a year 2000 program office, and continued to use its chief technology officer council to help coordinate and prioritize efforts; (3) the District also contracted with an information technology firm to assist in completing the remediation effort; (4) to accomplish this in the short time remaining, the District and the contractor plan to concurrently: (a) remediate and test system applications; (b) assess and fix the information technology (IT) infrastructure, including the data centers, hardware, operating systems, and telecommunications equipment; (c) assess and correct noninformation technology assets; and (d) develop contingency plans; (5) the District has done the following: (a) developed an inventory of information technology applications; (b) initiated pilot remediation and test efforts with the pension and payroll system; (c) adopted a contingency planning methodology which it is now piloting on the 911 system, the water and sewer system, and the lottery board system; and (d) developed a strategy for remediating non-IT assets which is now being tested on the water and sewer system; (6) the District's recent actions reflect a commitment on the part of the city to address the year 2000 problem and to make up for the lack of progress; (7) however, the District is still significantly behind in addressing the problem; (8) the District has not: (a) identified all of its essential business functions that must continue to operate; (b) finished assessing its IT infrastructure and its non-information technology assets; (c) provided guidance to its agencies on testing; and (d) identified resources that will be needed to complete remediation and testing; (9) until the District completes the assessment phase, it will not have reliable estimates on how long it will take to renovate and test mission-critical systems and processes and to develop business continuity and contingency plans; (10) District officials acknowledge that the city is not able to provide assurance that all critical systems will be remediated on time; and (11) therefore, to minimize disruptions to vital city services, it will be essential for the District to effectively manage risks over the next 15 months.
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Since 1992, DOD has obligated more than $2.5 billion of the over $3 billion the Congress has appropriated to help CTR recipient countries destroy weapons of mass destruction, transport and store weapons to be destroyed, and prevent weapons proliferation. Early in the program, CTR assistance was largely provided to recipient countries in the form of equipment, such as cranes, trucks, and cutting tools. As the program matured, most of the assistance provided was in the form of services, such as the dismantlement of Russian nuclear submarines that are contracted for or provided by the CTR program to recipient countries. Additionally, other costs have been associated with the program, such as travel expenses, the defense and military contacts program, and contractor support. Figure 1 shows the level and types of assistance provided from fiscal years 1992 through 2000. In 1992, DOD began providing equipment to recipient countries for use in destroying weapons of mass destruction and improving the infrastructure needed to destroy these weapons. By the mid-1990s, DOD began to hire U.S. companies to coordinate and integrate the destruction of the recipient countries' weapons of mass destruction because these countries claimed they could no longer afford to complete the work and were falling behind schedule. When work is undertaken at sensitive facilities where access is limited or denied, DOD often contracts directly with recipient country contractors. DOD uses the following three basic procedures to provide oversight and maintain accountability for CTR assistance: (1) audit and examination team visits, (2) routine program management, and (3) intelligence analysis. At the start of the CTR program, bilateral agreements were signed with recipient countries that established the United States' right to determine if assistance is being used for its intended purposes. To implement its rights under these agreements, DOD initially developed what it calls "audit and examination" procedures to account for CTR-provided equipment. Under these procedures, a DOD team documents equipment condition and use by visiting sites to inspect the equipment and reviewing documents to determine its use, a process of essentially taking an inventory of equipment provided under the program. CTR assistance provided in the form of service contracts is generally overseen and accounted for under the program management function. Program management entails the continual involvement of DOD officials throughout the life of the project to ensure proper use of all services and training before payment, in accordance with Federal Acquisition Regulations. All contracts for services with recipient countries are awarded on a firm-fixed-price basis; that is, contract milestones must be met and work accepted by a U.S. government representative before payment is authorized. The Defense Contract Audit Agency reviews all contract costs and conducts audits of U.S. contractors involved with the CTR program. To compliment its audit and examination and program management oversight, DOD also uses information provided by the intelligence community to account for CTR assistance. Initially, much of the CTR assistance provided consisted of equipment, whereas now the vast majority of assistance is provided in the form of contracted services. As illustrated in figure 2, in 1994, 45 percent of CTR assistance provided was equipment compared with less than 1 percent in 2000. DOD has procedures in place to obtain the information necessary to provide reasonable, but not absolute, assurance that most CTR assistance is used for the purpose intended. Through program management, audit and examination procedures, and intelligence analysis, our analysis indicated that DOD can reasonably account for at least 95 percent of the total program dollars provided to recipient countries. Using these methods, DOD obtains a variety of information, including documentary, visual, testimonial, and photographic evidence, that it then uses to compile its annual accounting report to the Congress. The 5 percent or less of the total value of assistance provided for which DOD cannot give reasonable assurance that it is being used for the purposes intended generally consists of equipment located at sites where DOD's access is restricted or denied. (See app. I for information on DOD's 1999 report accounting for CTR assistance.) Through program management, audits and examinations, and intelligence analysis, DOD can account for most of the total program dollars provided to recipient countries. As illustrated in figure 1, approximately $2.2 billion of the $2.5 billion of CTR assistance obligated has been in the form of services and other activities, with the remaining $340 million of assistance provided in the form of equipment. Our review shows that DOD maintains effective accountability for services, other activities, and some equipment through its program management and intelligence analysis. However, the inability to view all equipment, particularly at those sites where Russia does not allow U.S. personnel access, precludes DOD from determining that all equipment is being used for the intended purpose. Our analysis showed that a limited amount of equipment--less than 5 percent of the total value of CTR assistance provided--is in locations where U.S. personnel have no access rights or do not visit. Although DOD has used these procedures to account for CTR assistance since the program began, we found that, in the past, DOD officials did not routinely document the results of their program management visits. DOD has strengthened its procedures for documenting information collected through its program management efforts, which is extremely important now that the vast majority of new CTR assistance is in the form of services, whose accountability primarily relies on program management. DOD partially accounts for CTR assistance through program management, which provides oversight of the majority of CTR assistance. In managing their projects, CTR program officials make frequent visits to recipient countries. Through these site visits, they observe the use of CTR-provided equipment, monitor contract performance and schedule, and inspect and accept the work performed, in addition to discussing technical and programmatic issues with recipient country officials. DOD has recently developed a reporting system to capture these activities more systematically. Since implementing the system at the start of fiscal year 2001, 70 program management visits were conducted through the end of February 2001; 69 of these visits have been documented. Thirteen visits included inspecting and accepting the work performed, and 30 visits included the inspection of CTR-provided equipment and materials, among other activities performed. Additionally, program managers obtain information from the U.S. contractors that manage some of the projects and maintain CTR-provided equipment. Project managers obtain the status of projects from contractors responsible for managing entire projects. For example, the U.S. contractor for the construction of the Security Assessment Training Center at Sergiev Posad, Russia, maintains U.S. nationals on site to directly oversee ongoing work. Contractor personnel provide weekly status reports and meet frequently with CTR project officials. When we visited Sergiev Posad in January 2001, we observed the interaction between contractor personnel and program officials regarding the construction of a small arms training facility and the testing of various security systems. For example, figure 3 shows several types of vehicle security gates provided through CTR assistance. These gates are tested by U.S. and Russian personnel at the facility to determine which equipment best meets requirements for upgrading security at Russian nuclear storage facilities. DOD also has one U.S. contractor providing logistics and maintenance support for all CTR-provided equipment. This contractor has recently developed the Electronic Information Delivery System that tracks equipment location, value, and maintenance. The system also monitors the number of contractor visits scheduled, completed, and denied to the sites where equipment is located. The database is available to program officials through the Internet. Program officials can obtain reliable information from their various contractors on how CTR assistance is used. DOD personnel conduct audit and examination visits on the basis of formal agreements and procedures with recipient countries. Audit and examination teams essentially take an inventory of CTR-provided equipment to verify location and use for the annual accounting report; however, the teams do not assess the projects' efficiency or effectiveness. For calendar year 2000, DOD scheduled 23 audits and examinations, of which 14 were conducted. The remaining nine were either cancelled or postponed, primarily due to difficulties with the Russians concerning the agreement governing audit and examination procedures. However, CTR program officials stated that they had full confidence that the equipment meant to be inventoried by the audit and examination teams was being used as intended as the result of their program management procedures. The selection of which projects, sites, and equipment will undergo an audit and examination is judgmental and is based on the risk of equipment loss, misuse, or diversion; the estimated dollar value of the equipment; the date of the last audit and examination of that project; and the site's accessibility. DOD officials, however, could not always specify the rationale used in scheduling audits and examinations. Audit and examination team leaders determine the specific sites to be visited and equipment to be inventoried on the basis of program manager and contractor input; however, the decision is subject to director approval. Audit and examination teams, through visual inspection and record reviews, annually inventory a selection of CTR-furnished equipment to ensure its proper location and use. The information obtained through audits and examinations varies from project to project, depending upon the implementing agreements with recipient countries. For example, we observed DOD officials conduct two audits and examinations in Russia. One consisted of visiting a site where CTR-provided equipment was located, meeting with the officials who used the equipment, conducting a complete inventory of high-value equipment, and reviewing training documents. Figure 4 shows the Reutov Business Development Center, where we observed an audit and examination team examine about $270,000 worth of CTR-provided office equipment. The other audit and examination compared detailed photographs, taken by recipient country officials, of CTR-provided equipment with inventory lists provided by DOD and the recipient country. Although the DOD officials who conducted these audit and examination visits verified that equipment provided through the CTR program was in place, the officials did not assess whether the projects examined were conducted in an efficient manner, or whether they were effectively meeting the objectives of the CTR program, because such assessments were not part of the scope of work of the audit and examination teams. The Weapons Intelligence, Nonproliferation, and Arms Control Center provides intelligence analysis to the CTR program. The center's staff analyzes information obtained from across the intelligence community regarding CTR-provided assistance. Its assessments supporting CTR accountability are included in a classified annex to DOD's annual accounting report. The center's assistance also includes briefings to program and project managers when needed, assessments of ways in which potential CTR projects could enhance recipient countries' military forces, studies of current events and trends, and information helpful in negotiating and implementing projects. DOD's inability to gain access to all sites in some recipient countries where CTR-provided equipment is located has been an issue since the CTR program began in 1992. The U.S. government has been concerned about its ability to examine the use of the equipment, while recipient countries have had security concerns regarding U.S. access to sensitive facilities. In an effort to balance these concerns, bilateral agreements were signed to provide the United States with the general right to audit CTR assistance, but separate agreements were also required specifying the procedures by which the United States can audit individual projects. For example, all audit and examination team visits require a 30-day notice of the audit before arrival of the team and are limited to no more than three visits per calendar year, per project. Due to the extreme sensitivity of nuclear weapon storage sites, Russia did not agree to provide U.S. personnel with access to those sites. Thus, a separate agreement was negotiated to provide photographic audits rather than on-site visits to account for the use of CTR-provided assistance. This agreement stipulates that recipient country officials, after meeting with the audit and examination team, use CTR-provided cameras and film to photograph equipment at sites where U.S. officials are denied access. The team provides the country officials with specific guidance on how to photograph the equipment as well as a unique identifier that must be included in all photographs. Recipient country officials then provide the photographs to the awaiting audit and examination team for review. The team compares the CTR-provided equipment in the photographs with inventory lists maintained by DOD and the recipient country. Although the level of access varies among CTR projects, nearly all CTR program-related visits must be preapproved by recipient countries. Certain types of documents, such as visas, are required of all visitors. We have grouped the level of access to sites where $340 million worth CTR equipment has been provided into the following three categories: (1) those sites where no access is provided to U.S. personnel, although audits and examinations are performed through alternative methods; (2) those sites where audits and examinations are not performed due to the absence of administrative arrangements but where program managers have access to the project sites (restricted access); and (3) those sites where access has not been denied to either audit and examination teams or project managers (unrestricted access). Figure 5 shows the value of CTR equipment by recipient country and level of access. United States officials are not provided access to the Russian sites where the equipment associated with the storage and transportation of nuclear warheads is located. In some cases, equipment such as the U.S.-provided railcars used to transport warheads is delivered to alternate locations for review by U.S. government officials. In other cases, such as for the equipment at warhead storage sites, U.S. government officials are provided with time-stamped photographs of the equipment to account for its use. For example, figure 6 is a photograph of a supercontainer that was used to transport nuclear weapons. The photograph was taken during the January 2001 audit and examination of equipment at Russian nuclear weapons storage sites. DOD accepted the photograph as proof that the equipment was located at a nuclear weapons storage site where U.S. personnel were denied access. Audit and examination teams have restricted access to sites containing equipment designed to help the Russians eliminate their strategic nuclear delivery systems--that is, heavy bombers, intercontinental ballistic missiles, and submarine launched ballistic missiles--and the safe storage of fissile materials. Although program managers usually have access to those sites where such equipment is located, the Russian government has denied access to CTR audit and examination teams since 1999, even though DOD considers this a violation of Russia's obligations under the bilateral agreements. DOD officials said that they are working with the Russian government, primarily the Ministry of Atomic Energy, to negotiate a mutually acceptable arrangement to promote the continuation of audits and examinations. The final category covers CTR equipment provided to recipient countries where access has not been routinely denied to audit and examination teams and project managers. This equipment ranges from that used to destroy chemical weapons in Russia to that used to eliminate strategic nuclear delivery vehicles in Ukraine and Kazakhstan. However, recipient countries must preapprove virtually all visits to sites where CTR assistance is located, and, occasionally, project managers and audit and examination teams are denied access to CTR-provided equipment. For example, during a September 2000 audit and examination of export control equipment in Kazakhstan, team members were denied access to two buildings for security concern reasons. Furthermore, some contractor personnel have been denied access to recipient country facilities that are normally open to U.S. personnel. From May 2000 through April 2001, the CTR logistics support contractor scheduled 361 site visits to repair and maintain CTR-provided equipment, but in 9 cases, the requests were denied. All nine denials were at sites in Russia involving the elimination of strategic offensive arms. DOD could improve the quality of its program oversight function by better targeting and expanding the scope of its audit and examination procedure. Audits and examinations have become less useful in accounting for CTR assistance because they frequently duplicate what program managers do on a routine basis, and, as currently conducted, the reviews simply consist of taking equipment inventories. As the CTR program has changed from providing equipment to providing contracted services, audits and examinations have not evolved to include assessments of the effectiveness or efficiency of the services provided. Many audits and examinations conducted in 2000 appear to provide little value in accounting for CTR assistance beyond the information already provided through program management and intelligence analysis. Of the 13 audits and examinations scheduled for Russia in calendar year 2000, 7 did not take place. However, CTR officials we interviewed stated that it did not matter that these audit and examinations were not conducted because the officials could account for their projects without the information supplied by audits and examinations. The officials said they had sufficient data available from program management and intelligence analysis to provide reasonable assurance on the use of equipment. Figure 7 is a photograph used to inventory CTR-provided equipment at a Russian nuclear weapons storage site. DOD accepted this photograph as proof that U.S.-provided equipment was located at the site where U.S. personnel were denied access. Our analysis indicated that audit and examination visits often duplicated equipment verification already performed and documented through program management. For example, in October 2000, a project manager visited a strategic nuclear arms elimination site in Ukraine and documented his observation of CTR-provided equipment, including 16 of 33 dump trucks. Later, in December, an audit and examination team visited the same site and inventoried the same equipment, but this time observed 17 of 33 trucks. During both visits, the remaining trucks were accounted for through a review of records. Although DOD officials acknowledged that audits and examinations, as currently conducted, provide little additional value, they believe that these procedures should continue to be used to account for CTR assistance. The officials commented that the United States should maintain its right to audit and examine CTR-provided assistance as stated in the bilateral agreements with the recipient countries but added that the scope of audits and examinations could be expanded to encompass more than simply taking an inventory of equipment. The results of a recent DOD Inspector General audit of CTR assistance support the concept of broader reviews.For example, the report raised no issues regarding the accountability of assistance but did raise concerns regarding the efficiency of some CTR projects. Specifically, DOD officials questioned how recipient countries would use funds generated by salvageable materials from the elimination of weapons of mass destruction. Furthermore, with the help of the Defense Systems Management College, DOD officials are reviewing CTR program management processes to see if they can be strengthened. DOD has procedures in place that provide reasonable assurance that most assistance is used for its intended purpose; however, DOD's inability to gain access to some sites preclude it from collecting sufficient evidence to ensure that all CTR-provided assistance is used only for the purposes intended. DOD has developed and begun implementing new procedures for documenting the methods it uses to collect data regarding CTR assistance. Specifically, information obtained from the recently developed reporting system to capture program manager trip activities and the Electronic Information Delivery System for tracking CTR-provided equipment could improve the quality of future accounting reports. Given the program's transition from providing equipment to providing services, most of the audits and examinations conducted in 2000 appear to lack value beyond that provided by program management and intelligence analysis. By restructuring and better targeting audits and examinations, DOD would have a more valuable tool to oversee and account for CTR assistance. This may mean doing fewer audits and examinations, but expanding the scope of such audits and examinations to include assessments of projects' effectiveness and efficiency, including the delivery of services. Currently, there are no well-defined criteria for targeting audits and examinations. To improve DOD's accounting of CTR-provided assistance, we recommend that the Secretary of Defense strengthen audit and examination procedures by developing criteria to target audits and examinations at the most vulnerable CTR projects, such as those least accounted for through other means; and expanding the scope of audits and examinations from simply taking an inventory of equipment provided under the program to assessing the effectiveness and efficiency of CTR assistance, including contracted services. DOD's Defense Threat Reduction Agency commented on a draft of this report and agreed with our findings and our recommendation to enhance the quality of its oversight of the Cooperative Threat Reduction Program. In discussing how it plans to implement our recommendation, DOD said it has developed a methodology to better target audits and examinations at the most vulnerable CTR projects, such as those least accounted for through other means. The methodology includes calculating a weighted risk factor for each CTR project based on 10 criteria. (See appendix II for more details.) By applying these criteria to each project, program officials can better target which audits and examinations to conduct. In addition, DOD officials plan to expand the scope of audits and examinations to periodically assess the effectiveness and efficiency of CTR assistance, including contracted services. DOD did not specify, however, how and when such measures would be incorporated into its CTR audit and examination process. On the basis of the legislative mandate, our objectives were to assess (1) whether DOD's oversight procedures produce the necessary information to determine if the threat reduction assistance, including equipment provided and services furnished, is being used as intended and (2) whether improvements can be made in the way DOD carries out its oversight responsibilities. To accomplish our objectives, we examined DOD's scope, procedures, and mechanisms for collecting and analyzing data used to account for the use of CTR assistance; determined what data DOD uses to report on whether CTR assistance is being used for the purpose intended; and reviewed how much of the equipment and services DOD actually accounts for. Specifically, we interviewed Defense Threat Reduction Agency officials, CTR policy officials, and CTR contractors responsible for DOD's CTR accounting reports. We interviewed four of the six primary program managers and several project managers, particularly those who had audit and examination visits for their programs cancelled. We interviewed five of the eight audit and examination team leaders. We also met with officials from the Weapons Intelligence, Nonproliferation, and Arms Control Center to obtain information on certain CTR projects and on how the intelligence community supports CTR program accounting efforts. We reviewed program management trip reports, weekly reports, quarterly program reviews, and other program documents. We were given a demonstration and were provided documentation of the newly developed Electronic Information Delivery System, which is a contractor-based logistics and maintenance support database. We also spoke with U.S. contractors working in Russia. We accompanied a Defense Threat Reduction Agency audit and examination team on two audits and examinations in Russia from January 19, 2001, to February 1, 2001. Additionally, we reviewed all audit and examination trip reports for 1999 and 2000. We met with and obtained documentation from officials in the DOD Inspector General's Office who had recently examined several CTR projects. We also reviewed DOD's annual accounting report for 1999 to determine whether the Department had met the legislative requirements of section 1206 of the National Defense Authorization Act for Fiscal Year 1996. See appendix I for our analysis. We performed our work from October 2000 through May 2001 in accordance with generally accepted government auditing standards. We are providing copies of this report to other interested congressional committees and the Secretary of Defense. We will make copies available to others upon request. Please contact me at (202) 512-4128 if you or your staff have any questions concerning this report. Key contributors to this assignment were F. James Shafer, Hynek Kalkus, Beth Hoffman Leon, Martin DeAlteriis, and Lynn Cothern. As required by section 1206 of Public Law 104-106, we reviewed the Department of Defense's (DOD) 1999 accounting report to determine if it (1) contained current and complete data on the Cooperative Threat Reduction (CTR) assistance provided (both equipment and services), (2) described how CTR-provided assistance was accounted for and used, (3) provided a description of how DOD plans to account for the assistance during the following year, and (4) listed specific information on Russia's arsenal of tactical nuclear warheads. On the basis of our review, DOD's 1999 accounting report covered the legislatively mandated information, yet it did not always convey the information completely and consistently. Specifically: DOD's 1999 accounting report contained current and complete data on a little over two-thirds of all CTR assistance provided to the recipient countries through September 1999. According to DOD officials, the monies not accounted for in the report were spent on equipment purchased in country; equipment purchased in the United States but not yet shipped; and "other" CTR program costs, such as travel, shipment of equipment, military-to-military contacts, and Defense Threat Reduction Agency contractors. The report lists equipment totaling $314 million, services totaling $1.1 billion, and miscellaneous items totaling almost $16 million, for a combined total of nearly $1.5 billion worth of assistance. By the end of fiscal year 1999, however, the CTR program had provided over $2.1 billion of assistance to the recipient countries. The report lists some of the equipment that was purchased in recipient CTR countries, but it does not distinguish between that equipment and equipment shipped from the United States. According to CTR officials, the draft 2000 accounting report will provide more information about equipment purchased in recipient countries for that year. The 1999 report also included a listing of about $27 million in CTR equipment that DOD provided to recipient states during a 3- month period in 1997 that the 1998 accounting report excluded. In its 1999 accounting report, DOD described how CTR-provided assistance was accounted for and used. Specifically, DOD explained the methods it used to account for CTR-provided equipment--audits and examinations, program management trips, and intelligence obtained through national technical means. The 1999 accounting report listed where the equipment was located at the time of the report and described the value of contractor services provided for each project. Although the report usually provided summary assessments of whether the equipment at the various projects was being used for its intended purposes, it did not detail the services provided and often did not specifically assess whether such services were satisfactory. DOD officials acknowledged that this was the situation but explained that they judged the amount of information on contractor services to be sufficient. Unlike the 1998 report, the 1999 accounting report summarized how the Departments of State and Energy account for their CTR-funded projects and referred the reader to reports submitted by these departments that detail how the assistance was accounted for. The 1999 accounting report provided a description of how DOD plans to account for the assistance in fiscal year 2000. Although DOD had planned to conduct 23 audits and examinations during the fiscal year, it only conducted 14. The remaining nine were either cancelled or postponed due to difficulties with the Russians concerning the agreement governing audit and examination procedures. DOD's 1999 accounting report did not list specific information on Russia's arsenal of tactical nuclear warheads as required by section 1312 of the National Defense Authorization Act for Fiscal Year 2000. However, DOD provided this information in a separate report sent to the Congress on January 9, 2001. DOD's 1999 report accounting for CTR assistance, like its five predecessors, was submitted late to the Congress. The report was due on January 31, 2000, but was not issued to the Congress until January 17, 2001--a delay of almost 12 months. DOD officials attributed the delay to a prolonged internal review process and to the fact that CTR policy officials revised the draft report, late in the review process, to incorporate the recommendations contained in our March 2000 report. The Department's delay prevented the Congress from knowing the status of CTR-provided assistance while members were considering CTR program funding levels for fiscal year 2001.
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Since 1992, Congress has authorized more than $3 billion for the Cooperative Threat Reduction (CTR) program to help Russia, Belarus, Ukraine, Kazakhstan, Uzbekistan, Moldova, and Georgia secure and eliminate weapons of mass destruction. Concerned about proper oversight of equipment and services provided by the program, Congress required the Department of Defense (DOD) to report annually on whether the assistance was being used as intended. This report reviews (1) whether DOD's oversight procedures produce the necessary information to determine if the threat reduction assistance, including equipment provided and services furnished, is being used as intended and (2) whether DOD can improve its oversight. GAO found that DOD has procedures in place that reasonably ensure that at least 95 percent of the assistance is being used as intended and is adequately accounted for. Because of access restrictions imposed by the Russian government, a limited amount of equipment--less than five percent of the total value of assistance provided--is in locations where access by U.S. personnel is not permitted. DOD can enhance the quality of its program oversight by better targeting and expanding the scope of its formal audit and examination procedures.
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Of the TARP performance audit recommendations we have made, some have been program specific, while others have addressed crosscutting issues such as staffing and communications. Our program-specific recommendations have focused on the following TARP initiatives: CPP was designed to provide capital to financially viable financial institutions through the purchase of preferred shares and subordinated debentures. The Community Development Capital Initiative (CDCI) provided capital to Community Development Financial Institutions by purchasing preferred stock. Capital Assessment Program (CAP) was created to provide capital to institutions not able to raise it privately to meet Supervisory Capital Assessment Program--or "stress test"-- requirements. This program was never used. Credit market programs: Term Asset-backed Securities Loan Facility (TALF) provided liquidity in securitization markets for various asset classes to improve access to credit for consumers and businesses. SBA 7(a) Securities Purchase Program provided liquidity to secondary markets for government-guaranteed small business loans in the Small Business Administration's (SBA) 7(a) loan program. American International Group (AIG) Investment Program (formerly Systemically Significant Failing Institutions Program) provided support to AIG to avoid disruptions to financial markets from its possible failure. Automotive Industry Financing Program (AIFP) aimed to prevent a significant disruption of the American automotive industry through government investments in the major automakers. The Home Affordable Modification Program (HAMP) divides the cost of reducing monthly payments on first-lien mortgages between Treasury and mortgage holders/investors and provides financial incentives to servicers, borrowers, and mortgage holders/investors for loans modified under the program. Principal Reduction Alternative (PRA) pays financial incentives to mortgage holders/investors for principal reduction in conjunction with a HAMP loan modification for homeowners with a current loan-to-value ratio exceeding 115 percent. The Second-Lien Modification Program (2MP) provides incentives for second-lien holders to modify or extinguish a second-lien mortgage when a HAMP modification has been initiated on the first-lien mortgage for the same property. Home Affordable Foreclosure Alternatives (HAFA) provides incentives for short sales and deeds-in-lieu of foreclosure as alternatives to foreclosure for borrowers who are unable or unwilling to complete the HAMP first-lien modification process. Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (Hardest Hit Fund or HHF) supports innovative measures developed by state housing finance agencies and approved by Treasury to help borrowers in states hit hardest by the aftermath of the housing crisis. Federal Housing Administration's (FHA) Short Refinance Program provides underwater borrowers--those with properties that are worth less than the principal remaining on their mortgage--whose loans are current and are not insured by FHA with the opportunity to refinance into an FHA-insured mortgage. As of August 2015, our performance audits of the TARP programs have resulted in 72 recommendations to Treasury. Of the 72 performance audit recommendations, Treasury has implemented 59, or approximately 82 percent; partially implemented 4--that is, taken some steps toward implementation but needs to take more actions; and not implemented 3-- that is, Treasury has not taken steps to implement them (see fig.1). Among the 7 recommendations that Treasury has taken some or no steps to implement, 1 was directed at CPP and 6 directed at the MHA housing programs. Finally, 6 performance audit recommendations have been closed-not implemented. Due to Treasury's inaction and the evolving nature of the programs, we considered 3 of them to be outdated and no longer applicable. Two of these 6 recommendations were related to CPP and 2 were related to the MHA programs. Treasury has taken action on the majority of our recommendations for CPP. Specifically, to date, Treasury has implemented six of our nine recommendations for CPP. For example, Treasury implemented our recommendation that it apply lessons learned from the implementation of CPP to similar programs, such as the Small Business Lending Fund (SBLF), by including a process for reviewing regulators' viability determinations for all eligible applicants for SBLF. Specifically, Treasury included additional evaluation by a central application review committee for all eligible applicants who had not been approved by their federal regulator. Treasury also took steps to provide information from its evaluation to the regulator when their views differ. These steps should help ensure that applicants will receive consistent treatment in investment decisions across different regulators. However, Treasury has not implemented three of our CPP-related recommendations--one remains open and two have been closed. In 2012, we recommended that Treasury consider analyzing and reporting on remaining and former CPP participants separately. In particular, we noted that the remaining CPP institutions tended to be less profitable and hold riskier assets than other institutions of similar asset size. For example, the remaining CPP institutions had significantly lower returns on average assets and higher percentages of noncurrent loans than former CPP and non-CPP institutions. They also held less regulatory capital and reserves for covering losses. Although our analysis found differences in the financial health of remaining and former CPP institutions, we noted that Treasury's quarterly financial analysis of CPP institutions did not distinguish between them. By not distinguishing between remaining and former CPP participants, Treasury misses an opportunity to provide greater transparency about the financial health of institutions remaining in CPP. Treasury stated that it would carefully consider our recommendation and emphasized its ongoing commitment to keeping the public informed of its progress in winding down CPP. While Treasury reported generally on the results of its CPP auctions and the status of institutions remaining in the program, as of August 2015, it had not yet considered analyzing and reporting on remaining and former CPP participants separately and it is not likely to do so, according to Treasury. Treasury believes that providing information about the financial position of institutions remaining in CPP is unnecessary because it is publicly available to interested parties through regulatory filings or other sources. We closed two recommendations for Treasury to periodically collect and review certain information from the bank regulators on the analysis and conclusions supporting their decisions on CPP repayment requests to help ensure consistency of the CPP repayment process. Treasury did not take actions that would address the recommendations because it believed these recommendations raised questions about how to balance the goals of consistency with the need to respect the independence of regulators. Although we disagreed with Treasury's position, we closed these two recommendations as not implemented because Treasury officials stated that since it is winding down the program, only a few remaining CPP participants are likely to make full repayments. Thus we determined that implementation of these recommendations is not as critical as it was at the time we made them. Since 2009, we have made 27 recommendations aimed at improving MHA's TARP-funded housing programs. As of August 2015, Treasury had implemented 19 of them. Examples of more recent actions Treasury has taken to implement these recommendations include the following: In June 2010, we recommended that Treasury expeditiously finalize and implement benchmarks for performance measures under the first- lien modification program, as well as develop measures and benchmarks for the recently announced HAMP-funded homeowner assistance programs. Since June 2011, Treasury has been reporting in its MHA program performance reports on the performance of the largest MHA servicers in three categories: (1) identifying and contacting homeowners, (2) homeowner evaluation and assistance, and (3) program management and reporting. Treasury established quantitative and qualitative benchmarks for each of the three performance categories for HAMP first-lien modifications and other TARP-funded MHA programs. In the same report, we recommended that Treasury expeditiously implement a prudent design for the remaining TARP-funded housing programs. In July 2013, Treasury's MHA risk assessment included measuring internal control activities for 2MP, PRA, and HAFA. In June 2012, we recommended that Treasury and FHA update their estimates of participation in the FHA Short Refinance Program and use the updated estimates to reassess the terms of the letter of credit facility to help ensure that the program is cost-effective. After FHA provided Treasury with updated participation estimates, Treasury amended the letter of credit facility in March 2013, reducing the authorized amount by $7 billion to $1 billion. Treasury also reduced the cap on administrative fees that could be charged by $92 million (from $117 million to $25 million). In March 2015, Treasury amended the purchase agreement for the letter of credit facility for a second time, reducing the amount by an additional $900 million ($1 billion to $100 million). As a result of these two actions, Treasury deobligated approximately $7.9 billion in total, disallowing its use for future obligations. In July 2012, we recommended that Treasury expeditiously conduct a comprehensive risk assessment of HAMP Tier 2, using the standards for internal control in the federal government as a guide. In April 2013, Treasury conducted a risk assessment of MHA programs, including HAMP Tier 2, based on internal control standards. The risk assessment included identifying the types and potential impacts of risks on the MHA program and appropriate mitigating steps taken to address those risks. In February 2014, we recommended that Treasury issue clarifying guidance to servicers on providing effective relationship management to borrowers with limited English proficiency (LEP). Treasury had previously issued guidance to servicers requiring them to develop and implement a policy to identify the requirements and appropriate caseload for the relationship manager position, including a provision for providing effective relationship management to borrowers whose primary language is a language other than English. In April 2014, Treasury issued guidance requiring servicers to ensure that staff are able to effectively communicate with all borrowers, including LEP borrowers, by either employing multilingual individuals or engaging an outside vendor to provide interpretation services. Treasury has not implemented 8 of the 27 recommendations related to MHA's TARP-funded programs. Six of these recommendations remain open, including 4 of which Treasury has taken some action. Finally, we closed the remaining 2 TARP-funded housing program recommendations as not implemented. The four recommendations that Treasury has taken some action to address are as follows: In June 2010, we recommended that Treasury expeditiously report activity under PRA, including the extent to which servicers determined that principal reduction was beneficial to investors but did not offer it, to ensure transparency in the implementation of this program feature across servicers. Starting with the monthly MHA performance report for the period through May 2011, Treasury began reporting summary data on the PRA program. Specifically, Treasury provides information on PRA trial modification activity as well as median principal amounts reduced for active permanent modifications. In addition, Treasury's public MHA loan-level data files include information on the results of analyses of borrowers' net present value under PRA and indicate whether principal reduction was part of the modification. While this information would allow interested users with the capability to analyze the extent to which principal reduction was beneficial but not offered overall, it puts the burden on others to do the analysis and report the results publicly. Also, the publicly available data do not identify individual servicers and thus cannot be used to assess the implementation of this program feature across servicers. Treasury officials stated that they believe they have implemented this recommendation through the reporting described previously. Moreover, the officials stated that it would be neither useful nor helpful to provide these data broken out by specific identified servicer. Because servicers may choose to implement the PRA program under individually developed terms, Treasury officials stated that broken out data would not permit a proper comparison. However, our recommendation was intended to ensure transparency in the implementation of this program feature across servicers, which would require that information be reported on an individual servicer basis to allow comparison between servicers and highlight differences in the policies and practices of individual servicers. As such, we maintain that Treasury has partially implemented this recommendation and should take action to fully implement it. In February 2014, we recommended that Treasury ensure that the compliance agent assess servicers' compliance with LEP relationship management guidance, once it was established. Treasury issued clarifying LEP guidance to MHA program servicers in April 2014. In July 2015, Treasury officials stated that they had reached out to the seven largest MHA servicers to obtain their policies on implementing the guidance and confirmed that such written policies are consistent with MHA guidance on LEP. In October 2014, we recommended that Treasury conduct periodic evaluations using analytical methods, such as econometric modeling, to help explain differences among MHA servicers in redefault rates. Such analyses could help inform compliance reviews, identify areas of weaknesses and best practices, and determine the need for additional program policy changes. Treasury conducted an analysis to compare redefault rates among servicers and to determine whether servicers' portfolio of HAMP-modified loans performed at, above, or below expectations for the metrics analyzed. Despite these analyses, Treasury officials maintained that such an analysis is inherently challenging and limited and therefore would not repeat it. Treasury officials gave several reasons for not periodically repeating this analysis. First, they cited data limitations, including a lack of loan origination and current credit profile data. However, Treasury does have access to variables that both it and we have identified in the past as being important for predicting redefault, including the size of any change in payments, delinquency duration, and credit scores and loan-to-value ratios at origination. Second, Treasury indicated that excluding loans due to missing observations could lead to unintended consequences. However, such limitations are not unusual when researchers conduct this type of analysis and researchers can employ measures to correct for or identify biases in the data. In addition, Treasury conducted such analyses when designing the program. Further, Treasury has relied on this dataset to identify factors that they believe influence redefault. And finally, we determined that the existing data are sufficiently reliable to allow for more sophisticated analytical methods such as an econometric analysis that could control for certain differences among servicers. Third, Treasury noted that it can rely on compliance reviews, including a review of sampled loans at individual servicers, to ensure that servicers followed program guidance. However, more rigorous analytical methods are a useful tool to supplement and inform ongoing compliance efforts, which by themselves may not detect significant variations in performance across servicers. Such methods would also be useful in identifying areas of weaknesses and best practices and the potential need for additional program policy changes. Treasury disagreed and for the reasons discussed above, questioned the usefulness of such analysis with regard to informing compliance efforts or identifying best practices or areas of weakness. However, in our October 2014 report, we identified large differences among some servicers both with and without controls for certain loan, borrower, and property characteristics. We determined that the existing data are sufficiently reliable to allow for more sophisticated analytical methods such as an econometric analysis that could control for certain differences among servicers. By not capitalizing on the information these methods provide, Treasury risks making policy decisions based on potentially incomplete information and may miss opportunities to identify best practices to assist the greatest number of eligible borrowers. Thus, we continue to maintain that Treasury should take action to fully implement this recommendation. In the same report, we recommended that Treasury conduct periodic evaluations to help explain differences in MHA servicers' reasons for denying applications for trial modifications. Such evaluations could help inform compliance reviews of individual servicers, identify areas of weaknesses and best practices, and determine the potential need for programmatic changes. Treasury put together a list of servicers with reporting anomalies that had been identified and sent them questionnaires asking them to explain the rationale behind using certain codes to report denials (denial codes) of applications for trial modifications. Treasury expects to have answers back by October 2015. Beyond that, Treasury stated that it and the MHA Program Administrator planned to continue to collect data and monitor trends in the data on an ongoing basis and reach out to servicers on an as- needed basis to collect more information. Treasury's compliance agent has also added procedures for testing denial codes that servicers report. According to Treasury officials, Treasury has used the prevalence of certain denial codes to inform certain policy changes. For example, they said that the most common reason that applications for HAMP were denied is that borrowers did not submit the documentation necessary to evaluate their eligibility for HAMP. In response, Treasury has simplified documentation requirements where appropriate several times. In addition, Treasury told us that they use the denial code information to form the basis for discussions with individual servicers to ensure compliance with program guidelines and reporting practices. Although these are examples of Treasury's analysis of overall denial rates, Treasury's actions do not address differences in individual MHA servicers' reasons for denial. Additionally, it is not clear whether Treasury plans to conduct periodic evaluations of differences in denial rates or how Treasury will use the information it gathers to identify areas of weaknesses and best practices and determine whether additional policy changes are needed. Thus, we continue to maintain that Treasury should take action to implement this recommendation. The two recommendations that Treasury has not implemented are as follows: In February 2014, we recommended that Treasury require its MHA compliance agent to take steps to assess the extent to which servicers had established internal control programs that effectively monitored compliance with fair lending laws applicable to MHA programs. In April 2014, Treasury officials stated that they planned to continue efforts to promote fair lending policies. However, as of August 2015, they did not plan to implement our recommendation. As we noted in the report, both the MHA Servicer Participation Agreement and MHA Handbook require that servicers have an internal control program to monitor compliance with relevant consumer protection laws. According to Treasury officials, the federal agencies with supervisory authority over fair lending remain in the best position to monitor servicers in this area. Representatives of the federal regulators said that their fair lending reviews have a broader overall focus that may not specifically focus on MHA activities. Moreover, our analysis identified some statistically significant differences among four large MHA program servicers in the number of denials and cancellations of trial modifications and in the potential for redefault of permanent modifications for certain protected groups. Evaluating the extent to which servicers have developed and maintained internal controls to monitor compliance with fair lending laws could give Treasury additional assurances that servicers are implementing the MHA program in compliance with fair lending laws. In July 2015, we recommended that Treasury develop and implement policies and procedures that established a standard process to better ensure that changes to TARP-funded housing programs were based on evaluations that comprehensively and consistently met the key elements of benefit-cost analysis. In its written comments on the draft report, Treasury agreed that it was important to assess the benefits and costs of proposed program modifications and noted that it would seriously consider the extent to which it could apply our recommendation going forward. Treasury officials said that they planned to provide an update on actions taken or planned in a required response to Congress in September 2015. We provided Treasury a draft copy of this report for review and comment. Treasury provided technical comments that we have incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees. This report will also be available at no charge on our web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact Daniel Garcia-Diaz at (202) 512-8678 or [email protected] for questions about nonmortgage-related TARP programs, or Mathew Scire at (202) 512-8678 or [email protected] for questions about mortgage- related TARP programs. 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. The following table summarizes the status of our TARP performance audit recommendations as of August 28, 2015. We classify each recommendation as implemented, partially implemented (the agency took steps to implement the recommendation but more work remains), open (the agency has not taken steps to implement the recommendation), and closed, not implemented (the agency decided not to take action to implement the recommendation). The recommendations are listed by report. In addition to the contact named above, Harry Medina and Karen Tremba (Assistant Directors), Anne A. Akin (Analyst-in-Charge), Bethany Benitez, Emily Chalmers, John Karikari, and Jena Sinkfield made key contributions to this report.
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The Emergency Economic Stabilization Act of 2008 (EESA) authorized the creation of TARP to address the most severe crisis that the financial system had faced in decades. Treasury has been the primary agency responsible for TARP programs. EESA provided GAO with broad oversight authorities for actions taken under TARP and included a provision that GAO report at least every 60 days on TARP activities and performance. This 60-day report describes the status of GAO's TARP performance audit recommendations to Treasury as of August 2015. In particular, this report discusses Treasury's implementation of GAO's recommendations, focusing on two programs: CPP and MHA. GAO's methodologies included assessing relevant documentation from Treasury, interviewing Treasury officials, and reviewing prior TARP reports issued by GAO. As of August 2015, GAO's performance audits of the Troubled Asset Relief Program (TARP) activities have resulted in 72 recommendations to the Department of the Treasury (Treasury). Treasury has implemented 59 of the 72 recommendations (about 82 percent), some of which were aimed at improving transparency and internal controls of TARP. The status of the remaining recommendations is as follows: Treasury has partially implemented four of the recommendations--that is, it has taken some steps toward implementation but needs to take more actions. All four recommendations are directed at the Making Home Affordable (MHA) program, a collection of housing programs designed to help homeowners avoid foreclosure. The recommendations call for Treasury to, for example, issue guidance and monitor servicer compliance on working with borrowers with limited English proficiency. Treasury issued applicable guidance and obtained the policies of the larger MHA servicers, but has not assessed the implementation of those policies at the servicers. Three recommendations remain open--that is, Treasury has not taken steps to implement them. Among these open recommendations are one directed at the Capital Purchase Program (CPP), which provided capital to certain U.S. financial institutions, and two recommendations directed at the MHA housing programs. For example, in July 2015, GAO recommended that Treasury establish a standard process to better ensure that changes to TARP-funded MHA programs are based on comprehensive benefit-cost analyses. Treasury told GAO they would consider these recommendations at the time the recommendations were made. Six recommendations have been closed but were not implemented. Four are related to CPP and MHA and two to other TARP activities. Generally, Treasury did not take action before the programs evolved or began to wind down, and therefore GAO determined that the recommendations were outdated and no longer applicable. GAO continues to maintain that Treasury should take action to fully implement the four partially implemented recommendations and three open recommendations.
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Created in 2008, CPP was the primary initiative under TARP to help stabilize the financial markets and banking system by providing capital to qualifying regulated financial institutions through the purchase of senior preferred shares and subordinated debt. On October 14, 2008, Treasury allocated $250 billion of the original $700 billion in overall TARP funds for CPP. The allocation was subsequently reduced in March 2009 to reflect lower estimated funding needs, as evidenced by actual participation rates. The program was closed to new investments on December 31, 2009. Under CPP, qualified financial institutions were eligible to receive an investment of between 1 and 3 percent of their risk-weighted assets, up to a maximum of $25 billion. generally received senior preferred shares that would pay dividends at a rate of 5 percent annually for the first 5 years and 9 percent annually thereafter. EESA required that Treasury also receive warrants to purchase shares of common or preferred stock or a senior debt instrument to further protect taxpayers and help ensure returns on the investments. Institutions are allowed to repay CPP investments with the approval of their primary federal bank regulator and afterward to repurchase warrants at fair market value. Risk-weighted assets are all assets and off-balance-sheet items held by an institution, weighted for risk according to the federal banking agencies' regulatory capital standards. In May 2009, Treasury increased the maximum amount of CPP funding that small financial institutions (qualifying financial institutions with total assets of less than $500 million) could receive from 3 to 5 percent of risk-weighted assets. Federal Reserve System, as well as bank and financial holding companies; Federal Deposit Insurance Corporation (FDIC), which provided primary federal oversight of any state-chartered banks that were not members of the Federal Reserve System; Office of the Comptroller of the Currency (OCC), which was responsible for chartering, regulating, and supervising commercial banks with national charters; and Office of Thrift Supervision (OTS), which chartered federal savings associations (thrifts) and regulated and supervised federal and state thrifts and savings and loan holding companies. OTS has since been eliminated. The primary federal regulator is generally the regulator overseeing the lead bank. Primary federal regulators of bank holding companies also consult with the Federal Reserve. referred to an interagency CPP Council composed of representatives from the four banking regulators, with Treasury officials as observers. The CPP Council evaluated and voted on the applicants, forwarding to Treasury applications that received "approval" recommendations from a majority of the council members. Treasury provided guidance to regulators and the CPP Council to use in assessing applicants that permitted consideration of factors such as signed merger agreements or confirmed investments of private capital, among other things, to offset low examination ratings or other attributes of weaknesses. Finally, institutions that the banking regulators determined to be the weakest and thus ineligible for a CPP investment, such as those with the lowest examination ratings, received a presumptive denial recommendation. The banking regulators or the CPP Council sent recommendations for approval to Treasury's Investment Committee, which was composed of three to five senior Treasury officials, including OFS's Chief Investment Officer (who served as the committee chair) and the assistant secretaries for financial markets, economic policy, financial institutions, and financial stability at Treasury. The Investment Committee could also request additional analysis or information in order to clear up any concerns before deciding on an applicant's eligibility. After completing its review, the Investment Committee made recommendations to the Assistant Secretary for Financial Stability for final approval. Once the Investment Committee recommended preliminary approval, Treasury and the approved institution initiated the closing process to complete the investment and disburse the CPP funds. Nine major financial institutions were initially included in CPP.institutions did not follow the application process that was ultimately developed but were included because Treasury and the federal banking regulators considered them essential to the operation of the financial system. At the time, these nine institutions held about 55 percent of U.S. banking assets and provided a variety of services, including retail, wholesale, and investment banking and custodial and processing services. According to Treasury officials, the nine financial institutions agreed to participate in CPP in part to signal the program's importance to the stability of the financial system. Initially, Treasury approved $125 billion in capital purchases for these institutions and completed the These transactions with eight of them on October 28, 2008, for a total of $115 billion. The remaining $10 billion was disbursed after the merger of Bank of America Corporation and Merrill Lynch & Co., Inc. was completed in January 2009. Repayments and income from dividends, interest, and warrants from CPP investments have exceeded the amounts originally disbursed, but concerns remain about the financial strength of the remaining institutions and their ability to repay and exit the program. As we have reported, Treasury disbursed $204.9 billion to 707 financial institutions nationwide from October 2008 through December 2009. As of January 31, 2012, Treasury had received $211.5 billion in repayments and income from its CPP investments, exceeding the amount originally disbursed by $6.6 billion (see fig. 2). The repayments and income amount included $185.5 billion in repayments of original CPP investments as well as $11.4 billion in dividends, interest, and fees; $7.7 billion in warrants sold; and $6.9 billion in gains from the sale of Citigroup common stock. After accounting for write-offs and realized losses totaling $2.7 billion, CPP had $16.7 billion in outstanding investments as of January 31, 2012. Although this $16.7 billion is still potentially at risk, Treasury estimated a lifetime gain of $13.5 billion for CPP as of November 30, 2011. As of January 31, 2012, 52 percent (366) of the original 707 institutions remained in CPP. These institutions accounted for $16.7 billion in outstanding investments, or 8 percent of the original amount disbursed. About two-thirds of the outstanding investments were concentrated in a relatively small number of institutions (see fig. 3). Specifically, 25 remaining CPP investments accounted for $11.2 billion, or 67 percent of outstanding investments. In contrast, the remaining $5.5 billion (33 percent) was spread among 341 institutions. On a geographical basis, outstanding CPP investments were relatively widely disbursed throughout the United States as of January 31, 2012. All but 3 states and the District of Columbia had at least 1 institution with CPP investments outstanding, and 25 states had at least 5 such institutions (see fig. 4). California had the highest number of remaining CPP institutions with 33, followed by Illinois with 24. These states also had the highest number of original CPP recipients (72 and 45, respectively). In terms of total CPP investments outstanding, however, Alabama had the largest amount ($3.6 billion), followed by Utah ($1.4 billion), Georgia ($1.4 billion), and Puerto Rico ($1.3 billion). Nearly half (341) of the 707 institutions that originally participated in CPP had exited the program as of January 31, 2012. Of the 341 institutions that exited CPP, 43 percent, or 146 institutions, exited by fully repaying their investments. Another 48 percent, or 165 institutions, exited CPP by exchanging their investments under other federal programs: 28 through the Community Development Capital Initiative (CDCI) and 137 through the SBLF program (see fig. 5).CPP recipients that exited the program, 15 went into bankruptcy or receivership, 12 had investments sold by Treasury, and 3 merged with another institution. CPP dividend and interest payments are due on February 15, May 15, August 15, and November 15 of each year, or the first business day subsequent to those dates. The reporting period ends on the last day of the calendar month in which the dividend or interest payment is due. number of institutions missing dividend or interest payments due on their CPP investments increased steadily from 8 in February 2009 to 158 in November 2011, or about 42 percent of institutions still in the program (see fig. 6). This increase has occurred while program participation has declined, and the proportion of those missing scheduled payments has risen accordingly. The number of institutions missing payments has stabilized since February 2011, but most of these institutions continued to miss them. In particular, 119 of the 158 institutions that missed payments in November 2011 had also missed payments in each of the previous three quarters. Moreover, only 7 of the 158 institutions had never missed a previous payment. On July 19, 2011, Treasury announced that it had, for the first time, exercised its right to elect members to the boards of directors of two of the remaining CPP institutions. In considering whether to nominate directors, Treasury said that it proceeds in two steps. First, after an institution misses five dividend or interest payments, Treasury sends OFS staff members to observe board meetings. Second, once an institution has missed six dividend payments, Treasury decides whether to nominate a board member based on a variety of considerations, including what it learns from the board meetings, the institution's financial condition, the function of its board of directors, and the size of its investment.January 31, 2012, Treasury had elected 12 board members to 7 CPP institutions. At the same time that the number of institutions missing dividend payments has risen, the number of CPP institutions on FDIC's problem bank list has generally increased. FDIC compiles a list of banks with demonstrated financial, operational, or managerial weaknesses that threaten their continued financial viability and publicly reports the number of such institutions on a quarterly basis. While some CPP funds were disbursed to bank holding companies, FDIC's problem bank list does not include them. FDIC accounted for bank holding companies participating in CPP when their subsidiary depositories were designated as problem banks. It is possible that a bank holding company CPP recipient downstreamed CPP funds to a subsidiary depository that appeared on the problem bank list. However, it is unclear the extent to which this downstreaming occurred and thus the extent to which subsidiaries on the As of December 31, 2009, 47 list may have benefitted from CPP funds. CPP institutions were on the problem bank list (see fig. 7). This number had grown to 120 institutions by December 31, 2010, and to 130 by December 31, 2011. The number of these institutions increased every quarter from March 2009 to June 2011 and rose even as the number of institutions participating in CPP declined. As figure 7 shows, the number of problem banks fell slightly for the first time in the third quarter of 2011. Federal and state bank regulators may not allow such institutions to make dividend payments in an effort to preserve their capital and promote safety and soundness. Multiple subsidiary depositories of the same CPP bank holding company that were designated as problem banks were counted separately. The financial strength of the participating institutions will largely determine the speed at which they repay their investments and exit CPP and thus is a key factor in the program's total lifetime income. Institutions will have to demonstrate that they are financially strong enough to repay their CPP investments in order to receive regulatory approval to exit the program. The institutions' financial strength will also be a primary factor in whether they make dividend payments, and institutions that continue to miss payments may have difficulty exiting CPP. Financial institutions that are on the problem bank list because of their financial weaknesses, as identified by their regulators, may also face challenges exiting the program. In late 2013, CPP dividend and interest rates will begin increasing (as described earlier), and the increase may prompt institutions to repay their investments more quickly. If broader interest rates are low, especially approaching the date that the dividend resets, banks could have a further incentive to redeem their preferred shares. However, the increased dividend rate could make exiting even more difficult for problem banks and those that have missed payments. As we have previously reported, in unwinding TARP programs, Treasury has stated that it strives to protect taxpayer investment and maximize overall investment returns with competing constraints, promote the stability of financial markets and the economy by preventing disruptions, bolster markets' confidence to increase private capital investment, and dispose of the investments as soon as it is practicable. As we and others have noted, these goals at times conflict--that is, maximizing returns on investments may require Treasury to hold the assets until their value increases, creating a conflict with the goal of exiting as soon as practicable. Treasury officials told us that Treasury's practice was generally to hold rather than sell its CPP investments. As a result, Treasury's ability to exit the program would depend on the ability of institutions to repay their investments. However, Treasury officials noted that, if warranted, Treasury could change its practice in the future and sell more of its investments to third parties. Institutions that remain in CPP tend to be financially weaker than institutions that have exited the program and institutions that did not receive CPP capital. Our analysis considered various measures that describe banking institutions' profitability, asset quality, capital adequacy, and ability to cover losses. The analysis focused on institutions with under $10 billion in assets, a group that constituted nearly all of the remaining institutions. We analyzed financial data on 352 remaining CPP institutions and 256 former CPP institutions that exited CPP through full repayments or conversion to CDCI or SBLF. These two groups accounted for 608 of the 707 institutions that participated in CPP. We compared these two groups to a non-CPP group (i.e., institutions that have not participated in CPP and have less than $10 billion in assets) of 8,040 active financial institutions for which financial information was available. All financial information generally reflects quarterly regulatory filings on December 31, 2011. Profitability measures for remaining CPP institutions were lower than those for former CPP participants and the non-CPP group. From March 2008 to December 2011, the remaining CPP institutions consistently had lower quarterly return on average assets values than the other groups (see fig. 8). This measure shows how profitable a company is relative to its total assets and how efficient management is at using its assets to generate earnings. For the quarter ending December 31, 2011, remaining CPP institutions had a median return on average assets of 0.25, compared with 0.74 for former CPP institutions and 0.69 for the non-CPP group. The return on average equity measure, which shows the profit a company generates with the money shareholders have invested, showed a similar but more pronounced relationship. The median return on average equity was 2.71 for remaining CPP institutions, compared with 7.15 for former CPP institutions and 6.22 for the non-CPP group. Further, the median net interest margin--another important measure of profitability--was consistently lower for remaining CPP institutions than for the other groups, but the differences were less pronounced, particularly in recent quarters (see fig. 9). The net interest margin measures a company's investment decisions by comparing its investment returns to its interest expenses. A higher margin indicates a more successful business strategy. For the quarter ending December 31, 2011, the median net interest margin was lowest (3.74) for the remaining CPP institutions. However the medians were not significantly higher for the other two groups--3.90 for former CPP institutions and 3.79 for the non- CPP group. Not only were remaining CPP institutions less profitable than former CPP institutions and the non-CPP group, but they also held relatively more poorly performing assets, as measured by several financial indicators. First, remaining CPP institutions had a consistently higher percentage of noncurrent loans than former CPP institutions and the non-CPP group from March 2008 to December 2011 (see fig. 10). While the median noncurrent loan percentage increased over time for each group before leveling off, the rate of growth was steeper and the period of growth lasted longer for the remaining CPP institutions. As of December 31, 2011, a median of 4.18 percent of loans for remaining CPP institutions were noncurrent, compared with 1.68 percent for former CPP institutions and 1.70 percent for the non-CPP group. Second, remaining CPP institutions had a higher median ratio of net charge-offs to average loans (1.22) than both former CPP institutions (0.47) and the non-CPP group (0.30), as of December 31, 2011. Finally, both remaining and former CPP institutions tended to hold loans that were more concentrated in risky business lines than those held by the non-CPP group, although the differences, and the overall percentages of these loans, were relatively small for one loan category. Both remaining and former CPP institutions had higher proportions of commercial real estate and construction and land development loans compared with the non-CPP group (see fig. 11). As we have reported, delinquencies on commercial real estate loans have more than doubled since the onset of the financial crisis in 2008, and such loans are prone to volatility because of high transaction costs, rigid and constrained supply, and a number of other factors. While remaining CPP institutions had about the same proportion of commercial real estate loans overall as the former CPP institutions (about 35 percent), they had a noticeably higher proportion of construction and land development loans compared to the non-CPP group. Although these loans made up only about 4 to 8 percent of the banks' overall portfolios, construction and land development loans are generally considered to be particularly risky. For example, they often have long development times and can include properties that are built without firm commitments from buyers or lessees. Compared with former CPP institutions and the non-CPP group, remaining CPP institutions held less regulatory capital as a percentage of assets. Regulators require minimum amounts of capital to lessen an institution's risk of default and improve its ability to sustain operating losses. Capital can be measured in several ways, but we focused on Tier 1 capital, which includes both risk-based and common risk-based measures, because it is the most stable form of regulatory capital. The Tier 1 risk-based capital ratio measures Tier 1 capital as a share of risk- weighted assets, and the common equity Tier 1 ratio measures common equity Tier 1 as a share of risk-weighted assets. Remaining CPP institutions had lower Tier 1 capital levels than former CPP institutions and the non-CPP group. On a quarterly basis, for example, the Tier 1 risk-based capital ratio for remaining CPP participants generally remained well below those for the former CPP institutions and the non-CPP group from March 2008 to December 2011 (see fig. 12). While Tier 1 capital levels of the remaining institutions have trended slightly upward since December 2009, levels for the other two groups rose at a slightly higher rate, increasing the gap between the groups. As of December 31, 2011, Tier 1 capital accounted for 12.38 percent of risk- weighted assets for remaining CPP institutions compared with 14.09 percent for former CPP institutions and 14.81 percent for the non-CPP group. Because Tier 1 capital for the remaining institutions includes funds received through TARP, ratios using common equity Tier 1--which generally does not include TARP funds--may better illustrate these institutions' capital adequacy. For the remaining CPP institutions, TARP funds comprised a median of 25 percent of the institution's Tier 1 capital. As was the case with the Tier 1 risk-based capital ratio, the common equity Tier 1 ratio for remaining CPP institutions generally remained well below those for the former CPP institutions and the non-CPP group from March 2008 to December 2011 (see fig. 12). However, the differences between both CPP groups and the non-CPP group were more pronounced possibly because common equity Tier 1 generally does not include TARP funds. While the ratio for remaining CPP institutions stayed relatively stable from March 2008 to December 2010, it has since begun increasing slightly. As of December 31, 2011, the common equity Tier 1 ratio was lower for remaining CPP institutions than the other two groups. In particular, common equity Tier 1 for remaining CPP institutions comprised a median of 10.53 percent of risk-weighted assets, compared with 12.09 percent for former CPP institutions and 14.68 percent for the non-CPP group. In addition to holding less regulatory capital than former CPP institutions and the non-CPP group, remaining CPP institutions also had significantly lower reserves for covering losses. On a quarterly basis, the median ratio of reserves to nonperforming loans was consistently lower for remaining CPP institutions than for the other groups from March 2008 to December 2011 (see fig. 14). The ratio for all three groups declined in 2008 and 2009, and while it began to stabilize for the non-CPP group in 2010, it continued to decline for remaining CPP institutions. As of December 31, 2011, the ratio of reserves to nonperforming loans was lower for remaining CPP institutions (40.87) than for former CPP participants (70.93) and the non-CPP group (59.56). We also compared loan loss provisions to net charge-offs and found that the remaining CPP institutions had lower ratios (74.48) than former CPP institutions (92.47) but higher than the non-CPP group (72.78). Remaining CPP institutions also had noticeably higher Texas Ratios than former CPP institutions and the non-CPP group. The Texas Ratio helps determine a bank's likelihood of failure by comparing its troubled loans to its capital. The higher the ratio, the more likely the institution is to fail. On a quarterly basis, median Texas Ratios for remaining CPP institutions remained consistently above those for former CPP institutions and the non-CPP group from March 2008 to December 2011 and rose at a faster rate (see fig. 15). Since December 2010, median Texas Ratios for remaining CPP institutions have stabilized, while those for former CPP and the non-CPP group have shown slight decreases. As of December 31, 2011, remaining CPP institutions had a median Texas Ratio of 51.14, compared with 20.06 for former CPP institutions and 17.20 for the non- CPP group. Moreover, about 19 percent (66) of the 352 remaining CPP institutions had a Texas Ratio of more than 100 percent, indicating an elevated likelihood of failure, compared with only about 1 percent (3) of the 256 former CPP institutions. To assess CPP's effect on lending by depository institutions, Treasury began publishing a quarterly analysis of CPP institutions. The analysis included financial data in three categories: balance sheet and off-balance sheet items, performance ratios, and asset quality measures. Treasury grouped the institutions by asset size and separated institutions that received CPP funds from those that did not. However, Treasury did not compare remaining CPP institutions to former CPP institutions. While Treasury's analysis is intended to measure CPP's effect on the financial institutions that participated, its analysis could also provide useful information about the relative likelihood of remaining institutions to repay their investments and exit the program. Our analysis found differences in the financial condition of remaining and former CPP institutions, suggesting that the remaining CPP institutions could face challenges in repaying CPP funds and exiting the program. Treasury said that it did not perform this analysis because the quarterly CPP report was designed only to group banks into categories based on asset size and to analyze the differences between CPP and non-CPP institutions. In our prior work, we noted that Treasury should ensure transparency in providing financial assistance to private market participants, especially given the unprecedented government assistance it provided to the banking industry during the recent financial crisis. We also recommended that Treasury ensure that external stakeholders, including Congress and the public, are informed about the program's current strategy. Treasury's quarterly CPP analysis is a useful tool in providing transparency about the public's investment in financial institutions. In addition, Treasury makes public a variety of products on its website-- including transaction reports, dividend and interest reports, and monthly 105(a) reports--that account for all investments and provide program- level summaries for all TARP programs. However, the usefulness and transparency of Treasury's quarterly CPP analysis--which includes detailed bank financial measures--could be enhanced by distinguishing between former and remaining CPP institutions because the financial characteristics of these two groups differ. As a result, Congress and the public would benefit from a more complete and meaningful picture of the condition of the remaining institutions. CPP repayments and other income surpassed the program's original investment disbursements, and as institutions continue to exit CPP, this surplus continues to grow. Furthermore, Treasury's latest estimate (November 30, 2011) projects CPP's lifetime income to be $13.5 billion. However, a growing number of the remaining institutions have missed scheduled dividend or interest payments or appeared on FDIC's problem bank list. As a result, there is increased concern regarding the speed at which institutions will be able to repay remaining funds and how much of these funds Treasury will ultimately recover. In particular, our analysis showed that institutions remaining in CPP were generally less profitable, held riskier assets and less regulatory capital, and had lower reserves for covering losses compared with institutions that repaid their CPP investment and those that never participated in the program. Despite the noticeably different financial profiles for remaining and former CPP institutions, Treasury's quarterly analysis of CPP institutions does not distinguish between these two groups. As we have indicated in past reports on TARP, transparency remains a critical element in the government's unprecedented assistance to the financial sector. Such transparency helps clarify to policymakers and the public the costs of TARP assistance and the government's intervention in various markets. Enhancing the quarterly CPP analysis by distinguishing between remaining and former CPP participants will help Treasury provide Congress and the public with a more transparent and comprehensive understanding of the status of CPP and the institutions that participate in it. To provide Congress and the public with more transparent and comprehensive information on remaining CPP institutions and enhance its reporting, the Secretary of the Treasury should consider analyzing and reporting on remaining and former CPP participants separately. We provided a draft of this report to Treasury for its review and comment. Treasury provided written comments that we have reprinted in appendix II. In its written comments, Treasury stated that it would carefully consider our recommendation to further enhance transparency by analyzing and reporting on remaining and former CPP participants separately. Treasury emphasized its ongoing commitment to keep the public informed of its progress in winding down CPP. We believe that implementation of our recommendation would further strengthen Treasury's reporting to the Congress and the public on the status of CPP. We are sending copies of this report to the Financial Stability Oversight Board, Special Inspector General for TARP, interested congressional committees and members, and Treasury. The report also 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 A. Nicole Clowers at (202) 512-8678 or [email protected], or Daniel Garcia-Diaz at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. The objectives of our report were to examine (1) the status of the Capital Purchase Program (CPP), including repayments and other proceeds to date, restructuring of investments, and timeliness of dividend payments, and (2) the financial condition of institutions that received investments under CPP compared with institutions that exited CPP and those that did not participate in the program. To assess the status of CPP at the program level, we analyzed data from a number of sources including the Department of the Treasury (Treasury) and the Federal Deposit Insurance Corporation (FDIC). In particular, we used Treasury's January 2012 Monthly 105(a) Report to Congress to determine the dollar amounts of outstanding investments, the number of remaining and former participants, and the geographical distribution of each as of January 31, 2012. We also used data from Treasury's Dividends and Interest reports from February 2009 through November 2011 to determine the extent to which participants had missed payments throughout the life of the program. We interviewed Treasury officials to compare our missed payment counts with theirs and noted the reasons for any differences. Finally, we obtained from FDIC summary information on its quarterly problem bank list to show the trend of CPP institutions appearing on the list from December 2008 through December 2011. To assess the financial condition of institutions that received investments under CPP, we reviewed industry documents--including summaries of monitoring data used by banking regulators and Treasury--to identify commonly used financial measures for depository institutions. These measures help demonstrate an institution's financial health related to a number of categories including profitability, asset quality, capital adequacy, and loss coverage. We obtained such financial data for all depository institutions using SNL Financial--a private financial database that contains publicly filed regulatory and financial reports. We merged the data with SNL Financial's CPP participant list to create the three comparison groups--remaining CPP institutions, former CPP institutions, and a non-CPP group comprised of all institutions that did not participate in CPP. We analyzed financial data on 352 remaining CPP institutions and 256 former CPP institutions that exited CPP through full repayments or conversion to the Community Development Capital Initiative or the Small Business Lending Fund, accounting for 608 of the 707 CPP participants (see table 1). Our analysis focused on institutions with less than $10 billion in assets, which constituted nearly all of the remaining CPP institutions. Of the 99 CPP institutions excluded from our analysis, 11 were active participants with more than $10 billion in assets; 37 were former participants with more than $10 billion in assets; and 51 had no data available in SNL Financial, had been acquired, or were defunct. We compared the remaining and former CPP institutions to a non-CPP group of 8,040 active financial institutions for which financial information was available. We chose to present median values, but we also analyzed weighted averages and found the results to be similar. Financial data were available from SNL Financial for 427 of the 608 CPP institutions, and we accounted for an additional 181 institutions using the financial information of the holding company's largest subsidiary from SNL Financial. All financial information reflects quarterly regulatory filings on December 31, 2011, unless otherwise noted. We downloaded all financial data from SNL Financial on February 20, 2012. Finally, we compared our analysis with Treasury's quarterly analysis of CPP institutions, and we also leveraged our past reporting on the Troubled Asset Relief Program (TARP), as well as that of the Special Inspector General for TARP, as appropriate. We determined that the financial information used in this report, including CPP program data from Treasury and financial data on institutions from SNL Financial, was sufficiently reliable to assess the condition and status of CPP and institutions that participated in the program. For example, we tested the Office of Financial Stability's internal controls over financial reporting as it relates to our annual audit of the office's financial statements and found the information to be sufficiently reliable based on the results of our audits of fiscal years 2009, 2010, and 2011 financial statements for TARP. We have assessed the reliability of SNL Financial data--which is obtained from financial statements submitted to the banking regulators--as part of previous studies and found the data to be reliable for the purposes of our review. We verified that no changes had been made that would affect its reliability. We conducted this performance audit from August 2011 to March 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 contacts named above, Christopher Forys, Emily Chalmers, William Chatlos, Rachel DeMarcus, Michael Hoffman, Marc Molino, Tim Mooney, and Patricia Moye made significant contributions to this report.
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The Capital Purchase Program (CPP) was established as the primary means of restoring liquidity and stability to the financial system under the Troubled Asset Relief Program (TARP). Under CPP, the Department of the Treasury (Treasury) invested almost $205 billion in 707 eligible financial institutions between 2008 and December 2009. CPP recipients have made dividend and interest payments to Treasury on the investments. TARP's authorizing legislation requires GAO to report every 60 days on TARP activities, including those of CPP. This report examines (1) the status of CPP and (2) the financial condition of institutions receiving CPP investments. GAO reviewed Treasury reports on the CPP program and participants and interviewed officials from Treasury and the financial regulators. Using financial and regulatory data, GAO compared the financial condition of institutions remaining in CPP with those that had exited the program and those that did not participate in CPP. While repayments, dividends, and interest from institutions participating in the Capital Purchase Program (CPP) have exceeded the program's original investment disbursements, the number of missed payments has increased over the life of the program. As of January 31, 2012, the Department of the Treasury (Treasury) had received $211.5 billion from its CPP investments, exceeding the $204.9 billion it had disbursed. Of that amount, $16.7 billion remains outstanding, and most of these investments were concentrated in a relatively small number of institutions. In particular, as of January 31, 2012, 25 institutions accounted for $11.2 billion, or 67 percent, of outstanding investments. As of November 30, 2011, Treasury estimated that CPP would have a lifetime income of $13.5 billion after all institutions exited the program. As of January 31, 2012, 341 institutions had exited CPP, almost half by repaying CPP with funds from other federal programs. Institutions continue to exit CPP, but the number of institutions missing scheduled dividend or interest payments has increased. For example, as of November 30, 2011, the number of institutions that had missed their quarterly payments rose to 158, a marked increase from 8 in February 2009, even though CPP had fewer participants. The number of CPP institutions designated as problem banks--that is, demonstrating financial, operational, or managerial weaknesses that threatened their continued financial viability--also rose from 47 in December 2009 to 130 in December 2011. Institutions that continue to miss payments and problem institutions may have difficulty ever fully repaying their CPP investments. GAO's analysis showed that the remaining CPP institutions were financially weaker than institutions that had exited the program and institutions that did not receive CPP capital. In particular, the remaining CPP institutions tended to be less profitable and hold riskier assets than other institutions of similar asset size. Among other things, they had significantly lower returns on average assets and higher percentages of noncurrent loans than former CPP and non-CPP institutions. They also held less regulatory capital and reserves for covering losses. Although GAO's analysis found differences in the financial health of remaining and former CPP institutions, Treasury's quarterly financial analysis of CPP institutions did not distinguish between them. In prior work, GAO has noted the importance of providing clear information to Congress and the public about the performance of the assistance provided through the various programs within the Troubled Asset Relief Program. By distinguishing between remaining and former CPP participants, Treasury could provide greater transparency about the financial health of institutions remaining in CPP. To provide Congress and the public with more transparent and comprehensive information on institutions remaining in CPP and enhance its reporting, the Secretary of the Treasury should consider analyzing and reporting on remaining and former CPP participants separately. Treasury stated that it would carefully consider our recommendation.
| 6,901 | 785 |
Congress first authorized the F2F program in the 1985 Farm Bill to provide for the transfer of knowledge and expertise of U.S. agricultural producers and businesses to middle-income countries and emerging democracies on a voluntary basis. Most recently, Congress reauthorized the program in the 2014 Farm Bill. Congress has authorized the F2F program to provide a broad range of U.S. agricultural expertise using U.S volunteers. The 2- to 4-week volunteer assignments are designed, among other things, to improve farm and agribusiness operations and agricultural systems, field crop cultivation, fruit and vegetable growing, livestock operations, marketing, and the strengthening of cooperatives and other farmer organizations (see fig. 1). USAID promotes a secondary goal not specifically noted in the authorizing legislation: to increase the American public's understanding of international development issues and programs and international understanding of the United States and U.S. development programs. The volunteer nature of the program's activities provides the opportunity for people-to-people cultural and technical exchange. USAID and its implementing partners give volunteers guidance about their responsibility for conducting public awareness activities about their experiences to promote better understanding of international development issues and objectives upon their return home. For the program's first 6 years, annual amounts provided to F2F were below $2 million. However, with the dissolution of the Soviet Union, USAID initiated F2F program activities in the newly independent countries, including conducting a substantial number of volunteer assignments in Russia. The additional funding for these countries significantly increased the size of the F2F program. In the 2008 Farm Bill, Congress required that a minimum of $10 million be used to carry out the F2F program for each of the fiscal years 2009 through 2013. Over the fiscal years 2009 through 2013 period, USAID obligated an average of $11.5 million annually to the F2F program, and the program disbursed a total of $57.7 million for that program cycle. In the 2014 Farm Bill, Congress increased the minimum annual F2F funding requirement to $15 million. During the fiscal years 2009 through 2013 F2F program cycle, implementing partners under eight cooperative agreements and one contract made 2,984 volunteer assignments, most to 28 core countries (see fig. 2). Cooperative agreements with each partner typically include work in 2 to 5 core countries where the majority of volunteer assignments will occur. Beginning with the 2009 through 2013 F2F program cycle, USAID missions also began making separate Associate Awards to F2F partners to implement related programs (see app. II for more information on these awards). In addition, the cooperative agreements allowed for "flexible" volunteer assignments outside the core countries. F2F currently limits these flexible assignments to approximately 15 percent of the volunteer assignments for a given partner. USAID is implementing the fiscal years 2014 through 2018 F2F program through a total of nine cooperative agreements. In fiscal year 2014, the program had 296 volunteer assignments in 32 countries. USAID's Bureau for Food Security administers the F2F program using a funding mechanism known as a Leader with Associate Award Cooperative Agreement. These agreements are global in nature, with core countries identified within defined geographical regions. USAID awards these agreements to implementing partners, typically U.S. nongovernmental organizations, universities, private volunteer organizations, or contractors, for a 5-year funding cycle. USAID uses the agreements to establish objectives, tasks, and responsibilities for the implementing partners. In this way, USAID provides program-wide direction and administration for F2F while relying on implementing partners to manage on-the-ground operations and execution of program activities. In the current program cycle, USAID awarded nine cooperative agreements to seven implementing partners. USAID awarded one of these cooperative agreements to a nongovernmental organization for a F2F Special Program Support project. That partner provides program- wide technical support services for the volunteer programs and finances specialized F2F volunteer projects to bring in smaller implementing organizations, test new approaches, and identify new sources of volunteers. Implementing partners are expected to collaborate with the Special Program Support project when appropriate. F2F has two USAID headquarters staff to handle the daily operations and oversight of the program and the implementing partners. At the beginning of each 5-year cycle, USAID uses a solicitation process and corresponding request for assistance (RFA) to provide a description of the program's needs and how USAID will evaluate the applicants. In response, implementing partners describe the key components of their proposals, such as the intended country and regional focus, recruitment strategy, and agricultural sector focus. USAID specifies in the RFAs the areas in which USAID will have "substantial involvement" in implementation decisions, such as approval of implementing partners' annual work plans, key personnel, and the monitoring and evaluation plan. In the most recent RFA, USAID determined the countries that were eligible within prescribed geographic regions. USAID also used the RFA to build in a minimum level of geographical overlap and coordination with U.S. foreign assistance programs. This was accomplished most notably with the U.S. global hunger and food security initiative, Feed the Future, by directing partners to include at least two Feed the Future focus countries within each region. After the competitive award process is completed, USAID continues to inform and approve partners' annual work plans, which detail specific activities and objectives for each country in which the partner operates. USAID provides further guidance to its implementing partners through a manual, Managing International Volunteer Programs: A Farmer-to-Farmer Program Manual. USAID led the development of this manual in conjunction with implementing partners to collect lessons learned and best practices based on 20 years of F2F program experience and published the manual in 2005. According to the manual, its purpose is to serve as a reference for partners managing international volunteer programs, specifically F2F. It describes best practices on program management, volunteer assignment development and implementation, and public outreach. According to USAID, the F2F program provides this manual to all of its implementing partners. According to USAID officials, the Special Program Support project will assist USAID and the current implementing partners to update the manual later in this program cycle. Implementing partners identify agriculture sectors to focus on, such as horticulture, staple foods, and aquaculture, for individual countries with USAID input. According to USAID, partners consult with the F2F program office and the relevant missions to get their input, review, and approval on F2F activities before the partners begin activities in that country. USAID also said that partners consult with local stakeholders, F2F guidance, and other USAID program documents, such as Feed the Future's sector analyses to develop these program activities and subsequent volunteer assignments. As the partners implement the program, they continue to work with the missions. However, each mission's level of involvement can vary, depending on its portfolio of activities and interest. Implementing partners in the current F2F program cycle generally follow consistent practices for designing volunteer assignments, recruiting volunteers, and managing volunteer assignments. All partners work with hosts to develop a scope of work for each assignment, interview candidates, and assess the volunteers' performance. However, they have inconsistent practices for screening volunteer candidates against terrorist watch lists and do not have a means to systematically report negative assessments of volunteers to USAID or each other. We found that the implementing partners that send volunteers follow consistent practices to design volunteer assignments, recruit volunteers, and manage volunteer assignments, which are outlined in USAID's F2F program manual. Designing volunteer assignments: Implementing partners' field staff identify host organizations (hosts) to potentially receive technical assistance through a variety of means, including networking with local government officials, consulting with the USAID mission, and visiting agricultural cooperatives and farming groups. To select hosts, field staff conduct in-depth interviews with potential hosts and assess them against predetermined criteria, such as the potential host's ability to contribute resources to a volunteer assignment. Afterwards, field staff work with each selected host to assess its needs and identify how a volunteer might be able to provide assistance. They then work with the host to develop a scope of work for a single assignment that identifies the issue to be addressed, the assignment's objectives, the host's contributions, and the conditions under which the volunteer will be living and working. If a host would benefit from more than one assignment, field staff work with the host to develop a strategic plan for the multiple assignments. Recruiting for volunteer assignments: To solicit volunteers for assignments, each implementing partner conducts networking activities and posts information about its volunteer assignments on its respective website. Each of the partners employs web-based application forms to collect information about volunteer candidates and manage the information in its database. Field staff send scopes of work to the implementing partner recruiters in the United States as early as 3 months before the start of a volunteer assignment. Recruiters search their databases for candidates based on skills and narrow down candidates based on their dates of availability. They then interview candidates to assess whether their technical expertise matches the assignment's needs and whether the candidates can adapt to the environment and culture. As part of the interview process, partners contact professional references for all candidates who are new to their program. Recruiters present finalist information to field staff who discuss the candidates with the hosts, and the host then select the volunteer. Managing volunteer assignments: Before the volunteer's arrival, the field staff, the host, and the volunteer make any adjustments needed to the scope of work and establish an assignment schedule. Field staff provide the volunteer with an in-country orientation, introduce the volunteer to the host, and monitor the volunteer through regular communication during the 2- to 4-week assignment. Upon completion of the assignment, the partners require the volunteer to provide recommendations to the host organization, debrief field staff, and complete a summary trip report. In addition, each implementing partner requires its field staff and hosts to assess the volunteer's performance and indicate whether they would recommend the volunteer for another assignment. We found that only two of the six partners screen volunteers against terrorist watch lists specified in a standard provision of their cooperative agreements and that the partners follow inconsistent practices for conducting other background checks on F2F volunteer candidates. This standard provision of the cooperative agreements prohibits implementing partners from engaging in transactions with, or providing resources or support to, individuals associated with terrorism, including those individuals or entities that appear on the Department of the Treasury's Specially Designated Nationals and Blocked Persons List and the United Nations Security designation list. USAID officials stated that this provision applies to volunteers and they expect implementing partners to screen volunteers against these lists. However, USAID's F2F program manual states only that implementing partners generally check "several references." We found that two of the six partners screen volunteers against the two watch lists noted in the standard provision, in addition to screening against several other lists and checking professional references. We also found that a third partner conducts another form of background check on all volunteer candidates, in addition to contacting professional references. Specifically, that partner checks to see if candidates' names are in the U.S. government's System for Award Management, a free consolidated database of firms and individuals that are ineligible to receive contracts (or similar types of mechanisms) from the U.S. government. If the volunteer candidate has worked with the partner before, two of these three partners said they do not always screen the candidate again; the third partner said it rescreens the candidate if over a year has passed since his or her last assignment. All three of these implementing partners use software or web-based programs to screen candidates against the various watch lists, a process they stated takes a minute or less to complete. According to these three partners, they screen candidates against watch lists because they believe they are required to do by U.S. government regulations and that doing so is critical to their reputations as organizations. The three partners also said that this type of background check is important to reduce the risk of a volunteer engaging in criminal or any other activities that would cause the program to be seen negatively. Specifically, these partners said the volunteer's character and conduct could affect the volunteer's ability to achieve the objectives of his or her assignment, an outcome that could undermine the program's goals, hurt relationships with host organizations, and undermine the program's reputation. The remaining three implementing partners do not screen candidates against watch lists. They said they believed that USAID does not require them to do so. They also noted that they believed that professional reference checks and Internet research provide them with enough insight into a candidate's character and conduct. Various forms of background checks are important because they provide recruiters with additional information that the candidate may not have reported, or is not publicly available, and because these checks are a means to verify information that the candidate provided. As a result, partners that do not run the background checks may risk fielding volunteers who could harm the program's reputation and goals. We found that implementing partners do not have a systematic means of reporting or obtaining information from assessments of repeat volunteer candidates. As a result, partners can be unaware of assessments indicating that another partner would not recommend the volunteer for another assignment. For the fiscal years 2009 through 2013 program cycle, USAID reported that 41 percent of the volunteers were repeat volunteers. According to GAO's Internal Control Management and Evaluation Tool, internal and external information should be obtained and provided to management as a part of reporting on operational Specifically, information performance relative to established objectives.critical to achieving the agency's objectives, including information relative to critical success factors, should be identified and regularly reported to management and be used to inform future decisions such as selecting volunteers. While USAID's F2F program manual encourages implementing partners to share information and contacts for volunteer recruitment, the manual could discourage implementing partners from reporting negative volunteer performance assessments to each other or to USAID. Specifically, with regards to volunteer program evaluation, the manual states: "Due to the fact that volunteers by nature offer their specialized services free of charge, a publicized negative performance evaluation has the potential to be a public relations disaster, damaging future recruitment efforts and perhaps work with hosts. Thus, evaluations of individual volunteers are not performed or reported systematically. Problems are generally identified in regular performance monitoring and management processes, and kept internal to the implementing organization." As mentioned earlier in this report, all six partners assess the volunteer's performance upon completion of the assignment and consult with host organizations as part of the assessment. Four of the six use a rating scale to assess a volunteer's performance, including rating factors such as technical ability, quality of deliverables, and cultural sensitivity. All of the partners indicated that they kept information internally in their electronic databases on whether they would field the volunteer on another assignment. The partners also said that they contact other implementing partners for references on candidates who were previous volunteers. However, the partners said they do not systematically report this information to USAID or each other, and only share the results of assessments only when specifically requested. Without systematic collection and sharing of information, USAID cannot know whether the volunteers received negative assessments on their performance. Given that the volunteers provide the program's primary input--technical assistance--ensuring the quality of the volunteer's performance is critical to the success of the program's goals and reputation. In addition, partners risk fielding volunteers who received negative assessments on assignments with other implementers, which could undermine the program's goals and reputation. For example, in one instance, a partner told us that it removed a volunteer because of conduct issues and determined not to field that volunteer on another assignment. However, another partner selected that volunteer for an assignment that started shortly after the first assignment. During the second assignment, that partner also had to recall the volunteer because of similar conduct issues. USAID used a program-wide evaluation to adjust the program and conducts ongoing monitoring and evaluation, but USAID does not obtain information on a key aspect of the program's implementation. After a 2012 program-wide evaluation, USAID revised program indicators, established a committee to discuss best practices, and increased training for implementing partner staff. USAID uses semiannual and annual formal reports and other means to conduct ongoing monitoring and evaluation activities. However, USAID is not collecting information on the extent to which volunteers are successfully completing the specific tasks and objectives that are assigned to them in scopes of work. Since 2003, USAID has conducted three program-wide evaluations of F2F. USAID's most recent evaluation, in May 2012, found inefficiencies in the program's data collection and reporting processes. Among other things, the evaluation recommended that USAID revise the list of required program indicators and reduce those less relevant for program management. In response, USAID revised the F2F standard program indicators and their definitions with extensive input from implementing partners and other stakeholders. USAID uses these indicators to track progress and report on changes along the cause-and-effect theory of the program's development plan--leading from inputs and activities to outputs, outcomes, and impacts. According to USAID, another important use of the indicators and reporting is to maintain the implementing partners' focus on achieving results. The revised indicators are intended to standardize F2F program reporting. Nevertheless, a challenge for USAID in developing effective F2F monitoring and evaluation indicators is the variety of volunteer assignments. While the F2F program's primary input for all volunteer assignments is always short-term technical assistance, the type of the technical assistance and the outputs expected can vary significantly among assignments. For example, volunteer assignments range from developing a business plan for an agriculture cooperative to training farmers on practices for soybean cultivation. The 2012 evaluation also recommended that USAID increase support to train implementing partner staff on the appropriate use of the indicators so they can better track indicator data and impacts across the program. In response, USAID formed a working committee, led by F2F's two program staff and made up of implementing partners, to (1) discuss issues with data collection and data quality and (2) develop and disseminate best monitoring and evaluation practices. Additionally, USAID held a workshop in early 2014 for all F2F implementing partners (including headquarters and field staff) and provided opportunities for training and discussion sessions on all aspects of F2F implementation. Monitoring and evaluation procedures, indicators, issues, and best practices were a particular focus. In addition, F2F Implementing Partners' Meetings are held each year and, according to USAID, include additional opportunities to cover program topics, including monitoring and evaluation issues. According to implementing partners, the training and workshops helped field staff better understand how to use the indicators consistently. USAID officials told us that the training and workshops also stressed the importance of thoroughly and accurately collecting initial, or baseline, data on host organizations. The F2F office conducts ongoing performance monitoring and evaluation formally through semiannual and annual reports and informally, through ongoing communication with implementing partners. USAID tracks implementation pace, progress, and performance through the following indicators that implementing partners report on in semiannual and annual reports: inputs, such as the number of volunteer assignments, number of volunteer scopes of work, and number of days of volunteer service; outputs, such as the number of persons trained, number of host organizations assisted, and number of volunteer recommendations; outcomes, such as the number of volunteer recommendations adopted and value of resources leveraged by volunteers in the United States; and impacts, such as the value of annual gross sales and value of rural and agricultural lending and the area under improved environmental and natural resource management. USAID aggregates this information for its program-wide analyses. The goal of these monitoring and evaluation processes is to provide F2F management information it can use to guide program design and better target agricultural sectors, thereby increasing the program's effectiveness. We found that USAID does not systematically obtain information on a key aspect of the program's implementation. Specifically, USAID does not review information on the extent to which volunteers meet the objectives identified in the scopes of work. According to GAO's Internal Control Management and Evaluation Tool, information should be obtained and provided to management as a part of reporting on operational performance relative to established objectives. Key to achieving F2F's goals is the program's primary input--the technical assistance a volunteer provides while on assignment. F2F guidance states that the scopes of work should translate program plans into specific tasks for volunteers. The guidance also states clearly that written scopes of work make it easier for the partner to recruit and guide volunteers and assess the success of the volunteer assignment. According to USAID officials and implementing partner staff, detailed and focused scopes of work are part of the essential foundation for successful volunteer assignments, and implementing partners give much time and consideration to their development. These scopes of work include the set of objectives and activities that the volunteer is to accomplish while on assignment. According to the six implementing partners, achievement of an assignment's objectives, as described under the scope of work, contributes to the program's desired outputs, outcomes, and impacts. All implementing partners require their volunteers to prepare trip reports that summarize the extent to which they achieved the specified objectives and completed activities listed in the scope of work. According to implementing partners, the reasons for not achieving an objective or completing an activity may vary and can be attributed to circumstances outside of the implementing partner staff or volunteer's control. While conducting our fieldwork, we found an instance in which a volunteer's objectives were not achieved. Specifically, in that case, the volunteer was unable to oversee the installation of a machine--an objective listed in the scope of work--because required parts needed for its assembly were not delivered by a third-party contractor to the host organization. However, the volunteer productively used his time to improve the output of a grain- processing machine. According to the implementing partners, volunteer trip reports and debriefings are to include information on the extent to which activities and objectives were accomplished. However, we found that none of the partners track the frequency of assignments when the activities in scopes of work are changed or whether the volunteers were unable to accomplish them during an assignment. While USAID obtains some statements of work and volunteer trip reports, it does not review the extent to which volunteers are able to accomplish the objectives specified in their assignments. Reviewing selected trip reports against scopes of work for this information throughout the program cycle could improve USAID's understanding of the performance of its primary input--the volunteer technical assistance. This information could provide additional insight on the extent to which volunteers achieve established objectives and therefore whether volunteers are being effectively used. The success of the F2F program largely depends on implementing partners that work with hosts to develop appropriate scopes of work and then find volunteers with the technical expertise and skill sets to complete them. Although recruitment efforts focus largely on the volunteer's skill set and experience, partners are inconsistently screening volunteer candidates to verify information about them. Specifically, four partners do not conduct any screening against terrorist watch lists as expected by USAID. Assessment information on repeat volunteers--especially information on negative assessments--could provide important insights into the volunteer's ability to execute another F2F assignment. By implementing a consistent process to screen volunteers and by systematically sharing negative volunteer assessments, USAID and its partners could enhance their ability to ensure that volunteers execute their scopes of work without undermining the program's goals and reputation. USAID took important steps to improve its ability to monitor program performance and evaluate program impact after the most recent evaluation, in 2012. However, USAID is not reviewing information on a key aspect of the program's performance--the extent to which the specified objectives and activities in scopes of work are accomplished. Achievement of an assignment's objectives, as described under the scope of work, contributes to the program's desired outputs, outcomes, and impacts. With this information, USAID could enhance its ability to make better, evidenced-based management decisions. To enhance USAID's oversight of the program, we recommend that the Administrator of USAID take the following four actions: ensure F2F implementing partners screen volunteer candidates against terrorist watch lists, as described in their cooperative agreements and USAID guidance; develop guidance for the implementing partners on the types of background checks they should perform as they screen volunteer candidates; update the F2F program manual to ensure that implementing partners systematically share negative volunteer assessment information with USAID and each other; and further develop its monitoring process to review the extent to which volunteers accomplish objectives and activities specified in the scopes of work. We provided a draft of this report for comment to USAID. In its written comments, reproduced in appendix III, USAID concurred with our recommendations. USAID expressed appreciation for F2F volunteers, noting that they give generously of their time and expertise. USAID also outlined the steps it plans to take in response to each recommendation, noting that the changes should strengthen the management of F2F. We are sending copies of this report to the appropriate congressional committees, the Administrator of USAID, 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 regarding this report, please contact me at (202) 512-9601 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. For this report, we examined (1) how the U.S. Agency for International Development (USAID) administers the John Ogonowski and Doug Bereuter Farmer-to-Farmer (F2F) program, (2) how partners implement volunteer assignments and screen volunteers for the F2F program, and (3) the extent to which USAID uses monitoring and evaluation to manage the F2F program. To address our objectives, we reviewed program documents and information from the previous and current program cycles covering fiscal years 2009 through 2013 and 2014 through 2018, respectively. To determine how USAID administers the F2F program, we analyzed USAID and implementing partner documents such as requests for applications, cooperative agreements, and country program descriptions. We also reviewed USAID's F2F program manual. In addition, we reviewed USAID data on the number of volunteer assignments. Our analysis of these data found some inconsistencies, but we found the data sufficiently reliable to generally enumerate the number of volunteer assignments by country. We divided those countries into four roughly even groups. We met with officials from USAID's Bureau of Food Security F2F program in Washington, D.C., to understand their role in administering the program. We also met with the headquarters officials for implementing partners of the current program cycle, either in Washington, D.C., or via teleconference. GAO, Internal Control Standards: Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington, D.C.: August 2001). addition, we conducted fieldwork in Ghana and Uganda, meeting with USAID mission officials, implementing partner field staff, F2F volunteers, and beneficiary host organizations. In selecting countries for fieldwork, we considered various factors, including the number of volunteers assigned, the implementing partner's experience with the program and whether Associate Award activities occurred in either the previous or current cycle. To determine the extent to which USAID uses monitoring and evaluation to manage the program, we reviewed documents such as the implementing partner's semiannual and annual reports, USAID's 2012 midterm evaluation of the program, and USAID's list of performance indicators and their definitions. We also reviewed GAO's Internal Control Management and Evaluation Tool. In addition, we met with officials from USAID's Bureau of Food Security F2F program in Washington, D.C., and with an implementing partner while conducting fieldwork to understand how the program's monitoring and evaluation process has changed and the indicators on which the implementing partners currently report. We conducted this performance audit from May 2014 to April 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 conclusions based on our audit objectives. U.S. Agency for International Development (USAID) missions can leverage the Farmer-to-Farmer (F2F) program by making separate awards to F2F partners to implement agricultural programs. According to USAID guidance, a mission can make one or more of these awards, known as Associate Awards, to the recipient of an already existing Leader with Associate Award Cooperative Agreement (LWA) without going through an additional competitive proposal process. Therefore, missions, in consultation with implementing partners and the F2F office, can design and propose programs to implement under the Associate Award mechanism. Mission staff independently administer the Associate Award program and are responsible for financial oversight, monitoring and evaluation, and all other reporting requirements. Nevertheless, according to USAD officials, Associate Award programs are required to report the number of volunteers used in their programs to the F2F office to ensure that volunteers are incorporated into Associate Award programming. According to USAID guidance, F2F Associate Awards must be in alignment with the original program's purpose and goals. Associate Awards may provide for (1) additional volunteer services in a F2F country or another country, (2) complementary support for F2F projects (i.e., grants, training, equipment and facilities, or other inputs) that can improve F2F program outreach and impact, or (3) volunteer services and complementary support for agricultural projects addressing a specific F2F development objective. Although F2F limits its activities to the provision of volunteer technical assistance, Associate Award programs use other funding sources and may implement other types of development activities in addition to volunteer assistance. LWAs and Associate Awards are considered separate obligating mechanisms; thus, funds from one award cannot be transferred to another. According to USAID officials, the Associate Award process is relatively fast and streamlined because it does not require any further competition. Mission officials noted that Associate Awards are an attractive option when considering funding mechanisms available for agriculture-related programs. During the fiscal years 2009 through 2013 cycle, USAID awarded 15 Associate Awards to three implementing partners, totaling $125 million. For example, a $32 million Associate Award was granted to an agriculture-related program in Ghana. In the current cycle, USAID has awarded 2 Associate Awards, 1 in Burma for $27 million and another in Ethiopia for approximately $3 million. In addition to the contact named above, Valerie L. Nowak (Assistant Director), Brian Tremblay (Analyst-in-Charge), Tina Cheng, Lynn Cothern, Martin De Alteriis, Mark Dowling, and Sushmita Srikanth made key contributions to this report.
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First authorized in the 1985 Farm Bill, the F2F program leverages U.S. agricultural expertise by sending volunteers on short-term assignments to provide technical assistance to farmers, farm groups, and agribusinesses in developing and middle-income countries. During fiscal years 2009 through -2013, F2F funded about 2,984 volunteer assignments and obligated an average of $11.5 million annually. In the 2014 Farm Bill, Congress mandated that GAO conduct a review of the F2F program. GAO examined (1) how USAID administers the program, (2) how partners implement volunteer assignments and screen volunteers, and (3) the extent to which USAID uses monitoring and evaluation to manage the program. To address these objectives, GAO reviewed program documents and met with USAID F2F officials and current implementing partners. In addition, we conducted fieldwork in two countries that we selected based on factors, including the number of volunteers assigned. The U.S. Agency for International Development's (USAID) Bureau for Food Security administers the Farmer-to-Farmer (F2F) program through implementing partners under 5-year cooperative agreements. USAID provides overall direction, but relies on partners to execute program activities. USAID uses the agreements to establish the partners' objectives, tasks, and responsibilities. Once selected, partners create work plans for USAID's approval that describe potential volunteer assignments, such as providing expertise on grain processing and storage or groundnut production. Source: GAO. | GAO-15-478 USAID's partners follow consistent practices to implement volunteer assignments, but they have inconsistent practices for screening volunteer candidates against terrorist watch lists. All partners develop a scope of work for each assignment, interview candidates, and assess the volunteer's performance. However, only two partners screen candidates against the terrorist watch lists as expected by USAID. These partners and one other partner screen candidates against other watch lists. In addition, partners do not have a means to systematically report negative volunteer assessments to USAID or each other, even though 41 percent of volunteers in the last program cycle were repeat volunteers. Without conducting required checks and providing information on prior negative assessments, partners risk selecting volunteers who could undermine F2F's goals and reputation. USAID uses its monitoring and evaluation process to adjust the program, but does not review information on a key aspect of the program's implementation. In response to a program-wide evaluation, USAID revised performance indicators, established a committee that discusses best practices, and increased training for implementing partner staff. However, USAID does not systematically review information on the extent to which volunteers meet the objectives identified in the scopes of work. Reviewing volunteer trip reports against scopes of work could improve USAID's understanding of the volunteers' performance and provide additional insight on implementation progress and whether volunteers are being effectively used. GAO is recommending that USAID (1) ensure F2F partners screen volunteer candidates against terrorist watch lists, (2) develop guidance on the other types of background checks implementing partners should perform, (3) ensure that implementing partners systematically share negative volunteer assessment information, and (4) monitor the extent to which the objectives and activities in the scopes of work are accomplished. USAID concurred with GAO's recommendations.
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Prevention is the most effective and efficient way to minimize fraud, waste, and abuse in any federal program, including disaster assistance, and is also a key element described in the Standards for Internal Control in the Federal Government. The most crucial element of fraud prevention is to substantially diminish the opportunity for fraudulent access into the system through front end controls. Figure 2 displays how preventive controls fit within a larger fraud, waste, and abuse prevention program. Fraud prevention can be achieved by requiring that registrants provide information in a uniform format, and validating that information against external sources. In the current environment, agencies have at their disposal a large number of data sources that they can use to validate the identity and address of registrants. However, our work related to FEMA's management of the IHP program for hurricanes Katrina and Rita found that their limited use of a third-party validation process left room for substantial fraud. Effective fraud prevention controls require that agencies enter into data-sharing arrangements with organizations to perform validation. System edit checks are also key to identifying and rejecting fraudulent registrations before payments are disbursed. In addition, an effective fraud prevention system is not complete without adequate fraud awareness training of all personnel involved in the distribution of relief. Finally, any new systems or processes need to be field tested to ensure that the system is working properly prior to implementation. Prior to a disaster registrant gaining access to relief payments, key registrant information must be validated. For this program, data such as names, social security numbers (SSN), primary residences, citizenship status, and any other information which determines eligibility must be validated upfront, prior to agencies accepting the registration, or at least prior to disbursements being made. Obtaining releases from registrants which allow an agency to validate data with other sources such as social security records, tax records, and other information is an important step that can facilitate effective validation of data. Depending on the turnaround time needed for a payment, agencies can chose to validate records with federal government databases, or validate information with third-party contractors who can confirm key information with publicly available data from credit reports and other sources almost instantaneously. When using these third-party sources it is also important to at least periodically authenticate the data within the program with the source of the information such as Social Security Administration (SSA) or Internal Revenue Service (IRS) records. Regardless of the sources used, all key data concerning a registration has to be validated to minimize the risks to acceptable levels prior to the registrant being accepted in the program. For example, because FEMA lacked basic identity validation controls, they accepted thousands of IHP registrations from registrants who provided social security numbers that had never been issued or belonged to deceased individuals. In addition, because FEMA failed to validate damaged address information, we found thousands of dollars were paid to individuals for bogus damaged addresses. For data to be properly validated, it should be recorded in a uniform format. Once key data elements relating to disaster relief eligibility are determined, our work has shown that it is important to record the information in a format that will facilitate data validation with external sources. Otherwise, agencies may be faced with thousands or tens of thousands of registrations being rejected or placed in a manual review status because data was not recorded accurately. This is also particularly important when recording names, identity information, and addresses in order to prevent registrants from getting multiple payments by changing the spelling of their address or name. For example, data collected by hotels providing lodging that was paid for by FEMA did not record occupant's SSN or FEMA registration ID numbers. Thus, there were no common data elements that could be used to ensure people already staying at FEMA paid hotels did not also improperly receive rental assistance. Within the federal government, many organizations such as SSA, United States Postal Service (USPS), and IRS maintain information on disaster assisted registrants. These are all data sources that we have used in prior forensic work to identify fraudulent and improper payments. However, proactive actions are necessary on the part of agencies responsible for providing disaster assistance to enter into data-sharing agreements with organizations that own the data. Agreements have to be in place prior to any disaster occurring for agencies to take advantage of data-validation sources. Also for tax information, consent must be requested from the registrant at the time of registration. Finally, whenever possible, registration data and specific loss claims should be validated by a physical inspection of the disaster damage prior to payment. In some cases, as with the massive destruction caused by Hurricane Katrina, physical inspections in a timely manner are not possible, and therefore acceptance of data must be done through electronic verification. However, within the FEMA IHP program we found significant fraud related to expedited assistance payments that were made prior to any physical inspection being performed. In the cases we found, many fraudulent registrations could have been identified and rejected if inspections were performed because they would have seen that properties did not even exist, as we found when performing our own inspections. For example, FEMA failed to perform physical inspections on our undercover registrations, which used completely bogus property addresses and vacant lots. Had a physical inspection been performed, FEMA could have identified the fraudulent information and denied the expedited and rental assistance payments. Disaster relief programs must also have a network of system pre-payment edit checks in place to ensure that obviously false or duplicate information is not used to receive disaster relief payments. System edit checks can be performed before or after a registration is accepted into the system, but to be an effective preventive control, they must be performed prior to the distribution of a payment. Edit checks should include items such as ensuring that the same SSN was not used on multiple registrations, or that the registrant provides a verifiable physical address for which the disaster damaged is based on. In the case of FEMA's IHP program, we found the lack of effective system edit checks allowed numerous individuals to fraudulently register numerous times and receive multiple payments using the same name, social security number, or address. In one case, the lack of controls allowed an individual to register eight times using the same name and SSN and receive multiple disaster assistance payments. In addition, accepting applications with obviously inaccurate data exposed FEMA to the risk that disbursements would be made based on obviously false data. For example, we found during our work that FEMA paid millions of dollars in IHP payments to individuals who used a Post Office Box as their damaged physical address in order to receive assistance. In those cases system edits should have identified the Post Office Box as an invalid physical address and forced the applicant to provide a valid street address for the damage property in order to be considered for disaster assistance. Results of our work also showed that agencies must follow through and accurately implement--and not short-change--existing system edit checks to provide assurance that the program is protected. We found in the course of our work that FEMA had designed controls that may have prevented some fraudulent payments. However, our work also indicated that these controls were circumvented, for example, when FEMA designed scripts to override system edit checks that had identified registrations as potential duplicates, in an effort to disburse funds as quickly as possible. Adhering to existing control procedures is therefore also crucial when maintaining effective fraud prevention. Beyond the uniform recording and validation of data, other controls, including a well-trained work force that is aware of the potential for fraud, can help prevent fraud. Personnel involved in a disaster program, including government employees and call center and inspection contractors, should receive training about the potential for fraud within the program and the likely types of fraud they could encounter. Fraud awareness training with frontline personnel is crucial because they are part of the first line of defense and therefore play a key role in fraud prevention. If the personnel accepting registrations and performing physical inspections of properties and documents are aware of fraud indicators and suspicious activities, they will help to identify potentially fraudulent activity as soon as it occurs. Where possible, incentives can be provided to contractors not just to process registrations and claims quickly, but also to prevent fraud. In addition, when implementing any new controls, it is important to field test all systems prior to putting them in place. As stated in a recent testimony on the IHP program, FEMA acknowledged that they had instituted several new processes that had not been tested. Weaknesses in these new processes, including the lack of validation controls over key data elements, resulted in our findings of approximately $1 billion dollars in potential fraud in the IHP program. On top of reducing the risk of untested controls allowing substantial fraud, field-testing also helps to ensure that new controls do not improperly deny benefits to valid registrants. A safety net for those registrants who are wrongly denied disaster relief due to preventive controls should always be in place to ensure they receive assistance. This process should include staff who are adequately trained to expeditiously handle exceptions. Even with effective preventive controls, there is substantial residual risk that fraudulent registrants are likely to gain access to a disaster relief program and begin to receive payments. Therefore, after a registrant has successfully passed through upfront controls and begun to receive payments, our work at FEMA illustrated that agencies must continue their efforts to monitor the execution of the disaster relief program. Detection and monitoring efforts are addressed in the Standards for Internal Control in the Federal Government and include such activities as data-mining registrations, which have received payments, ensuring accountability over funds and monitoring how the disaster assistance is being spent, and establishing mechanisms to identify the existence of fraud. Figure 3 provides a perspective on how these controls fit into an overall fraud prevention program. Data-mining of registration data within the program should be done to look for suspicious information after payments have been made. Along with data-mining efforts, proper accountability controls over the distribution of funds and the monitoring of fund usage is key to obtaining reasonable assurance that relief payments are being used to mitigate the effects of a disaster. Also, setting up hotlines to identify potential frauds is an important activity that should be in place when distributing disaster funds. Finally, any lessons learned from detection and monitoring efforts should be used to improve preventive controls to reduce the risk for fraud, waste, and abuse in the future. Despite effective preventive controls, there is still risk for fraud, waste, and abuse within disaster programs once payments are made. Therefore, it is important that program managers continuously data mine registrations for suspicious activity. A robust data-mining program can include many different efforts. Examples of fraud indicators include but are not limited to searching for anomalies like those found at FEMA, including multiple payments sent to the same address or bank account. Abnormalities such as numerous residents in a damaged apartment building all relocating to the same location may also suggest fraud. Comparing recipient data against other government assistance programs such as databases containing information on Red Cross or FEMA paid for hotel rooms can help to identify duplication of benefits between programs. However, due to the difficulties of collecting overpayments, system edit checks that occur prior to payments being made are preferable to data-mining after payments have occurred. The data-mining we performed on FEMA's IHP program showed how important constant monitoring and detection can be. We searched for and found examples where the same individual received several rental assistance checks from FEMA while at the same time residing in a hotel room paid for by FEMA. We also found instances where multiple family members from the same household registered numerous times and received duplicate payments. Using external databases of federal and state prisoners, we found instances where prisoners had fraudulently registered for and received disaster relief payments while incarcerated. As shown by our examples, data-mining efforts should be done in a manner that uses creative solutions to search for potential fraud using all available data sources. To the extent that data-mining identifies systematic fraud, that intelligence should be fed back into the fraud prevention process and system edits so that for future disasters the fraud is detected before money is disbursed. When part of the disaster assistance comes in the form of cash or a cash equivalent such as a debit card, our work at FEMA shows that it is crucial for agencies to maintain strict accountability over who has received the assistance. This can be achieved by obtaining signatures of release from an agency official and, if appropriate, from the issuing bank official, along with a signature of acceptance from the relief recipient. Agencies should also be able to link each distribution of cash to a specific applicant. In the case of FEMA and their distribution of debit cards, adequate accountability was not maintained, resulting in more than $1 million worth of debit cards being distributed without a record of who received them. In addition, depending on the type of assistance provided and the means in which the assistance was distributed, it can be important for an agency to monitor the usage of disaster relief funds. Our review of FEMA's IHP program found that almost all money was distributed via check or EFT, which did not allow us to review whether the money was spent on disaster-related needs. A small amount, approximately $80 million, of IHP money was distributed via debit cards, which allowed us to see whether funds were being used appropriately. In this case, the vast majority of debit card money was still withdrawn as cash, but the remaining amount appeared to have been used for disaster-related needs. However, we did find a small number of purchases for nondisaster items such as football tickets, alcohol, massage parlor services, and adult videos. By monitoring these types of uses and contacting and possibly penalizing those who misuse funds, agencies may be able to ensure that disaster funds are used to help mitigate losses and not for inappropriate items. To detect existing fraud and prevent new cases in the future, agencies should also set up mechanisms to identify and investigate existing cases. The use of hotlines where individuals can anonymously call and report potential fraud can provide valuable investigation leads. The Department of Homeland Security (DHS) Office of Inspector General set up one such hotline specifically dedicated to fraud related to hurricanes Katrina and Rita. Similar hotlines are useful within any disaster relief program to help identify any fraudulent activity not caught by controls. In conjunction with fraud identified through data-mining or hotline tips, agencies should have in place teams ready to investigate leads, not only for future prosecution, but also to provide suggestions for how the fraud can be prevented in the future. The final aspect of a program designed to reduce fraud in a disaster assistance program is the investigation and aggressive prosecution of individuals who have fraudulently received disaster assistance. Suspicious cases identified through preventive, detective, and monitoring controls, along with hotline tips, should be referred to investigators for further review. In the course of our work performed on IHP fraud for hurricanes Katrina and Rita, we identified tens of thousands of potentially fraudulent registrations. We have already referred thousands of those cases to FEMA and the Katrina Fraud Task force for further investigation and expect to refer others for additional investigation and possible prosecution. While the criminal investigative process is general a lengthy process, we are aware that several individuals that we referred have already been indicted. This included one individual indicted for fraudulently obtaining over $25,000 from FEMA based on bogus registrations. Figure 4 displays how investigations and prosecutions fit into an overall fraud prevention program. While investigations and prosecution can be the most visible means to deal with fraudsters, they are also the most costly and should not be used in place of other more effective controls. Instead, agencies need to focus on prevention before money is spent. Still, by successfully prosecuting fraudsters, agencies can deter others who are thinking of taking advantage of disaster programs. In the end, investigations and prosecutions are a necessary part of an overall fraud prevention and deterrence program, but should be a last resort when all other controls have failed. In addition, knowledge from these investigations and prosecutions should be fed back into the fraud prevention process to better handle future disasters and enhance existing fraud prevention and detection programs. Managers of federal disaster assistance programs face a dual challenge-- delivering aid as quickly as possible while at the same time ensuring that relief payments go only to those who are truly in need. To meet this dual challenge, managers must recognize that fraud prevention and the rapid distribution of assistance are not conflicting mandates; instead, both can be accomplished if effective controls are in place and operating as intended. Of the controls discussed today, fraud prevention controls are the most useful and cost-effective means of reducing the loss of money due to fraud, because payments, once out the door, have proven extremely difficult to recover. Implementing an effective system of fraud prevention controls including upfront controls, post payment detection and monitoring, and prosecuting those who have exploited control weaknesses are crucial to building the American taxpayer's confidence that federal disaster assistance is given to those in need. Mr. Chairman and members of the Committee, this concludes my statement. I would be pleased to answer any questions that you or other members of the Committee have at this time. For further information about this testimony please contact Gregory Kutz at (202) 512-7455 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. 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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Federal agencies spend billions of dollars annually to aid victims of natural and other disasters and acts of terrorism. Managers of federal disaster assistance programs face a dual challenge--delivering aid as quickly as possible while at the same time ensuring that relief payments go only to those who are truly in need. Due to the very nature of the government's need to quickly provide assistance to disaster victims, federal disaster relief programs are vulnerable to significant risk of improper payments and fraudulent activities. On February 13, 2006, and on June 14, 2006, GAO testified concerning extensive fraud, waste, and abuse in the Individuals and Household Program (IHP), a component of the Federal Emergency Management Agency's (FEMA) disaster assistance programs. GAO identified significant internal control weaknesses that resulted in FEMA making tens of thousands of Expedited Assistance payments that were based on bogus registration data. GAO also found numerous other internal control failures in FEMA's IHP disaster assistance program, resulting in an estimate that FEMA made $600 million to $1.4 billion in improper and potentially fraudulent payments to registrants. The purpose of this testimony is to establish a framework for preventing, detecting, and prosecuting disaster assistance fraud. Recent GAO audits have illustrated the importance of an effective fraud, waste, and abuse prevention system in federal disaster assistance programs. GAO's Standards for Internal Control in the Federal Government provide a framework for internal control that can be used to minimize fraudulent, wasteful, and abusive activity regardless of whether dealing with the effects of natural disasters like hurricanes Katrina and Rita, or coping with the destruction left by the terrorist attacks of September 11, 2001. A well-designed fraud prevention system should consist of three crucial elements: (1) upfront preventive controls, (2) detection and monitoring, and (3) investigations and prosecutions. Upfront preventive controls can help screen out the majority of fraud, and are the most effective and efficient means to minimize fraud, waste, and abuse. Detection and monitoring, and aggressive prosecution of individuals committing fraud, while also crucial elements of an effective system, are less effective and generally cost more. Audit work has long confirmed that upfront preventive controls are most effective when they require validation of data provided by disaster registrants against other government or third-party sources, and physical inspections when possible. Preventive controls should also include procedures designed to identify problem registrants prior to payments. Training personnel on fraud awareness and potential fraud schemes is also an integral component in preventive controls. Collectively, these preventive controls can help improve program integrity and safeguard tax dollars. An effective fraud deterrence program must also include resources to continually monitor and detect potential fraud, and aggressively investigate and prosecute individuals who received assistance fraudulently. Monitoring and detection include data-mining for suspicious registrations and payment usage, and setting up fraud hotlines. Finally, program integrity is enhanced by investigating and prosecuting individuals who take advantage of program weaknesses. However, the high costs of prosecutions highlight our conclusion that upfront preventive controls are most effective in preventing fraud, and that lessons learned from detection and prosecutions should be used to improve preventive controls.
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VA comprises three major components: the Veterans Benefits Administration (VBA), the Veterans Health Administration (VHA), and the National Cemetery Administration (NCA). VA's mission is summed up in its mission statement, a quotation from Abraham Lincoln: "to care for him who shall have borne the battle and for his widow and his orphan." VA carries out this mission by providing benefits and other services to veterans and dependents. The department's vision is to be a more customer-focused organization, functioning as "One VA." This vision stemmed from the recognition that veterans think of VA as a single entity, but often encountered a confusing, bureaucratic maze of uncoordinated programs that put them through repetitive and frustrating administrative procedures and delays. The "One VA" vision is to create versatile new ways for veterans to obtain services and information by streamlining interactions with customers and integrating IT resources to enable VA employees to help customers more quickly and effectively. This vision will require modifying or replacing separate information systems with integrated systems using common standards to share information across VA programs and with external partner organizations, such as the Department of Defense. Accordingly, effective management of its IT programs is vital to VA's successful achievement of its vision and mission. Table 1 shows a breakdown of VA's approximately $2.1 billion IT budget request for fiscal year 2006. Of the total, VHA accounted for approximately $1.8 billion, VBA approximately $150 million, and NCA approximately $11 million. The remaining $84 million was designated for the department level. The Congress has long recognized that IT has the potential to enable federal agencies to accomplish their missions more quickly, effectively, and economically. However, fully exploiting this potential presents challenges to agencies. Despite substantial IT investments, the federal government's management of information resources has produced mixed results. One of the ways in which the Congress has addressed this issue was to establish the CIO position; an agency's CIO is to serve as the focal point for information and technology management within an agency. In 1996, the Clinger-Cohen Act established the position of agency CIO and specified responsibilities for this position. Among these responsibilities, the act required that the CIOs in the 24 major departments and agencies have information resources management (IRM) as their "primary duty." The Congress has mandated that CIOs should play a key leadership role in ensuring that agencies manage their information functions in a coordinated and integrated fashion in order to improve the efficiency and effectiveness of government programs and operations. CIOs have responsibilities that can contribute significantly to the successful implementation of information systems and processes. In July 2004, we reported on CIO roles, responsibilities, and challenges (among other things) at 27 major agencies. For this work, we identified major areas of CIO responsibilities that were either statutory requirements or critical to effective information and technology management. Altogether, we identified the 13 areas shown in table 2. According to our report, CIOs were generally responsible for the key information and technology management areas shown in the table, although not all CIOs were completely responsible for all areas. For example: * All the CIOs were responsible for the first five areas in the table (capital planning and investment management, enterprise architecture, information security, IT/IRM strategic planning, and IT/IRM human capital). * More than half had responsibility for six additional areas (major e- government initiatives, systems acquisition, information collection/paperwork reduction, records management, information dissemination, and privacy). * Fewer than half were responsible for two areas (information disclosure and statistics). It was common for CIOs to share responsibility for certain functions, and in some cases responsibilities were assigned to other offices. For example, systems acquisition responsibility could be shared among the CIO and other officials, such as a procurement executive or program executive; disclosure could be assigned to general counsel and public affairs, while statistical policy could be assigned to offices that deal with the agency's data analysis. Nevertheless, even for areas of responsibility that were not assigned to CIOs, agency CIOs generally reported that they contributed to the successful execution of the agency's overall responsibilities in that area. In carrying out their responsibilities, CIOs generally reported to their agency heads. For 19 of the agencies in our review, the CIOs stated that they had this reporting relationship. In the other 8 agencies, the CIOs stated that they reported instead to another senior official, such as a deputy secretary, under secretary, or assistant secretary. In addition, 8 of the 19 CIOs who said they had a direct reporting relationship with the agency head noted that they also reported to another senior executive, usually the deputy secretary or under secretary for management, on an operational basis. According to members of our Executive Council on Information Management and Technology, what is most critical is for the CIO to report to a top level official. Federal CIOs often remained in their positions for less than the length of time that some experts consider necessary for them to be effective and implement changes. At the major departments and agencies included in our review, the median time in the position of permanent CIOs whose time in office had been completed was about 23 months. For career CIOs, the median was 32 months; the median for political appointees was 19 months. To the question of how long a CIO needed to stay in office to be effective, the most common response of the CIOs (and former agency IT executives whom we consulted) was 3 to 5 years. Between February 10, l996, and March 1, 2004, only about 35 percent of the permanent CIOs who had completed their time in office reportedly had stayed in office for a minimum of 3 years. The gap between actual time in office and the time needed to be effective is consistent with the view of many agency CIOs that the turnover rate was high, and that this rate was influenced by the political environment, the pay differentials between the public and private sectors, and the challenges that CIOs face. In contrast, the CIOs at the 27 agencies were generally helped in carrying out their responsibilities by the background and experience they brought to the job. The background of the CIOs varied in that they had previously worked in the government, the private sector, or academia, and they had a mix of technical and management experience. However, virtually all had work experience or educational backgrounds in IT or IT-related fields; 12 agency CIOs had previously served in a CIO or deputy CIO capacity. Moreover, most of the them had business knowledge related to their agencies because they had previously worked at the agency or had worked in an area related to the agency's mission. To allow CIOs to serve effectively in the key leadership role envisioned by the Congress, federal agencies should use the full potential of CIOs as information and technology management leaders and active participants in the development of the agency's strategic plans and policies. The CIOs, in turn, must meet the challenges of building credible organizations and developing and organizing information and technology management capabilities to meet mission needs. In February 2001, we issued guidance on the effective use of CIOs, which describes the following three factors as key contributors to CIO success: * Supportive senior executives embrace the central role of technology in accomplishing mission objectives and include the CIO as a full participant in senior executive decision making. * Effective CIOs have legitimate and influential roles in leading top managers to apply IT to business problems and needs. Placement of the position at an executive management level in the organization is important, but in addition, effective CIOs earn credibility and produce results by establishing effective working relationships with business unit heads. * Successful CIOs structure their organizations in ways that reflect a clear understanding of business and mission needs. Along with knowledge of business processes, market trends, internal legacy structures, and available IT skills, this understanding is necessary to ensure that the CIO's office is aligned to best serve agency needs. The CIO study that we reported on in July 2004 also provides information on the major challenges that federal CIOs face in fulfilling their duties. In particular, CIOs view IT governance processes, funding, and human capital as critical to their success, as indicated by two challenges that were cited by over 80 percent of the CIOs: implementing effective information technology management and obtaining sufficient and relevant resources. * Effective IT management. Leading organizations execute their information technology management responsibilities reliably and efficiently. A little over 80 percent of the CIOs reported that they faced one or more challenges related to implementing effective IT management practices at their agencies. This is not surprising given that, as we have previously reported, the government has not always successfully executed the IT management areas that were most frequently cited as challenges by the CIOs--information security, enterprise architecture, investment management, and e-gov. * Sufficient and relevant resources. One key element in ensuring an agency's information and technology success is having adequate resources. Virtually all agency CIOs cited resources, both in dollars and staff, as major challenges. The funding issues cited generally concerned the development and implementation of agency IT budgets and whether certain IT projects, programs, or operations were being adequately funded. We have previously reported that the way agency initiatives are originated can create funding challenges that are not found in the private sector. For example, certain information systems may be mandated or legislated, so the agency does not have the flexibility to decide whether to pursue them. Additionally, there is a great deal of uncertainty about the funding levels that may be available from year to year. The government also faces long-standing and widely recognized challenges in maintaining a high-quality IT workforce. In 1994 and 2001, we reported on the importance that leading organizations placed on making sure they had the right mix of skills in their IT workforce. About 70 percent of the agency CIOs reported on a number of substantial IT human capital challenges, including, in some cases, the need for additional staff. Other challenges included recruiting, retention, training and development, and succession planning. In addition, two other commonly cited challenges were communicating and collaborating (both internally and externally) and managing change. * Communicating and collaborating. Our prior work has shown the importance of communication and collaboration, both within an agency and with its external partners. For example, one of the critical success factors we identified in our guide focuses on the CIO's ability to establish his or her organization as a central player in the enterprise. Ten agency CIOs reported that communication and collaboration were challenges. Examples of internal communication and collaboration challenges included (1) cultivating, nurturing, and maintaining partnerships and alliances while producing results in the best interest of the enterprise and (2) establishing supporting governance structures that ensure two- way communication with the agency head and effective communication with the business part of the organization and component entities. Other CIOs cited activities associated with communicating and collaborating with outside entities as challenges, including sharing information with partners and influencing the Congress and OMB. * Managing change. Top leadership involvement and clear lines of accountability for making management improvements are critical to overcoming an organization's natural resistance to change, marshaling the resources needed to improve management, and building and maintaining organizationwide commitment to new ways of doing business. Some CIOs reported challenges associated with implementing both changes originating from their own initiative and changes from outside forces. Implementing major IT changes can involve not only technical risks but also nontechnical risks, such as those associated with people and the organization's culture. Six CIOs cited dealing with the government's culture and bureaucracy as challenges to implementing change. Former agency IT executives also cited the need for cultural changes as a major challenge facing CIOs. Accordingly, in order to effectively implement change, it is important that CIOs build understanding, commitment, and support among those who will be affected by the change. Effectively tackling these reported challenges can improve the likelihood of a CIO's success. Until these challenges are overcome, federal agencies are unlikely to optimize their use of information and technology, which can affect an organization's ability to effectively and efficiently implement its programs and missions. In September 2005, we reported the results of our study of CIOs at leading private-sector organizations, in which we described the CIOs' responsibilities and major challenges, as well as private-sector approaches to information and technology governance. The set of responsibilities assigned to CIOs in the private sector were similar to those in the federal sector. In most areas, there was little difference between the private and federal sectors in the percentage of CIOs who had or shared a particular responsibility. In 4 of the 12 areas--enterprise architecture, strategic planning, information collection, and information dissemination and disclosure--the difference between the private- and federal-sector CIOs was greater; in each case, fewer CIOs in the private sector had these responsibilities. In all, the six functions least likely to be the CIO's responsibility in the federal sector were equivalent to the five functions least likely to be his or her responsibility in the private sector. Some of the federal CIOs' functions, such as information collection and statistical policy, did not map directly to the management areas in several of the private-sector organizations we contacted. Figure 1 compares federal and private-sector CIO responsibilities for the 12 areas, showing the percentage of CIOs who had or shared responsibility for each area. Among the private-sector CIOs, it was common to share responsibility with either business units or corporate functional areas; these sharing relationships accounted for almost a third of all responses. Among federal CIOs, the sharing of responsibility was not described in as many areas. Approximately half of all the private-sector CIOs described four major challenges: * Aligning IT with business goals was cited by 11 of the CIOs. This challenge requires the CIOs to develop IT plans to support their companies' business objectives. In many cases this entails cross- organization coordination and collaboration. * Implementing new enterprise technologies (e.g., radio frequency identification, enterprise resource planning systems, and customer relationship management systems) was cited by 8 of the CIOs. This challenge requires the broad coordination of business and corporate units. * Controlling IT costs and increasing efficiencies was cited by 9 of the CIOs. Several CIOs explained that by controlling costs and providing the same or better service at lower cost, they are able to contribute to their companies' bottom lines. A few CIOs also said that they generate resources for new investments out of the resources freed up by cost savings. * Ensuring data security and integrity was cited by 9 of the CIOs. Closely associated with this challenge was ensuring the privacy of data, which was raised by 6 CIOs. Additional management challenges commonly raised by the private- sector CIOs included * developing IT leadership and skills (7), * managing vendors, including outsourcing (7), improving internal customer satisfaction (5). Additional technical challenges commonly raised by the private- sector CIOs included implementing customer service/customer relationship management (CRM) systems (7), identifying opportunities to leverage new technology (6), integrating and enhancing systems and processes (5), and * rationalizing IT architecture (5). The challenges mentioned by the private-sector CIOs overlapped with those mentioned by federal CIOs in our previous study. Improving various IT management processes was mentioned by several private-sector CIOs (e.g., IT investment decision making) as well as by federal CIOs, as was developing IT leadership and skills. In technology-related areas, both private-sector and federal CIOs mentioned working with enterprise architectures and ensuring the security of systems as challenges. Although the challenges mentioned by private-sector CIOs resembled those mentioned by federal CIOs, there were a few differences. Private-sector CIOs mentioned challenges related to increasing IT's contribution to the bottom line--such as controlling costs, increasing efficiencies, and using technology to improve business processes--while federal CIOs tended to mention overcoming organizational barriers and obtaining sufficient resources. When asked to describe how the governance of information management and technology is carried out in their companies, 16 of the 20 private-sector companies told us that they had an executive committee with the authority and responsibility for governing major IT investments. As part of the governance of IT assets in their companies, nine of the CIOs said that they shared responsibility for IT investment management and that their involvement ranged from providing strong leadership to reviewing plans to ensure that they complied with corporate standards. Many of the private-sector CIOs were actively working to increase coordination among business units to enhance their governance process. Seven of the CIOs described efforts under way to implement enterprisewide financial and supply chain systems, which will move the companies to common business processes. Six CIOs also described using cross-organizational teams (sometimes called centers of excellence), which drive these broad collaborative efforts and others, such as the establishment of standards and common practices. With regard to the governance of the development of new systems, many of the private-sector CIOs described a process in which they collaborated closely with business units and corporate functional units in planning and developing systems to meet specific needs. The extent of the CIOs' involvement ranged from providing strong leadership and carrying out most activities to reviewing the other components' plans to ensure that they complied with corporate standards. With regard to sharing authority for decisions on the management of IT assets, several CIOs spoke of balancing between centralization and decentralization of authority and described their efforts to move between the two extremes to find the right balance. The appropriate balance often depended on other events occurring in the companies, such as major strategic realignments or acquisitions. For example, one CIO described his current evolution from a relatively decentralized structure--an artifact of a major effort to enable growth in the corporation--to a more centralized structure in order to reduce costs and drive profits. Since enactment of the Clinger-Cohen Act in 1996, the roles and responsibilities of VA's Chief Information Officer have evolved. From lacking a CIO entirely, the department has taken steps to address the challenges posed by its multiple widespread components and its decentralized information technology and services. In June 1998, VA assigned CIO responsibility to a top manager. However, we reported in July 1998 that the person holding the CIO position at VA had multiple additional major responsibilities, as this person also served as Assistant Secretary for Management, Chief Financial Officer, and Deputy Assistant Secretary for Budget. According to the act, the CIO's primary responsibility should be information and technology management. Noting that VA's structure was decentralized, its IT budget was large, and its CIO faced serious information and technology management issues, we recommended that the Secretary appoint a CIO with full-time responsibilities for IRM. Concurring with the recommendation, VA established the position of Assistant Secretary for Information and Technology to serve as its CIO. As of May 2000, however, the position of Assistant Secretary for Information and Technology was vacant, and as we reported at the time, it had been unfilled since its creation in 1998. The Secretary then created and filled the position of Principal Deputy Assistant Secretary for Information and Technology, designating that person as VA's acting CIO until an Assistant Secretary could be appointed. The Secretary also realigned IRM functions within VA under this position, which reported directly to the Secretary. As we reported, the Principal Deputy Assistant Secretary was involved in IT planning issues across the department. In addition to advising the Secretary on IT issues, he served as chair of the department's CIO Council and as a member of the department's Capital Investment Board, and he worked with the CIOs in VBA and VHA (at the time, NCA had no CIO). According to this official, one of his priorities was to ensure that IT activities in VBA and VHA were in concert with VA's departmentwide efforts. In August 2001, VA filled the CIO position. In March 2002, we testified that this hiring was one of the important strides that the Secretary of Veterans Affairs had made to improve the department's IT leadership and management, along with making a commitment to reform the department's use of IT. On June 29, 2003, the CIO retired after a tenure of almost 2 years (about the median length of tenure for federal CIOs, as discussed above); the current CIO was confirmed in January 2004. Figure 1 is a time line showing the history of the CIO position at VA since the passage of the Clinger-Cohen Act. Our prior work highlighted some of the challenges that the CIO faced as a result of the way the department was organized to carry out its IT mission. Among these challenges was that information systems and services were highly decentralized, and the VA administrations and staff offices controlled a majority of the department's IT budget. For example, in VA's information technology budget for fiscal year 2002 of approximately $1.25 billion, VHA controlled about $1.02 billion (over 80 percent), whereas the department level controlled about $60.2 million (less than 5 percent). In addition, we noted that there was neither direct nor indirect reporting to VA's cyber security officer--the department's senior security official--thus raising questions about this person's ability to enforce compliance with security policies and procedures and ensure accountability for actions taken throughout the department. The more than 600 information security officers in VA's three administrations and its many medical facilities throughout the country were responsible for ensuring the department's information security, although they reported only to their facility's director or to the chief information officer of their administration. Given the large annual funding base and decentralized management structure, we testified that it was crucial for the departmental CIO to ensure that well-established and integrated processes for leading, managing, and controlling investments are commonplace and followed throughout the department. This is consistent with the finding in our CIO review that implementation of IT management practices was a challenge; over half of federal CIOs identified IT investment management specifically. Recognizing weaknesses in accountability for the department's IT resources and the need to reorganize IT management and financing, the Secretary announced a realignment of the department's IT operations in a memorandum dated August 2002. According to the memorandum, the realignment would centralize IT functions, programs, workforce personnel, and funding into the office of the department-level CIO. In particular, several significant changes were described: * The CIOs in each of the three administrations--VHA, VBA, and NCA--were to be designated deputy CIOs and were to report directly to the department-level CIO. Previously, these officials served as component-level CIOs who reported only to their respective administrations' under secretaries. * All administration-level cyber security functions were to be consolidated under the department's cyber security office, and all monies earmarked by VA for these functions were to be placed under the authority of the cyber security officer. Information security officers previously assigned to VHA's 21 veterans integrated service networks would report directly to the cyber security officer, thus extending the responsibilities of the cyber security office to the field. * Beginning in fiscal year 2003, the department-level CIO would assume executive authority over VA's IT funding. In September 2002, we testified that in pursuing these reforms, the Secretary demonstrated the significance of establishing an effective management structure for building credibility in the way IT is used, and took a significant step toward achieving a "One VA" vision. The Secretary's initiative was also a bold and innovative step by the department--one that has been undertaken by few other federal agencies. For example, of 17 agencies contacted in 2002, 8 reported having component-level CIOs, none of which reported to the department-level CIO. Only one agency with component-level CIOs reported that its department-level CIO had authority over all IT funding. We also noted that the CIO's success in managing IT operations under the realignment would hinge on effective collaboration with business counterparts to guide IT solutions that meet mission needs, and we pointed out the importance of the three key contributors to CIO success described in our 2001 guidance (discussed earlier). Although we have not reviewed the current status of this proposed realignment or VA's current organizational structure, it remains our view that the proposed realignment held promise for building a more solid foundation for investing in and improving the department's accountability over IT resources. Specifically, under the realignment the CIO would assume budget authority over all IT funding, including authority to veto proposals submitted from subdepartment levels. This could have a significant effect on VA's accountability for how components are spending money. To sum up, the CIO plays a vital role in ensuring that VA's funds are well spent and in managing information technology to serve our nation's veterans. In our view, the realignment of VA's IT organization proposed in 2002 held promise for improving accountability and enabling the department to accomplish its mission. The additional oversight afforded the CIO could have a significant impact on the department's ability to more effectively account for and manage its proposed $2.1 billion in planned IT spending. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of this Committee may have at this time. For information about this testimony, please contact Linda D. Koontz, Director, Information Management Issues, at (202) 512-6240 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 Barbara Collier, Lester Diamond, Barbara Oliver, and J. Michael Resser. 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 carrying out its mission of serving the nation's veterans and their dependents, the Department of Veterans Affairs (VA) relies extensively on information technology (IT), for which it is requesting about $2.1 billion in fiscal year 2006. VA's vision is to integrate its IT resources and streamline interactions with customers, so that it can provide services and information to veterans more quickly and effectively. Fully exploiting the potential of IT to improve performance is a challenging goal for VA, as it is throughout government. The Clinger-Cohen Act of 1996 addressed this challenge by, among other things, establishing the position of chief information officer (CIO) to serve as the focal point for information and technology management within departments and agencies. As agreed with Congress, GAO will discuss the role of CIOs in the federal government and in the private sector, as well as provide a historical perspective on the roles and responsibilities of VA's CIO. In developing this testimony, GAO relied on its previous work at VA and on the CIO role, including a 2004 review of CIOs at major departments and agencies and a 2005 review of CIOs at leading private-sector organizations. In the federal government and in the private sector, the responsibilities and challenges of CIOs are largely similar. In most management areas, the federal and private-sector organizations reviewed showed little difference in the percentage of CIOs who had or shared a particular responsibility. The challenges cited by private-sector CIOs were also similar to those of federal CIOs: both groups cited improving IT management processes, developing IT leadership and skills, working with enterprise architectures, and ensuring the security of systems. Over time, VA has increased its attention to the CIO position and to information and technology management. After several years with CIOs whose primary duty was not information and technology management or who were serving in an acting capacity, the department appointed a full-time permanent CIO in August 2001. VA also recognized that its decentralized computing environment presented challenges, with a large proportion of the department's IT budget controlled by its administrations and staff offices. As a result, in 2002, the department proposed a realignment to strengthen the department-level CIO position and centralize IT management under this official. GAO has not reviewed the current status of this proposed realignment or VA's current organizational structure, but its view is that the realignment held promise for improving accountability and helping to accomplish VA's mission by increasing the CIO's oversight over IT management and spending.
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In December 2006, in response to SAFE Port Act requirements, DHS, and the Department of Energy (DOE) jointly announced the formation of the Secure Freight Initiative (SFI) pilot program to test the feasibility of scanning 100 percent of U.S.-bound container cargo at three foreign ports (Puerto Cortes, Honduras; Qasim, Pakistan; and Southampton, United Kingdom). According to CBP officials, while initiating the SFI program at these ports satisfied the SAFE Port Act requirement, CBP also selected the ports of Busan, South Korea; Hong Kong; Salalah, Oman; and Singapore to more fully demonstrate the capability of the integrated scanning system at larger, more complex ports. As of October 2009, SFI has been operational at five of these initial seven seaports. According to CBP and DOE officials, the SFI program builds upon existing container security measures by enhancing the U.S. government's ability to have containers scanned for nuclear and radiological material overseas and, thus, better assess the risk of weapons of mass destruction (WMD) in inbound cargo containers. Managed by TSA and the U.S. Coast Guard, the TWIC program aims to protect the nation's maritime transportation facilities and vessels by requiring maritime workers to complete background checks and obtain a biometric identification card in order to gain unescorted access to the secure areas of regulated facilities and vessels. A federal regulation in January 2007 set a compliance deadline, subsequently extended to April 15, 2009, whereby each maritime worker was required to hold a TWIC in order to obtain unescorted access to secure areas of regulated facilities and vessels. In addition, TSA has initiated a pilot to test the use of TWIC with related access control technologies. Concerns have grown about the security risks of small vessels and DHS has identified the four gravest risk scenarios involving the use of such vessels for terrorist attacks. Some of these risks have been shown to be real through attacks conducted outside U.S. waters, but to date, no small boat attacks have happened in the United States. These four scenarios include the use of a small vessel as (1) a waterborne improvised explosive device, (2) a means of smuggling weapons into the United States, (3) a means of smuggling humans into the United States, and (4) a platform for conducting a stand-off attack. Air cargo ranges in size from 1 pound to several tons, and can be shipped in various forms, including unit load devices (ULD) that allow many packages to be consolidated into one container or pallet, wooden crates, or individually wrapped/boxed pieces, known as loose or bulk cargo. Participants in the air cargo shipping process include shippers, such as manufacturers; freight forwarders, who consolidate cargo from shippers and take it to air carriers for transport; air cargo handling agents, who process and load cargo onto aircraft on behalf of air carriers; and air carriers that load and transport cargo. TSA's responsibilities include, among other things, establishing security requirements governing domestic and foreign passenger air carriers that transport cargo, and domestic freight forwarders. Airport perimeter and access control security is intended to prevent unauthorized access into secured airport areas, either from outside the airport complex or from within. Airport operators generally have direct day-to-day responsibility for maintaining and improving perimeter and access control security, as well as implementing measures to reduce worker risk. However, TSA has primary responsibility for establishing and implementing measures to improve security operations at U.S. commercial airports--that is, TSA-regulated airports--including overseeing airport operator efforts to maintain perimeter and access control security. Airport workers may access sterile areas-- areas of airports where passengers wait after screening to board departing aircraft-- through TSA security checkpoints or through other access points that are secured by the airport operator. The airport operator is also responsible, in accordance with its security program, for securing access to secured airport areas where passengers are not permitted. Airport methods used to control access vary, but all access controls must meet minimum performance standards in accordance with TSA requirements. The federal government has developed a strategy to address cyber threats. Specifically, President Bush issued the 2003 National Strategy to Secure Cyberspace and related policy directives, such as Homeland Security Presidential Directive 7, that specify key elements of how the nation is to secure key computer-based systems, including both government systems and those that support critical infrastructures owned and operated by the private sector. The strategy and related policies also establish DHS as the focal point for cyber critical infrastructure protection and assigns DHS multiple leadership roles and responsibilities in this area, to include (1) developing a comprehensive national plan for critical infrastructure protection, 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. More recently, 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 May 2009 report made a number of recommendations to improve the nation's approach. In October 2009, we reported that CBP has made some progress in working with the initial SFI ports to scan U.S.-bound cargo containers; but because of challenges to expanding scanning operations, especially to larger ports, the feasibility of scanning 100 percent of U.S.-bound cargo containers at over 600 foreign seaports remains largely unproven. CBP and DOE have been successful in integrating images of scanned containers onto a single computer screen that can be reviewed remotely from the United States and have also been able to use these initial ports as a test bed for new applications of existing technology, such as mobile radiation scanners. However, the SFI ports' level of participation, in some cases, has been limited in terms of duration or scope. While 54 to 86 percent of the U.S.-bound cargo containers, on average, were scanned at 3 comparatively low volume ports that are responsible for less than 3 percent of container shipments to the United States, CBP has not been able to achieve sustained scanning rates above 5 percent at 2 comparatively larger ports-- the type of ports that ship most containers to the United States. Scanning operations at the initial SFI ports have encountered a number of challenges, such as logistical problems with containers transferred from rail or other vessels, and CBP officials are concerned that they and the participating ports cannot overcome them. CBP has developed two initiatives related to SFI for improving container security; however, challenges remain as neither initiative will enable CBP to fully achieve the 9/11 Act requirement to scan 100 percent of all U.S.- bound cargo by July 2012. The first initiative, the "strategic trade corridor strategy," involves scanning 100 percent of U.S.-bound containers at selected foreign ports where CBP believes it will mitigate the greatest risk of weapons of mass destruction (WMD) entering the United States. The Secretary of Homeland Security approved this strategy and, according to CBP, is in negotiations with foreign governments to expand SFI to ports in those countries. The second initiative, known as "10+2", requires importers to provide 10 data elements and vessel carriers to provide 2 data elements on containers and their cargo to CBP, which provides further information to CBP, thus, improving its ability to identify containers that may pose a risk of containing WMD for additional scrutiny--such as scanning or physical inspection. Based on discussions with DHS and CBP officials, it is unclear whether DHS intends for the strategic trade corridor strategy and 10+2 to be implemented in lieu of the 100 percent scanning requirement or whether it is the first phase of implementation. While these initiatives may collectively improve container security, they will not enable CBP to fully achieve the 9/11 Act requirement to scan 100 percent of U.S.-bound containers by July 2012. According to CBP, it does not have a plan for fully implementing the scanning requirement by this date because it questions the feasibility; however, it has not performed a feasibility analysis of expanding 100 percent scanning, as required by the SAFE Port Act. To address this, in October 2009, we recommended that CBP conduct a feasibility analysis of implementing 100 percent scanning and provide the results, as well as alternatives to Congress, in order to determine the best path forward to strengthen container security. CBP concurred with our recommendation. Further, senior DHS and CBP officials acknowledge that most, if not all foreign ports, will not be able to meet the July 2012 target date for scanning all U.S.-bound cargo. As a result, DHS has recently decided to grant a blanket extension to all foreign ports, thus extending the target date for compliance with this requirement by 2 years, to July 2014. In November 2009 we reported that, based on lessons learned from its early experiences with enrollment and activation, TSA and its contractor took steps to prepare for a surge in TWIC enrollments and activations as local compliance dates approached. For example, according to TSA and port facility representatives, TSA and its contractor increased enrollment center resources, such as increasing the number of enrollment and activation stations to meet projected TWIC user demands. Likewise, the Coast Guard employed strategies to help the maritime industry meet the TWIC national compliance date while not disrupting the flow of commerce. As a result of these efforts, TSA reported enrolling 1,121,461 workers in the TWIC program, or over 93 percent of the estimated 1.2 million users, by the April 15, 2009 deadline. Although most workers received their TWICs, TSA data show that some workers experienced delays in receiving TWICs. Among the reasons for the delays was that a power failure occurred in October 2008 at the government facility that processes TWIC data that caused a hardware component failure in the TWIC enrollment and activation system for which no replacement component was on hand. In our November 2009 report on TWIC, we made recommendations to TSA to expedite the development of contingency and disaster recovery plans and system(s). DHS stated it is taking steps to address this recommendation and future potential TWIC system failures by developing a system to support disaster recovery by 2012. While DHS's efforts are a positive step, until they are complete, TWIC systems remain vulnerable to similar disasters. In response to our 2006 recommendation and a SAFE Port Act requirement, TSA initiated a pilot in August 2008 known as the TWIC reader pilot, to test TWIC-related access control technologies. The pilot is expected to test the viability of selected biometric card readers for use in reading TWICs within the maritime environment and test the technica l aspects of connecting TWIC readers to access control systems. The results of the pilot are expected to inform the development of the card reader rule requiring TWIC readers for use in controlling access at MTSA regulated vessels/facilities. Based on the August 2008 pilot initiation date, the card reader rule is to be issued no later than 24 months from the initiation of the pilot, or by August 2010. Although TSA has made significant progress to incorporate best practices into TWIC's schedule for implementing the reader pilot program, weaknesses continue to exist that limit TSA's ability to use the schedule as a management tool to guide the pilot and accurately identify the pilot's completion date. In response to limitations that we identified, the program office developed a new TWIC pilot master schedule in March 2009, and updated it in April 2009, and again in May 2009. The pilot schedule went from not meeting any of the nine scheduling best practices in September 2008 to fully addressing one of the practices, addressing seven practices to varying degrees, and not addressing one practice. While TSA has improved its technical application of program scheduling practices on the TWIC reader pilot program, as of May 2009, weaknesses remain that may adversely impact its usefulness as a management tool. For example, the schedule does not accurately reflect all key pilot activities or assign resources to those activities. To address these weaknesses, in our November 2009 report we recommended that TSA, in concert with pilot participants, fully incorporate best practices for program scheduling in the pilot. TSA concurred in part with our recommendation. In addition, shortfalls in TWIC pilot planning have presented a challenge for TSA and the Coast Guard in ensuring that the pilot is broadly representative of deployment conditions. This is in part because an evaluation plan that fully identifies the scope of the pilot and the methodology for collecting and analyzing the information resulting from the pilot has not been developed. Agency officials told us that no such evaluation plan was developed because they believe that the existing pilot documentation coupled with subject matter expertise would be sufficient to guide the pilot. However, our review of the TWIC pilot highlights weaknesses that could be rectified by the development and use of an evaluation plan. To address this, in November 2009, we recommended that TSA and the Coast Guard develop an evaluation plan to help ensure that needed information on the use of biometrics readers will result from the pilot. DHS concurred and discussed actions to implement the recommendation, but it is too early to determine if the intended actions will fully address the intent of the recommendation. While DHS and the Coast Guard have developed a strategy and programs to reduce the risks associated with small vessels, they face ongoing challenges in tracking small vessels and preventing attacks by such vessels. In April 2008, DHS issued its Small Vessel Security Strategy and is now in the process of developing and reviewing a more detailed implementation plan. After review by the Coast Guard and CBP, the draft plan was forwarded to DHS on September 18, 2009 with a recommendation for approval, but DHS has not yet issued a final decision. As part of its effort to improve security in the maritime domain, the Coast Guard is also implementing two major unclassified systems to track a broad spectrum of vessels. While these systems use proven technologies, they depend on the compliance of vessel operators to carry equipment needed to interact with these systems and to make sure the systems are turned on and functioning properly. These systems, however, generally cannot track small vessels. The Coast Guard and other agencies have other systems, though--which can include cameras and radars--that can track small vessels within ports, but these systems are not installed at all ports, and do not always work in bad weather or at night. In addition, the Coast Guard and other agencies, such as the New Jersey State Police, have several programs in place to address risks from small vessels, such as outreach efforts to the boating community to share threat information. However, the Coast Guard program faces resource limitations. For example, the Coast Guard's program to reach out to the boating community for their help in detecting suspicious activity, America's Waterway Watch, lost the funding it received through a Department of Defense readiness training program for military reservists in fiscal year 2008. Now it must depend on the activities of the Coast Guard Auxiliary, a voluntary organization, for most of its outreach efforts. Even with systems in place to track small vessels, there is widespread agreement among maritime stakeholders that it is very difficult to detect threatening activity by small vessels without prior knowledge of a planned attack. As we previously reported in March 2009, TSA has taken several key steps to meet the air cargo screening mandate of the 9/11 Act as it applies to domestic cargo. TSA's approach involves multiple air cargo industry stakeholders sharing screening responsibilities across the air cargo supply chain. According to TSA officials, this decentralized approach is expected to minimize carrier delays, cargo backlogs, and potential increases in cargo transit time, which would likely result if screening were conducted primarily by air carriers at the airport. The specific steps that TSA has taken to address domestic air cargo screening include the following: Revised air carrier security programs: Effective October 1, 2008, TSA established a requirement for 100 percent screening of nonexempt cargo transported on narrow-body passenger aircraft. Effective February 1, 2009, TSA also required air carriers to ensure the screening of 50 percent of all nonexempt air cargo transported on all passenger aircraft. Furthermore, effective February 2009, TSA revised or eliminated most of its screening exemptions for domestic cargo. Created the Certified Cargo Screening Program (CCSP): TSA created a voluntary program to allow screening to take place earlier in the shipping process and at various points in the air cargo supply chain--including before the cargo is consolidated. In this program, air cargo industry stakeholders--such as freight forwarders and shippers--voluntarily apply to become certified cargo screening facilities (CCSF). CCSFs in the program were required to begin screening cargo as of February 1, 2009. Issued an interim final rule: On September 16, 2009, TSA issued an interim final rule, effective November 16, 2009, that among other things, codifies the statutory air cargo screening requirements of the 9/11 Act and establishes requirements for entities participating in the CCSP. Established the Air Cargo Screening Technology Pilot: To operationally test explosives trace detection (ETD) and X-ray technology among CCSFs, TSA created the Air Cargo Screening Technology Pilot in January 2008, and selected some of the largest freight forwarders to use the technologies and report on their experiences. This pilot is ongoing, with an anticipated end date of August 2010, and the results have not yet been finalized. Expanded its explosives detection canine program: To assist air carriers in screening cargo, TSA has taken steps to expand the use of TSA-certified explosives detection canine teams. TSA now has 120 allocated canine teams dedicated to air cargo screening at 20 major airports. While these steps are encouraging, TSA faces several challenges in meeting the air cargo screening mandate. First, although industry participation in the CCSP is vital to TSA's approach to move screening responsibilities across the supply chain, the voluntary nature of the program may make it difficult to attract program participants needed to screen the required levels of domestic cargo. Attracting certified cargo screening facilities (CCSF) is important because much cargo is currently delivered to air carriers in a consolidated form and the requirement to screen individual pieces of cargo will necessitate screening earlier in the air cargo supply chain. However, there are concerns about potential program costs, including acquiring expensive technology, hiring additional personnel, conducting additional training, and making facility improvements. Second, while TSA has taken steps to test technologies for screening and securing air cargo, it has not yet completed assessments of the technologies it plans to allow air carriers and program participants to use in meeting the August 2010 screening mandate. According to TSA officials, the agency has conducted laboratory assessments and plans to complete operational testing of X-ray technologies by late 2009, and laboratory and operational testing of explosives trace detection technology by August 2010. However, these technologies, which have not yet been fully tested for effectiveness, are currently being used by industry participants to meet air cargo screening requirements. Third, TSA faces challenges overseeing compliance with the CCSP due to the size of its current Transportation Security Inspector (TSI) workforce. Under the CCSP, in addition to performing inspections of air carrier and freight forwarders, TSIs are to also perform compliance inspections of new regulated entities that voluntarily become CCSFs, as well as conduct additional CCSF inspections of existing freight forwarders. TSA officials have stated that there may not be enough TSIs to conduct compliance inspections of all the potential CCSFs once the program is fully implemented by August 2010. Until TSA completes its staffing study, TSA may not be able to determine whether it has the necessary staffing resources to ensure that entities involved in the CCSP are meeting TSA requirements to screen and secure air cargo. Finally, TSA has taken some steps to meet the screening mandate as it applies to inbound cargo but does not expect to achieve 100 percent screening of inbound cargo by the August 2010 deadline. TSA revised its requirements to, in general, require carriers to screen 50 percent of nonexempt inbound cargo. TSA also began harmonization of security standards with other nations through bilateral and quadrilateral discussions. In addition, TSA continues to work with CBP to leverage an existing CBP system to identify and target high-risk air cargo. However, TSA does not expect to meet the mandated 100 percent screening level by August 2010. This is due, in part, to existing inbound screening exemptions, which TSA has not reviewed or revised, and to challenges TSA faces in harmonizing the agency's air cargo security standards with those of other nations. Moreover, TSA's international inspection resources are limited. We will continue to explore these issues as part of our ongoing review of TSA's air cargo security efforts, to be issued next year. In our September 2009 report on airport security, we reported that TSA has implemented a variety of programs and protective actions to strengthen the security of commercial airports. For example, in March 2007, TSA implemented a random worker screening program--the Aviation Direct Access Screening Program (ADASP)--nationwide to enforce access procedures, such as ensuring that workers do not possess unauthorized items when entering secured areas. In addition, TSA has expanded requirements for background checks and the population of individuals who are subject to these checks, and has established a statutorily directed pilot program to assess airport security technology. In 2004 TSA initiated the Airport Access Control Pilot Program to test, assess, and provide information on new and emerging technologies, including biometrics. TSA issued a final report on the pilots in December 2006. As we reported in September 2009, while TSA has taken numerous steps to enhance airport security, it continues to face challenges in several areas, such as assessing risk, evaluating worker screening methods, addressing airport technology needs, and developing a unified national strategy for airport security. For example, while TSA has taken steps to assess risk related to airport security, it has not conducted a comprehensive risk assessment based on assessments of threats, vulnerabilities, and consequences, as required by DHS's National Infrastructure Protection Plan . To address these issues, we recommended, among other things, that TSA develop a comprehensive risk assessment of airport security and milestones for its completion, and evaluate whether the current approach to conducting vulnerability assessments appropriately assesses vulnerabilities. DHS concurred with these recommendations. Further, to respond to the threat posed by airport workers, the Explanatory Statement accompanying the DHS Appropriations Act, 2008, directed TSA to use $15 million of its appropriation to conduct a pilot program at seven airports to help identify the potential costs and benefits of 100 percent worker screening and other worker screening methods. In July 2009 TSA issued a final report on the results and concluded that random screening is a more cost-effective approach because it appears "roughly" as effective in identifying contraband items at less cost than 100 percent worker screening. However, the report also identified limitations in the design and evaluation of the program and in the estimation of costs. Given the significance of these limitations, we reported in September 2009 that it is unclear whether random worker screening is more or less cost- effective than 100 percent worker screening. In addition, TSA did not document key aspects of the pilot's design, methodology, and evaluation, such as a data analysis plan, limiting the usefulness of these efforts. To address this, we recommended that TSA ensure that future airport security pilot program evaluation efforts include a well-developed and well- documented evaluation plan, to which DHS concurred. Moreover, although TSA has taken steps to develop biometric worker credentialing, it is unclear to what extent TSA plans to address statutory requirements regarding biometric technology, such as developing or requiring biometric access controls at airports, establishing comprehensive standards, and determining the best way to incorporate these decisions into airports' existing systems. To address this issue, we have recommended that TSA develop milestones for meeting statutory requirements for, among other things, performance standards for biometric airport access control systems. DHS concurred with this recommendation. Finally, TSA's efforts to enhance the security of the nation's airports have not been guided by a national strategy that identifies key elements, such as goals, priorities, performance measures, and required resources. To better ensure that airport stakeholders take a unified approach to airport security, we recommended that TSA develop a national strategy that incorporates key characteristics of effective security strategies, such as measurable goals and priorities, to which DHS concurred. Federal law and policy establish DHS as the focal point for efforts to protect our nation's computer-reliant critical infrastructures. Since 2005, we have reported that DHS has not yet fully satisfied its key responsibilities for protecting these critical infrastructures and have made recommendations for DHS to address in key cyberscurity areas, to include the five key areas shown in table 1. DHS has since developed and implemented certain capabilities to satisfy aspects of its responsibilities, but the department 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 United States Computer Emergency Readiness Team did not fully address 15 key attributes of cyber analysis and warning capabilities related to four key areas. As a result, we recommended that the department address shortfalls in order to fully establish a national cyber analysis and warning capability. DHS agreed in large part with our recommendation. 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, but its actions to address the lessons had not been fully implemented. Consequently, we recommended that DHS complete corrective activities to strengthen coordination between public and private sector participants in response to significant cyber incidents. DHS concurred with our recommendation and has made progress in completing some identified activities. We also testified in March 2009 on needed improvements to the nation's cybersecurity strategy. In preparing 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 these experts are listed in table 2. These recommended improvements to the national strategy are in large part consistent with our previous reports and extensive research 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. Mr. Chairman, this concludes my statement for the record. For questions about this statement, please contact Cathleen A. Berrick at 202-512-8777, or [email protected]. For further information regarding maritime security issues, please contact Stephen L. Caldwell at 202-512- 9610, or [email protected]. For further information regarding aviation security issues, please contact Stephen M. Lord at 202-512-4379, or [email protected]. For further information regarding cybersecurity issues, contact David A. Powner 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 statement. In addition to the contacts named above, Christopher Conrad, Assistant Director, managed this review. Jonathan Bachman, Dave Bruno, Lisa Canini, Joseph Cruz, Michael Gilmore, Barbara Guffy, Lemuel Jackson, Steve Morris, Robert Rivas, Yanina Golburt Samuels, and Rebecca Kuhlmann Taylor made significant contributions to the work. Frances Cook, Geoffrey Hamilton, Tom Lombardi, and Jan Montgomery provided legal support. Linda Miller provided assistance in testimony preparation. 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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Securing the nation's transportation and information systems is a primary responsibility of the Department of Homeland Security (DHS). Within DHS, the Transportation Security Administration (TSA) is responsible for securing all transportation modes; U.S. Customs and Border Protection (CBP) is responsible for cargo container security; the U.S. Coast Guard is responsible for protecting the maritime environment; and the National Protection and Programs Directorate is responsible for the cybersecurity of critical infrastructure. This statement focuses on the progress and challenges DHS faces in key areas of maritime, aviation, and cybersecurity. It is based on GAO products issued from June 2004 through November 2009, as well as ongoing work on air cargo security. GAO reviewed relevant documents; interviewed cognizant agency officials; and observed operations at 12 airports, chosen by size and other factors. The results are not generalizable to all airports. DHS hasmade progress in enhancing security in the maritime sector, but key challenges remain. For example, as part of a statutory requirement to scan 100 percent of U.S.-bound container cargo by July 2012, CBP has implemented the Secure Freight Initiative at select foreign ports. However, CBP does not have a plan for fully implementing the 100 percent scanning requirement by July 2012 because it questions the feasibility, although it has not performed a feasibility analysis of the requirement. Rather, CBP has planned two new initiatives to further strengthen the security of container cargo, but these initiatives will not achieve 100 percent scanning. Further, TSA, the Coast Guard, and the maritime industry took a number of steps to enroll over 93 percent of the estimated 1.2 million users in the Transportation Worker Identification Credential (TWIC) program (designed to help control access to maritime vessels and facilities) by the April 15, 2009 compliance deadline, but they experienced challenges resulting in delays and in ensuring the successful execution of the TWIC pilot. While DHS and the Coast Guard have developed a strategy and programs to reduce the risks posed by small vessels, they face ongoing resource and technology challenges in tracking small vessels and preventing attacks by such vessels. In the aviation sector, TSA has made progress in meeting the statutory mandate to screen 100 percent of air cargo transported on passenger aircraft by August 2010 and in taking steps to strengthen airport security, but TSA continues to face challenges. TSA's efforts include developing a system to allow screening responsibilities to be shared across the domestic air cargo supply chain, among other steps. Despite these efforts, TSA and the industry face a number of challenges including the voluntary nature of the program, and ensuring that approved technologies are effective with air cargo. TSA also does not expect to meet the mandated 100 percent screening deadline as it applies to air cargo transported into the U.S., in part due to existing screening exemptions for this type of cargo and challenges in harmonizing security standards with other nations. GAO is reviewing these issues as part of its ongoing work and will issue a final report next year. In addition, TSA has taken a variety of actions to strengthen airport security by, among other things, implementing a worker screening program; however, TSA still faces challenges in this area. DHS has made progress in strengthening cybersecurity, such as addressing some lessons learned from a cyber attack exercise, but further actions are warranted. Since 2005, GAO has reported that DHS has not fully satisfied its key responsibilities for protecting the nation's computer-reliant critical infrastructures and has made related recommendations to DHS, such as bolstering cyber analysis and warning capabilities and strengthening its capabilities to recover from Internet disruptions. DHS has since developed and implemented certain capabilities to satisfy aspects of its responsibilities, but it has not fully implemented GAO's recommendations and, thus, more action is needed to address the risk to critical cybersecurity infrastructure.
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IRS relies on automated information systems to process over 200 million taxpayer returns and collect over $1.6 trillion in taxes annually. IRS uses its computer systems to, among other things, process tax returns, maintain taxpayer data, calculate interest and penalties, and generate refunds. IRS operates facilities throughout the United States that process tax returns and other information supplied by taxpayers. The data are then electronically transmitted to master files of taxpayer information that are maintained and updated. Because of IRS' heavy reliance on its facilities, effective security controls are critical to IRS' ability to maintain the confidentiality of sensitive taxpayer data, safeguard assets, and ensure the reliability of financial management information. Federal law, Department of the Treasury directives, and IRS' own internal policies and procedures require the implementation of sound security practices and standards. The Computer Security Act and the Clinger-Cohen Act require, among other things, the establishment of standards and guidelines for ensuring the security and privacy of sensitive information in federal computer systems. Similarly, IRS' tax information security guidelines require that all computer and communications systems that process, store, or transmit taxpayer data adequately protect these data, and the Internal Revenue Code prohibits the unauthorized disclosure of federal returns and return information outside IRS. To adequately comply with these guidelines, IRS must ensure that (1) access to computer data, systems, and facilities is properly restricted and monitored, (2) changes to computer systems software are properly authorized and tested, (3) backup and recovery plans are prepared, tested, and maintained to ensure continuity of operations in the case of a disaster, and (4) data communications are adequately protected from unauthorized intrusion and interception. The need for strong and effective computer security over taxpayer information is clear. IRS computer systems contain sensitive taxpayer information such as name, address, social security number, and details on each taxpayer's financial holdings. As we previously reported, these and similar types of information have been used to commit financial crimes and identity fraud nationwide. Commonly reported financial crimes include using someone's personal information to fraudulently establish credit, run up debt, or take over and deplete existing financial accounts. Taxpayers can suffer injury to their reputations when credit is fraudulently established and debts incurred in their names. Bad credit could in turn lead to difficulties in obtaining loans or jobs and require a lengthy and expensive process to clear one's personal records. Over the past 5 years, we have reviewed the effectiveness of IRS security and general controls as part of our annual audit of IRS' financial statements. During this period, we testified and reported numerous times on the ineffectiveness of these controls in safeguarding IRS computer systems and facilities. In April 1997, we reported on serious weaknesses at five IRS facilities that we visited. These weaknesses were in eight functional areas, which are (1) physical security, (2) logical security,(3) data communications management, (4) risk analysis, (5) quality assurance, (6) internal audit and security, (7) security awareness, and (8) contingency planning. We also noted that IRS' ability to monitor and detect the unauthorized access and perusal of electronic taxpayer records by IRS employees, also known as browsing, was limited. We reported that until these weaknesses are corrected, IRS runs the risk of its tax processing operations being disrupted and taxpayer data being improperly used, modified, or destroyed. Because of the seriousness of the weaknesses, we recommended, among other things, that IRS (1) reevaluate its current approach to computer security and report its plans for improving computer security to the Congress and (2) prepare and submit a plan to the Congress for correcting all the weaknesses identified at the five facilities and for identifying and correcting security weaknesses at the other IRS facilities. In 1997, the Congress passed the Taxpayer Browsing Protection Actwhich amended the Internal Revenue Code of 1986 to make unlawful unauthorized access and inspection of taxpayer records a crime and to establish penalties for unlawful access and inspection of taxpayer records. The objectives of our review were to determine and summarize the status of the computer-related general control weaknesses identified at the five IRS facilities discussed in our April 1997 report and to assess the effectiveness of computer controls at a sixth facility. To determine the effectiveness of IRS' corrective actions taken to resolve these weaknesses, we interviewed agency officials responsible for correcting them, reviewed these officials' action plans and status reports, and conducted on-site evaluations to verify the effectiveness of corrective actions taken. Our on-site evaluations of IRS computer-related general controls were conducted in conjunction with our audit of IRS' fiscal year 1997 custodial financial statements and with the assistance of the independent public accounting firm which also participated in the review supporting our April 1997 report. Our evaluations included the review of related IRS policies and procedures; on-site tests and observations of computer-related controls; and discussions with IRS headquarters and facility personnel, security representatives, and other pertinent officials at the locations visited. Our evaluation did not include external penetration testing of IRS computer facilities. We performed evaluations at six IRS facilities--the five facilities visited during our previous review and one additional facility. We requested and received IRS comments on the results of our on-site evaluations from the Director of the Office of Systems Standards and Evaluation, who has servicewide responsibility for computer security. We did not verify IRS' statements regarding corrective actions taken subsequent to our site visits but plan to do so during future reviews. To evaluate IRS' computer security management, we assessed information pertaining to computer controls in place at headquarters and field locations and held discussions with headquarters officials. We did not assess the computer-related controls that IRS plans to incorporate under any of its long-term plans to modernize its tax processing systems. We also did not assess IRS efforts to resolve the Year 2000 computing crisis. Our work was performed at IRS headquarters in Washington, D.C., and at six facilities located throughout the United States from November 1997 through July 1998. We performed our work in accordance with generally accepted government auditing standards. IRS has taken and is taking action to implement the recommendations contained in our April 1997 report to improve computer security. For example, IRS designated computer security as a material weakness in its fiscal year 1997 Federal Managers' Financial Integrity Act report, acknowledging the seriousness of these computer-related general control weaknesses and the risk they pose to the agency's operations. IRS has established the Office of Systems Standards and Evaluation to centralize responsibility for IRS security and privacy issues. The office is staffed with over 60 security, privacy, systems life-cycle, and administrative specialists led by two senior executives who report to the Chief Information Officer. The office is responsible for establishing and enforcing standards and policies for all major security programs including, but not limited to, physical security, data security, and systems security. IRS has acted to address recommendations made in our April 1997 report by preparing and transmitting to the Congress a high-level action plan for identifying and correcting the security weaknesses at all of its facilities including the five facilities discussed in our prior report; reevaluating and establishing a new approach to managing computer security that involves the resolution of security weaknesses and issues by facility type, including computing centers, service centers, district offices, and others; and submitting to the Congress its plan for improving the service's management approach to computer security. In addition, the Office of Systems Standards and Evaluation has developed computer security awareness briefings on unauthorized access to taxpayers' records, conducted computer security reviews at IRS facilities, and developed a tracking system for reporting the status of actions planned or taken to correct the weaknesses identified in our April 1997 report. We confirmed that IRS has corrected or has implemented compensating controls that mitigated the risks associated with 63 percent of the total weaknesses identified in our April 1997 report. Each facility had varying degrees of success resolving the weaknesses previously reported. The actual rate of resolution ranged from 42 percent to 80 percent. Corrective actions taken by one or more of the five facilities include strengthening the overall controls over physical access to IRS facilities, reducing the number of IRS employees authorized to read or change sensitive system files and/or taxpayer data, conducting risk analyses of the facilities and of locally developed computer programs, updating and testing some disaster recovery plans, and improving overall security awareness. Although IRS has made significant strides in improving computer security at certain facilities, an effective servicewide computer security management program has not yet been fully implemented. Our study of the security management practices of leading organizations found that these organizations successfully managed their information security risks through an ongoing cycle of risk management activities. As shown in figure 1, each of these activities is linked in a cycle to help ensure that business risks are continually monitored, policies and procedures are regularly updated, and controls are in effect. The risk management cycle begins with an assessment of risks and a determination of needs. This assessment includes identifying cost-effective policies and related controls. The policies and controls, as well as the risks that prompted their adoption, must be communicated to those responsible for complying with them and implemented. Finally, and perhaps most important, there must be procedures for evaluating the effectiveness of policies and related controls and reporting the resulting conclusions to those who can take appropriate corrective action. In addition, our study found that a strong central security management focal point can help ensure that the major elements of the risk management cycle are carried out and can serve as a communications link among organizational units. Since our April 1997 report, IRS has taken several actions consistent with the risk management cycle described above to improve its servicewide computer security management program. For example, IRS created the Office of Systems Standards and Evaluation as the central focal point for computer security within IRS, published revised computer security policies and procedures, promoted security awareness, and is evaluating controls at many of its facilities. However, several actions have not yet been completed or performed. For example, IRS has not fully (1) assessed risks for all of its facilities, networks, major systems, and data, (2) evaluated controls over key computing resources, and (3) implemented actions to eliminate or mitigate all of the weaknesses identified during computer control evaluations. IRS is planning or taking actions to implement these elements as part of its new strategy for its servicewide computer security management program. Until IRS fully implements an effective computer security management program, IRS is exposed to the risk that other computer control weaknesses could occur and not be detected promptly enough to prevent unnecessary losses or disruptions. Although IRS has mitigated many computer security weaknesses, weaknesses in IRS' computer security controls continue to place IRS' automated systems and taxpayer data at serious risk to both internal and external threats that could result in the denial of computer services or in the unauthorized disclosure, modification, or destruction of taxpayer data. Serious weaknesses still persist at all five of the facilities included in our April 1997 report and at a sixth facility reviewed in conjunction with this audit. Our current review identified weaknesses that remain uncorrected at the five facilities visited during our prior audit and additional weaknesses we identified at those locations and at a sixth facility included in this review. The weaknesses primarily pertained to the following six functional areas: physical security, logical security, data communications, risk analysis, quality assurance, and contingency planning. These weaknesses expose taxpayers to an increased risk of loss and damages due to identity theft and other financial crimes resulting from the unauthorized disclosure and use of information they provide to IRS. A synopsis of these weaknesses by functional area follows. Physical security involves restricting physical access to computer resources, usually by limiting access to the buildings and rooms where these resources are housed to protect them from intentional or unintentional loss or impairment. Physical access control measures such as locks, guards, fences, and surveillance equipment are critical to safeguarding taxpayer data and computer operations from internal and external threats. We found continuing and new physical security weaknesses at the facilities visited. The following are examples of weaknesses that have not yet been corrected. Access to sensitive computing areas, such as computer rooms, data communications areas, and tape libraries was not adequately controlled. For example, non-librarians without a legitimate business need could gain unauthorized access to sensitive tape libraries because there were no additional control measures restricting access to tape libraries from other controlled areas. Facilities visited could not account for a total of 397 missing computer tapes, some of which contain sensitive taxpayer data or privacy information. Logical security controls are designed to limit or detect access to computer programs, data, and other computing resources to protect these resources from unauthorized modification, loss, and disclosure. Logical security control measures include the use of safeguards incorporated in computer hardware, system and application software, communication hardware and software, and related devices. These safeguards include user identification codes, passwords, access control lists, and security software programs. Logical controls restrict the access of legitimate users to the specific systems, programs, and files they need to conduct their work and prevent unauthorized users from gaining access to computing resources. Controls over access to and modification of system software are essential to protect the overall integrity and reliability of information systems. We identified weaknesses relating to logical security controls at the six sites reviewed. Examples of uncorrected vulnerabilities include the following. Computer support personnel whose job responsibilities did not require it were given the ability to change, alter, or delete taxpayer data and associated programs. Access to system software was not limited to individuals with a need to know. For example, we found that database administrators had access to system software, although their job functions and responsibilities did not require it. The powerful "root" authority, which allows users to read, modify, and delete any data file, execute any program, and activate or deactivate audit logs, had been granted to 12 computer systems analysts at one facility whose assigned duties did not require such capabilities. Individuals without a need to know had access to key system logs that provided the capability to perform unauthorized system activities and then alter the audit trail to avoid detection. Tapes and disks containing taxpayer data were not overwritten prior to reuse, thus potentially allowing unauthorized access to sensitive data and computer programs. Security software was not configured to provide optimum security over tape media. In addition, IRS' ability to detect and monitor unauthorized access by employees remains limited. The information system, Electronic Audit Research Log, developed by IRS to monitor and detect browsing can not detect all instances of browsing or unauthorized access to taxpayer records because it only monitors employees using the Integrated Data Retrieval System, the primary computer system IRS employees use to access and adjust taxpayer accounts. The Electronic Audit Research Log does not monitor the activities of IRS employees using other systems, such as the Distributed Input System and Totally Integrated Examination System, which are also used to create, access, or modify taxpayer data. In addition, the Electronic Audit Research Log does not adequately distinguish potential unauthorized accesses to taxpayer data from legitimate activity. As a result, the effort to investigate potential unauthorized accesses is time-consuming and difficult. IRS is developing a new system, the Audit Trail Lead Analysis System, which is intended to improve its capability to distinguish between unauthorized accesses and legitimate activity. If properly implemented, this system would improve IRS' capability to detect unauthorized accesses to taxpayer data. However, the Audit Trail Lead Analysis System is not scheduled to be implemented until January 1999 and will only monitor the activities of IRS employees using the Integrated Data Retrieval System and not other systems used to create, access, or modify taxpayer data. As a result of these logical security weaknesses, taxpayer and other sensitive data and programs were placed at unnecessary risk of unauthorized modification, loss, and disclosure without detection. Data communications management is the function of monitoring and controlling communications networks to ensure that they operate as intended and securely transmit timely, accurate, and reliable data. Without adequate data communications security, the data being transmitted can be destroyed, altered, or diverted, and the equipment itself can be damaged. We identified data communications weaknesses at IRS facilities. Examples of the weaknesses existing at the time of our review include the following. Telecommunications equipment was still not physically protected, thus increasing the risk of improper use, modification, or destruction of data, as well as potential equipment damage. For example, telecommunications patch panels were not placed in a locked closet or enclosure, thereby increasing the risk of unauthorized tampering with these telecommunication connections. Dial-in access was not adequately protected. For example, data transmitted over telecommunications lines were not encrypted. Because plain text was transmitted, sensitive taxpayer data remained vulnerable to unauthorized access and disclosure. The purpose of a risk analysis is to identify security threats, determine their magnitude, and identify areas needing additional safeguards. Without these analyses, systems' vulnerabilities may not be identified and appropriate controls may not be implemented to correct them. We found weaknesses in this area at the facilities visited. For example, we found that risk analyses of the facilities' local networks had not been performed or were not available. Without these analyses, IRS system vulnerabilities may go undetected, thereby jeopardizing IRS processing operations and sensitive taxpayer data. Controls over the design, development, and modification of computer software help to ensure that all programs and program modifications are properly authorized, tested, and approved. An effective quality assurance program requires reviewing software products and software change control activities to ensure that they comply with the applicable processes, standards, and procedures and satisfy the control and security requirements of the organization. One aspect of a quality assurance program is validating that software changes are adequately tested and will not introduce vulnerabilities into the system. We identified weaknesses at IRS facilities. Examples of these weaknesses follow. There was no independent quality assurance review or testing of locally developed programs. Application programmers have the capability to access or modify production computer software programs after the programs have been reviewed or tested, increasing the risk of unauthorized changes to production programs. Application programmers use real taxpayer data for software testing purposes, increasing the risk that sensitive taxpayer data could be disclosed to unauthorized individuals. Without adequate quality assurance and control over the software development and change process, IRS runs a greater risk that software supporting its operations will not (1) produce reliable data, (2) execute transactions in accordance with applicable laws, regulations, and management policies, or (3) effectively meet operational needs. An organization's ability to accomplish its mission can be significantly affected if it loses the ability to process, retrieve, and protect information that is maintained electronically. For this reason, organizations should have (1) established procedures for protecting information resources and minimizing the risk of unplanned interruptions, (2) a disaster recovery plan for restoring critical data processing capabilities, and (3) a business resumption plan for resuming business operations should interruptions occur. Disaster recovery and business resumption plans specify emergency response procedures, backup operations, and postdisaster recovery procedures to ensure the availability of critical resources and facilitate the continuity of operations in an emergency. These plans address how an organization will deal with a full range of contingencies, from electrical power failures to catastrophic events, such as earthquakes, floods, and fires. The plans also identify essential business functions and rank resources in order of criticality. To be most effective, disaster recovery and business resumption plans should be periodically tested and employees should be trained in and familiar with the use of these plans. We found weaknesses relating to contingency planning at the facilities reviewed, as the following examples illustrate. Disaster recovery plans had not been completed or lacked essential information, such as designation of an alternate computer processing site, telecommunications requirements, and procedures for restoring mission-critical processes and applications. Disaster recovery procedures were not adequately tested to determine IRS' ability to restore and operate all mission-critical applications. Disaster recovery goals and milestones were not developed based on users' business needs, which provides little assurance that users' processing needs will be met in the event of a disaster. Business resumption plans had not been developed or were incomplete. Backup generator capacity or the alternate electrical power source did not effectively meet the needs of the facilities. Due to the nature of these and other weaknesses, IRS facilities may not be able to recover their data processing capabilities, resume business operations, and restore critical data promptly in the event of a disaster or disruption of service. Consequently, IRS has little assurance that during a crisis (1) the cost of recovery efforts or the reestablishment of operations at a remote location will be kept to a minimum, (2) taxpayer data will not be lost, (3) transactions will be processed accurately and correctly, and (4) complete and accurate taxpayer, financial, or management information will be readily available. IRS has made significant progress in correcting its serious weaknesses in computer security controls intended to safeguard IRS computer systems, data, and facilities. However, serious weaknesses remain uncorrected and IRS has not yet fully assessed all of the risks to its computer processing operations nor has it evaluated the effectiveness of computer controls over key computing resources, which indicates that the service does not know the full extent of its computer security vulnerabilities. Until IRS identifies and corrects all of its critical computer security weaknesses and fully institutionalizes an effective servicewide computer security management program, the service will continue to expose its tax processing operations to the risk of disruption; taxpayer data to the risk of unauthorized use, modification, and destruction; and taxpayers to loss and damages resulting from identity fraud and other financial crimes. We recommend that the Commissioner of Internal Revenue direct the Chief Information Officer and Director of the Office of Systems Standards and Evaluation to work in conjunction with the facility directors as appropriate to continue efforts to implement appropriate control measures to limit physical access to facilities, computer rooms, and computing resources based on job responsibility; limit access authority to only those computer programs and data needed to perform job responsibilities and review access authority regularly to identify and correct inappropriate access; configure security software to provide optimum security over tape media; establish adequate safeguards over telecommunications equipment and remote access to IRS systems; ensure that all computer programs and program modifications are authorized, tested, and independently reviewed and that real taxpayer data is not used for software testing; and establish controls that ensure that disaster recovery plans and business resumption plans are comprehensive, current, and fully tested. We also recommend that the Commissioner of Internal Revenue ensure that IRS completes the implementation of an effective servicewide computer security management program. This program should include procedures for assessing risks for all of IRS' facilities, networks, major systems, and taxpayer data on a regular, ongoing basis to ensure that controls are adequate; periodically evaluating the effectiveness of controls over key computing resources at IRS facilities; and implementing actions to correct or mitigate weaknesses identified during such computer control evaluations. In commenting on a draft of this report, IRS agreed with our recommendations and stated that the report's conclusions and recommendations are consistent with its ongoing actions to improve systems security. IRS specified the actions it has taken or plans to take to adequately mitigate the remaining weaknesses and stated that an additional 12 percent of the weaknesses have been corrected since the completion of our review. We will review the actions taken by IRS to mitigate the remaining weaknesses as part of our audit of IRS' fiscal year 1998 financial statements. As agreed with your office, unless you publicly announce the contents of this report earlier, we will not distribute it until 30 days from the date of this letter. At that time, we will send copies to the Chairman and Ranking Minority Members of the Subcommittee on Treasury, Postal Service, and General Government, House Committee on Appropriations; Subcommittee on Treasury, General Government, and Civil Service, Senate Committee on Appropriations; Senate Committee on Finance; House Committee on Ways and Means; and House Committee on Government Reform and Oversight. We will also send copies to the Secretary of the Treasury, Commissioner of Internal Revenue, and Director of the Office of Management and Budget. Copies will be made available to others upon request. If you have questions about this report, please contact me at (202) 512-3317. Major contributors to this report are listed in appendix II. Gregory C. Wilshusen, Assistant Director, (202) 512-6244 Ronald E. Parker, Senior Information Systems Analyst Walter P. Opaska, Senior Information Systems Auditor 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 Internal Revenue Service's (IRS) progress in correcting serious computer security weaknesses at five IRS facilities, focusing on: (1) additional security weaknesses identified at the five facilities and at an IRS facility not included in GAO's previous report; and (2) steps IRS has taken or plans to take to implement a service-wide computer security management program. GAO noted that:(1) IRS is making significant progress to improve computer security over its facilities; (2) since GAO's April 1997 report, IRS has acknowledged the seriousness of its computer security weaknesses, consolidated overall responsibility for computer security management within one executive-level office under its Chief Information Officer, reevaluated its approach to computer security management, and developed a high-level plan for mitigating the weaknesses GAO identified; (3) GAO found that IRS has corrected or mitigated the risks associated with 63 percent of the weaknesses discussed in its prior report; (4) while progress has been made, serious weaknesses continue to exist at the five facilities visited during GAO's prior audit, and it identified several additional weaknesses at those locations and at a sixth facility included in this review; (5) these weaknesses exist primarily because IRS has not yet fully institutionalized its computer security management program; (6) these weaknesses affect IRS' ability to control physical access to its data processing facilities and sensitive taxpayer data and computer programs, prevent or detect unauthorized changes to taxpayer data or computer software, and restore essential IRS operations following an emergency or natural disaster; (7) until these weaknesses are mitigated, IRS continues to run the risk of its tax processing operations being disrupted; (8) furthermore, sensitive taxpayer data entrusted to IRS could be disclosed to unauthorized individuals, improperly used or modified, or destroyed, thereby exposing taxpayers to loss or damages resulting from identity fraud and other financial crimes; (9) in comments agreeing with GAO's recommendations, IRS stated that since the end of GAO's review, it had also specified actions planned and under way to address the remaining weaknesses; and (10) GAO will review those actions as part of its audit of IRS' fiscal year 1998 financial statements.
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Bid protests and related litigation have resulted in changes to DHS' approach for the TASC program and have contributed to a significant delay in awarding a contract. The initial TASC approach was to migrate its component systems to two financial management systems--Oracle Federal Financials and SAP--that were already in use by several DHS components. Figure 1 shows the key events that have occurred affecting the TASC program. One of these key events was the filing of a bid protest regarding DHS' initial TASC approach to migrate its components to two financial management systems already in use. DHS subsequently issued its January 2009 TASC request for proposal for the provision of an integrated financial, acquisition, and asset management COTS system already in use at a federal agency to be implemented departmentwide. A second bid protest was filed over this January 2009 request for proposal and the U.S. Court of Federal Claims dismissed the protestor's complaint, allowing DHS to proceed with this request for proposal. However, the protestor filed an appeal of this dismissal in July 2009. DHS responded to the July 2009 appeal in September 2009 and DHS officials indicated that the protestor responded to DHS' response in October 2009. In June 2007, we made six recommendations to DHS to help the department reduce the risks associated with acquiring and implementing a departmentwide financial management system. Our preliminary analysis indicates that DHS has begun to take actions toward the implementation of four of the recommendations, as shown in table 1. However, all six recommendations remain open. We do recognize that DHS cannot fully implement all of our recommendations until a contract is awarded because of its selected acquisition approach. DHS has developed certain elements for its financial management strategy and plan for moving forward with its financial system integration efforts but it faces significant challenges in completing and implementing its strategy. DHS has defined its vision for the TASC program, which is to consolidate and integrate departmentwide mission-essential financial, acquisition, and asset management systems, by providing a seamless, real- time, web-based system to execute mission-critical end-to-end integrated business processes. DHS has also established several major program goals for TASC which include, but are not limited to: creating and refining end-to-end standard business processes and a standard line of accounting, supporting timely, complete, and accurate financial management and reporting, enabling DHS to acquire goods and services of the best value that ensure that the department's mission and program goals are met, and enabling consolidated asset management across all components. DHS officials stated that this system acquisition is expected to take a COTS-based system already configured and being used at a federal agency as a starting point for its efforts. This approach is different than other financial management system implementation efforts reviewed by GAO where an agency acquired a COTS product and then performed the actions necessary to configure the product to meet the agency's specific requirements. Our review found that the strategy being taken by DHS does not contain the elements needed to evaluate whether the acquired system will provide the needed functionality or meet users' needs. For example, it does not require DHS to (1) perform an analysis of the current processes to define the user requirements to be considered when evaluating the various systems, (2) perform a gap analysis before the system is selected and (3) assess the extent to which the COTS-based system used at another agency has been customized for the respective federal entities. Studies have shown that when an effective gap analysis was not performed, program offices and contractors later discovered that the selected system lacked essential capabilities. Furthermore, adding these capabilities required expensive custom development, and resulted in cost and schedule overruns that could have been avoided. Without a comprehensive strategy and plan that considers these issues, DHS risks implementing a financial management system that will be unnecessarily costly to maintain. The January 2009 request for proposal states that the selected contractor will be required to provide a concept of operations for TASC. This concept of operations is expected to provide an operational view of the new system from the end users' perspective and outline the business processes as well as the functional and technical architecture for their proposed systems. On October 21, 2009, DHS provided us with a concept of operations for the TASC program that we have not had the opportunity to fully evaluate to assess whether it comprehensively describes the new system's operations and characteristics. According to DHS officials, this concept of operations document was prepared in accordance with the Institute of Electrical and Electronics Engineers (IEEE) standards. However, it is unclear how the DHS-prepared concept of operations document will relate to the selected contractor's concept of operations document called for in the request for proposal. According to the IEEE standards, a concept of operations is a user- oriented document that describes the characteristics of a proposed system from the users' viewpoint. A concept of operations document also describes the operations that must be performed, who must perform them, and where and how the operations will be carried out. The concept of operations for TASC should, among other things: define how DHS' day-to-day financial management operations are and will be carried out to meet mission needs; clarify which component and departmentwide systems are considered financial management systems; include a transition strategy that is useful for developing an understanding of how and when changes will occur; develop an approach for obtaining reliable information on the costs of its financial management systems investments; and link DHS' concept of operations for the TASC program to its enterprise architecture. A completed concept of operations prior to issuance of the request for proposal would have benefited the vendors in developing their proposals so that they could identify and propose systems that more closely align with DHS' vision and specific needs. While DHS has draft risk management, project management, and configuration management plans, DHS officials told us that other key plans relating to disciplined processes generally considered to be best practices will not be completed until after the TASC contract is awarded. These other plans include the requirements management, data conversion and system interfaces, quality assurance, and testing plans. Offerors were instructed in the latest request for proposal to describe their testing, risk management, and quality assurance approaches as well as component migration and training approaches. The approaches proposed by the selected contractor will become the basis for the preparation of these plans. While we recognize that the actual development and implementation of these plans cannot be completed until the TASC contractor and system have been selected, it will be critical for DHS to ensure that these plans are completed and effectively implemented prior to moving forward with the implementation of the new system. Disciplined processes represent best practices in systems development and implementation efforts that have been shown to reduce the risks associated with software development and acquisition efforts to acceptable levels and are fundamental to successful system implementations. The key to having a disciplined system development effort is to have disciplined processes in multiple areas, including project planning and management, requirements management, configuration management, risk management, quality assurance, and testing. Effective processes should be implemented in each of these areas throughout the project life cycle because change is constant. Effectively implementing the disciplined processes necessary to reduce project risks to acceptable levels is hard to achieve because a project must effectively implement several best practices, and inadequate implementation of any one may significantly reduce or even eliminate the positive benefits of the others. Although, DHS has identified nine end-to-end business processes that will be addressed as part of the TASC program, the department has not yet identified all of its existing business processes that will be reengineered and standardized as part of the TASC program. It is important for DHS to identify all of its business processes so that the department can analyze the offerors' proposed systems to assess how closely each of these systems aligns with DHS' business processes. Such an analysis would position DHS to determine whether a proposed system would work well in its future environment or whether the department should consider modifying its business processes. Without this analysis, DHS will find it challenging to assess the difficulties of implementing the selected system to meet DHS' unique needs. For the nine processes identified, DHS has not yet begun the process of reengineering and standardizing those processes. DHS has asked offerors to describe their proposed approaches for the standardization of these nine processes to be included in the TASC system. According to an attachment to the TASC request for proposal, there will be additional unique business processes or sub-processes, beyond the nine standard business processes identified, within DHS and its components that also need to be supported by the TASC system. For DHS' implementation of the TASC program, reengineering and standardizing these unique business processes and sub-processes will be critical because the department was created from 22 agencies with disparate processes. A standardized process that addresses, for example, the procurement processes at the U.S. Coast Guard, Federal Emergency Management Agency (FEMA), and the Secret Service, as well as the other DHS components, is essential when implementing the TASC system and will be useful for training and the portability of staff. Although DHS officials have stated that they plan to migrate the new system first to its smaller components and have recently provided a high- level potential approach it might use, DHS has not outlined a conceptual approach or plan for accomplishing this goal throughout the department. Instead, DHS has requested that TASC offerors describe their migration approaches for each of the department's components. While the actual migration approach will depend on the selected system and events that occur during the TASC program implementation, critical activities include (1) developing specific criteria requiring component agencies to migrate to the new system rather than attempting to maintain legacy business systems; (2) defining and instilling new values, norms, and behaviors within component agencies that support new ways of doing work and overcoming resistance to change; (3) building consensus among customers and stakeholders on specific changes designed to better meet their needs; and (4) planning, testing, and implementing all aspects of the migration of the new system. For example, a critical part of a migration plan for the new system would describe how DHS will ensure that the data currently in legacy systems is fully prepared to be migrated to the new system. An important element of a migration plan is the prioritizing of the conversion of the old systems to the new systems. For example, a FEMA official stated that the component has not replaced its outdated financial management system because it is waiting for the implementation of the TASC program. However, in the interim, FEMA's auditors are repeatedly reporting weaknesses in its financial systems and reporting, an important factor to be considered by DHS when preparing its migration plan. Because of the known weaknesses at DHS components, it will important for DHS to prioritize its migration of components to the new system and address known weaknesses prior to migration where possible. Absent a comprehensive migration strategy, components within DHS may seek other financial management systems to address their existing weaknesses. This could result in additional disparate financial management systems instead of the integrated financial management system that DHS needs. While DHS' RMTO has begun recruiting and hiring employees and contractors to help with the TASC program, the department has not identified the gaps in needed skills for the acquisition and implementation of the new system. DHS officials have said that the department is unable to determine the adequate staff levels necessary for the full implementation of the TASC program because the integrated system is not yet known; however, as of May 2009, the department had budgeted 72 full-time equivalents (FTE) for fiscal year 2010. The 72 FTEs include 38 government employees and 34 contract employees, (excluding an IV&V contractor). DHS officials told us that this level of FTEs may be sufficient for the first deployments of the new system. According to RMTO officials, as of August 2009, RMTO had 21 full-time federal employees with expertise in project management, financial business processes, change management, acquisition management, business intelligence, accounting services, and systems engineering. In addition, RMTO officials stated that there are seven contract workers supporting various aspects of the TASC program. RMTO also utilizes the services of the Office of the Chief Financial Officer and component staff. According to RMTO officials, some of DHS' larger components, such as Immigration and Customs Enforcement have dedicated staff to work on the TASC program. Many of the department's past and current difficulties in financial management and reporting can be attributed to the original stand-up of a large, new, and complex executive branch agency without adequate organizational expertise in financial management and accounting. Having sufficient human resources with the requisite training and experience to successfully implement a financial management system is a critical success factor for the TASC program. While updating the status of the six prior recommendations, we identified two issues that pose unnecessary risks to the success of the TASC program. These risks are DHS' significant reliance on contractors to define and implement the new system and the lack of independence of DHS' V&V function for the TASC program. The department plans to have the selected contractor prepare a number of key documents including plans needed to carry out disciplined processes, define additional business processes to be standardized, and propose a migration approach. However, DHS has not developed the necessary contractor oversight mechanisms to ensure that its significant reliance on contractors for the TASC program does not result in an unfavorable outcome. Work with other systems acquisition and implementation efforts have shown that placing too much reliance on contractors can result in systems efforts plagued with serious performance and management problems. For example, DHS' Office of Inspector General (OIG) recently reported that the U.S. Customs and Border Protection (CBP) had not established adequate controls and effective oversight of contract workers responsible for providing Secure Border Initiative (SBI) program support services. Given the department's aggressive SBI program schedule and shortages of program managers and acquisition specialists, CBP relied on contractors to fill the staffing needs and get the program underway. However, CBP had not clearly distinguished between roles and responsibilities that were appropriate for contractors and those that must be performed by government employees. CBP also had not provided an adequate number of contracting officer's technical representatives (COTR) to oversee support services contractors' performance. As a result, according to the OIG report, contractors were performing functions that should have been performed by government workers. According to the OIG, this heavy reliance on contractors increased the risk of CBP relinquishing its responsibilities for SBI program decisions to support contractors, while remaining responsible and accountable for program outcomes. DHS' V&V contractor was not an independent reviewer because RMTO was responsible for overseeing the contractor's work and authorizing payment of the V&V invoices. On October 21, 2009, DHS officials indicated that they have restructured the V&V contract to address our concerns by changing the reporting relationship and the organization that is responsible for managing the V&V contract. Under the previous arrangement, the V&V contractor was reporting on work of the RMTO, the program manager for the TASC program and the RMTO Director was serving as the COTR for the V&V contract. As part of the COTR's responsibilities, RMTO approved the V&V contractor's invoices for payment. The independence of the V&V contractor is a key component to a reliable verification and validation function. Use of the V&V function is a recognized best practice for large and complex system development and acquisition projects, such as the TASC program. The purpose of the V&V function is to provide management with objective insight into the program's processes and associated work products. For example, the V&V contractor would review system strategy documents that provide the foundation for the system development and operations. According to industry best practices, the V&V activity should be independent of the project and report directly to senior management to provide added assurance that reported results on the project's status are unbiased. An effective V&V review process should provide an objective assessment to DHS management of the overall status of the project, including a discussion of any existing or potential revisions to the project with respect to cost, schedule, and performance. The V&V reports should identify to senior management the issues or weaknesses that increase the risks associated with the project or portfolio so that they can be promptly addressed. DHS management has correctly recognized the importance of such a function and advised us that they have taken prompt steps so that the V&V function is now being overseen by officials in DHS' Office of the Chief Information Officer. It is important that V&V is technically, managerially, and financially independent of the organization in charge of the system development and/or acquisition it is assessing. In conclusion, Mr. Chairman, six years after the department was established, DHS has yet to implement a departmentwide, integrated financial management system. DHS has started, but not completed implementation of the six recommendations we made in June 2007, aimed at helping the department to reduce risk to acceptable levels, while acquiring and implementing an integrated departmentwide financial management system. The open recommendations from our prior report continue to be vital to the success of the TASC program. In addition, as DHS moves toward acquiring and implementing a departmentwide financial management system, it has selected a path whereby it is relying heavily on contractors to define and implement the TASC program. Therefore, adequate DHS oversight of key elements of the system acquisition and implementation will be critical to reducing risk. Given the approach that DHS has selected, it will be paramount that DHS develop oversight mechanisms to minimize risks associated with contractor- developed documents such as the migration plans, and plans associated with a disciplined development effort including requirements management plans, quality assurance plans, and testing plans. DHS faces a monumental challenge in consolidating and modernizing its financial management systems. Failure to minimize the risks associated with this challenge could lead to acquiring a system that does not meet cost, schedule, and performance goals. To that end, our draft report includes specific recommendations, including a number of actions that, if effectively implemented, should mitigate the risks associated with DHS' heavy reliance on contractors for acquiring and implementing an integrated departmentwide financial management system. In addition, we also recommended that DHS designate a COTR for the IV&V contractor that is not in RMTO, but at a higher level of departmental management, in order to achieve the independence needed for the V&V function. As discussed earlier, DHS officials advised us that they have already taken steps to address this recommendation and we look forward to DHS expeditiously addressing our other recommendations too. Mr. Chairman, this completes our prepared statement. We would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For more information regarding this testimony, please contact Kay L. Daly, Director, Financial Management and Assurance, at (202) 512-9095 or [email protected], or Nabajyoti Barkakati, Chief Technologist, at (202) 512- 4499 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. In addition to the contacts name above, other team members include John C. Martin, Senior Level Technologist; Chanetta R. Reed, Assistant Director; and Sandra Silzer, Auditor-in-Charge. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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In June 2007, GAO reported that the Department of Homeland Security (DHS) had made little progress in integrating its existing financial management systems and made six recommendations focused on the need for DHS to define a departmentwide strategy and embrace disciplined processes. In June 2007, DHS announced its new financial management systems strategy, called the Transformation and Systems Consolidation (TASC) program. GAO's testimony provides preliminary analysis of the status of its prior recommendations and whether there were additional issues identified that pose challenges to the successful implementation of the TASC program. GAO reviewed relevant documentation, such as the January 2009 Request for Proposal and its attachments, and interviewed key officials to obtain additional information. GAO provided a draft report that this testimony is based on to DHS on September 29, 2009, for review and comment. After reviewing and considering DHS' comments, GAO plans to finalize and issue the report including providing appropriate recommendations aimed at improving the department's implementation of the TASC program. GAO's preliminary analysis shows that DHS has begun to take actions to implement four of the six recommendations made in the 2007 report; however, none of these recommendations have been fully implemented. GAO recognizes that DHS cannot fully implement some of the recommendations aimed at reducing the risk in accordance with best practices until the contract for TASC is awarded. DHS has taken, but not completed, actions to (1) define its financial management strategy and plan, (2) develop a comprehensive concept of operations, (3) incorporate disciplined processes, and (4) implement key human capital practices and plans for such a systems implementation effort. DHS has not taken the necessary actions on the remaining two recommendations, to standardize business processes across the department, including applicable internal control, and to develop detailed consolidation and migration plans since DHS will not know the information necessary to develop these items until a contractor is selected. While some of the details of the department's standardization of business processes and migration plans depend on the selected new system, DHS would benefit from performing critical activities, such as identifying all of its affected current business processes so that DHS can analyze how closely the proposed system will meet the department's needs. GAO's preliminary analysis during this review also identified two issues that pose challenges to the TASC program--DHS' significant risks related to the reliance on contractors to define and implement the new system and the lack of independence of the contractor hired to perform the verification and validation (V&V) function for TASC. DHS plans to rely on the selected contractor to complete key process documents for TASC such as detailed documentation that governs activities such as requirements management, testing, data conversion, and quality assurance. The extent of DHS' reliance on contractors to define and implement key processes needed by the TASC program, without the necessary oversight mechanisms to ensure that (1) the processes are properly defined and (2) effectively implemented, could result in system efforts plagued with serious performance and management problems. Further, GAO identified that DHS' V&V contractor was not independent with regard to the TASC program. DHS management agreed that the V&V function should be performed by an entity that is technically, managerially, and financially independent of the organization in charge of the system development and/or acquisition it is assessing. Accordingly, DHS officials indicated that they have restructured the contract to address our concerns by changing the organization that is responsible for managing the V&V function.
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All six projects serve adults who are economically disadvantaged, with a range of reasons why they have been unable to get and keep a job that would allow them to become self-sufficient. Many participants lack a high school diploma or have limited basic skills or English proficiency; have few, if any, marketable job skills; have a history of substance abuse; or have been victims of domestic violence. The projects we visited had impressive results. Three of the sites had placement rates above 90 percent--two placed virtually all those who completed their training. The other three projects placed two-thirds or more of those who completed the program. The sites differ in their funding sources, skills training approaches, and client focus. For example: We visited two sites that are primarily federally funded and target clients eligible under the Job Training Partnership Act (JTPA) and Job Opportunities and Basic Skills (JOBS) program. These sites are Arapahoe County Employment and Training in Aurora, Colorado, which is a suburb of Denver, and The Private Industry Council (TPIC) in Portland, Oregon. Both of these sites assess clients and then follow a case management approach, linking clients with vocational training available through community colleges or vocational-technical schools. The Encore! program in Port Charlotte, Florida, serves single parents, displaced homemakers, and single pregnant women. Encore!'s 6-week workshop and year-round support prepare participants for skill training. It is primarily funded by a federal grant under the Perkins Act and is strongly linked with the Charlotte Vocational Technical Center (Vo-Tech). The Center for Employment Training (CET) in Reno, Nevada, focuses on three specific service-related occupations and serves mainly Hispanic farmworkers. Participants may receive subsidized training from sources such as Pell grants, JTPA state funds, and the JTPA Farmworker Program, as well as grants from the city of Reno. Focus: HOPE, in Detroit, Michigan, also serves inner-city minorities but emphasizes development of manufacturing-related skills. Its primary funding source in 1994 was a state economic development grant. STRIVE (Support and Training Results in Valuable Employment), in New York City's East Harlem, primarily serves inner-city minorities and focuses on developing in clients a proper work attitude needed for successful employment rather than on providing occupational skills training. STRIVE is privately funded through a grant from the Clark Foundation, which requires a two-for-one dollar match from other sources, such as local employers. Projects also differ in other ways, such as the way project staff interact with clients--customizing their approach to what they believe to be the needs of their participants. For example, STRIVE's approach is strict, confrontational, and "no-nonsense" with the East Harlem men and women in their program. In contrast, Encore! takes a more nurturing approach, attempting to build the self-esteem of the women, many of them victims of mental or physical abuse, who participate in the program in rural Florida. One important feature of these projects' common strategy is ensuring that clients are committed to participating in training and getting a job. Each project tries to secure client commitment before enrollment and continues to encourage that commitment throughout training. Project staff at several sites believed that the voluntary nature of their projects is an important factor in fostering strong client commitment. Just walking through the door, however, does not mean that a client is committed to the program. Further measures to encourage, develop, and require this commitment are essential. All the projects use some of these measures. Some of the things that projects do to ensure commitment are (1) making sure clients know what to expect, so they are making an informed choice when they enter; (2) creating opportunities for clients to screen themselves out if they are not fully committed; and (3) requiring clients to actively demonstrate the seriousness of their commitment. To give clients detailed information about project expectations, projects use orientation sessions, assessment workshops, and one-on-one interviews with project staff. Project officials say that they do this to minimize any misunderstandings that could lead to client attrition. Officials at both STRIVE and Arapahoe told us that they do not want to spend scarce dollars on individuals who are not committed to completing their program and moving toward full-time employment; they believe that it is important to target their efforts to those most willing to take full advantage of the project's help. For example, at STRIVE's preprogram orientation session, staff members give potential clients a realistic program preview. STRIVE staff explain their strict requirements for staying in the program: attending every day--on time, displaying an attitude open to change and criticism, and completing all homework assignments. At the end of the session, STRIVE staff tell potential clients to take the weekend to think about whether they are serious about obtaining employment and, if so, to return on Monday to begin training. STRIVE staff told us that typically 10 percent of those who attend the orientation do not return on Monday. Both CET and Focus: HOPE provide specific opportunities for clients to screen themselves out. They both allow potential clients to try out their training program at no charge to ensure the program is suitable for them. Focus: HOPE reserves the right not to accept potential clients on the basis of their attitude, but it does not routinely do this. Instead, staff will provisionally accept the client into one of the training programs, but put that client on notice that his or her attitude will be monitored. All six projects require clients to actively demonstrate the seriousness of their commitment to both training and employment. For example, all projects require clients to sign an agreement of commitment outlining the client's responsibilities while in training and all projects monitor attendance throughout a client's enrollment. In addition, some project officials believed that requiring clients to contribute to training is important to encouraging commitment. Focus: HOPE requires participants--even those receiving cash subsidies--to pay a small weekly fee for their training, typically $10 a week. A Focus: HOPE administrator explained that project officials believe that students are more committed when they are "paying customers," and that this small payment discourages potential participants who are not seriously committed to training. All the projects emphasize removing employment barriers as a key to successful outcomes. They define a barrier as anything that precludes a client from participating in and completing training, as well as anything that could potentially limit a client's ability to obtain and maintain a job. For example, if a client lacks appropriate basic skills, then providing basic skills training can allow him or her to build those skills and enter an occupational training program. Similarly, if a client does not have adequate transportation, she or he will not be able to get to the training program. Because all the projects have attendance requirements, a lack of adequate child care would likely affect the ability of a client who is a parent to successfully complete training. Moreover, if a client is living in a domestic abuse situation, it may be difficult for that client to focus on learning a new skill or search for a job. The projects use a comprehensive assessment process to identify the particular barriers each client faces. This assessment can take many forms, including orientation sessions, workshops, one-on-one interviews, interactions with project staff, or a combination of these. For example, at TPIC's assessment workshop, clients complete a five-page barrier/needs checklist on a wide variety of issues, including food, housing, clothing, transportation, financial matters, health, and social/support issues. At the end of this workshop, clients must develop a personal statement and a self-sufficiency plan that the client and case manager use as a guide for addressing barriers and for helping the client throughout training. Encore! and Arapahoe have similar processes for identifying and addressing barriers that clients face. Rather than relying on a formal workshop or orientation process, CET identifies clients' needs through one-on-one interviews with program staff when a client enters the program. Throughout the training period, instructors, the job developer, and other project staff work to provide support services and address the client's ongoing needs. All the projects arrange for clients to get the services they need to address barriers, but--because of the wide range of individual client needs--none provides all possible services on-site. For example, although all six projects recognize the importance of basic skills training, they arrange for this training in different ways. Arapahoe contracts out for basic skills training for clients, while CET, Encore!, and Focus: HOPE provide this service on-site and TPIC and STRIVE refer clients out to community resources. Only Focus: HOPE provides on-site child care; however, all five other projects help clients obtain financial assistance to pay for child care services or refer clients to other resources. Because some of the projects attract many clients who have similar needs, these projects provide certain services on-site to better tailor their services to that specific population. For example, because it serves Hispanic migrant farmworkers with limited English proficiency, CET provides an on-site English-as-a-second-language program. Likewise, because a major barrier for many of Encore!'s clients is low self-esteem resulting from mental and/or physical abuse, Encore! designed its 6-week workshop to build self-esteem and address the barriers that these women face so that they are then ready to enter occupational training. Each project we visited emphasizes employability skills training. Because so many of their clients have not had successful work experiences, they often do not have the basic knowledge others might take for granted about how to function in the workplace. They need to learn what behaviors are important and how to demonstrate them successfully. These include getting to work regularly and on time; dressing appropriately; working well with others; accepting constructive feedback; resolving conflicts appropriately; and, in general, being a reliable, responsible, self-disciplined employee. Each project coaches students in employability skills through on-site workshops or one-on-one sessions. For example, CET provides a human development program that addresses such issues as life skills, communication strategies, and good work habits. Similarly, Arapahoe helps each client develop employment readiness competencies through a workshop or one-on-one with client case managers. Some of the projects also develop employability skills within the context of occupational skills training, with specific rules about punctuality, attendance, and, in some cases, appropriate clothing consistent with the occupation for which clients are training. STRIVE concentrates almost exclusively on employability skills and, in particular, attitudinal training. This project has a very low tolerance for behaviors such as being even a few minutes late for class, not completing homework assignments, not dressing appropriately for the business world, and not exhibiting the appropriate attitude. We observed staff dismissing clients from the program for a violation of any of these elements, telling them they may enroll in another offering of the program when they are ready to change their behavior. Program staff work hard to rid clients of their attitude problems and "victim mentality"--that is, believing that things are beyond their control--and instill in them a responsibility for themselves, as well as make them understand the consequences of their actions in the workplace. All the projects have strong links with the local labor market. Five of the six projects provide occupational skills training, using information from the local labor market to guide their selection of training options to offer clients. These projects focus on occupations that the local labor market will support. Project staff strive to ensure that the training they provide will lead to self-sufficiency--jobs with good earnings potential as well as benefits. In addition, all but one of the six projects use their links to local employers to assist clients with job placement. While their approaches to occupational training and job placement differ, the common thread among the projects is their ability to interpret the needs of local employers and provide them with workers who fit their requirements. All five projects that provide occupational training are selective in the training options that they offer clients, focusing on occupational areas that are in demand locally. For example, CET and Focus: HOPE have chosen to limit their training to one or a few very specific occupational areas that they know the local labor market can support. Focus: HOPE takes advantage of the strong automotive manufacturing base in the Detroit area by offering training in a single occupation serving the automotive industry--machining. With this single occupational focus, Focus: HOPE concentrates primarily on meeting the needs of the automotive industry and the local firms that supply automotive parts. Students are instructed by skilled craftspeople; many senior instructors at Focus: HOPE are retirees who are passing on the knowledge they acquired during their careers. The machines used in training are carefully chosen to represent those that are available in local machine shops--both state-of-the-art and older, less technically sophisticated equipment. Job developers sometimes visit potential work sites, paying close attention to the equipment in use. This information is then used to ensure a good match between client and employer. While offering a wide range of training options, Vo-Tech, which trains Encore! participants, is linked to the local labor market, in part by its craft advisory committees. These committees involve 160 businesses in determining course offerings and curricula. Vo-Tech recently discontinued its bank teller program shortly after a series of local bank mergers decreased demand for this skill. It began offering an electronics program when that industry started expansion in the Port Charlotte area. Vo-Tech also annually surveys local employers for feedback on its graduates' skills and abilities, using the feedback to make changes to its programs. When feedback from local employers in one occupation indicated that Vo-Tech graduates were unable to pass state licensing exams, the school terminated the instructors and hired new staff. All the projects assist clients in their job search. Five of the six projects had job developers or placement personnel who work to understand the needs of local employers and provide them with workers who fit their requirements. For example, at Focus: HOPE the job developers sometimes visit local employers to discuss their required skill needs. Virtually all graduates of Focus: HOPE are hired into machinist jobs in local firms. The placement staff that works with Encore! graduates noted that there are more positions to fill than clients to fill them. They believe that because of their close ties with the community and the relevance of their training program they have established a reputation of producing well-trained graduates. This reputation leads employers to trust their referrals. Mr. Chairman, that concludes my prepared statement. At this time I will be happy to answer any questions you or other members of the Subcommittee may have. For information on this testimony, please call Sigurd R. Nilsen, Assistant Director, at (202) 512-7003; Sarah L. Glavin, Senior Economist, at (202) 512-7180; Denise D. Hunter, Senior Evaluator, at (617) 565-7536; or Betty S. Clark, Senior Evaluator, at (617) 565-7524. Other major contributors included Benjamin Jordan and Dianne Murphy Blank. 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 discussed the merits of 6 highly successful employment training programs for economically disadvantaged adults. GAO found that the programs: (1) serve adults with little high school education, limited basic skills and English language proficiency, few marketable job skills, and past histories of substance abuse and domestic violence; (2) have a fairly successful placement rate, with three of the programs placing 90 percent of their clientele; (3) ensure that the clients are committed to training and getting a good job, and as a result, require them to sign an agreement of commitment outlining their responsibilities; (4) provide child care, transportation, and basic skills training to enable clients to complete program training and acquire employment; (5) improve their clients employability through on-site workshops and one-on-one sessions; (6) have strong links with the local labor market and use information from the local market to guide training options; and (7) aim to provide their clients with training that will lead to higher earnings, good benefits, and overall self-sufficiency.
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Under the Clean Water Act, EPA is responsible for publishing water quality criteria that establish thresholds at which contamination-- including waterborne pathogens--may threaten human health. States are required to develop standards, or legal limits, for these pathogens by either adopting EPA's recommended water quality criteria or other criteria that EPA determines are equally protective of human health. The states then use these pathogen standards to assess water quality at their recreational beaches. The BEACH Act amended the Clean Water Act to require the 35 eligible states and territories to update their recreational water quality standards using EPA's 1986 criteria for pathogen indicators. In addition, the BEACH Act required EPA to (1) complete studies on pathogens in coastal recreational waters and how they affect human health, including developing rapid methods of detecting pathogens by October 2003, and (2) publish new or revised water quality criteria by October 2005, to be reviewed and revised as necessary every 5 years thereafter. The BEACH Act also authorized EPA to award grants to states, localities, and tribes to develop comprehensive beach monitoring and public notification programs for their recreational beaches. To be eligible for BEACH Act grants, states are required to (1) identify their recreational beaches, (2) prioritize their recreational beaches for monitoring based on their use by the public and the risk to human health, and (3) establish a public notification program. EPA grant criteria give states some flexibility on the frequency of monitoring, methods of monitoring, and processes for notifying the public when pathogen indicators exceed state standards, including whether to issue health advisories or close beaches. Although the BEACH Act authorized EPA to provide $30 million in grants annually for fiscal years 2001 through 2005, since fiscal year 2001, congressional conference reports accompanying EPA's appropriations acts have directed about $10 million annually for BEACH Act grants and EPA has followed this congressional direction when allocating funds to the program. EPA has made progress implementing the BEACH Act's provisions but has missed statutory deadlines for two critical requirements. Of the nine actions required by the BEACH Act, EPA has taken action on the following seven: Propose water quality standards and criteria--The BEACH Act required each state with coastal recreation waters to incorporate EPA's published criteria for pathogens or pathogen indicators, or criteria EPA considers equally protective of human health, into their state water quality standards by April 10, 2004. The BEACH Act also required EPA to propose regulations setting forth federal water quality standards for those states that did not meet the deadline. On November 16, 2004, EPA published in the Federal Register a final rule promulgating its 1986 water quality standards for E. coli and enterococci for the 21 states and territories that had not adopted water quality criteria that were as protective of human health as EPA's approved water quality criteria. According to EPA, all 35 states with coastal recreational waters are now using EPA's 1986 criteria, compared with the 11 states that were using these criteria in 2000. Provide BEACH Act grants--The BEACH Act authorized EPA to distribute annual grants to states, territories, tribes and, in certain situations, local governments to develop and implement beach monitoring and notification programs. Since 2001, EPA has awarded approximately $51 million in development and implementation grants for beach monitoring and notification programs to all 35 states. Alaska is the only eligible state that has not yet received a BEACH Act implementation grant because it is still in the process of developing a monitoring and public notification program consistent with EPA's grant performance criteria. EPA expects to distribute approximately $10 million for the 2007 beach season subject to the availability of funds. Publish beach monitoring guidance and performance criteria for grants--The BEACH Act required EPA to develop guidance and performance criteria for beach monitoring and assessment for states receiving BEACH Act grants by April 2002. After a year of consultations with coastal states and organizations, EPA responded to this requirement in 2002 by issuing its National Beach Guidance and Required Performance Criteria for Grants. To be eligible for BEACH Act grants, EPA requires recipients to develop (1) a list of beaches evaluated and ranked according to risk, (2) methods for monitoring water quality at their beaches, such as when and where to conduct sampling, and (3) plans for notifying the public of the risk from pathogen contamination at beaches, among other requirements. Develop a list of coastal recreational waters--The BEACH Act required EPA to identify and maintain a publicly available list of coastal recreational waters adjacent to beaches or other publicly accessible areas, with information on whether or not each is subject to monitoring and public notification. In March 2004, EPA published its first comprehensive National List of Beaches based on information that the states had provided as a condition for receiving BEACH Act grants. The list identified 6,099 coastal recreational beaches, of which 3,472, or 57 percent, were being monitored. The BEACH Act also requires EPA to periodically update its initial list and publish revisions in the Federal Register. However, EPA has not yet published a revised list, in part because some states have not provided updated information. Develop a water pollution database--The BEACH Act required EPA to establish, maintain, and make available to the public an electronic national water pollution database. In May 2005, EPA unveiled "eBeaches," a collection of data pulled from multiple databases on the location of beaches, water quality monitoring, and public notifications of beach closures and advisories. This information has been made available to the public through an online tool called BEACON (Beach Advisory and Closing Online Notification). EPA officials acknowledge that eBeaches has had some implementation problems, including periods of downtime when states were unable to submit their data, and states have had difficulty compiling the data and getting it into EPA's desired format. EPA is working to centralize its databases so that states can more easily submit information and expects the data reporting will become easier for states as they further develop their system. Provide technical assistance on floatable materials--The BEACH Act required EPA to provide technical assistance to help states, tribes, and localities develop their own assessment and monitoring procedures for floatable debris in coastal recreational waters. EPA responded by publishing guidance titled Assessing and Monitoring Floatable Debris in August 2002. The guidance provided examples of monitoring and assessment programs that have addressed the impact of floatable debris and examples of mitigation activities to address floatable debris. Provide a report to Congress on status of BEACH Act implementation-- The BEACH Act required EPA to report to Congress 4 years after enactment of the act and every 4 years thereafter on the status of implementation. EPA completed its first report for Congress, Implementing the BEACH Act of 2000: Report to Congress in October 2006, which was 2 years after the October 2004 deadline. EPA officials noted that they missed the deadline because they needed additional time to include updates on current research and states' BEACH Act implementation activities and to complete both internal and external reviews. EPA has not yet completed the following two BEACH Act requirements: Conduct epidemiological studies--The BEACH Act required EPA to publish new epidemiological studies concerning pathogens and the protection of human health for marine and freshwater by April 10, 2002, and to complete the studies by October 10, 2003. The studies were to: (1) assess potential human health risks resulting from exposure to pathogens in coastal waters; (2) identify appropriate and effective pathogen indicator(s) to improve the timely detection of pathogens in coastal waters; (3) identify appropriate, accurate, expeditious, and cost-effective methods for detecting the presence of pathogens; and (4) provide guidance for state application of the criteria. EPA initiated its multiyear National Epidemiological and Environmental Assessment of Recreational Water Study in 2001 in collaboration with the Centers for Disease Control and Prevention. The first component of this study was to develop faster pathogen indicator testing procedures. The second component was to further clarify the health risk of swimming in contaminated water, as measured by these faster pathogen indicator testing procedures. While EPA completed these studies for freshwater--showing a promising relationship between a faster pathogen indicator and possible adverse health effects from bacterial contamination--it has not completed the studies for marine water. EPA initiated marine studies in Biloxi, Mississippi, in the summer of 2005, 3 years past the statutory deadline for beginning this work, but the work was interrupted by Hurricane Katrina. EPA initiated two additional marine water studies in the summer of 2007. Publish new pathogen criteria--The BEACH Act required EPA to use the results of its epidemiological studies to identify new pathogen indicators with associated criteria, as well as new pathogen testing measures by October 2005. However, since EPA has not completed the studies on which these criteria were to be based, this task has been delayed. In the absence of new criteria for pathogens and pathogen indicators, states continue to use EPA's 1986 criteria to monitor their beaches. An EPA official told us that EPA has not established a time line for completing these two remaining provisions of the BEACH Act but estimates it may take an additional 4-5 years. One EPA official told us that the initial time frames in the act may not have been realistic. EPA's failure to complete studies on the health effects of pathogens for marine waters and failure to publish revised water quality criteria for pathogens and pathogen indicators prompted the Natural Resources Defense Council to file suit against EPA on August 2, 2006, for failing to comply with the statutory obligations of the BEACH Act. To ensure that EPA complies with the requirements laid out in the BEACH Act, we recommended that it establish a definitive time line for completing the studies on pathogens and their effects on human health, and for publishing new or revised water quality criteria for pathogens and pathogen indicators. While EPA distributed approximately $51 million in BEACH Act grants between 2001 and 2006 to the 35 eligible states and territories, its grant distribution formula does not adequately account for states' widely varied beach monitoring needs. When Congress passed the BEACH Act in 2000, it authorized $30 million in grants annually, but the act did not specify how EPA should distribute grants to eligible states. EPA determined that initially $2 million would be distributed equally to all eligible states to cover the base cost of developing water quality monitoring and notification programs. EPA then developed a distribution formula for future annual grants that reflected the BEACH Act's emphasis on beach use and risk to human health. EPA's funding formula includes the following three factors: Length of beach season--EPA selected beach season length as a factor because states with longer beach seasons would require more monitoring. Beach use--EPA selected beach use as a factor because more heavily used beaches would expose a larger number of people to pathogens, increasing the public health risk and thus requiring more monitoring. EPA used coastal population as a proxy for beach use because information on the number of beach visitors was not consistently available across all the states. Beach miles--EPA selected beach miles because states with longer shorelines would require more monitoring. EPA used shoreline miles, which may include industrial and other nonpublicly accessible areas, as a proxy for beach miles because verifiable data for beach miles was not available. Once EPA determined which funding formula factors to use, EPA officials weighted the factors. EPA intended that the beach season factor would provide the base funding and would be augmented by the beach use and beach mile factors. EPA established a series of fixed amounts that correspond to states' varying lengths of beach seasons to cover the general expenses associated with a beach monitoring program. For example, EPA estimated that a beach season of 3 or fewer months would require approximately two full-time employees costing $150,000, while states with beach seasons greater than 6 months would require $300,000. Once the allotments for beach season length were distributed, EPA determined that 50 percent of the remaining funds would be distributed according to states' beach use, and the other 50 percent would be distributed according to states' beach miles, as shown in table 1. EPA officials told us that, using the distribution formula above and assuming a $30 million authorization, the factors were to have received relatively equal weight in calculating states' grants and would have resulted in the following allocation: beach season--27 percent (about $8 million); beach use--37 percent (about $11 million); and beach miles--37 percent (about $11 million). However, because funding levels for BEACH Act grants have been about $10 million each year, once the approximately $8 million, of the total available for grants, was allotted for beach season length, this left only $2 million, instead of nearly $22 million, to be distributed equally between the beach use and beach miles factors. This resulted in the following allocation: beach season--82 percent (about $8 million); beach use--9 percent (about $1 million); and beach miles--9 percent (about $1 million). Because beach use and beach miles vary widely among the states, but account for a much smaller portion of the distribution formula, BEACH Act grant amounts may vary little between states that have significantly different shorelines or coastal populations. For example, across the Great Lakes, there is significant variation in coastal populations and in miles of shoreline, but current BEACH Act grant allocations are relatively flat. As a result, Indiana, which has 45 miles of shoreline and a coastal population of 741,468, received about $205,800 in 2006, while Michigan, which has 3,224 miles of shoreline and a coastal population of 4,842,023, received about $278,450 in 2006. Similarly, the current formula gives localities that have a longer beach season and significantly smaller coastal populations an advantage over localities that have a shorter beach season but significantly greater population. For example, Guam and American Samoa with 12 month beach seasons and coastal populations of less than 200,000 each receive larger grants than Maryland and Virginia, with 4 month beach seasons and coastal populations of 3.6 and 4.4 million, respectively. If EPA reweighted the factors so that they were still roughly equal given the $10 million allocation, we believe that BEACH Act grants to the states would better reflect their needs. Consequently, we recommended that if current funding levels remain the same, that the agency should revise the formula for distributing BEACH Act grants to better reflect the states' varied monitoring needs by reevaluating the formula factors to determine if the weight of the beach season factor should be reduced and if the weight of the other factors, such as beach use and beach miles should be increased. States' use of BEACH Act grants to develop and implement beach monitoring and public notification programs has increased the number of beaches being monitored and the frequency of monitoring. However, states vary considerably in the frequency in which they monitor beaches, the monitoring methods used, and the means by which they notify the public of health risks. Specifically, 34 of the 35 eligible states have used BEACH Act grants to develop beach monitoring and public notification programs; and the remaining state, Alaska, is in the process of setting up its program. However, these programs have been implemented somewhat inconsistently by the states which could lead to inconsistent levels of public health protection at beaches in the United States. In addition, while the Great Lakes and other eligible states have been able to increase their understanding of the scope of contamination as a result of BEACH Act grants, the underlying causes of this contamination usually remain unresolved, primarily due to a lack of funding. For example, EPA reports that nationwide when beaches are found to have high levels of contamination, the most frequent source of contamination listed as the cause is "unknown". BEACH Act officials from six of the eight Great Lakes states that we reviewed--Illinois, Michigan, Minnesota, New York, Ohio, and Wisconsin--reported that the number of beaches being monitored in their state has increased since the passage of the BEACH Act in 2000. For example, in Minnesota, state officials reported that only one beach was being monitored prior to the BEACH Act, and there are now 39 beaches being monitored in three counties. In addition, EPA data show that, in 1999, the number of beaches identified in the Great Lakes was about 330, with about 250 being monitored. In 2005, the most recent year for which data are available, the Great Lakes states identified almost 900 beaches of which about 550 were being monitored. In addition to an increase in the number of beaches being monitored, the frequency of monitoring at many of the beaches in the Great Lakes has increased. We estimated that 45 percent of Great Lakes beaches increased the frequency of their monitoring since the passage of the BEACH Act. For example, Indiana officials told us that prior to the BEACH Act, monitoring was done a few times per week at their beaches but now monitoring is done 5-7 days per week. Similarly, local officials in one Ohio county reported that they used to test some beaches along Lake Erie twice a month prior to the BEACH Act but now they test these beaches once a week. States outside of the Great Lakes region have reported similar benefits of receiving BEACH Act grants. For example, state officials from Connecticut, Florida, and Washington reported increases in the number of beaches they are now able to monitor or the frequency of the monitoring they are now able to conduct. Because of the information available from BEACH Act monitoring activities, state and local beach officials are now better able to determine which of their beaches are more likely to be contaminated, which are relatively clean, and which may require additional monitoring resources to help them better understand the levels of contamination that may be present. For example, state BEACH Act officials reported that they now know which beaches are regularly contaminated or are being regularly tested for elevated levels of contamination. We determined that officials at 54 percent of Great Lakes beaches we surveyed believe that their ability to make advisory and closure decisions has increased or greatly increased since they initiated BEACH Act water quality monitoring programs. However, because EPA's grant criteria and the BEACH Act give states and localities some flexibility in implementing their programs we also identified significant variability among the Great Lakes states beach monitoring and notification programs. We believe that this variability is most likely also occurring in other states as well because of the lack of specificity in EPA's guidance. Specifically, we identified the following differences in how the Great Lake states have implemented their programs. Frequency of monitoring. Some Great Lakes states are monitoring their high-priority beaches almost daily, while other states monitor their high- priority beaches as little as one to two times per week. The variation in monitoring frequency in the Great Lakes states is due in part to the availability of funding. For example, state officials in Michigan and Wisconsin reported insufficient funding for monitoring. Methods of sampling. Most of the Great Lakes states and localities use similar sampling methods to monitor water quality at local beaches. For example, officials at 79 percent of the beaches we surveyed reported that they collected water samples during the morning, and 78 percent reported that they always collected water samples from the same location. Collecting data at the same time of day and from the same site ensures more consistent water quality data. However, we found significant variations in the depth at which local officials in the Great Lakes states were taking water samples. According to EPA, depth is a key determinant of microbial indicator levels. EPA's guidance recommends that beach officials sample at the same depth--knee depth, or approximately 3-feet deep--for all beaches to ensure consistency and comparability among samples. Great Lakes states varied considerably in the depths at which they sampled water, with some sampling occurring at 1-6 inches and other sampling at 37-48 inches. Public notification. Local officials in the Great Lakes differ in the information they use to decide whether to issue health advisories or close beaches when water contamination exceeds EPA criteria and in how to notify the public of their decision. These differences reflect states' varied standards for triggering an advisory, closure, or both. Also, we found that states' and localities' means of notifying the public of health advisories or beach closures vary across the Great Lakes. Some states post water quality monitoring results on signs at beaches; some provide results on the Internet or on telephone hotlines; and some distribute the information to local media. To address this variability in how the states are implementing their BEACH Act grant funded monitoring and notification programs, we recommended that EPA provide states and localities with specific guidance on monitoring frequency and methods and public notification. Further, even though BEACH Act funds have increased the level of monitoring being undertaken by the states, the specific sources of contamination at most beaches are not known. For example, we determined that local officials at 67 percent of Great Lakes' beaches did not know the sources of bacterial contamination causing water quality standards to be exceeded during the 2006 beach season and EPA officials confirmed that the primary source of contamination at beaches nationwide is reported by state officials as "unknown." For example, because state and local officials in the Great Lakes states do not have enough information on the specific sources of contamination and generally lack funds for remediation, most of the sources of contamination at beaches have not been addressed. Local officials from these states indicated that they had taken actions to address the sources of contamination at an estimated 14 percent of the monitored beaches. EPA has concluded that BEACH Act grant funds generally may be used only for monitoring and notification purposes. While none of the eight Great Lakes state officials suggested that the BEACH Act was intended to help remediate the sources of contamination, several state officials believe that it may be more beneficial to use BEACH Act grants to identify and remediate sources of contamination rather than just continue to monitor water quality at beaches and notify the public when contamination occurs. Local officials also reported a need for funding to identify and address sources of contamination. Furthermore, at EPA's National Beaches Conference in October 2006, a panel of federal and academic researches recommended that EPA provide the states with more freedom on how they spend their BEACH Act funding. To address this issue, we recommended that as the Congress considers reauthorization of the BEACH Act, that it should consider providing EPA some flexibility in awarding BEACH Act grants to allow states to undertake limited research to identify specific sources of contamination at monitored beaches and certain actions to mitigate these problems, as specified by EPA. _ _ _ _ _ In conclusion, Mr. Chairman, EPA has made progress in implementing many of the BEACH Act's requirements but it may still be several years before EPA completes the pathogen studies and develops the new water quality criteria required by the act. Until these actions are completed, states will have to continue to use existing outdated methods. In addition, the formula EPA developed to distribute BEACH Act grants to the states was based on the assumption that the program would receive its fully authorized allocation of $30 million. Because the program has not received full funding and EPA has not adjusted the formula to reflect reduced funding levels, the current distribution of grants fails to adequately take into account the varied monitoring needs of the states. Finally, as evidenced by the experience of the Great Lakes states, the BEACH Act has helped states increase their level of monitoring and their knowledge about the scope of contamination at area beaches. However, the variability in how the states are conducting their monitoring, how they are notifying the public, and their lack of funding to address the source of contamination continues to raise concerns about the adequacy of protection that is being provided to beachgoers. This concludes our prepared statement, we would be happy to respond to any questions you may have. If you have any questions about this statement, please contact Anu K. Mittal @ (202) 512-3841 or [email protected]. Other key contributors to this statement include Ed Zadjura (Assistant Director), Eric Bachhuber, Omari Norman, and Alison O'Neill. 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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Waterborne pathogens can contaminate water and sand at beaches and threaten human health. Under the Beaches Environmental Assessment and Coastal Health (BEACH) Act, the Environmental Protection Agency (EPA) provides grants to states to develop water quality monitoring and public notification programs. This statement summarizes the key findings of GAO's May 2007 report, Great Lakes: EPA and the States Have Made Progress in Implementing the BEACH Act, but Additional Actions Could Improve Public Health Protection. In this report GAO assessed (1) the extent to which EPA has implemented the Act's provisions, (2) concerns about EPA's BEACH Act grant allocation formula, and (3) described the experiences of the Great Lakes states in developing and implementing beach monitoring and notification programs using their grant funds. EPA has taken steps to implement most BEACH Act provisions but has missed statutory deadlines for two critical requirements. While EPA has developed a national list of beaches and improved the uniformity of state water quality standards, it has not (1) completed the pathogen and human health studies required by 2003 or (2) published the new or revised water quality criteria for pathogens required by 2005. EPA stated that the required studies are ongoing, some studies were initiated in the summer of 2005, but the work was interrupted by Hurricane Katrina. EPA subsequently initiated two additional water studies in the summer of 2007. According to EPA, completion of the studies and development of the new criteria may take an additional 4 to 5 years. Further, although EPA has distributed approximately $51 million in BEACH Act grants from 2001-2006, the formula EPA uses to make the grants does not accurately reflect the monitoring needs of the states. This occurs because the formula emphasizes the length of the beach season more than the other factors in the formula--beach miles and beach use. These other factors vary widely among the states, can greatly influence the amount of monitoring a state needs to undertake, and can increase the public health risk. Thirty-four of the 35 eligible states have used BEACH Act grants to develop beach monitoring and public notification programs. Alaska is still in the process of developing its program. However, because state programs vary they may not provide consistent levels of public health protection nationwide. GAO found that the states' monitoring and notification programs varied considerably in the frequency with which beaches were monitored, the monitoring methods used, and how the public was notified of potential health risks. For example, some Great Lakes states monitor their high-priority beaches as little as one or two times per week, while others monitor their high-priority beaches daily. In addition, when local officials review similar water quality results, some may choose to only issue a health advisory while others may choose to close the beach. According to state and local officials, these inconsistencies are in part due to the lack of adequate funding for their beach monitoring and notification programs. The frequency of water quality monitoring has increased nationwide since passage of the Act, helping states and localities to identify the scope of contamination. However, in most cases, the underlying causes of contamination remain unknown. Some localities report that they do not have the funds to investigate the source of the contamination or take actions to mitigate the problem, and EPA has concluded that BEACH Act grants generally may not be used for these purposes. For example, local officials at 67 percent of Great Lakes beaches reported that, when results of water quality testing indicated contamination at levels exceeding the applicable standards during the 2006 beach season, they did not know the source of the contamination, and only 14 percent reported that they had taken actions to address the sources of contamination.
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Experts agree that chemical facilities are among the most attractive targets for terrorists intent on causing massive damage. Despite the risk these facilities pose, no one has yet comprehensively assessed security at the nation's chemical facilities. EPA regulates about 15,000 facilities under the 1990 amendments to the Clean Air Act because they produce, use, or store more than certain threshold amounts of specific chemicals that would pose the greatest risk to human health and the environment if they were accidentally released into the air. These facilities must take a number of steps, including preparing a risk management plan (RMP), to prevent and prepare for an accidental release and, therefore, are referred to as RMP facilities. These facilities fall within a variety of industries and produce, use, or store a variety of products, including basic chemicals; specialty chemicals, such as solvents; life science chemicals, such as pharmaceuticals and pesticides; and consumer products, such as cosmetics. Some of these facilities are part of critical infrastructure sectors other than the chemical sector. For example, about 2,000 of these facilities are community water systems that are part of the water infrastructure sector. In addition, other facilities that house hazardous chemicals that are listed under the RMP regulations are not subject to RMP requirements because the quantities stored or used are below threshold amounts. Through the RMP program, EPA has gained extensive expertise with chemical facilities and processes that could be useful in helping DHS assess security issues. Federal requirements currently address security at some U.S. chemical facilities. For example, a small number of chemical facilities must comply with the Maritime Transportation Security Act of 2002 and its implementing regulations, which require maritime facility owners and operators to conduct assessments, develop security plans, and implement security measures. In addition, certain community water systems--while not specifically considered chemical facilities but which use and store large volumes of chemicals--are required by the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 to conduct and submit a vulnerability assessment to EPA and prepare an emergency response plan that incorporates the results of the assessment. According to EPA, 1,928 drinking water facilities that are also subject to EPA's RMP program must comply with this act. Some states and localities have also created security requirements at chemical facilities. In addition, the federal government imposes safety and emergency response requirements on chemical facilities that may incidentally reduce the likelihood and consequences of terrorist attacks. For example, Section 112(r) of the Clean Air Act includes a general duty clause directing owners and operators of facilities to identify hazards, design and maintain a safe facility to prevent releases, and minimize the consequences of any accidental releases that occur. Under Section 112(r), RMP facilities must also implement a program to prevent accidental releases that includes safety precautions and maintenance, and monitoring and training measures, and they must have an emergency response plan. The Department of Labor's Occupational Safety and Health Administration's process safety management standard also requires facilities to conduct analyses of their chemical processes which must address hazards of the process, engineering and administrative controls applicable to the hazards, facilities siting, and evaluation of the possible health and safety effects of failures of controls on employees. DHS is developing a plan for protecting the chemical sector that will establish a framework for reducing the overall vulnerability of the sector in partnership with the industry and state and local authorities. At the time of our review, DHS did not provide a specific date for completion of the Chemical Sector-Specific Plan. DHS completed a draft of the plan in July 2004 and has been working to revise it to accommodate changes to DHS's risk management strategy and comments from stakeholders. DHS officials told us that the final plan--which they now expect to complete and release in the fall of 2006--will reflect the basic principles and content described in the draft plan. On the basis of our review of the draft plan and discussions with DHS officials, the final plan will, among other things, (1) present background information on the sector; (2) describe the process DHS will use to develop an inventory of chemical sector assets; (3) describe DHS's efforts to identify and assess chemical facilities' vulnerabilities and plans to prioritize these efforts on the basis of the vulnerability assessments; (4) outline the protective programs that will be created to prevent, deter, mitigate, and recover from attacks on chemical facilities, and describe how DHS will work with private sector and government entities to implement these programs; (5) explain the performance metrics DHS will use to measure the effectiveness of DHS and industry security efforts; and (6) outline the department's challenges in coordinating the efforts of the chemical sector. DHS has also initiated actions to identify the chemical sector's critical assets, prioritize facilities, develop and implement protective programs, exchange information with the private sector, and coordinate efforts with EPA and other federal agencies. DHS is focusing its efforts for the chemical sector by identifying high-priority facilities. As a starting point, DHS has adapted EPA's RMP database of facilities with more than threshold amounts of certain chemicals to develop an interim inventory of 3,400 chemical facilities that pose the greatest hazard to human life and health in the event of a terrorist attack. These are facilities where a worst- case scenario release potentially could affect over 1,000 people. According to DHS, 272 of these facilities could potentially affect more than 50,000 people. DHS is also developing a new risk assessment methodology to compare and prioritize all critical infrastructure assets according to their level of threat, their vulnerability to attack, and the consequences of an attack on the facility. According to DHS, Risk Analysis Management for Critical Asset Protection (RAMCAP) will provide a common methodology, terminology, and framework for homeland security risk analysis and decision making that is intended to allow consistent risk management across all sectors. The RAMCAP process entails chemical facility owners/operators voluntarily completing a screening tool to identify the consequences of an attack. On the basis of the results of the screening tool, DHS will identify facilities of highest concern and ask them to voluntarily complete a security vulnerability assessment. Finally, DHS has implemented a number of programs to assist the private sector and local communities in reducing vulnerabilities. For example, DHS works with local law enforcement officials and facility owners through the Buffer Zone Protection Program to improve the security of the area surrounding a facility. To assess and identify vulnerabilities at chemical facilities, DHS deploys teams of experts from both government and industry to conduct a site assistance visit. DHS had conducted 38 site assistance visits at chemical facilities as of June 15, 2005, and planned to conduct additional visits in fiscal year 2006 on the basis of need. DHS has also installed cameras at some high-consequence facilities, providing local law enforcement authorities with the ability to conduct remote surveillance and allowing state homeland security offices and DHS to monitor the facilities. In addition, DHS distributes threat information to the industry through various means and coordinates sector activities with the Chemical Sector Coordinating Council, an industry-led working group formed voluntarily by trade associations that acts as a liaison for the chemical sector. DHS also coordinates with EPA and other federal agencies through a government coordinating council. EPA officials believe that the agency could further assist DHS by providing analytical support in identifying high-risk facilities that should be targeted in DHS' chemical sector efforts, among other activities. With few federal security requirements, industry associations have been active in promoting security among member companies. Some industry associations, including the American Chemistry Council (ACC), the Synthetic Organic Chemical Manufacturers Association, and the National Association of Chemical Distributors, require member companies to assess their facilities' vulnerabilities and make security enhancements, requiring as a condition of membership that they conduct security activities and verify that these actions have been taken. ACC, representing 135 chemical manufacturing companies with approximately 2,000 facilities, has led the industry's efforts to improve security at their facilities. ACC requires its members to adhere to a set of security management principles that include performing physical security vulnerability assessments using an approved methodology, developing plans to mitigate vulnerabilities, taking actions to implement the plans, and having an independent party such as insurance representatives or local law enforcement officials verify that the facilities implemented the identified physical security enhancements. These reviewers do not verify that a vulnerability assessment was conducted appropriately or that actions taken by a facility adequately address security risks. However, ACC requires member companies to periodically conduct independent third-party audits that include an assessment of their security programs and processes and their implementation of corrective actions. In addition, ACC members must take steps to secure cyber assets, such as computer systems that control chemical facility operations, and the distribution chain from suppliers to customers, including transportation. Other industry associations have encouraged their members to address security by a variety of means. Most of the 16 associations we spoke to have developed security guidelines and best practices. For example, the International Institute of Ammonia Refrigeration, representing facilities such as food storage warehouses, developed site security guidelines tailored to ammonia refrigeration facilities and provides information about security resources to members. Several industry associations have also developed vulnerability assessment methodologies to assist their member companies in evaluating security needs. For example, the National Petrochemical and Refiners Association, in partnership with the American Petroleum Institute, developed a vulnerability assessment methodology tailored to refiners and petrochemical facilities. Despite industry associations' efforts to encourage or require members to voluntarily address security, the extent of participation in the industry's voluntary initiatives is unclear. Chemical industry officials told us they face a number of challenges in preparing facilities against a terrorist attack. Most of the chemical associations we contacted stated that the cost of security improvements is a challenge for some chemical companies. For example, ACC reports that its members have spent an estimated $2 billion on security improvements since September 11, 2001. Representatives of the American Forest & Paper Association and the National Paint and Coatings Association told us that small companies, in particular, may struggle with the cost of security improvements or the cost of complying with any potential government security programs because they may lack the resources larger companies have to devote to security. Industry stakeholders also cited the need for guidance on what level of security is adequate. While DHS has issued guidance to state Homeland Security Offices and the Chemical Sector Coordinating Council on vulnerabilities and protective measures that are common to most chemical facilities, several stakeholders expressed a desire for guidance on specific security improvements. For example, representatives of the National Petrochemical and Refiners Association stated that one reason the association holds workshops and best practices sessions is to meet the challenge of determining the types of security measures that constitute a reasonable amount of security. In addition, industry officials told us that the lack of threat information makes it difficult for companies to know how to protect facilities. A few industry officials also mentioned limited guidance on conducting vulnerability assessments and difficulty in conducting employee background checks as challenges. One industry association stated that it would like its members to receive guidance from DHS on how to conduct vulnerability assessments. Another association expressed frustration because none of the current vulnerability assessment tools address issues specific to their member facilities, which package and distribute chemicals, and it would like DHS to help develop or approve a methodology for this type of facility. Finally, a number of stakeholders we contacted told us that emergency response preparedness is a challenge for chemical companies. An official with an industry-affiliated research center asserted that emergency responders and communities in the United States are prepared to respond to a toxic release. However, other stakeholders we spoke with stated that many facilities have conducted security vulnerability assessments but may not have done enough emergency response planning and outreach to the responders and communities that would be involved in a release. A 2004 survey by a chemical workers union of workers at 189 RMP facilities found that only 38 percent of respondents indicated that their companies' actions in preparing to respond to a terrorist attack were effective, and 28 percent reported that no employees at their facilities had received training about responding to a terrorist attack since September 11, 2001. While environmental laws require emergency response planning for accidental chemical releases, several stakeholders told us facilities need to consider very different scenarios with consequences on different orders of magnitude when planning the emergency response for a terrorist incident. Existing laws give DHS limited authority to address chemical sector security, but DHS currently lacks specific authority to require all high-risk facilities to assess their vulnerabilities and take corrective actions, where needed. A number of existing laws outline DHS's responsibilities for coordinating with the private sector and obtaining information on and protecting critical infrastructure, but these laws provide DHS with only limited authority to address security concerns at U.S. chemical facilities. For example, under the Homeland Security Act, the Secretary of DHS is responsible for coordinating homeland security issues with the private sector to ensure adequate planning, equipment, training, and exercise activities. Furthermore, the Act gives DHS's Under Secretary for Information Analysis and Infrastructure Protection (IAIP) responsibilities related to protecting critical infrastructure, including accessing, receiving, analyzing, and integrating information from federal, state, and local governments and private sector entities to identify, detect, and assess the nature and scope of terrorist threats to the United States; carrying out comprehensive assessments of the vulnerabilities of the nation's key resources and critical infrastructure; developing a comprehensive national plan for securing the nation's key resources and critical infrastructure; and recommending the necessary measures to protect these key resources and critical infrastructure. DHS does not currently have the authority to require all chemical facilities to conduct vulnerability assessments or to enter chemical facilities without their permission to assess security or to require and enforce security improvements. There is also no legislation requiring chemical facilities to provide information about their security and vulnerabilities. Furthermore, except with respect to certain chemical facilities covered under federal security requirements for other critical infrastructures, existing laws do not give DHS the right to enter a chemical facility to assess its vulnerability to a terrorist attack or the authority to require and enforce the implementation of any needed security improvements at these facilities. The Homeland Security Act, with some limited exceptions, does not provide any new regulatory authority to DHS and only transferred the existing regulatory authority of any agency, program, or function transferred to DHS, thereby limiting actions DHS might otherwise be able to take under the Homeland Security Act. Therefore, DHS has relied solely on the voluntary participation of the private sector to address facility security. As a result, DHS cannot ensure that all high-risk facilities are assessing their vulnerability to terrorist attacks and taking corrective action, where necessary. DHS has concluded that its existing patchwork of authorities does not permit it to regulate the chemical industry effectively, and that the Congress should enact federal requirements for chemical facilities. Echoing public statements by the Secretary of Homeland Security and the Administrator of EPA in 2002 that voluntary efforts alone are not sufficient to assure the public of the industry's preparedness, in June 2005, both DHS and EPA called for legislation to give the federal government greater authority over chemical facility security. Similarly, we concluded in 2003, and continue to believe, that additional federal legislation is needed because of the significant risks posed by thousands of chemical facilities across the country to millions of Americans and because the extent of security preparedness at these facilities is unknown. In testimony before the Congress in June 2005, the Acting Undersecretary for IAIP stated that any proposed regulatory structure (1) must recognize that not all facilities within the chemical sector present the same level of risk, and that the most scrutiny should be focused on those facilities that, if attacked, could endanger the greatest number of lives, have the greatest impact on the economy, or present other significant risks; (2) should be based on reasonable, clear, equitable, and measurable performance standards; and (3) should recognize the progress that responsible companies have made to date. He also stated that the performance standards should be enforceable and based on the types and severity of potential risks posed by terrorists, and that facilities should have the flexibility to select among appropriate site-specific security measures that will effectively address those risks. In addition, he said that DHS would need the ability to audit vulnerability assessment activities and a mechanism to ensure compliance with requirements. While many stakeholders--including representatives from industry, research centers, and government--agreed on the need for additional legislation that would place federal security requirements on chemical facilities, they expressed divergent views on whether such legislation should require the use of inherently safer technologies. Implementing inherently safer technologies could potentially lessen the consequences of an attack by reducing the chemical risks present at facilities. The Department of Justice, in introducing a methodology to assess chemical facilities' vulnerabilities, recognized that reducing the quantity of hazardous material may make facilities less attractive to terrorist attack and reduce the severity of an attack. Furthermore, DHS's July 2004 draft Chemical Sector-Specific Plan states that inherently safer chemistry and engineering practices can prevent or delay a terrorist incident, noting that it is important to make sure that facility owners/operators consider alternate ways to reduce risk, such as using inherently safer design, implementing just-in-time manufacturing, or replacing high-risk chemicals with safer alternatives. However, DHS told us that the use of inherently safer technologies tends to shift risks rather than eliminate risks, often with unintended consequences. Some previous chemical security legislative proposals have included a requirement that facility security plans include safer design and maintenance actions, or that facility security plans include "consideration" of alternative approaches regarding safer design. Representatives from three environmental groups told us that facilities have defined security too narrowly, without focusing on reducing facility risks through safer technologies. Noting that no existing laws require facilities to analyze inherently safer options, these representatives believe legislation should require such an analysis and give DHS or EPA the authority to require the implementation of technologies if high-risk facilities are not doing so. Process safety experts at one research organization recognized that reducing facility hazards and the potential consequences of chemical releases makes facilities less vulnerable to attack. However, these experts also explained that inherently safer technologies can be prohibitively expensive and can shift risks onto other facilities or the transportation sector. For example, reducing the amount of chemicals stored at a facility may increase reliance on rail or truck shipments of chemicals. However, the substitution of chemicals such as liquid bleach for chlorine gas at drinking water facilities reduces overall risks. These experts support legislative provisions requiring analysis or consideration of technology options but do not support giving the federal government the authority to require specific technology changes because of the complexity of these decisions. Representatives of two research centers affiliated with the industry told us that while facilities should look at inherently safer technologies when assessing their vulnerability to terrorist attack, safer technologies are not a substitute for security. Industry associations and company officials were strongly opposed to any requirements to use inherently safer technologies. The majority of the industry officials we contacted opposed an inherently safer technologies requirement, with many stating that inherently safer technologies involve a safety issue that is unrelated to facility security. Industry officials voiced concerns about the federal government's second-guessing complex safety decisions made by facility process safety engineers. Representatives from four associations and two companies told us that, in many cases, it is not feasible to substitute safer chemicals or change to safer processes. Certain hazardous chemicals may be essential to necessary chemical processes, while changing chemical processes may require new chemicals that carry different risks. In July 2005 testimony before the Congress, a Synthetic Organic Chemical Manufacturers Association representative explained that while inherently safer technologies are intended to reduce the overall risks at a facility, they could do so only if a chemical hazard was not displaced to another time or location or did not magnify another hazard. Furthermore, process safety experts and representatives from associations and companies report that some safer alternatives are extremely expensive. For example, reducing facility chemical inventories by moving to on-site manufacturing when chemicals are needed can cost millions of dollars, according to a stakeholder. One company also voiced opposition even to a legislative requirement that facilities "consider" safer options. The official explained that the company opposed such a provision--even if legislation does not explicitly give the government the authority to require implementation of safer technologies--because it might leave companies liable for an accident that might have been prevented by a technology option that was considered but not implemented. Despite voluntary efforts by industry associations and a number of DHS programs to assist companies in protecting their chemical facilities, the extent of security preparedness at U.S. chemical facilities remains largely unknown. DHS does not currently have the authority to require the chemical industry to take actions to improve their security. On this basis, DHS has concluded--as we did in 2003 and again in January 2006--that its existing authorities do not allow it to effectively regulate chemical sector security. Since 2002, both DHS and EPA have called for legislation creating security requirements at chemical facilities, and legislation has been introduced without success in every Congress since September 11, 2001. By granting DHS the authority to require high-risk chemical facilities to take security actions, policy makers can better ensure the preparedness of the chemical sector. Furthermore, implementing inherently safer technologies potentially could lessen the consequences of a terrorist attack by reducing the chemical risks present at facilities, thereby making facilities less attractive targets. However, substituting safer technologies can be prohibitively expensive and can shift risks onto other facilities or the transportation sector. Also, in many cases, it may not be feasible to substitute safer chemicals or change to safer processes. Therefore, given the possible security and safety benefits as well as the potential costs to some companies of substituting safer technologies, a collaborative study employing DHS's security expertise and EPA's chemical expertise could help policy makers determine the appropriate role of safer technologies in facility security efforts. For further information about this statement, please contact John B. Stephenson at (202) 512-3841. Karen Keegan, Omari Norman, Joanna Owusu, Vincent P. Price, and Leigh White made key contributions to this statement. Since 2001, the Congress has considered a number of legislative proposals that would give the federal government a greater role in ensuring the protection of the nation's chemical facilities. These legislative proposals would have granted DHS or EPA, or one of these agencies in consultation with the other, the authority to require chemical facilities to conduct vulnerability assessments and implement security measures to address their vulnerabilities. In the 109th Congress, five bills have been introduced but have not yet been acted upon: H.R. 1562, H.R. 2237, S. 2145, H.R. 4999, and S. 2486. High-priority facilities would be required to submit vulnerability assessments and security plans to DHS; other chemical sources would be required to self-certify completion of assessments and plans and provide DHS copies upon request. High-priority facilities would be required to submit vulnerability assessments and to certify that they have prepared prevention, preparedness, and response plans to EPA. Designated chemical sources would be required to submit vulnerability assessments, security plans, and emergency response plans to DHS. The assessment and security plan would be required to address security performance standards established by DHS for each risk-based tier. Chemical sources would be required to self-certify completion of assessments and plans. DHS, in consultation with EPA, would identify high-priority categories of facilities; DHS would receive and review assessments and plans. EPA, in consultation with DHS and state and local agencies, would identify high-priority categories of facilities; EPA would receive assessments and certifications. DHS would designate facilities as chemical sources and assign each chemical source to a risk-based tier. DHS would receive and review assessments, plans and certifications. EPA would have no role. DHS would, when and where it deems appropriate, conduct or require the conduct of vulnerability assessments and other activities to ensure and evaluate compliance; DHS could disapprove a vulnerability assessment or site security plan; following written notification and consultation with the owner or operator, DHS could issue a compliance order. Not later than 3 years after the deadline for submission of vulnerability assessments and response plans, EPA, in consultation with DHS, would review and certify compliance of each assessment and plan; following consultation with DHS, and 30 days after providing notification to the facility and providing advice and technical assistance to bring the assessment or plan into compliance and address threats, EPA could issue a compliance order. DHS would review and approve or disapprove all vulnerability assessments, security plans, and emergency response plans for facilities in higher risk tiers within one year, and within five years for all other facilities. DHS would be required to disapprove of any vulnerability assessment, site security plan, or emergency response plan not in compliance with the vulnerability assessment, site security plan, and emergency response plan requirements. For higher risk facilities, if DHS disapproves the assessment or plans, the Secretary could issue an order to a chemical source to cease operation. For other facilities, the Secretary could issue an order to a chemical source to cease operation, but only after a process of written notification, consultation and time for compliance. Would provide for court awarded civil penalties up to $50,000 per day for failure to comply with an order, site security plan, or other recognized procedures, protocols, or standards, and administrative penalties up to $250,000 for failure to comply with an order. Would provide for court awarded civil penalties up to $25,000 per day, criminal penalties, and administrative penalties (if the total civil penalties do not exceed $125,000) for failure to comply with an order. Would provide for court awarded civil penalties up to $50,000 per day, and administrative penalties of not more than $25,000 per day (not to exceed $1 million per year) for failure to comply with a DHS order or directive issued under the act. Also calls for criminal penalties of up to $50,000 in fines per day, imprisonment for not more than two years, or both for knowingly violating an order or failing to comply with a site security plan. Response plans would be required to include a description of safer design and maintenance options considered and reasons those options were not implemented; EPA would be required to establish a clearinghouse for information on inherently safer technologies and would be authorized to provide grants to assist chemical facilities demonstrating financial hardship in implementing inherently safer technologies. None. Would exempt information obtained from disclosure under the Freedom of Information Act (FOIA) or otherwise, or from disclosure under state or local laws; information would also not be subject to discovery or admitted into evidence in any federal or state civil judicial or administrative procedure other than in civil compliance action brought by DHS. Calls for DHS, in consultation with others, to establish confidentiality protocols. Would exempt information obtained from disclosure under FOIA; calls for EPA, in consultation with DHS, to establish information protection protocols. Would exempt information obtained from disclosure under FOIA, or from disclosure under state or local laws. Certifications submitted by the chemical sources, orders for failure to comply, and certificates of compliance and other orders would generally be made available to the public. Calls for DHS, in consultation with the Director of the Office of Management and Budget and appropriate federal law enforcement officials, to create confidentiality protocols for the maintenance and use of records; would establish penalties for the unlawful disclosure of protected information. Upon petition, DHS would be required to endorse other industry, state, or federal protocols or standards that the Secretary of DHS determines to be substantially equivalent. None. Would allow the Secretary to determine that vulnerability assessments, security plans, and emergency response plans prepared under alternative security programs meet the act's requirements and to permit submissions or modifications to the assessments or plans. Would grant DHS right of entry; would exempt facilities that are subject to MTSA (port facilities) or the Bioterrorism Act (community water systems). Except with respect to protection of information, would not affect requirements imposed under state law. Would grant EPA right of entry; would authorize EPA to provide grants for training of first responders and employees at chemical facilities; would not affect requirements imposed under state law. Would grant DHS right of entry; would exempt facilities that are subject to MTSA from certain area security requirements but these facilities would otherwise comply with the act's requirements. Would preserve the right of States to adopt chemical security requirements that are more stringent than the Federal standard, as long as the State standard does not conflict with the Federal standard. S. 2486, introduced on March 30, 2006, would impose a general duty on chemical facility owners and operators, in the same manner as the duty under the Clean Air Act's Section 112(r), to identify hazards that may result from a criminal release, ensure the design, operation, and maintenance of safe facilities by taking such actions as are necessary to prevent criminal releases, and eliminate or significantly reduce the consequences of any criminal release that does occur. S. 2486 also directs DHS to work with EPA, as well as state and local agencies, to identify not fewer than 3,000 high priority chemical facilities. These facilities would be required to take adequate actions (including the design, operation, and maintenance of safe facilities), to detect, prevent, or eliminate or significantly reduce the consequences of criminal releases and to submit a report to DHS that includes a vulnerability assessment; a hazards assessment; a prevention, preparedness, and response plan; statements as to how the response plan meets regulatory requirements and general duty requirements; and a discussion of the consideration of the elements of design, operation, and maintenance of safe facilities. "Design, operation, and maintenance of safe facilities" is defined as practices of preventing or reducing the possibility of a release through use of inherently safer technologies, among other things. DHS would certify compliance and DHS and EPA would establish a program to conduct inspections of facilities. The bill also provides for civil penalties, administrative penalties, and criminal penalties (including imprisonment for up to 2 years for first violations and up to 4 years for subsequent violations), for owners or operators of high priority facilities who fail to comply with an order. Also in the 109th Congress, the conference committee for H.R. 2360, making appropriations for DHS for fiscal year 2006, directed DHS to submit a report to the Senate and House Committees on Appropriations by February 10, 2006, describing (1) the resources needed to implement mandatory security requirements for the chemical sector and to create a system for auditing and ensuring compliance with the security standards and (2) the security requirements and any reasons why the requirements should differ from those already in place for chemical facilities that operate in a port zone; complete vulnerability assessments of the highest risk U.S. chemical facilities by December 2006, giving preference to facilities that, if attacked, pose the greatest threat to human life and the economy; and complete a national security strategy for the chemical sector by February 10, 2006. 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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Terrorist attacks on U.S. chemical facilities could damage public health and the economy. The Department of Homeland Security (DHS) coordinates federal efforts to protect these facilities from attacks. GAO was asked to provide a statement for the record based on its report Homeland Security: DHS Is Taking Steps to Enhance Security at Chemical Facilities, but Additional Authority Is Needed ( GAO-06-150 , January 27, 2006), GAO reviewed (1) DHS's actions to develop a strategy to protect chemical plants, assist with the industry's security efforts, and coordinate with other federal agencies, (2) industry security initiatives, (3) DHS's authorities and the need for additional security legislation, and (4) stakeholders' views on any requirements to use safer technologies. DHS is developing a Chemical Sector-Specific Plan, which is intended to, among other things, describe DHS's ongoing efforts and future plans to coordinate with federal, state, and local agencies and the private sector; identify chemical facilities to include in the sector, assess their vulnerabilities, and prioritize them; and develop programs to prevent, deter, mitigate, and recover from attacks on chemical facilities. DHS officials told GAO that they now expect to complete and release the plan in the fall of 2006. In addition, DHS has taken a number of actions to protect the chemical sector from terrorist attacks. DHS identified 3,400 facilities that, if attacked, could pose the greatest hazard to human life and health and has initiated programs to assist the industry and local communities in protecting chemical plants. DHS also coordinates with the Chemical Sector Coordinating Council, an industry-led group that acts as a liaison for the chemical sector, and with EPA and other federal agencies. The chemical industry is voluntarily addressing plant security, but faces challenges. Some industry associations require member companies to assess plants' vulnerabilities, develop and implement mitigation plans, and have a third party verify that security measures were implemented. Other associations have developed guidelines and other tools to encourage their members to address security. Industry officials said that high costs and limited guidance on how much security is adequate create challenges in preparing facilities against terrorism. Because existing laws provide DHS with only limited authority to address security at chemical facilities, it has relied primarily on the industry's voluntary security efforts. However, the extent to which companies are addressing security is unclear. DHS does not have the authority to require chemical facilities to assess their vulnerabilities and implement security measures. Therefore, DHS cannot ensure that facilities are taking these actions. DHS has stated that its existing authorities do not permit it to effectively regulate the chemical industry, and that the Congress should enact federal requirements for chemical facilities. Many stakeholders agreed--as GAO concluded in 2003 and again in January 2006--that additional legislation placing federal security requirements on chemical facilities is needed. Stakeholders had mixed views on whether any chemical security legislation should require plants to substitute safer chemicals and processes, which could lessen the potential consequences of an attack, but could be costly or infeasible for some plants. DHS has stated that safer practices may make facilities less attractive to terrorist attack, but may shift risks rather than eliminate them. Environmental groups told GAO that they favored including or considering inherently safer technologies in any federal requirements, but most industry officials GAO contacted opposed a requirement to use safer technologies because they may shift risks or be prohibitively expensive.
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The SAB provides a mechanism for EPA to receive peer review and other advice in the use of science at EPA. The SAB is authorized to, among other things, review the adequacy of the scientific and technical basis of EPA's proposed regulations. The SAB and its subcommittees or panels focus on a formal set of charge questions on environmental science received from the agency. Depending on the nature of the agency's request, the entire advisory process generally takes 4 to 12 months from the initial discussion on charge questions with EPA offices and regions to the delivery of the final SAB report. Figure 1 depicts the stages of the SAB advisory process. CASAC provides independent advice to EPA on "air quality criteria."Under the Clean Air Act as amended, CASAC is to review the criteria and the existing NAAQS every 5 years and make recommendations to EPA for new standards and revisions of existing standards, as appropriate. In addition, CASAC is directed to advise EPA of the areas in which additional knowledge is required to appraise the adequacy and basis of the NAAQS and describe the research efforts necessary to provide the required information. CASAC also is directed to advise EPA of the relative contribution to air pollution of concentrations of natural as well as human activity, and any adverse public health, welfare, social, economic, or energy effects that may result from various strategies for attainment and maintenance of the NAAQS. CASAC's advisory process is similar to the SAB's process, including the option of establishing subcommittees and panels that send their reports and recommendations to CASAC. As federal advisory committees, the SAB and CASAC are subject to FACA, which broadly requires balance, independence, and transparency. FACA was enacted, in part, out of concern that certain special interests had too much influence over federal agency decision makers. The head of each agency that uses federal advisory committees is responsible for exercising certain controls over those advisory committees. For example, the agency head is responsible for establishing administrative guidelines and management controls that apply to all of the agency's advisory committees, and for appointing a Designated Federal Officer (DFO) for each advisory committee. Advisory committee meetings may not occur in the absence of the DFO, who is also responsible for calling meetings, approving meeting agendas, and adjourning meetings. As required by FACA, the SAB and CASAC operate under charters that include information on their objectives, scope of activities, and the officials to whom they report. Federal advisory committee charters must be renewed every 2 years, but they can be revised before they are due for renewal in consultation with GSA. An analysis of changes in the SAB's charter regarding to whom the SAB is to provide advice is included in appendix I. requested advice from the SAB regarding two reviews the SAB was conducting. According to EPA officials, this was the first time representatives of a congressional committee formally requested advice from the SAB. Both requests were addressed and submitted directly to the SAB Chair and the Chair of the relevant SAB panel and sent concurrently to the SAB staff office and EPA Administrator. While ERDDAA does not outline a role for EPA in mediating responses from the SAB to the designated congressional committees, EPA identifies such a role for itself under FACA. Specifically, EPA points to the DFO's responsibility to manage the agenda of an advisory committee. Also under FACA, EPA is responsible for issuing and implementing controls applicable to its advisory committees. Responses to the committee's requests for scientific advice were handled by the SAB staff office and EPA's Office of Congressional and Intergovernmental Relations (OCIR). The SAB staff office and, later, OCIR responded to the committee's first request for advice, and OCIR responded to the committee's second request for advice. See table 1 for more information on these requests. EPA's procedures for processing congressional requests for scientific advice from the SAB do not ensure compliance with ERDDAA because the procedures are incomplete and do not fully account for the statutory access designated congressional committees have to the SAB. Specifically, EPA policy documents do not clearly outline how the EPA Administrator, the SAB staff office, and members of the SAB panel are to handle a congressional committee's request for advice from the SAB. In addition, EPA policy documents do not acknowledge that the SAB must provide scientific advice when requested by select congressional committees. EPA's written procedures for processing congressional committee requests to the SAB are found in the SAB charter and in the following two documents that establish general policies for how EPA's federal advisory committees are to interact with outside parties: EPA Policy Regarding Communication Between Members of Federal Advisory Committee Act Committees and Parties Outside of the EPA (the April 2014 policy), and Clarifying EPA Policy Regarding Communications Between Members of Scientific and Technical Federal Advisory Committees and Outside Parties (the November 2014 policy clarification). Collectively, the SAB's charter, EPA's April 2014 policy, and EPA's November 2014 policy clarification provide direction for how EPA and the SAB are to process requests from congressional committees. However, these documents do not clearly outline procedures for the EPA Administrator, the SAB staff office, and members of the SAB panel to use in processing such requests. At the time of the House committee's two requests to the SAB in 2013, the SAB charter was the only EPA document that contained written policy relating to congressional committee requests under ERDDAA. The SAB charter briefly noted how congressional committees may access SAB advice, stating; "While the SAB reports to the EPA Administrator, congressional committees specified in ERDDAA may ask the EPA Administrator to have SAB provide advice on a particular issue." (GAO italics) Beyond what the charter states, however, no EPA policy specified a process the Administrator should use to have the SAB provide advice and review a congressional request. In response to a request from the SAB staff office that EPA clarify the procedures for handling congressional committee requests, EPA, through an April 4, 2014, memorandum informed the SAB that committee members themselves and the federal advisory committees as a whole should refrain from directly responding to these external requests. Attached to the memorandum was the April 2014 policy that stated: "if a FACA committee member receives a request relating to the committee's work from members of Congress or their staff, or congressional committees, the member should notify the DFO, who will refer the request to the EPA OCIR. OCIR will determine the agency's response to the inquiry, after consulting with the relevant program office and the DFO." This policy, however, did not provide more specific details on processing requests from congressional committees under ERDDAA. In November 2014, EPA issued a clarification to the April 2014 policy, specifying that SAB members who receive congressional requests pursuant to ERDDAA should acknowledge receipt of the request and indicate that EPA will provide a response. The November 2014 policy clarification does not identify the SAB as having to provide the response. The November 2014 policy clarification also stated that the request should be forwarded to the appropriate DFO and that decisions on who and how best to respond to the requests would be made by EPA on a case-by-case basis. While the November 2014 policy clarification provides greater specificity about processing requests, it is not consistent with the SAB charter because the policy indicates that congressional committee requests should be handled through the DFO, whereas the charter indicates that they should be handled through the EPA Administrator and provides no further information. A senior-level EPA official stated that the agency considered that the charter and the November 2014 policy clarification differed in the level of detail, but not in the broad principle that the agency is the point of contact for congressional requests to the SAB (and SAB responses to those requests). However, under the federal standards of internal control, agencies are to clearly document internal controls, and the documentation is to appear in management directives, administrative policies, or operating manuals. While EPA has documented its policies, they are not clear, because the charter and the November 2014 policy clarification are not consistent about which office should process congressional requests. Agency officials said that the SAB charter is up for renewal in 2015. By modifying the charter when it is renewed to reflect the language in the November 2014 policy clarification--that congressional requests should be forwarded to the appropriate DFO-- EPA can better ensure that its staff process congressional committee requests consistently when the agency receives such a request. Moreover, neither the April 2014 policy nor the November 2014 policy clarification clearly documents EPA's procedures for reviewing congressional committee requests to determine which questions would be taken up by the SAB consistent with the federal standards of internal control. Because EPA's procedures for reviewing congressional committee requests are not documented, it will be difficult for EPA to provide reasonable assurance that its staff are appropriately applying criteria when determining which questions the SAB will address. EPA officials told us that internal deliberations in response to a congressional request follow those that the agency would apply to internal requests for charges to the SAB. Specifically, officials told us that EPA considers whether the questions are science or policy driven, whether they are important to science and the agency, and whether the SAB has already undertaken a similar review. In addition, under ERDDAA, the SAB is required to provide requested scientific advice to select committees, regardless of EPA's judgment. As EPA has not fully responded to the committee's two 2013 requests to the SAB, by clearly documenting its procedures for reviewing congressional requests to determine which questions should be taken up by the SAB and criteria for evaluating requests, the agency can provide reasonable assurance that its staff process these and other congressional committee requests consistently and in accordance with both FACA and ERDDAA. Furthermore, the charter states that when scientific advice is requested by one of the committees specified in ERDDAA, the Administrator will, when appropriate, forward the SAB's advice to the requesting congressional committee. Neither the charter nor the April 2014 policy and November 2014 policy clarification specify when it would be "appropriate" for the EPA Administrator to forward the SAB's advice to the requesting committee. Such specificity would be consistent with federal standards of internal control that call for clearly documenting internal controls. Without such specification, the perception could be created that EPA is withholding information from Congress that the SAB is required to provide under ERDDAA. EPA officials stated that the EPA Administrator does not attempt to determine whether advice of the SAB contained in written reports should be forwarded to the requesting committee and that all written reports are publically available on the SAB website at the same time the report is sent to the EPA Administrator. By modifying the charter or other policy documents to reflect when it is and when it is not appropriate for the EPA Administrator to forward the advice to the requesting committee, EPA can better ensure transparency in its process. In general, under FACA, as a federal advisory committee, the SAB's agenda is controlled by its host agency, EPA. As such, the SAB generally responds only to charge questions put to it by EPA although, under ERDDAA, the SAB is specifically charged with providing advice to its host agency as well as to designated congressional committees. In addition, it is EPA's responsibility under GSA regulations for implementing FACA to ensure that advisory committee members and staff understand agency-specific statutes and regulations that may affect them, but nothing in the SAB charter, the April 2014 policy, or the November 2014 policy clarification communicates that, ultimately, SAB must provide scientific advice when requested by congressional committees. For example, we found no mechanism in EPA policy for the SAB to respond on its own initiative to a congressional committee request for scientific advice unrelated to an existing EPA charge question. A written policy for how the SAB should respond to a congressional committee request that does not overlap with charge questions from EPA would be consistent with federal internal control standards. Moreover, such a policy would better position the SAB to provide the advice it is obligated to provide under ERDDAA and for EPA to provide direction consistent with GSA regulations for implementing FACA. CASAC has provided certain types of advice related to the review of NAAQS. The Clean Air Act requires CASAC to review air quality criteria and existing NAAQS every 5 years and advise EPA of any adverse public health, welfare, social, economic, or energy effects that may result from various strategies for attainment and maintenance of NAAQS. According to a senior-level EPA official, CASAC has carried out its role in reviewing the air quality criteria and the NAAQS, but has never provided advice on adverse social, economic, or energy effects related to NAAQS because to date EPA has not asked CASAC to do so. This is in part because NAAQS are to be based on public health and welfare criteria, so information on the social, economic, or energy effects of NAAQS are not specifically relevant to setting NAAQS. In a June 2014 letter to the EPA Administrator, CASAC indicated that, at the agency's request, it would review the impacts (e.g., the economic or energy impacts) of strategies for attaining or maintaining the NAAQS but stressed that such a review would be separate from reviews of the scientific bases of NAAQS. In response to such a request, the letter stated that an ad hoc CASAC panel would be formed to obtain the full expertise necessary to conduct such a review. A senior-level EPA official stated that EPA continues to examine this issue and is considering how to proceed. Information from EPA-requested reviews could be useful for the states, which implement the strategies necessary to achieve the NAAQS. EPA is required to provide states, after consultation with appropriate advisory committees, with information on air pollution control techniques, including the cost to implement such techniques. 42 U.S.C. SS 7408(b)(1) (2015). According to a senior-level EPA official, EPA collects this information from other federal advisory committees, the National Academy of Sciences, and state air agencies, among others, and EPA fulfills its statutory obligation by issuing Control Techniques Guidelines and other implementation guidance. EPA has policies and guidance to help ensure that its federal advisory committees maintain their independence from the agency when performing their work. Under GSA regulations for implementing FACA, agencies must develop procedures to ensure that the federal advisory committees are independent from the agency when rendering judgments. EPA policies and guidance to help ensure the independence of its federal advisory committees include general discussions of FACA requirements that apply to all of EPA's federal advisory committees as well as those specifically for the SAB. For example, the April 2014 Policy refers to the agency's responsibilities under FACA to maintain its separation from its federal advisory committees. In addition, EPA's Scientific Integrity Policy sets out the expectation that all agency employees, including scientists, managers and political appointees, will ensure, among other things, that the agency's scientific work is of the highest quality and free from political interference or personal motivations. This policy states that EPA prohibits managers and other agency leadership from intimidating or coercing scientists to alter scientific data, findings, or professional opinions or to inappropriately influence scientific advisory boards. The agency has also developed the EPA Peer Review Handbook to provide guidance to EPA staff and managers who are planning to conduct peer reviews. The handbook includes information on planning and conducting a peer review as well as the types of peer reviews performed by external peer reviewers, such as federal advisory committees. Specifically, the handbook provides information on the independence aspects of a peer review, such as how closely EPA officials should interact with peer reviewers when a review is being conducted to maintain independence. The SAB staff office has also developed documents that contain some references to how the SAB and CASAC can maintain their independence from EPA. Specifically, the SAB Office developed a handbook for SAB members that includes a section on how SAB members should expect to For example, the handbook states that maintain their independence.SAB committee and panel members are expected to avoid interaction with anyone--including agency representatives or members of the interested public--who might create a perception of conflict of interest. The SAB handbook also has a section on the role of the agency during the SAB's report preparation phase. This section states that the agency should not in any way approve or attempt to influence the content of draft panel or committee reports. In addition, EPA officials explained that the agency does not review or comment on drafts of SAB or CASAC products, so that it cannot influence them in their final form. Finally, the SAB office, as part of a fiscal year 2012 list of initiatives to enhance public involvement in SAB and CASAC activities included a statement that the SAB office and federal advisory committees would not accept a charge from EPA that unduly narrows the scope of an advisory activity. EPA's SAB plays an important role assisting the agency in using high- quality science by providing EPA with scientific advice on a wide range of matters and reviewing scientific research the agency uses when developing environmental regulations. Under ERDDAA, the SAB is also required to provide scientific advice to designated congressional committees when requested. In November 2014, EPA issued a clarification revising its policy for how it processes congressional committees' requests for scientific advice from the SAB. However, shortcomings exist with EPA's policy documents. First, the November 2014 policy clarification differs from the SAB's charter regarding which offices should receive and process congressional requests. As a result, EPA staff may not process congressional committee requests consistently, since the treatment will vary depending on whether staff follow the policy clarification or the charter. Agency officials said that the SAB charter is up for renewal in 2015. By modifying the charter when it is renewed to reflect the language in the November 2014 policy clarification, that congressional requests should be forwarded to the appropriate DFO, EPA can better ensure that its staff process congressional committee requests consistently when the agency receives them. Additionally, EPA has not documented its procedures for reviewing congressional committee requests to determine which questions should be taken up by the SAB or criteria for evaluating those requests. By documenting the agency's procedures and criteria, EPA can provide reasonable assurance that its staff handle congressional requests consistently and in accordance with both FACA and ERDDAA. Furthermore, the SAB's charter states that the Administrator will forward the SAB's response to a committee's request when appropriate, but EPA has not specified in policy documents when it would be appropriate for the Administrator to forward the SAB's advice to the requesting committee. Without such specification, the perception could be created that EPA is withholding information from Congress that the SAB is required to provide under ERDDAA. By clarifying procedures to reflect when it is and when it may not be appropriate for the Administrator to forward the advice to the requesting committee, EPA can better ensure transparency in its process and consistency with ERDDAA. Finally, it is EPA's responsibility to ensure that advisory committee members and staff understand agency-specific statutes and regulations that may affect them under regulations for implementing FACA. However, EPA policy documents do not specify how the SAB would respond on its own initiative to a congressional committee's request for scientific advice unrelated to an existing EPA charge question, as it must do under ERDDAA. By documenting procedures on how the SAB should respond to a congressional committee request that does not overlap with charge questions from EPA, the agency would better position the SAB to provide the advice it is obligated to provide under ERDDAA and EPA itself to provide direction consistent with regulations for implementing FACA. To better ensure compliance with ERDDAA when handling congressional requests for scientific advice from EPA's SAB, we recommend that the EPA Administrator take the following four actions: Clarify in the charter when it is renewed which offices should receive and process congressional requests. Document procedures for reviewing congressional committee requests to determine which questions should be taken up by the SAB and criteria for evaluating such requests. Clarify in policy documents when it is and when it is not appropriate for the EPA Administrator to forward advice to the requesting committee. Specify in policy documents how the SAB should respond to a congressional committee's request for scientific advice unrelated to an existing EPA charge question. We provided EPA with a draft of this report for review and comment. In written comments, reproduced in appendix II, EPA stated that it concurred with the recommendations in the report and provided information on planned actions to address each recommendation. EPA also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the EPA Administrator, and other interested parties. In addition, this 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 contributions to this report are listed in appendix III. The Environmental Research, Development, and Demonstration Authorization Act of 1978 (ERDDAA) mandated that EPA establish the SAB and required the SAB to provide the EPA Administrator with scientific advice as requested. Congress amended ERDDAA in 1980 to require EPA's SAB to provide scientific advice to designated congressional committees when requested. Below is our analysis of the changes to the charter regarding to whom the SAB is to provide advice. In 1978, the Charter Objectives and Responsibilities stated that: "The objective of the Board is to provide advice to EPA's Administrator on the scientific and technical aspects of environmental problems and issues. The Board reports to the Administrator. It will review issues, provide independent advice on EPA's major programs, and will perform special assignments as requested by the Agency and as required by the ERDDAA of 1978 and the CAA Amendments of 1977." In response to the ERDDAA amendments, EPA changed the charter in 1981 to reflect that certain congressional committees could also request advice. Additional changes to the charter over the years regarding to whom the SAB is to provide advice are reflected in the table below. In addition to the individual named above, Vincent Price and Janet Frisch, Assistant Directors; Ulana Bihun; Antoinette Capaccio; Greg Carroll; and John Delicath made key contributions to this report.
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EPA formulates rules to protect the environment and public health. To enhance the quality and credibility of such rules, EPA obtains advice and recommendations from the SAB and CASAC--two federal advisory committees that review the scientific and technical basis for EPA decision-making. ERDDAA requires the SAB to provide both the EPA Administrator and designated congressional committees with scientific advice as requested. Amendments to the Clean Air Act established CASAC to, among other things, provide advice to the Administrator on NAAQS. GAO was asked to look into how the SAB and CASAC are fulfilling their statutory obligations in providing such advice. This report examines (1) the extent to which EPA procedures for processing congressional requests to the SAB ensure compliance with ERDDAA; (2) the extent to which CASAC has provided advice related to NAAQS; and (3) policies EPA has to ensure that the SAB and CASAC maintain their independence when performing their work. GAO reviewed relevant federal regulations and agency documents, and interviewed EPA, SAB, and other relevant officials. The Environmental Protection Agency's (EPA) procedures for processing congressional requests for scientific advice from the Science Advisory Board (SAB) do not ensure compliance with the Environmental Research, Development, and Demonstration Authorization Act of 1978 (ERDDAA) because these procedures are incomplete. For example, they do not clearly outline how the EPA Administrator, the SAB staff office, and others are to handle a congressional committee's request. While the procedures reflect EPA's responsibility to exercise general management controls over the SAB and all its federal advisory committees under the Federal Advisory Committee Act (FACA), including keeping such committees free from outside influence, they do not fully account for the specific access that designated congressional committees have to the SAB under ERDDAA. For example, EPA's policy documents do not establish how EPA will determine which questions would be taken up by the SAB. EPA officials told GAO that in responding to congressional requests, EPA follows the same process that it would apply to internal requests for questions to the SAB, including considering whether the questions are science or policy driven or are important to science and the agency. However, under ERDDAA, the SAB is required to provide requested scientific advice to select committees, regardless of EPA's judgment. By clearly documenting how to handle congressional requests received under ERDDAA consistent with federal standards of internal control, EPA can provide reasonable assurance that its staff process responses consistently and in accordance with the law. The Clean Air Scientific Advisory Committee (CASAC) has provided certain types of advice related to the review of national ambient air quality standards (NAAQS), but has not provided others. Under the Clean Air Act, CASAC is to review air quality criteria and existing NAAQS every 5 years and advise EPA of any adverse public health, welfare, social, economic, or energy effects that may result from various strategies for attainment and maintenance of NAAQS. An EPA official stated that CASAC has carried out its role in reviewing the air quality criteria and the NAAQS, but CASAC has never provided advice on adverse social, economic, or energy effects related to NAAQS because EPA has never asked CASAC to do so. In a June 2014 letter to the EPA Administrator, CASAC indicated it would review such effects at the agency's request. EPA has policies and guidance to help ensure that its federal advisory committees--including the SAB and CASAC--maintain their independence from the agency when the advisory committees perform their work. Under General Services Administration regulations for implementing FACA, an agency must develop procedures to ensure that its federal advisory committees are independent from the agency when rendering judgments. EPA policies and guidance to help ensure the independence of its federal advisory committees include guidance specifically for the SAB and general requirements that apply to all of EPA's federal advisory committees, including the SAB and CASAC. For example, EPA's Scientific Integrity Policy states that EPA prohibits managers and other agency leadership from intimidating or coercing scientists to alter scientific data, findings or professional opinions, or inappropriately influencing scientific advisory boards. GAO recommends that to better ensure compliance with ERDDAA, EPA take steps to improve its procedures for processing congressional committee requests to the SAB for advice. EPA agreed with GAO's recommendations.
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those sectors where USTR has negotiating authority because of some countries' expected opposition to further tariff reductions. At Singapore, proposals are expected for WTO members to begin work on the next generation of trade issues. However, because these issues include areas heretofore outside the scope of detailed trade negotiations--environmental protection, investment rules, competition policy, labor standards, and bribery and corruption--it is unlikely members will reach consensus on the WTO's role. Of these issues, only environment is on the WTO agenda already, but members have not decided how to reconcile environmental concerns with trade objectives. USTR strongly supports discussing labor standards as part of the WTO agenda. USTR may begin to address bribery and corruption issues indirectly as it seeks to expand participation in the Agreement on Government Procurement. However, many other members are just as strongly opposed to including these two issues. On the other hand, the United States is not yet prepared to agree to a negotiating program for competition policy and would prefer discussions on investment policy to take place primarily in the Organization for Economic Cooperation and Development (OECD). In earlier testimony we noted that it will take time and resources to (1) completely build the WTO so that members can address all its new roles and responsibilities; (2) make members' national laws, regulations, and policies consistent with new commitments; (3) fulfill notification requirements and then analyze the new information; and (4) resolve differences about the meaning of the agreements and judge whether members have fulfilled their commitments. It is critical that USTR monitor implementation of the agreements to ensure that other WTO members are honoring their commitments and thus that the agreements' expected benefits are being realized. USTR and the Departments of Commerce and Agriculture have created specific units to try to monitor foreign government compliance with trade agreements, including those of the Uruguay Round. created some new bodies; however, these bodies address new areas of coverage, for example, the Councils for Trade in Services and for Trade-Related Aspects of Intellectual Property Rights. Other bodies, such as the WTO Committee on Antidumping Practices, were "reconstituted" from previous GATT committees but were given new responsibilities by the Uruguay Round agreements and now have broader membership. The WTO Secretariat, headed by its Director General, facilitates the work of the members. The work of the bodies organized under the WTO structure is still undertaken by representatives of the approximately 123 member governments, rather than the Secretariat. Early meetings of some WTO committees were focused on establishing new working procedures and work agendas necessary to implement the Uruguay Round agreements. The ministers will be judging the progress of members in implementing numerous agreements to date, based on information collected from the many notification requirements placed upon member governments. These notifications are aimed at increasing transparency about members' actions and laws and therefore encourage accountability. Notifications take many forms. For example, one provision requires members to file copies of their national legislation and regulations pertaining to antidumping measures. WTO committees began reviewing the notifications they received from member governments in 1995. The information provided allows members to identify general problems with implementing the terms of the agreements, as well as monitor each others' specific activities and, therefore, to enforce the agreements. Limitations in members' reporting may make it difficult for the ministers to assess progress in some areas. The WTO Director General noted some difficulties with members' fulfilling their notification requirements in his report in December 1995. Some foreign government and WTO Secretariat officials told us in 1995 that the notification requirements had placed a burden on them and that they had not foreseen the magnitude of information they would be obligated to provide. The WTO Secretariat estimated that the Uruguay Round agreements specified over 200 notification requirements. It also noted that many members were having problems understanding and fulfilling the requirements within the deadlines. While developing countries reportedly faced particular problems, even the United States missed some deadlines for filing information on subsidies and customs valuation laws. To address concerns about notifications, WTO formed a working party in February 1995 to simplify, standardize, and consolidate the many notification obligations and procedures. This working party may make recommendations for changes for the ministers to consider. The WTO dispute settlement mechanism is intended to be a central element in providing security and predictability to this multilateral trading system. Through it, members have a system to resolve disputes that result from violations of WTO obligations or impairment of benefits from WTO agreements. The new dispute resolution mechanism incorporates several objectives that were particularly important to the United States--time limits for each step in the dispute settlement process and elimination of a country's ability to block the adoption of resolutions from dispute settlement panel reports. The new Dispute Settlement Understanding established time limits for each of the four stages of a dispute: consultation, panel review, appeal, and implementation. Also, unless there is unanimous opposition in the WTO Dispute Settlement Body, the panel or appellate report is to be adopted. Further, the recommendations and rulings of the Dispute Settlement Body can neither add to or diminish the rights and obligations provided in the Uruguay Round agreements nor directly force members to change their laws or regulations. However, if members choose not to implement the recommendations and rulings, the Dispute Settlement Body may authorize trade retaliation. From January 1, 1995, to August 30, 1996, formal WTO dispute settlement procedures have been invoked in 53 instances. Most of the cases are still in progress--35 are either in the consultation phase, under panel review, or on appeal. Of the 18 closed cases, 16 have been settled or abandoned, and 2 have been closed after a final appeal. The United States has availed itself of the dispute settlement mechanism more than any other member. The United States has initiated 17 cases on a variety of issues including patent protection in India, Portugal, and Pakistan; meat import restrictions in South Korea and the European Union (EU); and restrictions on the importation of magazines into Canada. There are currently four pending cases against actions or measures taken by the United States--two involve import restraints concerning textile and apparel products, one relates to an antidumping investigation of tomatoes from Mexico, and the other concerns the Cuban Liberty and Democratic Solidarity Act of 1996. As of the end of August 1996, dispute settlement panels have reached decisions involving five cases. The two closed cases, which were combined into a single panel, involved a challenge by Venezuela and Brazil to a U.S. Environmental Protection Agency regulation setting forth the methods by which importers of gasoline were to determine characteristics of gasoline imported and sold in the United States in 1990. The panel found that the regulation was inconsistent with a GATT 1994 provision concerning national treatment of imported products. On appeal, the dispute settlement Appellate Body modified the panel's report but upheld the panel's conclusion. The other three cases, also combined into one panel, were brought by the United States, Canada, and the EU against Japan's liquor tax. The panel found the Japanese tax to be inconsistent with GATT 1994, on national treatment grounds. Japan has filed an appeal, which is currently pending. It is unclear to what extent the ministers at the WTO Singapore meeting will analyze the implementation of the new dispute settlement process and what criteria they would use to do so. USTR officials view this process as a success, in part because complaints can be resolved even before a panel hears the case. In addition, USTR has recently testified that the new mechanism is proving to be a very effective market-opening tool. However, it may be difficult to objectively evaluate the results of a dispute settlement process. We observed in our previous work on 5 years of dispute settlement under the U.S.-Canada Free Trade Agreement (CFTA)that it may take many years before a sufficiently large body of cases accrues to permit statistically significant observations about the process. In that report we focused on the possible effects of panelists' backgrounds, the types of U.S. agency decisions appealed, and the patterns of panel decision-making. We learned that any effort to evaluate the functioning of the dispute settlement process presents significant analytical challenges. example, increase market access in key sectors and improve protection of intellectual property rights. Under the Uruguay Round Agreement on Textiles and Clothing, textile quotas are to be phased out over a 10-year period beginning in January 1995. Because of the 10-year phase-out, the effects of the textiles agreement will not be fully realized until 2005, after which textile and apparel trade will be fully integrated into WTO and its disciplines (practices). Integration is to be accomplished by (1) completely eliminating quotas on selected products in four stages and (2) increasing quota growth rates on the remaining products at each of the first three stages. By 2005, all bilateral quotas maintained under the agreement on all WTO members are to be removed. During the first stage of product integration (1995 through 1997), virtually no quotas were removed by the United States and other major importing countries. The United States is the only major importing country to have published a list of products to be removed from quota for all three stages; other countries, such as the EU and Canada, have only published their integration plan for the first phase. Under the U.S. integration schedule, 89 percent of all U.S. apparel products under quota in 1990 and 67 percent of textile and apparel products combined will not be integrated into normal WTO rules until 2005. Importer and retailer representatives have expressed concern about the delay in lifting the majority of textile and apparel quotas until the end of the phase-out period. However, U.S. officials have pointed out that the Statement of Administrative Action accompanying the U.S. bill to implement the Uruguay Round agreements provided that "integration of the most sensitive products will be deferred until the end of the 10-year period." During the phase-out period, the safeguards provision of the textiles agreement permits a country to impose a new quota only when it determines that increased imports of a particular textile or apparel product are seriously damaging, or present an actual threat of serious damage to, its domestic industry. The agreement further provides that any quotas imposed during the phase-out period be reviewed by a newly created Textiles Monitoring Body (TMB) within WTO, which is to supervise the textile agreement's implementation. TMB consists of individuals from 10 countries, including the United States. The United States and Brazil are the only WTO members thus far to have imposed new quotas on imports they found were harming their domestic industries under the agreement's safeguard procedures. In 1995, the United States issued 28 requests for consultations (or "calls") to impose quotas and has issued 2 calls thus far in 1996 to a total of 19 countries (11 WTO members and 8 nonmembers). Brazil has issued calls to four countries to date. As of August 1996, TMB had reviewed the imposition of seven quotas (where no agreement was reached with the exporting country). All of these quotas had been imposed by the United States. TMB found that the threat of serious damage to domestic industry had been demonstrated in one case. In three cases, TMB found that the threat of serious damage had not been demonstrated, and the quotas were subsequently rescinded; in three other cases, TMB could not reach consensus. TMB has not published details about the reasons for its decisions. Three of the cases TMB reviewed were subsequently brought before the Dispute Settlement Body by the countries subject to the U.S. safeguard action. The United States rescinded one action, and the other two cases are currently pending. report on the textile agreement's implementation to the WTO General Council in early November. Liberalizing agricultural trade was a key U.S. objective during the Uruguay Round. The United States anticipated that better rules and disciplines on government policies in this area would foster a more market-oriented trading system and improve the competitive position of the U.S. agriculture sector. Therefore, monitoring other members' implementation of their Uruguay Round agricultural commitments is essential to securing anticipated U.S. gains. Several important issues are likely to be discussed at the ministerial meeting, as the reports of two WTO committees and one WTO working party focus on, or relate to, agricultural trade. First, the WTO Committee on Agriculture will report on implementation of the agriculture agreement, including any aspects needing additional attention or review. This Committee's report is expected to address two other issues: (1) a decision to review the impact of the agreement on net food-importing countries and (2) preparations necessary to resume the agreement's required negotiations in 1999. Second, the WTO Committee on Sanitary and Phytosanitary (SPS) Measures will report on implementation of the SPS agreement. Third, the WTO Working Party on State Trading Enterprises will report on its efforts to better document and understand the role of STEs in WTO. implementation issue was discussed outside the Committee under the dispute settlement process, when the United States requested consultations with the EU to resolve its concerns about EU implementation of market access commitments for grain imports. In addition to implementation issues, the Committee's report is expected to address its responsibility for monitoring WTO members' commitment to review levels of food aid available to net food-importing countries. This commitment recognized that least-developed and net food-importing developing countries might experience negative effects from Uruguay Round agricultural reform if it affected the availability of food supplies from external sources at reasonable terms and conditions. WTO members agreed to establish appropriate mechanisms to ensure that agricultural reform does not have an adverse impact on the provision of sufficient levels of food aid. The recent rise in global commodity prices and the near-record lows in international grain reserves have increased the cost of food imports for some countries. Some least-developed and net food-importing countries have already indicated they are concerned about the impact of agricultural reform on their countries, but U.S. officials do not believe the limited reforms implemented so far are responsible for shortages or price increases. Still, net food-importing countries expect action to be taken within the Committee to review food aid levels and establish a sufficient level of aid to meet legitimate needs. The Committee is considering whether and how such a review should be conducted and hopes to resolve this issue before the ministerial meeting. However, if resolution is not achieved within the Committee, the issue is likely to be discussed at the World Food Summit in November 1996 and again in Singapore. implementation of the agreement, preparing for negotiations to resume is also important. The second Committee report that will address agricultural issues is the Committee on SPS Measures. The SPS agreement recognizes that members have a right to adopt measures to protect human, animal, and plant life or health. However, it requires, among other things, that such measures be based on scientific principles and not act as disguised trade restrictions. The United States was a key supporter of this agreement, recognizing that the lack of sufficient disciplines on the use of SPS measures could undermine the intent of the agriculture agreement if members were allowed to replace tariffs and quotas with unscientific animal and plant health or food safety measures. The United States has signalled its intent to use WTO channels to challenge unscientific SPS measures. For example, through WTO consultations in 1995, the United States persuaded South Korea to modify its practice for determining product shelf-life, which was adversely affecting U.S. meat and other exports. Also, in May 1996, the United States requested a dispute settlement panel be convened to review the EU's long-standing ban on hormone-treated meat, which has substantially blocked U.S. beef imports since 1989. potential to distort trade. This framework helps clarify that being sanctioned by the government does not necessarily mean that an STE is distorting trade; rather, a key factor is the presence of direct or indirect subsidies that can give an STE a greater potential to distort trade. We reported that another factor in evaluating the trade-distorting effect of STEs (or private commercial firms) is share of the world market. The working party on STEs is developing an illustrative list of STE attributes and practices in WTO and continues to study the questionnaire used to collect information about them. The United States is working within the forum to develop a modified questionnaire that would help make STE activities more transparent. U.S. government and agricultural industry officials hope to negotiate additional disciplines on STEs when agricultural negotiations resume in 1999. Negotiations in several service sectors and on market access for certain goods were left unfinished at the end of the Uruguay Round and may be discussed by ministers at Singapore. USTR has pursued trade liberalization and market access in these areas since the Uruguay Round, but in many cases the outcome of these efforts remains uncertain. For example, within the framework of the General Agreement on Trade in Services (GATS), negotiations covering the financial, telecommunications, and maritime service sectors have not yet resulted in final agreements. In addition, USTR hopes to achieve further market access through new tariff reductions for a variety of goods but has testified that considerably more work remains to build "the necessary international consensus" for making such reductions. because U.S. negotiators, in consultation with the private sector, concluded that other members' offers to open their markets to U.S. financial services firms, especially those of certain developing countries, were insufficient to justify broader U.S. commitments (with no most-favored-nation exemption or other limitations). At the end of 1997, members, including the United States, will have an opportunity to modify or withdraw their commitments. Thus, the final outcome and impact of the financial services agreement are still uncertain. USTR has testified that negotiations for a financial services agreement are expected to resume in the first half of 1997, and the ministers may discuss this at Singapore. WTO members were also not able to reach agreement on a basic telecommunications services agreement by the original deadline of April 30, 1996, and negotiations were subsequently extended to a new deadline of February 15, 1997. The United States has noted that while some members made offers that matched that of the U.S. offer in terms of openness, many others did not, thus the United States would not accept the agreement. In addition, the United States has said that in order for the extended negotiations to succeed, "more and better" offers must be made by members, including both developed and developing nations. Similarly, negotiations for a multilateral maritime services agreement were unsuccessful and were suspended in June 1996 until the year 2000, when negotiations for all services sectors will be reopened. When suspending the negotiations, participating members agreed to refrain from applying new measures that would affect trade in this area during this time. The United States has said that other participating members to the negotiations did not offer "to remove restrictions so as to approach current U.S. openness in this area." The United States did not submit an offer in maritime services because USTR believed that other countries were not serious about liberalization. spirits, nonferrous metals, oilseeds and oil products, and certain chemical and pharmaceutical products, but expects opposition in some of these areas from several major trading partners. Members are debating what work should be done by WTO on new issues related to international trade at Singapore. As tariff and nontariff barriers to trade are reduced, other areas (traditionally seen as domestic) have drawn attention as potential international trade barriers. These include (1) environmental protection, (2) investment rules, (3) competition policy, (4) labor standards, and (5) bribery and corruption issues. Although these are not traditionally discussed as trade policy topics, they reflect a broader concept of what some WTO members believe are factors affecting market access opportunities in a global economy. For example, some WTO members believe that enforcing certain environmental and labor standards can be a disguise for protectionist policies. Also, activities such as price-fixing, market sharing, and noncompetitive procurement practices can lead to market distortions and reduce access for foreign competitors. The WTO has begun to address some of these issues, but no consensus has been reached on the extent to which they should be dealt with in the WTO. Some of these negotiations in new areas could be quite controversial, based on the previous experience with including areas like agriculture and services in the Uruguay Round negotiating agenda. Of the emerging issues, environment has developed the furthest within the WTO. At Marrakesh in 1994, members decided to establish a Committee on Trade and Environment. Trade and environment issues overlap because some government measures to balance economic growth with environmental concerns are perceived as protectionist and may conflict with WTO obligations. At the same time, some trade policies may impede the development of sound environmental policies. In the past, GATT dispute panels have ruled against measures that conflicted with national treatment principles or that appeared to apply to areas outside a country's sovereign jurisdiction. The United States believes that free trade and environmental protection policies can be mutually supportive and plans to convey this message at the Singapore ministerial meeting, in keeping with the 1992 United Nations Declaration in Rio de Janeiro. The WTO Committee on Trade and Environment is to identify the relationship between trade and environmental measures and make appropriate recommendations within the context of open and equitable trade. The Committee is expected to present a report at Singapore, but it is unclear what the report will include because of the complex issues and divergent views. Members generally agree that promoting free trade and environmental protection is not inherently contradictory; however, they have not agreed on specific ways to address these issues. Several items are under discussion, including ecolabeling programs; the relationship between multilateral environmental agreements and the WTO; and the effect of environmental measures on market access, particularly in relation to developing countries. Ecolabeling programs have received a great deal of attention by the Committee. Some members believe these programs act as trade barriers, and members have not reached an agreement about whether or not ecolabeling programs need greater transparency. USTR firmly believes that all forms of ecolabeling are subject to the WTO's Technical Barriers to Trade (TBT) Agreement, which requires transparency and public participation when applying product standards. Other members, however, have expressed doubts about whether all ecolabeling programs are covered by the TBT agreement. USTR anticipates the WTO Committee will need to discuss this and other issues after Singapore. specific service sectors, including business services and construction and engineering services. Countries are debating in which forums to pursue further liberalization in investment. Therefore, any Singapore proposals to establish a work program for WTO on investment issues will have to take into account negotiations in other forums. Most notable is the OECD, whose members are working to establish a Multilateral Agreement on Investment in 1997 that would be open to both OECD and non-OECD members. Nevertheless, the EU and Canada favor discussing investment rules in the WTO because its membership is larger than the OECD. There is a wide divergence of views among other members; some lesser-developed members oppose negotiations in the WTO, according to USTR. On the other hand, the United States and other nations would like to continue focusing on the OECD negotiations rather than negotiating in the WTO, believing that (1) the OECD has the potential to achieve a higher standard of liberalization (that is, on a par with NAFTA and U.S. bilateral investment treaties) than the WTO could and (2) some WTO members are not ready for such an agreement. Still, the United States supports creating a modest work program to educate WTO members on these issues. National competition or antitrust policies of other countries can affect opportunities and benefits for U.S. exporters and consumers. For example, price-fixing, market sharing, and other monopolistic business practices have been recognized as potential trade barriers. By distorting market competition, these practices can diminish market access opportunities, consumer choices, and other intended benefits of liberalized trade. Anticompetitive practices can also lead to trade disputes. For example, the United States has initiated two WTO dispute settlement proceedings against Japan in cases involving photographic films and paper and distribution services. before determining whether any sort of negotiating program in the WTO is appropriate. USTR has emphasized that the United States will not accept any initiative in the WTO that would threaten U.S. antitrust or antidumping laws. The United States has participated in creating guidelines and in undertaking studies of competition policy issues at the OECD, along with Japan and EU member states. WTO members are currently considering the role of labor standards in the international trade regime. The desire to link international trade and labor issues is not new, but labor issues have been the province of the International Labor Organization (ILO), a specialized agency of the United Nations created in 1919. ILO, whose purpose is to improve working conditions and living standards for workers throughout the world, provides a forum for consideration of various labor issues including the establishment of core labor standards, which currently vary from country to country. At the conclusion of the Uruguay Round negotiations, several members, most notably the United States and some members of the EU, proposed that labor issues be formally brought into the world trading system. However, other WTO member countries in both the developed and the developing world have been concerned that mandated international labor standards may either inhibit their economic development or act as protectionist barriers to their exports. The United States, based on a provision of the Uruguay Round Agreements Act, recommended that the WTO establish a working party to examine the relationship between trade and internationally recognized worker rights. The U.S. proposal does not envision negotiations but seeks to begin discussions limited to how core labor standards and trade can be mutually supportive in promoting growth and development. Thus far, no consensus currently exists either on bringing labor issues into the WTO, or on developing potential linkages between the WTO and ILO, a possible first step. transparency in government procurement. Bribery and corruption increase the cost and risk of conducting business in foreign countries. The difference in the way that U.S. and foreign laws treat these activities can also reduce U.S. companies' access to foreign markets. For example, U.S. legislation passed in 1977 prohibits U.S. companies from engaging in bribery of foreign public officials. In contrast, some other countries do not have criminal penalties for engaging in the bribery of foreign public officials, and in some countries businesses are allowed to take tax deductions for bribery expenses. Other multilateral organizations have already taken steps to address bribery and corruption, with U.S. encouragement. For example, OECD members have agreed to criminalize the acceptance and payment of bribes. Members of the Organization of American States have entered into a treaty that would make this conduct criminal. The OECD has also recommended that member countries eliminate tax deductions for the payment of bribes. The Association of Southeast Asian Nations foreign ministers in a recent forum on the WTO agenda rejected the U.S. proposal to include corruption and other "social clauses" that they did not consider trade related. The United States is promoting efforts to reduce bribery by foreign companies and government officials by encouraging WTO members to sign the Agreement on Government Procurement. To date, only 22 industrialized countries, including the United States, have done so; and none of the least developed countries are signatories. The provisions of the new agreement, which went into effect in 20 countries on January 1, 1996, promote transparency in government procurement procedures and require that countries not discriminate against foreign or foreign-owned suppliers or otherwise allow practices that would preclude competitive procurement. negotiations with individual WTO members over tariff and market access commitments. After these negotiations are concluded, the working party submits a Protocol of Accession and a report to the Ministerial Conference for approval. Accession is approved by a two-thirds majority vote of WTO members. The United States expects the Singapore ministerial meeting to address the broad range of accession applications--rather than single out any particular application for attention. USTR reports there are 31 countries whose applications for accession have been accepted; active negotiations are under way on about 20 of them. Four nations have completed accession negotiations since the WTO entered into force. The United States supports accession of countries capable of and willing to (1) undertake WTO obligations and (2) provide commercially viable market access commitments for goods and services to the WTO. The United States also uses the negotiations to address outstanding bilateral trade issues covered by the WTO. For example, USTR reports that Taiwan has made significant concessions in its bilateral negotiations with the United States over market access, services, and government procurement. Nevertheless, significant issues remain outstanding. The accession of China to the WTO is an issue of intense U.S. interest. China gained observer status to the GATT in 1982 and requested accession to the GATT in 1986. The United States and other nations have insisted that China's accession be approved on the basis of China's willingness to make commercially viable commitments that provide greatly expanded market access and ensure compliance with WTO obligations. U.S.-China bilateral negotiations are ongoing, and a WTO working party meeting on China's accession is scheduled for October 1996. This concludes my statement for the record. Thank you for permitting me to provide you with this information. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO discussed the implementation of the Uruguay Round agreements and the World Trade Organization's (WTO) operations in the context of the upcoming Singapore ministerial meeting. GAO noted that: (1) implementation of the Uruguay Round agreements is complex, and the Singapore meeting will provide WTO member countries with the opportunity to take stock of their implementation efforts; (2) limitations and variations in the amount of information reported by member countries has made it difficult for WTO committees and working groups to oversee implementation of the agreements and a new dispute settlement mechanism; (3) implementation of the WTO Agreement on Textiles and Clothing has been a major area of contention between exporting and importing countries; (4) the United States has many concerns regarding the implementation of commitments to liberalize agricultural trade, and has indicated that it will propose further agricultural reform negotiations; (5) it is not clear whether efforts to liberalize trade in the services sector will be successful, since WTO member countries have been unable to reach final agreements covering some sectors; and (6) it is expected that WTO members will begin work on the next generation of trade issues in such areas as environmental protection, investment rules, competition policy, labor standards, and bribery and corruption at the Singapore meeting.
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In creating AmeriCorps, the Congress chartered a federal corporation to work with the states to fund local national and community service projects. The President appoints a chief executive officer and a 15-member bipartisan board of directors that is confirmed by the Senate to govern the Corporation; each member serves a 5-year term. The board has the authority to review and approve the strategic plan and proposed grant decisions. The Corporation provides grants to AmeriCorps projects directly and through states. To receive AmeriCorps funds, states must establish commissions on national service. These state commissions must have between 15 and 25 members and be composed of representatives from a variety of fields, including local government, existing national service programs, local labor organizations, and community-based organizations. Since AmeriCorps began, 48 states, the District of Columbia, and Puerto Rico have created commissions. These state commissions, in turn, subgrant AmeriCorps funds to local community service projects. The act gives critical program responsibilities to both the federal and state governments. Because national service was intended to address community needs, the act sought to balance a centralized federal program role with state responsibility for planning, implementing, and overseeing most eligible AmeriCorps projects because state governments are thought to be closer to and therefore more knowledgeable about community needs. Although it directly selects and oversees some AmeriCorps projects, the Corporation is primarily responsible for establishing national criteria for determining projects' eligibility for federal funds and for assisting the states in carrying out their program responsibilities. Both the Corporation and the states are jointly responsible for other program areas such as providing training and technical assistance to local AmeriCorps projects. Table 1 lists the Corporation's and the states' responsibilities. AmeriCorps*State/National is the Corporation's flagship AmeriCorps program. AmeriCorps*State/National participants earn an education award of up to $4,725 for full-time service or half that amount for part-time service. A minimum of 1,700 hours of service within a year is required to earn the full $4,725 award. To earn a part-time award, a participant must perform 900 hours of community service within 2 years (or within 3 years in the case of participants who are full-time college students). Individuals can serve more than two terms; however, they can receive only federally funded benefits, including education awards, for two terms. The Corporation allows projects to devote some portion, not more than 20 percent, of participants' service hours to nondirect service activities, such as training or studying for the equivalent of a high school diploma. With regard to attrition, participants can earn prorated education awards if they are released for compelling personal circumstances, such as illness or critical family matters, and have served at least 15 percent of their service term. Participants released for cause are ineligible to receive an education award and may disqualify themselves from future service in AmeriCorps. Participants may be released for cause for a variety of reasons, including being convicted of a felony, chronic truancy, or consistent failure to follow directions. In addition, participants released for cause may include those who leave a project early to take advantage of significant opportunities for personal development or growth, such as educational or professional advancement. Education awards, which are held in trust by the U.S. Treasury, are paid directly to qualified postsecondary institutions or student loan lenders and must be used within 7 years after service is completed. In addition to the education award, AmeriCorps*State/National participants receive a living allowance stipend that is at least equivalent to, but no more than double, the average annual living allowance received by VISTA volunteers--about $7,500 for full-time participants in fiscal year 1996. Additional benefits include health insurance and child care assistance for participants who qualify for such support. Individuals can join a national service project before, during, or after postsecondary education, but must be a high school graduate, agree to earn the equivalent of a high school diploma before receiving an education award, or be granted a waiver by the project. A participant must be 17 or older and be a citizen, a national, or a lawful permanent resident alien of the United States. Selection of participants is not based on financial need. In its fiscal year 1997 appropriations, the Corporation anticipated fielding about 24,000 full- and part-time AmeriCorps*State/National participants. The act created three types of grant awards as funding streams for AmeriCorps*State/National projects: formula, competitive, and national direct. The act lists criteria that state commissions and the Corporation must use in selecting AmeriCorps projects for grant awards. The principal criteria include project quality, innovation, and sustainability. In addition, service projects must address community education, public safety, human, or environmental needs. States may develop additional criteria, based on identified service needs, to use in selecting projects for state formula grants. Similarly, the Corporation develops additional criteria that reflect particular national needs that states use to nominate projects for competitive grant awards and that the Corporation uses to select projects for national direct grants. State formula grants: One-third of the funds appropriated for AmeriCorps*State/National grants are distributed to state commissions strictly on the basis of population. In fiscal year 1995, state commissions were awarded about $67 million to support 262 projects using formula grants. State competitive grants: At least one-third of funds appropriated for AmeriCorps*State/National grants are awarded to state commissions on a competitive basis. The Corporation ranks the highest quality projects among those submitted by the states for these funds. In fiscal year 1995, the Corporation awarded another $64 million to state commissions to finance 103 projects using competitive grants. National direct grants: The Corporation competitively awards the remaining appropriations to public or private nonprofit organizations, institutions of higher education, or multistate organizations. In fiscal year 1995, the Corporation directly awarded about $58 million to support 57 projects using national direct grants. AmeriCorps grantees use grant funds to pay up to 85 percent of the cost of participants' living allowances and benefits and up to 67 percent of other project costs, including participant training, education, and service gear; staff salaries, travel, transportation, supplies, and equipment; and project evaluation and administrative costs. To ensure that federal Corporation dollars are used to leverage other resources for project support, grantees must also obtain support from non-Corporation sources to help pay for the project. This support, which can be cash or in-kind contributions, may come from other federal sources as well as state and local governments, and private sources. In-kind contributions include personnel to manage AmeriCorps*State/National projects and to supervise and train participants; office facilities and supplies; and materials and equipment needed in the course of conducting national service projects. The National and Community Service Trust Act provides for extensive state control of AmeriCorps. State commissions must develop strategic plans that identify state educational, public safety, human, and environmental service needs. On the basis of these plans and the act's criteria, commissions select projects to finance with formula grant funds and nominate other projects to the Corporation as candidates for competitive grants. Commissions have ultimate responsibility for administering both formula and competitive awards. In addition, commissions must monitor and evaluate the performance of the AmeriCorps projects under their purview and assess projects' compliance with state and federal regulations. These reviews determine whether commissions renew funding for AmeriCorps projects in succeeding years. Commission officials in all seven states told us they used a grassroots effort to develop their strategic plans and identify service needs. They said they sought input from a broad cross-section of individuals and organizations to ensure extensive input in identifying state service needs. Most commission officials said they solicited public comment through local and regional meetings and other public forums. For example, one commission mailed meeting announcements to various government, nonprofit, and community-based organizations. Another commission mailed over 1,000 invitations to various service programs and individuals. Another state commission used interactive computer technology to coordinate input from 60 individuals collectively representing over 250 organizations. After developing state plans and prioritizing service needs, commissions used a variety of measures to identify, develop, and select AmeriCorps projects. For example, while some commissions published request-for-proposals packages, others solicited proposals from existing community service and government agencies, and some held regional meetings around the state where local organizations identified community needs and proposed projects to address them. In general, state commissions convened review panels to assess project proposals and rank them according to how well they met the state's needs and priorities as established in the state's strategic plan. One review panel was composed only of the commissioners themselves; others used panels made up of commissioners, commission staff, and local service project officials; while another included citizens with academic and public service backgrounds. State commissioners, using the results of these panels, then selected projects to fund with the state's allotted formula funds or to submit to the Corporation for competition with other state commissions' selections. Commission officials in all seven states told us they based their project monitoring and evaluation protocols on Corporation guidelines. Some state commissions developed additional evaluation and monitoring measures to ensure projects remain in compliance. Commission staff in six of the states conducted project site visits, while in Texas, commissioners themselves conducted on-site reviews. Typically, the commissions used their site visit results and periodic reports submitted by project administrators to determine whether projects effectively achieved project objectives. States chose to organize their commissions in a variety of ways. The seven commissions we reviewed fell into one of three organizational models: (1) part of a preexisting state agency; (2) an independent state agency; or (3) a nonprofit agency. Five commissions operated within existing state agencies. For example, the Virginia commission operated within the state's Department of Social Services. California created its commission as an independent agency, while the Rhode Island legislature decided to charter its state service commission as a nonprofit agency, thereby obtaining tax-exempt status from the Internal Revenue Service. State commissions' administrative budgets and their staffing levels varied significantly among the seven states. For example, in terms of administrative budgets, the Rhode Island commission managed about $183,000, while the California commission managed over $1.3 million in fiscal year 1996. Also, in regard to staffing levels, the Virginia commission employed 1.5 FTE staff, while the California commission employed 18 FTE staff. Both federal and state government contributions defined state commission budgets and their staff resources. Under the act, the Corporation awards administrative grants of between $125,000 and $750,000 to states to help pay for commission operations. Federal administrative grants are limited to 85 percent of a commission's costs in the first year and decrease to 50 percent of costs in the fifth and subsequent operating years. States must contribute either cash or in-kind resources to obtain administrative grants. Among the seven states, the type (cash or in-kind) and amount of support provided by the state varied. Table 2 lists the commissions' total budgets and staffing levels for fiscal year 1996. During the 1995-96 program year, the number of AmeriCorps projects in the seven states varied depending on (1) the number of projects commissions financed with their allotted formula funds, (2) the number of projects that won competitive funding, and (3) the number of projects funded directly by the Corporation rather than by the state commissions. The number of formula-funded projects ranged from a low of 1 in Rhode Island to a high of 19 in California. The number of projects awarded competitive grants ranged from none in Virginia to eight in Texas. The number of national direct projects administered by the Corporation in the seven states also varied. While only 1 national direct project operated in Virginia, 18 such projects operated in California. Table 3 lists the number of state commission formula and competitive projects and the number of national directs projects in each state. For the 24 projects we reviewed, outputs and characteristics varied extensively. We reviewed information on enrollment, attrition, and participants' use of education awards for each project. In addition, we obtained data on projects' expenditures and the source of projects' financial support. To calculate enrollment, we added the number of full- and part-time participants that began a term of service for each project. We calculated attrition rates on two bases: (1) the number of participants who ended service early for cause and (2) the combined total of participants who ended service early for cause and for compelling personal circumstances. We determined education award usage based on the number of participants who earned either a full or prorated education award and the number of participants who had used either part of or the full value of their awards at the time of our review. The following points illustrate the extent of variability among the projects: Participant enrollment: AmeriCorps enrollment ranged from 21 to 350 participants. The median enrollment was about 46 participants. Attrition rates: The attrition rate for participants who ended service early for cause ranged from 3 to 58 percent. The median attrition rate was 22 percent. The overall attrition rate--participants who ended service early for either cause or compelling personal circumstances--ranged from 9 to 95 percent, and the median was 39 percent. Education award usage: The proportion of participants who accessed their education award ranged from 17 to 78 percent. The median was 54 percent. Appendix II lists projects' enrollment, attrition rates, and participant education award usage. Project-level expenditures also varied widely. Our expenditure data excluded funding for education awards and for state commission and Corporation administrative expenses. Projects obtained cash support and in-kind resources to cover their expenditures from the Corporation, other federal agencies, state and local governments, and the private sector. The projects' expenditures ranged from $206,000 to $3.9 million. The median expenditure was $627,000. The share of these expenditures that were supported by the following sources was corporation grants--0 to 78 percent (the median was 66 percent), public sector resources--49 to 100 percent (the median was 83 percent), private sector sources--0 to 51 percent (the median was 17 percent). Figure 1 illustrates private sector support for all 24 projects. Appendix III lists detailed expenditure data for all 24 projects. One of the National and Community Service Trust Act's objectives is to help the nation address its unmet human, education, environmental, and public safety needs. The projects included in our sample all reported diverse service activities that address one or more of these needs. While some projects' service activities were focused on meeting a particular need within the community, such as housing, other projects' activities addressed multiple areas of need, such as environmental and education needs. In the project reports we reviewed in detail, participants organized food programs that served 2,500 children; assisted with totally rehabilitating 16 vacant public housing units; operated a 7-week summer reading camp for 36 children; planted trees, removed debris, and created gardens improving 32 urban neighborhoods; and provided parenting classes to low-income families. State commissioners and executive directors in all seven states agreed with senior Corporation officials that a federal role in the AmeriCorps program is needed. None of these officials believed that eliminating the federal Corporation and simply allocating funds directly to state commissions would serve the program well. While some state officials told us that the grant allocation process warrants significant change, other state officials noted the indispensability of federal oversight. Corporation officials believed that a federal role is needed for conducting nationwide data gathering on the AmeriCorps program, evaluating the performance of AmeriCorps projects and state commissions, and providing a central repository of information on the "best practices" of individual AmeriCorps projects and state commission operations. All seven state commission executive directors agreed that a federal role is necessary to provide the AmeriCorps program with a national identity. According to these officials, a national identity helps AmeriCorps projects obtain widespread public support. They told us that national identity provides AmeriCorps participants with a sense that the benefits of their service extend not only to themselves and their communities, but to the whole nation. Furthermore, they said AmeriCorps' name recognition and positive reputation help local projects recruit participants. To promote national identity, the Corporation provides AmeriCorps projects national advertisement, service gear, and the means to network with other projects across the country to share experience and knowledge. In addition, the Corporation encourages projects to adhere to certain standardized elements such as the ethic reflected by the Corporation's slogan "getting things done," a standard orientation and pledge, and participation in national events. Most commission officials also welcomed the federal oversight of AmeriCorps. Some officials told us that while reducing the federal role could save money, a lack of oversight would spawn fraud, waste, and abuse. Several commission officials, for example, expressed concern that, without federal oversight, other state officials might bypass commission offices and fund projects, regardless of whether they meet national service priorities, to serve partisan agendas. Another official said that without a federal role, the AmeriCorps program would become wholly dependent on the support of the states' executive leadership, noting a fear for the future of their states' AmeriCorps programs if elected governors do not support national service. Corporation officials agreed that a national identity for the AmeriCorps program is important and that a federal role provides it. They also noted that the federal government has a vital role in evaluating the AmeriCorps program, sharing evaluation results with others, and developing and increasing the evaluation capacity of state commissions. They believe that such a role helps to address the disparity between state commissions' competence and performance by, in part, serving as a central repository of information on successful AmeriCorps projects and state commission management strategies. Furthermore, evaluating projects and state commissions ensures that federal taxpayer dollars are efficiently and effectively used to finance legitimate national service projects. Commission officials in the seven states disagreed on whether states should have more control over federal grant funds, particularly in terms of allocating federal funds. Some commission officials supported allocating all three types of grants (formula, competitive, and national direct) to the states based on population. The California contingent advocated allocating all AmeriCorps grant funds to states using a population-based formula. California officials argued that the Corporation's competitive grant-making process is redundant because it occurs after states review and select projects for funding on their own. In addition, these officials told us that federal selection of AmeriCorps projects usurps the state commissions' right to exercise their best judgment, expertise, and creativity in administering national service projects in their states. Other officials told us that the competitive grant-making process promotes equity and ensures that the relatively higher quality projects receive funding. Officials in Rhode Island argued that the competitive grant-making process provides a more equitable distribution of national resources than strict population-based allocations. They said that such simplistic methods arbitrarily penalize states with small populations and reward states with large populations, while ignoring the variability in quality among national service projects. Officials in other states told us that commissions themselves, rather than individual projects, should compete for federal grants. Officials in Maryland and Texas told us that the Corporation should allocate federal AmeriCorps grants to states on the basis of commissions' demonstrated ability to effectively manage quality national service projects in their states. They argued that the Corporation should treat different states differently, taking into account states' unique service needs. Neither Maryland nor Texas officials, however, had developed a set of suggested criteria for the Corporation to use to make such determinations. Senior Corporation officials told us that they are not certain the competitive process used, in part, to allocate funds to state commissions achieves the quality control over project selection that was originally anticipated. They oppose, however, allocating all available funding to state commissions based simply on population demographics. Corporation officials stated that such a method does not take into account the differing abilities of state commissions to administer and oversee AmeriCorps projects, noting that two states have yet to even appoint state commissions. In addition, these officials believe that national direct projects play an important role in the AmeriCorps program and should receive grants directly from the Corporation. While these officials told us that in the future the Corporation may recommend that the Congress change the act's grant allocation process, they had no specific proposals for the Congress to consider at the time of our review. Some state commission officials we visited told us that giving states more control over the AmeriCorps program would eliminate or alleviate current problems they have coordinating with AmeriCorps projects operating in their state. Historically, national direct projects were not required to coordinate with state commission officials, which some commission officials cited as a point of frustration. These officials told us that the public holds them culpable for the actions of national direct AmeriCorps projects because the public does not distinguish between national direct projects and state-administered projects. In addition, some state commission officials said they doubt that out-of-state nonprofits fully understand the needs of local communities in their states. Corporation officials acknowledged the difficulties that some states have experienced coordinating with national direct projects. To ameliorate this problem, an official said that as of January 1997, the Corporation requires national direct grantees to coordinate with the relevant state commission officials. In addition, in the future, state commissions can provide comments on the Corporation's national direct grant selections, which these Corporation officials believe will also help eliminate this coordination problem. Corporation officials told us, however, that national direct grants play an essential program role. They argued that community service is central to the mission of many national nonprofit organizations and that these organizations are, by and large, the recipients of such grants. Specifically, these officials believe that national direct grants help (1) attract national nonprofit organizations to the AmeriCorps program, (2) achieve a more efficient and less bureaucratic method of administering projects that operate in several states, and (3) recruit nonprofit organizations with the economies of scale that could allow the Corporation to dramatically decrease its per-participant costs by funding only the portion of projects' expenses associated with providing participants their education awards. In commenting on our report, the Corporation stated that in calculating attrition rates, we should not have included participants who leave projects early to take advantage of opportunities for educational or professional advancement because such departures do not reflect on program quality. We did not, however, use attrition rates or any other output as a project quality index and, therefore, did not modify our calculations. Although the Corporation believes that the term "outputs" should characterize only project accomplishments, we use the term to characterize participant enrollment, project attrition, education award usage, and project expenditures--a use of the term that is consistent with long-standing conventions of social science research. The Corporation also stated that a complete analysis of education award usage may not be available for several years because participants have up to 7 years to use their awards. Our education award calculation represents a snapshot in time, and our report describes the 7-year interval. The Corporation suggested other changes that were primarily technical and editorial in nature. We revised the report as appropriate, defining our use of the terms "project" and "program," for instance, and clarifying that we used the most current and appropriate data available for our analysis. We are sending copies of this report to the appropriate House and Senate committees and other interested parties. We will also make copies available to others on request. If you have any questions about this report, please call me at (202) 512-7014 or Jeff Appel, senior evaluator, at (617) 565-7513. This report was prepared under the direction of Wayne B. Upshaw, Assistant Director. Ben Jordan, evaluator, also contributed to this report. Participants work to meet the needs of at-risk youth through peer counseling, health education/outreach, gang intervention, conflict resolution, alcohol/drug counseling and education, outreach to homeless youth, after-school recreation, tutoring, and child care. Participants serve in a citywide partnership to develop neighborhood-based service projects. Members mentor/tutor community youth, provide training in conflict management skills, and engage individuals in physical improvement projects. Participants serve in teams to plan and perform activities, including rural and urban environmental projects, trail construction and maintenance, tree planting, city infrastructure maintenance, and organizing city youth activities. Participants tutor and counsel at-risk youth, develop and operate after-school programs, deliver basic health care services, and implement physical improvement projects through a 19- organization partnership. Participants provide independent living assistance and health care to homebound elderly individuals, enlarge area food pantries, create youth literacy programs, and develop educational programs for Head Start students in Appalachian Maryland. Participants tutor low-income students, in a tri-county area, using a cascading leadership model. Participants supervise high school students who, in turn, act as mentors and tutors for middle and elementary school students. Participants work in rural, urban, and suburban areas of the state through a collaboration among the Maryland Conservation Corps, Civic Works, and Community Year. Participants work to stabilize soil erosion, build community gardens, and rehabilitate homes for low-income families. Participants conduct home visits to the chronically ill and provide health service referrals. Participants also tutor first-grade students, develop structured after-school intergenerational activities, and teach school readiness skills to preschool children. Grace Hill AmeriCorps RiverFront Trail Project Participants help conserve the Mississippi Riverfront by restoring and beautifying trails. Participants work to increase the educational success of urban youth by organizing outdoor recreational and educational activities and by planning weekly summer educational events. Participants serve the St. Joseph area by developing academic laboratories in schools, organizing and conducting neighborhood cleanup projects and recycling programs, and working with children to establish community gardens that provide food to local food pantries. Participants work to reduce violence against children by recruiting tutors and mentors to work with high-risk youth, developing a literacy program for parents, developing after-school and summer programs, and working with juvenile authorities to develop service projects for youthful offenders. Participants work to increase the capacity of schools to improve the achievement of fourth- through eighth-graders in low-income communities and identify and train volunteers to develop service projects in literacy, the environment, first aid and personal safety, and substance abuse prevention. (continued) Participants provide a range of services for at-risk students of all ages, including preschool assistance, tutoring for school-aged youth and adults, and referral services. Participants serve in teams to strengthen communities by tapping the resources of local residents, business, and nonprofit organizations. Participants provide services such as mentoring/tutoring students from kindergarten through seventh grade and participating in community gardening, low-income housing, and after-school programming. Participants work to improve low-income areas by building energy-efficient homes using least toxic materials and alternative building methods. Participants also renovate and weatherize existing homes to save on energy costs. Participants serve children living in poverty by offering nutritious food and enrichment activities at summer food sites, tutoring and mentoring at schools, providing violence prevention/conflict resolution activities, and facilitating access to health care. Participants provide parenting education services at schools and community nonprofit organizations. Participants conduct home visits, community outreach and recruitment, teen parent mentoring, and developmental screening, and provide child care for teen parent students. Participants operate after-school service-learning programs in elementary schools. Participants work in teams with other youth from varied backgrounds to strengthen the community in areas including the environment, hunger and homelessness reduction, and public safety. Participants work to rehabilitate, revitalize, and maintain public housing units in their own communities. Participants serve as outreach workers for community-based organizations that provide tutoring/mentoring, parenting skill workshops, physical exams and immunizations, conflict resolution training, and prenatal health education. Participants teach conflict resolution skills, provide tutoring and frontline gang intervention, and implement after-school, late night, and summer recreation programs for rural and Native American youth. Participants also provide independent living support to mentally ill adults. Participants rehabilitate low-income housing units and construct new housing for emergency and transitional living. Participants also work to restore habitats for native plants, vegetation, and wildlife. They are also involved in developing recreational areas in state parks and improving hiking and biking trails. Participants work to improve water quality and restore a reduced salmon population by rehabilitating damaged watersheds and building fences to prevent erosion. Participants serve in various agencies across the state on a wide range of projects, including developing a statewide literacy initiative for recent immigrants, providing at-risk youth with service alternatives to gang activity, and concentrating services to a needy, isolated Native American reservation. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a legislative requirement, GAO reviewed state commissions' capacity to absorb additional AmeriCorps program management responsibility, focusing on: (1) the statutory role of state commissions; (2) state commission operations, including project-level outputs from national service projects within their purview, such as participant enrollment and expenditure data; and (3) extending state commissions' administrative and oversight role over AmeriCorps and correspondingly decreasing the federal government's role. GAO found that: (1) by assigning state commissions significant responsibilities, the National and Community Service Trust Act of 1993, in effect, emphasizes state control of the AmeriCorps program; (2) these responsibilities include developing a statewide service infrastructure, selecting and funding AmeriCorps projects, and monitoring and evaluating projects; (3) state commissions directly control two-thirds of the federal funds available for AmeriCorps projects; (4) for fiscal year 1995, state commissions received $131 million of $192 million available in federal funding; (5) GAO's review of seven state commissions indicated that all are performing program management activities envisioned by the act, but vary in terms of their infrastructures and project outputs; (6) operational resources of the state commissions in GAO's sample varied widely; (7) for selected projects, outputs also varied both within and among the state commissions; (8) officials from the seven state commissions agreed on the need for a federal role in AmeriCorps, but disagreed on how much federal control is desirable; (9) on one hand, all officials agreed that only a federal entity can provide AmeriCorps with a national identity, which they considered essential; (10) on the other hand, they disagreed on the role the Corporation for National and Community Service should play in allocating AmeriCorps funding grants; (11) senior Corporation officials agreed with state officials that a federal role is necessary to provide the AmeriCorps program with a national identity; (12) they also stated that a federal role is necessary to conduct performance evaluations of national service projects and state commissions; (13) these officials acknowledged that changes to the funding allocation process might better achieve the Corporation's quality control objectives and said they may recommend changes to Congress when it considers reauthorization of the act; and (14) Corporation officials noted that, notwithstanding their view that the act gave the states a substantial degree of control over the program, they have initiated actions to increase state commissions' autonomy.
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The Secure Rural Schools Act was enacted to help address fiscal difficulties confronting rural counties having substantial federal lands and a history of federal timber harvesting. The act, as reauthorized, comprises three principal titles. Under Title I, counties are to use the majority of payments they receive for the same purposes for which they used federal receipts, in most cases for the benefit of roads and schools. Under Title II, counties may reserve a portion of the payments to fund certain land management projects that benefit federal lands. Title III authorizes the use of a portion of the payments for certain purposes related to wildland fire and emergency services on federal lands. These authorized uses include carrying out certain activities to increase the protection of people and property from wildland fires under the Firewise Communities program, reimbursing the county for search and rescue and other emergency services performed on federal land, and developing community wildfire protection plans to help protect homes and neighborhoods. Title III requires counties to follow certain administrative requirements, including publishing public notices of proposed uses for the payments and submitting annual certifications of Title III expenditures to either the Forest Service or BLM, as appropriate, stating that any Title III funds spent in the previous year went toward authorized uses. For fiscal years 2008 through 2011, 358 counties received a total of $108 million for Title III projects, and individual counties received from about $3,600 to over $2 million in a single fiscal year for such projects. The Forest Service and BLM are responsible for carrying out certain parts of the Secure Rural Schools Act. Both agencies calculate the amounts that counties are to receive each year, and both agencies are required by the act to review the counties' certification of Title III expenditures as the agencies determine to be appropriate. The act also requires the agencies to issue regulations to implement the act, although it does not describe what the regulations are to address or establish a deadline for issuing them. In our July 2012 report, we found that the Forest Service and BLM had taken few actions to oversee county spending under Title III of the Secure Rural Schools Act and that the guidance they provided was limited and, in some cases, did not appear consistent with the act. We also found that some expenditures by selected counties we contacted may have been inconsistent with the act--which may have resulted in part from the limited guidance available from the agencies--and that counties we reviewed did not consistently follow Title III's administrative requirements. In July 2012, we reported that neither the Forest Service nor BLM had issued regulations under the act and that the guidance the agencies had issued was limited and sometimes unclear. We expressed particular concern that the agencies had not developed regulations or clear guidance because the act itself does not define key terms. For example, the act authorizes counties to use Title III funds for "search and rescue and other emergency services, including firefighting, that are performed on federal land" but does not specify the types of activities covered by this phrase.certain provisions open to varying interpretations, and available guidance from the agencies had done little to clarify this language, counties had generally been left to make their own interpretations about which types of expenditures are allowable under Title III and which are not. We concluded that because the language of the law leaves To provide guidance, the Forest Service had developed a brief overview of Title III, which generally echoed wording in the act, and a "frequently asked questions" document responding to questions on authorized uses of Title III funds. At the time of our report, agency officials told us they believed the frequently asked questions document provided sufficient clarity for counties to use when considering how to spend Title III funds. Officials from several counties we contacted, however, told us they found these documents to be of little help, and our review of these documents found that they did not clearly define terms from the act or specify which types of expenditures were allowed under the act and which were not. For example, the act authorizes counties to use Title III funds for "search and rescue and other emergency services, including firefighting, that are performed on federal land" but does not define the types of activities covered by this phrase. Neither of the Forest Service documents defined such activities. In addition, in the frequently asked questions document, the Forest Service listed eight specific uses of Title III funds--including purchase of capital equipment, capital improvements, purchase of land, and training for emergency response--and asked, "Are Title III funds authorized for the following uses?" Instead of answering the question directly, the documents stated that for certain uses--such as construction of facilities, purchase of real property, and purchase of vehicles and other capital equipment--the act does not explicitly authorize these uses. It then further stated that reimbursement for certain uses--such as the purchase of replacement equipment damaged or destroyed during an emergency response or maintenance of vehicles and equipment in proportion to their actual use for emergency services performed on federal land--may be allowable. We concluded that such statements were confusing and unclear. Further, our review showed that, in addition to being unclear, the Forest Service's frequently asked questions document appeared to be inconsistent with certain provisions of the act. For example, the act authorizes counties to use Title III funds to carry out activities under the Firewise Communities program to educate homeowners about, and assist them with, techniques in home siting, construction, and landscaping. Forest Service guidance documents, however, defined Firewise Communities as an approach that, among other things, "emphasizes community responsibility for planning in the design of a safe community as well as effective emergency response." The documents did not emphasize the act's requirement that counties' Firewise activities with Title III funds must be limited to providing fire-related education or assistance to homeowners. Moreover, the frequently asked questions document stated that developing emergency 9-1-1 systems under Firewise--which is not an activity clearly authorized under the act--may also be an authorized use of Title III funds. We raised concerns that including emergency response in a definition of Firewise and suggesting that developing 9-1-1 systems may be an authorized activity under the act could lead some counties to interpret the act as allowing expenditures that improve the county's emergency response--a use not clearly authorized under the act. Our report also raised issues related to counties' certification that any Title III funds spent in the previous year went toward uses authorized under the act. For example, we found that the Forest Service and BLM had jointly developed a process to assist counties in certifying their Title III expenditures but that the information the agencies directed the counties to submit--typically the amount spent in each of the three allowable Title III spending categories but without further details regarding actual activities--did not allow either agency to determine whether counties spent their Title III funds appropriately. In addition, the act requires counties to submit certifications only for the years they have spent funds, and we found that neither the Forest Service nor BLM had a process to contact counties that did not submit a certification to determine if these counties spent no Title III funds that year or had simply not submitted the required certification. Some county officials we interviewed said they had not submitted certifications even when their counties had Title III expenditures the previous year. Overall, we found that of the $108 million in Title III payments provided to 358 counties for fiscal years 2008 through 2011, the counties had certified having spent about $46 million--or less than half the total amount--by the end of calendar year 2011. However, because the agencies did not have a process to ensure an accurate accounting of the amounts of Title III funds spent and unspent, we concluded that it was unclear whether the amounts were accurate and that it would be difficult to ensure that counties return to the U.S. Treasury any funds that remain unobligated upon the act's expiration, as the act requires. We also found that expenditures by counties we contacted for our 2012 report did not in all cases appear consistent with the act. These counties reported using Title III funds for projects that were generally aligned with the three broad purposes of Title III--wildland fire preparedness, emergency services on federal land, and community wildfire protection planning-- and some counties reported expenditures that were clearly authorized by the act. Nevertheless, we identified various expenditures by some counties that may not have been consistent with specific requirements of the act, such as the following examples: Wildland fire preparedness. Title III authorizes counties to spend funds for activities carried out under the Firewise Communities program but specifies that these activities are to involve educating or assisting homeowners with home siting, home construction, or home landscaping to help protect people and property from wildfires. Some counties we reviewed used Title III funds on broad emergency preparedness activities that may not be consistent with the 2008 act. For example, two counties we reviewed told us they spent part of their Title III funds to clear vegetation along roads, some of which are potential emergency evacuation routes, and others said they removed vegetation from county lands, parks, schools, or cemeteries or from larger swaths of land to create fuel breaks--locations not directly associated with home siting, home construction, or home landscaping. In addition, four counties used Title III funds to update their 9-1-1 telephone systems, according to county officials--an activity not clearly authorized by Title III (although, as noted, agency guidance stated that such an activity may be allowable). Emergency services on federal land. Title III authorizes counties to use funds as reimbursement for search and rescue and other emergency services, including firefighting, that they perform on federal lands. Some counties we reviewed spent Title III funds on activities that may not have been consistent with this requirement. For example, instead of reimbursements for specific incidents, a number of counties used Title III funds to pay a portion of their fire or emergency services departments' salary and administrative costs, including office supplies, utility costs, or insurance. As justification for this approach, these counties cited the high percentage of federal land in their counties or the difficulty in breaking out the costs of emergency services on federal versus nonfederal land. Some counties we reviewed also used the funds to carry out routine law enforcement patrols on federal land; officials from one of these counties told us that these patrols help reduce and deter criminal activity and enhance visitor safety on federal lands. In addition, some counties reported that, to maintain access to federal lands, they used Title III funds to help rebuild flood-damaged roads, and some reported using funds to purchase equipment, such as radios and GPS equipment, sonar equipment, watercraft, all-terrain vehicles, snowmobiles, and trucks for patrols. Community wildfire protection planning. The act authorizes counties to use Title III funds "to develop community wildfire protection plans in coordination with the appropriate Secretary concerned." Some counties we reviewed reported Title III expenditures for wildfire protection planning activities that may not be consistent with this provision. For example, one county used Title III funds to purchase vehicles having firefighting capabilities, as well as other equipment associated with emergency response. Another county used Title III funds to contract for firefighter dispatch and suppression services. Officials from this county explained that county emergency service units cannot reach certain remote areas quickly, so they contract with a state agency to provide dispatch and suppression services during the heavy wildland fire season, and because the area served is largely federal land, the county pays for a portion of the contract costs with Title III funds. We also found that counties we reviewed did not consistently follow Title III's administrative requirements. Title III requires counties to certify expenditures to the Forest Service or BLM annually and provide 45-day notification to the public and any applicable resource advisory committee before spending funds. The 2008 act also required projects to be initiated by September 30, 2011. Our review identified instances where counties did not follow the requirements, including: Certification. Some counties did not submit certifications at all or submitted their certifications late, some certified expenditures for multiple years simultaneously, and some acknowledged putting incorrect information on the certification form. We found various reasons for counties' not complying with the certification requirements in the act. Three counties, according to county officials we interviewed, did not submit their certifications to the Forest Service for the years they spent funds because they were unaware of the requirement to do so. Two other counties submitted certification forms for some but not all years in which they spent funds, and many counties submitted their certification forms after the deadline specified in the act, in some cases because they were initially unaware of or overlooked the requirement to do so. Public notification. The act directs each county, before moving forward with Title III projects, to publish a proposal describing its planned use of Title III funds in local newspapers or other publications, after which the county must allow a 45-day comment period before using the funds. Some counties in our review followed only part of the public notification requirement. For example, some counties published notices in their local newspapers but did not allow for a 45-day comment period before moving ahead with projects or activities, according to county officials and documents, while other counties issued public notices in some years but not in others. We also found four counties that did not issue any public notices on their Title III project proposals; officials from these counties told us that they were unaware of the requirement to do so. Notice to resource advisory committees. Some counties in our review did not notify the relevant resource advisory committees of their Title III projects, as required under the act. County officials cited a number of reasons for the lack of notification, including (1) they were unaware of the requirement to do so; (2) the committee meets only once a year in the summer, which does not coincide with the county's timeline for the Title III budgeting process; and (3) the county planned to notify the resource advisory committee but did not because a local Forest Service official stated that resource advisory committees were involved only in Title II, not Title III projects--even with a specific reference to such committees in Title III of the act. Project initiation. Some counties did not initiate projects by September 30, 2011, as required by the 2008 act.interviewed provided a number of reasons why they missed this deadline. For example, counties did not receive their Title III funds for fiscal year 2011 until 2012, and officials in one county told us that their county's guidelines prohibit starting projects before funding is actually received. Another county had not initiated all of its Title III projects because some of its previous projects had cost less than estimated, unexpectedly leaving the county more Title III funds to spend; county officials told us that they were selecting additional Title III projects on which to use the extra funding. The 2008 act also required Title III funds to be obligated by September 30, 2012, and officials from nearly all counties in our review that had spent funds told us they anticipated doing so. However, as noted, the agencies did not have a process to ensure an accurate accounting of the amount of Title III funds spent and unspent, making it difficult to ensure that unobligated funds are returned to the U.S. Treasury when the act expires. In response to our recommendation that the agencies strengthen their oversight by issuing regulations or clear guidance specifying the types of allowable county uses of Title III funds, the Forest Service and BLM provided additional guidance to counties, which clarifies the types of allowable uses of county funds. In addition, the agencies reported that they plan to update their expenditure reporting requirements for Title III funds, so that counties report not only funds expended the previous year but also amounts remaining unobligated. Regarding guidance, soon after our report was issued in July 2012,agencies updated their websites to provide substantial additional information on allowable expenditures under the act. Given that this information includes specific discussion about, and numerous examples of, expenditures that are and are not authorized by the act, we believe the that this additional guidance addresses our recommendation. The guidance addressed each of the three main areas of allowable spending under Title III, as follows: Wildland fire preparedness. As we noted, several counties reported expending funds for broad emergency preparedness activities under the Firewise Communities program that did not appear consistent with the act because they did not involve providing fire-related education or assistance to homeowners. This issue is specifically addressed in the guidance, which now states that Title III authorizes funds to be "spent on Firewise Communities program activities that (1) educate homeowners in fire-sensitive ecosystems about techniques in siting (positioning or locating) a home, constructing a home, landscaping and maintenance around a home. . .or (2) assist homeowners in implementing these techniques" (emphasis in original). The guidance goes on to list examples of activities that are authorized--such as disseminating Firewise information or assisting with "clean-up days"-- and those that are not--such as updating 9-1-1 systems or clearing vegetation along emergency evacuation routes or from county lands, parks, schools, cemeteries, or other larger swaths of land not directly associated with home siting. Emergency services on federal land. Likewise, the guidance addresses concerns we raised about whether certain projects related to emergency services on federal land were clearly consistent with the act. The guidance, among other things, clarifies the definition of emergency services and provides lists of expenses that are authorized (e.g., salary or wages of emergency response personnel deployed during an emergency response) and those that are not (e.g., routine sheriff's patrols of national forest roads and campgrounds, cleanup after a flood event, and purchase of capital equipment or real property). Community wildfire protection planning. The guidance also addresses concerns we raised about development of community wildfire protection plans by clarifying authorized uses and illustrating those that are not authorized, including the implementation of activities described in such plans. Regarding annual reporting requirements on the part of counties, both agencies updated the certification form for counties to use in certifying Title III expenditures, so that counties must report not only on the funds expended the previous year but also on the amount of their Title III funds that remain unobligated. Such an update is consistent with guidance provided by Agriculture's Office of General Counsel in response to a Forest Service request for legal advice on its role in counties' return of unobligated Title III funds. The update is likely to allow the agencies a more accurate accounting of the overall amounts of Title III funds spent and unspent--a need we noted in our report. In our July 2012 report, we also suggested that if Congress chooses to extend Title III beyond the 1-year reauthorization enacted in 2012, it should consider revising and clarifying the language of Title III to make explicit which types of expenditures are and are not allowable under the act. Given that the agencies have issued guidance that we believe clarifies the allowable uses of Title III funds, there may be less need for changes to the language of the act itself. Nevertheless, it will be important to monitor counties' Title III expenditures to observe whether the incidence of expenditures that appear inconsistent with the act diminishes in the wake of the additional guidance the agencies have issued. Chairman Wyden, Ranking Member Murkowski, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff have any questions about this testimony, please contact me at (202) 512-3841or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this testimony include Steve Gaty (Assistant Director), Ellen W. Chu, Jonathan Dent, Richard P. Johnson, Lesley Rinner, and Leigh McCaskill White. 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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Under the Secure Rural Schools Act, counties with federal lands may elect to receive payments to help stabilize revenues lost because of declining federal timber sales. Under Title III of the act, counties are authorized to use these funds for certain projects related to wildland fire and emergency services on federal lands. The act provides oversight roles for the Forest Service and BLM, requiring them to review counties' certification of their Title III expenditures as the agencies determine to be appropriate and to issue regulations to carry out the act's purposes. GAO reported to this committee in July 2012 that the agencies had provided limited oversight of county spending under Title III and that, although the projects for which counties reported using Title III funds were generally aligned with the broad purposes of Title III, county spending did not in all cases appear consistent with specific provisions of the act. This testimony describes (1) key findings of GAO's July 2012 report on oversight and implementation of the act (GAO-12-775) and (2) actions the agencies have taken to strengthen oversight of county spending since the July 2012 report was issued. The testimony is based primarily on GAO's 2012 report and includes selected updates conducted in March 2013 on actions the agency has taken in response to that report. GAO is making no recommendations in this testimony. In July 2012 GAO recommended that the agencies strengthen their oversight by issuing regulations or clear guidance. The agencies concurred, and took action to implement this recommendation. In July 2012 GAO reported that the Forest Service and Bureau of Land Management (BLM) had taken few actions to oversee county spending under Title III of the Secure Rural Schools and Community Self-Determination Act, and that the guidance they provided was limited and in some cases did not appear consistent with the act. GAO also reported that some expenditures by selected counties may have been inconsistent with the act--which may have resulted in part from the limited guidance available from the agencies--and that reviewed counties did not consistently follow Title III's administrative requirements. Specifically, GAO found the following: Neither the Forest Service nor BLM had issued regulations under the act, and the guidance the agencies had issued was limited and sometimes unclear. Forest Service guidance, for example, did little to clarify language in the act, neither defining terms from the act nor specifying which types of expenditures were allowed under the act and which were not. The absence of clear guidance or regulations was of particular concern to GAO because the act itself does not define key terms. For example, the act authorizes counties to use Title III funds for "emergency services" but does not specify the types of activities covered by this term. Moreover, the agencies did not have assurance that they had an accurate accounting of the amounts of Title III funding spent and unspent by the counties, which is important because the act requires unobligated funds to be returned to the U.S. Treasury upon the act's expiration. The counties GAO reviewed reported using Title III funds for projects that were generally aligned with the three broad purposes of Title III--wildland fire preparedness, emergency services on federal land, and community wildfire protection planning--but GAO identified certain expenditures by some counties that may not be consistent with specific requirements of the act. Such expenditures included funding for activities such as clearing vegetation along evacuation routes, updating 9-1-1 systems, and conducting routine law enforcement patrols on federal land. Some counties GAO reviewed reported using funds to purchase equipment, such as radios and GPS equipment, sonar equipment, watercraft, all-terrain vehicles, snowmobiles, and trucks for patrols. Counties also did not consistently follow Title III's administrative requirements, which include annual certification of expenditures, 45-day notification periods to the public and others before spending funds, and deadlines for project initiation. For example, some counties did not submit a certification for certain years when they spent funds, some counties submitted their certifications late, and some counties did not consistently follow notification and project initiation requirements. Since GAO's report was issued, the Forest Service and BLM have provided additional guidance to counties, which clarifies allowable uses of Title III funds. In addition, the agencies reported that they plan to change their requirements for annual reporting of expenditures to obtain additional information regarding the extent to which counties have obligated their Title III funds. The additional guidance addresses the recommendation in GAO's July 2012 report.
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NOAA operates GOES as a two-satellite system that is primarily focused on the United States. These satellites are uniquely positioned to provide timely environmental data about the earth's atmosphere, its surface, cloud cover, and the space environment to meteorologists and their audiences. They also observe the development of hazardous weather, such as hurricanes and severe thunderstorms, and track their movement and intensity to reduce or avoid major losses of property and life. Furthermore, the satellites' ability to provide broad, continuously updated coverage of atmospheric conditions over land and oceans is important to NOAA's weather forecasting operations. To provide continuous satellite coverage, NOAA acquires several satellites at a time as part of a series and launches new satellites every few years (see table 1). NOAA's policy is to have two operational satellites and one backup satellite in orbit at all times. Four GOES satellites--GOES-10, GOES-11, GOES-12, and GOES- 13--are currently in orbit. Both GOES-11 and GOES-12 are operational satellites, with GOES-12 covering the east and GOES-11 the west. GOES-13 is currently in an on-orbit storage mode. It is a backup for the other two satellites should they experience any degradation in service. GOES-10 is at the end of its service life, but it is being used to provide limited coverage of South America. The others in the series, GOES-O and GOES-P, are planned for launch over the next 2 years. NOAA is also planning the next generation of satellites, known as the GOES-R series, which are planned for launch beginning in 2015. NOAA plans for the GOES-R program to improve on the technology of prior series, in terms of both system and instrument improvements. The system improvements are expected to fulfill more demanding user requirements by updating the satellite data more often and providing satellite products to users more quickly. The instrument improvements are expected to significantly increase the clarity and precision of the observed environmental data. NOAA originally planned to acquire six different types of instruments. In September 2006, however, NOAA decided to reduce the scope and technical complexity of the GOES-R program because of expectations that total costs, which were originally estimated to be $6.2 billion, could reach $11.4 billion. Specifically, NOAA reduced the minimum number of satellites from four to two, cancelled plans for developing a critical instrument--the Hyperspectral Environmental Suite (which reduced the number of planned satellite products from 81 to 68), and divided the Solar Imaging Suite into two separate acquisitions. The agency estimated that the revised program would cost $7 billion. In addition to the reductions in scope, NOAA also delayed the launch of the first satellite from September 2012 to December 2014. NOAA is solely responsible for GOES-R program funding and overall mission success. However, since it relies on the National Aeronautics and Space Administration's (NASA) acquisition experience and technical expertise to help ensure the success of its programs, NOAA implemented an integrated program management structure with NASA for the GOES-R program. Within the program office, there are two project offices that manage key components of the GOES-R system--the flight and ground segment project offices. The flight project office, managed by NASA, is responsible for awarding and managing the spacecraft segment contract, delivering flight-ready instruments to the spacecraft segment contractor for integration onto the satellites, and overseeing the systems engineering and integration. The ground segment project office, managed by NOAA, oversees the ground contract, satellite data product development and distribution, and on-orbit operations of the satellites. NOAA and NASA have made progress on the GOES-R program. In January 2008, NOAA approved the program's move from the preliminary design and definition phase to the development phase of the acquisition life cycle. This approval also gave the program the authority to issue the requests for proposals for the spacecraft and ground segment projects--which it did in January 2008 and May 2008, respectively. The program office plans to award the prime contract for the spacecraft segment in May 2009 and the contract for the ground segment in June 2009. In addition, between September 2004 and December 2007, the GOES-R program awarded contracts for the development of five key instruments. These instruments are currently in varying stages of development. Figure 1 depicts the schedule for both the program and key instruments. NOAA has made several important decisions about the cost, scope, and schedule of the GOES-R program. After reconciling the program office's cost estimate with an independent cost estimate, the agency established a new program cost estimate of $7.67 billion, an increase of $670 million from the previous estimate. Agency officials plan to revisit this cost estimate after the spacecraft and ground segment contracts are awarded but stated that it was developed with a relatively high level of confidence and that they believe that any adjustments would be well within the $7.67 billion program budget. To mitigate the risk that costs would rise, program officials decided to remove selected program requirements from the baseline program and treat them as options that could be exercised if funds allow. These requirements include the number of products to be distributed, the time to deliver the remaining products (product latency), and how often these products are updated with new satellite data (refresh rate). Specifically, program officials eliminated the requirement to develop and distribute 34 of the 68 envisioned products, including aircraft icing threat, turbulence, and visibility. Program officials explained that these products are not currently being produced by legacy GOES satellites; they are new products that could be produced from the advanced GOES-R instruments. In addition, the program slowed planned product latency on the remaining products by as much as 10 minutes for hurricane intensity and 6 minutes for volcanic ash detection and height. It also reduced the refresh rates on these products by as much as 55 minutes for sea surface temperatures, cloud top observations, and vertical moisture profiles in the atmosphere. Program officials included the restoration of the products, latency, and refresh rates as options in the ground segment contract--items that could be acquired at a later time. NOAA also delayed GOES-R program milestones including the dates for issuing the requests for proposals by up to 6 months and awarding the contracts for the spacecraft and ground segments by 12 and 10 months, respectively. The dates when the satellites would be available for launch have also slipped by 4 months, with the first satellite launch now scheduled for April 2015. Program officials attributed these delays to providing more stringent oversight before releasing the requests for proposals, additional time needed to evaluate the contract proposals, and funding reductions in fiscal year 2008. Recent events have raised doubts about the feasibility of the GOES-R launch date. Specifically, after the spacecraft segment contract was awarded and then protested in December 2008, NASA decided to re-evaluate the proposals. NASA now plans to re-award the contract in May 2009. Because NASA has agreed to a 72-month development cycle for the spacecraft segment (from contract award date to launch readiness), the launch date of GOES-R will likely be delayed until at least May 2015. Any delays in the launch of the first GOES-R satellite run counter to NOAA's policy of having a backup satellite in orbit at all times and could lead to gaps in satellite coverage. This policy proved useful in December 2008, when NOAA lost communication with GOES-12, but was able to use GOES-13 as an operational satellite until communication was restored. However, beginning in November 2014, NOAA expects to have two operational satellites in orbit (O and P), but it will not have a backup satellite in place until GOES-R is launched. If NOAA experiences a problem with either of its operational satellites before GOES-R is in orbit, it will need to rely on older satellites that are beyond their expected operational lives and therefore may not be fully functional. GOES-R has taken steps to address lessons from other satellite programs. These actions include ensuring sufficient technical readiness of the spacecraft and ground segments prior to awarding the contracts. However, key risks remain and important actions remain to be completed in selected areas. Specifically, key technology risks remain--affecting both the ground segment and the instruments. While the hardware that is to be used for the ground segment is mature, key components have not previously been integrated. In addition, the program office has identified the Advanced Baseline Imager and the Geostationary Lightning Mapper instruments as having a high level of risk associated with cost due in part to the technical challenges posed by each instrument. Program officials reported that they have sufficient management reserves to address these risks. To manage such risks, NOAA uses earned value management, a proven means for measuring progress against cost and schedule commitments and thereby identifying potential cost overruns and schedule delays early, when the impact can be minimized. Two key aspects of this process are (1) conducting comprehensive integrated baseline reviews to obtain agreement from stakeholders on the value of planned work and validate the baseline against which variances are calculated and (2) using monthly variance reports to provide information on the current contract status, the reasons for any deviations from cost or schedule plans, and any actions taken to address these deviations. To its credit, the GOES-R program office is using earned value management to oversee the key instrument contracts and plans to use it on the spacecraft and ground segment contracts. To date, the program office has performed integrated baseline reviews on the instruments and obtains and reviews variance reports for each of the instruments. However, the program's integrated baseline review for the Advanced Baseline Imager did not include a review of schedule milestones, the adequacy of how tasks are measured, and the contractor's management processes. Further, the variance reports for two instruments--the Advanced Baseline Imager and the Geostationary Lightning Mapper--do not describe all of the significant variances. Program officials explained that they meet with the contractor on a monthly basis to discuss all of the variances, but they were unable to provide documentation of these discussions or the reasons for, impact of, or mitigation plans for the variances. As a result of these shortfalls, the program office has less assurance that key instruments will be delivered on time and within budget, and it is more difficult for program managers to identify risks and take corrective actions. Before it was cancelled in September 2006, the Hyperspectral Environmental Suite was originally planned as part of the GOES-R satellite series to meet requirements for products that are currently produced by GOES satellites as well as new technically-advanced products not currently produced by GOES satellites. NOAA still considers these requirements to be valid, and NOAA and the science community still have a need for the advanced products. NOAA had planned to use the new sounding products to improve its performance goals, such as helping to increase the lead times associated with severe thunderstorm warnings from an average of 18 minutes in 2000 to as much as 2 hours by 2025, and helping to increase the lead times associated with tornado warnings from an average of 13 minutes in 2007 to as much as 1 hour by 2025. In addition, NOAA had planned to use the new coastal waters imaging products to provide more accurate and quantitative understanding of areas for which NOAA has management responsibilities. In particular, the coastal water imaging products could have been used to predict and monitor the growth, spread, severity and duration of harmful algal blooms. Recent studies suggest that harmful algal blooms are occurring more frequently because of climate change. NOAA, NASA, and the Department of Defense assessed alternatives for obtaining advanced sounding and coastal water imaging products from a geostationary orbit. The results of the analysis recommended that NOAA work with NASA to develop a demonstration sounder to fly on an as-yet undetermined satellite and to evaluate other options for coastal waters imaging. NOAA plans to assess the technical feasibility of various options and to have the National Research Council make recommendations on long-term options for coastal water imaging. However, NOAA has not defined plans or a timeline for addressing the requirements for advanced products. Further, agency officials were unable to estimate when they would establish plans to fulfill the requirements. Until a decision is made on whether and how to provide the advanced products, key system users will not be able to meet their goals for improving the lead times or accuracy of severe weather warnings, and climate research organizations will not obtain the data they need to enhance the science of climate, coastal, environmental, and oceanic observations. In our report, we are making three recommendations that, if implemented, could improve the management and oversight of the GOES-R acquisition. These are: ensuring that any rebaselining of a key instrument includes an assessment of milestones, adequacy of resources, task and technical planning, and management processes; ensuring that reasons for cost and schedule variances are fully disclosed and documented; and, if feasible, developing a plan and timeline for restoring the advanced capabilities removed from the program. In written comments on a draft of this report, the Department of Commerce agreed with our findings and recommendations and outlined steps it is taking to implement them. The department also provided technical comments on the report, which we incorporated as appropriate. In summary, NOAA has made repeated and continuing efforts to learn from problems experienced on other satellite programs. The GOES-R satellite series is now in development, but program costs have increased, the scope of the program has been reduced, and schedules have been delayed. Further, unless the program exercises contract options, key benefits in terms of new products and faster data updates will not be realized. Of particular concern are the three years of launch delays since 2006. In addition, recent events make it likely that the launch of GOES-R will continue to slip, which increases the risk of having gaps in satellite coverage. Until NOAA and NASA act to address this risk, the United States' ability to maintain the continuity of data required for weather forecasting is in jeopardy. In addition, NOAA has not yet developed a plan or a timeline for recovering the advanced capabilities that were removed. Until such decisions and plans are made, the geostationary user community may not be able to make significant improvements in their severe weather forecasts, or their ability to monitor our coastal environments. Mr. Chairman and members of the Subcommittee, this concludes our statement. We would be pleased to respond to any questions that you or other members of the Subcommittee may have at this time. If you have any questions on matters discussed in this testimony, please contact David A. Powner at (202) 512-9286 or by e-mail at [email protected]. Other key contributors to this testimony include Colleen M. Phillips, Assistant Director; Carol Cha; William Carrigg; Neil Doherty; Franklin Jackson; Kaelin Kuhn; Lee McCracken; and Eric Winter. 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 Commerce's National Oceanic and Atmospheric Administration (NOAA), with the aid of the National Aeronautics and Space Administration (NASA), plans to procure the next generation of geostationary operational environmental satellites, called the Geostationary Operational Environmental Satellite-R series (GOES-R). GOES-R is to replace the current series of satellites, which will likely begin to reach the end of their useful lives in 2014. This series is considered critical to the United States' ability to maintain the continuity of data required for weather forecasting through the year 2028. GAO was asked to summarize its report being released today that (1) determines the status of the GOES-R program, (2) evaluates whether plans for the acquisition address problems experienced on similar programs, and (3) determines whether NOAA's plan will be adequate to support current data requirements. NOAA has made progress on the GOES-R acquisition, but the program's cost, schedule, and scope have changed. The GOES-R program has awarded development contracts for key instruments and plans to award contracts for the spacecraft and ground segments by mid-2009. However, after reconciling program and independent cost estimates, the program established a new cost estimate of $7.67 billion--a $670 million increase from the prior $7 billion estimate. The program also reduced the number of products the satellites will produce from 81 to 34 and slowed the delivery of these products in order to reduce costs. More recently, the program also delayed key milestones, including the launch of the first satellite, which will likely be delayed from December 2014 until at least May 2015. This delay in the GOES-R launch runs counter to NOAA's policy of having a backup satellite in orbit at all times and could lead to gaps in satellite coverage if GOES-O or P fail prematurely. GOES-R has taken steps to address lessons from other satellite programs, but important actions remain to be completed. These actions include ensuring sufficient technical readiness of the system's components prior to key decisions. However, technical challenges remain on the ground segment and instruments, the program did not perform a comprehensive review after rebaselining a critical instrument, and it has not documented all of the reasons for cost overruns. Until these issues are addressed, NOAA faces an increased risk that the GOES-R program will repeat the same mistakes that have plagued other satellite programs. While NOAA and the science community expressed a continuing need for advanced products that were removed from the program, the agency has not developed plans or a timeline for meeting these requirements. Until a decision is made on whether and how to proceed in providing the advanced products, key system users, such as weather forecasters, will not be able to meet their goals for improving the accuracy of severe weather warnings.
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At the time of the regulatory takeover, Monarch Life was domiciled in Massachusetts and licensed in all 50 states and the District of Columbia. Monarch Life was subject to solvency monitoring in each state in which it was licensed. As the state of domicile, Massachusetts had primary responsibility for taking action to resolve the insurer's financial troubles. As of December 1990, about 5 months before it entered receivership, Monarch Life reported assets of $4.5 billion. The insurer's business included variable life insurance, annuities, and disability insurance. As a wholly-owned subsidiary of the holding company, Monarch Life, in turn, owned two life insurance company subsidiaries: Springfield Life Insurance Company, Incorporated, domiciled in Vermont, and First Variable Life Insurance Company, domiciled in Arkansas. Springfield Life was placed in receivership by Vermont regulators in May 1991. First Variable, however, was not taken over by Arkansas regulators. Finally, the holding company also owned various real estate and investment management companies. A holding company structure provides opportunities for an insurance company to diversify its business and increase efficiency by sharing administrative operations with affiliated companies. Also, a holding company can draw on its resources to provide capital infusions and financial support for a troubled insurance subsidiary. However, interaffiliate transactions may pose risks to an insurer's solvency. An insurer faces the risk that affiliates may not repay money borrowed from the insurer. Selling or transferring assets from affiliated companies to an insurer also places the insurer at risk of receiving poor quality assets. Moreover, financial problems within a holding company structure may adversely affect an insurer. An overleveraged holding company cannot provide financial support for its insurer and may attempt to divert funds from the insurer to assist ailing noninsurance affiliates. Abusive interaffiliate transactions have contributed to several major life insurance failures. The Baldwin-United failure in 1983 was caused in large part by abusive interaffiliate transactions in which the holding company siphoned cash from its insurance subsidiaries. In an investigation of the 1991 failure of Guarantee Security Life, the Permanent Subcommittee on Investigations of the Senate Committee on Governmental Affairs learned that Guarantee Security allegedly used phony investments in unreported affiliates to mask its insolvency. We previously testified that interaffiliate transactions drained the capital or masked the financial condition in four other failures: Executive Life of California, Executive Life of New York, First Capital, and Fidelity Bankers. Every state has statutory guidelines requiring insurers to disclose transactions with affiliated companies, and many states require prior regulatory approval to prevent abusive transactions. State regulators rely on off-site analyses of insurer-reported statutory financial statements and periodic on-site examinations to monitor insurer solvency. The National Association of Insurance Commissioners (NAIC) has a program for accrediting state insurance departments that meet its financial regulation standards. These standards define the laws and regulations, as well as various regulatory practices and procedures, that NAIC believes, at a minimum, are needed for effective insurance solvency regulation. The Massachusetts Division of Insurance was accredited by NAIC in December 1993. To determine whether interaffiliate transactions had a role in Monarch Life's financial problems, we reviewed the insurer's annual statutory financial statements filed with state regulators, financial statements filed with the Securities and Exchange Commission (SEC) by the insurer as well as its parent holding company, public reports of regulatory examinations of Monarch Life as of 1985 and 1988, and court proceedings pertaining to the receivership. We also met with Monarch Life officials and reviewed legal documents pertaining to the insurer's lawsuit against its former law firm and independent auditors. To evaluate the adequacy of regulatory oversight by the Massachusetts Division of Insurance, we attempted to establish when Massachusetts regulators became aware that transactions with affiliated companies could endanger Monarch Life's solvency and what actions regulators took to protect policyholders. We reviewed financial analysis files of the Massachusetts Division of Insurance and interviewed regulatory officials responsible for managing the Monarch Life receivership. We also reviewed the workpapers from the examination conducted in 1989 for the 3-year period ending December 31, 1988 (hereafter "the 1988 examination"). The public report of the 1988 examination was issued in January 1990--10 months before the holding company's public disclosure of Monarch Life's financial problems. We sought to identify how examiners assessed Monarch Life's transactions with affiliated companies and whether the examination detected any problems. In particular, we attempted to determine whether the examiners followed guidance on investigating interaffiliate transactions recommended in NAIC's Financial Condition Examiners Handbook. Compliance with NAIC's examiners handbook is required for a state to be accredited. We also examined Massachusetts insurance holding company laws in place at the time of the Monarch Life takeover, as well as amendments to those laws adopted in November 1993. We used NAIC data to determine to what extent Massachusetts had adopted NAIC's model Insurance Holding Company System Regulatory Act. This model--one of the minimum standards for accreditation--details regulatory authorities recommended by NAIC for monitoring an insurance company within a holding company structure. In particular, we considered whether Massachusetts had (1) requirements for prior approval of material transactions, (2) examination access to affiliated companies, and (3) sanctions for violating insurance holding company laws. NAIC had added such provisions to the model Insurance Holding Company System Regulatory Act following the Baldwin-United failure. We obtained written comments on a draft of this report from the Massachusetts Division of Insurance and incorporated its comments where appropriate. (See app. I for the text of Massachusetts regulators' comments.) We did our work in Boston and Springfield, MA, between January 1993 and July 1994 in accordance with generally accepted government auditing standards. Financial troubles of the holding company endangered the solvency of Monarch Life and led to the regulatory takeover. In December 1989, the holding company reported $72 million in losses on its real estate investments, including estimated costs for disposing of those assets. In May 1990, the holding company borrowed $235 million from a consortium of banks and pledged its stock in Monarch Life as collateral for the debt.In addition to the stock pledge, the loan agreement included a net worth covenant requiring the holding company to maintain a minimum capital level. As a result of the depressed real estate market, the holding company reported additional losses in 1990 on its real estate operations. In the third quarter report it filed with SEC in November 1990, the holding company disclosed that real estate losses of $103 million caused a default on the net worth covenant in the loan agreement. At that time, the holding company informed the Massachusetts Division of Insurance that its real estate losses and resulting inability to repay money borrowed from Monarch Life had adversely affected the insurer's liquidity and capital resources. In the fourth quarter, the holding company reported additional losses of $20 million and defaulted on the interest payment due on its loan. Further, the holding company disclosed that, because it had pledged its Monarch Life stock, it could lose control of the insurer to its bank creditors. In 1985, the holding company had begun operating a cash pool account to control and maximize use of available cash from its subsidiaries within the holding company group. According to the "Short-Term Investment Pool" agreement dated September 1986, Monarch Life was to transfer its available cash to the holding company's pool account at the end of each day. In return, Monarch Life was to receive a short-term interest rate on its cash funds, which previously had been placed in noninterest-bearing accounts. In 1986, the holding company reportedly had bank lines of credit totaling $125 million, which were to guarantee the availability of Monarch Life's cash on a demand basis. Any subsidiary in the holding company system could borrow cash from the pool account at the holding company's short-term interest rate. In effect, the pool account represented loans from Monarch Life to the holding company and other subsidiaries. These loans were not secured by collateral, and Monarch Life had no controls to ensure that affiliates borrowing from the pool account could repay their loans. Table 1 shows how much the holding company owed to Monarch Life at year-end from 1985 to 1989. In 1985, before the pool was formally established, the insurer lent nearly $7 million to the holding company. By the end of 1986, Monarch Life had a balance of $70 million--approximately 59 percent of its reported capital and surplus--in the holding company's pool account. By year-end 1989, the insurer's balance in the pool account had grown by 57 percent to nearly $111 million--about 80 percent of its reported capital and surplus. Given the size of its "investment" in the holding company's pool account compared with its surplus, Monarch Life's financial health depended on the holding company's ability to repay the cash. The pool account provided a means for the holding company to divert cash from Monarch Life. Instead of servicing short-term cash needs, the holding company used the insurer's cash to finance long-term real estate investments. However, the holding company did not have the financial resources to repay the insurer's cash. By September 1990, the holding company owed nearly $165 million to Monarch Life and its subsidiary--equivalent to over 110 percent of Monarch Life's reported capital and surplus. In the third quarter 1990 report it filed with SEC, the holding company disclosed that it had discontinued the pool account and was trying to repay Monarch Life. Of $157 million owed to Monarch Life and its subsidiary as of November 1990, the holding company partially repaid the balance by transferring three subsidiaries to Monarch Life. The holding company estimated the subsidiaries were worth $60 million. In its 1990 annual statutory financial statement, Monarch Life wrote off $63 million of its balance in the pool account and nearly $4 million on its holdings of common stock of the holding company. At the holding company's direction, Monarch Life also invested directly in several affiliated real estate entities. In December 1989, Monarch Life and its two insurance subsidiaries invested $53 million--equivalent to 38 percent of Monarch Life's reported capital and surplus in 1989--in an affiliated real estate limited partnership. According to Monarch Life officials and Massachusetts regulators, the holding company created the partnership because it did not have the liquidity to repay cash borrowed through the pool account. The partnership's assets had been transferred to the newly created partnership from the holding company's real estate affiliates, and the holding company, as the general partner, continued to control the underlying properties. The partnership served as a way for the holding company to transfer assets, including mortgage loans exceeding 75 percent of the properties' values, that would not qualify as legally permitted investments if held directly by Monarch Life. According to Monarch Life, the insurer and its subsidiaries lost $34 million on the limited partnership. In June 1990, Monarch Life paid $33 million to purchase three bank loans on the marina joint venture of an affiliated real estate company. At that time, the real estate market in Massachusetts was depressed, and the marina units were not selling. The three loans had been overdue since March 1990, and the venture was on the verge of bankruptcy. The failure of the joint venture would have bankrupted the real estate affiliate and could have precipitated a chain of defaults under the holding company's various loans and lines of credit. Monarch Life's purchase of the three bank loans disguised the possible insolvency of the affiliate and potential credit crisis for the holding company itself. We question whether the investment--representing 33 percent of Monarch Life's reported 1990 capital and surplus--in a troubled real estate venture was in the best interest of the insurance policyholders. According to Monarch Life officials, the insurer lost nearly $20 million as a result of its investment. Monarch Life faced additional risk by acting as a loan guarantor for some of the holding company's real estate operations. As of December 1990, Monarch Life was committed to lend $6 million to the holding company's limited partnerships and had guaranteed mortgage loans for the holding company's real estate ventures totaling about $69 million--$14 million more than the estimated value of the underlying properties. According to the Massachusetts receivership petition in 1991, Monarch Life received little, if any, compensation for the loan guarantees, which were highly risky given the inadequate underlying collateral. Until the holding company's disclosures in November 1990, the Massachusetts Division of Insurance was unaware of the interaffiliate transactions that depleted Monarch Life's assets and undermined its solvency. The statutory financial statements that Monarch Life filed with state regulators did not disclose information crucial for regulators to fully assess the risks of the insurer's transactions with affiliated companies. Further, the last triennial examination of Monarch Life did not detect the riskiness of the pool account transactions because examiners did not assess whether the holding company could repay the loans. Once the holding company disclosed that its inability to repay Monarch Life endangered the insurer's solvency, Massachusetts regulators responded swiftly to protect the insurer's policyholders. Timely, accurate, and complete information about an insurer's assets is crucial for effective solvency regulation. If financial reporting does not fairly and promptly present an insurer's true condition, regulators cannot act quickly to resolve problems. Monarch Life--like all insurers domiciled in Massachusetts--was required to submit quarterly and annual statutory financial statements as well as annual audited statutory financial statements. However, Monarch Life's statutory financial statements indicated neither the magnitude of its investments in affiliates nor the economic substance of the pool account. In its 1989 statutory financial statements, Monarch Life disclosed its purchase of the limited partnership from the holding company as an interaffiliate transaction but did not reveal that the partnership itself was a related party. In its 1990 statutory financial statement, Monarch Life did not indicate that its purchase of the marina bank loans resulted in its investment in an affiliated joint venture. Monarch Life reported its participation in the pool account as "Other Long-Term Invested Assets" and did not identify these amounts as unsecured long-term loans to affiliated companies. Moreover, statutory financial statements filed with Massachusetts regulators did not fully disclose the magnitude of Monarch Life's loans to the holding company. Monarch Life officials and Massachusetts regulators alleged that the holding company manipulated the pool account to lower the balances reported in Monarch Life's quarterly and annual statutory financial statements. Figure 1 shows the insurer's pool account balance at the end of each month from December 1988 to January 1990. During this time period, the pool account balance in each of Monarch Life's quarterly reports--March, June, September, and December--was lower than the monthly balances both preceding and following the quarter's end. The December balance of nearly $111 million reported in Monarch Life's 1989 annual financial statement was sizably less than its November balance of nearly $190 million. The $111 million balance (80 percent of Monarch Life's capital and surplus at year-end 1989) did not trigger closer scrutiny by Massachusetts regulators, in part because the reported balance was less than $125 million--the amount of the holding company's lines of credit which were to guarantee the availability of the insurer's cash on a demand basis. Monarch Life has alleged that the holding company drew down its lines of credit to manipulate the pool balances and did not disclose the pool's illiquidity. Monarch Life's statutory financial statements also did not portray its full exposure to the pool account because Monarch Life was not required to consolidate the financial accounts of its wholly-owned subsidiaries. In accordance with Massachusetts statutory accounting practices, Monarch Life reported the statutory capital and surplus of its insurance subsidiaries as assets on its own statutory financial statements. Monarch Life reported its pool account balance of nearly $111 million in its 1989 statutory statement, but its subsidiary, Springfield Life, also had a pool account balance of $15 million at year-end. Whereas Monarch Life's pool account balance alone represented 80 percent of its capital and surplus, the combined exposure of the insurer and its subsidiary totaled 91 percent.Financial information consolidating details about the assets and liabilities of wholly-owned subsidiaries would have been useful to regulators monitoring Monarch Life's solvency. We reported in 1989 that most states required on-site examinations only once every 3 to 5 years, although regulators could examine a troubled insurer more frequently. Regulatory examinations took months or even years to complete. According to NAIC's examiners handbook, the state of domicile is to lead the examination of a multistate insurer, and examiners from other states in which the insurer is licensed can participate. The final examination report is to be distributed to all states where an insurer is licensed and filed as a public document. We previously found that time lags between triennial examinations, as well as reporting delays, had impaired regulators' ability to evaluate financial deterioration and take corrective action in the case of other life insurance failures. By law, the Massachusetts Division of Insurance was required to examine the financial activities of domestic insurance companies at least once every 5 years, but the state's practice was to examine life insurers on a triennial basis. Massachusetts regulators examined Monarch Life as of 1985 and again as of 1988. The insurer was not due to be examined again until 1993 by law, or until 1991 on a triennial basis. The public examination reports we reviewed did not reveal the problems with interaffiliate transactions that led to the regulatory takeover of Monarch Life. The public report of Massachusetts' 1985 examination of Monarch Life did not mention the pool account. The public report of Massachusetts' 1988 examination--issued in January 1990--listed Monarch Life's $102 million balance in the pool account but did not discuss whether the balance was recoverable. The reported examination scope included "a general examination of the accounts and records of the subsidiaries" within the insurer's control. According to the Special Counsel to the Receiver of Monarch Life, however, the 1988 examination did not detect the riskiness of the pool account transactions because the examiners did not follow examination policies and procedures. NAIC's examiners handbook identifies unsecured loans to affiliates as a potentially abusive transaction and suggests examiners verify that an insurer's cash accounts are not used for the benefit of affiliates. NAIC's examiners handbook also recommends confirming collateral for loans and obtaining information as to the financial capability of affiliated companies to repay material balances. Even though Monarch Life's pool account balance represented 72 percent of its capital and surplus in 1988, we saw no evidence in the 1988 examination workpapers that Massachusetts examiners assessed the holding company's ability to repay the pool account loans. The Massachusetts examiners verified that Monarch Life transferred cash in the amounts reported as of 1988, but the workpapers contained no evaluation of whether Monarch Life could recover its money. In an October 1993 report on the Massachusetts Division of Insurance, the Massachusetts State Auditor found that the state's field examinations of insurance companies were ineffective. In a sample of 6 of 14 examinations completed in fiscal year 1990, state auditors found that 5 of the 6 sets of examination workpapers contained no evidence of an internal control assessment. The sixth set--those for Monarch Life--included limited control testing but no conclusions about control adequacy. Moreover, the regulatory examinations focused on account-by-account balances reported in the insurers' annual statutory financial statements and did not provide an overall assessment of solvency. In particular, the State Auditor cited the 1988 examination of Monarch Life as an example of the examination report describing each account balance but providing no conclusions about the insurer's solvency. In its response to the State Auditor's report, Massachusetts indicated that its examination process has changed significantly since the receivership of Monarch Life in May 1991. In late 1991, Massachusetts hired a new deputy commissioner to oversee the examination and financial surveillance units and replaced the former examination managers with technically qualified professionals with insurance experience. Starting in 1993, Massachusetts was to implement a new examination handbook and increase supervisory review of examiners' work. NAIC's accreditation of Massachusetts in December 1993 signified that a review team determined, among other things, that Massachusetts was in compliance with NAIC's examiner's handbook. In its comments on this report, the Massachusetts Division of Insurance said that it had upgraded its examination capability by hiring more examiners and using independent auditors and actuarial firms to assist in examinations of large insurance companies. Once the holding company disclosed that its financial condition endangered Monarch Life's solvency, Massachusetts regulators moved swiftly to protect the insurer's policyholders. In November 1990, the Division of Insurance ordered Monarch Life to cease payments to the holding company and began a special examination to assess Monarch Life's financial condition. Massachusetts regulators disapproved Monarch Life's request to pay a dividend of $25 million to the holding company at year-end 1990. In December 1990, Monarch Life reduced its operations by selling $3 billion in variable life insurance policies to another insurer. In a letter to the Massachusetts governor dated November 29, 1990, the Massachusetts insurance commissioner projected that the Division's "forceful actions will prevent any threat of insolvency for Monarch Life, but the situation will require continued vigorous regulatory action on our part over the next few months." At that time, Massachusetts regulators believed that the financial woes of the holding company would not have a direct effect on Monarch Life. However, on the basis of the special examination results, Massachusetts regulators initiated the receivership on May 30, 1991, in order to safeguard Monarch Life's assets for policyholders. Acting on behalf of Monarch Life, the Massachusetts Insurance Commissioner, as Receiver, filed an involuntary bankruptcy petition against the holding company in the United States Bankruptcy Court on May 31, 1991. Under the bankruptcy reorganization, the former holding company's bank creditors became the majority shareholders of the reorganized holding company. As part of the reorganization, Monarch Life was released from court-supervised receivership in September 1992 but remained under the close supervision of the Massachusetts Division of Insurance. Monarch Life ceased selling new life insurance and annuities during 1992. Monarch Life also ceased selling disability insurance in June 1993 because of higher than expected losses. On the basis of a special actuarial examination conducted as of September 1993, Massachusetts regulators directed Monarch Life to increase its insurance loss reserves and sell its subsidiary, First Variable, to increase liquidity and capitalization. Because the bank shareholders objected to the sale, which was crucial to the insurer's recapitalization, Monarch Life's financial condition was deemed unsound, and Massachusetts regulators put the insurer back in receivership in June 1994. In our 1992 testimony about four large life insurance failures, we reported that interaffiliate transactions of insurance companies were a regulatory blind spot. State regulators did not regulate either the parent holding companies or the noninsurance affiliates and subsidiaries of the failed insurers. Instead, state regulators were to evaluate and control the insurers' transactions with affiliated companies. In the case of Executive Life, California regulators could not effectively assess interaffiliate transactions and protect policyholder interests because Executive Life repeatedly failed to report and secure approval for transactions with affiliated companies. Massachusetts regulators relied on insurer-reported data to assess whether Monarch Life's transactions with affiliates were fair and reasonable. Under Massachusetts laws, Monarch Life was required to file registration statements describing the financial condition of the holding company and the identities of all companies within the holding company system, as well as reports of material transactions. According to Monarch Life officials and Massachusetts regulators, however, the insurer and its parent holding company repeatedly failed to comply with Massachusetts holding company reporting requirements. As a result, Massachusetts regulators were unaware of risky interaffiliate transactions that depleted Monarch Life's assets and undermined its solvency. "Intercompany transactions and intermingling of assets make it nearly impossible to estimate the solvency of an insurer without looking at the various entities that are a part of the holding company, including the parent. Effective regulation of insurance holding company systems requires state regulators to review consolidated financial statements with uniform accounting standards and to examine the financial transactions among the parent holding company and its affiliates as a unitary economic enterprise." At the time of the Monarch Life takeover in 1991, Massachusetts lacked the authority, recommended under NAIC's model Insurance Holding Company System Regulatory Act, to prevent abusive interaffiliate transactions. In Massachusetts, only large dividends--those exceeding the greater of 10 percent of policyholder surplus or net gain from operations for a life insurer--required prior regulatory approval. NAIC's model recommends prior approval not only for large dividends but also for any transaction exceeding 3 percent of a life insurer's admitted assets. Massachusetts could request that Monarch Life produce records and accounts pertaining to interaffiliate transactions but lacked the authority recommended by NAIC to examine the affiliates. Massachusetts also lacked the authority to impose sanctions for violating insurance holding company laws. In November 1993, Massachusetts expanded its insurance holding company legislation to provide greater regulatory authority over an insurer's transactions with affiliated companies. Massachusetts regulators now have greater authority to prevent potentially abusive transactions beforehand, rather than trying to recover money after a transaction has occurred. Massachusetts regulators gained authority to examine affiliates' records if an insurer fails to produce data about interaffiliate transactions. Massachusetts also added civil and criminal penalties for violating holding company reporting and approval requirements. NAIC's accreditation of Massachusetts in December 1993 signified that a review team determined, among other things, that Massachusetts holding company regulations were "substantially similar" to NAIC's model Insurance Holding Company System Regulatory Act. We support state adoption of the minimum authorities recommended under NAIC's model Insurance Holding Company System Regulatory Act as an important step towards improving regulatory oversight of an insurer within a holding company. However, even the best holding company reporting requirements cannot prevent dishonesty. Regulators' ability to enforce Massachusetts insurance holding company laws still relies on prompt and complete disclosure of an insurer's transactions with affiliated companies. Untimely or incomplete disclosure can hinder regulators' ability to protect an insurer from potentially abusive interaffiliate transactions. Since a holding company's operations may be the cause of a subsidiary insurer's solvency problems, total reliance upon the insurer and its holding company to disclose the nature and extent of potentially abusive transactions is not prudent. On-site examinations are regulators' primary way to verify insurer-reported information and detect violations of holding company reporting and approval requirements. To adequately assess the consequences of an insurer's transactions with affiliated companies, examiners must recognize the economic substance of transactions and use procedures for investigating interaffiliate transactions recommended in NAIC's examiners handbook. The longer the interval between examinations, the greater the opportunity a holding company has to engage in potentially abusive transactions without prompt regulatory detection. Before November 1990, Massachusetts regulators were unaware that Monarch Life would be unable to recover cash diverted by the holding company into risky real estate investments. In part, Massachusetts regulators were unaware because Monarch Life did not disclose the extent and riskiness of its transactions with affiliated companies. Deficiencies in the last triennial examination of Monarch Life also contributed to regulators overlooking the riskiness of Monarch Life's dealings with affiliated companies. Since the Monarch Life receivership in 1991, Massachusetts has increased regulatory safeguards against potentially abusive transactions between an insurer and affiliated companies. However, the regulatory approach continues to rely on a holding company system to reveal potentially abusive transactions involving an insurance subsidiary. The case of Monarch Life illustrates how an insurer's failure to comply with holding company reporting requirements can create a regulatory blindspot. Without independent evaluation of insurer-reported data, insurance regulators may not detect problems within a holding company system until losses endanger insurer solvency. In commenting on a draft of this report, the Massachusetts Division of Insurance said the report was fair and accurately addressed an area deserving of regulatory focus. The Division also provided information about improvements in its examination process implemented since 1991 when Monarch Life was placed in receivership. We revised the text to reflect this information and to incorporate where appropriate other technical corrections provided by the Massachusetts Division of Insurance. We are sending copies of this report to interested congressional members and committees, the Massachusetts insurance commissioner, and NAIC's Executive Vice President. We also will provide copies to others upon request. This report was prepared under the direction of Lawrence D. Cluff, Assistant Director for the Insurance Group, who may be reached on (202) 512-8023 if you have questions concerning the report. Other major contributors were MaryLynn Sergent, Evaluator-in-Charge, and John McDonough, Senior Evaluator. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO examined the placing of Monarch Life Insurance Company in receivership, focusing on: (1) whether the actions of the parent holding company or affiliated companies endangered the solvency of Monarch Life; and (2) the adequacy of regulatory oversight leading up to the insurance receivership. GAO found that: (1) the holding company pledged Monarch Life stock as collateral on a loan which endangered its solvency and led to the regulatory takeover by the holding company's creditors; (2) the holding company diverted about $165 million from Monarch Life to fund its real estate activities, but it was unable to repay the loan; (3) Monarch Life lost $54 million in real estate investments and faced additional risk by acting as a loan guarantor for the holding company's real estate operations; (4) the Massachusetts Division of Insurance was unaware of Monarch Life's insolvency until the holding company disclosed its inability to repay its loans in 1990; (5) previous regulatory examinations of Monarch Life's financial statements did not reveal any solvency problems due to inadequate information on interaffiliate transactions; (6) once the holding company publicly announced that its financial condition endangered Monarch Life's solvency, state regulators acted quickly to protect the insurance policyholders; and (7) although Massachusetts expanded its regulatory authority to prevent abusive interaffiliate transactions between insurance companies, it continues to rely on insurer disclosure to enforce insurance holding company laws.
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Millions of noncitizens apply annually to enter the United States to live, work, or study. USCIS creates alien files, more commonly called A-files, to document the history of a person's interaction with USCIS or any DHS entity involved in immigration related actions. USCIS's Records Operation Handbook (ROH) provides instruction on when and how to create an A-file as well as how to request files and transfer them from one office to another. USCIS maintains A-files on certain individuals, including those who are immigrants or who apply for immigrant status, have become citizens, or have applied for asylum in the United States or refugee status overseas. The A-file is to contain all of the relevant documents of an alien's interactions with USCIS or other DHS components. For example, the A-file could contain an application for lawful permanent residency and petitions for an alien relative as well as documents related to enforcement actions such as an arrest warrant and the results of any immigration proceedings. While USCIS is the main user of A-files and the official DHS custodian for all of them, other DHS components, such as ICE and Customs and Border Protection (CBP), also use A-files for investigations or other enforcement actions. In addition, information and documents from A-files may be shared with agencies such as the FBI and Department of State. According to senior USCIS officials, USCIS spends about $13 million each year transporting A-files within USCIS and to other components and agencies. USCIS's long-range plans call for eventually converting paper A-files into electronic files, thus avoiding these transportation costs and making A-files available to multiple users simultaneously. In August 2006, USCIS awarded a 5-year $150 million contract to begin converting A-files. USCIS adjudicates applications for immigration benefits through a network of field offices that include 4 service centers, 33 district offices, and 8 asylum offices. In fiscal year 2005, USCIS's budget was about $1.8 billion and USCIS adjudicated about 7.5 million applications, of which over 715,000 were applications for naturalization. Naturalization applications are adjudicated at USCIS district offices and require the applicant to, among other things, undergo a security background check, be interviewed by an adjudicator and, demonstrate proficiency in English and a basic understanding of U.S. civics. As part of the adjudications process, adjudicators are to review the applicant's A-file to identify any information that may disqualify the applicant for naturalization, including information that may indicate potential fraud. Of the over 715,000 naturalization applications adjudicated in fiscal year 2005, USCIS denied about 64,000. All applications for an immigration benefit, including naturalization, are to be filed in the applicant's A-file. USCIS staff use USCIS's Central Index System to locate and request the A-file from the last known office location. However, the Central Index System can only identify the office location for the A-file; it does not provide precise information about where in an office an A-file is located. USCIS has NFTS, a system designed to provide more detailed information on the location of an A-file, down to a specific individual or file drawer. USCIS's predecessor, the Immigration and Naturalization Service, began deploying NFTS in November 2002. The system is now deployed to all records units in USCIS district and asylum offices, the USCIS's Texas Service Center and National Benefits Center, and all ICE and CBP units. Tentative plans call for deploying NFTS to USCIS's three other service centers by March 2007. NFTS is a Web-based system that is available to anyone in DHS who needs A-files. Users can obtain a user identification code that allows them to request, receive, and transfer A-files. Web-based training on how to use NFTS is available via DHS component intranet sites, including USCIS's EdVanatage Learning University, ICE's Virtual University, and the CBP Learning University. In January 2004, USCIS, ICE, and CBP signed a Service Level Agreement in which USCIS agreed to provide A-files to ICE and CBP, and ICE and CBP agreed to follow the ROH. USCIS's ROH describes the procedures that are to be followed for locating, sending, and receiving A-files. The ROH states that all DHS staff with access to NFTS should use NFTS to, for example, record the creation of an A-file, request A-files from other offices, record when an A-file is sent or transferred out to another office, and immediately record both when an A-file is received and the file's specific location. USCIS uses the Computer-Linked Application Information Management System (CLAIMS) 4, as the case management and tracking system for naturalization applications. CLAIMS 4 contains information from the naturalization application and other data, such as the results from security background checks and whether or not the application was approved. CLAIMS 4 can also track the status of a request for the A-file, indicating whether the A-file has been requested, received by the district office adjudicating the application, or deemed lost. Figure 1 shows the steps involved in locating A-files for naturalization applications. USCIS's Adjudicator's Field Manual provides adjudicators with guidance on naturalization procedures and how to determine whether an applicant meets the eligibility requirements for becoming a citizen. To improve the quality and consistency of all naturalization application processing, USCIS has issued Naturalization Quality Procedures (NQP) guidelines. The NQP provides detailed checklists that clerical staff and adjudicators must complete at each stage of the naturalization process. These completed checklists must be included in an A-file, along with the naturalization application and related documents. The NQP also requires that adjudicators be certified as NQP trained once every 3 years. Our analysis of USCIS data and interviews with USCIS district officials indicate that A-files are missing in a relatively small percentage of naturalization cases but that DHS staff may not always be updating NFTS when files are moved, resulting in delays in locating A-files or in not locating them at all. The CLAIMS 4 database contains a data field that indicates the status of the A-file request, such as whether the file has been received in the district office, requested but not yet received, or that the A-file has been declared lost. According to data from the CLAIMS 4 database, of the approximately 715,000 naturalization applications adjudicated in fiscal year 2005, the district office received the A-file in 685,000 of these cases (about 96 percent), indicating that A-files may not have been available in about 4 percent (about 30,000) of them. However, USCIS officials told us that this CLAIMS 4 data field is an optional field that USCIS staff may complete at various times during the adjudications process or not at all. USCIS officials told us that of the approximately 30,000 naturalization cases where the A-file status indicated something other than received in the district office, A-files were probably available in a number of them. However, because adjudicators may not always update the A-file data field to indicate whether the A-file was eventually received, how many is unknown. In about 13,000 of the approximately 30,000 cases, the A-file status indicator was blank. Data from USCIS's quality assurance audit of the naturalization program also indicate that the A-files are missing in a relatively small percentage of cases. In fiscal year 2005, the USCIS Performance Management Division sampled 28,575 naturalization applications adjudicated by district offices. Staff found that A-files were available in all but 129 of 28,575 cases sampled, about 0.5 percent. However, because of limitations in its sampling methodology, USCIS said this percentage cannot be projected to the universe of approximately 715,000 naturalization applications completed that year. Although USCIS officials from the 13 district offices we spoke with acknowledged that their offices do not track how often naturalization applications are adjudicated without an A-file, they believed the percentage was low. They estimated the percentage of naturalization applications in fiscal year 2005 that were adjudicated without A-files ranged from less than 1 percent to 10 percent. GAO's Standards for Internal Control in the Federal Government states that information needed to achieve an agency's objectives should be identified and regularly reported to management. According to USCIS's Naturalization Quality Procedures, having and reviewing an applicant's A-file is critical to confirming that the applicant is eligible for naturalization and that no incidents have taken place that would disqualify the applicant from naturalization. In a November 2005 memo, the Acting USCIS Director of Domestic Operations stated that not having an A-file should be a "rare" occurrence, but did not quantify what "rare" meant. Since USCIS deems reviewing the A-file critical to the naturalization adjudications process, the lack of precise data on when an A-file is not available limits USCIS's ability to determine compliance with this critical step and whether additional actions are necessary to ensure A-files are available when needed. According to USCIS officials, adjudicators sometimes have difficulty locating A-files or cannot find them at all because the locations shown in NFTS are incorrect or not up to date. For example, according to a summary of the results of an April 2005 file audit conducted by USCIS's San Diego district office records staff, nearly 21 percent of the district's files (11,731 of 56,092 files audited) were not in the location shown in NFTS. Another 34,764 files shown to be under the control of the San Diego district could not be immediately located during the audit. Some of these files may have been in locked file cabinets that audit staff could not access, while others may have been transferred to another location and were no longer in the district. NFTS showed duplicate file locations for 464 files. Audit staff also found 281 of the files that NFTS indicated were lost. About half of the lost files were found within the local ICE Office of Investigations. The other half were found mostly within CBP. In addition, in June 2006 the Los Angeles district office conducted a file audit of three locations that had files. As shown in table 1, about 6 percent of the files indicated by NFTS to be at these three locations could not be found. For some A-files, the office location recorded in NFTS is not up to date. NFTS procedures require that a person receiving an A-file should "immediately" update NFTS. According to the Section Chief of the Records Systems Services Section of USCIS's Office of Records Management Branch, once a file is sent (either via the U.S. Postal Service or a private package delivery service) from one office to another, it should take no longer than a month for the A-file to arrive at the receiving office and for NFTS to be updated. During our review, USCIS checked NFTS and found 107,000 A-files that have been in transit over a month but had yet to be recorded as received in NFTS. Nearly 63,000 had been in transit more than 3 months. GAO's Standards for Internal Control in the Federal Government also states that transactions and other significant events should be promptly recorded so that they maintain their relevance, value, and usefulness to management in controlling operations and making decisions. Although USCIS considers compliance with NFTS procedures critical to enabling it to maintain control over A-files, DHS staff are not always complying with these procedures. According to USCIS officials, DHS staff are not always recording the movement of an A-file in NFTS, resulting in inaccurate information on the location of A-files. Officials from 10 of the 13 USCIS district offices we spoke with claim that the failure to record the movement of files in NFTS is a major reason for delays in locating an A-file, in not being able to locate an A-file at all, and in an A-file being declared lost. One district director stated that the cooperation of other DHS components in adhering to file transfer procedures was imperative, especially since they maintained A-files relating to national security investigations and other sensitive issues. According to USCIS records officials, the USCIS Records Division has not conducted a formal study or evaluation as to why NFTS users are not complying with all NFTS and ROH procedures. This cooperation is important, especially because USCIS has no authority to enforce compliance with file-tracking procedures among the other DHS components. The report summarizing the San Diego district's April 2005 file audit cited above stated that the number of files, in the thousands, that were not in the location shown in NFTS or could not be found was "staggering" and attested to the need to ensure that all personnel in all units and agencies use NFTS and follow procedures. According to the report, several locations were not using NFTS although NFTS was available. USCIS records officials stated that lack of compliance with NFTS procedures was "very prevalent." As of July 27, 2006, for the 14 district offices we included in our review, NFTS indicated that about 111,000 A-files were lost. USCIS officials offered several reasons why some staff may not be complying with NFTS file-tracking procedures. According to the report summarizing the San Diego district's April 2005 file audit, additional NFTS training is needed and compliance with the NFTS procedures should be mandated for all sites. The audit report recommended regular NFTS workshops for USCIS, CBP, and ICE staff. USCIS records officials stated that local management may not be emphasizing enough the importance of using NFTS. ICE officials we spoke to commented that they believe some of the NFTS file transfer procedures are cumbersome, resulting in some ICE staff circumventing them and not recording the file movement in NFTS. For example, whether sending or receiving A-files, the ROH requires that they all be routed through the local USCIS records unit whenever a file needs to be transferred from one ICE field location to another. This is because members of USCIS staff are the only ones allowed to transfer a file from one field location to another. However, according to ICE officials, because of the urgency of the situation, ICE personnel may send an A-file directly from one ICE office to another, bypassing the USCIS records units. As a result, the file movement to the new location is not recorded in NFTS. USCIS records officials stated that they do not believe lack of compliance stems from any technical problems with using NFTS because the system is Web-based and relatively easy to use. Missing A-files can cause delays in awarding immigration benefits, hinder USCIS's ability to uncover immigration fraud, and limit DHS's ability to take enforcement actions. According to USCIS's ROH, lost or missing A-files can cause delays or errors in awarding immigration benefits and can hamper investigation and enforcement actions. For example, USCIS procedures for processing naturalization applications allow USCIS to wait up to 3 months to try to find an A-file, thereby delaying adjudicating the application. According to several USCIS district officials, USCIS staff spend additional time and effort trying to locate files that are not in the location identified in NFTS, thus delaying their ability to process benefits quickly. Officials from all of the district offices we spoke with told us that USCIS faces an increased risk of granting naturalization to an ineligible applicant when the adjudicator does not have the A-file available because the file may contain potentially disqualifying information. Officials from several district offices stated that the A-file is needed to look for any inconsistencies between the naturalization application and other applications that the applicant had submitted when applying for previous benefits like legal permanent residency. For example, a naturalization application may contain facts about the applicant's marital or family (children) status that are inconsistent with information in the A-file, a possible indication of fraud that may not be uncovered without the A-file. These types of inconsistencies cannot be checked without the A-file. In addition, USCIS conducts background security checks on all naturalization applicants via the Interagency Border Inspection System (IBIS). IBIS guidance requires an IBIS name check on all names an applicant may have used. According to several district officials, the A-file may contain other names (aliases) the applicant may have used that should be checked against IBIS. Therefore, without the A-file, any potentially damaging information related to these other names may not be uncovered, increasing the risk of granting naturalization to an ineligible applicant. DHS's ability to take an enforcement action against an applicant may also be compromised. According to an ICE attorney, some immigration judges may be reluctant to, for example, order an alien removed from the United States without the complete A-file. Officials we spoke with stated that the steps contained in the Naturalization Quality Procedures mitigate somewhat the risk of naturalizing someone who is ineligible. For example, adjudicators must take additional steps when adjudicating a naturalization application without an A-file. Specifically, these steps include verifying the applicant's lawful admission to the United States and that the applicant has lived in the United States as a lawful permanent resident for the required amount of time--generally, 5 years--and lack of disqualifying information in USCIS databases, extra supervisory reviews to ensure that naturalization processing procedures have been followed, and not scheduling the oath ceremony on the same day that the naturalization application is adjudicated to allow sufficient time for the required supervisory reviews. Data from USCIS's quality assurance audit of the naturalization program indicate that USCIS staff is following procedures nearly all of the time when adjudicating a naturalization application without an A-file. Of the 129 quality assurance audit cases sampled in fiscal year 2005 where an A-file was not available, USCIS staff did not follow all of the required procedures in 5 cases. Officials from several district offices told us that the standard naturalization adjudication procedures (applicable when an A-file is either available or missing), such as background security checks, somewhat reduce the risk of granting naturalization to someone who is ineligible. For example, as part of USCIS's background security check, USCIS is to conduct an IBIS name check as well as both a fingerprint and FBI name check. In an April 2006 memorandum, the USCIS Director of Operations directed that naturalization interviews should not be scheduled until all background checks have been completed to ensure that all background security issues are resolved before USCIS interviews the applicant. According to officials from several district offices, the background security checks mitigate, somewhat, the risk of naturalizing someone who poses a potential national security or public safety threat. Although USCIS deems having an A-file critical to adjudicating a naturalization application, USCIS staff are not required to record whether an A-file was used to adjudicate a naturalization application. Recording whether an A-file was used to adjudicate a naturalization application could help USCIS assess the extent of the risk posed by adjudicating naturalization applications without an A-file and what actions may be necessary to address the problem. DHS staff who have access to A-files may not be consistently using NFTS to track the movement of A-files, hindering the ability to locate A-files when needed. While officials offered suggestions as to why staff may not be complying, such as the lack of NFTS training, it is unclear to what extent staff are not complying and why. Knowing the extent to which staff are not complying and why and addressing these reasons would increase DHS's ability to locate and provide A-files for adjudicators and others, thereby reducing the risk associated with adjudicating a naturalization application and other immigration benefits without the A-file. In order to improve USCIS's management information, prevent unnecessary delay, and more efficiently adjudicate applications, we are recommending that the Secretary of Homeland Security direct the Director of USCIS to require users to record or note whether an A-file was used to adjudicate a naturalization application and work together with other DHS users of A-files to determine the extent to which staff may not be complying with NFTS procedures for updating the system and why and correct any identified deficiencies in file-tracking compliance. We provided a draft of this report to DHS for review. On October 24, 2006 DHS provided written comments which are shown in appendix II. DHS also provided technical comments which we incorporated as appropriate. DHS agreed with both of our recommendations and stated that the report generally provides a good overview of the complexities associated with the process for ensuring adjudication officers have A-files when adjudicating naturalization applications. Regarding our recommendation to require users to record or note whether an A-file was used to adjudicate a naturalization application, DHS stated that it plans to modify its CLAIMS 4 system to make the data field related to file status mandatory. USCIS plans to make this modification in early to mid 2007. Regarding our recommendation that USCIS work together with other DHS users of A-files to determine the extent to which staff may not be complying with NFTS procedures and why and to correct any deficiencies in file-tracking procedures, DHS stated that information obtained from recently completed visits to USCIS, CBP and ICE field offices will help USCIS determine the level of compliance with file tracking procedures and identify remediation efforts required by each agency. This information will also serve as the basis for a planned joint policy on A-file management. DHS also cited several efforts it has taken or is planning to take to improve the management of A-files. For example, USCIS and CBP records managers have formed a partnership and are working to improve responsiveness to records management needs. USCIS established File Control Offices at several sub-offices allowing these sub-offices to move files to requesting offices as quickly as possible. USCIS' Records Management Branch will evaluate NFTS reports to track files that are not transferred within a reasonable amount of time and notify appropriate components to ensure compliance with policies and procedures. USCIS will continue on-site training as NFTS continues to be deployed across DHS. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Secretary of the Department of Homeland of Security and other interested congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions about this report or wish to discuss it further, please contact me at (202) 512-8777 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. To address all of our objectives, we interviewed United States Citizenship and Immigration Services (USCIS) headquarters officials, reviewed relevant documents, and sent e-mail questionnaires and followed up with phone calls to officials and staff from 13 (Chicago, Dallas, Detroit, Houston, Los Angeles, Miami, Newark, New York City, Philadelphia, San Diego, San Francisco, Seattle and Washington, D.C.) of USCIS's 33 district offices. We obtained written responses to our questionnaire from another district office (Boston). We selected these offices because they adjudicated most of the naturalization applications. Specifically, USCIS data indicate that these 14 offices adjudicated nearly two-thirds, or about 497,000, of the approximately 715,000 naturalization applications adjudicated in fiscal year 2005. In addition, to examine the extent to which USCIS records how often naturalization applications are adjudicated without an A-file, as well as the reasons why an A-file might be missing and what steps USCIS takes to compensate for any lack of an A-file during an adjudication process we obtained data related to naturalization applications adjudicated in fiscal year 2005 contained in the Computer-Linked Application Information Management System (CLAIMS) 4 database that records information from the naturalization application and related information, the results from USCIS quality assurance audits of a sample of naturalization applications reviewed in fiscal year 2005, and A-files indicated as lost and, as having been in transit and yet to be recorded as received in USCIS's National File Tracking System (NFTS). We also reviewed policies and procedures related to processing naturalization applications and instructions and guidance about using, locating, and requesting A-files. In a prior review, we determined how USCIS ensures the quality and consistency of adjudicator decisions by reviewing USCIS reports and data on accuracy rates related to its two quality assurance programs, interviewing USCIS officials in the Performance Management Division, reviewing the findings and recommendations of an independent study on USCIS's quality assurance programs and, discussing supervisory review practices with senior managers at the field offices we visited. However, we did not independently verify the extent and quality of supervisory review. We assessed the reliability of CLAIMS 4 and NFTS data by (1) reviewing summary data and specific data elements for obvious errors in accuracy and completeness, (2) reviewing related documentation, and (3) interviewing USCIS staff knowledgeable about the CLAIMS 4 and NFTS systems. For NFTS, we also observed how A-files are located, transferred, and received. However, we did not independently evaluate whether technical malfunctions may be a factor in the number of files with improperly identified locations, although we have no reason to believe that technical malfunctions have occurred. We found that information and summaries of the NFTS, CLAIMS 4, and quality assurance data were sufficiently reliable for the purposes of this report. We conducted our review from August 2005 through August 2006 in accordance with generally accepted government auditing standards. In addition to the above, Michael Dino, Assistant Director; Richard Ascarate; Jenny Chanley; Frances Cook; Carlos Garcia; Julian King; and Brian Lipman were key contributors to this report.
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To document the interactions of aliens with the Department of Homeland Security's (DHS) United States Citizenship and Immigration Services (USCIS) and other government entities, USCIS creates alien files, or A-files. While deemed critical, especially in making citizenship decisions, A-files are sometimes missing during adjudications. In 2002, naturalization was granted to an alien whose A-file was missing and who was later found to be associated with a terrorist organization. GAO focused its review on (1) how often USCIS adjudicates naturalization applications without an A-file and why, (2) the effect that missing A-files can have on the adjudication process, and (3) steps taken to help mitigate the risk of missing A-files. To address these questions, GAO interviewed officials and staff from USCIS and reviewed relevant data, policies, and procedures related to processing naturalization applications and the automated file-tracking system DHS established to track the movement of A-files. A-files were not available to adjudicate naturalization applications in a small percentage of cases. GAO found that of the naturalization applications adjudicated in 2005, about 30,000--or about 4 percent of them--may have been adjudicated without A-files. However, this number may be less because USCIS staff are not required to record whether an A-file was available. USCIS officials said that a major reason A-files were not available for naturalization application adjudications is that staff are not using the automated file-tracking system. USCIS officials suggested that staff might not be using the automated file-tracking system for lack of sufficient training on how to use the system, while local management may not be adequately emphasizing the importance of complying with A-file tracking policies and procedures. Missing A-files can have an impact on the process of adjudicating naturalization applications in several ways. For example, when an A-file is not available at the location indicated in the automated file-tracking system, additional time is spent trying to locate the file, which slows the adjudication process and applicants may wait longer for USCIS to process their application. In addition, missing A-files can hinder USCIS's ability to uncover immigration benefit fraud and limit DHS' ability to take enforcement actions. USCIS has steps in place to help mitigate the risk of adjudicating a naturalization application without an A-file. These steps include verifying the applicant's lawful admission to the United States and conducting extra supervisory reviews to ensure that naturalization processing procedures have been followed.
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Charities are organizations established to serve broad public purposes, such as the needs of the poor or distressed and other social welfare issues. The Internal Revenue Service reported that for 2002, 501(c)(3) organizations, which include charities, had total assets of over $1.7 trillion. In 2004, the Internal Revenue Service (IRS) recognized 820,000 charities, accounting for about 90 percent of 501(c)(3) organizations. Charities can include organizations with missions such as helping the poor, advancing religion, educating the public, or providing disaster relief services. Although the federal government indirectly subsidizes charities through their tax-exempt status and by allowing individuals to deduct charitable contributions from their income taxes, the federal government has a fairly limited role in monitoring charities. States provide the primary oversight of charities through their attorneys general and charity offices. Charities have historically played a large role in the nation's response to disasters. For example, after the September 11 attacks, 35 of the nation's larger charities--including the American Red Cross and the Salvation Army--collected almost $2.7 billion to provide food, shelter, mental health services, and other types of aid. Charities' roles in responding to disasters can vary. Some charities, including the American Red Cross and the Salvation Army, are equipped to arrive at a disaster scene and provide immediate mass care, including food, shelter, and clothing, and in some circumstances, emergency financial assistance to affected persons. Other charities focus on providing longer-term assistance, such as job training, scholarships, or mental health counseling. In addition, new charities may form after disasters to address specific needs, such as the charities established after the September 11 attacks to serve survivors of restaurant workers and firefighters. The U.S. government's National Response Plan provides a single, comprehensive framework for the federal response to domestic incidents, such as natural disasters and terrorist attacks. The plan provides the structure and mechanisms for the coordination of federal support to states and localities. Major cabinet and other federal agencies are signatories to the plan, along with the American Red Cross and the National Voluntary Organizations Active in Disaster (National VOAD), a national charity umbrella organization. The American Red Cross and National VOAD are the only nongovernmental organizations that signed the Plan. In December 2004, the Department of Homeland Security released the plan, which was developed at the request of President Bush. The plan incorporates and replaces several previous plans for disaster management, including the Federal Response Plan, which was originally signed in 1992. One of the ways the plan changed the Federal Response Plan was by not naming charities active in disaster relief other than the American Red Cross, but instead incorporating them under the umbrella organization, National VOAD. The plan designates 15 Emergency Support Functions, each identifying a specific disaster response need as well as organizations that have key roles in helping meet those needs. The sixth Emergency Support Function, the function most relevant to charities involved in disaster relief, creates a working group of key federal agencies and charitable organizations to address mass care, including sheltering, feeding, and emergency first aid; housing, both short- and long-term; and human services, such as counseling, processing of benefits, and identifying support for persons with special needs. As a direct service provider, the American Red Cross feeds and shelters victims of disasters. In addition to fulfilling this role, the American Red Cross is responsible for coordinating federal efforts to address mass care, housing, and human services under Emergency Support Function 6 with FEMA. The American Red Cross is the only charity to serve as a primary agency under any Emergency Support Function. The plan gives the American Red Cross responsibility for coordinating federal mass care assistance in support of state and local efforts. The American Red Cross also has responsibilities under other Emergency Support Functions, such as providing counseling services and working with the federal government to distribute ice and water. FEMA's responsibilities include convening regular meetings with key agencies and coordinating the transition of service delivery from mass care operations to long-term recovery activities, among other responsibilities. National VOAD, a membership organization composed of approximately 40 charities that provide services following disasters, is designated as a support agency under Emergency Support Function 6, but it does not provide direct services to victims. Rather, National VOAD is responsible for sharing information with its member organizations regarding the severity of the disaster, needs identified, and actions taken to address these needs. Following September 11, GAO reported several lessons learned that could help charities enhance their response to future disasters. These included easing access to aid for eligible individuals, enhancing coordination among charities and between charities and FEMA, increasing attention to public education, and planning for future events. Further, GAO recommended that FEMA convene a working group to encourage charities involved in disaster response to integrate these lessons learned from the September 11 attacks. Following our report, seven of the largest disaster response charities, in partnership with FEMA, formed the Coordinated Assistance Network (CAN) to ease collaboration and facilitate data sharing. While the network databases are still largely in a pilot phase, both government and charity representatives have praised the potential of the network's databases to improve collaboration. Easing access to aid for those eligible: We reported that charities could help survivors find out what assistance is available and ease their access to that aid through a central, easy-to-access clearinghouse of public and private assistance. We also suggested offering eligible survivors a case manager, as was done in New York City and in Washington, D.C., following September 11 to help to identify gaps in service and provide assistance over the long term. Enhancing coordination among charities and with FEMA: We also found that private and public agencies could improve service delivery by coordinating, collaborating, sharing information with each other, and understanding each other's roles and responsibilities. Collaborative working relationships are critical to the success of other strategies to ease access to aid or identify service gaps, such as creating a streamlined application process or a database of families of those killed and injured. Increasing attention to public education: After September 11, we reported that charities could better educate the public about the disaster recovery services they provide and ensure accountability by more fully informing the public about how they are using donations. Charities could improve transparency by taking steps when collecting funds to more clearly specify the purposes of the funds raised, the different categories of people they plan to assist, the services they plan to provide, and how long the charity plans to provide assistance. Planning for future events: Further, we reported that planning for how charities will respond to future disasters could aid the recovery process for individuals and communities. Although each disaster situation is unique, it could be useful for charities to develop an assistance plan to inform the public and guide the charities' fundraising efforts. In addition, state and local emergency preparedness efforts could explicitly address the role of charities and charitable aid in future events. GAO recommended that FEMA convene a working group to encourage charities involved in disaster response to integrate lessons learned from the September 11 attacks. After our report, FEMA encouraged charities to form a working group to share information following disasters, which became the Coordinated Assistance Network. The seven charities that formed CAN are the Alliance of Information and Referral Services, the American Red Cross, National VOAD, the Salvation Army, 9/11 United Services Group, Safe Horizon, and the United Way of America. The group worked in partnership with FEMA to develop a database to share information between agencies. The CAN network addressed several of the lessons learned that GAO identified. To ease access to aid for those eligible, the network is designed to share client data, such as previous addresses, employment information, and FEMA identification numbers, between charities. CAN is intended to ensure that victims need only explain their circumstances once, rather than repeatedly to different service providers. To enhance coordination among charities and with FEMA, the CAN network is designed to make charities more aware of the services provided by one another and identify any gaps or redundancies in services. Last, to plan for future events, the CAN network intends to build partnerships or working relationships among disaster response charities before disasters strike. While the CAN network databases are still largely in pilot phase, both government and charity representatives have praised the database's potential to improve collaboration and noted that it functioned well following the disasters, considering that it was not fully developed. Following the hurricanes, charities have raised more than $2.5 billion to assist in hurricane relief and recovery efforts. Many of the charities responding to the disaster have taken steps to coordinate with one another and with FEMA and other government agencies. For example, charities have shared information through daily conference calls and through electronic databases that allowed multiple organizations to access information about services provided to hurricane victims. Some charity representatives we spoke with praised the potential of these systems for sharing information, but also raised concerns that using these systems could be difficult at times. Charities also experienced problems in providing services to victims in some hard-to-reach areas. GAO teams that visited the Gulf Coast region in October 2005 observed that in areas where the American Red Cross did not operate, other charities, such as the Salvation Army and smaller charities--often local churches--provided relief services. Although smaller organizations helped fill the gaps in charitable services in the Gulf Coast region, some concerns have been raised about their ability to provide adequate services to victims. Charities have raised more than $2.5 billion in cash donations in response to the Gulf Coast hurricanes, according to the Center on Philanthropy at Indiana University. The center notes that this number is a low estimate, since it does not include direct giving to individuals, giving to smaller charities, or in-kind donations. As of November 18, the American Red Cross had raised more than $1.5 billion, more than half of all dollars raised. The Salvation Army raised the second-highest amount, $270 million, about 18 percent of the amount raised by the American Red Cross. The Bush-Clinton Katrina Fund and Catholic Charities were the next- largest fund raisers, each raising about $100 million. Charities operating in the Gulf Coast region following the hurricanes coordinated services through the convening of major national disaster relief organizations at the American Red Cross headquarters, daily conference calls organized by National VOAD, and databases established by CAN. The usefulness of the daily conference calls, as well as the CAN databases, was questioned by some charity representatives. In the weeks following Hurricane Katrina, the American Red Cross organized a national operations center with representatives from FEMA and several major national charities, including the Southern Baptist Convention and the Salvation Army, at its headquarters in Washington, D.C. Because of the scale of the hurricane disaster and the large response needed, this was the first time the American Red Cross coordinated this type of national operations center following a disaster. This working group helped the major charities coordinate services on the ground by allowing for face-to-face interaction and ongoing communication, according to charity representatives and FEMA officials. To help fulfill its information-sharing role under Emergency Support Function 6, National VOAD organized daily conference calls with FEMA and other federal government representatives and its member organizations operating in the Gulf Coast region. National VOAD also invited nonmember charitable organizations that were providing relief to hurricane victims to participate in these calls, which sometimes included more than 40 organizations at once. During these calls, both the federal government and charities were able to provide information and answer questions about services provided, needs identified, and the organizations' abilities to meet these needs. Representatives from charitable organizations told us that these calls were an effective way to coordinate the delivery of supplies among charities and help identify those regions that were most in need of charitable services. Charities were also able to share information through CAN databases. Following the hurricane disasters, CAN created a Web-based shelter registry that provided information about emergency shelters operating in the Gulf Coast region, including their capacity and operating status. CAN also activated the database of victim information, which at the time was being tested in six pilot communities. More than 40 charities-all of whom must sign CAN participation agreements, including the American Red Cross, the Salvation Army, and the United Way of America-were able to access this database and input information about the services they provided to individual clients, according to CAN representatives. Charities could share information about these clients, who were required to sign privacy releases, through the Web-based database, thus reducing service duplication and the need for victims to give the same information to multiple organizations. Although charity representatives we interviewed reinforced the importance of the conference calls and the CAN databases, they also raised concerns about the usefulness of these systems. For example, some representatives were concerned the conference calls had too many participants. Because 40 or more charities might be participating in any one call, the calls often ran long or dealt with issues that may not have been of interest to the whole group, according to some charity officials. Additionally, charity representatives told us that call participants sometimes provided information that turned out to be inaccurate. Charity officials we spoke with were supportive of CAN and its mission, but they raised several concerns about the usefulness of its databases following the hurricane disasters. One concern that we heard from a few charities was that the CAN case management system is still in its developmental stages and was therefore not ready to be activated on such a large scale. Many volunteers had not received sufficient training on the system, and some of the technological glitches had not been completely resolved, according to charity representatives. In addition, representatives told us that the shelter database, which was developed soon after the hurricanes and had not been previously tested, may not have been ready for widespread use. In addition, some officials said that after Katrina there was neither electricity nor Internet access in certain locations, and as a result, the CAN databases could not always be used. Some officials stated that they needed to collect information in writing at the time of the disaster and then input the data into the system once they had Internet access-a task that was time-consuming and diverted resources from other needed areas. CAN officials responded that the CAN databases were created primarily for long-term recovery efforts, which would take place after electricity and Internet access were restored, rather than for short- term relief. Charity representatives also told us that daily conference calls and electronic databases helped with coordination efforts, but these systems were not as important to coordination efforts as pre-existing relationships. Several of the charities we spoke with stated that in order for charities to function efficiently following a disaster, they must have some sort of established working relationship with the other charities involved in disaster relief efforts. One charity representative told us that it is difficult to make introductions in the chaos of a disaster. He stressed that charities that operate in disasters should have memorandums of understanding signed before a disaster strikes-a practice used by many charities-so that they can immediately coordinate efforts in a disaster situation. GAO teams that visited the Gulf Coast in October 2005 observed that the American Red Cross did not provide relief in certain areas because of safety policies; and thus, other charities, such as the Salvation Army and smaller charities, often helped to meet the needs of those areas. The American Red Cross told us that with the American Society for Civil Engineers and FEMA, it had previously developed policies intended to protect the safety of service providers and victims following a disaster. These policies include not establishing shelters in areas that may become flooded during a disaster or in structures that strong winds may compromise. However, victims remained in areas where the American Red Cross would not establish shelters. Further, where the American Red Cross was able to establish shelters, the needs of victims sometimes exceeded the capacity of the American Red Cross, as this represented the largest response effort in American Red Cross history. GAO teams in Mississippi observed that the Salvation Army and smaller charities, such as local church organizations, filled many of the needs for volunteer services that the American Red Cross did not meet. Additionally, GAO teams estimated that in the Birmingham, Alabama, area, a significant portion of the approximately 7,000 evacuees were being cared for and sometimes being housed by local churches and their members. Although smaller organizations provided needed charitable services in the Gulf Coast region, some concerns have been raised about the organizations' abilities to provide adequate services to victims. Some officials told us that the smaller organizations helped meet important needs, but many of the organizations had never operated in a disaster situation and may not have completely understood the situation. For example, officials told us that some of the small charities that placed children who were separated from their parents in homes did not retain sufficient information about which children were placed where. This made it difficult to locate missing children. Other officials told us that some of the smaller organizations that tried to establish "tent cities" to house evacuees were not prepared to provide the water, sanitation, and electricity these types of shelters require. In closing, the devastation of Hurricanes Katrina and Rita once again challenged federal, state, and local governments and charitable organizations' abilities to provide large-scale aid to hundreds of thousands of survivors. It also provided a critical opportunity to assess how the nation's charities have incorporated lessons learned from responding to the September 11 tragedy. Our report on charitable organizations' contributions after September 11 identified several lessons learned and made important recommendations for improving the delivery of charitable services after disasters. GAO's ongoing work on the coordination of charitable efforts in response to Hurricanes Katrina and Rita will examine how these recommendations have been implemented and how effectively charities coordinated in response to recent hurricanes. Specifically, this upcoming report will address questions regarding the amount of money charities have raised to assist people affected by the hurricanes and how these funds have been used, how well charities are meeting their responsibilities under the National Response Plan, how well charities are coordinating their relief efforts, how people affected by the hurricanes have accessed charitable services and relief supplies and the challenges they encountered in dealing with charities, and what charities are doing to guard against fraud and abuse. This report will be released next year. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of the subcommittee may have at this time. Cindy Fagnoni (202)512-7215, [email protected]. Individuals making key contributions to this testimony included Andrew Sherrill, Tamara Fucile, Mallory Barg Bulman, Scott Spicer, Rachael Valliere, Walter Vance, Richard Burkard, Bill Jenkins, and Norm Rabkin. 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 devastation and dislocation of individuals experienced throughout the Gulf Coast in Louisiana, Mississippi, Alabama, and Texas in the wake of Hurricanes Katrina and Rita has raised concern about both the charitable sector's and the government's abilities to effectively respond to such disasters. To strengthen future disaster response and recovery operations, the government needs to understand what went right and what went wrong, and to apply these lessons. The National Response Plan outlines the roles of federal agencies and charities in response to national disasters. Recognizing the historically large role of charities in responding to disasters, the plan included charities as signatories and gave them considerable responsibilities. In addition to carrying out the responsibilities outlined in the National Response Plan, charities served as partners to the federal government in providing both immediate and long-term assistance following Hurricanes Katrina and Rita. GAO was asked to provide an overview of lessons learned from charities' response to previous disasters as well as preliminary observations about the role of charities following the Gulf Coast hurricanes. As part of our ongoing work, GAO will continue to analyze federal and charitable efforts following the hurricanes. Following September 11, 2001, GAO reported lessons learned that could help charities enhance their response to future disasters. These included easing access to aid for eligible individuals, enhancing coordination among charities and between charities and the Federal Emergency Management Agency (FEMA), increasing attention to public education, and planning for future events. GAO also recommended that FEMA convene a working group of charities to coordinate lessons learned following September 11. Following the GAO report, seven disaster response charities partnering with FEMA formed the Coordinated Assistance Network to improve collaboration and facilitate data sharing. Following the Gulf Coast hurricanes, charities raised more than $2.5 billion dollars, according to Indiana University's Center of Philanthropy, with more than half of these funds going to the American Red Cross. GAO's preliminary work shows that these charities have taken steps to improve coordination of relief efforts by sharing information through daily conference calls and electronic databases. Despite these efforts, charities faced some challenges in coordinating service delivery. For example, some charities reported that their volunteers needed additional training to use the databases. GAO teams that visited the Gulf Coast region in October 2005 observed that in areas where the American Red Cross did not provide services, the Salvation Army and smaller organizations--often local churches--were able to meet many of the charitable needs of hard-to-reach communities. The American Red Cross's efforts to protect service providers may have prohibited it from operating in some of the harder-to-reach areas. Additionally, some concerns were raised about smaller charities' abilities to provide adequate disaster relief services.
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Introduced in 1993, the AV-8B aircraft with night attack and radar capabilities enhances pilots' abilities to locate and destroy targets under conditions of marginal weather, limited visibility (smoke, dust, or haze), and darkness. The two previously produced models had significant limitations. The day attack model, the first version of the aircraft procured by the U.S. Marines in 1982, has limited capability during the hours of darkness because the pilots cannot refer to the terrain and horizon to assist in maneuver, navigation, and attack. The night attack version, introduced into the fleet in 1989, has increased capabilities over the day attack version but still has limitations. Its Angle Rate Bombing System, used by the day and night attack models for weapons aiming and delivery, is not effective at night or during adverse weather conditions. In addition, the night attack version's forward looking infrared system, which assists in navigation during hours of darkness, is degraded by air moisture. All the prior upgrades to the AV-8B--from day to night attack models and then to models with the improved radar configuration--have been made by producing new models. Aircraft have not been rebuilt or modified. The Marines plan to deviate from this practice with REMAN. Under REMAN, the Marines plan to award single-year contracts to remanufacture 72 of the day attack model aircraft and convert them to aircraft with night attack and radar capabilities over a 10-year period. The day attack aircraft are to be transported to the Naval Aviation Depot (NADEP) in Cherry Point, North Carolina. There, the aircraft are to be tested for flight worthiness and then disassembled. About $6 million worth of parts from each aircraft are to be returned to the supply system and about $11.3 million of designated components and assemblies from each aircraft are to be either used in their current condition, refurbished, or modified for reuse in the REMAN program. The components and assemblies are to be sent to the contractor, McDonnell Douglas Aerospace Company in St. Louis, Missouri. The contractor is to integrate these used components and assemblies, along with a new fuselage, a new engine, and an APG-65 radar system, to produce the final REMAN aircraft. The first REMAN aircraft is scheduled for delivery in February 1996. Considering the costs associated with inducting an aircraft into the REMAN program, disassembling, refurbishing, and modifying components and assemblies; the value of components and assemblies furnished to the contractor; and economies available through multiyear procurement, our review indicated that the REMAN program is not the most cost-effective procurement approach. It would be feasible for the Navy to revise its acquisition strategy because the contractor's production line and facilities are still in place and ready for continued production of radar model AV-8B aircraft. During our review, we compared past procurement cost figures (adjusted for inflation) with current REMAN program cost estimates. We also assessed the impact of multiyear procurement on new production cost estimates due to recommendations by the Department of Defense (DOD) Inspector General and recent congressional interest. Twenty-one radar aircraft were procured in 1991 at an average unit flyaway cost of $22.4 million. Six more were procured in 1992 to replace aircraft lost during Desert Storm at an average unit flyaway cost of $31.9 million--a 42-percent increase that the program office explained was due to the small quantity procured. Table 1 shows the procurement history of the AV-8B program. The AV-8B program office does not have a current cost estimate for producing additional radar aircraft. Therefore, to facilitate a comparison of REMAN and probable new production costs, we used the fiscal year 1991 flyaway cost as a baseline because of its more efficient production rate (21 aircraft). Using Navy indexes, we escalated the average unit cost of fiscal year 1991 procurement ($22.4 million) by 7.5 percent ($24.1 million) to account for inflation. Then, using DOD data on potential savings from a multiyear procurement strategy for engines, we determined that the cost of new aircraft would be about $23.6 million per aircraft, without having provided the contractor the additional $11.3 million worth of reused, government-furnished components and assemblies. We discussed this methodology with DOD officials and they did not disagree. According to program documents, under the REMAN acquisition strategy, the Navy expects to pay between $23 million and $29.5 million for each aircraft, exclusive of the value of reused government-furnished equipment. "The remanufacture program commenced in fiscal year 1994 and has not completed a full manufacturing cycle. Therefore, process performance is not yet fully validated and extrapolation of cost savings are estimates based on the prime contractor's manufacturing process used in past production of new AV-8B aircraft of the same configuration. While total quantities appear firm and the requirement remains valid, a more appropriate time to consider a multi-year procurement acquisition strategy would be after the remanufacturing costs are substantiated, and we are comfortable that no system degradation has occurred as a result of remanufacture. We will then be in a position to make a recommendation with regards to a multiyear procurement plan for fiscal year 1998." If the program continues as planned, by 1998, procurement contracts will have been initiated to remanufacture 50 percent of the 72 aircraft planned for the REMAN program. Further, our review of the Navy's procurement history for this aircraft (see table 1) showed that the contractor has demonstrated the capability to produce new AV-8B aircraft at a more efficient rate than the procurement schedule for the REMAN program shown in table 2. Accelerated production to the fiscal year 1991 level would be a more cost-effective approach than the low rate being requested by the Navy, and would provide the Marine Corps with increased combat capability at a more efficient production rate. On the other hand, NADEP does not have the ability to disassemble the aircraft or refurbish and modify components and assemblies for reuse by the contractor under the REMAN program at the rate needed to support a production rate comparable to that available under new production. The NADEP at Cherry Point, North Carolina, has been tasked to disassemble the day attack aircraft removed from the fleet, ensure that the components and assemblies to be reused in the process of producing the radar version are in ready-for-use condition, and deliver these parts to the contractor. Each of the reused components and assemblies has a defined delivery schedule, which if not met will delay production at the contractor's facility and increase program costs. The Navy's ability to deliver the components and assemblies on schedule is questionable. According to NADEP officials, since the remanufacture program was not prototyped, the depot is experiencing many unanticipated problems. Each aircraft has some unique differences that must be resolved in terms of modification, replacement, or repair before a particular component is sent to the contractor for integration in the REMAN aircraft. If the depot does not have a replacement part on hand or the capability to modify or fabricate particular parts and assemblies, it must contract out for the capability or purchase the necessary new parts. All of these options would lead to delays and increased costs. The depot has experience in disassembling the AV-8B aircraft from its Age Exploration Program, which evaluates the structural integrity of the aircraft. However, the Age Exploration Program does not require the detailed level of dismantling that is required for the REMAN program. Additionally, unlike in the Age Exploration Program, under the REMAN program the depot is required to make over 30 new modifications to components that it has no previous experience making. In planning support to the REMAN program, the depot budgeted 2,879 staff hours per aircraft for the disassembly functions. However, the process has taken up to 5,100 staff hours for the first aircraft inducted into the program, and the next three aircraft are expected to consume about the same level of effort. Officials at the depot told us that the increase in the time required for the disassembly process was due to the fact that there had not been an opportunity to prototype the process, including the handling of various modifications. This increase in staff hours causes increases in costs and delays in schedule for the program. The fiscal year 1994 depot labor rate was $47.05 per hour. With the increase in required staff hours, the cost per aircraft inducted into the program will increase by about $104,000. Officials at the depot anticipate that the other three aircraft inducted into the REMAN program during fiscal year 1994 will also take about the same level of effort. As the depot technicians and mechanics gain more experience with the disassembly, refurbish, and modification operations, they expect the process to level off at about 4,000 staff hours per aircraft. Due to an increase in the Defense Business Operating Fund rates, the depot labor rate for fiscal year 1995 was much higher ($91.59 per hour) than fiscal year 1994 rates. Officials at the depot are optimistic that the rate for fiscal year 1996 will drop to about $66 per hour. If the labor rates drop to $66 per hour and stay constant for the remainder of the REMAN program and the depot achieves the estimated level of 4,000 staff hours per aircraft for disassembly, rework, and modification before shipping the kits to McDonnell Douglas, the results would still be an added cost to the program of about $74,000 per aircraft. To begin the disassembly process, four aircraft were inducted into the REMAN program between June and November 1994. The disassembled, modified, and reused-as-is components were scheduled for delivery to the contractor between July 1995 and May 1996, to meet a production delivery schedule of February through November 1996. As of August 1995, a complete set of components for one of the four aircraft inducted in fiscal year 1994 had been delivered to the contractor. Component sets for the other three aircraft, while not yet behind in their delivery schedules, were experiencing delays in their modification and preparation at the depot. Depot officials told us that these delays have occurred because of the inability to obtain parts and materials necessary to modify the day attack aircraft components in a timely fashion. Components from each disassembled aircraft are divided into 22 kits. Several of the components in each kit require some work or modification to be made ready for use before they are included in the respective kits. Each of the NADEP maintenance shops responsible for the modification to these components and assemblies have schedules to maintain, so as not to cause schedule delays in delivering the kits to the contractor. Delays in the receipt of materials required to make components ready for use put the depot at risk for not being able to deliver the components and assemblies to the contractor on schedule. During our visit to the depot in August 1995, we were told by various shop foremen that modification schedules were not being maintained because parts and modification kits they require to make the necessary modifications were not being delivered to the depot on schedule. The lack of parts and materials needed to make the necessary modifications to upgrade day attack aircraft components to the REMAN program specifications negatively affects the depot's ability to deliver the remanufacture kits to the contractor as scheduled. Some of these delays result from the contractor and NADEP vendors' failure to deliver as scheduled. While we were at the depot in August 1995, we noted a 50-day delay in the receipt of wing modification kits from McDonnell Douglas. According to depot officials, to minimize delays in providing the remanufacture kits to the contractor, arrangements have been made to borrow components and parts from the Aviation Supply Office in Philadelphia. Altimeters ordered from the vendor for the first four REMAN aircraft are a case in point. NADEP and the Aviation Supply Office agreed that when the parts are received from the vendor, the depot will forward them to the Aviation Supply Office as replacements for those borrowed. Costs associated with this innovative depot work-around to avoid schedule delays are increases charged to the REMAN program as an over-and-above cost. A new production strategy would mitigate this cost because the contractor would be furnishing new parts and assemblies as opposed to reused components from the disassembled day attack models being furnished by the government. According to Navy officials, over $130 million will be saved by using excess APG-65 radar assets from the F-18 aircraft in the AV-8B aircraft. In a March 11, 1994, Acquisition Decision Memorandum, the Principal Deputy Under Secretary of Defense for Acquisition and Technology concurred with the Navy's approach to accelerate the F-18 radar upgrade from APG-65 to APG-73 radars in order to provide the resulting excess APG-65 radar assets for the REMAN program. Three of the six basic components that make up the APG-65 radar system are common to the F-18's APG-73 radar and will remain in use in the F-18 aircraft. The remaining three components (the radar receiver/exciter, target data processor, and computer power supply) will become excess assets available to the REMAN program. In a 1995 classified report, we noted that the APG-73 radar had problems that needed to be resolved before entering the production phase. Responding to our report, DOD said that a procurement decision would be made sometime in 1996, after an operational evaluation of the system is completed. If problems continue and the APG-65 components are not available to the AV-8B REMAN program as planned, it is possible the program could be delayed. If the assets are not available at all, the AV-8B program office would then have to procure all new radar components. Program officials told us the assets would be provided by the F-18 program as planned either from spares stock or from F-18 fleet assets. They also mentioned the possibility that an older, less capable version of the APG-65 radar could be tested and used, if necessary. According to program officials, the 150-series APG-65 radar is the version required by the AV-8B aircraft. One of these officials also told us that the schedule for removal of the 150-series APG-65 radar assets from the F-18 aircraft is not in sync with the requirements of the AV-8B remanufacture program for radar assets. The AV-8B REMAN program will need radar assets before their scheduled removal from F-18 aircraft. Not only is the removal of radar assets from F-18s a schedule risk to the AV-8B program, the program officials stated that there is also a shortage of 17 sets for the remanufacture program. To compensate for this shortfall, the Navy is modifying 17 of the older 140-series APG-65 radar assets to 150-series configuration to meet REMAN schedule requirements. This work-around is being funded with monies from the AV-8B remanufacture and other Navy programs. In our discussions with contractor personnel about the impact of possible delays, we were told that if the radar components, which are to be furnished by the government, are not made available to the contractor on schedule, the aircraft could be provisionally delivered without radar. If this is the case, the aircraft would not be mission capable until the radar sets were made available. Under a new production strategy, the contractor would be responsible for providing new radar, mitigating this risk. In light of the availability of a more cost-effective strategy to buy new radar AV-8B aircraft, instead of modifying the day attack AV-8B, we recommend that you direct the Secretary of the Navy to develop a current cost estimate for producing new radar model aircraft and (1) revise the acquisition strategy for acquiring upgraded AV-8B aircraft for the Marine Corps so that after the existing annual contract expires, the Marine Corps acquires new radar models rather than remanufactured models and (2) take advantage of the savings available through multiyear procurement. In commenting on a draft of this report, DOD agreed that a multiyear procurement strategy is generally preferable and advantageous, but only partially concurred with our recommendation that the Navy be required to take advantage of savings available through multiyear procurement. DOD stated that it is policy to reevaluate program acquisition strategies as changes in fiscal resources or operational requirements justify. We believe that since the radar model AV-8B aircraft is a valid and stable Marine Corps requirement, now is the appropriate time for the Navy to take advantage of savings that could be realized through multiyear procurement. DOD disagreed with our recommendation to require the Secretary of the Navy to revise the acquisition strategy for acquiring upgraded AV-8B aircraft so that after the existing annual contract expires, the Marine Corps acquires new radar model aircraft rather than remanufactured aircraft. DOD based its disagreement on current fiscal constraints and cost analyses performed by the Naval Air Systems Command and the Office of the Secretary of Defense's Cost Analysis Improvement Group prior to the 1994 Milestone IV Defense Acquisition Board Review. According to DOD, these analyses, which projected that it would cost $29.7 million per aircraft to produce a new radar model AV-8B, confirmed that the REMAN program is the more cost-effective way to upgrade the AV-8B fleet. The information the Naval Air Systems Command and the Cost Analysis Improvement Group used in comparing the costs of the REMAN program with continued or new production is based on out-of-date historical cost data from the procurement of night attack model AV-8B aircraft that were last procured in fiscal year 1990. On the basis of those data, which were the best available at the time the REMAN program was considered, remanufacture of current assets might have been the best solution to modernize the AV-8B fleet. However, new data, based on the procurement of new radar model AV-8Bs, are now available. We used those data to arrive at our $23.6-million estimate for producing a new radar model AV-8B. During a meeting with DOD officials to discuss their comments on a draft of this report, DOD did not disagree with our methodology. Therefore, in our view, the data we used provides a more accurate cost indicator than an estimate of the night attack AV-8B aircraft modified for radar because our data come from actual procurement of radar model AV-8B aircraft. DOD also stated in its comments that the REMAN program will provide aircraft with the same operational capabilities that new production provides. This is an inaccurate characterization of the operational capabilities that will be provided under the REMAN program. In fact, aircraft to be produced under the REMAN program will have less operational capability because they will have less weapon-carrying capacity than the radar model AV-8B aircraft procured in fiscal year 1991. Specifically, because the REMAN aircraft will have reused wings from the day attack model aircraft, these aircraft will have only five external weapon stations, whereas the new production radar models have seven external stations. DOD's comments are presented in their entirety in appendix I. We obtained information on the project contract and management of the AV-8B Harrier Program by reviewing program documentation and interviewing officials at the following DOD locations: U.S. Navy Headquarters, Washington, D.C.; U.S. Marine Headquarters, Arlington, Virginia; Office of the Chief of Naval Operations, Washington, D.C.; AV-8B Program Office, Crystal City, Virginia; and Naval Aviation Depot, Cherry Point, North Carolina. We also visited contractor facilities at McDonnell Douglas Aircraft Division in St. Louis, Missouri. We conducted our review between October 1994 and November 1995 in accordance with generally accepted government auditing standards. This report contains recommendations to you. The head of a federal agency is required under 31 U.S.C. 720 to submit a written statement on actions taken on our recommendations to the Senate Committee on Government Affairs and the House Committee on Government Reform and Oversight no later than 60 days after the date of the report and to the Senate and House Committees on Appropriations with the agency's first request for appropriations made more than 60 days after the date of the report. We are sending copies of this report to appropriate congressional committees; the Secretary of the Navy; 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, Evaluator. The following is GAO's comment on the Department of Defense's (DOD) letter dated December 20, 1995. 1. According to DOD's response to a draft of this report, the radar model aircraft procured in 1991, that we used as our basis for comparing Remanufacture Program (REMAN) and new production cost, was the last year of a 3-year multiyear procurement buy. We determined that multiyear procurement for the 1991 buy was applicable only to the airframe. Therefore, we recalculated our estimate so as not to apply a multiyear cost saving factor for the airframe. This recalculation increased our estimate for new aircraft procurement but did not cause us to change our conclusions and recommendation in the final report. Our adjusted estimate is reflected in the body of the report. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO reviewed the Marine Corps' AV-8B Harrier Remanufacture program, focusing on whether it would be more cost-effective to rebuild older aircraft or procure new aircraft with increased capabilities. GAO found that the: (1) Navy estimates that it would cost between $23 million and $29.5 million to rebuild each AV-8B aircraft using refurbished parts; (2) Marines could procure new AV-8B radar attack aircraft for about $23.6 million each; (3) Navy does not have the ability to rebuild AV-8B aircraft as quickly as new aircraft can be produced; (4) Navy could revise its procurement strategy to procure new radar aircraft, since the remanufacture program is conducted under single-year contracts; (5) Navy is having difficulty disassembling older aircraft and acquiring replacement components in a timely and cost-effective manner; and (6) surplus radar equipment intended for use in rebuilding the aircraft may not be available as soon as anticipated, which could cause delays in the remanufacture program.
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The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (P.L. 104-193) replaced the entitlement program, Aid to Families with Dependent Children (AFDC), with Temporary Assistance for Needy Families (TANF). TANF provides $16.5 billion annually to the states in the form of block grants through 2002. Under TANF, recipients are required to work and can receive federal cash assistance for only a limited period of time. TANF's requirements vary from state to state because the 1996 act gave the states more control over the design of their own programs. While TANF is generally administered at the state level, the Department of Health and Human Services (HHS) is the primary federal agency providing oversight of states' welfare programs. Through its public housing and Section 8 programs, HUD provides housing assistance to about 4.3 million low-income households. In fiscal year 1997, HUD's outlays for Section 8 subsidies and for public housing modernization, development, and operating subsidies amounted to about $22.6 billion. About $7.5 billion of this amount was allocated through the tenant-based Section 8 certificate and voucher programs, under which housing agencies provide rent subsidies to private landlords. About $7.9 billion went directly to private landlords as part of the project-based Section 8 program, and about $7.2 billion went for the modernization, development, and operation of Public and Indian Housing. Included in this latter amount is $2.6 billion in appropriations that was distributed through HUD's formula-based performance funding system to state, county, and local housing agencies for the operation of public housing. In 1996, approximately a quarter of the households receiving HUD subsidies also received cash assistance. In general, families receiving housing assistance are required to pay 30 percent of their cash income (adjusted for certain items, such as child care and medical expenses) in rent, while HUD provides subsidies to housing agencies and private landlords to make up the difference between tenants' rental payments and the cost of operating public housing units or the rents charged by the landlords. Because rental payments are linked to household income, rental revenues will fall if families receiving assistance are unable to replace lost welfare benefits with wage income, and additional HUD subsidies will then be needed. But if assisted families' employment and earnings increase under welfare reform, then the amount of the required rental payments may rise, reducing the need for subsidies. For subsidy needs to decline, residents would have to earn more than they formerly received in cash assistance, and working residents would need to either remain in public and assisted housing after gaining employment or be replaced with employed residents. These conditions are less likely to hold in areas where cash benefit levels are high and nonsubsidized housing is available and affordable. HUD has established policies that can influence the impact of welfare reform on housing programs. For example, housing agencies and HUD can set minimum rents of up to $50 for tenants who live in public housing or have Section 8 certificates or vouchers, while owners of project-based Section 8 properties are required to charge minimum rents of $25. In addition, recent legislation has expanded housing agencies' authority to exclude some wage earnings from rental payment calculations in an effort to retain working families in public housing units. Similarly, while housing agencies and subsidized private landlords were formerly required to give preference in admission to very poor families, they are now allowed to give some preference to working families with wage income. In addition to these rent and admission policies, HUD provides programs, some of which originated in the mid-1980s, to deliver employment-related services to the tenants of public and assisted housing. These programs have provided job training, counseling, and placement services; child care; and transportation. We identified five studies estimating welfare reform's financial impact on housing programs nationally, one estimating the impact for eight housing agencies, and another seven estimating the impact for a single housing agency. While some of the studies suggest that welfare reform will likely cause only modest changes in the amounts of the HUD subsidies needed, some of the studies indicate more substantial effects. For example, one national study indicated that HUD would need to increase its annual subsidies to housing agencies by almost 42 percent to offset expected decreases in public housing rents, while another study indicated that HUD could decrease its annual subsidies to a particular housing agency by almost 20 percent. Differences in the studies' focus and assumptions help explain the widely varying estimates. While some researchers focused on a single feature of a state's welfare reform plan, others examined the national impact of a broad range of state plans; while some studies used "worst-case" assumptions about the employment and earnings prospects of welfare recipients, others used "best-guess" assumptions. Moreover, because certain welfare and housing policies have changed since the estimates were developed, the economy has been stronger than anticipated, and the effects of welfare reform on welfare recipients' behavior are difficult to predict, some of the authors of the studies we reviewed expressed uncertainty about their estimates. Five studies we identified estimated the financial impact of welfare reform nationally (see table 1). Three of these five studies suggest that welfare reform will have a relatively modest effect on the need for HUD subsidies, ranging from a 0.4-percent annual decrease to a 3.3-percent increase in the amount needed. The two remaining studies anticipate a greater effect. For example, the Council of Large Public Housing Authorities indicated, in the fall of 1996, that the annual amount needed for HUD subsidies could increase by 19 percent. Of the other eight studies we reviewed, seven estimated welfare reform's impact on individual housing agencies in different parts of the country, and one, by HUD's Office of Policy Development and Research, covered eight individual housing agencies. The estimates for these eight studies, which are summarized in table 2, varied widely, both from one housing agency to another and from one scenario to another for a single housing agency. In particular, under assumptions that the authors characterize as unlikely--that the state would adopt a harsh welfare reform plan and the housing authority would not provide employment assistance to affected residents--the Seattle housing authority's findings indicate that the agency could need an annual increase of as much as 37 percent of its fiscal year 1997 HUD subsidy to offset welfare reform's impact. Conversely, using optimistic assumptions, HUD predicted that rental revenues at the Dallas housing authority could rise by enough to warrant as much as a 20-percent reduction in the amount of the HUD subsidy needed. In addition to differences in geographic scope, the studies we reviewed differed in other key aspects of their focus, and these differences often dictated the assumptions used in the studies. Some of these studies took a worst-case approach to welfare reform, imposing very conservative assumptions about the employment and earnings prospects of welfare recipients with housing assistance. Generally, these analyses were designed to heighten the awareness of the welfare and housing assistance communities to the worst possible implications of some aspects of welfare reform and to prompt these communities to take appropriate action. For example, at the national level, the Council of Large Public Housing Authorities used a worst-case approach in the summer and early fall of 1996 to look at what would happen if all residents receiving cash assistance lost that assistance 5 years after the implementation of welfare reform (the federally mandated time limit) and if none of the affected families were able to replace any of these benefits with wage earnings. This analysis, which was designed to motivate the public housing community to take action, estimated that required rental payments could fall by 30 percent (the percentage of income that residents generally pay in rent) of the total amount of cash assistance lost. At the local level, the Minneapolis and St. Paul housing authorities designed studies to show the maximum potential effect of Minnesota's decision to reduce by $100 the monthly cash benefits for TANF recipients with housing assistance. To estimate the maximum impact of the $100 reduction on the housing agency and HUD, these studies ignored any possibility that residents receiving TANF benefits might have additional earnings to offset some of the $100 loss in benefits. Thus, the monthly rental payments of subsidized households would be $30 ($100 times 30 percent) less than they otherwise would have been. Under this scenario, the rental payments of public housing residents and Section 8 certificate and voucher holders would decline annually by $817,000 for Minneapolis and over $1 million for St. Paul. Other studies, designed to forecast HUD's actual budget needs, attempted to make best-guess estimates of the financial impact of welfare reform on HUD and housing agencies. HUD's national study and one by the Congressional Budget Office (CBO) used more elaborate methods to predict the employment and earnings prospects of welfare recipients. For example, relying on various studies of the earnings of former welfare recipients, CBO assumed that households with Section 8 assistance would be able to replace two-thirds of their lost welfare benefits with earnings when time limits take effect. These studies generally found that welfare reform would have a more modest impact than studies designed to look at the worst-case outcomes of imposing time limits. Still other studies, including the Johns Hopkins study, HUD's multisite study, and the Los Angeles study, were designed to determine a range of likely effects of welfare reform on HUD and housing agencies and to identify the factors that might influence the extent of these effects. Most of these studies focused on the potential impact of a broad range of factors--including welfare policies (e.g., time limits and employment sanctions), housing policies (e.g., minimum rents and exclusions of earned income from rental payment calculations), and local and national economic conditions--to determine which factors would have the largest impact on the subsidies needed. The studies used varying assumptions and models to estimate welfare reform's impact under different scenarios. For example, HUD's multisite study and the Los Angeles study estimated the impact of welfare reform under both optimistic and conservative assumptions about the employment and earnings prospects of welfare recipients with housing assistance. Additionally, both HUD's multisite study and the Johns Hopkins study varied their assumptions about welfare reform's rules by examining the potential effects of different state welfare programs. Some of the studies discussed above focused on the impact of certain housing policies. For example, HUD's multisite study found that because rental payments do not fall to zero when tenants lose their cash income but are required to pay minimum rents, the imposition of such minimum rents could offset much of the potential decline in rental revenues resulting from welfare reform. The Los Angeles study attempted to measure how much of the potential increases in rental payments the housing agencies would forgo because of policies excluding new income from rental payment calculations. Finally, studies designed by David Griffiths & Associates, Ltd. (DMG), focused on the impact of significant involvement by housing agency managers in helping tenants move into the labor market. DMG assumed, in its studies for both the District of Columbia and the Public Housing Authorities Directors Association, that a high level of involvement by housing agency managers would significantly improve the income prospects of welfare recipients. The varied assumptions underlying the studies we reviewed reflect researchers' uncertainties about changes in welfare and housing policies over time, the future of the economy, and the behavioral responses of welfare recipients. The authors of several of the studies described their estimates as outdated because events (such as the final version of a state's welfare reform law or the condition of the national economy) had not played out as the authors had anticipated when they conducted their studies. For example, the representative of DMG who developed the estimates for the Public Housing Authorities Directors Association and the District of Columbia told us that if he were developing the estimates today, he would revise the results of his pessimistic scenario significantly to take account of (1) modifications to the welfare reform law that have reduced the cuts in Supplemental Security Income he initially anticipated, (2) the significant emphasis HUD has placed on programs to help move people from welfare to work, and (3) the surprisingly strong economy. Similarly, the authors of HUD's multisite study told us that their estimates for Los Angeles are probably too pessimistic because they assumed a more restrictive welfare program than the one California actually adopted in August 1997. Other authors were also concerned about the general difficulty of predicting the future behavior of TANF recipients. For example, officials at CBO stated that because of uncertainties about how welfare reform would be implemented and how recipients would respond, they recognized that their estimates could be substantially different from actual outcomes. And, as we reported in January 1998, HUD is no longer standing behind its initial assessment of welfare reform's nationwide impact, in part, because of difficulties it identified in predicting how states will implement welfare reform plans and how welfare recipients will respond to welfare reform. The experts with whom we spoke generally agree that several methodological and data issues complicate efforts to forecast welfare reform's financial impact on HUD's housing subsidy programs. Some issues, such as differences in state welfare policies and plans for implementing welfare reform and uncertainty about the strength of the economy and the behavior of welfare recipients, make it difficult to predict the impact of welfare reform itself. Housing researchers generally agree, however, that estimating welfare reform's financial impact on housing programs is more complex than estimating welfare reform's impact overall because the characteristics of welfare recipients with housing assistance may be different from those of other welfare recipients, and housing agencies and landlords may adopt a broad range of housing philosophies and policies. Finally, the lack of consistent and reliable data further hampers researchers' efforts to predict welfare reform's financial impact on HUD's housing programs with any certainty. Differences in state welfare policies have always been important in evaluating the federal welfare program. Under AFDC, states paid different levels of benefits to entitled recipients, and HHS researchers reported that recipients were more likely to leave the welfare rolls in states with lower benefits than in states with higher benefits. Because welfare reform gave the states greater discretion in setting welfare policy, state policies now differ across a multitude of dimensions. For example, the states can now determine who is eligible for cash assistance and for how long. In addition, they can set specific work requirements and establish sanctions for recipients who violate their state welfare policies. Differences in the implementation of welfare plans at the state and local levels may exacerbate interstate differences in the impact of welfare reform. In particular, the manner in which caseworkers relay information to and interact with recipients affects outcomes under welfare reform. For example, in evaluating welfare reform in several states, the Manpower Demonstration Research Corporation (MDRC) found that differences in what caseworkers told clients in Florida and Minnesota help to explain differences in the timing of caseload reductions in those states. MDRC found that in Florida, where recipients could receive cash benefits for a maximum of 2 years, recipients tended to exhaust their benefits before getting jobs and therefore caseloads did not decline quickly, while in Minnesota, where recipients could receive federal cash benefits for 5 years, caseloads dropped quickly. MDRC told us that this difference in behavior seemed to occur, at least in part, because Florida caseworkers encouraged recipients to remain on TANF and spend their 2 years investing in job skills, while Minnesota caseworkers advised their clients to become employed as soon as possible and save their limited benefits for possible future needs. The studies we identified varied widely in the assumptions they used to predict welfare recipients' potential employment prospects and earnings. Experts with whom we spoke generally agree that welfare recipients' employment prospects and earnings depend on the market for low-skilled workers. The demand for these workers generally depends on the overall health of the national and local economy, while the supply depends on recipients' responses to the level of wages they could earn and the level of welfare benefits they could receive. In general, some issues make it difficult to predict the demand for low-skilled workers. First, because welfare reform has thus far occurred during a period of strong national job growth, researchers have little sense of how the demand for low-skilled labor will hold up during an economic slowdown. For example, experts have been unable to agree on how much of the recent decline in the number of families receiving cash assistance is the result of the very robust economy in recent years and how much is the result of welfare reform. In order to shed light on the degree to which economic conditions affect the impact of welfare reform, HUD researchers, in their multisite analysis, studied at least two cities with different economic conditions in each of three states. Welfare recipients in the same state were generally subject to the same welfare laws. While HUD found that welfare recipients in all three states had more success in entering labor markets in cities with more robust local economies, the difference was not consistent across the states. Second, some researchers have noted that while it may be possible to measure the number of low-skilled jobs available at a given point in time, this type of analysis will not necessarily reveal how many people can find employment over a period of time because of constant turnover in employment and other changes in labor market conditions over time. The supply of low-skilled workers will depend, in part, on how welfare recipients respond to changes in their state's welfare program. While some researchers believe that past studies of the impact of changing wages and benefit levels on welfare recipients' desire to work could help answer this question, other researchers believe that the 1996 welfare reforms constitute such a dramatic shift from earlier welfare policies that past behavior may not be a good predictor of future behavior. Thus, there is little consensus among experts about the future behavior of welfare recipients. Housing experts with whom we spoke generally agree that estimates of the effect of welfare reform on the general welfare population may not apply to the subset of welfare recipients in public and assisted housing. As we reported in June 1998, welfare recipients living in public housing are more likely to have been on welfare longer than those without housing assistance, and longer spells on welfare have been associated with less success in obtaining employment. In addition, experts suggest that welfare recipients with housing assistance may be less likely to go to work for several reasons: Welfare recipients with housing assistance will be able to retain a smaller portion of their new earnings because they will generally be required to pay 30 percent of those earnings in rent. Because housing assistance provides a "cushion," welfare recipients with public or assisted housing may have less incentive to work than other welfare recipients with the same job prospects but no housing assistance. Recent evidence suggests that job growth is occurring in the suburbs while welfare recipients are likely to live in urban centers or rural areas. In particular, welfare recipients with project-based housing assistance (including both public housing and project-based Section 8 assistance) may face higher relocation costs than other welfare recipients because they may have to give up their housing assistance to move to locations with better job prospects. The combination of longer periods on welfare and less incentive to work may help explain why some researchers have found that welfare recipients with housing assistance are less successful in moving from government-sponsored job training programs into long-term private sector employment. A recent study by MDRC researchers in Atlanta showed that of the participants in certain federal job training programs, those with no housing assistance were most likely, those with certificates and vouchers slightly less likely, and those in public housing least likely, to find employment after completing their training. Because of recent housing policy changes and uncertainty about the degree to which housing agencies will adopt these changes, researchers will have difficulty separating the effects of welfare reform from those of changes in housing policy, just as they have had difficulty separating the effects of welfare reform from those of overall economic conditions. Many of the studies we reviewed, as well as experts we consulted, recognized the importance of recent changes in rent and admission policies and programs to move welfare recipients to work. For example, the director of the housing authority in Athens, Georgia, told us that the types of admission preferences, the effect of management's involvement in helping tenants obtain employment, and the level of minimum rents could determine whether his agency's rental revenues rise or fall with welfare reform. However, recent legislation may limit the degree to which housing agencies will be able to use minimum rents to offset potential declines in rental payments under welfare reform. Welfare and housing researchers have used a combination of government administrative data--data collected by federal, state, or local officials on a host of factors associated with the recipients of welfare and housing assistance--and survey data to study the behavior of those who receive welfare and housing assistance. Administrative databases generally provide information over time on the participants in a program, while survey data generally conform more closely to research objectives but cover a smaller number of households. Because the states have more flexibility to design their own systems under welfare reform, data elements in administrative and survey databases may be less consistently defined than in the past. Although state welfare agencies have reported administrative data under HHS' emergency rules, which were phased in over a period of 9 months beginning in July 1997, some states have submitted data that are not fully consistent with HHS' specifications. HHS will be issuing final TANF reporting rules that better define terms, but according to an HHS official, the states will continue to have significant flexibility in how they define their programs, making data assessment more difficult. Similarly, according to an official in the Census Bureau's Housing and Household Economic Statistics Division, the increased interstate variation promoted by the 1996 welfare reforms has placed a significant burden on national organizations that collect survey data. For example, obtaining consistent data across states about the level of cash benefits may be difficult because the states have given their TANF benefits a variety of names. For example, Minnesota calls TANF the Minnesota Family Investment Plan, while California refers to TANF as CalWORKS. In addition, questioners and respondents may not know how to classify the increasingly common "one-time diversion" payments, which states use to provide one-time assistance to families in lieu of placing them on the welfare rolls. We and others have questioned the reliability of the existing national administrative and survey data on the residents of public and assisted housing. HUD collects administrative data on the residents of public and tenant-based assisted housing in its Multifamily Tenant Characteristics System database. Housing agencies are supposed to provide information for this database to HUD electronically in a specified format, but some agencies, especially the larger ones, do not report data for all of their residents, and the data contain errors as well. A HUD official told us that in recent years, HUD has concentrated on improving the response rate for these data, but the greater response has been accompanied by an increase in the number of data entry errors. HUD collects similar data on the residents of properties with project-based Section 8 assistance in the Tenant Rental Assistance Certification System database. According to HUD officials, this database suffers, on a smaller scale, from reporting problems and data errors such as those affecting the multifamily database. The reliability of survey data on housing assistance is also questionable because respondents to surveys with questions about this assistance often misreport their status. HUD has documented probable misreporting in the Current Population Survey and the American Housing Survey. For example, in a paper presented in May 1996, HUD economists reported that the majority of those receiving housing assistance who said they lived in public housing actually do not. Furthermore, they reported that the majority of the families receiving other housing assistance do not accurately identify the way they are assisted, and perhaps one-fifth of those who report receiving a housing subsidy do not actually receive one. In addition, the interim director of the Johns Hopkins University's Center for Policy Studies has noted similar reporting discrepancies in survey responses and administrative data and has suggested methods for improving the reliability of the survey responses. Although the Census Bureau and others are developing and testing questions to improve survey responses on welfare benefits and housing subsidies and HUD has worked to improve its data as well, it is still too early to obtain adequate data to test assumptions about the outcomes of recent welfare and housing reforms. We provided a draft of this report to HUD for review and comment. HUD stated that the report is fair and straightforward and provided some technical corrections. HUD's comments appear in appendix III. In addition, we provided excerpts of a draft of this report to the authors of each of the studies we reviewed. Several of the researchers and housing agencies provided us with comments that we incorporated as appropriate. To identify studies that estimated welfare reform's financial impact on housing assistance programs, we contacted known experts and officials from a variety of organizations and government agencies. In particular, we spoke with experts in housing and welfare research, representatives of major trade associations and advocacy groups, officials at 30 of the largest local housing authorities and 10 of the largest state housing agencies, and officials from 10 private management companies of various sizes that are managing properties with Section 8 subsidies. Although we attempted to identify as many studies as possible, we recognize that the 13 studies we identified (see app. I) may not include all such studies that were performed. It should also be noted that it was beyond the scope of this review to assess the quality of the research underlying the individual estimates we reviewed. To consistently present the different studies' estimates of dollar changes in rental revenues, costs, and subsidies, we presented each study's findings as the percentage change in the subsidy relative to the total performance fund and/or housing assistance payments HUD says the agency received in 1997. We ignored the facts that HUD does not always provide 100 percent of the subsidy needed for public housing, as calculated under the performance funding system formula, and that HUD's outlays may lag behind changes in rental revenues by 2 to 3 years. In addition, although the results presented here are based on the assumption that HUD will provide 100 percent of the needed subsidy, the studies we reviewed made different assumptions about the percentage of the needed subsidy that HUD would be likely to provide. These assumptions ranged from 85 percent to 100 percent. To the extent that the subsidy is funded at less than 100 percent, more of the cost of welfare reform will be borne by local housing agencies and less will be borne by HUD. See appendix I for a list of the individual studies we reviewed. To better understand the methodological and data issues that arise when estimating welfare reform's financial impact on HUD's housing programs, we also contacted known experts in welfare and housing who represented a broad range of views. We questioned them about the importance of specific methodological and data concerns using a semistructured questionnaire. We also gathered their research and analyzed the information collected from the interviews and research documents to develop common themes. Appendix II lists the experts with whom we spoke about methodological and data issues. We conducted our work from May 1998 through November 1998 in accordance with generally accepted government auditing standards. If you or your staff have any questions about this report, please contact me at (202) 512-7631. Major contributors to this report were Amy Abramowitz, Nancy Barry, DuEwa Kamara, and Lara Landeck. "Background Materials for Baseline Projections of Spending Under Current Law." Congressional Budget Office, Washington, D.C.: Mar. 1998. "The Fiscal Impacts of Welfare Reform: An Early Assessment." Council of Large Public Housing Authorities. Issue brief. Fall 1996. "Impact of Welfare Reform in Public Housing." David M. Griffith & Associates, Ltd. Sponsored by the Public Housing Authorities Directors Association. Unpublished. Spring 1997. Newman, Sandra and Joseph Harkness. "The Effects of Welfare Reform on Housing: A National Analysis." Presented at the Policy Research Roundtable on the Implications of Welfare Reform for Housing, sponsored by the Fannie Mae Foundation in collaboration with the Institute for Policy Studies at The Johns Hopkins University (work in progress). July 22, 1997. For updated information, see "The Effects of Welfare Reform on Housing: A National Analysis" in Newman, Sandra J. (ed.) The Home Front: Implications of Welfare Reform for Housing Policy, Washington, D.C.: The Urban Institute Press, forthcoming. "Technical Paper: Welfare Reform Budgeting." U.S. Department of Housing and Urban Development (HUD). Washington, D.C.: Oct. 4, 1996. "Estimated PHA Income Loss Due to Proposed AFDC Cuts." St. Paul Public Housing Agency, Unpublished. Feb. 28, 1997. "Impact of Welfare Reform on Program Costs." New Jersey Department of Community Affairs' Section 8 Housing Program. Unpublished. Jan. 1998. Nguyen, Mai, Charles Kastner, and Ashley Lommers-Johnson. "Welfare Reform: Status of Washington State's Welfare Reform Plan; Effects on Residents, the Seattle Housing Authority, and Neighborhoods; and Prospects for Employment and Rent Income." Presented at HUD headquarters, Washington, D.C. Dec. 17, 1996. "Potential Impact of CalWORKS." Housing Authority of the City of Los Angeles. Unpublished. Nov. 1997. "Welfare Act Impact Analysis: District of Columbia Housing Authority (DCHA)--Final Report." David M. Griffith & Associates, Ltd. Apr. 1997. "Welfare Reform Impact Study." Minneapolis Public Housing Authority. Unpublished. Spring 1997. Welfare Reform Impacts on the Public Housing Program: A Preliminary Forecast. U.S. Department of Housing and Urban Development. Office of Policy Studies and Research. Rockville, MD., Mar. 1998. "Welfare Reform Program and Financial Analysis." Miami-Dade Housing Agency. Unpublished. Oct. 1997. Paul Cullinan, Chief, Human Resources Cost Estimate Unit, Congressional Budget Office (CBO) Shelia Dacey, Analyst, CBO Debra Devine, Social Science Analyst, Office of Policy Development and Research, U. S. Department of Housing and Urban Development (HUD) Katherine L. Meredith, Program Examiner, Housing Branch, Executive Office of the President, Office of Management and Budget (OMB) Charles Nelson, Assistant Division Chief for Income and Poverty, Housing and Economic Household Statistics Division, Bureau of the Census, U. S. Department of Commerce Don Oellerich, Acting Deputy Chief Economist, Office of the Assistant Secretary of Planning and Evaluation, U. S. Department of Health and Human Services (HHS) Jim Brigle, Director of Government Affairs, Public Housing Authorities Directors Association George C. Caruso, Acting Executive Director, National Affordable Housing Mangement Association Connie Campos, Policy Analyst for Housing, National Association of Housing and Redevelopment Officials Major Galloway, Policy Analyst for Housing, National Association of Housing and Redevelopment Officials Debra Gross, Research Director, Council of Large Public Housing Authorities John Hiscox, Executive Director, Macon Housing Authority Walter Huelsman, Vice President and National Director of Housing Consulting, DMG-Maximus, Inc. 1. After additional discussions with HUD to clarify the information provided in comment 1, we included the data from HUD's suggested paragraph with certain appropriate modifications. 2. We deleted the footnote as suggested. 3. We changed the reference as requested. 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 provided information on welfare reform's financial impact on the Department of Housing and Urban Development's (HUD) budget, focusing on what: (1) studies have been done on welfare reform's financial impact on public and assisted housing; and (2) methodological and data issues, if any, arise when researchers estimate welfare reform's financial impact on low-income housing. GAO noted that: (1) officials at housing agencies and researchers at government agencies, universities, trade associations, and a consulting firm have estimated welfare reform's financial impact on some components of HUD's housing subsidy programs; (2) GAO identified 13 studies that estimated this impact; (3) these studies of welfare reform's financial impact on HUD's housing subsidy programs varied in their geographic scope, focus and assumptions, methods, and findings; (4) some studies also estimated welfare reform's impact under alternative scenarios and therefore developed a range of estimates of welfare reform's cost for HUD and housing agencies; (5) the estimates in the studies GAO reviewed generally varied with the issues on which they focused and the assumptions on which they were based; (6) some of the authors of the studies GAO reviewed told it that their estimates might not hold up over time because some federal and state welfare laws have changed since the estimates were first developed and the economy has been more robust than anticipated; (7) experts with whom GAO spoke generally agree that several issues complicate efforts to forecast welfare reform's financial impact on HUD's housing subsidy programs; (8) these issues include not only those encountered in predicting welfare reform's impact on the recipients and providers of public assistance, but also those specific to estimating welfare reform's financial impact on the residents of assisted housing, providers of subsidized housing, and HUD; (9) in general, wide variations in state welfare plans and their implementation complicate the estimation of welfare reform's impact; (10) the employment and wage prospects for welfare recipients depend, in part, on future local and national economic health and on recipients' behavior; (11) housing experts generally agree that estimating welfare reform's impact on housing programs is more complex than estimating welfare reform's impact overall because of possible differences in the behavior of welfare recipients with and without housing assistance, as well as variations in policies adopted by housing agencies and landlords; and (12) a lack of reliable data further hampers researchers' efforts to predict welfare reform's financial impact on HUD's housing programs.
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Since the 1960s, geostationary and polar-orbiting environmental satellites have been used by the United States to provide meteorological data for weather observation, research, and forecasting. NOAA's National Environmental Satellite, Data, and Information Service is responsible for managing the civilian operational geostationary and polar-orbiting satellite systems as two separate programs, called GOES and the Polar-orbiting Operational Environmental Satellites, respectively. Unlike polar-orbiting satellites, which constantly circle the earth in a relatively low polar orbit, geostationary satellites can maintain a constant view of the earth from a high orbit of about 22,300 miles in space. NOAA operates GOES as a two-satellite system that is primarily focused on the United States (see fig. 1). These satellites are uniquely positioned to provide timely environmental data about the earth's atmosphere, its surface, cloud cover, and the space environment to meteorologists and their audiences. They also observe the development of hazardous weather, such as hurricanes and severe thunderstorms, and track their movement and intensity to reduce or avoid major losses of property and life. Furthermore, the satellites' ability to provide broad, continuously updated coverage of atmospheric conditions over land and oceans is important to NOAA's weather forecasting operations. To provide continuous satellite coverage, NOAA acquires several satellites at a time as part of a series and launches new satellites every few years (see table 1). NOAA's policy is to have two operational satellites and one backup satellite in orbit at all times. Four GOES satellites--GOES-10, GOES-11, GOES-12, and GOES-13--are currently in orbit. Both GOES-11 and GOES-12 are operational satellites, with GOES-12 covering the east and GOES-11 the west. GOES-13 is currently in an on-orbit storage mode. It is a backup for the other two satellites should they experience any degradation in service. GOES-10 is at the end of its service life, but it is being used to provide limited coverage of South America. The others in the series, GOES-O and GOES-P, are planned for launch over the next 2 years. NOAA is also planning the next generation of satellites, known as the GOES-R series, which are planned for launch beginning in 2015. Each of the operational geostationary satellites continuously transmits raw environmental data to NOAA ground stations. The data are processed at these ground stations and transmitted back to the satellite for broadcast to primary weather services and the global research community in the United States and abroad. Raw and processed data are also distributed to users via ground stations through other communication channels, such as dedicated private communication lines and the Internet. Figure 2 depicts a generic data relay pattern from the geostationary satellites to the ground stations and commercial terminals. NOAA plans for the GOES-R program to improve on the technology of prior series, in terms of both system and instrument improvements. The system improvements are expected to fulfill more demanding user requirements by updating the satellite data more often and providing satellite products to users more quickly. The instrument improvements are expected to significantly increase the clarity and precision of the observed environmental data. NOAA originally planned to acquire six different types of instruments. Furthermore, two of these instruments--the Advanced Baseline Imager and the Hyperspectral Environmental Suite--were considered to be the most critical because they would provide data for key weather products. Table 2 summarizes the originally planned instruments and their expected capabilities. In September 2006, however, NOAA decided to reduce the scope and technical complexity of the GOES-R program because of expectations that total costs, which were originally estimated to be $6.2 billion, could reach $11.4 billion. Specifically, NOAA reduced the minimum number of satellites from four to two, cancelled plans for developing the Hyperspectral Environmental Suite (which reduced the number of planned satellite products from 81 to 68), and divided the Solar Imaging Suite into two separate acquisitions. The agency estimated that the revised program would cost $7 billion. Table 3 provides a summary of the timeline and scope of these key changes. NOAA's acquisition strategy was to award contracts for the preliminary design of the GOES-R system to several vendors who would subsequently compete to be the single prime contractor responsible for overall system development and production. In keeping with this strategy, NOAA awarded contracts for the preliminary design of the overall GOES-R system to three vendors in October 2005. However, in March 2007, NOAA revised its acquisition strategy for the development contract. In response to recommendations by independent advisors, the agency decided to separate the overall system development and production contract into two separate contracts--the spacecraft segment and the ground segment. In addition, to reduce the risks associated with developing technically advanced instruments, NASA awarded contracts for the preliminary designs for five of the planned instruments. NASA subsequently awarded development contracts for these instruments and, upon completion, plans to turn them over to the prime contractor responsible for the spacecraft segment of the GOES-R program. The sixth instrument, the Magnetometer, is to be developed as part of the spacecraft contract. NOAA is solely responsible for GOES-R program funding and overall mission success. However, since it relies on NASA's acquisition experience and technical expertise to help ensure the success of its programs, NOAA implemented an integrated program management structure with NASA for the GOES-R program (see fig. 3). NOAA also located the program office at NASA's Goddard Space Flight Center. Within the program office, there are two project offices that manage key components of the GOES-R system. These are called the flight and ground segment project offices. The flight project office, managed by NASA, is responsible for awarding and managing the spacecraft contract and delivering flight-ready instruments to the spacecraft. The ground segment project office, managed by NOAA, oversees the ground contract, satellite data product development and distribution, and on-orbit operations of the satellites. In October 2007, we reported that NOAA had completed preliminary design studies of GOES-R, but that program costs were likely to grow and schedules were likely to be delayed. At that time, GOES-R was estimated to cost $7 billion and scheduled to have the first satellite ready for launch in 2014. However, independent studies showed that the program could cost about $2 billion more than the program's cost estimate, and the first satellite launch could be delayed by 2 years. NOAA officials stated that they were working to reconcile the two different cost and schedule estimates. We also reported that while the program had implemented a risk management program, it had multiple risk lists that were not always consistent, and key risks were missing from the risk watch lists--including risks associated with unfilled executive positions, insufficient reserve funds for unexpected costs, and limitations in NOAA's insight into NASA's deliverables. Specifically, we noted that in past GOES procurements, NOAA did not have the ability to make quick decisions on problems because it lacked insight into the portions of the procurement that were managed by NASA. We recommended that the GOES-R program office manage risks using a program-level risk list and address the additional risks we identified. Over the past year, the program office has improved the integration of its risk management process and taken steps to mitigate the risks we identified. The GOES-R program has moved from the preliminary design and definition phase to the development phase of its acquisition life cycle. Program officials have awarded contracts for the five instruments, and they plan to award contracts for the spacecraft and ground segments later this year. However, the program's cost, scope, and schedule have changed. NOAA and NASA have made progress on the GOES-R program. In January 2008, NOAA approved a key decision milestone that allowed the program to move from the preliminary design and definition phase to the development phase of the acquisition life cycle. This approval also gave the program the authority to issue the requests for proposals for the spacecraft and ground segment projects--which it did in January 2008 and May 2008, respectively. The program office plans to award the prime contract for the spacecraft in May 2009 and the contract for the ground segment in June 2009. In addition, between September 2004 and December 2007, the GOES-R program awarded contracts for the development of five key instruments. Table 4 briefly describes each of these instruments, their contract award dates, and their cost and schedule estimates, while figure 4 depicts the schedule for both the program and key instruments. The five key instruments are currently in varying stages of development. One instrument, the Advanced Baseline Imager, has experienced technical issues leading to cost overruns and schedule delays. The program office rebaselined the cost and schedule of the program in February 2007 and then rebaselined the schedule again in March 2008. Since February 2007, the contractor incurred a cost overrun of approximately $30 million and, since March 2008, the contractor has delayed $11 million worth of work. Program officials reported that they have sufficient management reserves to address the overruns experienced to date. The other instruments are still very early in development. Table 5 describes the status and risk level of each instrument. NOAA has made several important decisions about the cost, scope, and schedule of the GOES-R program. After reconciling the program office's cost estimate of $7 billion with the independent cost estimate of about $9 billion, the agency established a new program cost estimate of $7.67 billion. This is an increase of $670 million from the previous estimate. Program officials plan to revisit this cost estimate after the spacecraft and ground segment contracts are awarded. However, agency officials, including NOAA's Chief Financial Officer and NOAA's National Environmental Satellite, Data, and Information Service Assistant Administrator, stated that this estimate was developed with a relatively high level of confidence and that they believe that any adjustments would be well within the $7.67 billion program budget. To mitigate the risk that costs would rise, program officials decided to remove selected program requirements from the baseline program and treat them as options that could be exercised if funds allow. These requirements include the number of products to be distributed, the time to deliver the remaining products (product latency), and how often these products are updated with new satellite data (refresh rate). Specifically, program officials eliminated the requirement to develop and distribute 34 of the 68 envisioned products, including aircraft icing threat, turbulence, and visibility. Program officials explained that these products are not currently being produced by legacy GOES satellites; they are new products that could be produced from the advanced GOES-R instruments. In addition, the program slowed planned product latency on the remaining products by as much as 10 minutes for hurricane intensity and 6 minutes for volcanic ash detection and height. It also reduced the refresh rates on these products by as much as 55 minutes for sea surface temperatures, cloud top observations, and vertical moisture profiles in the atmosphere. Program officials included the restoration of the products, latency, and refresh rates as options in the ground segment contract--items that could be acquired at a later time. NOAA also delayed GOES-R program milestones, including the dates for issuing the requests for proposals and awarding the contracts for the spacecraft and ground segments. The dates when the satellites would be available for launch have also slipped by 4 months, with the first satellite launch now scheduled for April 2015. Program officials attributed these delays to providing more stringent oversight before releasing the requests for proposals, additional time needed to evaluate the contract proposals, and funding reductions in fiscal year 2008. Table 6 identifies delays in key GOES-R milestones. Further delays in the launch of the first GOES-R satellite would run counter to NOAA's policy of having a backup satellite in orbit at all times and could lead to gaps in satellite coverage. Specifically, in 2015, NOAA expects to have two operational satellites in orbit, but it will not have a backup satellite in place until GOES-R is launched. If NOAA experiences a problem with either of its operational satellites before a backup satellite is in orbit, it will need to rely on older decommissioned satellites that may not be fully functional. GOES-R has taken steps to address lessons from other satellite programs, but important actions remain to be completed. Satellite programs are often technically complex and risky undertakings and, as a result, they often experience technical problems, cost overruns, and schedule delays. We and others have reported on repeated missteps in the acquisition of major satellite systems, including the National Polar-orbiting Operational Environmental Satellite System, the GOES I-M series, the Space Based Infrared System High Program, and the Advanced Extremely High Frequency Satellite System. Key lessons learned from these other satellite programs include the importance of (1) ensuring sufficient technical readiness of the system's components prior to key decisions, (2) establishing realistic cost and schedule estimates, (3) providing sufficient management at the program and contractor levels, and (4) performing adequate senior executive oversight to ensure mission success. Space programs often experience unforeseen technical problems in the development of critical components as a result of having insufficient knowledge of the components and their supporting technologies prior to key decision points. One key decision point is when an agency decides whether the component is sufficiently ready to proceed from a preliminary study phase into a development phase; this decision point results in the award of the development contract. Another key decision point occurs during the development phase when an agency decides whether the component is ready to proceed from design into production (also called the critical design review). Without sufficient technical readiness at these milestones, agencies could proceed into development contracts for components that are not well understood and enter into the production phase of development with technologies that are not yet mature. Since the late 1990s, NOAA has taken a series of steps to help mitigate technical readiness issues on GOES-R. Specifically, the agency conducted preliminary studies on the technologies to be used on the awarded contracts for the preliminary design of the planned instruments and the overall GOES-R system; awarded instrument development contracts that include provisions to develop prototypes or engineering models before the flight units for each instrument are developed; conducted a major review of the Advanced Baseline Imager before the certified that the technology for the spacecraft and ground segments was mature before awarding the contracts; removed the Hyperspectral Environmental Suite from the GOES-R series after preliminary studies showed that it was technically complex; established independent review teams responsible for assessing the program's technical, programmatic, and management risks on an annual basis to ensure sufficient technical readiness prior to the critical design review milestone; and established processes for reviewing the maturity and readiness of algorithms for each of the products. However, key technology risks remain--affecting both the ground segment and the instruments. Specifically, while the hardware that is to be used for the ground segment is mature, key components have not previously been integrated. Consequently, if the components do not work together, the program might have to procure separate antennas, which would impact the program's cost and schedule. The ground segment project office utilizes an integrated product team to manage and mitigate this risk and released a request for information to industry in January 2009. In addition to the ground segment risks, technical risks remain on the development of the instruments. For example, the contractor responsible for developing the Advanced Baseline Imager estimates that the instrument is over 50 percent complete and reports that it has experienced technical issues, including problems with the quality of components in the focal plane module, mirrors, and telescope. As of November 2008, the contractor incurred a cost overrun of approximately $30 million and delayed $11 million worth of work. The other instruments are earlier in their development. Since none has yet been demonstrated in a lab or test environment, the risk remains that the technologies are not sufficiently mature. The program plans to continue efforts to demonstrate technologies before key decision milestones on each instrument. In 2007, we reported that cost-estimating organizations throughout the federal government and industry use 12 key practices--related to planning, conducting, and reporting the estimate--to ensure a sound estimate. Table 7 lists these practices. The GOES-R program's cost estimate fully implemented 11 and partially implemented 1 of the 12 best practices for developing a credible cost estimate (see table 8). The practices that were fully implemented include clearly defining the purpose of the estimate and the program's characteristics, establishing and implementing a sound estimating approach, and appropriately assessing the risk and sensitivity of its estimate. The practice that was partially implemented involved ground rules and assumptions. The program defined and documented all of the ground rules and assumptions used in the estimate. However, an independent review team found that the assumed inflation rates used for the ground segment were overly optimistic and could lead to a shortfall of hundreds of millions of dollars. Specifically, the agency used the Department of Defense's inflation rates rather than NASA's historical experiences, which are more conservative. Program officials responded that the agency's long experience in developing ground systems would balance the optimistic inflation rates and that they could adjust the inflation rates, if warranted, in later years. In the past, we have reported on poor performance in program management. The key drivers of poor management often include ineffective risk management, insufficient staff to implement earned value management, and inadequate levels of management reserve. In 2006 and 2007, we reported that, while NOAA had taken steps to restructure its management approach on the GOES-R procurement in an effort to improve performance and to avoid past mistakes, key program management areas needed additional attention. We recommended that NOAA improve the consistency of its risk management process, assess and obtain the resources it needed for overseeing the earned value of its contracts, and provide sufficient management reserves to address unexpected issues in instrument development. NOAA subsequently implemented these recommendations by streamlining its risk management processes, supplementing oversight resources, and reassessing its management reserves. Since we last reported on this issue, the program office has made additional progress in earned value management, but more remains to be done. Earned value management provides a proven means for measuring progress against cost and schedule commitments and thereby identifying potential cost overruns and schedule delays early, when the impact can be minimized. Two key aspects of this process are conducting comprehensive integrated baseline reviews and using monthly variance reports to manage the program. An integrated baseline review is a process used by stakeholders to obtain agreement on the value of planned work and to validate the baseline against which the variances are calculated. These reviews assess the technical scope of the work, key schedule milestones, the adequacy of resources, task and technical planning, and management processes; they are completed whenever a new baseline is established. Once an integrated baseline review has been completed and the project management baseline has been validated, monthly variance reports provide information on the contract status, the reasons for any deviations from cost or schedule plans, and any actions taken to address these deviations. To its credit, the GOES-R program office is using earned value management to oversee the key instrument contracts and plans to use it on the spacecraft and ground segment contracts. To date, the program office has performed integrated baseline reviews on the instruments and obtains and reviews variance reports for each of the instruments. However, there are shortfalls in the program's approach. The program's integrated baseline review for the Advanced Baseline Imager did not include a review of schedule milestones, the adequacy of how tasks are measured, and the contractor's management processes. Further, the variance reports for two instruments--the Advanced Baseline Imager and the Geostationary Lightning Mapper--do not describe all of the significant variances. The imager's reports only describe the five largest cost and schedule variances and do not include variances associated with overhead. For example, the reasons for cost and schedule variances exceeding $1 million were not disclosed in October and November 2008 cost reports. Moreover, while the reports identified problems that resulted in cost growth and schedule slippage for the five largest variances, the reports did not identify the actions taken to address them. The mapper's reports also did not disclose the reasons for selected variances, including a $197,000 cost overrun in August 2008 and a $141,000 cost overrun in October 2008. Program officials explained that they meet with the contractor on a monthly basis to discuss all of the variances, but they were unable to provide documentation of these discussions or the reasons, impact of, or mitigation plans for the variances. As a result of these shortfalls, the program office has less assurance that key instruments will be delivered on time and within budget, and it is more difficult for program managers to identify risks and take corrective actions. Executive-level involvement is a key aspect of program success, and it is occurring on the GOES-R program. The Office of Management and Budget guidance calls for agencies to establish executive-level oversight boards to regularly track the progress of major system acquisitions. In addition, in 2007, NOAA and NASA signed both an interagency agreement and a management control plan that defined the agencies' respective roles and responsibilities. Among other things, the agreements called for the program to provide monthly status review briefings for executives on NOAA's Program Management Council and NASA's Goddard Space Flight Center Management Council. Since these agreements were approved, the program has consistently briefed senior management at monthly meetings and has effectively communicated the program's status and key risks. Additionally, key representatives of NOAA's Program Management Council attend the NASA council's meeting, and senior NASA executives attend NOAA's council meetings. The Hyperspectral Environmental Suite instrument was originally planned as part of the GOES-R satellite to meet requirements for products that are currently produced by GOES satellites (such as temperature and moisture profiles at different atmospheric levels), as well as new technically- advanced products (such as moisture fluctuations and ocean color) that are not currently produced by GOES satellites. Table 9 lists the current and new products that were originally planned to be provided by the Hyperspectral Environmental Suite. NOAA still considers these requirements to be valid. According to National Weather Service meteorologists, users depend on the products that they currently receive from GOES satellites in orbit for hourly and daily weather observations. In addition, NOAA and the science community still have a need for the advanced products. NOAA had planned to use the new sounding products to improve its performance goals, such as helping to increase the lead times associated with severe thunderstorm warnings from an average of 18 minutes in 2000 to as much as 2 hours by 2025, and helping to increase the lead times associated with tornado warnings from an average of 13 minutes in 2007 to as much as 1 hour by 2025. In addition, NOAA had planned to use the new coastal waters imaging products to provide more accurate and quantitative understanding of areas along the U.S. East Coast (within 50 miles of the shore) and 130 estuaries throughout the United States--areas for which NOAA has management responsibilities. Similarly, the environmental science communities have continued to express a need for the advanced products. In 2007, the National Research Council recommended that NOAA develop a strategy to restore the planned geostationary advanced sounding capability that was removed from the GOES-R program in order to allow high-temporal and high- vertical resolution measurements of temperature and water vapor. As part of that strategy, the report recommended that NOAA work with NASA to complete a demonstration satellite in the near term. In light of the cancellation of the Hyperspectral Environmental Suite, NOAA decided to use the planned Advanced Baseline Imager to develop the products that are currently produced by the GOES satellite sounders now in orbit. In mid-2006, NOAA compared the imager's anticipated capabilities with the legacy GOES sounder instrument and reported that the advanced imager would be able to produce the necessary data 20 times faster than the legacy sounder and with comparable or better spatial resolution. However, NOAA also reported that the advanced imager will be less accurate than the legacy sounder for four of the seven product groups. Table 10 compares the capabilities of the Advanced Baseline Imager with the legacy sounder in seven product groups. In an effort to obtain consensus from the GOES user community, NOAA briefed sounding experts on the Advanced Baseline Imager's ability to develop products currently produced by the legacy GOES sounder. These experts included representatives from the National Weather Service; the National Environmental Satellite, Data, and Information Services; the Department of Defense's satellite data processing centers; academia; and attendees at a weather-related conference. NOAA reported that users accepted this plan as a suitable alternative until an advanced sounder could be flown on the GOES series. NOAA noted that users were pleased with the anticipated improvements in refresh rates. While satellite data users were eager to obtain faster refresh rates, recent contract changes have since reduced these expected rates. As previously reported, when the program office reconciled its cost estimate with the independent estimate, the program removed or reduced selected capabilities from the ground segment project. One of the reduced capabilities was the refresh rates for most of the products. Instead of refresh rates that are 20 times faster, current plans call for refresh rates that are only 2 to 4 times faster than current products. The faster refresh rates are now options in the contract. In addition to efforts to address the requirements for existing products that were removed with the Hyperspectral Environmental Suite, NOAA, NASA, and the Department of Defense assessed alternatives for obtaining advanced sounding and coastal waters imaging products from a geostationary orbit. The options include placing an advanced instrument on a stand-alone satellite or on later GOES satellites. The results of the analysis recommended that NOAA work with NASA to develop a demonstration sounder to fly on an as-yet undetermined satellite in order to build a foundation for an eventual operational advanced sounder on a future GOES satellite. For coastal waters imaging, the analysis recommended that, in the near-term, NOAA evaluate a hyperspectral imager that is planned to be included on the International Space Station and that NOAA and NASA coordinate to identify and evaluate other options for the future. NOAA plans to assess the technical feasibility of various options and to have the National Research Council make recommendations on long-term options for coastal waters imaging. However, NOAA has not defined plans or a timeline for implementing any of the options or for addressing the requirements for advanced products. Further, agency officials were unable to estimate when they would establish plans to fulfill the requirements. Doing so would include justifying the funding for any new initiatives within the agency's investment decision process. Until a decision is made on whether and how to proceed in providing the advanced products, key system users such as the National Weather Service will not be able to meet their goals for improving the lead times or accuracy of severe weather warnings, including warnings for tornadoes and hurricanes. Further, climate research organizations will not obtain the data they need to enhance the science of climate, coastal, environmental, and oceanic observations. The GOES-R satellite series is now in development, but program costs have increased, schedules have been delayed, and the scope of the program has been reduced. Unless the program exercises contract options, key benefits in terms of new products and faster data updates will not be realized. In addition, recent events make it likely that schedules will continue to slip. Any delays in the launch of the first satellite in the GOES-R program increase the risk of gaps in satellite coverage. The program office has made repeated and continuing efforts to learn from problems experienced on other satellite programs, but more can be done in selected areas. Specifically, the program has improved the technical readiness of key components, adopted many sound estimating practices, implemented an earned value management process for overseeing contracts, and is obtaining executive-level oversight. However, the program's approach to earned value management has shortfalls. The program did not perform a comprehensive review after rebaselining a critical instrument--the Advanced Baseline Imager--and has not documented the reasons for all cost overruns. Until these issues are addressed, NOAA faces an increased risk that the GOES-R program will repeat the cost increases, schedule delays, and performance shortfalls that have plagued other satellite programs. In addition, while the GOES-R program office plans to recover existing product capabilities that were lost when a critical sensor was removed from the satellites, NOAA has not yet developed a plan or a timeline for recovering the advanced capabilities that were removed. Doing so would include justifying whether and how to proceed in fulfilling the advanced requirements. Until such decisions and plans are made, the geostationary satellite user community may not be able to make significant improvements in their severe weather forecasts. To improve NOAA's ability to effectively manage the GOES-R program, we recommend that the Secretary of Commerce direct the NOAA Administrator to ensure that the following three actions are taken: As part of any effort to rebaseline the cost and schedule of the Advanced Baseline Imager, perform an integrated baseline review and ensure that the review includes an assessment of key schedule milestones, the adequacy of resources, task and technical planning, and management processes. Improve the agency's ability to oversee contractor performance by ensuring that the reasons for cost and schedule variances are fully disclosed and documented. If feasible and justified, develop a plan and timeline for recovering the advanced capabilities that were removed from the program when the Hyperspectral Environmental Suite was cancelled. In written comments on a draft of this report, the Department of Commerce's Acting Secretary stated that the report did a fair and thorough job of assessing the status of the GOES-R program and NOAA's efforts to leverage lessons learned from similar programs. The department agreed with our findings and recommendations and outlined steps it is taking to implement them. For example, the department stated that NOAA will perform an integrated baseline review on the Advanced Baseline Imager, as part of any effort to rebaseline its cost and schedule, and that the GOES-R program office will ensure full disclosure of cost and schedule variances. The department also provided technical comments on the report, which we incorporated as appropriate. The department's comments are provided in appendix II. In addition, NASA's Associate Administrator for the Science Mission Directorate provided written comments on a draft of this report. In those comments, the Associate Administrator stated that the report is complete and accurate in its assessment of NASA's participation in the GOES-R program. The department's comments are provided in appendix III. 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 Commerce, the Administrator of NASA, the Director of the Office of Management and Budget, and other interested parties. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions on matters discussed in this report, please contact me at (202) 512-9286 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Our objectives were to (1) determine the status of the Geostationary Operational Environmental Satellite-R series (GOES-R) program, (2) evaluate whether the National Oceanic and Atmospheric Administration's (NOAA) plans for the GOES-R acquisition address problems experienced on similar programs, and (3) determine whether NOAA's plan to address the capabilities that were planned for the satellites, but then removed, will be adequate to support current data requirements. To determine the program's status, we evaluated various programmatic and technical plans, management reports, and other program documentation. We reviewed the spacecraft and ground segment requests for proposals, cost and schedule estimates, contractor performance reports on instrument development, planned system requirements, and monthly executive-level management briefings. We also interviewed NOAA and National Aeronautics and Space Administration (NASA) officials from the GOES-R program office. To evaluate whether NOAA's acquisition plans address problems experienced on similar programs, we identified lessons learned from other major space acquisitions by reviewing prior GAO reports and interviewing space acquisition experts. We compared these lessons learned with relevant program and contractor documents and risk lists. Key lessons were related to technical readiness, cost and schedule estimates, program management, and executive-level involvement. Specific steps in each of these areas are as follows: Technical readiness: We reviewed program, flight project, and ground segment risks, and instrument technical reviews. Cost and schedule estimates: We identified the process used to develop NOAA's cost estimate by reviewing the program cost estimate, the Cost Analysis Requirements Document, and program cost estimate briefings. We then compared NOAA's process with the 12 steps of a high-quality cost estimating process identified in our cost estimating guide. For each step, we assessed whether the GOES-R estimate fully met, partially met, or did not meet the practices associated with a sound cost estimate. We also interviewed government and contractor cost estimating officials. Program management: We analyzed the program's risk management plan, risk lists, cost performance reports, and integrated baseline reviews. Executive-level involvement: We analyzed the program's management control plan, attended NOAA and NASA executive council meetings and reviewed the program's briefings to executives at both agencies. We also discussed these topics with appropriate agency officials. To determine the adequacy of NOAA's plans to address the capabilities that were removed from the program, we identified the requirements for existing and advanced products that were associated with the cancelled Hyperspectral Environmental Suite instrument. We reviewed agency plans to fulfill requirements for the existing products and the analysis supporting this decision. We compared this analysis with an external scientific publication and interviewed satellite data users about the implications of plans to use the Advanced Baseline Imager to provide legacy products. To assess NOAA's plans to fulfill requirements for advanced products, we reviewed NOAA's analysis of options for addressing the advanced products, as well as National Research Council reports on priorities in satellite observation. We also interviewed satellite data users, including forecasters and modelers from the National Weather Service, and satellite data processing experts from the National Environmental Satellite, Data, and Information Service. We performed our work at NOAA and NASA offices in the Washington, D.C., metropolitan area. We conducted this performance audit from May 2008 to April 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 individual named above, Colleen M. Phillips, Assistant Director; Carol Cha; William Carrigg; Neil Doherty; Franklin Jackson; Kaelin Kuhn; Lee McCracken; Adam Vodraska; and Eric Winter made key contributions to this report.
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The Department of Commerce's National Oceanic and Atmospheric Administration (NOAA), with the aid of the National Aeronautics and Space Administration (NASA), plans to procure the next generation of geostationary operational environmental satellites, called the Geostationary Operational Environmental Satellite-R series (GOES-R). GOES-R is to replace the current series of satellites, which will likely begin to reach the end of their useful lives in approximately 2014. This series is considered critical to the United States' ability to maintain the continuity of data required for weather forecasting through the year 2028. GAO was asked to (1) determine the status of the GOES-R program, (2) evaluate whether plans for the acquisition address problems experienced on similar programs, and (3) determine whether NOAA's plan will be adequate to support current data requirements. To do so, GAO analyzed contractor and program data and interviewed officials from NOAA and NASA. NOAA has made progress on the GOES-R acquisition, but the program's cost, schedule, and scope have changed. The GOES-R program has moved into the development phase of its acquisition life cycle. It has awarded development contracts for the instruments and plans to award contracts for the spacecraft and ground segments by mid-2009. However, after reconciling program and independent cost estimates, the program established a new cost estimate of $7.67 billion--a $670 million increase from the prior $7 billion estimate. The program also reduced the number of products the satellites will produce from 81 to 34 and slowed the delivery of these products in order to reduce costs. More recently, the program also delayed key milestones, including the launch of the first satellite, which was delayed from December 2014 to April 2015. Such delays could lead to gaps in satellite coverage if NOAA experiences problems with its current operational satellites before a backup satellite is in orbit. GOES-R has taken steps to address lessons from other satellite programs, but important actions remain to be completed. NOAA has made progress in its efforts to address prior lessons by taking steps to ensure technical readiness on key components, using an acceptable cost estimating approach, implementing techniques to enhance contractor oversight, and regularly briefing agency executives. However, technical challenges remain on both the ground segment and the instruments. In addition, the program did not perform a comprehensive review after rebaselining a critical instrument, and it has not documented all of the reasons for cost overruns. Until these issues are addressed, NOAA faces an increased risk that the GOES-Rprogram will repeat the same mistakes that have plagued other satellite programs. NOAA has a plan to meet some, but not all, data requirements. An instrument that was originally planned as part of the GOES-R satellite was to meet requirements for 15 products that are currently produced, as well as 11 new, technically advanced, products. When NOAA removed this instrument from the GOES-R satellite program, it arranged to obtain the current products from another instrument. However, the agency has not developed plans or a timeline to address the requirements for the new products. Doing so would include justifying the funding for any new initiatives within the agency's investment decision process. Until a decision is made on whether and how to proceed in providing the advanced products, key system users, such as weather forecasters, will not be able to meet their goals for improving the accuracy of severe weather warnings. Further, climate research organizations will not obtain the data they need to enhance the science of climate, environmental, and oceanic observations.
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The use of information technology (IT) to electronically collect, store, retrieve, and transfer clinical, administrative, and financial health information has great potential to help improve the quality and efficiency of health care and is important to improving the performance of the U.S. health care system. Historically, patient health information has been scattered across paper records kept by many different caregivers in many different locations, making it difficult for a clinician to access all of a patient's health information at the time of care. Lacking access to these critical data, a clinician may be challenged to make the most informed decisions on treatment options, potentially putting the patient's health at greater risk. The use of electronic health records can help provide this access and improve clinical decisions. Interoperability--the ability to share data among health care providers--is key to making health care information electronically available. Interoperability enables different information systems or components to exchange information and to use the information that has been exchanged. This capability is important because it allows patients' electronic health information to move with them from provider to provider, regardless of where the information originated. If electronic health records conform to interoperability standards, they can be created, managed, and consulted by authorized clinicians and staff across more than one health care organization, thus providing patients and their caregivers the necessary information required for optimal care. Unlike paper-based health records, electronic health records can provide decision support capabilities, such as automatic alerts about a particular patient's health, or other advantages of automation. Interoperability depends on the use of agreed-upon standards to ensure that information can be shared and used. In the health IT field, standards may govern areas ranging from technical issues, such as file types and interchange systems, to content issues, such as medical terminology. DOD and VA have agreed upon numerous common standards that allow them to share health data. They have also participated in numerous standards- setting organizations tasked to reach consensus on the definition and use of standards. For example, DOD and VA officials serve as members and are actively working on several committees and groups within the Healthcare Information Technology Standards Panel. The panel identifies and harmonizes competing standards and develops interoperability specifications that are needed for implementing the standards. Interoperability can be achieved at different levels. At the highest level, electronic data are computable (that is, in a format that a computer can understand and act on to, for example, provide alerts to clinicians on drug allergies). At a lower level, electronic data are structured and viewable, but not computable. The value of data at this level is that they are structured so that data of interest to users are easier to find. At still a lower level, electronic data are unstructured and viewable, but not computable. With unstructured electronic data, a user would have to search through uncategorized data to find needed or relevant information. Beyond these, paper records also can be considered interoperable (at the lowest level) because they allow data to be shared, read, and interpreted by human beings. According to DOD and VA officials, not all data require the same level of interoperability, nor is interoperability at the highest level achievable in all cases. For example, unstructured, viewable data may be sufficient for such narrative information as clinical notes. Figure 1 shows the distinction between the various levels of interoperability and examples of the types of data that can be shared at each level. DOD and VA have been working to exchange patient health information electronically since 1998. We have previously described their efforts on three key projects: The Federal Health Information Exchange (FHIE), begun in 2001 and enhanced through its completion in 2004, enables DOD to electronically transfer service members' electronic health information to VA when the members leave active duty. The Bidirectional Health Information Exchange (BHIE), established in 2004, was aimed at allowing clinicians at both departments viewable access to health information on shared patients--that is, those who receive care from both departments. For example, veterans may receive outpatient care from VA clinicians and be hospitalized at a military treatment facility. The interface also allows DOD sites to see previously inaccessible data at other DOD sites. The Clinical Data Repository/Health Data Repository (CHDR) interface, implemented in September 2006, linked the department's separate repositories of standardized data to enable a two-way exchange of computable outpatient pharmacy and medication allergy information. These repositories are a part of the modernized health information systems that the departments have been developing--DOD's AHLTA and VA's HealtheVet. In its ongoing initiatives to share information, VA uses its integrated medical information system--the Veterans Health Information Systems and Technology Architecture (VistA)--which was developed in-house by VA clinicians and IT personnel. All VA medical facilities have access to all VistA information. DOD currently relies on its AHLTA, which comprises multiple legacy medical information systems that the department developed from commercial software products that were customized for specific uses. For example, the Composite Health Care System (CHCS), which was formerly DOD's primary health information system, is still in use to capture pharmacy, radiology, and laboratory order management. In addition, the department uses Essentris (also called the Clinical Information System), a commercial health information system customized to support inpatient treatment at military medical facilities. Not all of DOD's medical facilities yet have this inpatient medical system. As previously noted, the National Defense Authorization Act for Fiscal Year 2008 called for DOD and VA to jointly develop and implement, by September 30, 2009, electronic health record systems or capabilities that allow for full interoperability of personal health care information that are compliant with applicable federal interoperability standards. To facilitate compliance with the act, the departments' Interagency Clinical Informatics Board, made up of senior clinical leaders who represent the user community, began establishing priorities for interoperable health data between DOD and VA. In this regard, the board is responsible for determining clinical priorities for electronic data sharing between the departments, as well as what data should be viewable and what data should be computable. Based on its work, the board established six interoperability objectives for meeting the departments' data sharing needs. According to the former acting director of the interagency program office, DOD and VA considered achievement of these six objectives, in conjunction with capabilities previously achieved (e.g., FHIE, BHIE, and CHDR), to be sufficient to satisfy the requirement for full interoperability by September 2009. The six objectives are listed in table 1. Also since April 2008, the departments have been working to set up an interagency program office to be accountable for their efforts to implement fully interoperable electronic health record systems or capabilities by the September deadline. In January 2009, the office completed its charter, articulating, among other things, its mission and functions with respect to attaining interoperable electronic health data. The charter further identified the office's responsibilities in carrying out its mission, in areas such as oversight and management, stakeholder communication, and decision making. Among the specific responsibilities identified in the charter was the development of a plan, schedule, and performance measures to guide the departments' electronic health record interoperability efforts. Subsequent to an April 2009 Presidential announcement, the departments approved a new version of the interagency program office's charter in September to expand the office's responsibilities to include coordination and oversight of the development of a Virtual Lifetime Electronic Record (VLER). Still in the planning stages, VLER is intended to enable access to all electronic records for service members as they transition from military to veteran status, and throughout their lives. According to the Director of the DOD/VA Interagency Program Office, VLER is to expand the departments' existing electronic health record capabilities by enabling access to private sector health data as well. The revised charter describes that the office is responsible for developing and maintaining a master plan, integrated master schedule, and performance metrics for the VLER initiative. Our prior reports on DOD's and VA's efforts to develop fully interoperable electronic health record systems or capabilities noted their progress and highlighted issues that the departments needed to address to achieve electronic health record interoperability. Specifically, our July 2008 report noted that the departments were sharing some, but not all, electronic health information at different levels of interoperability. At that time the departments' efforts to set up the interagency program office were in the early stages. Leadership positions in the office were not permanently filled, staffing was not complete, and facilities to house the office had not been designated. Accordingly, we recommended that the Secretaries of Defense and Veterans Affairs expedite efforts to put in place permanent leadership, staff, and facilities for the program office. The departments agreed with this recommendation and have taken actions to address it. Our January 2009 report noted that the departments had defined plans to further increase their sharing of electronic health information; however, the plans did not contain results-oriented (i.e., objective, quantifiable, and measurable) performance goals and measures that could be used as a basis to track and assess progress. We recommended the departments develop and document such goals and performance measures for the six interoperability objectives, to use as the basis for future assessments and reporting of interoperability progress. DOD and VA agreed with our recommendation and stated that the departments intended to include results-oriented goals in their future plans. We also reported and testified in July 2009 that the departments were continuing to take steps toward achieving full interoperability by the September 2009 deadline. Specifically, we noted that they had identified six interoperability objectives and had fulfilled three of the six. For the remaining three objectives, DOD and VA had partially achieved planned capabilities but additional work was needed to meet the objectives. Moreover, our report and testimony also noted that the departments' interagency program office was not effectively positioned to function as a single point of accountability for achievement of full interoperability because it did not yet have fundamental IT management capabilities and was not fulfilling key responsibilities, including establishment of performance measures, a project plan, or a detailed schedule. As a result, we recommended that the departments improve management of their interoperability efforts by establishing a project plan and a complete and detailed integrated master schedule. DOD and VA have achieved planned capabilities for the three remaining objectives (expand questionnaires and self-assessment tools, expand Essentris in DOD, and demonstrate initial document scanning). Having now met all six of their interoperability objectives, the departments' officials, including the co-chairs of the group responsible for representing the clinician user community, believe they have satisfied the September 30, 2009, requirement for developing and implementing systems or capabilities that allow for full interoperability. Nevertheless, the departments are planning additional actions to further increase their interoperable capabilities, recognizing that clinicians' needs for interoperable electronic health records are evolving. The following describes the departments' activities with respect to the three remaining objectives. Expand questionnaires and self-assessment tools: The departments intended to provide all periodic health assessment data stored in the DOD electronic health record to VA in a format that associates questions with responses. Health assessment data are collected from two sources: questionnaires administered at military treatment facilities and a DOD health assessment reporting tool that enables patients to answer questions about their health. Questions relate to a wide range of personal health information, such as dietary habits, physical exercise, and tobacco and alcohol use. While the departments had established the capability for VA to view questions and answers from the questionnaires collected by DOD at military treatment facilities, they had not yet achieved the capability for VA to view information from the second source--DOD's health assessment reporting tool. Since our last review, the departments have established this capability and have therefore met their objective. Expand Essentris in DOD: DOD intended to expand Essentris to at least one additional site for each military service and to increase the percentage of inpatient discharge summaries that it shares electronically with VA. While the departments had previously expanded the system to two Army sites, they had not yet expanded to the remaining two military departments (Air Force and Navy). Since we last reported, the departments have met this objective by successfully deploying Essentris to an additional Air Force and Navy site. In addition, the departments expanded the system to two more Army sites and are sharing inpatient discharge summaries from 59 percent of DOD inpatient beds. Demonstrate initial document scanning: The departments intended to demonstrate an initial capability to scan service members' medical documents into the DOD electronic health record and share the documents electronically with VA. Since our last review, the departments have met this objective by successfully demonstrating the capability in a joint test environment. Specifically, DOD has demonstrated the capability to scan a medical document, associate the document with a test patient, and save the document into the patient's electronic health record; and VA demonstrated the capability to search and retrieve the scanned document associated with that patient. While the departments have met the remaining three objectives and believe they have met the September 30, 2009, deadline for achieving full interoperability as required by the act, they are planning additional work to further increase their interoperable capabilities. These actions reflect the departments' recognition that clinicians' needs for interoperable electronic health records are not static. Currently, the departments are focusing their efforts to meet clinicians' evolving needs for interoperable capabilities in the following areas. Clinicians have identified additional needs with respect to social history and physical exam data that have emerged since existing capabilities were made available in those areas. To meet these needs, the departments are planning additional efforts to provide, for example, the capabilities to search, sort, and filter patient social history and physical exam data based on criteria such as date, location of care, and type of document. DOD plans to further expand the implementation of Essentris to sites beyond those achieved as of September 2009. In this regard, the department has established a goal of making the inpatient system operational for 90 percent of its inpatient beds by January 31, 2011. In December 2009, DOD began limited user testing of the document scanning capability that was demonstrated in September 2009. According to department officials, this testing entails use of test data by a limited number of users at nine sites and is expected to be completed in March 2010. After that, further testing of the document scanning capability using actual data is expected at sites and dates that are to be determined. Beyond these ongoing efforts to meet their clinicians' evolving interoperability needs, the departments have begun planning their efforts to define and build VLER. For example, in mid-December 2009, VA and a private health care provider in San Diego, California, began a pilot project to demonstrate that clinical information such as patient demographic, allergy, and active medication information can be securely sent and received. DOD plans to be added to this pilot on January 31, 2010. Further, the departments are working in cooperation with the interagency program office and the Interagency Clinical Informatics Board to define additional clinical information to be exchanged, additional functionality, and additional geographic areas of interest for future VLER deployment. The interagency program office is not yet positioned to function as a single point of accountability for the implementation of interoperable electronic health record systems or capabilities. Since we last reported, the departments have made progress in setting up the office by hiring additional staff, including a permanent director. In addition, consistent with our prior recommendations, the office has begun to demonstrate responsibilities outlined in its charter in the areas of scheduling, planning, and performance measurement. However, the office's efforts to develop its capabilities in these areas are incomplete. Among the activities the departments identified in the September 2008 DOD/VA Information Interoperability Plan as necessary for setting up the interagency program office were appointing a permanent director and deputy director, as well as recruiting and hiring staff. Since we last reported in July 2009, DOD appointed a permanent director to lead the office, effective October 27, 2009. Also, VA filled the permanent deputy director position, effective January 17, 2010. According to the former acting deputy director, the departments have also filled 13 of 14 government staff positions, an increase of 3 staff since our last report. Additionally, this official stated the departments have taken steps to fill the remaining senior health program analyst position. He reported that a selection had been made to fill this remaining position, but a date for when this position would be filled remained to be determined. As previously noted, DOD, VA, and the interagency program office developed a new version of the office's charter in September 2009. Consistent with the office's original charter, the new version describes the office's responsibilities in carrying out its mission and function associated with attaining interoperable electronic data. For example, it identifies the office's responsibilities to develop an integrated master schedule, plan, and performance metrics to monitor the departments' performance against interoperability goals. Since we last reported, the office has taken steps toward developing, but has not yet fully established, these management tools. We previously recommended in July 2009 that the program office establish a complete and detailed master schedule to improve its management of the departments' efforts to achieve fully interoperable electronic health record systems. In response to our recommendation, the office has begun to develop an integrated master schedule that includes information about its ongoing interoperability activities, including VLER. For example, the schedule identifies the limited user testing of the document scanning capability that DOD plans between December 2009 and March 2010. However, the schedule does not include information about the tasks, resource needs, or relationships between tasks for the testing activity. The office's acting deputy director stated that the program office is currently working to improve the schedule by including task dependencies to help in identifying the critical path for the office's interoperability activities. Similarly, we recommended that the program office establish a project plan, which is an important tool for effective IT program management. The program office has concurred with the recommendation and has reported that it is developing a master program plan. In January 2010, department officials stated that this plan is undergoing review by the departments and is expected to be approved in February 2010. In January 2009 we recommended that DOD and VA take action to complete results-oriented (i.e., objective, quantifiable, and measurable) goals and performance measures to be used as a basis for the office to provide meaningful information on the status of the departments' interoperability initiatives. In November 2009, program office officials stated that such goals and measures would be included in the next version of the VA/DOD Joint Executive Council Joint Strategic Plan (known as the joint strategic plan), which the office expects to be approved in February 2010. While the departments have agreed with our past recommendations and have indicated that they are working toward addressing them, officials stated that other priorities have prevented full implementation of our recommendations. Specifically, the office has been focused on verifying achievement of the six interoperability objectives. Moreover, according to the former interim director, the office was focused on providing briefings and status information on activities the office has undertaken to achieve interoperability, in addition to participating in the departments' efforts to define VLER. In addition, the office director told us that it has taken the departments longer than anticipated to provide the detailed information that is needed by the office to prepare a schedule for joint interagency data sharing goals. While the interagency program office is nearly fully staffed and has begun to establish important management tools, it has not yet completed an integrated schedule, project plan, and results-oriented goals and measures. As a result, the interagency program office's ability to effectively provide oversight and management, including meaningful progress reporting on the delivery of interoperable capabilities, is jeopardized. If the departments fully implement our recommendations, they will have the comprehensive picture that they need for effectively defining and managing progress toward meeting their interoperability objectives and goals, including VLER. Furthermore, implementation of our recommendations will also better position the office to function as a single point of accountability for the delivery of interoperable electronic health records, which are intended to improve service members' and veterans' health care. In written comments on a draft of this report, the DOD official who is performing the duties of the Assistant Secretary of Defense (Health Affairs), the VA Chief of Staff, and the Director of the DOD/VA Interagency Program Office concurred with our findings. Beyond its concurrence with our findings, the VA Chief of Staff provided information regarding the department's efforts to address recommendations from our prior reports. For example, in response to our previous recommendation that the departments use results-oriented performance goals and measures as the basis for future assessments and reporting of interoperability progress, the Chief of Staff stated that the departments have prepared draft goals and measures for their joint strategic plan, which is to be finalized in February 2010. Additionally, in response to our prior recommendation that the departments establish a project plan and a compete and detailed integrated master schedule to improve management of their interoperability efforts, the Chief of Staff asserted that the interagency program office expects to have a draft project plan by the end of January 2010 and that VA meets monthly with DOD and the program office to coordinate input into an integrated master schedule. If the departments continue to implement our recommendations, they should be better positioned to effectively manage their ongoing efforts to increase their interoperable electronic health record capabilities. DOD and the interagency program office also provided technical comments on the draft report, which we incorporated as appropriate. Comments from the Departments of Defense and Veterans Affairs, and the DOD/VA Interagency Program Office are reproduced in appendixes II, III, and IV, respectively. We are sending copies of this report to the Secretaries of Defense and Veterans Affairs, appropriate congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have questions about this report, please contact me at (202) 512-6253 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 V. To determine the extent to which the Department of Defense (DOD) and the Department of Veterans Affairs (VA) developed and implemented electronic health record systems or capabilities that allowed for full interoperability by the September 30, 2009, deadline, we reviewed our previous work on DOD and VA efforts to develop health information systems, interoperable health records, and interoperability standards to be implemented in federal health care programs. We obtained and analyzed agency documentation and interviewed program officials to determine the departments' progress toward achieving full interoperability by September 30, 2009, as required by the National Defense Authorization Act for Fiscal Year 2008. Specifically, we compared the departments' interoperability plans, objectives, and requirements with the reported status of efforts to achieve full interoperability, corroborating officials' statements about progress through analyses of available documentation including test results and status reports. In addition, we analyzed agency plans and interviewed cognizant DOD and VA officials to determine the work required to meet additional clinician requirements and increase interoperability of electronic health information beyond September 30, 2009. To determine whether the interagency program office was functioning as a single point of accountability for developing and implementing electronic health records, we obtained and reviewed program office documentation, including its new charter and its integrated master schedule. We compared the responsibilities identified in the charter with actions taken by the office to exercise the responsibilities. Additionally, we interviewed interagency program office officials to determine the status of filling leadership and staffing positions within the office and to examine the level to which the departments have addressed our prior recommendations to develop needed management tools including results-oriented (i.e., objective, quantifiable, and measurable) goals and performance measures, a complete and detailed master schedule, and a project plan. We conducted this performance audit at DOD offices and the DOD/VA Interagency Program Office in the greater Washington, D.C., metropolitan area from September 2009 through January 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 contact named above, key contributions to this report were made by Mark Bird, Assistant Director; Rebecca Eyler; J. Michael Resser; and Kelly Shaw.
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The National Defense Authorization Act for Fiscal Year 2008 required the Department of Defense (DOD) and the Department of Veterans Affairs (VA) to accelerate their exchange of health information and to develop capabilities that allow for interoperability (generally, the ability of systems to exchange data) by September 30, 2009. It also required compliance with federal standards and the establishment of a joint interagency program office to function as a single point of accountability for the effort. Further, the act directed GAO to semiannually report on the progress made in achieving these requirements. For this fourth report, GAO determined the extent to which (1) DOD and VA developed and implemented electronic health record systems or capabilities that allowed for full interoperability by September 30, 2009, and (2) the interagency program office established by the act is functioning as a single point of accountability. To do so, GAO analyzed agency documentation on project status and conducted interviews with agency officials. DOD and VA previously established six objectives that they identified as necessary for achieving full interoperability; they have now met the remaining three interoperability objectives that GAO previously reported as being partially achieved--expand questionnaires and self-assessment tools, expand DOD's inpatient medical records system, and demonstrate initial document scanning. As a result of meeting the six objectives, the departments' officials, including the co-chairs of the group responsible for representing the clinician user community, believe they have satisfied the September 30, 2009, requirement for full interoperability. Nevertheless, DOD and VA are planning additional actions to further increase their interoperable capabilities and address clinicians' evolving needs for interoperable electronic health records. Specifically, (1) DOD and VA plan to meet additional needs that have emerged with respect to social history and physical exam data; (2) DOD plans to further expand the implementation of its inpatient medical records system to sites beyond those achieved as of September 2009; and (3) DOD and VA plan to test the capability to scan documents, in follow-up to their demonstration of an initial document scanning capability. Additionally, in response to a Presidential announcement, the departments are beginning to plan for the development and implementation of a virtual lifetime electronic record, which is intended to further increase their interoperable capabilities. The interagency program office is not yet positioned to function as a single point of accountability for the implementation of interoperable electronic health record systems or capabilities. The departments have made progress in setting up their interagency program office by hiring additional staff, including a permanent director. In addition, consistent with GAO's previous recommendations, the office has begun to demonstrate responsibilities outlined in its charter in the areas of scheduling, planning, and performance measurement. However, the office's effort in these areas does not fully satisfy the recommendations and are incomplete. Specifically, the office does not yet have a schedule that includes information about tasks, resource needs, or relationships between tasks associated with ongoing activities to increase interoperability. Also, key IT management responsibilities in the areas of planning and performance measurement remain incomplete. Among the reasons officials cited for not yet completing a schedule, plan, or performance measures were the office's need to focus on verifying achievement of the six interoperability objectives and participating in the departments' efforts to define the virtual lifetime electronic record. Nonetheless, if the program office does not fulfill key management responsibilities as GAO previously recommended, it may not be positioned to function as a single point of accountability for the delivery of future interoperable capabilities, including the development of the virtual lifetime electronic record.
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Until fiscal year 1998, Indian housing authorities and tribes received most of their funding for low-income housing through programs established under the U.S. Housing Act of 1937 and administered by HUD's Office of Native American Programs. Through its headquarters and six field offices, and with the help of 217 Indian housing authorities, HUD administered the housing programs that benefited Native American families that live in or near tribal areas. HUD provided funding to construct, maintain, and rehabilitate low-income housing through programs such as Development, Operating Subsidies, and Modernization. On October 26, 1996, the Native American Housing Assistance and Self-Determination Act was signed into law, separating Indian housing from public housing, administratively and financially. The regulations implementing NAHASDA were developed by a negotiated rulemaking committee. The committee had 58 members, 48 of them from geographically diverse small, medium, and large tribes; the other 10 were HUD employees. After review by the Office of Management and Budget, HUD published the final rule implementing NAHASDA on March 12, 1998; it went into effect on April 13, 1998. NAHASDA eliminated 9 of HUD's 14 separate Indian housing programs, replacing them with a single block grant program with one set of funding criteria for HUD to administer and, according to HUD officials, one system for managing and accounting for funds. The new act also allowed tribes to designate themselves, new housing entities, or existing Indian housing authorities as the housing entity to manage existing housing, to plan and implement housing programs, and to administer block grant funding. This change resulted in the number of housing entities more than doubling, from 217 housing authorities to 575 tribally designated housing entities. Under NAHASDA, to receive funding, each housing entity must submit an Indian housing plan to HUD describing 1-year and 5-year housing goals and objectives, housing needs, and financial resources. Prior to NAHASDA, HUD provided funding directly to Indian housing authorities and tribes through 14 programs for which a total of $2.8 billion was appropriated in fiscal years 1993 through 1997. Each program had its own criteria for awarding and allocating funds and its own system for managing and accounting for the funds. For nine of the programs, Indian housing authorities or tribes competed for funding. The Indian housing authorities and tribes submitted project proposals, which HUD then scored and ranked, awarding grants for the highest-ranked projects. For the other five programs, HUD allocated funds to Indian housing authorities or tribes noncompetitively through a formula or on a first-come, first-served basis. Tables I.1 and I.2 in appendix I describe each program and the criteria used to provide funding. Funding for HUD's Indian housing programs has remained relatively consistent in recent years, ranging from a low of $491 million in fiscal year 1996 to a high of $593 million in fiscal year 1995, as shown in figure 1. In fiscal year 1997, the last year these programs were funded separately, funding was approximately $562 million, of which almost $322 million, or 57 percent, was awarded through competitive programs. The approximately $240 million (43 percent) remaining was allocated noncompetitively. Figure 2 shows how the fiscal year 1997 funds were distributed. With the start of the NAHASDA program, HUD applied the act's allocation formula to determine the amounts of the fiscal year 1998 block grants. The formula considers tribes' housing needs, but did not include a factor for housing authorities' past performance. HUD determined that the Department was legally constrained from considering the past management performance of Indian housing authorities. The formula also did not factor in $929 million provided in past years but not yet spent by the Indian housing authorities and tribes. Most of the unspent funding was provided in fiscal years 1993 through 1997 for the Development and Modernization programs, which were intended to assist Indian housing authorities in building new housing and modernizing existing units. The housing entities can continue to use these unspent funds as originally planned or as proposed in their Indian housing plans. The NAHASDA block grant formula consists of two components: (1) the costs of operating and modernizing existing housing units and (2) the need for providing affordable housing. A housing entity's total block grant amount is the sum of the amounts determined under each of these two components--or the amount an Indian housing authority received in fiscal year 1996 for modernization and operating subsidy. To determine funding for the first component--operating and modernizing--HUD calculates the number of existing housing units an entity has and the operating costs of providing that housing. HUD then calculates the modernization costs of keeping these units in good working order. These two cost figures are combined as the entity's funding amount under the first component of the NAHASDA formula. To calculate funding of the second component of the NAHASDA formula--need for affordable housing--HUD uses various factors. These factors reflect each housing entity's Native American population, income levels, local housing costs and housing conditions, and the extent of housing shortages. Hence, it is through the calculation of this component that tribal housing needs are considered in the distribution of NAHASDA funding. In allocating funds in the first year of the NAHASDA program, HUD recognized that the data used to calculate block grants may need to be improved. HUD has hired a contractor to review alternative data sources to use when applying the NAHASDA formula. In addition, NAHASDA regulations require that HUD, with the consultation and involvement of the tribes, review the formula and, if necessary, revise the formula within 5 years. Appendix II provides a more detailed description of the current formula. HUD interpreted NAHASDA as legally constraining the Department from considering Indian housing authorities' past management performance as a factor in determining the eligibility of housing entities for fiscal year 1998 NAHASDA block grants. Indian housing authorities' past performance came under the requirements and regulations for programs created under the U.S. Housing Act of 1937, requirements and regulations that are no longer in effect since NAHASDA eliminated most of these programs. According to HUD's Office of General Counsel, there is no provision under NAHASDA allowing HUD, when awarding block grant funding under the act, to consider Indian housing authorities' failure to comply with requirements and regulations that are no longer in effect. Consequently, the housing entities were given the opportunity to demonstrate good management and performance under NAHASDA. However, HUD does have the authority and has, in several instances, placed conditions, such as additional monitoring and oversight, on the use of grant funds by a housing entity that has a history of poor performance in administering federal grant programs. For example, for a tribe with problems administering its Indian Community Development Block Grant and HOME programs, HUD plans to more closely monitor expenditures of NAHASDA block grant funds and to require that the tribe submit quarterly program and financial reports. In future fiscal years, regulations permit HUD, when dispensing new grants, to consider how well housing entities have managed past NAHASDA grants. NAHASDA regulations allow HUD to sanction poorly managed housing entities by (1) reducing or eliminating future grant funding or (2) replacing the housing entity managing the program. Such actions may be taken if HUD determines, through activities such as reviewing reports provided by tribes or making site visits, that housing entities are substantially noncompliant with NAHASDA regulations. HUD plans to closely monitor housing entities that are having performance problems and to provide them with technical assistance to help them comply with NAHASDA requirements. To monitor and assist these entities, HUD is using Internet e-mail to facilitate the submission and review of Indian housing plans and to respond to housing entities' questions about the program. Providing additional monitoring and technical assistance may pose a challenge for HUD, given the Department's decreasing resources. HUD's Inspector General has stated that effectively overseeing housing entities while simultaneously implementing the NAHASDA program may prove difficult with current HUD staffing because the number of housing entities served by HUD under NAHASDA will more than double. Until the first year of NAHASDA is completed, HUD will not know what the impact this increase in the number of housing entities served will have on its workload. The Deputy Assistant Secretary, Office of Native American Programs, estimated that 221 staff years will be needed to fully implement Indian housing programs. Meanwhile, several changes are planned to accommodate the future workload with the present staffing level of 178 employees. The planned changes include addressing the length and frequency of site visits, modifying some work processes, and using technology to improve efficiency. The Deputy Assistant Secretary added that because of the resource limitations, the office may have to reduce the number of site visits to tribal housing entities during fiscal year 1999. HUD plans to visit only 20 percent of the housing entities, instead of 33 percent as originally planned. Under NAHASDA regulations, the tribes also have a responsibility to monitor the performance and compliance of their housing entities. For example, tribes are required to ensure that their entities prepare periodic progress reports, including annual compliance assessments and performance and audit reports. The unspent $929 million in Indian housing funding was not a factor in calculating the fiscal year 1998 block grants because, according to HUD officials, the unspent funding addresses needs that continue to exist. This funding, awarded in previous years, remains available for housing entities to complete ongoing work or for eligible NAHASDA activities. NAHASDA regulations require housing entities to use unspent funding for housing planned under earlier housing programs if contracts have already been signed. However, if such contracts have not been signed, NAHASDA regulations allow the entities to integrate the funding into their overall NAHASDA housing plan. Housing entities report these unspent funds and the plans for their use as part of the Indian housing plans they submit for HUD's approval. Officials from HUD's Office of the Chief Financial Officer told us that some funds, particularly the Development and Modernization funds, have remained unspent because of the construction difficulties some projects on Indian lands have encountered. These difficulties include legal disputes and the remoteness of the Indian lands, which makes access difficult for the builders and other individuals, businesses, and suppliers needed to construct housing. Most of the unspent funding, almost $903 million of it, was provided in fiscal years 1993 through 1997 and was for the Development and Modernization programs. The unspent funding provided in fiscal years 1993 through 1997 is shown by program in figure 3. Over this same 5-year period, HUD provided a total of $2.8 billion for Indian housing programs; thus, about 30 percent of this funding remains unspent. In appendix III, table III.1 shows the unspent Indian housing funding by program over an 18-year period. Table III.2 shows the unspent Indian housing funding over the same period for 15 Indian housing authorities and tribes that have unspent funding of more than $10 million each. Other ($35.9) Operating Subsidies ($12.0) Section 8 Rental Assistance ($10.0) Drug Elimination ($8.6) Economic Development and Support Services ($3.4) Emergency Shelter Grants ($1.0) HOPE I ($0.7) Youth Sports ($0.2) HOME Investment Partnership ($38.9) Development ($511.3) Modernization ($316.5) As of September 30, 1998, HUD had allocated most of the fiscal year 1998 NAHASDA block grants and had requested funds from the Congress for fiscal year 1999 block grants. To receive grants from the $590 million available for the NAHASDA program in fiscal year 1998, each of the 575 housing entities had to submit an Indian housing plan by July 1, 1998. HUD had received plans representing over 97 percent of the entities by the deadline. As of September 30, 1998, HUD had approved 327 plans representing approximately $548 million and was in the process of reviewing 40 additional plans representing $39 million--for a total of 367 plans and $587 million in fiscal year 1998 block grants. Appendix IV shows the fiscal year 1998 block grant amount for each housing entity. For the fiscal year 1999 program, HUD requested $600 million from the Congress. As of September 30, 1998, however, HUD had not calculated the final fiscal year 1999 block grant allocations because it had not yet received its appropriation. Fiscal year 1999 Indian housing plans are due by July 1, 1999, for HUD's review and approval. Passage and implementation of NAHASDA presents HUD and the Native American tribes with both opportunities and challenges. NAHASDA allows HUD to manage and monitor most housing assistance to tribes through a single program. At the same time, NAHASDA more than doubled the number of grantees that must be assisted and monitored--during a period of declining resources at the Department. As for the tribes, they gained the freedom to set their own priorities and to determine how to best meet their housing needs with the resources available. Yet the tribes will ultimately be responsible for making sure that grant funds are spent efficiently and appropriately. It is too soon to determine how well HUD and the tribes will meet the challenges presented by NAHASDA. We provided the Department of Housing and Urban Development with a draft of this report for review and comment. HUD generally agreed with the report but commented that we should recognize that the Department merely administers the NAHASDA formula. The formula was a product of the negotiated rulemaking process, and the Department did not determine or control the elements of the formula. We have expanded the discussion in our report to reflect this concern. HUD also suggested that we include information on standard spend-out rates for the Development and Modernization programs in our discussion of unspent program funding to allow for a more comprehensive understanding of the issue. We believe that our discussion of the unspent program funding addresses this concern. We point out that most of the unspent funding was appropriated over a recent 5-year period--fiscal years 1993 through 1997. Furthermore, we describe the difficulties of building on Indian lands and point out that Development and Modernization funds can remain unspent because of these difficulties. Consequently, we did not make the suggested change to the report. Additionally, HUD provided a number of suggested technical and clarification comments that we have incorporated as appropriate. To determine how HUD awarded and allocated funding to Indian housing authorities and tribes before NAHASDA's enactment, we reviewed regulations governing HUD's grant award programs. In addition, we reviewed the applicable HUD handbooks and guidebooks and interviewed officials from HUD's headquarters Office of Native American Programs in Washington, D.C., and Denver, Colorado, who were familiar with the programs' funding. To determine the aggregate funding amounts for Indian housing programs in fiscal years 1993 through 1997, we obtained data from HUD's annual reports. To determine what factors HUD used to allocate Indian housing block grant funding to housing entities under NAHASDA, we reviewed NAHASDA, the final rule developed under the act, notices, and plans for implementing NAHASDA. We also analyzed the NAHASDA block grant allocation formula. We discussed the NAHASDA block grant allocation process and formula with officials of HUD's Office of Native American Programs who were responsible for NAHASDA's implementation. In addition, we interviewed members of the NAHASDA Negotiated Rulemaking Committee who participated in drafting the final rule and the block grant allocation formula. To determine the amount, type, and "age" of unspent Indian housing program funds, we analyzed data obtained for us by HUD from its Program Accounting System. We did not systematically verify the accuracy of HUD's data or conduct a reliability assessment of HUD's databases as part of this assignment. To determine the status of Indian housing block grant funding for fiscal year 1998, we reviewed HUD's reports on housing entities' status in meeting NAHASDA funding requirements and the associated funding amounts. We also interviewed officials of HUD's Office of Native American Programs who were responsible for calculating and allocating the fiscal year 1998 block grants. We performed our work from June 1998 through November 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of HUD and the Director, Office of Management and Budget. We will make copies available to others on request. Please call me at (202) 512-7631 if you or your staff have any questions. Major contributors to this report are listed in appendix V. Fiscal year 1997 funding (dollars in millions) For scoring and ranking proposals -- Bureau of Indian Affairs housing needs assessment -- Percentage of the area's total need -- Estimated number of units to be funded -- Weighted average cost of developing housing within each area -- Indian housing authority established under state law or a HUD-approved tribal ordinance -- Indian housing authority had the capacity to administer the program as demonstrated by compliance with HUD standards for housing development, modernization, and operations -- Indian housing authority met performance eligibility thresholds to apply for housing development funding: environmental review, fiscal closeout, final site approval and control, utility supplier's firm commitment, and preconstruction certification -- Relative unmet need for housing -- Relative Indian housing authority occupancy rate compared with the occupancy rates of other eligible Indian housing authorities -- Time since last Development grant was approved compared with that for other eligible Indian housing authorities -- Current Indian housing authority development "pipeline" activity already in progress -- For fiscal year 1997, HUD applied additional factors for scoring and ranking that included clear Indian housing authority demonstration of preplanning housing project activities, site selection that results in cost savings, and innovative approaches to development or financing that reduce housing delivery time or increase the number of units -- $1 million base amount for each field office -- Additional amount calculated by a formula that considered the latest Census data for the eligible Native American population residing in each area and the extent of poverty and housing overcrowding -- Reasonableness of project's cost -- Project's appropriateness for intended use -- Project can be achieved within 2 years -- Tribe's administrative, managerial, and technical capacity -- Tribe's past grants administration -- Tribe's actions to impede development of housing for low- and moderate-income individuals -- Outstanding block grant obligations to HUD -- Need for project and its design -- Project planning -- Leveraging of block grant funding (continued) Fiscal year 1997 funding (dollars in millions) Comprehensive Improvement Assistance Program for modernization(Nonemergency) Degree to which -- project addressed the housing needs of the tribe and maximized benefits to low-income families -- tribe had taken the financial, administrative, and legal actions necessary to undertake the proposed project and had the administrative staff to carry out the project -- tribe would use other sources of funding, such as state grants, private mortgage insurance, private contributions, and other federal grants, to leverage funding for the project -- Plan for evaluating activities -- Plan for establishing a relationship with local law enforcement entities -- Coordination with empowerment zone and welfare reform efforts -- Description of use of community facilities and bringing back community focus to housing authority properties -- Assurance that Indian housing authority has a broad range of tools for making and maintaining a safe community -- Indian housing authority's administrative capacity and relevant experience -- Problem's extent -- Support of residents, local government, and community in implementing activities -- Soundness of proposed plan -- Extent of coordination and participation with other organizations in community planning (continued) Fiscal year 1997 funding (dollars in millions) For scoring and ranking proposals -- Formula calculating emergency shelter needs for tribes within each field office area -- Form, timeliness, and completeness of application -- Tribe's eligibility as determined by Department of Treasury Office of Revenue Sharing -- Eligibility of persons to be served for program assistance -- Tribe's building compliance with disability requirements -- Tribe's capacity to carry out the proposed activities successfully and within a reasonable time -- Tribe's service to the homeless population that is most difficult to reach and serve -- Existence of an unmet need for the proposed project -- Appropriateness of proposed activities to meet the needs of the served population -- Extent of coordination with other community programs -- 51 percent or more of the residents included in the proposed project are affected by welfare reform -- Proposed activities must take place in a community facility that is easily accessible for applicants -- Community resources must be firmly committed to the project -- Indian housing authority's compliance with current programs -- Troubled housing authority must use a contract administrator -- Indian housing authority's administrative capacity and relevant experience -- Extent of problem and need for project -- Soundness of program approach and methodology -- Indian housing authority's ability to leverage project resources -- Extent of coordination with community to identify and address problems -- Funding provided to field offices to assist Indian housing authorities in providing funds for eligible families -- Families, not Indian housing authorities or tribes, must be eligible for assistance -- Funding provided to field offices to assist Indian housing authorities in providing funds for eligible families (continued) Fiscal year 1997 funding (dollars in millions) For scoring and ranking proposals -- Funding awarded directly to organizations by HUD's Office of Public and Indian Housing -- 51 percent or more of the residents included in the proposed project are affected by welfare reform -- Signed agreement between the applicant and the housing authority describing each of their roles and responsibilities -- Proposed activities must take place in a community facility that is easily accessible for applicants -- Must use the services of a contract administrator or mediator -- Must be a registered nonprofit organization -- Compliance with current programs and no unresolved audit findings -- Contract administrator must not be in default -- Letters of support from project participants -- Certification of resident organization board elections -- Resident organization's administrative capacity to carry out the project and its relevant experience -- Need for the project and extent of the problem -- Soundness of program approach and methodology -- Resident organization's ability to leverage project resources -- Extent that project reflects a coordinated community-based process identifying and addressing the problem -- HUD ONAP awarded a small portion of the funding using a lottery system Fiscal year 1997 funding (dollars in millions) Comprehensive Improvement Assistance Program for modernization(Emergency) For allocating funding to Indian housing authorities or tribes -- Funding allocated directly to field offices by HUD's Office of Public and Indian Housing -- HUD approval of Indian housing authority's comprehensive plan identifying all physical condition and management improvements of existing housing and action plan for achieving them -- Coordination with local officials in developing comprehensive plan -- Indian housing authority board resolution approving comprehensive plan -- Additional assurances or information required from HUD monitoring, audit findings, civil rights compliance findings, or corrective action orders -- Formula calculating housing modernization needs of Indian housing authorities -- Funding allocated directly to field offices by HUD's Office of Public and Indian Housing -- Indian housing authorities must meet HUD financial management and occupant income requirements -- Performance Funding System formula for calculating what a well-managed Indian housing authority would need to operate its housing programs -- Compliance with Fair Housing, Civil Rights, and environmental statutes -- Housing projects have to be fully available for occupancy -- All eligible applications funded subject to the availability of funds -- HUD does not allocate funding for loan guarantees to field offices -- Tribe must have developed eviction and foreclosure procedures -- HUD guarantees loans made by private lenders to applicants that meet loan qualifications (continued) Fiscal year 1997 funding (dollars in millions) Using the block grant formula established under the Native American Housing Assistance and Self-Determination Act of 1996 (NAHASDA), the Department of Housing and Urban Development (HUD) allocates funds to Indian housing entities for (1) the costs of operating and modernizing existing housing units and (2) the need for providing affordable housing activities. In calculating grant amounts for operating and modernizing existing housing, HUD, as specified in the formula, considers inflation since 1996 in the cost of providing these services, the number of housing units an entity operates, and the entity's cost of providing these services compared with the average cost for all entities. In calculating grant amounts for the need to provide affordable housing activities, HUD considers seven weighted factors specified in the formula indicating the need for housing activities and the cost of obtaining the activities. Additionally, once the block grants are calculated, HUD ensures that the funding amounts meet certain minimum levels. HUD calculates an entity's grant amount for operating and modernizing existing housing using fiscal year 1996 national average funding per housing unit and increasing it to reflect cost increases. After this inflation adjustment, HUD adjusts the national average amount to reflect geographic differences in the cost of operating and modernizing housing for each Indian housing entity. HUD then multiplies each entity's cost per unit by the number of housing units the entity operates to arrive at its grant amount. Figure II.1 illustrates the formula for calculating funding for operating and modernizing existing housing. Housing entities operate a variety of units that are classified into three major types: (1) low-income rental units built under the U.S. Housing Act of 1937, (2) units operated under the Section 8 Rental Assistance program, and (3) Turnkey III and Mutual Help homeownership units. For the NAHASDA block grants, HUD separately calculates grant amounts that reflect the operating and modernizing needs of each of these types of housing units. An entity's funding reflects these needs and is the sum of two calculations. Table II.1 shows a hypothetical sample calculation of an entity's funding for operating housing. In calculating funding for operating housing, HUD uses the 1996 national average funding for each of the three types of housing. In our hypothetical sample calculation, we assume that the inflation cost adjustment is 5.3 percent and that the entity's geographic cost factor is 14 percent above the national average. We also assume that the entity is responsible for operating 150 low-income housing units, 50 Section 8 housing units, and 20 Turnkey III and Mutual Help units. We use the fiscal year 1996 national average funding amount for each type of housing unit in our hypothetical calculation. The national average funding amount for low-income units in fiscal year 1996 was $2,440 per unit. We increase this amount by 5.3 percent for inflation and by 14 percent for operating costs above the national average, and consider that the entity operates 150 low-income units. Given these assumptions, our hypothetical housing entity would receive a grant amount of $439,354 for low-income units. Similar calculations for Section 8 units and for Turnkey III and Mutual Help units yield grant amounts of $217,576 and $12,676, respectively. Adding these three figures together yields a total operating housing grant amount of $669,606. In calculating funding for modernizing housing, HUD bases the average 1996 funding amount on the number of low-income and Turnkey III and Mutual Help units. Section 8 units are excluded in this calculation. The national average funding amount for modernizing housing units in fiscal year 1996 was $1,974 per unit. The block grant uses the same inflation adjustment factor for both operating and modernizing housing. Consequently, we assume a 5.3-percent inflation adjustment for this calculation. Under the block grant, the geographic cost factor for modernizing housing differs from that used for operating housing. In our sample calculation, we assume that the entity's geographic cost factor is 2 percent below the national average. The resulting grant calculation for modernizing housing is shown in table II.2. We increase the fiscal year 1996 modernizing funding amount by 5.3 percent for inflation, reduce it by 2 percent for below average costs, and consider the 170 housing units the entity operates (150 low-income units and 20 Turnkey III and Mutual Help units). These calculations result in a modernizing grant amount of $346,298. Adding this amount to the $669,606 the entity receives for operating housing results in a total grant of $1,015,904 for operating and modernizing housing. For fiscal year 1998, HUD derived the number of housing units and areas served from reports submitted by Indian housing authorities or tribes. The numbers reported were confirmed by the Department. HUD adjusted costs for inflation using the housing cost component of the Consumer Price Index, published annually by the Bureau of Labor Statistics. HUD adjusted for geographic differences in the cost of operating housing (for example, the costs of maintenance and tenant services) using the larger of the entity's historical Allowable Expense Levels for calculating operating subsidies under the Public Housing Program (prior to October 1, 1997) or the private sector housing Fair Market Rents, data collected and published annually by HUD. Fair Market Rents represent the rental cost of private sector housing units and reflect geographic differences in rental housing supply and demand in local U.S. housing markets. HUD based the geographic cost factor used to calculate funding for modernizing housing on the cost of building a standard housing unit of moderate design in various geographic locations. Given moderate housing design specifications, HUD calculates the labor, materials, and other costs required to construct such a unit in various locations. These amounts are based on cost surveys conducted by private firms. Thus, the geographic cost factor reflects labor, materials, and other costs in the housing construction industry. Once funding for operating and modernizing housing is determined for each entity, HUD totals the funding amounts and deducts the amounts from available appropriations. This calculation results in the amount of funding available to all housing entities to address the need to provide affordable housing activities. The formula for the need for housing activities allocates available funding among entities based on their proportionate share of seven weighted factors and the cost of building a standard housing unit of moderate design in various geographic locations. The geographic cost adjustment factor is the same as or similar to that used in the formula to calculate funding for modernizing housing. Figure II.2 shows the formula for calculating funding for the need for housing activities. The formula for calculating funding for the need to provide affordable housing activities uses various weighted need factors. The factors capture the portions of the national population that fall into seven categories and are American Indians or Alaska Natives living in areas where a tribe has jurisdiction or has provided substantial housing services. These categories include the Native American population, low-income households, households with housing cost exceeding half their income, low-income households in need of housing, and households living in overcrowded conditions or without kitchen or plumbing facilities. Table II.3 shows each factor and its associated weight. HUD multiplies each housing entity's share of each factor by the factor's assigned weight and adds the total for all factors to produce the entity's weighted share for the seven need factors. Population (American Indians and Alaska Natives) The third column of table II.3 shows the weight for each of the seven need factors. For example, in our sample calculation, we assume that a housing entity's jurisdiction covers, or that the entity has provided, substantial housing services to one-half of 1 percent of the total American Indian and Alaska Native population (see factor 1 in the table). This factor receives a weight of 11 percent in the formula. Multiplying the entity's share of the American Indian and Alaska Native population by the factor's weight produces the entity's weighted share for the factor. To produce the entity's weighted share of the seven factors, we make similar computations for each factor and add the entity's weighted shares together. HUD uses the formula shown in figure II.3 to calculate an entity's funding for the need to provide affordable housing activities. To illustrate, we assume that $100 million of the program's total appropriation remains after the operating and modernizing grants have been allocated. We use the weighted share of the seven need factors as calculated in table II.3, 0.00622. We also assume that the entity's geographic cost factor is 2 percent below the national average. Multiplying these amounts results in a grant calculation of $609,560 for need for housing activities. Funding for Need for Housing Activities After calculating funding for operating and modernizing housing and for the need for housing activities, HUD combines the amounts into a single block grant. The total grant amount of our hypothetical sample calculation is $1,267,736. For fiscal year 1998, HUD used the same geographic cost factor to calculate funding for the need to provide affordable housing activities as it did for modernizing existing housing. HUD obtained data for each of the seven need factors from the 1990 U.S. Census, which HUD updated to reflect current conditions. Housing entities can challenge the Census data by conducting their own surveys subject to HUD guidelines and by submitting the data to HUD for use in calculating grant amounts for need for housing activities. The NAHASDA regulations establish two kinds of minimum funding levels for housing entities. Consequently, when HUD calculates funding amounts that are below the legislated minimums, housing entities are given additional funds. The first minimum funding level guarantees every entity an allocation that at least equals its fiscal year 1996 funding for operating and modernizing housing. The second minimum funding level guarantees every housing entity an allocation of at least $50,000 for funding the need for affordable housing activities. In subsequent years, HUD will reduce the second minimum funding guarantee to $25,000, and in fiscal year 2002, it will be eliminated. Indian housing authority/tribe and programs Navajo Housing Authority, Arizona Choctaw Nation Housing Authority, Oklahoma Association of Village Council Presidents Housing Authority, Alaska Cherokee Nation Housing Authority, Oklahoma Tagiugmiullu Nunamiullu Housing Authority, Alaska Tohono O'odham Housing Authority, Arizona (continued) Indian housing authority/tribe and programs Standing Rock Housing Authority, South Dakota Northern Circle Housing Authority, California Bering Straits Regional Housing Authority, Alaska Navajo Nation of Arizona, New Mexico and Utah Yurok Housing Authority, California Karuk Tribe Housing Authority, California 0 (continued) Alaska Office of Native American Programs (Anchorage, Alaska) (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing Eastern/Woodlands Office of Native American Programs (Chicago, Illinois) (continued) Operating and modernizing existing housing (continued) Northern Plains Office of Native American Programs (Denver, Colorado) (continued) Operating and modernizing existing housing Southern Plains Office of Native American Programs (Oklahoma City, Oklahoma) (continued) Operating and modernizing existing housing (continued) Southwest Office of Native American Programs (Phoenix, Arizona) (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Northwest Office of Native American Programs (Seattle, Washington) (continued) Carol Anderson-Guthrie Robert J. 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Pursuant to a congressional request, GAO reviewed the Department of Housing and Urban Development's (HUD) implementation of the Native American Housing Assistance and Self-Determination Act of 1996 (NAHASDA), focusing on: (1) how HUD allocated funding to Indian housing authorities and tribes before NAHASDA's enactment, and how much was appropriated for Indian programs in fiscal years (FY) 1993 through 1997; (2) identifying the factors HUD used to allocate Indian housing block grant funding to tribes and tribally designated housing entities under NAHASDA, and whether HUD considered current tribal housing needs, past tribal housing management performance, and the magnitude of unspent housing grant funding for incomplete housing projects; (3) the amount, type, and age of unspent funding for incomplete housing projects; and (4) the status of HUD's Indian housing block grant funding for fiscal years 1998 and 1999. GAO noted that: (1) before NAHASDA became effective, HUD distributed funding to Indian housing authorities and tribes through 14 different programs, each having its own criteria for awarding and allocating grant funding; (2) for nine of these programs, funding was awarded competitively, requiring the Indian housing authorities or tribes to submit project proposals, which HUD then scored and ranked; (3) for the other five programs, HUD allocated funding to Indian housing authorities or tribes noncompetively, using formulas or distributing the funds on a first-come, first-serve basis; (4) over fiscal years 1993 through 1997, HUD provided a total of $2.8 billion to Indian housing authorities and tribes through these 14 programs; (5) after NAHASDA went into effect for FY 1998, eliminating 9 of the 14 separate Indian housing programs and replacing them with a single block grant program, HUD used the act's noncompetitive allocation formula to determine the grant amounts for the 575 Indian housing entities; (6) the formula has two components: (a) the costs of operating and modernizing existing housing units; and (b) the need for providing affordable housing activities; (7) the allocation formula does not include a factor for past management performance; (8) HUD's rationale was that there is no authority under the new act for it to consider the authorities' failure to comply with requirements and regulations that are no longer in effect; (9) relying on other guidance, HUD has placed conditions on the use of NAHASDA grant funds if a housing entity has a history of problems with administering other federal grant programs; (10) in subsequent years, HUD can consider performance under NAHASDA when dispensing new grants; (11) the block grant formula also did not consider the approximately $929 million in total unspent Indian housing program funding awarded in previous years because the funding addresses needs that continue to exist; (12) most of the unspent funds were provided in fiscal years 1993 through 1997 through two programs--Development and Modernization; (13) entities must report their planned use of those funds to HUD as part of their Indian housing plans; (14) for FY 1998, $590 million was appropriated for the Indian housing block grants awarded under the new act; (15) as of July 1, 1998, over 97 percent of the housing entities had submitted the required Indian housing plans to HUD describing their planned use of block grant funds and HUD approved 327 of those plans; and (16) for FY 1999, HUD requested $600 million for the program.
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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. The agency is in the process of implementing its compliance improvement initiative, which involves actions such as setting the targets and providing incentives to tank owners, but it is too early to gauge the impact of the agency's efforts on compliance rates. 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 is working with states to implement third party inspection programs, using either private contractors or other state agencies that may also be inspecting these business sites for other reasons. 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, is working with the states to gather data on leaks from upgraded tanks in order to determine whether equipment requirements need to be strengthened, 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.
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Hazardous substances that leak from underground storage tanks can contaminate the soil and water and pose continuing health risks. Leaks of methyl tertiary butyl ether--a fuel additive--have forced several communities to close their wells. GAO surveyed all 50 states and the District of Columbia to determine whether tanks are compliant with the Environmental Protection Agency's (EPA) underground storage tank (UST) requirements. About 1.5 million tanks have been closed since the program was created, leaving about 693,000 tanks subject to UST requirements. Eighty-nine percent of these tanks had the required protective equipment installed, but nearly 30 percent of them were not properly operated and maintained. EPA estimates that the rest were inactive and empty. More than half of the states do not meet the minimum rate recommended by EPA for inspections. State officials said that they lacked the money, staff, and authority to conduct more inspections or more strongly enforce tank compliance. 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. EPA is seeking better data on leaks from upgraded tanks and is considering whether it needs to set new tank requirements, such as double-walled tanks, to prevent future leaks.
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FAA provides facilities and equipment at airport terminal areas to help aircraft begin and end their flights. FAA's acquisition policy provides the framework for initiating and managing national facilities and equipment projects. The projects are funded through the agency's facilities and equipment appropriation. FAA's Airway Planning Standard Number One (APS-1) contains the policy and criteria the agency uses to establish the eligibility of terminal locations for facilities and equipment. This standard requires that traffic activity levels are the criteria to be used for "less expensive" equipment, whereas for "more expensive" equipment, locations must also meet minimum benefit-cost criteria. However, the standard does not define what is meant by less expensive or more expensive. Recognizing that it is not always economically possible to satisfy all requirements, the standard requires that equipment be allocated to locations where the greatest benefit will be derived from its cost or where there is the greatest operational need. The standard also requires that economics be the primary factor in considering improvements to existing facilities or services. The Department of Transportation and the Office of Management and Budget (OMB) have not requested nor has the Congress provided all funds requested by FAA's nine regional offices in recent years. Total requests have outpaced budgetary resources for facilities and equipment in terminal areas, as illustrated in figure 1. FAA's annual budget Call for Estimates requires that regional offices assign a numerical ranking to all locations recommended to receive funding for facilities and equipment. After the regions submit their requests to FAA headquarters, program sponsors for these projects, along with regional representatives, develop a priority list of locations for funding within the overall budget limitations for a given year. If the Office of the Secretary of Transportation or OMB makes changes to budget line items for these projects, program sponsors are expected to review and reprioritize locations for funding. The locations that are not funded must recompete for future-year budget funds. The Congress may also make changes to budget line items for these projects. For two of the three projects we reviewed, the Congress added funding for locations that were not requested by FAA. (See app. I.) For the three projects we reviewed, FAA's process for locating facilities and equipment ensured that candidate locations qualified for funding consideration and that high-priority locations were funded in accordance with agency guidance. This resulted in facilities and equipment being distributed in a fairly equal manner among FAA's nine regional offices on the basis of the priority assigned by each regional office and the availability of the regional office's work force to implement the projects. However, we found that FAA generally did not rank locations numerically from a national perspective, use benefit-cost analysis as a tool for ranking eligible locations, and document the factors used to select certain locations over others. Modern air commerce and transportation depend on consistently completing scheduled flights safely and on time. ILS is a critical component of an all-weather aviation system, because it provides the technology for allowing aircraft to approach and land at airports during adverse weather. Each year, FAA's Budget Office initiates a Call for Estimates requesting that regional offices submit candidate locations for ILS equipment. Once locations are identified, FAA's planning standard requires that ILS locations meet two-phase criteria. FAA regional offices use the Phase 1 criterion to determine which locations will be submitted to headquarters for further consideration. Under Phase 1, a ratio is computed by dividing the actual number of instrument approaches at a runway by FAA's standard for the minimum number of such approaches that qualify locations to have an ILS. Runways with a ratio of at least 1.0 are eligible for funding. The traffic activity ratio is an efficiency measure; runways with higher ratios are presumed to accommodate more traffic with given resources. The Phase 2 criterion is a benefit-cost analysis that FAA headquarters prepares on all locations that met the Phase 1 criterion. But since the number of locations meeting the Phase 2 criterion is much larger than budget constraints will allow, some locations may not be funded, even if economically justified. A location that is not funded must recompete in the following year and be subject to the reevaluation process. Because of special safety considerations, some locations will receive ILS equipment regardless of the criteria. For fiscal years 1992 through 1994, the program sponsor for the ILS project--the Flight Standards Service--told us that FAA regional offices developed the necessary justifications needed for each eligible ILS location submitted in response to the annual Call for Estimates. Regional offices also assign a numerical ranking to all locations within their respective regions. Priorities are established at the regional level on the basis of an analysis of such factors as weather history and air traffic needs. The program sponsor then ensures that candidate locations at the national level meet the Phase 1 criterion. Once the program sponsor ensures that candidate locations qualify for funding, cost estimates are finalized. The number of ILS locations that make it into FAA's annual budget submission depends on the funding levels of the agency's facilities and equipment budget and the ILS program. The program sponsor said that each regional office's number one priority location was generally selected for inclusion in the budget submissions for fiscal years 1992 and 1993. For fiscal year 1992, seven regions submitted requests and received funding for their first-priority location. In addition, one system was designated for the FAA Academy, and one region also received its second priority. For fiscal year 1993, seven regions submitted requests and received funding for their first priority, and two regions also received funding for their second priority. In addition to the locations FAA requested in its budget submission, the Congress added a total of 27 ILS locations in fiscal years 1992 and 1993, along with additional funding for those locations. (See app. I for more details.) The sponsor told us that in 1992 and 1993, locations were not ranked numerically from a national perspective. Furthermore, there was no documentation of what factors--including benefit-cost analysis--were considered in deciding which terminal locations received the new ILS. For fiscal year 1994, the ILS program sponsor decided to institute a numerical ranking system in which each eligible ILS location that the regions submitted in response to the Call for Estimates would be prioritized. The sponsor and regional representatives met to decide how to rank 179 candidate ILS locations on a national basis. Priorities for the first 78 locations were established on the basis of an analysis of 12 factors, such as safety, weather, and potential to improve air traffic flow. However, the program sponsor could not show how each factor was used to develop this national priority list. The program sponsor then requested benefit-cost analyses for the top 16 locations that were to be submitted to OMB for funding in order to ensure that they met the minimum Phase 2 criterion. Priorities for the candidate locations numbered 79 to 179 were based on Phase 1 traffic activity ratios. As OMB and the Congress made reductions to this FAA budget line item, the program sponsor deleted lower-ranked locations. The sponsor told us that changing conditions, such as a problem with an environmental impact statement or a delay in an anticipated land acquisition, could also force modification to the overall priorities. Seven regions received funding for between one and four new ILSs. The Congress did not direct additional ILS locations in fiscal year 1994. Despite the agency's additional emphasis on ILS in fiscal year 1994, the program sponsor told us that documentation does not exist to show how the 12 factors were used to select certain locations over others. As a result, while fiscal year 1994 was an improvement over prior years, questions remain about the ranking of ILS locations. For example, the program sponsor could not explain how traffic activity ratios were factored into the ranking process. The sponsor could not show why one location with a Phase 1 traffic activity ratio of 3.71 was ranked 6th nationally, yet another location with a Phase 1 traffic activity ratio of 49.08 was ranked 81st nationally. Nor could the sponsor show why a location with a ratio of 1.67 was ranked 4th nationally, yet another with a ratio of 35.66 was ranked 39th nationally. A more documented process would enhance FAA's ability to quantitatively support its decisions to fund projects at certain locations but not at others. This project replaces airport traffic control towers that are past their 20-year design life. Approximately six to eight towers are replaced each year. FAA's Air Traffic Plans and Requirements Service is the program sponsor for the Tower Replacement project. The program sponsor said that FAA used a consistent methodology based on APS-1 and agency policy for selecting locations for replacement towers in fiscal years 1992 through 1994. Each year, regional offices screened and ranked eligible locations on the basis of an analysis of operational requirements, space requirements, facility condition, airport traffic activity, safety conditions, and future growth. Because of funding limitations, the program sponsor told the nine regional offices to submit only their top three locations in any given budget year. An important element in the regional decision as to which location or locations are submitted is the availability of the regional office's work force to implement the projects. The program sponsor then reduced the 25 to 30 locations submitted by the regions to a top-priority group of 8 to 10, without any numerical ranking, after reviewing the regions' written justifications for tower replacement projects. The program sponsor could not show how each factor used by the regions--such as airport traffic activity or facility condition--was considered and how each factor was weighed in developing this list of 8 to 10 top locations. The sponsor did not use benefit-cost analyses to develop the list. According to the sponsor, the original tower siting was based on a benefit-cost analysis, and tower replacement is based on a review of continuing need, so the sponsor did not believe further analysis was needed. Generally one priority location was recommended for funding in each FAA regional office, although in some cases a regional office had two candidate locations funded in one year. Once the top locations had been identified, the program sponsor and regional representatives conducted an on-site inspection of these locations. If the on-site inspection revealed that the location was not in need of a replacement, it was removed as a replacement candidate. Moreover, the sponsor told us that changing conditions do arise that force modifications to the list of top locations, such as the identification of asbestos in a facility, a major shift of traffic activity, or natural disasters that weaken existing structures. Another factor that the sponsor told us affects FAA's decision-making process regarding tower replacement is congressional additions to FAA's budget request. In fiscal year 1992, the Congress added seven Tower Replacement locations to FAA's funding request. However, in fiscal years 1993 and 1994, the Congress added no additional locations for funding. (See app. I.) FAA recognizes the importance of congressional direction as a major determinant in naming towers for replacement and occasionally defers otherwise qualified locations to accommodate congressionally directed locations. " built in 1972. . . . The height of the control tower is not adequate to provide adequate depth perception for runways. . . . Controllers cannot visually determine if aircraft holding short of these runways are actually clear of the runways. This situation is more pronounced at night. . . . A new runway is currently under construction which will increase the airport capacity. The air conditioning and heating systems are inadequate and personnel must use a public access elevator to reach the tower cab." " is an old Air Force Tower that was constructed in 1947 and transferred to the FAA in 1954. The tower cab is limited in size and not adequate to handle the current and projected staffing levels for a safe and efficient air traffic operation. The support facilities are limited in area and very poorly arranged for a functional office environment. Support systems, such as the cab heating and air conditioning system, the power supply system, and the basic utility system, have either outlived their normal useful lives or are in need of extensive refurbishing and maintenance." Had FAA documented the factors it considered in arriving at its list of tower replacements to be funded and prioritized those locations, its ability to show why certain locations were selected over others would be enhanced. The D-BRITE system is an extension of an airport surveillance radar system. D-BRITE provides additional radar display positions at busy air traffic control towers and establishes positions at remote towers that do not currently have a radar display. The new equipment also reduces the need for verbal coordination and increases safety at both hub and remote towers. Additionally, the equipment assists the air traffic controller in identifying and sequencing aircraft traffic and provides traffic advisories to aircraft in visual flight rules conditions. Regional offices screened and ranked eligible locations for the D-BRITE project on the basis of traffic activity levels and the operational needs of the towers associated with a surveillance radar. Locations with the highest traffic activity were given the highest regional priorities. The program sponsor--FAA's Air Traffic Plans and Requirements Service--grouped the regional priorities into a national delivery schedule. According to the sponsor, this schedule takes into consideration the regional offices' ranking of locations, funding levels, and the ability of the offices' work force to install systems. The individual currently acting as the program sponsor was not involved with D-BRITE funding decisions for fiscal years 1992 to 1994. However, this individual believed that, in those years, each regional office generally received funding for its top-priority locations. The program sponsor said that D-BRITE locations were not ranked numerically from a national perspective. The sponsor also said that the locations were not analyzed from a benefit-cost perspective because they were linked to the establishment of airport surveillance radars for which benefit-cost analysis had already been considered. Moreover, the sponsor could not provide documentation to explain why some D-BRITE locations were recommended to receive equipment over others for any of the 3 years in question. While we found that FAA's process for selecting locations for facilities and equipment generally complied with the agency's current guidance, we believe that it could be improved if FAA ranked locations numerically from a national perspective, considered the results of benefit-cost analyses as a key factor when appropriate, and documented the rationale for its decisions. Program sponsors told us that a numerical national ranking was not done for these projects for two major reasons. First, national directives, such as APS-1, the Call for Estimates, and FAA's acquisition policy, do not require program sponsors to rank locations numerically from a national perspective. The officials pointed out that current guidance only requires regional offices to assign a numerical priority to all locations recommended to receive equipment. Second, although a national ranking may result in the allocation of equipment unevenly across regions, some program sponsors said that no useful purpose would be served in trying to determine whether one regional office's number two or lower-priority location was of a higher national importance than another office's number one location. According to the program sponsors, the cost of conducting such an analysis would consume significant resources and would create tension among regional offices about methodologies used to justify individual locations. We believe that because regional offices are required to rank candidate locations numerically for funding in their geographic area, FAA headquarters could do the same from a national perspective. This would provide FAA and the Congress with greater assurance that scarce resources are targeted to the highest-priority needs. Such a ranking would also expedite decision-making as program sponsors review, reprioritize, and defer lower-priority locations in response to changes made during each phase of the budget cycle. Moreover, such a ranking would quickly identify the importance of each location at any given point in time and demonstrate that FAA is taking a businesslike approach to investment decisions. While some FAA program sponsors said that no useful purpose is served in trying to determine whether one office's number two or lower-priority location is of a higher national importance than another office's number one priority, we believe that such analyses are warranted, under today's budget constraints, to ensure that the highest-priority locations are selected as the first to receive equipment. According to FAA's guide for Economic Analysis and Investment and Regulatory Decisions, rational decision-making requires that those activities with greater returns be undertaken before those with smaller returns. FAA program sponsors told us that the results of benefit-cost analyses were not a primary consideration when prioritizing locations under the three projects. For the ILS project, sponsors used benefit-cost analysis to screen locations for compliance with minimum criteria, not to rank alternative locations. Sponsors believe that regional staff have the most up-to-date information on locations in need of equipment. Therefore, they believe that the process for ILS selection must look beyond benefit-cost analysis and emphasize other factors, such as safety, weather, and potential to improve air traffic flow. Otherwise, benefit-cost considerations bias the selection process in favor of projects at large airports if qualitative criteria and judgment are excluded from the process. For the Tower Replacement and the D-BRITE establishment projects, program sponsors told us that FAA guidance currently does not call for any location-specific benefit-cost analysis. This is because the original tower siting was based on a benefit-cost analysis, and tower replacement is based on a review of continuing need. Decisions on D-BRITE siting are dependent on the airport surveillance radar siting decision, which is itself based on benefit-cost analysis. Furthermore, the sponsors believe that such analysis would serve no useful purpose but would overwhelm FAA's resources. The sponsors contended that 25- to 30-year-old towers must be replaced in order to continue serving an established need and that no useful purpose is served if the cost of conducting a benefit-cost study for an eligible D-BRITE location exceeded the cost of the project. We believe that good business management practices suggest that benefit-cost analysis can provide a useful, quantifiable means for weighing the value of alternative investments. We recognize that there are other considerations, such as a major shift in traffic activity or congressional direction. However, benefit-cost ratios provide a good starting point for ranking eligible locations. FAA's guidance also states that sound economic justification should be an important factor in the evaluation process. This guidance recognizes that benefit-cost analysis enables FAA to prioritize alternative investments so as to maximize the return on investment dollars. We recognize that the cost of an elaborate benefit-cost analysis for less expensive projects such as D-BRITE may be prohibitive, but a less rigorous analysis could be appropriate. For example, a simplified methodology, to save analytical resources, may allow FAA to approximate benefits. The Call for Estimates and APS-1 provide detailed guidance for how regional offices should prepare location justifications and assign priorities to locations recommended for funding. However, the orders provide no guidance for how program sponsors should document their funding decisions. FAA officials told us, however, that they do keep track of locations that were funded or deferred during each phase of the budget cycle. We believe that the process for selecting locations for funding would be improved if program sponsors maintained minutes of meetings where decisions are made and maintained an up-to-date system that tracked the status of and rationale for funding decisions. This system, if available to inspection by offices within FAA, the Congress, and aviation system users, would facilitate answers to queries from those groups about the relative ranking of locations. Moreover, documentation would greatly help program sponsors to explain to these groups the small differences that can determine whether a location is approved or not approved for funding. In addition, GAO's Standards for Internal Controls in the Federal Government stresses the need for agencies to clearly document significant events so that they are readily available for examination. The lack of documentation was a problem for the current ILS and D-BRITE program sponsors because various personnel changes--such as retirement, promotion, or resignation--had left their offices with no one available to answer questions about past decisions. We recognize that FAA views safety as its major responsibility, allocates facilities and equipment to high-priority locations, and responds to dynamic changes in traffic activity. Moreover, we found no evidence that FAA's decisions for locating and replacing air traffic control equipment are not meeting the critical needs of the nation's aviation system. However, FAA's process for selecting locations for facilities and equipment was not consistent among the three projects reviewed, and documentation was not available to show what factors program sponsors considered in location-selection decisions. Current FAA guidance does not require a numerical ranking of locations on a national basis, define what emphasis should be given to location-specific benefit-cost analyses and other factors, or specify what documentation is required when evaluating and selecting locations. If FAA improved its guidance, we believe that the agency would be in a better position to assure the Congress and aviation system users that the maximum value from investments in facilities and equipment is being received. Furthermore, the agency would help its internal decisionmakers when they review and reprioritize locations in response to changes made during each phase of the budget cycle. We recommend that the Secretary of Transportation direct the Administrator, FAA, to revise current guidance--APS-1, the Call for Estimates, and the agency's acquisition policy--as necessary to ensure that program sponsors (1) use consistent approaches and (2) document what factors they used in location-selection decisions, including benefit-cost analyses when warranted by the project's cost. This would allow FAA to rank eligible locations from a national perspective and help ensure that scarce facilities and equipment resources are targeted to the highest-priority needs. We discussed a draft of this report with FAA's Assistant Administrator for Budget and Accounting and FAA program sponsors for the three projects. The officials expressed serious concerns about the tone and conclusions of the draft because it implied that FAA does not attempt to allocate facilities and equipment using a rational process. The officials said that given budget constraints, congressionally directed locations, and limited regional office work forces, FAA does a good job in allocating facilities and equipment to high-priority locations. In response to the officials' concerns, we have made it clear in this report that FAA's process for locating facilities and equipment ensured that candidate locations qualified for funding consideration and that high-priority locations were funded in accordance with current agency guidance. Nevertheless, FAA recognized that improvements can be made in documenting its decision-making process. FAA officials also said that location-specific benefit-cost analysis would serve no purpose other than to overwhelm the agency's resources. While we recognize that an elaborate benefit-cost analysis is not appropriate in all cases, we continue to believe that, where warranted by a project's cost, it helps ensure that equipment will be allocated to locations where the greatest benefit will be derived from the cost. FAA officials also made several other suggested changes to improve the accuracy and clarity of the report. We made these changes throughout the text where appropriate. We performed our work from July 1993 through September 1994 in accordance with generally accepted government auditing standards. A detailed description of our objectives, scope, and methodology is contained in appendix II. We are providing copies of this report to interested congressional committees; the Secretary of Transportation; the Administrator, FAA; and the Director, OMB. We will also make copies available to others upon request. This work was performed under the direction of Allen Li, Associate Director, who may be reached at (202) 512-3600 if you or your staff have any questions. Major contributors to this report are listed in appendix III. The following are general descriptions and funding histories for the three Federal Aviation Administration (FAA) terminal modernization projects that we reviewed. These new landing systems provide precision approach guidance which allows aircraft to approach and land at airports during adverse weather. The ILS establishment project was terminated in 1982 when the Microwave Landing System was adopted as the precision landing system for the National Airspace System beyond the year 2000. However, FAA determined that there was an immediate need for precision approach systems at large and medium hub airports and their associated reliever airports as an interim solution prior to Microwave Landing System implementation. FAA recently terminated the Microwave Landing System project. A 3-year funding history for ILS establishment is shown in table I.1. This project replaces airport traffic control towers that are past their 20-year design life. FAA estimates that within the next 10 years nearly 150 towers will need to be replaced to enhance air safety and meet operational requirements. Approximately six to eight towers are replaced each year. Table I.2 provides a 3-year funding history for air traffic control tower replacement. D-BRITE will provide additional display positions at busy air traffic control towers and establish positions at remote towers that do not currently have a radar display. The new equipment will reduce verbal coordination and increase safety at both the hub and remote towers. Additionally, the equipment is used to help the air traffic controller identify and sequence aircraft traffic and will provide traffic advisories to aircraft in visual flight rules conditions. A 3-year funding history for D-BRITE establishment is shown in table I.3. NA = not available from FAA program sponsors. Our objective in this review was to determine how FAA decides where to locate and/or replace air traffic control facilities and equipment at or near airports when it cannot economically satisfy all operational requirements. To assess FAA's efforts in this area, we evaluated how FAA (1) prioritized locations to receive facilities and equipment, (2) considered benefit-cost analysis in its decisions, and (3) documented all considerations that would establish a location's priority for the receipt of facilities and equipment. To attain our objectives, we interviewed FAA headquarters and field personnel responsible for making decisions on locating facilities and equipment for these projects. Through interviews and reviews of agency documentation, we collected information on a location's justification, benefit-cost ratio, and national ranking. We reviewed federal regulations and guidelines pertaining to system acquisition, compared FAA's actions to the guidance, and identified key issues that could affect how the agency determines where to locate terminal facilities and equipment. We conducted our review between July 1993 and September 1994 at FAA headquarters in Washington, D.C., and FAA's New England Regional Office in Burlington, Massachusetts. We performed this review in accordance with generally accepted government auditing standards. We discussed the results of our work with FAA officials and have incorporated their views in the report as appropriate. Robert E. Levin, Assistant Director Robert D. Wurster, Assignment Manager Peter G. Maristch, Evaluator-in-Charge Amy Ganulin, Staff Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO reviewed the Federal Aviation Administration's (FAA) process for selecting locations for its three terminal area projects, focusing on how FAA: (1) prioritizes locations; (2) analyzes the costs and benefits of its decisions; (3) documents its location decisions; and (4) could improve its decisionmaking process. GAO found that: (1) FAA has funded the three projects in accordance with its own guidance and has fairly distributed facilities and equipment among its nine regional offices on a priority basis; (2) although FAA bases its project funding decisions on the availability of regional staff to implement the projects, it generally does not rank locations nationally or numerically, use cost-benefit analyses to rank eligible locations, or document the factors used to prioritize certain locations; (3) FAA believes that its approach for locating facilities and distributing equipment ensures that its limited resources are targeted to high-priority needs; (4) FAA believes that ranking each location on a national basis would be cost-prohibitive, create tensions among regional offices, favor large airports, and exclude safety factors that outweigh economic considerations; (5) current FAA guidance does not include provisions that specify how prospective locations will be evaluated; (6) FAA needs to develop a more analytically based decisionmaking process for ranking eligible locations; and (7) improved selection guidance could help FAA better ensure that it is making the best use of available resources in allocating facilities and equipment to high-priority locations.
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As computer technology has advanced, federal agencies and our nation's critical infrastructures--such as power distribution, water supply, telecommunications, and emergency services--have become increasingly dependent on computerized information systems to carry out their operations and to process, maintain, and report essential information. Public and private organizations rely on computer systems to transfer increasing amounts of money and sensitive and proprietary information, conduct operations, and deliver services to constituents. The security of these systems and data is essential to protecting national and economic security, and public health and safety. Conversely, ineffective information security controls can result in significant risks, including the loss of resources, such as federal payments and collections; inappropriate access to sensitive information, such as national security information, personal information on taxpayers, or proprietary business information; disruption of critical operations supporting critical infrastructure, national defense, or emergency services; and undermining of agency missions due to embarrassing incidents that diminish public confidence in government. Threats to systems supporting critical infrastructure and federal information systems are evolving and growing. Government officials are concerned about attacks from individuals and groups with malicious intent, such as criminals, terrorists, and foreign nations. Federal law enforcement and intelligence agencies have identified multiple sources of threats to our nation's critical information systems, including foreign nations engaged in espionage and information warfare, criminals, hackers, virus writers, and disgruntled employees and contractors. These groups and individuals have a variety of attack techniques at their disposal that can be used to determine vulnerabilities and gain entry into targeted systems. For example, phishing involves the creation and use of fake e- mails and Web sites to deceive Internet users into disclosing their personal data and other sensitive information. The connectivity between information systems, the Internet, and other infrastructures also creates opportunities for attackers to disrupt telecommunications, electrical power, and other critical services. For example, in May 2008, we reported that the Tennessee Valley Authority's (TVA) corporate network contained security weaknesses that could lead to the disruption of control systems networks and devices connected to that network. We made 19 recommendations to improve the implementation of information security program activities for the control systems governing TVA's critical infrastructures and 73 recommendations to address weaknesses in information security controls. TVA concurred with the recommendations and has taken steps to implement them. As government, private sector, and personal activities continue to move to networked operations, the threat will continue to grow. 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 U.S. citizens has been lost, stolen, or improperly disclosed, thereby potentially exposing those individuals to loss of privacy, identity theft, and financial crimes. Agencies have experienced a wide range of incidents involving data loss or theft, computer intrusions, and privacy breaches, underscoring the need for improved security practices. Further, reported attacks and unintentional incidents involving critical infrastructure systems demonstrate that a serious attack could be devastating. When incidents occur, agencies are to notify the federal information security incident center--the United States Computer Emergency Readiness Team (US-CERT). Over the past 5 years, the number of incidents reported by federal agencies to US-CERT has increased dramatically, from 5,503 incidents reported in fiscal year 2006 to about 41,776 incidents in fiscal year 2010 (a more than 650 percent increase). The three most prevalent types of incidents and events reported to US-CERT during fiscal year 2010 were: (1) malicious code (software that infects an operating system or application), (2) improper usage (a violation of acceptable computing use policies), and (3) unauthorized access (where an individual gains logical or physical access to a system without permission). Additionally, according to Department of Homeland Security (DHS) officials, US-CERT detects incidents and events through its intrusion detection system, supplemented by agency reports, for investigation (unconfirmed incidents that are potentially malicious or anomalous activity deemed by the reporting entity to warrant further review). Reports of cyber attacks and information security incidents against federal systems and systems supporting critical infrastructure illustrate the effect that such incidents could have on national and economic security. In July 2010, the Department of Defense (DOD) launched an investigation to identify how thousands of classified military documents (including Afghanistan and Iraq war operations, as well as field reports on Pakistan) were obtained by the group WikiLeaks.org. According to DOD, this investigation was related to an ongoing investigation of an Army private charged with, among other things, transmitting national defense information to an unauthorized source. In 2010, the Deputy Secretary of Defense stated that DOD suffered a significant compromise of its classified military computer networks in 2008. It began when a flash drive's malicious computer code, placed there by a foreign intelligence agency, uploaded itself onto a network and spread on both classified and unclassified systems. In February 2011, media reports stated that computer hackers broke into and stole proprietary information worth millions of dollars from the networks of six U.S. and European energy companies. The federal government has a variety of roles and responsibilities in protecting the nation's cyber-reliant critical infrastructure, enhancing the nation's overall cybersecurity posture, and ensuring the security of federal systems and the information they contain. In light of the pervasive and increasing threats to critical systems, the executive branch is taking a number of steps to strengthen the nation's approach to cybersecurity. For example, in its role as the focal point for federal efforts to protect the nation's cyber critical infrastructures, DHS issued a revised national infrastructure protection plan in 2009 and an interim national cyber incident response plan in 2010. Executive branch agencies have also made progress instituting several governmentwide initiatives that are aimed at bolstering aspects of federal cybersecurity, such as reducing the number of federal access points to the Internet, establishing security configurations for desktop computers, and enhancing situational awareness of cyber events. Despite these efforts, the federal government continues to face significant challenges in protecting the nation's cyber- reliant critical infrastructure and federal information systems. The administration and executive branch agencies have not yet fully implemented key actions that are intended to address threats and improve the current U.S. approach to cybersecurity. Implementing actions recommended by the president's cybersecurity policy review. In February 2009, the president initiated a review of the government's cybersecurity policies and structures, which resulted in 24 near- and mid-term recommendations to address organizational and policy changes to improve the current U.S. approach to cybersecurity. In October 2010, we reported that 2 recommendations had been implemented and 22 were partially implemented. Officials from key agencies involved in these efforts (e.g., DHS, DOD, and the Office of Management and Budget (OMB)) stated that progress had been slower than expected because agencies lacked assigned roles and responsibilities and because several of the mid-term recommendations would require action over multiple years. We recommended that the national Cybersecurity Coordinator (whose role was established as a result of the policy review) designate roles and responsibilities for each recommendation and develop milestones and plans, including measures to show agencies' progress and performance. Updating the national strategy for securing the information and communications infrastructure. In March 2009, we testified on the needed improvements to the nation's cybersecurity strategy. In preparation for that testimony, we convened a panel of experts that included former federal officials, academics, and private sector executives. The panel highlighted 12 key improvements that are, in its view, essential to improving the strategy and our national cybersecurity posture, including the development of a national strategy that clearly articulates strategic objectives, goals, and priorities. Developing a comprehensive national strategy for addressing global cybersecurity and governance. In July 2010, we reported that the U.S. government faced a number of challenges in formulating and implementing a coherent approach to global aspects of cyberspace, including, among other things, providing top-level leadership and developing a comprehensive strategy. Specifically, we found that the national Cybersecurity Coordinator's authority and capacity to effectively coordinate and forge a coherent national approach to cybersecurity were still under development. In addition, the U.S. government had not documented a clear vision of how the international efforts of federal entities, taken together, support overarching national goals. We recommended that, among other things, the national Cybersecurity Coordinator develop with other relevant entities a comprehensive U.S. global cyberspace strategy. The coordinator and his staff concurred with our recommendations and stated that actions had already been initiated to address them. Finalizing cybersecurity guidelines and monitoring compliance related to electricity grid modernization. In January 2011, we reported on efforts by the National Institute of Standards and Technology (NIST) to develop cybersecurity guidelines and Federal Energy Regulatory Commission (FERC) efforts to adopt and monitor cybersecurity standards related to the electric industry's incorporation of IT systems to improve reliability and efficiency--commonly referred to as the smart grid. We determined that NIST had not addressed all key elements of cybersecurity in its initial guidelines or finalized plans for doing so. We also determined that FERC had not developed an approach for monitoring industry compliance with its initial set of voluntary standards. Further, we identified six key challenges with respect to securing smart grid systems, including a lack of security features being built into certain smart grid systems and an ineffective mechanism for sharing information on cybersecurity within the industry. We recommended that NIST finalize its plans for updating its cybersecurity guidelines to incorporate missing elements and that FERC develop a coordinated approach to monitor voluntary standards and address any gaps in compliance. Both agencies agreed with these recommendations. Creating a prioritized national and federal cybersecurity research and development (R&D) agenda. In June 2010, we reported that while efforts to improve cybersecurity R&D were under way by the White House's Office Science and Technology Policy (OSTP) and other federal entities, six major challenges impeded these efforts. Among the most critical was the lack of a prioritized national cybersecurity research and development agenda. We found that despite its legal responsibility and our past recommendations, a key OSTP subcommittee had not created a prioritized national R&D agenda, increasing the risk that research pursued by individual organizations will not reflect national priorities. We recommended that OSTP direct the subcommittee to take several actions, including developing a national cybersecurity R&D agenda. OSTP agreed with our recommendation and provided details on planned actions. We are in the process of verifying actions taken to implement our recommendations. In addition, we have ongoing work related to cyber CIP efforts in several other areas including (1) cybersecurity-related standards used by critical infrastructure sectors, (2) federal efforts to recruit, retain, train, and develop cybersecurity professionals, and (3) federal efforts to address risks to the information technology supply chain. In addition to improving our national capability to address cybersecurity, executive branch agencies, in particular DHS, also need to improve their capacity to protect against cyber threats by, among other things, advancing cyber analysis and warning capabilities and strengthening the effectiveness of the public-private sector partnerships in securing cyber critical infrastructure. Enhancing cyber analysis and warning capabilities. In July 2008, we reported that DHS's US-CERT had not fully addressed 15 key attributes of cyber analysis and warning capabilities. 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 and has reported that it is taking steps to implement them. We are currently working with DHS officials to determine the status of their efforts to address these recommendations. Strengthening the public-private partnerships for securing cyber critical infrastructure. In July 2010, we reported that the expectations of private sector stakeholders were not being met by their federal partners in areas related to sharing information about cyber-based threats to critical infrastructure. Federal partners, such as DHS, were taking steps that may address the key expectations of the private sector, including developing new information-sharing arrangements. We also reported that public sector stakeholders believed that improvements could be made to the partnership, including improving private sector sharing of sensitive information. We recommended that the national Cybersecurity Coordinator and DHS work with their federal and private sector partners to enhance information-sharing efforts, including leveraging a central focal point for sharing information among the private sector, civilian government, law enforcement, the military, and the intelligence community. DHS officials stated that they have made progress in addressing these recommendations, and we will be determining the extent of that progress as part of our audit follow-up efforts. Federal systems continue to be afflicted by persistent information security control weaknesses. Specifically, agencies did not consistently implement effective controls to prevent, limit, and detect unauthorized access or manage the configuration of network devices to prevent unauthorized access and ensure system integrity. Most of the 24 major federal agencies had information security weaknesses in five key internal control categories, as illustrated in figure 1. In addition, GAO determined that serious and widespread information security control deficiencies were a governmentwide material weakness in internal control over financial reporting as part of its audit of the fiscal year 2010 financial statements for the United States government. 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 addition, the White House, OMB, and selected federal agencies have undertaken governmentwide initiatives to enhance information security at federal agencies. For example, the Comprehensive National Cybersecurity Initiative, a series of 12 projects, is aimed primarily at improving DHS's and other federal agencies' efforts to reduce vulnerabilities, protect against intrusion attempts, and anticipate future threats against federal executive branch information systems. However, the projects face challenges in achieving their objectives related to securing federal information, including better defining agency roles and responsibilities, establishing measures of effectiveness, and establishing an appropriate level of transparency. These challenges require sustained attention, which agencies have begun to provide. In summary, the threats to information systems are evolving and growing, and systems supporting our nation's critical infrastructure and federal systems are not sufficiently protected to consistently thwart the threats. Administration and executive branch agencies need to take actions to improve our nation's cybersecurity posture, including implementing the actions recommended by the president's cybersecurity policy review and enhancing cyber analysis and warning capabilities. In addition, actions are needed to enhance security over federal systems and information, including fully developing and effectively implementing agencywide information security programs and implementing open recommendations. Until these actions are taken, our nation's federal and nonfederal cyber critical infrastructure will remain vulnerable. Mr. Chairman, this completes my statement. I would be happy to answer any questions you or other members of the Subcommittee have at this time. If you have any questions regarding this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Other key contributors to this statement include Michael Gilmore (Assistant Director), Anjalique Lawrence (Assistant Director), Larry Crosland, Kush Malhotra, Bradley Becker, Lee McCracken, and Jayne Wilson. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Electricity Grid Modernization: Progress Being Made on Cybersecurity Guidelines, but Key Challenges Remain to be Addressed. GAO-11-117. Washington, D.C.: January 12, 2011. Information Security: Federal Agencies Have Taken Steps to Secure Wireless Networks, but Further Actions Can Mitigate Risk. GAO-11-43. Washington, D.C.: November 30, 2010. Cyberspace Policy: Executive Branch Is Making Progress Implementing 2009 Policy Review Recommendations, but Sustained Leadership Is Needed. GAO-11-24. Washington, D.C.: October 6, 2010. Information Security: Progress Made on Harmonizing Policies and Guidance for National Security and Non-National Security Systems. GAO-10-916. Washington, D.C.: September 15, 2010. Information Management: Challenges in Federal Agencies' Use of Web 2.0 Technologies. GAO-10-872T. Washington, D.C.: July 22, 2010. Critical Infrastructure Protection: Key Private and Public Cyber Expectations Need to Be Consistently Addressed. GAO-10-628. Washington, D.C.: July 15, 2010. Cyberspace: United States Faces Challenges in Addressing Global Cybersecurity and Governance. GAO-10-606. Washington, D.C.: July 2, 2010. Cybersecurity: Continued Attention Is Needed to Protect Federal Information Systems from Evolving Threats. GAO-10-834T. Washington, D.C.: June 16, 2010. Cybersecurity: Key Challenges Need to Be Addressed to Improve Research and Development. GAO-10-466. Washington, D.C.: June 3, 2010. Information Security: Federal Guidance Needed to Address Control Issues with Implementing Cloud Computing. GAO-10-513. Washington, D.C.: May 27, 2010. Information Security: Agencies Need to Implement Federal Desktop Core Configuration Requirements. GAO-10-202. Washington, D.C.: March 12, 2010. Information Security: Concerted Effort Needed to Consolidate and Secure Internet Connections at Federal Agencies. GAO-10-237. Washington, D.C.: March 12, 2010. Cybersecurity: Progress Made but Challenges Remain in Defining and Coordinating the Comprehensive National Initiative. GAO-10-338. Washington, D.C.: March 5, 2010. National Cybersecurity Strategy: Key Improvements Are Needed to Strengthen the Nation's Posture. GAO-09-432T. Washington, D.C.: March 10, 2009. Information Security: TVA Needs to Address Weaknesses in Control Systems and Networks. GAO-08-526. Washington, D.C.: May 21, 2008. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Pervasive and sustained cyber attacks continue to pose a potentially devastating threat to the systems and operations of our nation's critical infrastructure and the federal government. In recent testimony, the Director of National Intelligence stated that there had been a dramatic increase in malicious cyber activity targeting U.S. computers and networks. In addition, recent reports of cyber attacks and incidents affecting federal systems and critical infrastructures illustrate the potential impact of such events on national and economic security. The nation's ever-increasing dependence on information systems to carry out essential everyday operations makes it vulnerable to an array of cyber-based risks. Thus it is increasingly important that federal and nonfederal entities carry out concerted efforts to safeguard their systems and the information they contain. GAO is providing a statement describing (1) cyber threats to cyber-reliant critical infrastructures and federal information systems and (2) the continuing challenges facing federal agencies in protecting the nation's cyber-reliant critical infrastructure and federal systems. In preparing this statement, GAO relied on its previously published work in the area, which included many recommendations for improvements. Cyber-based threats to critical infrastructure and federal systems are evolving and growing. These threats can come from a variety of sources, including criminals and foreign nations, as well as hackers and disgruntled employees. These potential attackers have a variety of techniques at their disposal that can vastly expand the reach and impact of their actions. In addition, the interconnectivity between information systems, the Internet, and other infrastructure presents increasing opportunities for such attacks. Consistent with this, reports of security incidents from federal agencies are on the rise, increasing over 650 percent over the past 5 years. In addition, reports of cyber attacks and information security incidents affecting federal systems and systems supporting critical infrastructure illustrate the serious impact such incidents can have on national and economic security, including the loss of classified information and intellectual property worth millions of dollars. The administration and executive branch agencies continue to act to better protect cyber-reliant critical infrastructures, improve the security of federal systems, and strengthen the nation's cybersecurity posture. However, they have not yet fully implemented key actions that are intended to address threats and improve the current U.S. approach to cybersecurity, such as (1) implementing near- and mid-term actions recommended by the cybersecurity policy review directed by the president; (2) updating the national strategy for securing the information and communications infrastructure; (3) developing a comprehensive national strategy for addressing global cybersecurity and governance; and (4) creating a prioritized national and federal research and development agenda for improving cybersecurity. Federal systems continue to be afflicted by persistent information security control weaknesses. For example, as part of its audit of the fiscal year 2010 financial statements for the U.S. government, GAO determined that serious and widespread information security control deficiencies were a governmentwide material weakness. Over the past several years, GAO and agency inspectors general have made hundreds of recommendations to agencies for actions necessary to resolve prior significant control deficiencies and information security program shortfalls. The White House, the Office of Management and Budget, and selected federal agencies have undertaken additional governmentwide initiatives intended to enhance information security at federal agencies. However, these initiatives face challenges, such as better defining agency roles and responsibilities and establishing measures of effectiveness, and require sustained attention, which agencies have begun to provide. As such, GAO continues to identify protecting the federal government's information systems and the nation's cyber critical infrastructure as a governmentwide high-risk area.
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Natural gas is a colorless, odorless fossil fuel found underground that is generated through the slow decomposition of ancient organic matter. In some cases, the gas, composed mainly of methane, is trapped in pockets of porous rock held in place by impermeable rock. In other cases, natural gas may occur within oil reservoirs or in coal deposits. Natural gas is extracted via wells drilled into the porous rock. The natural gas is then moved through pipelines and processing plants to consumers. Historically, domestic natural gas production has occurred largely in Texas, Oklahoma, and Louisiana. In more recent years, as older fields have been depleted, the Rocky Mountain region, Alaska, and areas beneath the deeper waters of the Gulf of Mexico are becoming increasingly important in supplying natural gas; however, in many cases these supplies are not near pipelines and other infrastructure needed for getting the gas to markets, which increases the costs of gas obtained from the newer fields. residential users living in houses, apartments, and mobile homes; commercial users such as stores, offices, schools, places of worship, and industrial users covering a wide range of facilities for producing, processing, or assembling goods, including manufacturing, agricultural, and mining operations; entities that use natural gas to generate electricity and provide that electricity to others, such as regulated electric utilities and competitive suppliers of electricity; and the transportation sector, including pipeline companies, which use natural gas to operate the pipeline networks, as well as those using natural gas to power cars and buses. Most residential and commercial consumers rely on natural gas utilities to supply their gas. Industrial consumers and electricity generators obtain their gas through a variety of means, including buying it directly from spot markets and natural gas utilities. The demand for natural gas in the United States has generally been seasonal, with peak demand during the winter heating months. From April through October, companies typically purchase natural gas and place it into underground storage facilities located around the country. Later, as the seasonal demand increases, these stored supplies of natural gas are used to augment the supplies provided via pipelines. According to EIA, natural gas demand during winter months is usually 1.5 times greater than monthly natural gas production in other months. Over the past 25 years, the wholesale natural gas supply market has evolved from a highly regulated market to a largely deregulated market, where prices are mainly driven by supply and demand. While the regulated market ensured stable prices, it also caused severe gas supply shortages because, with artificially low prices, producers had no incentive to increase production and consumers had no reason to curtail their demand. Before implementation of the Natural Gas Policy Act of 1978, which began deregulation of wholesale natural gas prices, the federal government controlled the prices that natural gas producers could charge for the gas they sold through interstate commerce. Under this regulatory approach, producers located natural gas reserves, drilled wells, gathered the gas, and sold it at federally controlled prices to interstate pipeline companies. After purchasing the natural gas, pipeline companies generally transported and sold the gas to local distribution or gas utility companies. These companies, under the oversight of state or local regulatory agencies, then sold and delivered the gas to their consumers, such as homeowners. In today's restructured market, the retail prices that consumers pay are still regulated in many states and reflect the prices paid by their suppliers to acquire the natural gas. However, the federal government does not control the wholesale price of natural gas. Since the removal of federal price controls, the wholesale price of natural gas decreased initially and has become more volatile. Producers still locate and gather natural gas, but they now sell the gas at market-driven prices to a variety of companies, including marketers, broker/trader intermediaries, and a variety of consumers. New market centers have emerged, including a market center referred to as the Henry Hub, located in Henry, Louisiana. Henry Hub prices are reported on a daily basis, and trades made at that market are often used as benchmarks for other natural gas trades. The various players in the market may sell gas back and forth several times before it is actually delivered to the ultimate consumers. In some cases--in spot markets, for example--natural gas is sold for immediate delivery. In other cases, it may be sold for delivery in the future, through a variety of what are called futures markets. In addition, several types of financial derivatives related to natural gas--contracts whose market value is derived from the price of the gas itself--can be bought and sold through numerous sources by entities that are interested in protecting themselves against increases in the price of natural gas. Derivatives include natural gas futures and options, and derivative prices typically move in parallel with the spot market. Derivatives markets include exchanges such as the New York Mercantile Exchange, which is regulated by the CFTC; and the Intercontinental Exchange, which operates as an exempt commercial market without CFTC oversight but over which CFTC has anti- manipulation and anti-fraud authority; and off-exchange and over-the- counter (OTC) markets, which are not subject to general federal regulatory oversight. Since 1999, wholesale prices for natural gas have trended steadily upward due to expanding demand--largely for electricity production--and supply that could not expand as quickly because the industry is already operating at near capacity. This tightness in the demand and supply balance has also made the market susceptible to extreme price changes in times when either demand or supply change unexpectedly. One such period of extreme price changes occurred in late 2005, when two hurricanes hit the Gulf Coast region, disrupting a substantial portion of the domestic supply of natural gas. Prices spiked to high levels and, although they have since dropped, they remain unusually high today. Since 1999, wholesale natural gas prices have risen steadily, as demonstrated by the moving average in figure 1. Previously, in the early and mid-1990s, prices were generally low, usually ranging from $2 to $3 per million BTUs, adjusted for inflation. From January 1999 through July 2005, however, average wholesale prices increased by over 200 percent, rising from about $2 to $6.75 per million BTUs. Most recently, in the last half of 2005, prices rose to over $15 per million BTUs, sevenfold higher than prices seen in the early 1990s. A combination of market forces has caused the upward trend in wholesale natural gas prices since 1999. Demand for natural gas has been growing rapidly since the mid-1980s, with total consumption increasing by about 38 percent from 1986 through 2004. Figure 2 illustrates the extent to which consumption of natural gas has risen in the United States over the past 2 decades and the relative amounts used by each of the five types of consumers: residential, commercial, industrial, electricity generators, and transportation. A significant share of the increased demand in recent years has resulted from increased use of natural gas to generate electricity. Out of concern regarding the supply of natural gas and other factors, construction of power plants using oil or natural gas as a primary fuel was restricted from 1978, when the Powerplant and Industrial Fuel Use Act (Fuel Use Act) took effect, through 1987, when it was repealed. After the Fuel Use Act's repeal, use of natural gas by the electric generation sector increased by 79 percent from 1987 through 2004. Newer gas-powered plants produce low levels of pollutants, compared with many existing plants. This characteristic, as well as the long period of low prices in the 1990s and other factors, has made natural gas the primary fuel in new power plants. The supply of natural gas, however, has not kept pace with the increased demand. Historically, most of the natural gas used in the United States--85 percent in 2003--has been produced here. However, as older natural gas fields have been depleted, additional drilling for natural gas has been required in order to maintain domestic production. This additional drilling has not necessarily resulted in immediate additional supplies in part because development of new wells and supporting pipeline infrastructure can take time. Overall, from 1994 through 2003, domestic annual production held steady at about 19 trillion cubic feet. In 2003, EIA reported that the domestic natural gas industry had produced nearly all of the natural gas that could be produced on a monthly basis from 1996 through 2001--the most recent data then available. Furthermore, EIA reported that at times there was virtually no spare capacity in some parts of the country and forecasted that these tight supply conditions would continue, despite EIA's projection for a significant increase in drilling activity. In recent years, imports of natural gas have become increasingly important. Net imports of natural gas have increased steadily, rising by over 250 percent from 1987 through 2004. In 2004, the United States imported about 15 percent of the total natural gas consumed here. Nearly all of the imported gas comes from Canada via pipeline, and those imports constitute virtually all of Canada's production not used in that country. In addition, a small share--about 3 percent of total U.S. supply--has been shipped on special ocean tankers as liquefied natural gas (LNG) from countries such as Trinidad and Tobago, Nigeria, and others. These imports have increased significantly in recent years; however, it is not clear if we have the capacity to handle further increased shipments, in part because only five facilities in the United States are able to receive and process LNG imports. Moreover, because of limited international supplies and high prices in other markets, it also is not clear how much additional supply is available to the United States. The tight demand and supply balance has made the market for natural gas more susceptible to extreme price changes when demand or supply changed unexpectedly. As we previously reported, prices spikes occur periodically in natural gas markets because neither the demand side nor the supply side can quickly adjust to changes in the marketplace. On the demand side, some customers are able to react to changes in prices. For example, some industrial entities may be able to switch fuels or reduce their production. However, many other customers, such as residential customers, may have few fuel-switching options and little firsthand knowledge of spot natural gas prices--and understand the costs of their natural gas consumption only when they receive their bill. On the supply side, suppliers are slow to respond to price changes. For example, they may be delayed in responding to high prices because, as noted earlier, existing domestic sources of natural gas are already operating at near full capacity--often above 90 percent in the United States in recent years, according to EIA. In these circumstances, because little excess supply is readily available, it must be added, generally by drilling new wells and connecting those wells to existing pipelines, which can take time. For example, receiving regulatory approval can take a year or more, and the time to drill the well and connect it to the pipeline network can take another 6 to 18 months. Because neither the suppliers nor many consumers can react quickly to price changes, even small unexpected increases in demand or disruptions in supplies can cause sudden and significant price increases. Most recently, prices rose sharply following the landfall of two hurricanes in the Gulf region. It appears that the price spike was caused by the unexpected decrease in the supply of natural gas in late 2005 following Hurricanes Katrina and Rita, exacerbated by factors that raised demand. Because of the damage caused to production, processing, importing, and transporting infrastructure in the Gulf region, wholesale prices climbed to a high of $15 per million BTUs by December 2005. Other factors--such as market manipulation--may also have affected wholesale prices. Our ongoing work examining futures trading in natural gas markets will address this issue later this year. The Gulf region produces about 20 percent of the U.S. natural gas supply. The region's extensive natural gas-related infrastructure includes about 4,000 platforms that extract natural gas from beneath the ocean floor; two of the five terminals that import LNG into the United States; plants that remove impurities from natural gas to prepare it for sale and use; and an extensive network of pipelines, linked by hubs such as the Henry Hub, that transport natural gas to other parts of the United States. The paths of Hurricanes Katrina and Rita, in relation to Gulf region natural gas infrastructure, are shown in figure 3. The hurricanes forced operators to evacuate about 90 percent of the oil and gas platforms in the Gulf for safety reasons, rendering them unable to produce natural gas; shut down one of the two LNG importing terminals for about two weeks; damaged processing plants; and damaged several pipelines and their connecting hubs, delaying transmission of natural gas from supply facilities that were still operational. For example, the Henry Hub, a major gas market center, was closed by flooding for a total of 11 days following Katrina and Rita. As a result of all of these factors, the hurricanes had a significant impact on the supply of natural gas. Figure 4 shows the impact of Hurricanes Katrina and Rita on the production of natural gas from the Gulf region. Hurricane Katrina disrupted about 8 billion cubic feet of natural gas production per day immediately following its landfall--amounting to about 80 percent of daily production from the Gulf and about 16 percent of total daily U.S. production of natural gas. Lost production from Katrina was in the process of being restored when Hurricane Rita struck--again reducing production of natural gas from the Gulf region to levels similar to those immediately following Katrina. As a result of the severity and timing of these two hurricanes, the Gulf region produced less than half its usual amount of natural gas for about 9 weeks after Hurricane Katrina struck. By comparison, nearly all of the lost production that resulted from Hurricane Ivan in 2004 was restored within 9 weeks and amounted to about 20 percent of that caused by Katrina and Rita. By the end of January, only about 80 percent of the natural gas supplies that had been disrupted by Katrina and Rita had been restored, leaving the overall market tighter than it was prior to the hurricanes and leaving the U.S. vulnerable to future unexpected interruptions in supply or increases in demand--either of which could result in higher prices. The high natural gas prices that followed the Katrina and Rita supply disruptions came at a time when demand for natural gas was already high. Higher-than-average late-summer temperatures in August had led to increased demand for natural gas to generate electricity, particularly in the South. As a result of this high level of demand, existing supplies were stretched thin and overall price levels were high. In addition, the hurricanes struck as companies were filling their storage of natural gas in preparation for the winter heating season. Prices for natural gas in both the spot and the futures market spiked dramatically immediately following the supply disruptions caused by the 2005 hurricanes. In September 2005, after the second hurricane, natural gas spot prices increased to over $15 per million BTUs--roughly twice as high as the average price in July 2005 of about $7.60 per million BTUs. Futures prices to deliver gas in October also doubled to $14.20 per million BTUs, reflecting traders' expectations that high spot prices could continue into the future. Futures prices closely followed spot prices until early November 2005, when spot prices fell to about $9 per million BTUs, but prices for December gas futures remained at about $12 per million BTUs, reflecting the belief by futures market traders that natural gas prices would be high in December. A brief cold spell during the beginning of December increased demand for natural gas for heating purposes, driving prices up. The arrival of warmer than normal temperatures just before the end of the year reduced demand and has contributed to the recent reduction in prices. Figure 5 shows the spikes in natural gas prices during the months of, and following, the 2005 hurricanes. Two other instances of price spikes--caused by unexpected increases in demand--have occurred since 1999. First, coincident with the western electricity crisis, from mid-2000 through early 2001, wholesale prices for natural gas rose substantially and remained relatively high for nearly a year. This period witnessed significant increased demand for natural gas by the electric generation sector in order to meet electricity demand across the West during a year of diminished availability of hydroelectricity, a situation compounded by high demand through the winter and lower- than-normal storage levels. In a second instance, wholesale prices rose sharply in February 2003 during a period of high demand because of unusually cold winter temperatures; however, prices returned to normal relatively quickly. How higher wholesale natural gas prices are affecting consumers depends largely on the degree to which the consumers or their suppliers may have purchased gas on the spot market--which reflects current wholesale prices--or may have taken steps to reduce their exposure to these prices. The effect of higher prices also depends on the consumer's sensitivity to price changes. Some consumers, such as low-income residents and certain industries, are more sensitive to price changes than others. The impact of recent increases in natural gas wholesale prices on consumers depends on how much of the natural gas they use is purchased in spot markets. Those with the greatest reliance on spot markets are hit the hardest when prices rise or spike. For example, some natural gas utilities that relied on spot markets are spending significantly more on energy this winter, which may translate into higher gas bills for residential and commercial consumers. According to our preliminary work with the state commissions that regulate natural gas utilities, 10 states reported that at least some of the natural gas utilities they regulate were highly exposed to spot market prices. Furthermore, in a few states, some of the largest natural gas utilities projected they would purchase 70 percent or more of their natural gas supplies for this winter from the spot market. Participants in the market, such as industrial consumers who purchase gas directly from the market or natural gas utilities that purchase gas on behalf of their customers, can hedge against high spot market prices for natural gas in three main ways: (1) by purchasing and storing gas for use during times when prices are high; (2) by signing fixed-price contracts for delivery of the gas in the future; and (3) by purchasing financial instruments, such as options or derivatives, that increase in value as natural gas prices rise. Since the winter of 2000-2001, some state public utility commissions (PUCs) have encouraged the natural gas utilities they regulate to hedge some part of their gas purchases in order to help stabilize prices, according to the American Gas Association. According to the state commissions, 27 states reported that the utilities they regulate will acquire at least half of their expected winter natural gas needs at a known price, generally ranging from $7 to $10 per million BTUs. In that regard, last November, Commissioner Donald Mason of Ohio told Congress that customers around Dayton, Ohio, have saved about $3 per million BTUs as a result of hedging, including use of long-term, fixed- price contracts. Gas utilities are also taking other approaches to keep down or stabilize their customers' costs. For example, in some states, utilities offer "level" payment programs and show customers how to use energy wisely through energy-efficient appliances. In Minnesota, in 2005, all state- jurisdictional gas utilities are required to spend at least 0.5 percent of their gross operating revenues on conservation improvement efforts such as weather audits, weatherization, and rebates for purchases of energy- efficient appliances. While some gas utilities have made efforts to reduce their exposure to spot prices by increasing their use of hedging, as some did after the price spike in 2000-2001, some states and municipalities still discourage the use of hedging, according to the association that represents the public utility commissioners. While hedging allows consumers to obtain greater price stability, it has costs and risks, and utilities may lack incentives to undertake it. Storing gas for later use, for example, entails up-front costs such as the cost of placing it into and keeping it in storage. Market participants face risks if, for example, they purchase gas in advance under a fixed-price long-term contract and prices drop. For that reason, some natural gas utilities may be reluctant to enter into long-term contracts when prices are relatively high, according to a trade association that represents municipal gas utilities. Furthermore, absent specific PUC guidance to hedge purchases, gas utilities may have few incentives to hedge since they are generally able to pass along increased costs associated with purchases of natural gas. Moreover, some state regulators may not allow gas utilities to financially benefit from using hedging but hold them financially responsible if the hedge proves unnecessary. Furthermore, while under some circumstances hedging can reduce or eliminate the impact of a price spike, it may offer little benefit during prolonged periods of price changes. For example, a utility that signed a 5-year commitment to purchase natural gas at a predetermined price may witness no change in the cost of acquiring the natural gas during the period of the contract but would again face market prices (either higher or lower) when it came time to replace this gas supply at the end of the contract. In this sense, hedging may serve to delay until the contract term ends, but not prevent, the effect of higher or lower prices on consumers. Because energy costs account for a relatively large share of overall costs for some consumers or because they are heavily dependent on natural gas, any price increases can present significant difficulties. In particular, low- income residential consumers and some highly energy intensive industries appear likely to encounter the greatest impact. The effect of high natural gas prices has already been especially severe on low-income individuals. According to representatives from a trade association representing publicly owned natural gas utilities, a utility in Philadelphia, Philadelphia Gas Works, has billed $42 million more than they have collected so far this winter, representing an increase of 2 percent in uncollectible heating bills this winter compared with last winter. In Kentucky, utilities this winter have witnessed the highest number of complaints and the greatest number of problems faced by customers. Furthermore, federal assistance to low-income households in meeting heating expenditures provides only limited assistance. According to the National Association of State Energy Officials, the Low Income Home Energy Assistance Program (LIHEAP) currently serves only 20 percent of the eligible population, with average payments of $311 per family designed to help families pay projected natural gas heating expenditures of $1,568 this winter. Additionally, despite several years of increases, LIHEAP funding in fiscal year 2005 is only 67 percent of what it was in fiscal year 1982, adjusted for inflation. However, some states have increased funding for low-income individuals recently. For example, in December, Minnesota began distribution of an additional $13.4 million in funding designed to assist an additional 26,000 households in paying for heating. Electricity generators are also sensitive to higher prices because of their dependence on natural gas. This is true especially in the eastern United States, where, according to FERC, electricity generators rely heavily on natural gas. Furthermore, the region has many of the newer gas-fired electric power plants that have less flexibility to switch to other fuels, such as oil-based fuels, according to the National Petroleum Council and others. As a result, some consumers may see higher electricity bills. High natural gas prices are also adversely affecting industrial consumers. As we reported in 2003, some industrial consumers shut down production facilities because of higher energy costs in 2000 and 2001. Industry representatives expect recent high prices to have a similar effect. A recent survey by a trade association representing large energy consumers showed that more than half of 31 member companies surveyed are decreasing their demand for natural gas an average of 8 percent to 9 percent this winter compared with last winter, leading the association to conclude that higher prices have forced industries to curtail production in the United States. The association expects that further cutbacks will occur if prices remain high this year. According to an association that represents industrial consumers, high natural gas spot prices have been particularly detrimental to specific industries in the United States that rely on natural gas, such as fertilizer and chemical manufacturers, that compete in international markets. As we reported in 2003, natural gas expenses can account for 90 percent of the total cost of manufacturing nitrogen fertilizer. The high cost of domestic natural gas has made it difficult for U.S. producers of nitrogen fertilizer to compete with foreign nitrogen fertilizer producers, who can buy natural gas at lower prices and export their products to the United States. For example, in 2004, Trinidad and Tobago was the largest supplier of anhydrous ammonia, a type of nitrogen fertilizer, to the United States. Prices of natural gas are sharply lower in Trinidad and Tobago, where, according to the Fertilizer Institute, prices were about $1.60 per million BTUs in 2005. The U.S. fertilizer industry, which typically supplied 85 percent of its domestic needs from U.S.-based production during the 1990s, now relies on imports for nearly 45 percent of nitrogen supplies, according to a trade association representing fertilizer companies. Furthermore, other industries can be affected. In the fertilizer industry, according to a trade association representing fertilizer companies, costs are passed on to U.S. farmers, which have witnessed a dramatic increase in the cost of nitrogen fertilizers. The prices paid by farmers for the major fertilizer materials reached a record during the spring of 2005--on average, 8 percent higher compared with the same period in 2004, according to a trade association representing fertilizer companies. In today's restructured market, the federal government does not control the price of natural gas or directly regulate most wholesale prices. However, three federal agencies--FERC, CFTC, and EIA--play key roles in overseeing and supporting a competitive and informed natural gas marketplace. Under federal law, FERC is responsible for regulating the terms, conditions, and rates for interstate transportation by natural gas pipelines and public gas utilities to ensure that wholesale prices for natural gas, sold and transported in interstate commerce, are "just and reasonable." FERC's jurisdiction over retail natural gas sales is limited to domestic gas sold by pipelines, local distribution companies, and their affiliates. The commission does not prescribe prices for these commodity sales. FERC's regulatory authority applies to the physical markets for energy commodities, such as natural gas, and not to futures markets. In December 2002, we reported that as energy markets were restructured, FERC had not adequately revised its regulatory and oversight approach to respond to the transition to competitive energy markets. FERC agreed that its approach to ensuring just and reasonable prices needed to change: from one of reviewing individual companies' rate requests and supporting cost data to one of proactively monitoring energy markets to ensure that they are working well to produce competitive prices. That year, the commission established the Office of Market Oversight and Investigations to actively monitor energy markets and, when necessary, undertake investigations into whether any entity had or was attempting to manipulate energy prices. As we previously reported, in 2002, FERC staff undertook several studies and investigations to determine whether there had been attempts to manipulate upward prices for natural gas delivered to California during 2000-2001. FERC's ability to monitor the natural gas markets has been enhanced in several regards recently. First, the Energy Policy Act of 2005, passed last September, contains several enforcement provisions that increase the commission's ability to punish wrongdoers that harm the public. In particular, the act provides FERC with the authority to impose greater civil penalties on firms that commit fraud. In addition, FERC has taken steps to strengthen its efforts to protect energy consumers. These actions include establishing a telephone hotline that individuals can call to report market abuse or other problems. FERC also has begun actively monitoring natural gas markets to determine whether price movements are the result of market manipulation or market fundamentals. The staff reviews market activity for any possible manipulation that might also affect prices and performs a detailed review of natural gas prices and market activity on a daily basis with the intent of identifying areas of possible manipulation. If the staff identifies price anomalies that are not explained by market fundamentals, they investigate. Since 2002, FERC has settled a number of investigations involving natural gas market manipulation. For example, 10 companies agreed to pay settlements totaling approximately $84 million. In addition, a FERC administrative law judge found that another company exercised market power over natural gas prices in California during the 2001-2002 heating season, and the company subsequently agreed to pay a settlement of $1.6 billion. FERC officials told us that, since early fall of last year, it has received complaints, expressions of concern, and requests to investigate with respect to high natural gas prices through its enforcement hotline and from public officials and the general public. Additionally, FERC has identified areas of concern through its daily market oversight process. FERC officials told us that all complaints and concerns are taken seriously and actively investigated, where appropriate. However, since ongoing investigations are considered nonpublic under FERC's regulations, officials said they could not comment further on any ongoing investigations of the natural gas market. A large part of CFTC's mission is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity futures and options, including natural gas. CFTC does this for federally regulated exchanges such as NYMEX, and it has limited authority over certain other futures markets. It does not have general regulatory authority for other over-the-counter markets, including some used for trading natural gas futures or options. In fulfilling its regulatory role, CFTC conducts market surveillance to identify situations that could amount to attempted or actual futures market manipulation and to initiate appropriate preventive actions. For instance, to protect the futures market from excessive speculation that could cause unwarranted price fluctuations, CFTC or an exchange impose limits on the size of the transactions that may be held in futures or options of a commodity. In the natural gas futures market, these transaction limits are placed on trading that occurs during the spot month. To monitor these transaction limits, the commission has about 45 market surveillance staff and economists to do policy and economic analysis of energy trading issues. As part of its regulatory role, CFTC also enforces various laws prohibiting fraud, manipulation, and abusive trading practices. CFTC's enforcement group investigates and prosecutes alleged violations of the Commodity Exchange Act. From 2002 through May 2005, CFTC investigated over 40 energy companies and individuals, filed over 20 actions, and collected over $300 million in penalties. Most of these actions were related to natural gas. For example, in July 2004, Coral Energy Resources, L.P. (Coral), a Houston-based firm that marketed gas to consumers across the United States, was ordered to pay a civil monetary penalty of $30 million. The penalty was imposed because the CFTC found that Coral knowingly provided false, misleading, or inaccurate information concerning its natural gas transactions from January 2000 to September 2002. During that time, CFTC found that Coral employees also attempted to manipulate the price of natural gas in interstate commerce or for future delivery. Natural gas traders report their market information to firms like Natural Gas Intelligence, who in turn compile pricing and volume indexes, for instance, that are used by market participants to settle their transactions. Submitting incorrect information could affect the price of natural gas in interstate commerce and could affect the futures or options prices of gas. FERC and CFTC have recently signed a memorandum of understanding to create a more effective and efficient working relationship between the two agencies. The agreement covers the sharing of information and the confidential treatment of proprietary energy-trading data. FERC officials told us that if either agency needs information about trading within the other agency's jurisdiction, then the other agency must provide it. The understanding is to contribute to better coordination of enforcement cases. The Energy Information Administration (EIA) is charged with collecting information about energy markets, including natural gas. The information reported by this agency is important in promoting efficient natural gas markets and public awareness of these markets. In our 2002 analysis of natural gas markets, we identified that most elements of EIA's natural gas data collection program inadequately reflected some of the changes in the market. For example, with some exceptions, EIA's current natural gas data collection program remains primarily an annual effort to obtain comprehensive information on natural gas volumes and prices, while markets have evolved to require more timely and detailed data. However, beginning in the spring of 2002, EIA began to provide more real time market information that traders and other gas industry analysts use as an indicator of both supply and demand. For example, on May 9, 2002, EIA began releasing weekly estimates of natural gas in underground storage for the United States and three regions of the United States. According to EIA, these data are valued by market participants and are a key predictor of future natural gas price movements. EIA has also undertaken efforts to better understand derivatives markets and the effectiveness of energy derivatives to manage price risk. In addition, EIA's weekly natural gas data releases are published each Thursday, and according to EIA officials, these releases have been well received by natural gas market participants. Natural gas has become an essential element in our national energy picture. Ironically, however, natural gas markets may be suffering from the growing popularity of this versatile fuel. Rising demand and tightening supply appear to have contributed to both the general rise in prices over the past several years as well as the price spikes, such as that following the hurricanes in 2005. Moreover, the stage seems set for future price spikes if either demand is higher than expected or supplies are unexpectedly interrupted. To the extent that the higher prices persist and price spikes are possible, natural gas markets could pose significant challenges for our country. Many people may have to pay a larger percentage of their income for home heating and other uses of natural gas, such as electricity--not just this year, but every year. Some may not be able to afford it. Further, because some key industries have historically relied on low natural gas prices to be competitive, we may lose some of these industries along with the jobs that they provide. These are weighty issues that require concerted actions reaching across not just the natural gas industry but also across the energy sector and related financial markets. The American consumer wants secure, affordable, reliable, and environmentally sound energy. Meeting this demand will be a challenge. This hearing offers another important step in the process of overseeing the regulators--FERC and CFTC--charged with ensuring these markets operate as intended. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have at this time. If you have any questions about this testimony, please contact me at (202) 512-3841 or [email protected]. Other major contributors to this testimony include Karla Springer (Assistant Director), Lee Carroll, Michael Derr, Patrick Dynes, Elizabeth Erdmann, Philip Farah, John Forrester, Mark Gaffigan, Mike Hix, Chester Joy, Jon Ludwigson, Kristen Sullivan Massey, Cynthia Norris, Frank Rusco, Jena Sinkfield, Rebecca Spithill, John Wanska, and Kim Wheeler-Raheb. Meeting Energy Demand in the 21st Century: Many Challenges and Key Questions. GAO-05-414T. Washington, D.C.: March 16, 2005. Natural Gas: Domestic Nitrogen Fertilizer Production Depends on Natural Gas Availability and Prices. GAO-03-1148. Washington, D.C.: September 30, 2003. Energy Markets: Additional Actions Would Help Ensure That FERC's Oversight and Enforcement Capability Is Comprehensive and Systematic. GAO-03-845. Washington, D.C.: August 15, 2003. Natural Gas: Analysis of Changes in Market Price. GAO-03-46. Washington, D.C.: December 18, 2002. Energy Markets: Concerted Actions Needed by FERC to Confront Challenges That Impede Effective Oversight. GAO-02-656. Washington, D.C.: June 14, 2002. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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In early December 2005, wholesale natural gas prices topped $15 per million BTUs, more than double the prices seen last summer and seven times the prices common during the 1990s. For the 2005-2006 heating season, the U.S. Energy Information Administration predicts that residences heating with gas will pay 35 percent more, on average, than they paid last winter. This testimony addresses the following: (1) the factors causing natural gas price increases, (2) how consumers are affected by these higher prices, and (3) the roles federal government agencies play in ensuring that natural gas prices are determined in a competitive and informed marketplace. This testimony is based on GAO's 2002 published work in this area, updated through interviews, examination of data, and review of relevant publications. GAO's new work was conducted from December 2005 through February 2006 in accordance with generally accepted government auditing standards. Since 1999, wholesale prices for natural gas have trended upward because of expanding demand and supply that has not kept pace. The domestic natural gas industry has been producing at near capacity, and the nation's ability to increase imports has been limited. Tight supplies have also made the market susceptible to extreme price spikes when either demand or supply change unexpectedly. Prices spiked in August 2005 when hurricanes hit the Gulf Coast, disrupting a substantial portion of supply and again later when demand was pushed higher because of, among other reasons, colder-than-expected temperatures in early December. Although prices have dropped, they remain higher than last year. Other factors--such as market manipulation--may also have affected wholesale prices. We are currently examining futures trading in natural gas markets for signs of manipulation and expect to report on our results later this year. While most consumers' gas bills are rising, the degree of the increase depends, in part, on how much of their supply is purchased from wholesale spot markets. Consumers who directly, or indirectly, buy their natural gas mainly from spot markets will see prices that reflect both recent price spikes and the longer-term trend toward higher prices. Our work shows that some of the largest natural gas utilities in a few states expect to buy at least 70 percent of their gas at spot market prices this winter. These companies generally pass these prices on to their customers. On the other hand, consumers and suppliers that have reduced exposure to spot market prices because some of their gas has been purchased through a process called hedging may be insulated from price spikes and may postpone their exposure to even gradual price hikes. In this regard, utilities in more than half the states have hedged at least 50 percent of their supply for this winter by entering into long-term fixed-price contracts and other techniques. This will help stabilize prices for their customers. Nonetheless, high gas prices will hit some consumers hard, including lower-income households and companies that depend heavily upon natural gas, such as fertilizer manufacturers. The Federal Energy Regulatory Commission (FERC) and the Commodities Futures Trading Commission (CFTC) play key roles in ensuring that natural gas prices are determined in a competitive and informed marketplace. Both agencies monitor natural gas markets and investigate instances of possible market manipulation. Since 2002, FERC has settled a number of investigations involving natural gas market manipulation; for example, one company agreed to pay a settlement of $1.6 billion after FERC found it had exercised market power over natural gas prices in California during the 2001-2002 heating season. From 2002 through May 2005, CFTC investigated over 40 energy companies and individuals, filed over 20 actions, and collected over $300 million in penalties, most of which were natural gas related.
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For over 30 years, TCMP has been IRS' primary program for gathering comprehensive and reliable taxpayer compliance data. It has been IRS' only program for making statistically reliable estimates of compliance nationwide. It has also been used to identify areas where tax law needs to be changed to improve voluntary compliance and to estimate the tax gap and its components. TCMP data are also used outside IRS, including by Congress to make revenue estimates for new legislation and by the Department of Commerce's Bureau of Economic Analysis to adjust national income accounts such as the gross domestic product. The 1994 TCMP survey, which was to consist of over 150,000 income tax returns, was to be the most comprehensive TCMP effort ever undertaken. By auditing the tax returns of individuals (Form 1040), small corporations with $10 million or less in assets (Form 1120), Partnerships (Form 1065), and S corporations (Form 1120S), IRS planned to obtain comprehensive compliance data. Most sample results were to be sufficiently precise to be reliable at the national level as well as at smaller geographic areas across the country. The 1994 TCMP was designed to fulfill the information needs for several compliance areas expected to be important to IRS' functions over the next decade. The more important uses were to include development of audit selection formulas, validation of IRS' revised approach to categorizing returns for audit, and development of new approaches to researching compliance across specific geographic areas. Each of these uses is discussed in more detail below. Since 1969, IRS has used TCMP data to update its Discriminant Function (DIF) formulas, which are mathematical formulas used to select tax returns with the greatest probability of change for audit. The current formulas for individuals are based on 1988 tax returns, IRS' most recent individual TCMP audits. Formulas for small corporations are based on returns that were processed in 1987. IRS does not use DIF scores for partnerships and S corporations because of the age of the underlying TCMP audits. TCMP data were also to be used to test new compliance strategies. IRS planned to change the way it categorized returns for audit by adopting the market segment approach. Market segments represent groups of taxpayers with similar characteristics, such as those in manufacturing. IRS assumes that because these taxpayers have similar external characteristics, their tax compliance behavior will exhibit similar attributes. Finally, the 1994 TCMP was to provide compliance research data. IRS recently reorganized its compliance research function, establishing a National Office of Research and Analysis (NORA) and 31 District Office of Research and Analysis (DORA) sites. The 1994 TCMP was to be large enough to provide reliable compliance data for field and National Research Offices. IRS' researchers planned to use TCMP data to identify national and geographically specific areas of noncompliance and, by focusing on key compliance issues, develop programs to improve voluntary compliance. It is through these research efforts that IRS planned to improve overall voluntary compliance. Noncompliance represents a major source of lost revenue for the nation. IRS' most recent tax-gap estimates indicate that over $127 billion was lost to noncompliance in 1992. In an attempt to reduce this lost revenue, IRS established an objective of collecting at least 90 percent of the taxes owed through voluntary compliance and enforcement measures by the year 2001. However, this overall compliance rate has remained at about 87 percent since 1973. The 1994 TCMP was intended to provide data from which other programs could be developed to improve this rate and increase revenue. This nation's tax system is based on individuals and businesses voluntarily paying the taxes they owe. To the extent that this system works, it improves the efficiency of tax collection. Measuring the extent to which the tax system works and identifying areas in which it does not is the job of compliance measurement. TCMP has been IRS' only tool for measuring voluntary compliance and determining compliance issues. The postponed TCMP for 1994 tax returns was to establish the voluntary compliance benchmark to carry IRS into the next century. The objectives of this assignment were to (1) determine the possible effects on IRS' compliance programs of postponing the 1994 TCMP and (2) identify some potential short- and long-term alternatives to the planned TCMP for collecting this data. To determine the possible effects of postponing the 1994 TCMP, we talked to responsible officials in IRS' Research Division and the Examination Division. We obtained information on how these officials planned to use TCMP data and what will likely be affected now that TCMP has been postponed. To identify alternatives to the planned TCMP, we talked to IRS officials responsible for planning TCMP. We discussed alternative sampling methodologies with officials from IRS' Statistics of Income (SOI) Branch who were responsible for preparing the original TCMP sample and asked them to determine sample sizes on the basis of revised requirements. We developed the revised requirements on the basis of our discussions with IRS' Research Division staff as well as officials outside IRS, including congressional staff. Some of the observations in this report are based on the work we have done over the years on IRS' compliance programs as well as our specific work on TCMP in recent years. We requested comments from you on a draft of this report. On February 23, 1996, we obtained oral comments from IRS' Director of Research and the National Director of Compliance Specialization. We also obtained commented from you in a March 18, 1996, letter. These comments are discussed on page 13 of this report. We did our work in San Francisco, Dallas, and Washington, D.C., between August and December 1995 in accordance with generally accepted government auditing standards. The planned TCMP for 1994 tax returns was to establish the voluntary compliance benchmark to carry IRS into the next century. While agency officials said that postponing TCMP will help resolve budget problems, our work suggests that the loss of these or comparable data is also likely to disrupt IRS' efforts to increase the total collection percentage to 90 percent by 2001. For example, without these data, IRS will have difficulty updating the formulas it uses to select returns for audit and, thus, it would be more likely that a higher percentage of the returns IRS selects for audit would not result in changes to the amount of tax owed by the taxpayer. Additionally, without such data IRS will be unlikely to have sufficient data to validate its market segment approach to audits or to be used by the DORA research functions to identify programs to improve voluntary compliance. It is not clear whether IRS will replace the data it had planned to obtain from TCMP. However, updated compliance data will be needed in the short term if IRS still plans to update the audit selection formulas and in the long term to validate and improve IRS' compliance efforts. The primary system that will be disrupted by postponing TCMP is the one used by IRS to select returns for audit. Since 1969, IRS has used DIF formulas to select returns for audit. New DIF formulas are developed periodically from TCMP data and applied to all individual and small corporation income tax returns. IRS then selects returns for audit with the highest DIF scores. In 1992, over 55 percent of the audited returns of individuals were selected using the DIF score. The DIF selection system replaced programs that were largely dependent on auditor's judgment. The DIF system has not only improved the efficiency of IRS' audit efforts but also the consistency and objectivity of the selection process. The use of the DIF selection process has also resulted in fewer "no-change" audits, which not only waste IRS' resources but unnecessarily burden compliant taxpayers. According to IRS, use of the DIF scoring system reduced the no-change rate from over 46 percent in 1969 to about 15 percent in 1992. IRS officials believe the DIF process is dependent on periodically updating the formulas used to score returns. Formulas are updated so that they will more accurately identify the returns with the greatest probability for change. Until 1988, data from TCMP had been used to update formulas for individual returns every 3 years. However, the most recent TCMP was conducted on 1988 individual returns. For small corporations, partnerships, and S corporations, IRS has updated formulas much less frequently. TCMPs were conducted on corporate returns filed in 1987, and partnership and S corporation returns filed in 1982 and 1985, respectively. IRS is not certain how well the DIF scores will continue to perform if not updated. IRS officials believe that by 1998, the year IRS planned to have TCMP data available, the DIF scores may become less effective at identifying returns with the greatest potential for change. They said this decrease in effectiveness may occur because of changes in tax laws and taxpayer behavior--resulting in an increased no-change rate for DIF selected returns and potentially lower revenue yields. This would mean greater burden on compliant taxpayers if more of them are selected for audit. IRS officials indicated that they plan to monitor the performance of DIF over time. The 1994 TCMP was also intended to provide information on IRS' new market segment approach for grouping tax returns. IRS initiated the market segment approach on the basis of work done in its Western Region, which indicated that compliance rates and audit issues were likely to be similar for taxpayers with similar characteristics, such as businesses in the same industry (e.g., manufacturing or retail sales). Accordingly, IRS concluded that grouping taxpayers by market segments might result in selecting returns for audit that have a higher potential for change and might allow auditors to specialize in market segments. The 1994 TCMP was designed to provide data to test this hypothesis as well as to develop DIF scores by market segment rather than by audit class, as had been done in the past. Without TCMP or some alternative to provide similar information, IRS will not have data to show whether market segments are better for return selection purposes than traditional audit classes or be able to determine the compliance rate or compliance issues of the market segments. Because of these concerns, IRS no longer plans to test a selection of returns for audit by using the market segment approach. Instead, IRS plans to continue selecting returns for audit using the DIF score within audit classes. Finally, the 1994 TCMP was designed to provide compliance data for IRS' National and District Research Offices. IRS established these offices to research taxpayer compliance at the national and local levels. These researchers were to identify programs to improve compliance not only through audits but also through larger scale nonaudit programs, such as improved guidance and assistance to taxpayers and tax-law changes. TCMP also was to be used to develop benchmark compliance data for measuring future progress and determine how effectively managers were meeting their objectives of improving compliance. Without TCMP or an alternative data source, IRS' new research function would still be able to analyze noncompliance in filing returns and paying taxes. However, research on reporting compliance, the area where most of IRS' compliance dollars are spent, would be very limited. Thus, researchers would have inadequate data to identify emerging trends in reporting compliance, to develop solutions, and to test the effectiveness of these solutions. As a result, IRS would likely continue its reliance on enforcement to improve compliance. However, enforcement has proven to be a costly and ineffective way to increase overall voluntary compliance. According to IRS officials, because of criticisms of TCMP and budget concerns, the 1994 TCMP is unlikely to be conducted. Although IRS officials told us they planned to use an alternative method to obtain TCMP data, they currently have no short-term proposal on how to obtain these data. Regardless of how IRS plans to mitigate the loss of 1994 TCMP data, it would have to start soon in order to minimize the adverse effects of not updating its compliance programs. According to IRS officials, a number of alternative sampling strategies could fill the short-term data gap created by postponing TCMP indefinitely. From these strategies, we identified several alternative samples that met three basic objectives we considered important: (1) reducing the sample size to make data collection less costly for IRS and less burdensome to taxpayers, (2) maintaining IRS' ability to update the DIF scoring system, and (3) maximizing use of the work already completed to identify returns and collect data for the 1994 TCMP sample. One alternative sample would be for IRS to reduce the planned TCMP sample size and still provide some of the same data, although with less precision. This smaller sample could also be used to update the DIF score with little loss in accuracy. On the basis of our discussions with SOI officials, it appears IRS could reduce the sample size in any one of several ways, including decreasing the level of acceptable statistical precision for individual and corporate returns; selecting a sample with only businesses (sole proprietors, corporations, partnerships, and S corporations), with reduced precision; classifying TCMP sample returns and eliminating returns that past audit experience indicates are not likely to result in an audit adjustment; and selecting a sample that includes only sole proprietor and corporation returns. Numerous other alternatives to the sampling methodology and characteristics may give slightly different sample sizes. For example, by eliminating the requirement for updating the DIF formula, the sample size for the corporation and individual business option is reduced by about 12 percent, to 28,275. However, such an approach would lessen the value of TCMP because it would limit IRS' ability to update the DIF score, a primary purpose of TCMP audits. Reducing the sample size would reduce the cost of TCMP audits. IRS' cost estimates for the 1994 TCMP were divided into two types, (1) staffing costs and (2) opportunity costs. Staffing costs reflect IRS' cost estimates for auditors to conduct the TCMP audits. Opportunity costs reflect IRS' estimates of the difference between revenue generated through the regular audit program and revenue generated by TCMP audits. According to IRS officials, TCMP audits generate less revenue because the returns are randomly selected rather than identified by using the DIF score or as part of a special project and because the returns take longer to audit. Table 1 shows how the variations in sampling methodology and characteristics change the sample size and cost estimates. Changing the sample characteristics not only reduces the size but affects the usefulness of data from the sample. Each of the changes shown in table 1 has its own set of strengths and weaknesses that relate primarily to reliability and coverage. For example, reducing the sample to businesses only and reducing the precision would provide no information on nonbusiness individuals. Also, this sample would be of little use at the DORA level because it would not provide statistically reliable estimates of compliance below the national level. This sample could, however, provide some information on market segment compliance and be used to update the DIF formula for businesses and the return types where voluntary compliance is the lowest. Also, a business-only approach could be combined with a multiyear sample where the compliance of nonbusiness individual returns is evaluated in a future year. Although we did not fully evaluate the alternatives, the table in appendix I summarizes some of the more obvious trade-offs inherent in the alternatives discussed above. Deciding how to change the sampling strategy to reduce the sample size would require careful evaluation of the tradeoffs. It seems reasonable, however, to consider that any new sample should, at a minimum, allow some updating of the DIF formulas, since this was to be the primary purpose of the original TCMP. To the extent that other purposes can also be met through one of these alternative sampling strategies, the sample would be more valuable. Because a significant portion of IRS' workload and future revenue depends on compliance programs, it is important that IRS determine how to measure compliance. Such measurements are an on-going need for any tax system that depends on voluntary compliance. It is also important that any long-term solution to obtaining compliance measurement information address the issue of sustainability so that long-term consistent measurement data are available. Sustainability means that the program's costs, in terms of IRS' budget and perceived burden on the taxpayer, must be clearly defensible. Additionally, to be efficient and effective, it would be necessary to design a program that provides timely data and clearly identifies the objectives and uses of these compliance data. We identified several alternatives to the traditional TCMP that would meet some of the data needs that were lost when TCMP was postponed, including (1) conducting multiyear TCMP audits on smaller samples and combining the results; (2) using operational audit data; and (3) conducting a mini TCMP to identify compliance issues, with a more focused TCMP audit on the identified issues. We discuss these three options below. The multiyear TCMP alternative envisions annual TCMP-type audits on a smaller sample of tax returns which, over the course of several years, could be combined to obtain the required statistical precision. For example, IRS could disaggregate an entity type, such as individual taxpayers, into separate market segments or audit classes and conduct the audits of each segment on a 3-year cycle. Table 2 below shows an example of how such a program might operate. One benefit of such an approach to IRS would be that after the initial 3-year period, new and current data would become available for one of the segments every year, making it easier to fine-tune the compliance system. Such an approach, however, would require considerable effort from IRS' statisticians to ensure that the sample design was statistically sound. Also, it would require a long-term commitment from IRS managers to ensure that returns were audited regularly. A second option is to use data from operational audits already being done. Using data from operational audits would provide a large amount of compliance data. This option is also probably the most sustainable of the three we discuss because it would be less burdensome on compliant taxpayers and have no marginal staffing and opportunity costs. However, there are weaknesses. IRS currently has no system to track operational audit issues. While such a system is currently being developed, it is not yet operational and testing is not planned to begin until later in 1996. According to IRS officials, this database is to identify audit issues as well as provide codes to identify the causes of noncompliance. Also, IRS officials believe that using a database of operational audit results could not be used for updating the DIF formulas, determining ways to improve voluntary compliance, or systematically identifying emerging audit issues because the audited returns would not be randomly selected. A third option is to periodically conduct a very small TCMP that covers all taxpayers and follow up with mini TCMP audits on specific issues identified as concerns. Using this approach, IRS may be able to reduce the sample size and focus the majority of the audits on less compliant taxpayers, thus reducing cost and taxpayer burden. This approach may also provide IRS with insight into the areas of greatest noncompliance because efforts would be more focused. IRS officials said that this approach, however, would probably not provide sufficient data to update the DIF formulas and may be of little use at DORA sites because too few randomly selected returns would likely be examined. A significant proportion of IRS' present and future compliance programs have been predicated on the information obtained from TCMP. Benchmarking current compliance, validating the market segment approach, updating return selection formulas, researching noncompliance issues and developing programs to address them, and estimating the tax gap all depend on TCMP information. Without updated compliance data, increasing voluntary compliance, as envisioned by IRS, is less likely to occur. IRS has options to replace at least some of the data that would have been available from the 1994 TCMP audits. Auditing a smaller sample size by eliminating some return types and accepting a decrease in precision, is a factor in such options. While each of these alternatives has limitations, they would meet some of the data needs that were lost when TCMP was postponed. It is important for IRS to make a decision soon on how to replace TCMP data because it will take some time to implement a replacement, and IRS projects that the currently available 1988 data will be less effective by 1998. If IRS does not develop a sustainable compliance measurement program, IRS' compliance programs may be disrupted as the proportion of audits that result in no-changes increases and IRS' access to information on emerging compliance issues decreases. In the long term, such disruptions are likely to result in increased burdens on compliant taxpayers as more of them are selected for audit. To provide the data necessary to help meet the objectives of IRS' compliance strategies, we recommend that you identify a short-term alternative strategy to minimize the negative effects of the compliance information that is likely to be lost because TCMP was postponed, and develop a cost-effective, long-term strategy to ensure the continued availability of reliable compliance data. We requested comments from you on a draft of this report. Responsible IRS officials, including the National Director, Compliance, Research and National Director, Compliance Specialization, provided comments in a February 23, 1996, meeting. These officials agreed with our recommendations and provided some technical comments, which we have incorporated where appropriate. In a March 18, 1996, letter, you restated those agreement and indicated that over the next several months IRS would devote substantial effort to investigating all potential options for capturing reliable compliance information as an alternative to TCMP. We believe the actions that IRS proposes, if properly implemented, will be responsive to our recommendations. This report contains recommendations to you. The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight not later than 60 days after the date of this letter. A written statement also must be sent to the House and Senate Committees on Appropriations with the agency's first request for appropriations made more than 60 days after the date of this letter. We are sending copies of this report to pertinent congressional committees with responsibilities related to IRS, the Secretary of the Treasury, and other interested parties. Copies will be made available to others upon request. The major contributors to this report are listed in appendix II. If you have any questions, please contact me on (202) 512-9044. Useable to update DIF scores, provides baseline compliance for market segments, useable at the DORA level for most market segments, very precise compared with other options. Large sample size requiring significant resource and cost commitment. Useable to update DIF scores, provides baseline data for national market segments, reduces the sample size and burden. Not useable at the DORA level. Useable to update DIF formula for businesses, where the most noncompliance occurs, provides baseline data for national market segments, reduces the sample size and burden. Not usable to update the DIF score for individual returns, not useable at the DORA level. Possibly useable to update DIF formulas, would provides some national market segment information, reduces the sample size and burden. Not useable at the DORA level, problems identifying no-change returns. Useable to update DIF formulas for selected classes of business return, provides national market segment compliance data, reduces the burden on individual taxpayers. Not useable to update the DIF score or identify compliance issues for nonbusiness individuals, partnerships, and S corporations not useable at the DORA level. Ralph T. Block, Assistant Director Louis G. Roberts, Evaluator-in-Charge The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO assessed the potential effects on the Internal Revenue Service's (IRS) compliance programs of postponing the 1994 Taxpayer Compliance Measurement Program (TCMP) survey and identified some potential short- and long-term TCMP alternatives. GAO found that: (1) IRS postponed the 1994 TCMP because of criticisms and budget constraints; (2) IRS does not know how it will obtain the taxpayer compliance data it needs; (3) the loss of 1994 TCMP data could increase compliant taxpayers' burden over the long term because audits may become less targeted; (4) to mitigate the data losses over the short term, IRS could employ a number of alternatives, including doing a smaller survey; (5) any alternative should reduce sample size to lessen taxpayer burden and administrative costs, maintain IRS ability to update the discriminant function scoring system, and maximize the use of already completed work; (6) a limited survey would reduce the quantity and quality of the data collected, but still provide national compliance data; (7) IRS must determine how it will measure compliance over the long term, since its workload and future revenues depend on taxpayers' voluntary compliance; (8) long-term alternatives include conducting small multiyear TCMP audits, using data from operational audits to assess compliance changes, and conducting periodic national mini-TCMP audits; (9) IRS must decide on a compliance information-gathering alternative in the near term, since any alternative will take several years to develop and implement; and (10) the alternatives will likely not gather data as comprehensive as the originally planned TCMP data.
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In September 1993, the National Performance Review called for an overhaul of DOD's temporary duty (TDY) travel system. In response, DOD created a task force to examine the department's travel operations. The task force found that those operations were costly, inefficient, fragmented, and did not adequately support DOD's mission travel needs. On December 13, 1995, the Under Secretary of Defense for Acquisition and Technology (AT&L) and the Under Secretary of Defense (Comptroller)/Chief Financial Officer issued a memorandum, "Reengineering Travel Initiative," which established the PMO-DTS and tasked it with acquiring travel services that would be used DOD-wide. In a 1997 report to the Congress, the DOD Comptroller reported that the existing DOD TDY travel systems were never designed to be integrated. The report stated that because there was no centralized focus on the department's travel practices, the travel policies were issued by different organizations and the process had become fragmented and "stovepiped." The report further noted that there was no vehicle in the current structure to overcome these deficiencies as no single individual or organization within the department had specific responsibility for management control of DOD TDY travel. In 1998, the department initiated efforts to develop and implement DTS to provide the department with a single, integrated, end-to-end travel system. According to DTMO officials, the department projects that DTS will be deployed to all intended locations--about 9,800-- during fiscal year 2009. In response to congressional concerns regarding the implementation and operation of DTS, the John Warner National Defense Authorization Act for Fiscal Year 2007 directed that the department have an independent assessment of DTS to determine the most cost-effective method of meeting DOD's travel requirements. The assessment, which was completed by the Institute for Defense Analyses (IDA) in March 2007, focused on three mandatory elements specified in the legislation. The first two pertained to the department's travel reservation process and the third to the feasibility of making the DTS financial infrastructure mandatory for all DOD travel transactions and phasing out legacy travel systems. The IDA study found that the department's mid-February 2007 updates to DTS effectively addressed the underlying issues and concerns raised by the study regarding continued use of DTS's travel reservation process and recommended its continued use. Regarding the feasibility of making DTS mandatory for all DOD travel transactions, the study concluded that while the institute found that legacy systems are being used even when DTS could be used, there were situations--such as certain travel types (e.g., permanent change of station) that DTS cannot accommodate and sites where DTS has not yet been fielded--that must be addressed before the use of DTS can be made mandatory DOD-wide. As a result, the study recommended that DOD mandate the use of DTS for all travel that it is currently capable of supporting. Our January 2006 and September 2006 reports contained 14 recommendations aimed at improving DOD's management oversight and implementation of DTS and related travel policies. DOD officials have indicated that the department has taken action to close all 14 of our recommendations. However, based upon our work to date to validate DOD's actions, we consider 7 of the 14 recommendations as closed and the remaining 7 open. The 7 closed recommendations pertained to premium-class travel, unused airline tickets, use of restricted airfare, proper testing of system interfaces, and streamlining of certain travel processes, such as the process for approving travel voucher expenses. Our preliminary analysis of the 7 closed recommendations found that the actions taken by the department responded to the intent of our recommendations; however, we need to perform additional work to validate the department's closed status regarding these recommendations. Of the 7 open recommendations, 3 related to the adequacy of DTS's requirements management and system testing, 3 related to DTS underutilization, and 1 related to developing an approach that will permit the use of automated methods to reduce the need for hard copy receipts to substantiate travel expenses. Below are two examples of where DOD has acted upon our prior recommendations and two examples where the recommendations remain open. Premium-class travel. We reported in January 2006 that the commercial travel offices (CTO) were not adhering to the department's policy restricting the use of premium-class travel and recommended that the department take action to ensure that CTOs do so. Because each premium-class ticket costs the government up to thousands of dollars more than a coach-class ticket, unauthorized premium-class travel can result in millions of dollars in unnecessary travel costs annually. Our preliminary work found that the department has made changes to DTS requiring approval of premium-class travel by the authorizing official prior to the issuance of the airline ticket to the traveler by the CTO. Additionally, in October 2007, DOD released a Web-based management tool, which captures premium-class travel approvals and provides monthly reports related to premium-class travel to DTMO. Further, according to DOD officials, the CTO contracts include a monthly reporting requirement regarding premium-class travel. The department's actions are responsive to the intent of our recommendation. Unused airline tickets. We reported in January 2006 that DOD had not recovered millions of dollars in airline tickets that DOD travelers purchased but did not use. To address this issue, we recommended that the department consider the viability of using commercial databases to identify unused airline tickets, for which reimbursement should be obtained, and to help ensure that the actual travel taken was consistent with the information shown on the travel voucher. In its efforts to implement this recommendation, DTMO found that commercial sources could not readily identify unused airline tickets. In implementing this recommendation, DTMO officials acknowledged that the ongoing CTO initiative, which is scheduled for completion by June 2009, requires CTOs to identify and cancel an unused airline ticket 30 days after the planned trip date and then initiate the refund process. CTOs will be required to provide monthly unused airline ticket reports. DTMO officials stated that as the department negotiates new CTO contracts, this reporting requirement will be included in all new contracts. The department's actions are responsive to the intent of our recommendation. Requirements management and system testing. Our January 2006 and September 2006 reports noted problems with DTS's ability to properly display flight information and traced those problems to inadequate requirements management and system testing. Specifically, the system was not displaying all eligible flights that travelers could choose within their anticipated departure and arrival times due to inadequately defined requirements. Properly defined requirements are a key element in developing and implementing systems that meet their cost, schedule, and performance goals since requirements define the (1) functionality that is expected to be provided by the system and (2) quantitative measures by which to determine through testing whether that functionality is operating as expected. We recommended that DOD implement the processes necessary to provide reasonable assurance that requirements are properly documented and adequately tested and to simplify the display of airfares in DTS. To determine if the department acted on our three previous recommendations, we selected 90 requirements related to DTS's display of flight information for detailed review and analysis of the testing performed. We also selected an additional 119 requirements that were covered by DOD's testing process that was newly implemented in July 2007. Based upon our preliminary analysis and discussions with DTMO, PMO-DTS, and the prime contractor for the development and implementation of DTS, we found that while DTS's requirements management and testing process has improved, problems still persist. The problems were generally related to missing documentation, the limited scope of requirements testing performed, or both. For example, one requirement indicated that DTS should not allow a traveler to select flight departure or arrival dates that were outside the established itinerary trip dates. Our review of DOD's test of this requirement showed that only 3 of the 6 boundary conditions needed to fully test this requirement had been tested. Neither DOD nor its contractor could provide documentation supporting testing for the day after the traveler's departure date, the day before the arrival date, and the day after the arrival date. Based on our analysis, this requirement was not adequately tested. Another requirement indicated that if the contract carrier for the specified General Services Administration (GSA) city pair is Southwest, then DTS shall identify the available flights based on Southwest's published Y-class fares for the specified city pair. Our analysis found that the test documentation associated with this requirement only displayed the flights for GSA limited availability fares, which did not include the Southwest Y-class fares called for by the requirement. Therefore, this requirement was not adequately tested. Our review of the 119 requirements included in DOD's new testing process disclosed that the process does not fully address the problems related to weak requirements management and system testing that we identified in our prior DTS reports. For example, we found that requirements were not adequately tested. The three recommendations we made in the area remain open. The department has provided additional documentation and we are in the process of analyzing the documentation to determine the extent to which the revised requirement management and testing processes have improved. DTS underutilization. Our January 2006 and September 2006 reports noted the challenge facing the department in attaining planned DTS utilization. More specifically, as discussed in our September 2006 report, we found that while the military services have issued various memorandums that mandate the use of DTS to the fullest extent possible at those sites where DTS has been deployed, sites were still using legacy travel systems to process TDY travel. Additionally, we found that the department did not have reasonable quantitative metrics to measure and reliably report on the extent to which DTS was actually being used. As of the issuance of our September 2006 report, DTS utilization rates reported by DOD were based on the DTS Voucher Analysis Model developed in calendar year 2003 using military service data, which were not verified or validated. Furthermore, PMO-DTS officials acknowledged that the model had not been updated with actual data over the years. As a result, estimated DTS utilization reported to DOD management and the Congress was questionable. In our September 2006 report, we recommended that (1) the department develop a process by which the military services would use validated quantitative data from DTS and their individual legacy systems to identify the total universe of DTS-eligible transactions on a monthly basis and (2) these data be used to update the DTS Voucher Analysis Model to report actual DTS utilization rates. Our preliminary observations show that while the department has taken some action to implement this recommendation, DOD still does not have reasonable quantitative metrics to measure the extent of DTS utilization as its metrics continue to be based, at least in part, on estimates. DTMO officials stated that DOD no longer uses the DTS Voucher Analysis Model to report DTS utilization. Instead, in March 2007, DTMO began consolidating travel voucher processing data provided by the military services and publishing this information in the Defense Travel Enterprise Quarterly Metrics Reports. These reports include metrics for DTS fielding, DTS voucher processing, and DTS reservation module usage performance. These reports are provided to DOD management and the military services and include military service data for legacy systems and data available from DTS. The Defense Travel Enterprise Quarterly Metrics Report states that the number of TDY vouchers processed in legacy systems is an estimate because of limitations in DTMO's ability to collect these data from the legacy systems of the military services and defense agencies. Military service officials stated that they are unable to determine the number of legacy system vouchers that should have been processed by DTS (total universe of travel vouchers). As of September 30, 2008, DTS's reported voucher processing utilization rates were 73 percent for the Army, 64 percent for the Navy, and 49 percent for the Air Force. Because the department is unable to identify the total universe of travel vouchers, the estimated utilization rates may be over- or understated and the three recommendations in this area remain open. In our September 2006 report, we reported that the DTS utilization rate should be calculated by comparing actual vouchers processed in DTS to the total universe of vouchers that should be processed in DTS. The universe would exclude those travel vouchers that could not be processed through DTS, such as those related to permanent change of station or deployment travel. A key component of DOD's efforts to transform its travel process is the elimination of the department's legacy travel systems. As highlighted in the 1995 DOD Travel Reengineering Report, continued use of legacy travel systems not only diminishes the efficiency of the department's travel operations, it also results in additional costs. Our preliminary work found that the department has not yet identified and validated the number of legacy travel systems still used by the military services and the cost of operating them. Information provided by DTMO indicates that the military services are still using 23 legacy travel systems. However, information provided by the military services identified only 12 legacy travel systems-- 10 of which were included on the DTMO list. Regarding potential savings, other than budget information provided by the military services for four legacy travel systems, cost information for the other legacy travel systems was not provided. We reviewed the department's fiscal year 2009 information technology budget in an attempt to identify the universe of legacy travel systems and their associated operating and maintenance costs. However, 20 of the 23 systems on DTMO's list were not identified in the budget. Without a valid inventory of legacy travel systems, it is unlikely that DOD management or the Congress--in particular, this subcommittee--will receive reliable reports regarding when these systems are likely to be eliminated and the continuing annual cost to operate and maintain them. Furthermore, without accurate information about legacy travel systems, DOD is at risk of not fully achieving its goal of eliminating stovepiped legacy travel systems. Some legacy travel systems will be used for the foreseeable future even after DTS is deployed to all its intended locations during fiscal year 2009. For example, the Air Force has indicated that it will continue to operate and maintain the Reserve Travel System to process permanent duty travel by civilians. Similarly, the Army will continue to operate and maintain its Windows Integrated Automated Travel System for the same purpose. This functionality is not in DTS and the department does not currently have a time frame for including this functionality. Continued operation of legacy travel systems, particularly where DTS has been deployed, diminishes savings available through electronic processing of travel vouchers and related travel information. At present, it is not possible to measure the lost savings because DOD has not identified the total universe of travel vouchers that it ideally should be processing electronically, nor does DOD have accurate information about legacy travel systems currently in use. As long as the military services continue to use legacy travel systems, they will continue to rely on manual versus electronic voucher processing even at locations where DTS has been deployed. As a result, these DOD components pay DFAS higher fees to process travel vouchers. Given that the Army is DFAS's largest customer of manually processed travel vouchers, DFAS officials stated that the Army will benefit the most from the electronic voucher processing capabilities that DTS provides. DFAS provides only limited manual travel voucher processing for the Navy and the Air Force. As new functionality is added to DTS, the use of legacy travel systems should decrease, resulting in a reduction of the aggregate DFAS cost to process manual vouchers. For example, the department reported that in fiscal year 2008, the Army processed more than 1.5 million vouchers, and about 1.1 million of those vouchers were processed through DTS. However, as discussed above, both DFAS and Army officials acknowledged that they are unable to determine how many of the remaining 400,000 legacy system travel vouchers should have been processed by DTS (the total universe of travel vouchers). In addition, our preliminary work to review the reasonableness of the rates DFAS charges for electronic and manual travel voucher processing identified some calculation errors. For fiscal year 2009, DFAS estimates it will charge DOD components an average of $2.47 for travel vouchers processed electronically and $36.52 for travel vouchers processed manually. However, in reviewing the price computation, we found that DFAS allocated too much general and administrative cost to its travel voucher processing activities. DFAS personnel were unaware of the error until our review, but indicated that it was most likely a misinterpretation of the guidance. Overhauling DOD's financial management and business operations represents a daunting challenge. DTS implementation is an example of the difficulties the department faces in achieving transformation of its travel operations through implementation of best practices and a standardized travel system. With over 3.3 million military and civilian personnel as potential travel system users, at approximately 9,800 locations around the world, the sheer size and complexity of the undertaking overshadows any such project in the private sector. As we have previously reported, because each DOD component receives its own funding for the operation, maintenance, and modernization of its own systems, nonintegrated, local business systems have proliferated throughout the department. The elimination of stovepiped legacy systems and use of less expensive electronic processing, which could be achieved with the successful implementation of DTS, are critical to realizing the anticipated savings. In closing, we also would like to reiterate that following this testimony, we plan to issue a report on the status of DOD's actions on GAO's previous recommendations, which will include any further recommendations needed to improve the department's implementation of DTS and ensure its success in the future. Mr. Chairman, this concludes my prepared statement. We would be happy to answer any questions that you or other members of the subcommittee may have at this time. For further information about this testimony, please contact Asif A. Khan at (202) 512-9095 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. In addition to the above contacts, the following individuals made key contributions to this testimony: Darby Smith, Assistant Director; Evelyn Logue, Assistant Director; J. Christopher Martin, Senior-Level Technologist; F. Abe Dymond, Assistant General Counsel; Jehan Abdel-Gawad; Beatrice Alff; Margaret Mills; and John Vicari. To determine the status of our 14 recommendations to improve the Department of Defense's (DOD) travel processes and Defense Travel System (DTS) implementation, we met with representatives of the Defense Travel Management Office (DTMO) and the Program Management Office- Defense Travel System (PMO-DTS) to obtain an understanding of actions taken, under way, or planned by the department in response to our recommendations. We obtained and analyzed documentation, such as policies, procedures, and testing documentation, that supported the actions DOD has taken. More specifically, to determine the specific actions taken related to our previous recommendations on requirements management and system testing, in November 2008, we analyzed 90 requirements and reviewed relevant documentation to determine if the requirements had been tested and the result of the tests. The requirements selected for review related primarily to the display of flight information-- since that was an area of concern in our prior work. Subsequently, in January 2009, we analyzed another 119 requirements because the program's requirements management and testing practices changed in July 2007, and we wanted to verify whether the changes had been effectively implemented. We discussed the results of our requirements management and system testing analysis with representatives of the DTMO, the PMO- DTS, and the prime contractor. For some recommendations, such as the one related to premium-class travel, we obtained a demonstration of the new procedures that had been implemented and reviewed reports produced by DTS when premium-class travel was taken. Furthermore, to obtain an understanding of the actions taken to address the concerns we had reported regarding DTS utilization, we met with officials in the DTMO, PMO-DTS, and travel management representatives of the military services. To assess DOD's plans regarding the use of legacy travel systems after the DTS is fully implemented, we obtained legacy travel system inventory data from the DTMO and compared them with data obtained from military service personnel responsible for travel for their respective components to determine if there were any differences. We also obtained from the military services a listing of the legacy travel systems that will continue to operate once the DTS is deployed to all intended locations and the rationale for the continued operation of these systems. To determine the cost to operate and maintain the legacy travel systems, we requested information from the DTMO and the military services. In addition, we reviewed the department's fiscal year 2009 information technology budget request to identify the universe of legacy travel systems and their associated operating and maintenance costs. To assess the reasonableness of DOD's cost estimates for processing travel vouchers electronically versus manually, we met with Defense Finance and Accounting Service (DFAS)-Indianapolis officials to obtain an understanding of the methodology used to determine the price charged a customer to process a travel voucher. More specifically, we (1) obtained and analyzed documentation supporting the methodology used by the DFAS to compute the cost estimates for electronically and manually processing a travel voucher and (2) used our cost assessment guide as a reference to determine whether the DFAS considered all appropriate and reasonable cost elements in developing its computation of costs for processing manual and electronic travel vouchers. We conducted fieldwork from July 2008 through March 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 the preliminary findings and conclusions presented in this testimony based upon the audit objectives. We discussed the preliminary findings included in our testimony with DOD officials. After completing additional work, we plan to issue a report on the status of DOD's actions on GAO's previous recommendations, which will include any further recommendations needed to improve the department's implementation of DTS and ensure its success in the future. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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In 1995, the Department of Defense (DOD) began an effort to implement a standard departmentwide travel system--the Defense Travel System (DTS). As part of its ongoing monitoring, GAO's April 2008 testimony before this subcommittee highlighted challenges confronted by the department in its implementation efforts. GAO's testimony today is based on its current follow-up work conducted at the request of this subcommittee, as well as the Subcommittee on Readiness. GAO's testimony today focuses on the actions DOD has taken to (1) implement previous GAO recommendations regarding implementation of DTS and related travel policies, (2) phase out legacy travel systems and their associated costs, and (3) implement electronic travel voucher processing. To address these objectives, GAO (1) analyzed specific documentation, such as test documentation, travel policies, and budget data, and (2) interviewed appropriate DOD travel personnel. GAO has made 14 recommendations aimed at improving DOD's management oversight and implementation of DTS and related travel policies to make DTS the standard departmentwide travel system. GAO considers 7 of the 14 recommendations closed and the remaining 7 recommendations as being open. The 7 closed recommendations pertained to premium-class travel, unused airline tickets, use of restricted airfare, proper testing of system interfaces, and streamlining of certain travel processes, such as the process for approving travel voucher expenses. GAO's analysis of the 7 closed recommendations found that the actions taken by the department responded to the intent of the recommendations. Of the 7 open recommendations, 3 related to the adequacy of DTS's requirements management and system testing, 3 to DTS underutilization, and 1 to developing an approach that will permit the use of automated methods to reduce the need for hard copy receipts to substantiate travel expenses. In the area of requirements management and testing, GAO found that while DTS's requirements management and testing process has improved, problems still persist. The problems were generally related to missing documentation, the limited scope of requirements testing performed, or both. In the area of DTS utilization, GAO found that the department still does not have in place the metrics to determine the number of manual travel vouchers that should have been processed through DTS. Further, DOD does not have accurate and complete information on the number of legacy travel systems that are still in use by the military services. Defense Travel Management Office (DTMO) data indicates that there are 23 legacy travel systems, but military services' data identify 12--10 of which are on the DTMO list. In addition, GAO found that the department lacks visibility of the cost to operate and maintain these legacy systems. The DTMO and the military services could only provide limited cost data for each identified legacy travel system and the department's fiscal year 2009 information technology budget contained cost data for only 3 of the 23 systems on the DTMO list. According to the military services, some of the legacy systems will be needed even after DTS has been deployed to all intended locations because DTS will not include certain functionality, such as the processing of civilian permanent duty travel. Without a valid inventory of legacy travel systems, it is unlikely that DOD management or the Congress will receive reliable reports regarding when duplicative systems are likely to be eliminated and the annual savings available from avoiding the associated operating and maintenance costs. Finally, GAO found that there is a significant difference between the costs of processing a travel voucher manually and electronically. Based upon departmental data , the fee charged to process a travel voucher manually is about 15 times greater than electronic voucher processing--approximately $37 manually and $2.50 electronically. Shutting down legacy travel systems, which require manual processing, would provide cost savings to the department related to the processing of travel vouchers.
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As we have reported in the past, the impact of invasive species in the United States is widespread, and their consequences for the economy and the environment are profound. Invasive species affect people's livelihoods and pose a significant risk to industries such as agriculture, ranching, and fisheries. The cost to control invasive species and the cost of damages they inflict, or could inflict, on property and natural resources are estimated in the billions of dollars annually. For example, according to the U.S. Department of Agriculture (USDA), each year the Formosan termite causes at least $1 billion in damages and control costs in 11 states; USDA also estimates that, if not managed, fruit flies could cause more than $1.8 billion in damage each year. Invasive species continue to be introduced in new locations, with recent examples including the northern snakehead fish in Maryland, the emerald ash borer in Michigan, and the monkeypox virus in the Midwest. Invasive species may arrive unintentionally as contaminants of bulk commodities, such as food, and in packing materials, shipping containers, and ships' ballast water. Ballast water is considered a major pathway for the transfer of aquatic invasive species. Ballast is essential to the safe operation of ships because it enables them to maintain their stability and control how high or low they ride in the water. Ships take on or discharge ballast water over the course of a voyage to counteract the effects of loading or unloading cargo, and in response to sea conditions. The ballast that ships pump aboard in ports and harbors may be fresh, brackish, or salt water. These waters could potentially contain various organisms that could then be carried to other ports around the world where they might be discharged, survive, and become invasive. Other invasive species may be introduced intentionally; kudzu, for example--a rapidly growing invasive vine that thrives in the southeastern United States--was intentionally introduced from Japan as an ornamental plant and was used by USDA in the 1930s to control soil erosion. Federal agencies implement a variety of invasive species-related programs and activities pursuant to their specific missions and responsibilities. USDA, for example, spends significant resources on prevention and control activities for invasive species that harm agricultural and forest products. USDA is also responsible for preventing infectious diseases, some of which are considered invasive, from spreading among livestock. States also play a major role in addressing invasive species, either through their own programs or through collaboration with or funding from federal programs. Such programs and the amount of resources expended on them vary considerably among the states. In response to concerns that we were losing the battle against invasive species, President Clinton signed Executive Order 13112 in February 1999 to prevent the introduction of invasive species; provide for their control; and minimize their economic, environmental, and human health impacts. The executive order established the National Invasive Species Council, which is now composed of the heads of 11 federal departments and agencies, to provide national leadership on invasive species and to ensure that federal efforts are coordinated and effective, among other things. The executive order also required the Secretary of the Interior to establish a federal advisory committee to provide information and advice to the Council. To achieve the goals of the executive order, the Council was to develop a national management plan that would serve as the blueprint for federal action on invasive species. S. 525, if enacted, would call on the Council to carry out several other activities such as implementing a strategy to share information collected under the proposed legislation and to develop a program for educating the public about certain pathways for invasive species; it would also authorize funds for the Council to carry out these activities. The National Invasive Species Council's management plan, Meeting the Invasive Species Challenge, issued in January 2001, calls for actions that are likely to help control invasive species, such as issuing additional regulations to further reduce the risk of species introductions via solid wood packing material, developing methods to determine rapid response measures that are most appropriate for specific situations, and devoting additional resources to strengthening inspection services at ports of entry. However, as we observed in our October 2002 report, the plan lacks a clear long-term goal and quantifiable performance criteria against which to evaluate its overall success. For example, the plan does not contain performance-oriented goals and objectives, such as reducing the introduction of new species by a certain percentage or reducing the spread of established species by a specified amount. Instead, the plan contains an extensive list of actions that, while likely to contribute to preventing and controlling invasive species, are not clearly part of a comprehensive strategy. Similarly, many of the actions in the plan call for federal agencies to take certain steps rather than to achieve specific results and do not have measurable outcomes. For example, the plan calls for the Council to work with relevant organizations to "expand opportunities to share information, technologies, and technical capacity on the control and management of invasive species with other countries." The plan also calls for the Council to support international conferences and seminars. These types of actions are more process-oriented than outcome-oriented; taken individually, the actions may be useful, but judging whether they are successful and have contributed to an overall goal, will be difficult. Federal officials involved in developing the plan told us that they recognize that it has deficiencies and are working on improvements. The Council acknowledged in the plan itself that many of the details of the actions called for would require further development in the implementation phase. The executive director of the Council staff told us that, in her opinion, given the scope of this first-time effort, it would have been unrealistic and difficult to agree on specific measurable goals. She also said that, in many areas, the federal government does not have the data on invasive species conditions needed to set long-term goals and develop better performance measures. She said that many of the actions called for in the management plan are designed to help develop needed data but pointed out that doing so for some aspects of invasive species management will be difficult given the comprehensive data needed. The management plan also called for the Council to establish a transparent oversight mechanism by April 2001 to report on implementation of the plan and compliance with the executive order. This mechanism, however, is just now being set in place. Without this mechanism, the only available measure that could have be used to assess overall progress in implementing the plan was the percentage of planned actions that were completed by the dates set in the plan. By this measure, implementation has been slow. Specifically, federal agencies had completed less than 20 percent of the 65 actions that were called for by September 2002. Council agencies had started work on over 60 percent of the remaining planned actions, however, including some that have a due date beyond September 2002. Several actions in the plan that were completed on time related to the development of the Council's Web site, which is found at www.invasivespecies.gov. In addition, the National Oceanic and Atmospheric Administration, the Coast Guard, the Department of the Interior, and the Environmental Protection Agency (EPA) had sponsored research related to ballast water management. Nevertheless, a vast majority of the members of the Invasive Species Advisory Committee, which we surveyed for our October 2002 report, said that the Council was making inadequate or very inadequate progress. We found several reasons for the slow progress in implementing the plan. First, delays occurred in establishing the teams of federal and nonfederal stakeholders that were intended to guide implementation of various parts of the plan. Second, our review of agencies' performance plans (prepared pursuant to the Government Performance and Results Act) indicated that while some agencies' plans described efforts taken to address invasive species under their own specific programs, none of the plans specifically identified implementing actions called for by the plan as a performance measure. Some stakeholders expressed the view that the low priority given to implementing the plan and associated limited progress may be due to the fact that the Council and plan were created by executive order, and thus do not receive the same priority as programs that are legislatively mandated. Finally, we also noted a lack of funding and staff specifically devoted to implementing the plan. To address these shortcomings, we recommended that the Council co- chairs (the Secretaries of Agriculture, Commerce, and the Interior) ensure that the updated management plan contains performance-oriented goals and objectives and specific measures of success and give high priority to establishing a transparent oversight mechanism for use by federal agencies complying with the executive order and reporting on implementation of the management plan. We also recommended that all member agencies of the National Invasive Species Council with assigned actions in the current management plan recognize their responsibilities in either their departmental or agency-level annual performance plans. The agencies generally agreed with our recommendations. Since we issued our report, the Council made significant progress on its first crosscutting budget--one of the planned actions in the management plan that should help to develop performance measures and promote better coordination of actions among agencies. The Office of Management and Budget is currently reviewing the Council's proposal for the fiscal year 2004 budget cycle. In addition, according to Council staff, the oversight mechanism should be finalized in July 2003, and the first revision to the management plan should be finalized later this summer. According to experts and agency officials we consulted, current efforts by the United States are not adequate to prevent the introduction of aquatic invasive species into the Great Lakes via ballast water of ships, and they need to be improved. Since 1993, federal regulations have required vessels entering the Great Lakes from outside the Exclusive Economic Zone--a zone extending 200 nautical miles from the shore--to exchange their ballast water in the open ocean (that is, water deeper than 2,000 meters) before entering the zone. Exchanging ballast water before arriving in the Great Lakes is intended to serve two purposes: to flush aquatic species taken on in foreign ports from the ballast tanks and to kill with salt water any remaining organisms that happen to require fresh or brackish water. If a ship bound for the Great Lakes has not exchanged its ballast water in the open ocean it must hold the ballast in its tanks for the duration of the voyage through the lakes or conduct an exchange in a different approved location. Data from the Coast Guard show that the percentage of ships entering the Great Lakes after exchanging their ballast water has steadily increased since the regulations took effect in 1993 and averaged over 93 percent from 1998 through 2001. Despite this, numerous aquatic invasive species have entered the Great Lakes via ballast water and have established populations since the regulations were promulgated. Experts have cited several reasons for the continued introductions of aquatic invasive species into the Great Lakes despite the ballast water regulations. In particular, the Coast Guard's ballast water exchange regulations do not apply to ships with little or no pumpable ballast water in their tanks, which account for approximately 70 percent of ships entering the Great Lakes from 1999 through 2001. These ships, however, may still have thousands of gallons of residual ballast and sediment in their tanks that could harbor potentially invasive organisms from previous ports of call and then be discharged to the Great Lakes during subsequent ballast discharges. There are also concerns that open-ocean ballast water exchange is not an effective method of removing all potentially invasive organisms from a ship's ballast tank. Federal officials believe that they should do more to develop treatment standards and technologies to protect the Great Lakes from ballast water discharges. The Coast Guard is now working to develop new regulations that would include a performance standard for ballast water--that is, a measurement of how "clean" ballast water should be before discharge within U.S. waters. The Coast Guard is expecting to have a final rule ready for interdepartmental review by the fall of 2004 that will contain ballast water treatment goals and a standard that would apply not only to ships entering the Great Lakes but to all ships entering U.S. ports from outside the Exclusive Economic Zone. Once the Coast Guard sets a performance standard, firms and other entities will be able to use this as a goal as they develop ballast water treatment technologies. While several technologies are being investigated, such as filtration and using physical biocides such as ultraviolet radiation and heat treatment, a major hurdle to be overcome in developing technological solutions is how to treat large volumes of water being pumped at very high flow rates. In addition, small container vessels and cruise ships, which carry a smaller volume of ballast water, may require different technologies than larger container vessels. As a result, it is likely that no single technology will address the problem adequately. Consequently, it could be many years before the world's commercial fleet is equipped with effective treatment technologies. Without more effective ballast water standards, the continued introduction of aquatic invasive species into the Great Lakes and other aquatic systems around the country is likely to cause potentially significant economic and ecological impacts. We reported in October 2002 that the Coast Guard and the Department of Transportation's Maritime Administration are developing programs to facilitate technology development. In addition, the National Oceanic and Atmospheric Administration and the U.S. Fish and Wildlife Service have funded 20 ballast water technology demonstration projects at a total cost of $3.5 million since 1998 under a research program authorized under the National Invasive Species Act. Other programs also support research, and the Maritime Administration expects to make available several ships of its Ready Reserve Force Fleet to act as test platforms for ballast water technology demonstration projects. Once effective technologies are developed, another hurdle will be installing the technologies on the world fleet. New ships can be designed to incorporate a treatment system, but existing ships were not designed to carry ballast water technologies and may have to go through an expensive retrofitting process. With each passing year without an effective technology, every new ship put into service is one more that may need to be retrofitted in the future. Public and private interests in the Great Lakes have expressed dissatisfaction with the progress in developing a solution to the problem of aquatic invasive species introduced through ballast water. An industry representative told us that she and other stakeholders were frustrated with the slow progress being made by the Coast Guard in developing a treatment standard. More broadly, in the absence of stricter federal standards for ballast water, several Great Lakes states have considered adopting legislation that would be more stringent than current federal regulations. In addition, in a July 6, 2001, letter to the U.S. Secretary of State and the Canadian Minster of Foreign Affairs, the International Joint Commission and the Great Lakes Fishery Commission stated their belief that the two governments were not adequately protecting the Great Lakes from further introductions of aquatic invasive species. They also noted a growing sense of frustration within all levels of government, the public, academia, industry, and environmental groups throughout the Great Lakes basin and a consensus that the ballast water issue must be addressed now. The two commissions believe that the reauthorization of the National Invasive Species Act is a clear opportunity to provide funding for research aimed at developing binational ballast water standards. S. 525 sets forth a more aggressive program against the introduction of aquatic invasive species through ballast water and related pathways. In particular, it would require ballast water standards for ships in all waters of the U.S., instead of the current voluntary program for waters outside of the Great Lakes. It also specifically authorizes significantly more funding in the form of grants to states, and federal funding and grants for research, including research on pathways, likely aquatic invaders, and development of cost-effective control methods. Now let me turn to our most recent work gathering state perspectives on invasive species legislation and management. State officials who responded to our survey identified several gaps in, or problems with, existing federal legislation on aquatic and terrestrial invasive species, as well as other barriers to their efforts to manage invasive species. According to our new work, the lack of legal requirements for controlling already-established or widespread invasive species was the gap in existing legislation on aquatic and terrestrial species most frequently identified by state officials. Specifically, they said that this is a problem for species that do not affect a specific commodity or when a species is not on a federal list of recognized invasives. Officials noted that if there is no federal requirement, there is often little money available to combat a species and that a legal requirement would raise the priority for responding to it. For example, one state official complained about the lack of authority to control Eurasian ruffe, an invasive fish that has spread through several Great Lakes and causes great harm to native fisheries. He compared this to the authorities available to control the sea lamprey, which has a mandated control program that is funded by the U.S. and Canada. In addition, some state officials said that in the absence of federal requirements, differences among state laws and priorities also pose problems for addressing established species, for example, when one state may regulate or take actions to control a species and an adjacent state does not. Some state officials noted that they have little authority to control or monitor some species and that getting laws or regulations for specific species, such as those for the sea lamprey, takes time. Many state officials also identified ineffective federal standards for ballast water as a problem for addressing invasive species. Specifically, some state officials complained that standards and treatment technologies, regulations, compliance with reporting requirements, and penalties for noncompliance are lacking and say that research and legislation are needed to address the problem. As we reported in October 2002, federal regulations for ballast water are not effective at preventing invasive species from entering our waters and are only required for ships entering the Great Lakes. Some state officials also said that federal leadership is essential to fund efforts in these areas and to provide coordination among states. As I have already noted, S. 525 would authorize a more aggressive program for developing standards and technologies for regulating ballast water. Although some state officials believe solving the ballast water problem is possible, some officials pointed to difficulties in doing so with some methods. Specifically, these officials noted that some environmentalists are opposed to chemical treatments, while industry groups have objected to the cost of some technologies. S. 525 would revise the definition of "environmentally sound" (as in environmentally sound control measures) to delete the emphasis on nonchemical measures. State officials reported that inadequate federal funding for state efforts was the key barrier to addressing invasive species--both aquatic and terrestrial. In particular, state officials were concerned about having sufficient funds to create management plans for addressing invasive species, particularly as more states begin to develop plans, and for inspection and enforcement activities. State officials also identified the need for additional funds to conduct monitoring and detection programs, research, and staffing. In particular, some state officials noted that uncertainty in obtaining grant funds from year to year makes it difficult to manage programs, especially when funding staff positions relies on grants. S. 525 would specifically authorize significantly more funding in grants to address invasive species than is specifically authorized under the current legislation. Many state officials also identified a lack of public education and outreach as a barrier to managing terrestrial invasive species. Public education and outreach activities are important components of the battle against invasive species, as many invasives have been introduced through the activities of individuals, such as recreational boating, and the pet, live seafood, and plant and horticultural trades. For example, the outbreak of the monkeypox virus that has sickened at least 80 people in the Midwest is thought to have spread from a Gambian rat imported from Africa to be sold as a pet. S. 525 includes efforts intended to provide better outreach and education to industry, including the horticulture, aquarium, aquaculture, and pet trades, and to recreational boaters and marina operators, about invasive species and steps to take to reduce their spread. State officials identified a lack of cost-effective control measures as a key barrier to addressing aquatic invasive species. Some officials commented that there is a need for more species-specific research to identify effective measures. For example, one successful control effort--the sea lamprey control program--costs about $15 million per year. However, similar control programs for all invasive species would be problematic and officials told us that targeted research on control methods is needed, particularly for aquatic invasive species. S. 525 would authorize a grant program for research, development, demonstration, and verification of environmentally sound, cost-effective technologies and methods to control and eradicate aquatic invasive species. State officials' opinions varied on the preferred leadership structure for managing invasive species and whether to integrate legislative authority on invasive species. Many state officials indicated that specifically authorizing the National Invasive Species Council would be an effective management option and favored integrated authority, but in both cases, the margins were relatively small. Currently, no single agency oversees the federal invasive species effort. Instead, the National Invasive Species Council, which was created by executive order and is composed of the heads of 11 federal departments and agencies, is intended to coordinate federal actions addressing the problem. State officials most often identified specifically authorizing the Council in legislation as an effective leadership structure for managing invasive species. Almost all of the Invasive Species Advisory Committee members that responded to our survey agreed with this approach. During our work for our October 2002 report, the executive director of the Council noted that legislative authority for the Council, depending on how it was structured, could be useful in implementing the national management plan for invasive species by giving the Council more authority and, presumably, authorizing more resources. Officials from USDA, the Department of Defense, and EPA also told us that legislative authority, if properly written, would make it easier for Council agencies to implement the management plan, as implementing actions under the executive order are perceived to be lower in priority than are programs that have been legislatively mandated. Many state officials, however, also believed that keeping the current Council authority as established by executive order is an effective option. As you know, federal authorities for addressing invasive species are scattered across a patchwork of laws under which aquatic and terrestrial species are treated separately. Questions have been raised about whether this is the most effective and efficient approach and whether the federal government's ability to manage invasive species would be strengthened if integrated legal authority addressed both types of invasives. Some believe such an approach would provide for more flexibility in addressing invasive species; others are concerned that such an approach would disrupt existing programs that are working well. On the basis of the responses from state officials, no clear consensus exists on whether legislative authority for addressing aquatic and terrestrial invasive species should be integrated. Overall, state officials were in favor of integrating legislative authority, but the margin was relatively small. Differences were more distinct, however, when we considered the state officials' expertise. Specifically, we asked officials whether they considered themselves experts or knowledgeable in aquatic invasive species, terrestrials, or both. A large majority of the state officials who identified themselves as having expertise solely in aquatic invasive species were against integrating aquatic and terrestrial authority. The terrestrial experts were also against integrated authority, but with a smaller majority. These positions contrast with those of the state officials who said they were experts or knowledgeable in both aquatic and terrestrial invasives; these officials favored integrated authority by a large majority. About twice as many members of the Invasive Species Advisory Committee who responded to our survey favored integrating legislation on aquatic and terrestrial invasive species compared to those who did not. Regarding the drawbacks of integrating authority for aquatic and terrestrial invasive species, many state officials said that it could be difficult to address all possible situations with invasive species and some species or pathways may get overlooked, and were concerned that it may reduce state flexibility implementing invasive species programs. Some state officials said that the two types of invasives should be handled separately, since the ecological complexities of aquatics and terrestrials are very different--different pathways of entry and spread, and different requirements for control methods and expertise. In addition, some officials stated that combining legislative authority would result in competition among various invasive species programs for scarce resources. In particular, one official referred to the "issue of the moment" phenomenon, where a specific invasive species becomes the focus of great public attention and receives a large share of resources, while many other species may get very few resources. On the other hand, many state officials saw an increased focus on pathways for invasive species--as opposed to on specific species--as a possible benefit of integrating authority for aquatic and terrestrial invasive species. Such an approach could facilitate more effective and efficient efforts to address invasive species. Many state officials also believed that integration of legislative authority could result in increased coordination between federal agencies and states. Some state officials described the efforts needed to address invasives as requiring broad, interdisciplinary coordination and characterized the current federal effort as fragmented and ineffective. In addition, some state officials said that the classification of species into aquatic or terrestrial types might not be clear-cut and that the current separation between them is "an artificial federal construct," citing, for example, the difficulty of classifying amphibians. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions that you or Members of the Subcommittee may have. For further information about this testimony, please contact me at (202) 512-3841. Mark Bondo, Mark Braza, Kate Cardamone, Curtis Groves, Trish McClure, Judy Pagano, Ilga Semeiks, and Amy Webbink also made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Invasive species--nonnative plants and animals--have caused billions of dollars in damage to natural areas, businesses, and consumers. In 2001, the federal government issued a National Management Plan to coordinate a national control effort involving the 20 or so federal agencies that are responsible for managing invasive species. In October 2002, GAO reported on the implementation of the management plan and efforts to manage ballast water, among other things. This testimony discusses some of GAO's findings and recommendations in that report. It also presents the results of a subsequent GAO survey of state officials responsible for managing terrestrial and aquatic invasive species. This survey sought state perspectives on (1) the perceived gaps in existing legislation and barriers to addressing terrestrial and aquatic invasive species and (2) the federal leadership structure for addressing invasive species, as well as the integration of federal legislation on terrestrial invasive species with legislation on aquatic invasives. In 2002, GAO reported that while the National Management Plan calls for many actions that are likely to contribute to preventing and controlling invasive species in the United States, it does not clearly articulate specific long-term goals toward which the government should strive. For example, it is not clear how implementing the actions in the plan will move national efforts toward outcomes such as reducing new invasive species by a specific number or reducing the spread of established species by a specific amount. Moreover, GAO found that the federal government had made little progress in implementing many of the actions called for by the plan. Reasons for the slow progress included delays in establishing teams to be responsible for guiding implementation of the planned actions, the low priority given to implementation by the National Invasive Species Council and federal agencies, and the lack of funding and staff responsible for doing the work. In addition, GAO reported that current federal efforts are not adequate to prevent the introduction of invasive species into the Great Lakes via the ballast water of ships. Although federal officials believe more should be done to protect the Great Lakes from ballast water discharges, their plans for doing so depend on the development of standards and technologies that will take many years. More recently, state officials who responded to GAO's survey, identified a number of gaps in, or problems with, existing legislation addressing invasive species and other barriers to managing invasives. Many state officials identified a lack of legal requirements for controlling invasive species that are already established or widespread as a key gap in legislation addressing both aquatic and terrestrial invasive species. State officials also often recognized ineffective standards for ballast water as a major problem in aquatics legislation. Regarding barriers to managing invasive species, state officials identified a lack of federal funding for state invasive species efforts, public education and outreach, and cost-effective control measures as major problems. State officials' opinions varied on the preferred leadership structure for managing invasive species and whether to integrate legislative authority on invasive species. Many officials indicated that specifically authorizing the National Invasive Species Council would be an effective management option and favored integrated authority, but in both cases, the margins were relatively small. State officials indicated that the possible benefits of integrated legislation would be increased coordination between federal agencies and states and an increased focus on invasive species pathways, as opposed to focusing on individual species. The possible drawbacks identified included concerns that a single piece of legislation would not be able to address all possible situations dealing with invasive species and might reduce state flexibility in addressing invasives.
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Federal agencies and our nation's critical infrastructures--such as energy, transportation systems, communications, and financial services-- are dependent on computerized (cyber) information systems and electronic data to carry out operations and to process, maintain, and report essential information. The information systems and networks that support federal operations are highly complex and dynamic, technologically diverse, and often geographically dispersed. This complexity increases the difficulty in identifying, managing, and protecting the myriad of operating systems, applications, and devices comprising the systems and networks. The security of federal information systems and data is vital to public confidence and the nation's safety, prosperity, and well-being. However, systems used by federal agencies are often riddled with security vulnerabilities--both known and unknown. For example, the national vulnerability database maintained by the National Institute of Standards and Technology (NIST) identified 82,384 publicly known cybersecurity vulnerabilities and exposures as of February 9, 2017, with more being added each day. Federal systems and networks are also often interconnected with other internal and external systems and networks, including the Internet, thereby increasing the number of avenues of attack and expanding their attack surface. In addition, cyber threats to systems supporting the federal government and critical infrastructure are evolving and becoming more sophisticated. These threats come from a variety of sources and vary in terms of the types and capabilities of the actors, their willingness to act, and their motives. For example, foreign nations--where adversaries possess sophisticated levels of expertise and significant resources to pursue their objectives--pose increasing risks. Cybersecurity professionals can help to prevent or mitigate the vulnerabilities that could allow malicious individuals and groups access to federal IT systems. The ability to secure federal systems depends on the knowledge, skills, and abilities of the federal and contractor workforce that uses, implements, secures, and maintains these systems. This includes federal and contractor employees who use the IT systems in the course of their work as well as the designers, developers, programmers, and administrators of the programs and systems. However, the Office of Management and Budget (OMB) has noted that the federal government and private industry face a persistent shortage of cybersecurity and IT talent to implement and oversee information security protections to combat cyber threats. In addition, the RAND Corporation and the Partnership for Public Service have reported that there is a nationwide shortage of cybersecurity experts, in particular in the federal government. According to these reports, this shortage of cybersecurity professionals makes securing the nation's networks more challenging and may leave federal IT systems vulnerable to malicious attacks. We and others have identified a number of key challenges federal agencies are facing to ensure that they have a sufficient cybersecurity workforce with the skills necessary to protect their information and networks from cyber threats. These challenges pertain to identifying and closing skill gaps as part of a comprehensive workforce planning process, recruiting and retaining qualified staff, and navigating the federal hiring process. A high-performance organization needs a workforce with talent, multidisciplinary knowledge, and up-to-date skills in order to achieve its mission. To ensure such a workforce for cybersecurity, we have identified key practices for strategic IT workforce planning that focus especially on the need for organizations to identify and address gaps in critical skills. These practices include (1) setting the strategic direction for IT workforce planning, (2) analyzing the workforce to identify skill gaps, (3) developing strategies and implementing activities to address these gaps, and (4) monitoring and reporting progress in addressing gaps. However, over the last several years, we and others have reported on federal agencies' challenges to define their cybersecurity workforces and address their IT skills gaps. For example: In November 2011, we reported that eight federal agencies had identified challenges in their workforce planning efforts. For example, they were not able to determine the size of their cybersecurity workforce because of variations in how the cyber-related work was defined and the lack of a cybersecurity specific occupational series. In addition, we noted that the eight agencies had taken varied steps to implement workforce planning practices for cybersecurity personnel. For example, five of the eight agencies had established cybersecurity workforce plans or other agency-wide activities addressing cybersecurity workforce planning. However, these plans did not always include strategies for addressing gaps in critical skills or competencies, among other things. To address these shortcomings, we made six recommendations to enhance individual agency workforce planning activities. Of the six agencies to which we made individual recommendations, five agreed and one neither agreed nor disagreed with our recommendations. Since our report was issued, the agencies have implemented most of these recommendations. In January 2015, we reported that the Office of Personnel Management (OPM) and a Chief Human Capital Officers Council working group had identified skills gaps in government-wide, mission- critical occupations, including cybersecurity. We noted that, although these initial efforts had created an infrastructure for addressing skills gaps, overall progress was mixed. At times, goals had targets that were difficult to measure. Likewise, agency officials chose to track metrics that often did not allow for an accurate assessment of progress made toward these goals for closing skills gaps. In addition, OPM had not established time frames or a process for collecting government-wide staffing and competency data to help agencies determine the competencies that are critical to successfully achieving their mission. We pointed out that OPM and selected agencies could improve efforts to address skills gaps by strengthening their use of quarterly data-driven reviews (known as HRstats). Based on these findings, we recommended that OPM (1) strengthen its methodology for identifying and addressing skills gaps, (2) establish a schedule and process for collecting government-wide staffing and competency data, and (3) develop a set of metrics for agency HRstat reviews. OPM generally concurred with the first and third recommendations, but did not concur with the second recommendation, citing funding constraints. These recommendations have not yet been implemented. In an April 2015 report, the Partnership for Public Service noted a continuing need for the government to develop an understanding of the size and skills of the current cybersecurity workforce; project the government's future cybersecurity human capital needs; assess qualitative and quantitative gaps between the current workforce and the workforce needed to address future challenges; and develop strategies, as well as program and policy goals, designed to close those gaps. The Partnership attributed these challenges to the lack of a government-wide master cybersecurity workforce strategy, leaving agencies to operate largely on their own under a haphazard system. In November 2016, we reported that five selected agencies had made mixed progress in assessing their IT skill gaps. These agencies had started focusing on identifying cybersecurity staffing gaps, but more work remained in assessing competency gaps and in broadening the focus to include the entire IT community. For example, four of the five agencies had not demonstrated an established IT workforce planning process, which would assist them in identifying and addressing skill gaps. In several cases, these shortcomings were due to a lack of comprehensive policies and procedures for assessing workforce needs. We recommended that the agencies take steps to fully implement IT workforce planning practices. The agencies agreed or partially agreed with our recommendations; however, the recommendations have not yet been implemented. An effective hiring process meets the needs of agencies and managers by filling positions with quality employees through the use of a timely, efficient, and transparent process. To recruit and retain personnel with the critical skills needed to accomplish their missions, federal agencies can offer incentives, such as recruitment, relocation, and retention incentive payments; student loan repayments; annual leave enhancements; and scholarships. Agencies can also use training and development opportunities as an incentive to help recruit and retain employees. However, we and others have found that agencies have faced persistent challenges in recruiting and retaining well-qualified cybersecurity talent: In November 2011, we reported that the quality of cybersecurity training and development programs varied significantly across the eight agencies in our review. Additionally, most of the eight agencies in our review said they used some incentives to support their cybersecurity workforce; however, they either had not evaluated or had difficulty evaluating whether incentives effectively support hiring and retaining highly skilled personnel in hard-to-fill positions. We also found that, although OPM had planned to develop guidance and tools to assist agencies in the administration and oversight of their incentive programs, it had not yet done so. To address this shortcoming, we recommended that OPM finalize and issue guidance to agencies on how to track the use and effectiveness of incentives for hard-to-fill positions, including cybersecurity positions; OPM has since implemented this recommendation. In August 2016, we reported the results of our review of the current authorities of agency chief information security officers (CISO). Among other things, CISOs identified key challenges they faced in fulfilling their responsibilities. Several of these challenges related to the cybersecurity workforce, such as not having enough personnel to oversee the implementation of the number and scope of security requirements. In addition, CISOs stated that they were not able to offer salaries that were competitive with the private sector for candidates with high-demand technical skills. Furthermore, CISOs said that some security personnel lacked security skills or were not sufficiently trained. Others have also noted the challenge of hiring and retaining qualified cybersecurity professionals. For example, the April 2015 Partnership for Public Service report highlighted obstacles to federal recruitment of cybersecurity talent, including the inability of the government to offer salaries competitive with those in the private sector. In addition, according to a January 2017 report from the federal CIO Council, chief information officers (CIO) reported that it is difficult for agencies to offer well-qualified candidates a salary that is competitive with the private sector. This salary issue in turn can create problems in retaining talented government employees. OMB has also identified additional potential issues, such as job candidates' concern that a private sector position may give them more autonomy and a more flexible work culture than a federal information security position. We have previously reported that the federal hiring process all too often does not meet the needs of (1) agencies in achieving their missions; (2) managers in filling positions with the right talent; and (3) applicants for a timely, efficient, transparent, and merit-based process. In short, we noted that the federal hiring process is often an impediment to the very customers it is designed to serve in that it makes it difficult for agencies and managers to obtain the right people with the right skills, and applicants can be dissuaded from public service because of the complex and lengthy procedures. As we and others have reported, the federal hiring process can pose obstacles to the efficient and effective hiring of cybersecurity talent: The Partnership for Public Service reported in 2015 that the government loses top candidates to a slow and ineffective hiring process characterized by "self-inflicted" process delays and outdated assessment methods. The CIO Council also reported in January 2017 that CIOs were often frustrated with the federal hiring process. Its report noted that the hiring process for federal agencies often takes significantly longer than in the private sector and that selection officials with limited cybersecurity expertise may misevaluate candidates' capabilities, leading to under-qualified candidates advancing ahead of well-qualified ones. In August 2016, we issued a report on the extent to which federal hiring authorities were meeting agency needs. Although competitive hiring has been the traditional method of hiring, agencies can use additional hiring authorities to expedite the hiring process or achieve certain public policy goals. Among other things, we noted that agencies rely on a relatively small number of hiring authorities (as established by law, executive order, or regulation) to fill the vast majority of hires into the federal civil service. Further, while OPM collects a variety of data to assess the federal hiring process, neither it nor agencies used this information to assess the effectiveness of hiring authorities. Conducting such assessments would be a critical first step in making more strategic use of the available hiring authorities to more effectively meet their hiring needs. We recommended that OPM work with agencies to determine the extent to which hiring authorities were meeting agency needs and use this information to refine, eliminate, or expand authorities as needed. OPM generally concurred with these recommendations but has not yet implemented them. As noted previously, we have identified both information security and strategic human capital management as government-wide high-risk areas. To address these high-risk areas, agencies need to take focused, concerted action, including implementing our outstanding recommendations, which can help mitigate the challenges associated with developing an effective cybersecurity workforce. This will help ensure that the federal government has a capable cybersecurity workforce with the necessary knowledge, skills, and competencies for carrying out its mission. Based on a review of our previous work, we identified a number of ongoing efforts to improve the cybersecurity workforce. The executive branch, Congress, and federal agencies have recognized the need for, and taken actions aimed at achieving, an effective federal cybersecurity workforce. Specifically, executive branch organizations have initiatives under way to help government agencies address workforce-related challenges; Congress passed legislation intended to improve workforce planning and hiring; and federal agencies have instituted other ongoing activities that may assist the federal government in enhancing its cybersecurity workforce. A number of executive branch initiatives have been undertaken over the last several years intended to improve the federal cybersecurity workforce. They include the following, among others: The National Initiative for Cybersecurity Education (NICE): This initiative, which began in March 2010, is a partnership between government, academia, and the private sector that is coordinated by NIST to help improve cybersecurity education, including efforts directed at training, public awareness, and the federal cybersecurity workforce. The mission of NICE is to energize and promote a robust network and an ecosystem of cybersecurity education, training, and workforce development. NICE fulfills this mission by coordinating with government, academic, and industry partners to build on existing successful programs, facilitate change and innovation, and bring leadership and vision to increase the number of skilled cybersecurity professionals helping to keep our nation secure. National Cybersecurity Workforce Framework: In April 2013, NICE published a national cybersecurity workforce framework, which was intended to provide a consistent way to define and describe cybersecurity work at any public or private organization, including federal agencies. The framework defined 31 cybersecurity-related specialty areas that were organized into seven categories: (1) securely provision, (2) operate and maintain, (3) protect and defend, (4) investigate, (5) collect and operate, (6) analyze, and (7) oversight and development. In November 2016, NIST issued a draft revision to the framework. Among other things, the revised framework defines work roles within each specialty area and also describes cybersecurity tasks for each work role and the knowledge, skills, and abilities demonstrated by a person whose cybersecurity position includes each work role. The revised framework is intended to enable agencies to examine specific IT, cybersecurity, and cyber-related work roles, and identify personnel skills gaps, rather than merely examining the number of vacancies by job series. OMB Cybersecurity Strategy and Implementation Plan: In October 2015, OMB issued its Cybersecurity Strategy and Implementation Plan (CSIP) for the Federal Civilian Government to present the results of a comprehensive review of the federal government's cybersecurity (known as the "Cybersecurity Sprint"). According to the CSIP, the Cybersecurity Sprint identified two key observations related to the federal cybersecurity workforce: (1) the vast majority of federal agencies cited a lack of cyber and IT talent as a major resource constraint that impacted their ability to protect information and assets; and (2) there were a number of existing federal initiatives to address this challenge, but implementation and awareness of these programs was inconsistent. To address these challenges, among other things, the CSIP tasked OPM to provide agencies with information on a number of hiring, pay, and leave flexibilities to help recruit and retain individuals in cybersecurity positions, and called for OMB and OPM to publish a cybersecurity human resources strategy and identify possible actions to help the federal government recruit, develop, and maintain a pipeline of cybersecurity talent. Cybersecurity National Action Plan: Announced by the White House in February 2016, the Cybersecurity National Action Plan was intended to build on the CSIP activities while calling for innovation and investments in cybersecurity education and training to strengthen the talent pipeline. As part of this plan, the fiscal year 2017 President's Budget proposed investing $62 million to, among other things, expand the CyberCorps Scholarship for Service program to include a CyberCorps Reserve program offering scholarships for americans who wish to gain cybersecurity education and serve their country in the civilian federal government; develop a cybersecurity core curriculum for academic institutions; and strengthen the National Centers for Academic Excellence in Cybersecurity Program to increase the number of participating academic institutions and expand cybersecurity education across the nation. These initiatives were intended to help the federal government recruit and retain cybersecurity talent with the technical skills, policy expertise, and leadership abilities necessary to secure federal assets and networks well into the future. Federal Cybersecurity Workforce Strategy: As called for by the CSIP, OMB and OPM issued the Federal Cybersecurity Workforce Strategy in July 2016, detailing government-wide actions to identify, expand, recruit, develop, retain, and sustain a capable and competent workforce in key functional areas to address complex and ever- evolving cyber threats. The strategy identified a number of key actions within four broad goals to address cybersecurity workforce challenges. Table 1 describes the goals of the strategy and associated activities. According to OMB's 2016 report on agency implementation of the Federal Information Security Modernization Act of 2014 (FISMA), agencies had made progress in implementing this strategy to address workforce shortages. Specifically, OMB reported that agencies hired over 7,500 cybersecurity and IT employees in 2016; by comparison, federal agencies hired 5,100 cybersecurity and IT employees in 2015. These executive branch initiatives include many actions that could help address the challenges of identifying and closing skill gaps, recruiting and retaining staff, and navigating the federal hiring process. While responsible agencies have begun to take action on many of these items, it will be important to continue this momentum if these efforts are to be effectively implemented and foster a significant improvement in the federal cybersecurity workforce. In addition to the aforementioned executive-level initiatives, several recently enacted federal laws include provisions aimed at improving the federal cybersecurity workforce. For example: The Cybersecurity Enhancement Act of 2014 includes provisions intended to address challenges related to recruiting and hiring. Specifically, the law requires the Department of Commerce, National Science Foundation (NSF), and DHS, in consultation with OPM, to support competitions and challenges to identify, develop, and recruit talented individuals to perform duties relating to the security of information technology in federal, state, local, and tribal government agencies, and the private sector. The law also calls for NSF, in coordination with OPM and DHS, to continue a federal cyber scholarship-for-service program to recruit and train the next generation of information technology professionals, industrial control system security professionals, and security managers to meet the needs of the cybersecurity mission for federal, state, local, and tribal governments. The Border Patrol Agent Pay Reform Act of 2014 includes provisions intended to improve recruiting and hiring of cybersecurity staff at DHS. Specifically, the law authorizes the Secretary of Homeland Security to establish, as positions in the excepted service, such positions in DHS as the Secretary determines to be necessary to carry out certain responsibilities relating to cybersecurity. The Homeland Security Cybersecurity Workforce Assessment Act (2014) requires DHS to take certain actions related to cybersecurity workforce planning. Specifically, the Secretary of Homeland Security is to identify all positions in DHS that perform cybersecurity functions and identify cybersecurity work categories and specialty areas of critical need. The Federal Cybersecurity Workforce Assessment Act of 2015 assigns specific workforce planning-related actions to federal agencies. These actions include developing a coding structure to capture the work roles outlined in the revised National Cybersecurity Workforce Framework (OPM, in coordination with NIST); establishing procedures for implementing the coding structure to identify all civilian cybersecurity positions (OPM, in coordination with DHS, NIST, and the Office of the Director of National Intelligence); identifying all IT or cyber positions at agencies, and assigning the appropriate codes to each (federal agencies); and identifying IT and cyber-related work roles of critical need, and report these needs to OPM (each federal agency, in consultation with OPM, NIST, and DHS). The act also requires GAO to analyze and monitor the implementation of the act's requirements and report on this assessment to Congress. We plan to report on the results of our review by no later than December 18, 2018. Similar to the executive branch initiatives discussed above, these laws call for actions that, if effectively implemented, can address challenges related to skill gaps and recruiting, hiring, and retaining skilled cybersecurity professionals. Further, these laws are an important mechanism to hold agencies accountable for taking action and demonstrating results in building an effective cybersecurity workforce. Beyond the government-wide initiatives and recently enacted legislation discussed previously, federal agencies have instituted other ongoing activities that may assist the federal government in enhancing its cybersecurity workforce. These include the following, among others: Promoting cyber and science, technology, engineering and mathematics (STEM) education: A recent presidential commission on cybersecurity highlighted the need for federal programs that support education at all levels to incorporate cybersecurity awareness for students as they are introduced to and provided with Internet- based devices. As an example of such a program, the National Integrated Cyber Education Research Center (NICERC), an academic division of the Cyber Innovation Center funded by DHS, was created to design, develop, and advance both cyber and STEM academic outreach and workforce development programs across the nation. NICERC develops cyber-based curricula for use by K-12 teachers across the country. The curricula developed by NICERC is free to any K-12 educator within the United States and comprises a library of cyber-based curricula that provides opportunities for students to become aware of cyber issues, engage in cyber education, and enter cyber career fields. CyberCorps scholarship: According to the Partnership for Public Service, one way agencies can increase the supply of cyber talent is through the use of undergraduate and graduate scholarships to promising cybersecurity and STEM students. One such program--the Scholarship for Service program operated by DHS and NSF-- provides scholarships and stipends to undergraduate and graduate students who are pursuing information security-related degrees, in exchange for 2 years of federal service after graduation. According to a November 2015 memo from the federal Chief Human Capital Officer Council, since 2000 these scholarships have been awarded to more than 1,650 students. There are also nearly 400 graduating students in related academic programs to meet agencies' cybersecurity needs each year. National Centers of Academic Excellence: Sponsored by DHS and the National Security Agency, this program designates specific 2- and 4-year colleges and universities as "centers of academic excellence" (CAE) based on their robust degree programs and close alignment to specific cybersecurity-related knowledge units, validated by subject matter experts. Currently, over 200 colleges and universities across 44 states, the District of Columbia, and the Commonwealth of Puerto Rico are designated CAEs for cyber-related degree programs. This program is intended to help institutions of higher education produce skilled and capable cybersecurity professionals and equip students with the necessary knowledge, skills, and abilities needed to protect and defend our nation's infrastructures. National Initiative for Cybersecurity Careers and Studies: DHS, in partnership with several other agencies, launched the National Initiative for Cybersecurity Careers and Studies (NICCS) in February 2013 as an online resource to connect government employees, students, educators, and industry with cybersecurity training providers across the nation. NICCS provides a catalog of cybersecurity-focused training courses that are delivered by accredited universities, CAEs, federal agencies, and other training providers. Each course is mapped to the National Cybersecurity Workforce Framework. In coordination with a strategic, government-wide approach to improving the workforce, these programs and activities are intended to provide valuable resources for agencies as they attempt to mitigate the shortage of cybersecurity professionals. In summary, recruiting, developing, and retaining a qualified and competent cybersecurity workforce remains a critical challenge for the federal government. This is highlighted by the ever-evolving nature of the cyber threat and the vulnerabilities that we have identified over the years in agencies' information security programs. The federal government continues to be challenged in key areas--such as identifying skills gaps, recruiting and retaining qualified staff, and navigating the federal hiring process--that are essential to ensuring the adequacy of its cybersecurity workforce. To better equip agencies to adequately protect federal information and information systems from increasingly sophisticated and ever-changing cyber threats, it is critical that a number of our open recommendations be addressed. Recent federal initiatives and legislation are intended to address the challenges associated with the cybersecurity workforce, and agencies may also be able to draw on other ongoing activities to help assist in mitigating cybersecurity workforce gaps. If effectively implemented, these initiatives, laws, and activities could help establish the cybersecurity workforce needed to secure and protect federal IT systems. Chairman Hurd, Ranking Member Kelly, and Members of the Subcommittee, this concludes my statement. I would be pleased to address any questions that you have. If you have any questions about this statement, please contact Nick Marinos at (202) 512-9342 or [email protected]. Other contributors to this statement include Tammi Kalugdan, assistant director; William Cook, analyst-in-charge; Chris Businsky; David Hong; Franklin Jackson; Lee McCracken; Luis Rodriguez; Adam Vodraska; Daniel Wexler; and Merry Woo. 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 faces an ever-evolving array of cyber-based threats to its systems and information. Further, federal systems and networks are inherently at risk because of their complexity, technological diversity, and geographic dispersion, among other reasons. GAO has designated the protection of federal information systems as a government-wide high-risk area since 1997. In 2001, GAO introduced strategic government-wide human capital management as another area of high risk. A key component of the government's ability to mitigate and respond to cyber threats is having a qualified, well-trained cybersecurity workforce. However, shortages in qualified cybersecurity professionals have been identified, which can hinder the government's ability to ensure an effective workforce. This statement discusses challenges agencies face in ensuring an effective cybersecurity workforce, recent initiatives aimed at improving the federal cyber workforce, and ongoing activities that could assist in recruiting and retaining cybersecurity professionals. In preparing this statement, GAO relied on published work related to federal cybersecurity workforce efforts, and information reported by other federal and non-federal entities focusing on cybersecurity workforce challenges. GAO and others have identified a number of key challenges facing federal agencies in ensuring that they have an effective cybersecurity workforce: Identifying skills gaps: As GAO reported in 2011, 2015, and 2016, federal agencies have faced challenges in effectively implementing workforce planning processes for information technology (IT) and defining cybersecurity staffing needs. GAO also reported that the Office of Personnel Management (OPM) could improve its efforts to close government-wide skills gaps. Recruiting and retaining qualified staff: Federal agencies continue to be challenged in recruiting and retaining qualified cybersecurity staff. For example, in August 2016, GAO reported that federal chief information security officers faced significant challenges in recruiting and retaining personnel with high-demand skills. Federal hiring activities: The federal hiring process may cause agencies to lose out on qualified candidates. In August 2016 GAO reported that OPM and agencies needed to assess available federal hiring authorities to more effectively meet their workforce needs. To address these and other challenges, several executive branch initiatives have been launched and federal laws enacted. For example, in July 2016, OPM and the Office of Management and Budget issued a strategy with goals, actions, and timelines for improving the cybersecurity workforce. In addition, laws such as the Federal Cybersecurity Workforce Assessment Act of 2015 require agencies to identify IT and cyber-related positions of greatest need. Further, other ongoing activities have the potential to assist agencies in developing, recruiting, and retaining an effective cybersecurity workforce. For example: Promoting cyber and science, technology, engineering and mathematics (STEM) education: A center funded by the Department of Homeland Security (DHS) developed a kindergarten to 12th grade-level cyber-based curriculum that provides opportunities for students to become aware of cyber issues, engage in cyber education, and enter cyber career fields. Cybersecurity scholarships: Programs such as Scholarship for Service provide tuition assistance to undergraduate and graduate students studying cybersecurity in exchange for a commitment to federal service. National Initiative for Cybersecurity Careers and Studies: DHS, in partnership with several other agencies, launched the National Initiative for Cybersecurity Careers and Studies in 2013 as an online resource to connect government employees, students, educators, and industry with cybersecurity training providers across the nation. If effectively implemented, these initiatives, laws, and activities could further agencies' efforts to establish the cybersecurity workforce needed to secure and protect federal IT systems. Over the past several years, GAO has made several recommendations to federal agencies to enhance their IT workforce efforts. Agencies are in various stages of implementing these recommendations.
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To develop and maintain a national system of safe airports, FAA promulgates federal standards and recommendations for the design of airport infrastructure. FAA's airport design standards regulate how an airport must be configured to safely serve aircraft with certain characteristics, such as wingspan and weight. Design Group V standards serve the B-747, while Design Group VI standards will serve NLA (see fig. 1). FAA has established a process to grant modifications to airport design standards according to an airport's unique local conditions. Under a recently established policy, FAA headquarters officials have the sole authority to approve modifications to the standards for accommodating NLA. Generally, an airport's request must show that an acceptable level of safety, economy, durability, and workmanship will continue despite any modification. (See app. II for more detailed information on airport design standards and the process for requesting and granting modifications.) With the arrival of NLA closer and the availability of more up-to-date information to airport officials about whether airlines plan to offer NLA service at their airports, 14 airports reported that they expect to serve NLA by 2010. Determining the cost to serve NLA is difficult because a number of issues are unresolved including whether and the extent to which FAA revises NLA's design standards or which airlines actually buy NLA and the frequency of NLA service at U.S. whether NLA will begin service in the United States as early as 2006, as planned; and the extent to which the cost estimates reported by the airports are attributable to NLA instead of changes to accommodate growth in air traffic. The 14 airports that expect to serve NLA by 2010 collectively reported that their cost estimate for infrastructure changes is $2.1 billion. However, even with these changes, officials from most of these airports told us that they do not expect their airports to fully meet current Design Group VI standards. (See app. III for a list of these cost estimates by airport. See app. IV for the cost estimates from these 14 airports to upgrade their four major types of infrastructure.) Regarding the unresolved issues, most airport officials told us that they plan to apply to FAA for modifications to the standards or to serve NLA by restricting its operations. FAA has three studies underway to evaluate certain Design Group VI standards to determine which ones should be revised. One study uses actual data from taxiing B-747 aircraft to determine how much pilots deviate from a taxiway's centerline. The amount of deviation is important to help determine a taxiway's required width to operate NLA safely. According to FAA, it has continuously kept airport and industry officials informed of preliminary results of its on- going studies. However, FAA will not know until 2003, when the final results are expected, whether to revise the current Design Group VI standards and/or grant modifications or what the nature of any changes might be. There are certain Design Group VI standards for which modifications cannot be granted. For example, runway and taxiway bridges designed to safely support a B-747 with a maximum taxiing weight of 875,000 pounds cannot support an A380 with a maximum taxiing weight of 1.4 million pounds. Which airlines actually buy NLA, how they use these aircraft in their route structure, and the total number of NLA that are put into service will influence which airports eventually receive NLA and the cost for infrastructure changes. For example, Honolulu International Airport is a likely destination for NLA if Japan Airlines or All Nippon Airways, two of the key airlines that serve this airport, buy them. If not, Honolulu International Airport would not likely receive NLA on a regular basis and could possibly accommodate them through modifications to standards, thereby avoiding more costly infrastructure changes. The total number of NLA in service and which airlines purchase them will be influenced by market demand, which is even more uncertain than when the estimates were made because of the September 11th terrorist attacks. Before and after these attacks, Airbus has estimated that 1,500 NLA would be flying worldwide by 2019. In contrast, in July 2001, Airbus' competitor, Boeing, said that it estimated that 500 NLA would be flying by then--a threefold difference. Each company's future vision of air travel accounts for the large difference between their estimates. Officials at many of the airports we surveyed believe that if they serve only a few NLA, they might be able to accommodate these aircraft with operational restrictions, thus making full compliance with Design Group VI standards unnecessary. For example, to help ensure safety, an airport could restrict NLA's ground movement to designated taxi routes, terminal gates, and runways, and/or could restrict the ground movement of other aircraft. The total estimated cost to accommodate NLA could also change because the timing of its arrival is uncertain. The A380 has not been completely built and the first flight (certification trial) is not expected until 2004. The A380 is not expected to arrive in the United States until 2006. Meanwhile, many factors, including commercial decisions and unforeseen technical problems in certifying the aircraft for service, could delay this schedule. This uncertainty has led some airports to decide that they will not upgrade their infrastructure unless they are reasonably certain that some of the airlines they serve will be using NLA there. Lastly, distinguishing, where possible, between the costs for growth and those specific to serving NLA would affect the estimated costs of infrastructure changes. Costs that airports would incur for growth, regardless of whether they serve NLA, should be separated from those that an airport is incurring only because it is serving NLA. Airbus officials stated that most of the estimated costs airports reported for infrastructure upgrades are attributable to growth rather than accommodating NLA. However, airport officials have told us that, in some cases, costs attributable to growth and serving NLA are so interrelated that it is very difficult to separate them. Within the next 2 years, we expect some of these issues will be resolved. For example, FAA expects to have final results from its tests on certain airport design standards in 2003 and will then be able to decide whether to revise the standards. With these issues resolved, airports will have a clearer understanding of the infrastructure changes that must be made and their costs. We sent a draft of this report to the Department of Transportation, the Airports Council International-North America, and Airbus for their review and comment. We met with Transportation officials, including the Director, Office of Airport Safety and Standards, FAA. These officials suggested that we explain why some airports indicated large differences between the costs for meeting Design Group VI standards reported to FAA in 1997 and those we received in 2001. We believe that the costs for making infrastructure changes to fully meet Design Group VI do not provide a realistic estimate of the changes that airports expect to make to serve NLA. Therefore, we revised the report to focus on the airports that expect to serve NLA and the costs of those infrastructure changes they expect to make. FAA officials also provided a number of clarifying comments, which we have incorporated. The Senior Vice-President, Technical and Environmental Affairs, Airport Council International-North America, provided oral comments. He suggested that we clarify the relationship between Design Group VI standards for new construction at airports and NLA's operational requirements. He said that the draft report made reference to airports' inability to meet Design Group VI standards without noting that airports can accommodate NLA with operating restrictions. We revised the report to clarify this point. The Deputy Vice President of Safety and Technical Affairs for Airbus provided written comments (see app. V for the full text of Airbus' comments). Airbus agreed with the list of 14 airports that reported that they expect to serve NLA by 2010. However, the company said that the estimates from these airports overstated the costs to accommodate NLA. The company's collective estimate for the 14 airports that expect to serve NLA is $520 million, as opposed to the $2.1 billion collectively estimated by the airports. The company provided two major reasons for this difference. First, Airbus said that, in the majority of cases, there is no safety need to bring existing airport infrastructure to Group VI standards to accommodate the A380. Second, Airbus said that the cost estimates reported by the airports are "rough" and do not reflect detailed analysis. Airbus said that most of the cost estimates airports reported could be attributed to the growth of air traffic and are not directly related to accommodating NLA. With respect to whether airports can safely accommodate NLA now, the report was revised to acknowledge that many airports could accommodate NLA by placing ground restrictions on its movement or the movement of other aircraft and that these measures might obviate the need for immediate infrastructure changes. However, if Airbus' expectation of a robust demand for its NLA becomes reality, these measures are not likely to provide an efficient long-term solution, especially at those large airports that have experienced delay and congestion problems in the past. As for the rigor of the estimates, we asked the airports to derive their cost estimates from those used to support such planning documents as their master plan and capital budget. We revised the report to clarify the basis for their estimates. While the draft report acknowledged that the estimates were based on assumptions about several factors, we revised it to state that distinguishing between the costs attributable to growth versus the costs specific to serving NLA would affect an airport's cost estimate. Airport officials have told us that it is very difficult to separate these costs, especially when an airport expects to serve NLA as a part of its growth. Airbus also disagreed with including any costs for the five airports that are not likely to receive NLA by 2010. However, if these costs are included, the company estimated the costs for 19 airports to fully meet Design Group VI standards at $1.7 billion, as opposed to the $4.6 billion reported to us. We agree with Airbus that including the costs for five airports to fully meet standards when they do not expect to accommodate NLA does not provide a useful estimate. Moreover, some airports told us that they do not expect to make some of the changes that they reported would be necessary to meet these standards because of space limitations or other factors. Therefore, we revised the report to focus on the airports that expect to accommodate NLA and their cost estimates for the infrastructure changes they plan to make. We performed our work from June to December 2001 in accordance with generally accepted government auditing standards. As agreed with your offices, unless you publicly release 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 of this report to the Ranking Minority Members, Senate Committee on Commerce, Science, and Transportation and its Aviation Subcommittee; interested Members of Congress; the Secretary of Transportation; and the Administrator, FAA. This report is also available on GAO's home page at http://www.gao.gov. If you have any questions on matters discussed in this report, please call me at (202) 512-3650 or call Belva Martin, Assistant Director, at (202) 512- 4285. We can also be reached by e-mail at [email protected] and [email protected], respectively. See appendix VI for a list of key contributors to this report. We mailed a survey to officials at 23 airports and asked them to update the cost estimates to upgrade their airport infrastructure that they had reported to the Federal Aviation Administration (FAA) in 1997. We sent surveys to the same 22 airports that FAA had surveyed because those airports provided nearly all of the B-747 service or serve as hubs for airlines that might purchase New Large Aircraft (NLA) and therefore are likely to also serve NLA. We also included Indianapolis because it is a cargo hub for Federal Express, which has already placed an order with Airbus for 10 NLA. Because 4 years have elapsed, we expected that airport officials would have more recent information to estimate the following: the cost to accommodate NLA, if FAA revises the Design Group VI standards or grants modifications to them and the cost to fully meet Design Group VI standards. The officials were asked to specify their airport's total estimated costs to upgrade the following four major types of infrastructure for NLA: runways; taxiways; bridges, culverts, and tunnels; and terminals, concourses, and aprons. (See app. IV for estimates of these costs by category.) We also asked additional questions about their plans for serving NLA, such as the number of aircraft they expect to serve and the time frame for service. When answers were unclear or incomplete, we conducted follow-up telephone calls for clarification. We asked airports to derive their cost estimates from those that were used to support planning documents, such as an airport's master plan and capital budget. We did not verify the airports' estimates for accuracy. We received responses from 22 of the 23 airports, including 19 of the 20 that responded in 1997 and 3 additional airports. Only Lambert-St. Louis International Airport did not respond. In 1997, FAA received responses from 20 of the 22 airports it surveyed; Honolulu International and Orlando International did not respond. The FAA establishes airport design standards to configure an airport's infrastructure to safely serve aircraft with certain characteristics, such as wingspan and weight. Design Group V standards serve the Boeing 747, while Design Group VI standards will serve NLA. FAA defines Design Group V aircraft as those having a wingspan of at least 171 feet but less than 214 feet. Design Group VI aircraft are those having a wingspan of at least 214 feet but less than 262 feet. The standards for Design Group VI were published in 1983 and are currently under review by FAA. The agency has established an NLA Facilitation Group to help introduce NLA at airports. This group is made up of FAA, Boeing, Airbus, and other aviation officials, including representatives of airports, airlines, and pilots. Unique local conditions might require modifications to airport design standards on a case-by-case basis. FAA's approval is required for modifying airport design standards that are related to new construction, reconstruction, expansion, or an upgrade at an airport that receives federal or federally approved funding. FAA has established a process to approve modifications to standards. An airport's request for a modification must be submitted to the appropriate FAA regional or district office for evaluation to determine whether the modification is appropriate, and, if it is, the proper level of approval. Under a recently established policy, FAA headquarters officials have sole authority to approve modifications to standards related to serving NLA. Some of the Design Group VI standards that pose the most difficult challenges for airports are runway and taxiway widths, separation distances (e.g., for a runway and parallel taxiway and for parallel taxiways), and infrastructure strength (e.g., for bridges and culverts). Clearances on aprons, ramps, gate areas, and terminals at many airports might also need to be upgraded to meet these standards. For example, John F. Kennedy International Airport (JFK) does not fully meet all of the current Design Group V standards because the airport is severely limited by a lack of airfield space. Airport management is developing plans to get the airport to Design Group V and hopes that with FAA's granting a modification to the airport or revising certain Design Group VI standards, the airport would be able to safely serve NLA. (See table 1 for a comparison of current design group requirements for key infrastructure features of airports and specific features at JFK.) Our survey asked airports to provide cost estimates for four major types of airport infrastructure: runways; taxiways; bridges, culverts, and tunnels; and terminals, concourses, and aprons. According to a 1997 survey, these areas represent those that are most likely to require upgrades to accommodate NLA. Figure 3 shows the percentage of the $2.1 billion total estimated cost to upgrade each major type of airport infrastructure at the 14 airports that expect to accommodate NLA through revisions or modifications to FAA's airport design standards. The $663 million reported for upgrading runways accounts for the largest percentage of cost (32 percent). NLA. Moreover, Los Angeles International Airport's estimate to upgrade its runways accounts for $398 million of the total reported by 14 airports. Upgrading bridges, tunnels, and culverts accounts for 28 percent of the total cost ($593 million). The vast majority of the bridge and tunnel costs are attributable to a $508-million project at Los Angeles where the freeway runs under the airfield. Upgrading the cost for taxiways accounts for 24 percent ($509 million) of the total cost, and upgrading terminals, concourses, and aprons accounts for 15 percent of the total cost ($317 million). At some airports, airlines are responsible for these areas, so upgrading them does not show up as a cost to airports. Additionally, since two airports, Indianapolis International and Memphis International, are primarily going to receive the cargo version of the A380, terminal upgrades would not be needed. Key contributors to this assignment were Carolyn Boyce, Jean Brady, Stephen Brown, James Fields, David Hooper, Michael Horton, Mitchell Karpman, Kieran McCarthy, Richard Scott, and Kate Wulff.
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Airbus Industrie plans to introduce the New Large Aircraft (NLA) to U.S. airports in 2006. The Boeing 747 (B-747)is currently the largest commercial aircraft. The Federal Aviation Administration (FAA) sets standards that govern how an airport must be configured to safely serve aircraft with certain wingspans and weight. A B-747 operates under Design Group V standards, while FAA has determined that NLA will operate under Design Group VI standards. Determining the cost to serve NLA is difficult because several possible infrastructure changes at airports are unresolved. These include (1) whether and the extent to which FAA revises the standards or grants modifications, (2) which airlines buy NLA and the frequency of NLA service at U.S. airports, (3) when NLA begin serving these airports, and (4) the extent to which the cost estimates reported by the airports are attributed to NLA instead of changes to accommodate growth in air traffic. The 14 airports that expect to serve NLA by 2010 collectively report that their cost estimate for infrastructure changes is $2.1 billion; however, the ultimate cost will depend on how issues that affect cost will be resolved. As these issues are resolved, airports will have a clearer understanding of what infrastructure changes must be made at their costs.
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The bureau performs large surveys and censuses that provide statistics about the American people and the U.S. economy. The business activities of the bureau can be divided into four categories: decennial and other periodic census programs, demographic programs, economic programs, and reimbursable work programs that are conducted mainly for other federal agencies. During fiscal year 2000, the bureau conducted the actual decennial count of U.S. population and housing as of April 1, 2000, which is its largest and most complex activity. The results of the 2000 decennial census are used to apportion seats in the U.S. House of Representatives, draw congressional and state legislative districts, and form the basis for the distribution of an estimated $200 billion annually of federal program funds over the next decade to state and local governments. Since the 1970 census, the bureau has used essentially the same methodology to count the vast majority of the American population during the decennial census. The bureau develops an address list of the nation's households and mails census forms (questionnaires) to those households asking the occupants to mail back the completed forms. The bureau hires temporary census takers, known as enumerators, by the hundreds of thousands to gather the requested information for each nonresponding household. Over time, because of social and attitudinal changes, the public became less willing to participate in the decennial census. By 1990, these problems escalated to the point where the most expensive census up to that time produced less accurate results than the preceding census. Consequently, the bureau's plan for the 2000 census included the above elements but also included several important innovations to the census process designed to improve census accuracy. For example, prior to the 2000 census, local and tribal government officials were given expanded opportunities to review the bureau's address list and identify missing addresses for inclusion in the census. The bureau also implemented the New Construction Program, which invited local governments to submit addresses for housing units that had been built subsequent to the completion of the address list in January 2000. In addition, the 2000 census questionnaires were available upon request in six languages, and households were given expanded opportunities to respond to the 2000 census by telephone or via the Internet. Also, for the 2000 census, the bureau initiated the largest promotion and outreach effort in its history for a decennial census and conducted the first-ever paid advertising campaign. As indicated in table 1, the increase in decennial census full-cycle costs in recent decades has been dramatic. Expressed in dollars of fiscal year 2000 purchasing power, the full-cycle costs of the decennial census rose from $920 million for the 1970 census to a current estimate of about $6.5 billionfor the 2000 census, for an increase of about 600-percent after adjusting for inflation. The Gross Domestic Product (GDP) price index was used to adjust for inflation for the 1970, 1980, 1990, and 2000 censuses, while projections for years 2001 through 2003 were adjusted using factors from the Congressional Budget Office's Economic and Budget Outlook, January 2001. Since census costs depend primarily on the expense of delivering a mail questionnaire to a housing unit or having an enumerator visit a housing unit, it is more realistic to relate cost growth to the rise in the number of housing units rather to population growth. Even when housing units are vacant and contain no household, there is a cost to ascertaining that fact. Therefore, the number of housing units is the relevant unit to consider for cost analysis. A housing unit may be a house, an apartment, a mobile home, a group of rooms, or a single room that is occupied (or, if vacant, is intended for occupancy) as separate living quarters. Separate living quarters are those in which the occupants live separately from any other individuals in the building and which have direct access from outside the building or through a common hall. For vacant units, the criteria of separateness and direct access are applied to the intended occupants whenever possible. If that information cannot be obtained, the criteria are applied to the previous occupants. Both occupied and vacant housing units are included in the housing unit inventory. Boats, recreational vehicles, vans, tents, and the like are housing units only if they are occupied as someone's usual place of residence. Vacant mobile homes are included provided they are intended for occupancy on the site where they stand. Vacant mobile homes on dealers' lots, at factories, or in storage yards are excluded from the housing inventory. Also excluded from the housing inventory are quarters being used entirely for nonresidential purposes, such as stores or offices, or quarters used for the storage of business supplies or inventory, machinery, or agricultural products. The estimated full-cycle costs of the 2000 census do not take into account all costs of the decennial census. For example, as of September 30, 2000, about $85 million of costs for estimated claims for unemployment for temporary workers are not included in the cost per housing unit figures in this report. Any unemployment claims paid are absorbed by the Federal Employees Compensation Account in the Unemployment Trust Fund, administered by the Department of Labor, without reimbursement by the bureau. As shown in figure 1, the cost per housing unit in constant fiscal year 2000 dollars grew from $13 in 1970 to $56 in 2000, a 330-percent increase. In constant fiscal year 2000 dollars, the estimated full-cycle cost of the 2000 decennial census of about $6.5 billion is nearly double the $3.3 billion cost of the 1990 decennial census. When full-cycle cost is divided by the number of American households of 117.3 million in 2000 and 104.0 million in 1990, the cost per housing unit of the 2000 census of $56 increased 75- percent compared to the 1990 census cost of $32 per housing unit. Table 2 shows the cost increases in eight broad "frameworks" of effort used by the bureau in its financial management reports for the 2000 census. The $24 cost per housing unit increase was primarily the result of increased costs in four of the eight frameworks: (1) $16 for expanded field data collection methods, (2) $3 for the extensive use of technology and contractor support, referred to as automated data processing and telecommunications support, (3) $2 for more enhanced methods for data content and products, and (4) $2 for increases in marketing, communication, and partnership programs. Finally, other areas such as the compilation of a complete and accurate address list and the testing of the census design contributed the remaining $1 of the $24 increase in the 2000 census compared to the 1990 census. Framework 3, Field Data Collection and Support Systems, was the most expensive and the largest component of census costs, contributing about $16 or two-thirds of the $24 increase in per housing unit cost of the 2000 census. Field data collection is labor-intensive and includes operations such as nonresponse follow-up, which entails temporary workers, known as enumerators, visiting millions of households that did not return census questionnaires by mail or otherwise respond. As indicated in table 2, the cost for this framework for the 1990 census was about $1.7 billion, which accounted for half of the total $32 per housing unit cost. However, for the 2000 census, costs for this framework more than doubled to about $3.8 billion or $32 of the total $56 per housing unit cost. The $16 increase for the 2000 census occurred due to (1) expanded data collection operations, (2) lower productivity for enumerators who conducted the nonresponse follow-up operation, and (3) higher logistic support costs. First, according to the bureau, expanded data collection operations contributed about $14 of the $16 increase in field data collection costs. For example, for the 2000 census, the bureau expanded coverage improvement programs, which were designed to improve census coverage and accuracy. For the 2000 census, the coverage improvement program included for the first time the enumeration of addresses from the update/leave operation and new construction follow-up. Also, another example of expanded operations for the 2000 census was the telephone questionnaire assistance center. For the 1990 census, the telephone questionnaire assistance was conducted by bureau staff members, who handled over 2 million calls and worked in six processing centers. For the 2000 census, the telephone questionnaire assistance center was operated by contractors, who handled about 6 million calls and operated from 22 nationwide call centers. We could not analyze each data collection operation and compare the 2000 census to the 1990 census, except for the nonresponse follow-up operation discussed below, due to incomplete or missing cost and performance data for the 1990 census. Second, lower enumerator productivity for the nonresponse follow-up operation in the 2000 census compared to the 1990 census contributed about $1 of the $16 increase in costs in the field data collection area. According to the bureau, enumerator productivity to visit nonresponding households and complete questionnaires in the 1990 census was 1.56 cases per hour but dropped by one-third to 1.04 cases per hour in the 2000 census. Productivity is calculated by dividing the total workload (the number of housing units) by the total number of production hours worked. For the 1990 census, the bureau had a workload of over 39 million nonresponding housing units as compared to a workload of about 42 million nonresponding housing units in the 2000 census for a 7-percent increase. About 25 million production hours for the 1990 census increased to about 40 million production hours for the 2000 census for a 60-percent increase. However, according to the bureau officials, the higher production hours for the 2000 census were due to more quality assurance procedures, such as crew leader edits and enhanced office checks, plus more re-interview checks. Information on enumerator productivity rates by type of local census office, the bureau's methodology for refining the productivity data, and factors that could improve the collection and analysis of productivity data in the future are highlighted in our October report. Third, higher logistical support costs for increases in the number and size of local census offices, increases in equipment, and increases in temporary support office workers in the 2000 census compared to the 1990 census contributed less than $1 of the $16 increase in the field data collection area. For the 1990 census, there were 458 district offices, which were increased by 62 to a total of 520 local census offices for the 2000 census. According to the bureau, the additional 62 local census offices were necessary to support the increase in workload for the 2000 census. This 14-percent increase in the number of offices resulted in cost increases for items such as space rental, utilities, equipment, and supply costs. Also, according to the bureau, the local census offices in 2000 were larger with more equipment, such as mapping equipment and telecommunications, when compared to those in 1990. In addition, the bureau asserts that the 2000 census had a higher number of temporary office workers in the local census offices that were used to support all activities of the 2000 census, such as address list development. Again, we were unable to independently analyze the bureau assertions due to the lack of or incomplete cost data for the 1990 census. Framework 5, Automated Data Processing and Telecommunications Support, was the second largest category of costs for both the 1990 and the 2000 censuses and contributed about $3 of the $24 per housing unit cost increase for the 2000 census. As indicated in table 2, the cost for this framework for the 1990 census was about $487 million or almost $5 of the total $32 per housing unit cost. However, for the 2000 census, the cost for this framework increased about 80-percent to $877 million or about $8 of the total $56 per housing unit cost. This $3 increase was due to the development and staffing of a new data capture system for the 2000 census using new automatic document scanning technology, which was supported by contractors. This contrasted with the 1990 census, for which bureau personnel developed and conducted data capture technology operations in-house and hand keyed more census questionnaire information. During the 1990 census, the bureau developed and built a data capture system in-house called FACT90. This system consisted of high-speed cameras to film each form, microfilm processors to develop and process the film, and a film optical sensing device to capture check box responses from the forms for computer input. Computer terminals were used to enter all handwritten data from the paper forms. Automation was limited to the multiple-choice questions and the bureau keyed 100-percent of the reported write-in fields. Also, name keying was limited primarily to multi- unit surnames for person number one on the questionnaire. Although the bureau had seven data capture centers in 1990, final data capture processing was not completed until September 1991. For the 2000 decennial census, the bureau relied extensively on contractors to develop a data capture system that used the latest commercial technology, incorporated a number of internal controls to improve the accuracy of data processed, and was more timely in completing census operations. The bureau did not have the expertise to develop the complex new technology in-house. The technology included automated equipment to sort questionnaires by categories and optical character recognition readers to scan approximately 75-percent of handwritten questions without need for further human intervention. In addition, optical mark recognition equipment captured 100-percent of the check box questions on both the long and short form questionnaires. Internal controls included manual review of a small number of data fields that contained multiple responses for accuracy as part of the keying operation before data were transmitted for processing. In addition, response data were verified and a file was returned to check questionnaires using a positive checkout system, and there was 100- percent full name keying of all persons in the household to assist the bureau in a review for duplicate counts. The four data capture centers with the new technology allowed for the processing of census data to be completed by the end of 2000. Framework 2, Data Content and Products, was the third largest category of costs for the 2000 census and contributed over $2 of the $24 per housing unit cost increase for the 2000 census. This area included questionnaire design of long and short forms, a multiple mailing strategy, and printing and postage costs. As indicated in table 2, the cost for this framework for the 1990 census was about $272 million, or less than $3 of the total $32 per housing unit cost. However, for the 2000 census, costs for this framework more than doubled to $579 million, or almost $5 of the total $56 per housing unit cost. The $2 cost increase of the 2000 census was due to the design of a more user-friendly questionnaire, the availability of a census questionnaire in other languages, a multiple mailing strategy with higher printing and postage costs, and the development of a new data retrieval system to disseminate census 2000 data. For the 1990 census, questionnaires were "computer-friendly" to assist the bureau in processing the forms more easily, but some households found them difficult to understand and complete. For the 2000 census, the bureau contracted with commercial designers to produce questionnaires that were simpler and easier to fill out or "respondent-friendly," thus making them more likely to be completed and returned. Questionnaires for the 1990 census were only available in English and Spanish, while for the 2000 census, questionnaires were also available in Chinese, Korean, Vietnamese, and Tagalog. The availability of the additional language forms in 2000 and the redesign of the census questionnaire also increased printing costs over the 1990 census. In addition, for the 1990 census, the bureau mailed the census questionnaires and a postnotice card. For the 2000 census, the bureau developed a multiple mail strategy to inform households about the census. First, a prenotice card was sent out to alert households of the census and its benefits with an offer to send a questionnaire in languages other than English upon request. The census questionnaire then was mailed noting that "responses were required by law." Finally, a postnotice card was sent to households thanking those who participated and reminding others to complete the forms if they had not already done so. For the 1990 census, about 180 million items were printed using third-class postage on all mailings at a cost of about $17 million. For the 2000 census, printing volume almost doubled to about 340 million items, including additional language forms, and all mailings used first-class postage at a cost of about $117 million. Also, according to the bureau, for the 1990 census, data was disseminated using CD-ROM and printed copy. For the 2000 census, the bureau expanded its efforts through a new data retrieval system called the American FactFinder to disseminate census data. This system is available to the widest possible array of users through the Internet, Intranets, and all available intermediaries, including the nearly 1,800 State Data Centers and affiliates; the 1,400 Federal Depository libraries; and other libraries, universities, and private organizations. Framework 8, Marketing, Communication, and Partnerships, was the fourth largest category of increased cost for the 2000 census, and this area contributed about $2 of the $24 per housing unit cost increase for the 2000 census. This area included costs for advertising and promotion and partnerships with state, local, and tribal governments, as well as community groups. As indicated in table 2, the cost for this framework for the 1990 census was about $91 million, or less than $1 of the total $32 per housing unit cost. However, for the 2000 census, costs for this framework quadrupled to $374 million, or over $3 of the total $56 per housing unit cost. The $2 cost increase for the 2000 census was the result of expanded efforts to promote a higher level of responsiveness, particularly for those segments of the population traditionally most difficult to enumerate. These efforts included a paid advertising campaign and the involvement of community partnerships. For the 1990 census, the bureau marketing effort was limited and it was considerably expanded for the 2000 census. This included a multifaceted effort to remind the general population about the census, educate members of the public who did not understand the purpose of the census and its significance to their communities, and motivate Americans to complete their census questionnaires. The main components of the bureau's Partnership and Marketing Program for the 2000 census were the following. The bureau used its first-ever paid advertising campaign to generate awareness about the 2000 census via print, broadcast, and out-of-home advertising. For the 1990 census, an advertising campaign was conducted with free advertising of the Ad Council, a nonprofit organization responsible for administering public service advertising campaigns. Since the advertising was free to fill available air space, the bureau had no control over the time of day that its advertising was broadcast, which included many early morning hours to very small viewing audiences. For the 2000 decennial census, the bureau expanded its marketing program to a national audience during prime viewing times and hired a contractor to design and conduct a professional advertising campaign at a cost of about $1 per housing unit. The bureau established partnerships with businesses, nongovernmental organizations, and government entities to help deliver the census message and obtain a more complete and accurate population count. This activity was considered important because local organizations knew their conditions and circumstances better than the bureau. This effort resulted in bureau partnerships with about 140,000 state, local, and tribal governments and community groups that added about $1 to the per housing unit cost to the 2000 census. A recent GAO report contains further information and best practices on the bureau's partnership program. The remaining frameworks 1, 4, 6, and 7 contributed the remaining $1 of the $24 per housing unit cost increase for the 2000 census when compared to the 1990 census. As indicated in table 2, the costs for these four frameworks for the 1990 census totaled about $745 million or about $7 of the total $32 per housing unit cost. For the 2000 census, costs for these four frameworks increased about 23-percent to about $920 million or about $8 of the total $56 per housing unit cost. The $1 cost increase for the 2000 census was due to increased bureau efforts to compile a complete and accurate address list and to plan, evaluate, and test aspects of the census design, including dress rehearsals. In commenting on a draft of this report, the Department of Commerce, U.S. Census Bureau, concurred with the underlying data as presented in this report and provided its perspective on four matters, which we address below. First, the bureau stated repeatedly that Census 2000 was enormously successful and it was disappointed we made no effort to assess the costs of the 2000 census with respect to the high quality of the data produced in the face of significant challenges. In this regard, the objectives of this review did not include assessing the quality of the 2000 census. Our objectives were to (1) update full-cycle costs to reflect the most current information and (2) analyze bureau data to determine the causes of the significant increase in cost per housing unit for the 2000 census when compared to the cost for the 1990 census. Further, the bureau is still assessing the quality of the 2000 census in its postenumeration review through fiscal year 2003. As stated in the introduction to this report, this product is one of several we will be issuing in the coming months on lessons learned from the 2000 census. As was done after the 1990 census, we are currently reviewing key operations of the 2000 census. Second, the bureau stated that we reported the cost increases without providing appropriate explanation for them. We disagree. Throughout this review, we repeatedly asked the bureau for explanations and supporting documentation for the reasons for the cost increases. To the extent data and explanations were provided for the cost increases, we discussed them in this report. However, in many instances, particularly with respect to the 1990 census, the bureau was unable to provide us explanations or documentation at the activity and project level. Our report clearly states that cost information provided by the bureau for the 1990 census was limited. Third, the bureau pointed out that any analysis of cost increases must take into account the fact that the bureau was asked to develop, and to begin to implement, two different operational designs. Our September 1999 reportprovided information on the Supreme Court decision that prohibited the bureau from carrying out its plans to use statistical methods. As mentioned in that report, the bureau did not begin detailed budgeting for a nonsampling-based census until after the Supreme Court ruling in January 1999. Our work associated with this review showed that the majority of the cost increases for the 2000 census were not in the planning of two operational designs but in the execution of the traditional census. Specifically, we found no evidence that the bureau's planning for a "dual- track" census was a significant driver of cost increases of the 2000 census compared to the 1990 census. Finally, the bureau noted that it was not appropriate to discuss the cost increases without acknowledging the substantial achievement in developing and implementing extensive new census operations. As stated previously, the objectives of this review did not include evaluating the quality of new programs implemented as part of Census 2000. Throughout the report, we mentioned several important innovations to the census process and related costs, including expanded partnership agreements, the New Construction program, the availability of the census questionnaire in multiple languages, and expanded mass media efforts including the first- ever paid advertising campaign. Also, we have a separate effort under way to analyze variances from the bureau's fiscal year 2000 budget and the reasons that certain obligations and expenditures were different than planned. The complete text of the response to our draft report from the Department of Commerce, U.S. Census Bureau, is presented in appendix II. We are sending copies of this report to the Chairman and Ranking Minority Member, Senate Committee on Governmental Affairs, and the Chairman and Ranking Minority Member, House Committee on Government Reform and Oversight. We are also sending copies to the Acting Director of the U.S. Census Bureau, the Secretary of Commerce, the Director of the Office of Management and Budget, the Secretary of the Treasury, and other interested parties. This report will also be available on GAO's home page at http://www.gao.gov. If you or your staffs have any questions on this report, please contact me at (202) 512-9095 or by e-mail at [email protected] or Roger R. Stoltz, Assistant Director, at (202) 512-9408 or by e-mail at [email protected]. Key contributors to this report were Cindy Brown Barnes and Linda Brigham. The objectives of this report were to (1) update full-cycle costs and (2) analyze bureau data to determine the causes of the significant increase in cost per housing unit for the 2000 census when compared to the cost for the 1990 census. We did not assess the quality of the 2000 census in this report. To fulfill these objectives, we obtained and analyzed financial data from the U.S. Census Bureau to develop full-cycle costs of the 1970, 1980, 1990, and 2000 decennial censuses and converted all amounts to constant fiscal year 2000 dollars in order to eliminate the effects of inflation over time. We then identified components of full-cycle costs to the extent the bureau was able to provide the data and calculated cost per housing unit. For the 2000 census, we obtained cost and full-time equivalent employment information for budget and actual data from unaudited bureau financial management reports. This information was available in eight broad "frameworks" of effort that the bureau further divided into 23 activities and, within these activities, further divided into 119 projects. However, the 1990 census information was originally presented in 13 frameworks. We requested and the bureau provided reclassified cost data on the 1990 census in these eight frameworks to help facilitate comparisons between the 1990 and 2000 censuses. For the 1990 census, the bureau provided very limited cost data by activity and project, so we decided not to attempt detailed cost comparisons at that level of detail. We therefore focused on identifying activities or projects for the 2000 census that, according to the bureau, either did not exist or had very low costs in the 1990 census. We also used other bureau information, such as pay rates, employment statistics, and the number of temporary offices, to supplement our analysis as needed. We conducted interviews with senior bureau officials and others who provided us with oral and written evidence. This included an overview of 2000 census operations with comparisons to 1990 census operations, reasons for the increase in the cost per housing unit, and cost studies and analyses from the bureau and other independent organizations. We reviewed and analyzed this information as well as our past reports on decennial census operations. We performed our work in Washington, D.C., and at bureau headquarters in Suitland, Maryland. Our work was performed from June through August 2001 in accordance with U.S. generally accepted government auditing standards, except that we did not audit and therefore give no assurance as to the reliability of cost information provided by the bureau. On November 7, 2001, we received comments from the Department of Commerce, U.S. Census Bureau, on a draft of this report. The bureau's comments are discussed in the "Agency Comments and Our Evaluation" section and are reprinted in appendix II. The following are GAO's comments on the letter dated November 7, 2001, from the Department of Commerce, U.S. Census Bureau. 1. See the "Agency Comments and Our Evaluation" section of this report. 2. The full-cycle cost of the 2000 census was nearly double the full-cycle cost of the 1990 census. On a cost-per-housing-unit basis, the increase was 75 percent, which is accurately stated in the text of our report. We have modified the heading referred to in the bureau's comments to reflect that the 75-percent increase was significant. Also, we disagree with the bureau's assertion that the increased cost per housing unit observed in the 2000 census must be discussed in the context of the bureau's ability to reverse a decades-long trend in declining response rates, which reflects an increase in cooperation from the public. We have modified the report to reflect that preliminary data on the postcensus mail return rate, a more precise indicator of public cooperation than the initial mail response rate, declined from 74 percent for the 1990 census to 72 percent for the 2000 census. 3. The changes in field operation staffing described by the bureau in its comments on field data collection activities for the 2000 census, as well as other changes, may have had a significant impact on the quality of the 2000 census results. However, as stated in our report, we did not assess the quality of the 2000 census. Also, we did not have sufficient information to adjust the cost per housing unit in the 2000 census for such changes in quality. In addition, as stated in footnote 3, we adjusted all costs in the report to constant fiscal year 2000 dollars using the Gross Domestic Product price index. This index reflects changes in the compensation paid to all federal workers, which increased from 1990 to 2000 at about the same rate as the wages paid for field operation staff. Thus, these wage increases cannot be viewed as a major reason for the increase in the cost per housing unit for the 2000 census. 4. Our report does not imply that much of the increased costs attributed to the bureau's technological innovations occurred because of increased reliance on private contractors. Further, the scope of our work did not include determining whether the use of contractors was appropriate for these activities. We reiterate that this report responds to our congressional clients' request for information on the costs of the 2000 census and does not and was not intended to provide qualitative information on the results of the census. We are not suggesting that the bureau refrain from using external contractors to assist in exploring the possibility of expanding software development activities to in- house operations, particularly as these activities become more complex. The concern discussed in our October 2000 report was the lack of effective and mature software and system development processes, not whether such activities were done by contractors or in- house. 5. This report provided information on the significant cost drivers for the 2000 census as compared to the 1990 census, in accordance with our requesters' needs. As stated in the "Agency Comments and Our Evaluation" section of this report, we are conducting a review of key operations of the 2000 census. Thus, the scope of this report did not include an assessment of the effect of the redesign of the questionnaire and the availability of questionnaires and language assistance guides in many languages. Likewise, while the report refers to the increased cost of marketing, communication, and partnership programs, the link between response rates and these programs was not within the scope of our review. 6. We agree that estimates for worker's compensation claims and litigation are included in the $6.5 billion of full-cycle cost to the extent that these costs are reflected in the fiscal year 2002 and 2003 budgets and have modified the report accordingly.
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The estimated $6.5 billion full-cycle cost of the 2000 decennial census is nearly double that of the 1990 census. When the full-cycle cost is divided by the number of American households, the cost per housing unit of the 2000 census was $56 compared to $32 per housing unit for the 1990 census. The primary reasons for the cost increases include the following: (1) in the 1990 census, field data collection cost was $16 per housing unit, while in the 2000 census it was $32 per housing unit; (2) in the 1990 census, technology costs were $5 per housing unit compared to $8 per housing unit for the 2000 census; and (3) the data content and products activity cost $3 per housing unit in 1990 and $5 per housing unit in 2000.
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Diabetes, a chronic disease, was the sixth leading cause of death in the United States in 2000, contributing to the loss of more than 200,000 lives, according to CDC. Type 1 diabetes, in which the body fails to produce insulin, is usually diagnosed in children and young adults. Type 2 diabetes, in which the body fails to use insulin properly, is associated with aging, a family history of diabetes, physical inactivity, and obesity and accounts for 90 to 95 percent of all diabetes cases. Although type 2 diabetes occurs most often among adults, it is increasingly being diagnosed in children and adolescents. One study found that, on average in 2002, individuals with diabetes incurred about $13,243 in health care expenditures, compared with about $2,560 in expenditures for individuals without diabetes. These estimates include costs attributed to complications of diabetes, such as cardiovascular disease, neurological symptoms, and kidney disease. Federal health agencies and national organizations concerned with diabetes patient care have identified a number of services and supplies that individuals with diabetes often need to help manage their disease. Table 1 lists services considered important for diabetes patient care by the American Association of Diabetes Educators; the American Dietetic Association; and the National Diabetes Quality Improvement Alliance (Alliance), a consortium of 13 private-sector organizations and government agencies, including the American Diabetes Association (ADA), CDC, and the Centers for Medicare & Medicaid Services. In addition to such services, according to federal agencies and organizations concerned with diabetes patient care, individuals with diabetes often need certain supplies to manage their disease. Needed supplies may include blood glucose monitors, glucose control solutions (used to check the accuracy of testing equipment and test strips), test strips, lancets and lancet devices (used to prick the skin for a blood sample to self-test blood glucose levels), insulin (when necessary), insulin pumps (to administer insulin), disposable needles and syringes (also to administer insulin), alcohol swabs, and therapeutic shoes (for individuals with severe diabetic foot disease). Health coverage may be provided through the purchase of insurance policies that are subject to state laws and regulations or through means other than insurance. Health coverage provided through the purchase of insurance in a given state, whether purchased by individuals or by employers, is subject to insurance requirements in that state, including requirements to cover specified illnesses, services, or supplies. For example, states often require coverage of cancer-screening services such as mammography or tests for colorectal cancer. These state requirements are in addition to coverage requirements established by federal law. In 2001, two-thirds of Americans younger than 65 (the age at which people generally become eligible for Medicare), received health coverage through their own employer or that of a family member. Large private employers often self-fund their health plans, and coverage provided by these plans is not subject to state insurance regulation, although it is generally subject to federal requirements. Health coverage provided by the federal government is also not subject to state insurance regulation. For FEHBP, OPM is responsible for contracting with private health insurance carriers to offer health benefit plans to federal employees. By federal law, the terms of any FEHBP contract negotiated by OPM that relate to coverage or benefits preempt any inconsistent state or local law or regulation. OPM routinely preempts state requirements to ensure a consistent set of benefits among nationwide FEHBP plans, according to an OPM official. In 2004, 47 states had laws or regulations related to coverage of diabetes services or supplies, although specific requirements varied by state (see fig. 1 and app. II). Forty-five states required insurance policies to cover specific services or supplies for diabetes. Two more states, Mississippi and Missouri, required "mandated offerings"; that is, these states required insurance policies to provide coverage for diabetes at the option of purchasers. Some states' requirements applied only in narrow circumstances. For example, Arizona and Wisconsin required coverage of diabetes supplies only when a health insurance policy covered the treatment of diabetes. The services most frequently specified in state requirements were diabetes education and medical nutrition therapy: 45 states required that insurance policies cover diabetes education, and 27 states required coverage of medical nutrition therapy. State requirements may have focused more often on these two services in part because national organizations concerned with diabetes patient care--including ADA, the American Dietetic Association, and the American Association of Diabetes Educators--have supported "model" legislation centered on these two services. According to ADA and the American Dietetic Association, the organizations focused on these two services in particular because others, such as eye and foot exams, were thought to be covered by most policies as general medical services. The model legislation also includes coverage of "diabetes equipment and supplies," and 47 states required such coverage. Twenty-eight states identified which supplies must be covered, although their specific requirements varied. Some states had specific requirements regarding the coverage of certain services, such as diabetes education. Forty-two states specified at least some criteria for the training or education that health care professionals must have to provide diabetes education. These criteria varied widely from state to state. To provide diabetes education in Louisiana, for example, health professionals must have demonstrated expertise in diabetes and must have completed an educational program in compliance with the National Standards for Diabetes Self-Management Education established by ADA. In contrast, several states required educators to be licensed professionals with expertise in diabetes but did not define the term expertise. Eight states referred to ADA's national standards in setting their requirements for diabetes education programs. Some of these states required programs to be consistent with these standards, while others mentioned them as an example of acceptable standards. Among the 47 states whose laws or regulations required coverage of diabetes supplies, specific coverage requirements varied. For example, 19 states did not specify which supplies must be covered; instead, these states typically required coverage of all medically necessary equipment and supplies prescribed by a physician. The remaining 28 states specified covered supplies, either in laws or regulations, but the number of supplies varied among the states. For example, Michigan had requirements related to insulin, blood glucose monitors, test strips, lancets, lancet devices, syringes, and insulin pumps. In contrast, Mississippi required coverage of equipment and supplies, including supplies used in connection with blood glucose monitoring and insulin administration, but did not specify which supplies. Some states that listed covered supplies also prescribed procedures for adding new supplies to the list. For example, in New Jersey, the Commissioner for Insurance, in consultation with the Commissioner of Health, may update the list of supplies. While nearly all states have required some coverage of diabetes services or supplies in the insurance policies they regulate, some states have authorized a class of health insurance policies that are not bound by many of the state coverage requirements, which may include those for coverage of diabetes services and supplies. Known as "flexible health benefit" or "limited-benefit" policies, and typically marketed to small employers or individuals, such policies may, through lower premiums, reduce the cost of coverage. At least two states, Louisiana and Arkansas, have authorized limited-benefit policies that are not bound by requirements related to diabetes services and supplies. Louisiana has authorized such policies for individuals not otherwise able to obtain health coverage and for small employers (3-35 employees), and Arkansas has authorized them for all groups, regardless of size. ADA is concerned that limited-benefit policies may not provide sufficient coverage of the services and supplies that individuals with diabetes need to manage their condition. The 3 largest plans participating in FEHBP--Blue Cross and Blue Shield, Mail Handlers, and Government Employees Hospital Association, Inc.-- and the 13 large-employer self-funded plans we contacted covered most of the diabetes services and supplies we reviewed. All 16 plans covered at least 7 of the 10 diabetes services, as well as at least five of nine diabetes supplies. Few of the plans we contacted placed limits on coverage for diabetes services and supplies. The three largest FEHBP plans covered at least 8 of the 10 diabetes services we reviewed (see table 2). Both diabetes education and medical nutrition therapy were covered by two of the three plans, although one plan placed conditions on these services: diabetes education was covered when provided at a hospital and medical nutrition therapy when provided by a physician. The three plans stated that coverage requirements for diabetes services and supplies applied only in cases of medical necessity. The plans generally did not, however, set monetary limits on their coverage for diabetes services. One exception was smoking cessation therapy, for which one plan set $100 lifetime limits per enrollee for both counseling and drug therapy. Another plan set $100 lifetime limits per enrollee for smoking cessation counseling. The three FEHBP plans all covered at least seven of nine diabetes supplies, including blood glucose monitors, glucose control solutions, test strips, lancets and lancet devices, insulin, insulin pumps, and disposable needles and syringes. One plan did not cover alcohol swabs, and two plans did not cover therapeutic shoes. One plan limited its coverage of supplies; specifically, this plan set lifetime durable medical equipment limits of $10,000 per person for specific supplies, including blood glucose monitors and insulin pumps. Each of the 13 large employers' self-funded health plans we reviewed covered at least 7 of 10 diabetes services, specifically, blood glucose, lipid, and urine tests; eye and foot exams; blood pressure management, and influenza vaccinations. The remaining 3 services were covered by at least 9 plans (see fig. 2). Among these plans, we found limits on coverage only for smoking cessation therapy. One plan, for example, had a lifetime maximum of three drug therapy treatments for smoking cessation, and another plan had a maximum of two smoking-cessation programs per lifetime for each enrollee for both counseling and drug therapy. In a few cases, the plans specified certain conditions for coverage. For example, among the 11 plans offering coverage of diabetes education, 4 did so only if an employee with diabetes was enrolled in the plan's diabetes management program. Three of the 10 plans offering coverage of medical nutrition therapy did so only as part of their diabetes management program. Of the 9 plans covering smoking cessation therapy, 5 restricted coverage to drug therapy and did not cover smoking cessation counseling. Most of the self-funded plans stipulated that diabetes services and supplies were covered only when medically necessary. In addition, 7 plans required waiting periods ranging from 30 days to 6 months after an employee was hired before health coverage began. One plan did not cover preexisting conditions--either an injury or illness--occurring during the 90 days before a newly hired employee began the waiting period. All 13 self-funded plans covered at least five of nine diabetes supplies, including insulin, insulin pumps, disposable needles and syringes, test strips, and lancets and lancet devices, and all but 1 covered blood glucose monitors (see fig. 3). Only 1 of the 13 plans reported having limits on the quantity of supplies covered, covering one blood glucose monitor per year. Two of the 13 plans reported placing conditions on their coverage of supplies. For example, 1 plan told us that it allowed up to a 90-day supply of items for each claim, and another plan covered therapeutic shoes when prescribed by a physician and purchased through an authorized supplier. Data from CDC's 2003 nationwide survey showed that individuals with diabetes received some but not all diabetes services, and those who had health coverage were more likely to have received services than those who did not. The proportion of individuals with diabetes receiving diabetes services varied widely by type of service and among states. Another CDC survey, which included a physical examination of participants, indicated that many individuals with diabetes did not have their diabetes-related conditions adequately controlled. National data show that individuals with diabetes ages 18 and older receive many but not all diabetes services. In a nationwide telephone survey conducted in 2003, the majority of individuals with diabetes reported receiving at least one of six identified diabetes services for which national data were available. Substantially fewer individuals reported receiving within the past 12 months the five services recommended that individuals with diabetes receive at least once a year. Although the receipt of services varied by service, half or more of the individuals with diabetes reported receiving each given service. For example, an estimated 88 percent had received a test for blood glucose within the past 12 months, and an estimated 52 percent had received diabetes education. A much smaller proportion, 33 percent, had received the five services recommended that individuals with diabetes receive at least once a year-- specifically, a blood glucose test, a cholesterol test, an eye exam, a foot exam, and an influenza vaccination (see fig. 4). CDC's survey also indicated that an estimated 82 percent of individuals with diabetes were taking insulin or diabetes medication to control their blood glucose. Otherwise, use of diabetes supplies was not captured in CDC's survey. According to CDC's 2003 survey, in comparison with individuals with diabetes who lacked health coverage, a larger proportion who had health coverage reported receiving one or more services. For example, an estimated 90 percent of individuals with diabetes who had health coverage at the time of the survey had received a blood glucose test, compared with 71 percent of those who reported not having such coverage (see fig. 5). Moreover, the estimated proportion of individuals with diabetes who received all of the five diabetes services was more than twice as high for those who had coverage than for those who did not. For example, although an estimated 35 percent of those with health coverage had received a blood glucose test, a cholesterol test, eye exam, foot exam, and influenza vaccination, just 14 percent of those without health coverage received the same set of services. CDC's 2003 survey showed substantial variation among states in the receipt of diabetes services. Depending on the service, the estimated state- by-state percentages of individuals with diabetes who reported receiving services varied widely. For example, the estimated state-by-state percentages of individuals with diabetes who reported receiving an eye exam ranged from 55 to 84 percent (see table 3). Despite this state-by-state variation, the same services were generally the most received across all states. In most states, for example, more individuals received blood glucose and cholesterol tests than received foot exams or diabetes education. For 1999-2002, data from CDC's NHANES--a nationally representative survey that involves a physical examination to assess each participant's health--indicated that many individuals with diabetes ages 18 and older did not have adequate control of related conditions that could lead to health complications. Experts say that controlling blood glucose and cholesterol levels lowers the risk of nerve damage, vision disorders, and cardiovascular disease; detecting renal disease early decreases the risk of kidney failure. Yet data from CDC's NHANES showed that about 19 percent of examined participants with diabetes had poor control of their blood glucose, and about half of them had cholesterol levels putting them at increased risk for cardiovascular disease. In addition, about 40 percent were at increased risk of renal disease, as evidenced by a positive test for abnormal levels of a protein in their urine. The data also showed that about 38 percent of individuals with diabetes who did not have health coverage had glucose levels indicative of poor control, compared with about 16 percent of those who had health coverage. We provided a draft of this report to CDC for comment. The agency provided us with technical comments, which we incorporated into the report as 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 issue date. At that time, we will send copies to interested congressional committees and members and make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7118. Another contact and key contributors to this report are listed in appendix III. To assess health care coverage and receipt of diabetes services and supplies, we obtained information from federal health agencies and national organizations concerned with diabetes patient care and identified 10 services and nine supplies that individuals with diabetes often need. To determine the extent to which states require coverage of diabetes services and supplies for the health insurance policies they regulate, we examined state laws and regulations from September 2004 through December 2004 related to diabetes and the extent to which they required coverage of specific services and supplies. We also reviewed information prepared by the American Diabetes Association (ADA) and the American Dietetic Association and interviewed officials there, as well as from states and the National Conference of State Legislatures. In addition, we reviewed state requirements for limited-benefit policies--which are not required to comply with coverage requirements usually applicable to health insurance--in Louisiana, Arkansas, and Colorado. To examine the extent to which the largest plans participating in the Federal Employees Health Benefits Program (FEHBP) and the largest self- funded employer plans cover diabetes services and supplies, we obtained information from the three largest national FEHBP plans--Blue Cross and Blue Shield, Mail Handlers, and Government Employees Hospital Association, Inc.--which together covered approximately 5.3 million people in 2003, or about 65 percent of employees, retirees, and their dependents covered by FEHBP plans. We also contacted a random sample of 15 of the 50 largest Fortune 500 companies, ranked by the number of employees, regarding their plans' coverage of diabetes services and supplies in 2004 and received responses from 13 of them. Together these 13 large companies, which had self-funded health plans, employed about 2.4 million people in 2003. Because employers may offer their employees more than one health plan option, we asked employers to provide coverage information related to the health plan that had the largest enrollment. We relied on the information as reported by officials of the health plans reviewed and did not independently verify their responses. Because of our sampling approach, we cannot generalize our findings to all FEHBP plans or to all large employers. Although we received responses from most (16 of 18) of the FEHBP plans and employers we contacted, our results may still reflect some selection bias, in that employers offering more benefits might have been more likely to respond than those offering fewer benefits. To assess information on the extent to which individuals with diabetes receive diabetes services and use supplies, we analyzed data for individuals ages 18 and older provided by the Centers for Disease Control and Prevention (CDC) from two nationwide surveys: the Behavioral Risk Factor Surveillance System (BRFSS) for 2003 and the National Health and Nutrition Examination Survey (NHANES) for 1999-2002: BRFSS is a nationwide telephone survey conducted every year by state health departments, with technical and methodological assistance provided by CDC. A "cross-sectional" or point-in-time survey, BRFSS samples the civilian noninstitutionalized population of adults ages 18 and older in the United States, including the 50 states and the District of Columbia; all data from BRFSS are self-reported. The survey's purpose, methods, and data analyses are available at http://www.cdc.gov/brfss. We used data from CDC gathered during 2003 about services individuals with diabetes reported receiving within the 12 months preceding the survey, which represented the most recent information available. BRFSS 2003 included a representative sample of 19,162 participants with diabetes. In addition to questions from the core sections of the survey, we used questions from a diabetes-specific section, which included data from 46 states in 2003, to collect data on disease management practices from respondents with diabetes. NHANES is a nationally representative survey, whose data are collected every year and released every 2 years by CDC, that samples the civilian noninstitutionalized U.S. population. It is a two-part survey, consisting of an in-home interview plus a health examination in a mobile examination center. Its purpose, methods, and data analyses are available at http://www.cdc.gov/nchs/nhanes.htm. We used NHANES data from 1999-2002--the most recent information available--for adults ages 18 and older, which included a representative sample of 904 participants with diabetes. We relied on NHANES results from the physical examinations, which included laboratory tests, for specific test values for individuals who had reported a prior diagnosis of diabetes, including tests for blood glucose, cholesterol, and kidney disease. We examined data provided to us by CDC from each survey separately. When possible, the data were stratified by health coverage status (respondents who reported having health coverage and those who reported not having it). For both surveys, we used data only from respondents who reported receiving a diagnosis of diabetes before the survey period. Most of CDC's estimates from BRFSS were stratified by state, although we could not develop state-level estimates by health coverage; NHANES estimates were limited to the national level. We analyzed a total of 10 indicators for diabetes services and supplies from both surveys (see table 4). We assessed the reliability of the NHANES and BRFSS data provided by CDC by (1) reviewing existing information about the data and the methods used to collect them and (2) interviewing and working with agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purposes of this report. Our review had several data limitations. First, BRFSS data were self-reported for each service we reviewed, and both BRFSS and NHANES used self-reported diagnoses of diabetes from participants, a practice that can result in recall bias. Second, BRFSS is a telephone survey, which limits data collection to individuals who have telephones. Third, both surveys are cross-sectional; that is, they provide information at one point in time. For example, although health coverage was assessed at the time the surveys were conducted, we could not determine whether participants' coverage changed over the survey year. Lisa A. Lusk, Jennifer Major, Adrienne Griffin, Craig Winslow, and Ellen W. Chu made key contributions to this report.
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Diabetes, which afflicts millions of Americans, is a manageable disease whose effects can be mitigated with proper care, regularly received. Experts recommend certain services and supplies for managing diabetes. Because these can be costly, concerns exist about whether individuals with diabetes have access to and receive what they need. Little is known, however, about health plan coverage of diabetes services and supplies. GAO reviewed the extent to which (1) states require insurance policies to cover diabetes services and supplies, (2) health coverage not subject to state requirements includes diabetes services and supplies, and (3) individuals with diabetes ages 18 and older receive services and supplies. GAO analyzed all 50 states' and the District of Columbia's laws and regulations pertaining to diabetes coverage. GAO also obtained from selected health plans providing coverage not subject to state requirements--13 large-employer plans and 3 plans in the Federal Employees Health Benefits Program (FEHBP)--information on coverage of 10 services and nine supplies identified as important for individuals with diabetes. In addition, GAO obtained national data from the Centers for Disease Control and Prevention (CDC) on individuals' receipt of diabetes services and supplies. GAO received technical comments from CDC and incorporated them in the report as appropriate. In 2004, 47 states, including the District of Columbia, had laws or regulations related to coverage of diabetes services or supplies, although specific requirements varied by state. Services for which states most often required coverage were diabetes education (45 states) and medical nutrition therapy (27 states). All 47 required coverage of diabetes supplies, although some states were more specific than others about which supplies must be covered. Health plans GAO contacted that provide coverage not subject to state insurance requirements--those offered by 13 large Fortune 500 companies and the 3 largest health plans in FEHBP--covered most of the services and supplies recommended for individuals with diabetes, generally without limits on the coverage. Each plan covered at least 7 of 10 diabetes services, such as an annual blood glucose test, cholesterol and blood pressure monitoring, and influenza vaccinations, as well as at least five of nine diabetes supplies, such as insulin and insulin-administering supplies. According to a 2003 CDC nationwide survey, the majority of individuals with diabetes reported receiving at least one diabetes service within the past 12 months. Significantly fewer individuals, however, reported receiving five services that individuals with diabetes are recommended to receive at least once a year. For example, an estimated 88 percent reported receiving a test for blood glucose, whereas an estimated 33 percent had received the five recommended services: blood glucose and cholesterol tests, eye and foot exams, and an influenza vaccination. Receipt of diabetes services and supplies varied by service, state, and whether an individual had health coverage. For example, 71 percent of individuals with diabetes who had health coverage at the time of the survey received eye exams, compared with 46 percent of individuals with diabetes who lacked coverage.
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A mission of USCIS is to provide timely and accurate information and services to immigrant and nonimmigrant aliens as well as to federal employees who make informed decisions about, for example, granting citizenship and approving immigration benefits. To perform this mission, staff dispersed among approximately 89 of USCIS's field offices require, among other things, access to an alien applicant's case history information. Currently, this information resides primarily in the paper-based A-Files. To improve the reliability and currency of the A-Files, as well as their accessibility to geographically and organizationally dispersed users, USCIS intends to automate the A-Files, beginning with scanning certain forms contained in the A-Files and storing the resulting electronic images. While these automation efforts were to be part of their IT Transformation Program, both A-Files automation and the IT Transformation Program were recently incorporated into an agencywide organizational and business transformation effort referred to as the USCIS Transformation Strategy. A-Files are a critical component of the USCIS mission of ensuring the integrity of the immigration system. These files are used by USCIS staff to make immigration and citizenship decisions. Maintaining the currency of these files and distributing them in a timely manner has been a long- standing challenge. An A-File is the set of records USCIS maintains on certain individuals to document their interaction with USCIS in actions prescribed by the Immigration and Nationality Act and other regulations. The single most important set of records kept by USCIS are A-Files. An A-File contains between one and hundreds of pages of documents and forms, such as submitted benefits and naturalization forms, photographs, fingerprints, and correspondence from family members or third-party sponsors. According to USCIS, A-File information is used to grant or deny immigration-related benefits, capture subsequent status changes, prosecute individuals who violate immigration law, document chain of custody for enforcement, control and account for records in compliance with the code of federal certify the existence or nonexistence of records. USCIS estimates that it currently has more than 55 million of these paper- based files, each of which is to be maintained for a 75-year period. Generally, USCIS processes for adjudicating alien benefit requests vary by type of application or form, and may involve creating, searching, transporting, obtaining, examining, updating, or storing the A-File. Figure 1 is an example of one such process: the Family-Based Adjustment of Status, also referred to as the Application to Register Permanent Residence, or Form I-485. The process of submitting this form involves both manual and automated steps. As illustrated in figure 1, the alien submits the I-485, along with the required fee and supporting information, to a USCIS "lock box" in Chicago that is operated by the Department of the Treasury on behalf of USCIS. Treasury then captures the form electronically and creates an extract file containing selected I-485 data elements that it sends in an electronic format to the USCIS National Benefits Center (NBC), along with the original paper form and supporting information. NBC prepares a daily upload file of all cases that need biometric appointments. This information is used to schedule an interview and direct the applicant to the Application Support Center, where biometrics, such as fingerprints, will be captured. NBC obtains the paper application and the selected electronic data elements, and inputs the data elements into the Computer Linked Application Management System 3 (CLAIMS 3). In addition, NBC searches a USCIS electronic index system, known as the Central Index System (CIS), to determine whether an A-File already exists for the individual. If an A-File does not exist, one is created. If one does exist, NBC determines its location by accessing an additional system called the National File Tracking System (NFTS), which tracks the physical location of the A-File. When NBC obtains the requested A-File, it merges the Form I-485 into the A-File. NBC then performs an initial name check using the Interagency Border Inspection System and the Federal Bureau of Investigation (FBI) National Name Check Program, and updates the A-File with the results. While NBC is processing the application, the Application Support Center is collecting the applicant's biometrics and sending the data electronically to the FBI, where a criminal background check is performed on the applicant. When the FBI has completed the background check, it sends the results to NBC, which then prints the results and adds them to the A-File. When the A-File contains the I-485 application, biometrics, and background check results, it is transported to the USCIS local office closest to the applicant for a ruling on the applicant's request. The local office reviews the file, interviews the applicant, and makes a decision on the permanent residence request. The A-File is then transported to the National Records Center in Missouri for storage (see fig. 2). According to a recent report by the DHS Inspector General (IG), this paper- based process is costly. For example, the estimated costs for copiers and copy paper for one USCIS service center is more than $400,000 per year. Further, according to senior USCIS officials, the agency spends approximately $13 million each year transporting A-Files within USCIS and to other bureaus and agencies. Besides USCIS's need for A-Files, DHS's Immigration and Customs Enforcement (ICE), Customs and Border Protection (CBP), and U.S. Visitor and Immigrant Status Indicator Technology (US-VISIT) need access to either the data in the A-Files or the A-Files themselves, as do agencies external to DHS, including the FBI, the Department of State, and state and local governments. For example, USCIS officials told us that the FBI uses A-Files data in performing law enforcement activities. In addition, USCIS documentation shows that ICE uses A-Files as the principle source of information for prosecuting aliens who have committed crimes and for immigration removal proceedings; CBP uses A-Files when it interviews and arrests aliens; and the Department of State uses data within the A-Files when issuing visas to alien visitors. According to USCIS officials, obtaining access to these A-Files has been a long-standing problem. The limitations in the USCIS IT and data-sharing environments are not confined to the A-Files. According to a recent report by the DHS IG, USCIS uses duplicative, nonintegrated, and inefficient data systems that have limited information sharing, resulting in data integrity and reliability problems. For example, adjudicators may need to access more than a dozen systems using between 5 and 17 passwords, and may have to restart these systems multiple times to process a given application. In addition, the IG reported that the networks and hardware platforms across USCIS offices are outdated and inconsistent. The IG also reported that past problems in this IT environment have led to small, disparate business process re-engineering initiatives that were narrowly focused and were not sufficiently coordinated across the organization to enable standardized processes. To address these limitations, USCIS began an IT Transformation Program in March 2005 that was led by the agency's Office of the Chief Information Officer (OCIO) and was intended to move USCIS progressively toward a paperless environment that facilitates information sharing. In January 2006, USCIS reported that this IT transformation effort was being subsumed into a new, long-term organizational and business transformation effort, referred to as the USCIS Transformation Strategy. Under this strategy, according to USCIS officials, long-term solutions to its A-Files automation needs will be pursued within the context of business process re- engineering. In the interim, however, USCIS still intends to reduce the volume of paper associated with its existing A-Files through a program called the Integrated Digitization Document Management Program (IDDMP). According to USCIS, the goals of the IDDMP are to comply with laws governing electronic information storage and access reduce the backlog of immigration benefit requests, ensure timely access to files, and reduce paper-based file storage and transportation costs; and respond to a statement in The 9/11 Commission Report that all points in the border system--from consular offices to immigration services offices--will need appropriate electronic access to an applicant's file. To accomplish these objectives, IDDMP is to convert paper forms and documents in existing A-Files to electronic images and manage the retrieval, movement, retention, and disposition of these images. The program is not intended to change existing USCIS core business processes, but rather to merely reduce the amount of paper associated with these business processes and improve user access to these scanned forms and documents. The program is estimated to cost about $190 million over 8 years, which includes planning, acquisition of hardware and software products and services, and operations and maintenance. As part of the IDDMP, USCIS initiated a digitization and storage pilot to scan approximately 1 million A-Files that include adjudicated I-485 forms and supporting documents (each containing about 100 pages). The purpose of the pilot is to validate that the digital format satisfies user needs, to identify network storage requirements, and to provide insight into potential scanning and storage problems. According to USCIS program officials, the pilot involves five separate contracts, three of which are primarily funded from $20 million that Congress had designated for "the historical records project to convert immigration records into an electronic, digitally-accessible format." The other contracts were awarded using other USCIS funding. Officials told us that they needed to move quickly to obligate these funds before they were due to expire at the end of September 2005, so they awarded four of the contracts in September 2005. A description of each of the contracts follows. Records digitization facility. According to program officials, this contract is intended to set up a facility for scanning the piloted number of A-Files and for scanning future A-Files. The contract is to cover preparing the documents for scanning, scanning the documents, and performing quality assurance checks on the captured images. It also is to cover indexing the scanned images using the meta-data standards defined in the requirements definition contract portion of the digitization pilot and temporarily storing the images in a staging server until they are accessed under the enterprise document management service contract. According to officials, this contract was originally awarded in September 2005, and a protest was filed in October 2005. During the course of the protest, the agency took corrective action, which included re-evaluation of the proposal; the protest was dismissed, the original award was vacated, and a new award is expected in March 2006. The estimated value of the new contract is $14 million. Enterprise document management service. This contract, awarded in September 2005, is to gather technical requirements for the design and implementation of a system to electronically manage the scanned images created by the records digitization process. In addition, the contractor is to design and implement a system capable of ensuring image and data quality and compliance with the DHS document management standard. It also includes development of a Web infrastructure and implementation of user interface software components. The value of this contract is about $2.3 million. Storage facility infrastructure. Under this contract, awarded in September 2005, the contractor is to provide hardware, software, and a wide area network for the digitization and storage process. The value of this contract is about $7.2 million. Records business process re-engineering. This contract, which was awarded in September 2005, includes determining how I-485 A-Files are currently used for adjudicating permanent residence requests and documenting the process for compilation, movement, digitization, and lockdown of I-485 A-Files. The contractor is also to determine how to effectively relocate the I-485 forms to the records digitization facility. The estimated value of this contract is $487,400. Requirements definition. This contract, which was awarded in October 2005 using fiscal year 2006 funds, covers gathering and documenting non- USCIS stakeholder digitization and document management requirements, including the meta-data requirements for indexing the scanned documents. As of December 2005, the first draft of requirements had been reviewed by USCIS and some of the external stakeholders, including ICE, CBP, and the Department of State. The contractor's next steps are to refine the requirements and develop, among other things, the plans of action and a concept of operations for the digitization and document management processes. The value of this contract is about $451,000. It is not yet possible to determine the effectiveness of USCIS's management of its long-term A-Files automation effort because this effort is not yet under way. However, USCIS currently has a near-term A-Files automation effort under way (IDDMP) that it is not effectively managing. Specifically, USCIS has not developed a program management plan to guide program execution and provide the basis for reliable cost and schedule estimates, and it does not have a plan for evaluating its IDDMP concept of operations pilot test of a document scanning capability. According to USCIS officials, these plans do not exist because the program is just getting started. Nevertheless, five contracts have either been awarded or are to be awarded under this program, a pilot test is under way, and significant program costs are anticipated. Without effective planning, IDDMP is at risk of falling short of expectations and its funding requests cannot be justified. As we have previously reported, technology alone cannot be relied on to solve long-standing and fundamental business problems, such as USCIS's dependence on paper-laden A-Files. Instead, our work has shown that such organizational and business transformation requires a number of key, interdependent elements working collectively to effect meaningful and long-lasting institutional change and mission improvement. These elements begin with strong, sustained executive leadership to direct and oversee organizational reforms. Other elements include a comprehensive and integrated business transformation plan, strategic management of human capital, effective processes and related tools (such as an enterprise architecture to provide a business and technology blueprint and associated road map), and results-oriented performance measures that link institutional, unit, and individual personnel goals, measures, and expectations. Until recently, USCIS had high-level, technology-focused plans for modernizing its information systems environment, including plans for automating its A-Files. These plans were part of the OCIO's IT Transformation Program, which included four components: (1) establishing and evolving a mature CIO organization; (2) improving the IT infrastructure; (3) implementing an information-based architecture to facilitate information standardization, security, and sharing; and (4) providing new business capabilities. However, agency officials told us in January 2006 that the IT Transformation Program has been reconsidered and will now be incorporated into a broader effort referred to as the USCIS Transformation Strategy. While this broader organizational and business transformation strategy has yet to be formally documented, officials told us that the strategy will, among other things, align IT modernization with broader organizational and business process changes. Restated, the IT modernization will be neither separate from nor the driver of organizational transformation. Rather, it will support and enable organizational transformation. To illustrate, one approach to long-term A- Files automation could potentially involve doing away with both paper forms and electronic images of these forms and instead provide for the electronic capture of data when the applications are filed using Web-based services and management of the captured data via corporate data warehouses to facilitate data access and sharing. USCIS's more broadly based organizational and business transformation concept, in which IT modernization will be treated as an enabler rather than an independent undertaking or a driver, is more consistent with effective transformation practices employed by successful organizations. However, our experience has shown that successful organizations also perform other key elements related to organizational and business transformation. As we have previously reported, these elements are as follows: Ensure top leadership drives the transformation. Leadership must set the direction, pace, and tone and provide a clear, consistent rationale that brings everyone together behind a single mission. Establish a coherent mission and integrated strategic goals to guide the transformation. Together, these define the culture and serve as a vehicle for employees to unite and rally around. Focus on a key set of principles and priorities at the outset of the transformation. A clear set of principles and priorities serves as a framework to help the organization create a new culture and drive employee behaviors. Set implementation goals and a timeline to build momentum and show progress from day one. Goals and a timeline are essential because the transformation could take years to complete. Dedicate an implementation team to manage the transformation process. A strong and stable team is important to ensure that the transformation receives the attention needed to persevere and be successful. Use the performance management system to define responsibility and assure accountability for change. A "line of sight" shows how team, unit, and individual performance can contribute to overall organizational results. Establish a communication strategy to create shared expectations and report related progress. The strategy must effectively communicate with employees, customers, and stakeholders. Involve employees to obtain their ideas and allow them to participate in the transformation. Employee involvement strengthens the process and allows them to share their experiences and shape policies. Build a world-class organization. Building on a vision of improved performance, the organization adopts the most efficient, effective, and economical personnel, system, and process changes and continually seeks to implement best practices. One such practice is the use of an enterprise architecture. The degree to which USCIS incorporates each of these key elements into its current transformation efforts will help to determine the success of its efforts, including the automation of its A-Files. Industry best practices and information technology program management principles stress the importance of effective planning in the management of programs, such as IDDMP. Inherent in such planning is the development and use of program management plans, which define, among other things, program goals and major milestones, delineate work tasks and products and the associated schedules and resources for achieving them, define management processes and structures (e.g., processes and structures for tracking and overseeing contractors), identify key players and stakeholders and their roles and responsibilities, and specify performance measures and reporting mechanisms. They also require plans for testing and evaluating program products and capabilities, including plans for evaluating the results of pilot-testing efforts. Pilot evaluation plans include goals and objectives, tasks, time frames, resource needs, roles and responsibilities, and evaluation criteria and results measures. Such plans are essential to ensuring, among other things, that programs are executed properly and that funding requests are reliably derived. USCIS has yet to develop either an IDDMP management plan or a pilot evaluation plan. According to USCIS OCIO officials, the IDDMP is only now being initiated, and the program office, including program staff, is not fully in place. Thus, they said it is too early to expect these plans to exist. Nevertheless, USCIS has awarded four contracts and is in the process of awarding a fifth related to the program; these contracts total about $20 million, including an ongoing digitization and storage technology pilot test, and it estimates that it will spend $190 million over an 8-year period on the program. At the same time, officials told us they do not yet know which of the roughly 50 types of forms associated with A-Files will be scanned and stored or the sequence in which form types will be scanned. If all forms are scanned, information provided by USCIS shows that scanning and storage could cost as much as $550 million. The absence of program planning was also noted in a December 2005 workshop by one of the digitization and storage pilot contractors. Discussion points during this workshop included IDDMP's lack of a clear vision and business objectives, critical gaps in the digitization approach, confusion regarding terminology and roles and responsibilities, and the lack of a management plan. Restated, this means that large sums of resources are being invested, and much larger sums are likely to be invested, on a program that lacks plans for ensuring that the resources are invested effectively and that resource estimates are valid. According to OCIO officials, while the funding estimates are a "guess," $20 million in funds were designated in fiscal year 2005 for converting historical immigration records into a digitally accessible format, and they needed to move quickly to obligate these funds before they expired at the end of September 2005. These officials also told us that, while they did not have time to fully establish and staff a program office that would have pre- empted the contractor's concerns, they are now taking steps to deal with the concerns. However, we have yet to receive documentation from USCIS as to the scope and nature of the steps they are taking. Without effective planning, including a clearly defined program scope, IDDMP is at risk of falling short of expectations and its future funding needs are not adequately justified. While it is too early to determine how effectively USCIS is managing its long-term A-Files automation effort, USCIS's recent decision to reconsider its long-term IT modernization plans--including the role of IT in the agency's broader organizational and business transformation efforts--was both warranted and appropriate. As USCIS defines and pursues these strategic transformation efforts, it is important that the agency adequately incorporate the keys to successful organizational transformation discussed in this report. With respect to management of its near-term A-Files automation efforts, key IDDMP planning activities are not being performed effectively. Given the contractual commitments being made on IDDMP, as well as the potential for the cost of this program to reach well into the hundreds of millions of dollars, it is critical that USCIS expeditiously develop an effective program management plan and pilot evaluation plan to guide the execution of the program and the pilot test, respectively. Without these plans, IDDMP is at risk of not meeting expectations and its funding needs are not adequately justified. To better ensure the success of USCIS's long-term transformation efforts, to include A-Files automation, we recommend that the Secretary of Homeland Security direct the Director of USCIS to implement the following two recommendations: 1. Ensure that the key elements to successful organizational and business transformation cited in this report are employed. 2. Ensure that both a program management plan and a pilot evaluation plan are expeditiously developed and approved for IDDMP, along with a reliable estimate of funding requirements. In commenting on a draft of this report, the Department of Homeland Security agreed with our recommendations and described actions that are planned and under way to address them. It also provided technical comments that we have incorporated, as appropriate. The department's comments are reprinted in appendix II. 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 report date. At that time, we will send copies to the Secretary of Homeland Security, the Director of the United States Citizenship and Immigration Services, and appropriate congressional committees. We will also make copies available to others on request. In addition, 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) 512-3439 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 objective was to determine whether the United States Citizenship and Immigration Service (USCIS) is effectively managing its alien files (A-Files) automation efforts. To accomplish this objective, we reviewed and analyzed USCIS's information technology (IT) strategic plan, IT Transformation Program planning documents, and IT Transformation Program mission needs statement, as well as available documentation for the Integrated Digitization Document Management Program (IDDMP). In addition, we reviewed the A-Files budget submission to the Office of Management and Budget, the digitization and storage contractor statements of work, and requirements meeting minutes. Among other things, we interviewed program officials, including the USCIS chief information officer and the IDDMP manager. We also interviewed officials from Immigration and Customs Enforcement and met with officials at the Department of Homeland Security (DHS) Office of Inspector General to discuss program management activities for the IDDMP. We conducted our work at DHS headquarters offices in Washington, D.C., from August 2005 through February 2006 in accordance with generally accepted government auditing standards. In addition to the contact named above, the following staff made key contributions to this report: Michael Marshlick, Assistant Director; Elena Epps; Kate Feild; and Nancy Glover.
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The United States Citizenship and Immigration Services (USCIS) relies on about 55 million paper-based files to adjudicate applications for immigration status and other benefits. Ensuring the currency and availability of these manual files, referred to as alien files, or A-Files, is a major challenge. To address this challenge, USCIS has initiated efforts, both long and near term, to automate the A-Files. The long-term effort is now being re-examined within the context of a larger USCIS organizational transformation initiative. In the near term, USCIS has begun a digitization program, which it estimates will cost about $190 million over an 8-year period to electronically scan existing paper files and store and share the scanned images. GAO was asked to determine whether USCIS was effectively managing its A-Files automation efforts. USCIS's effectiveness in managing its long-term effort for automating the A-Files cannot yet be determined because the scope, content, and approach for moving from paper-based to paperless A-Files has yet to be defined. Nevertheless, GAO believes that USCIS's recent decision to re-examine prior agency plans for a strategic A-Files automation solution within the context of an agencywide transformation strategy appropriately recognizes the integral support role that information technology plays in organizational and business transformation. GAO also believes that the success of USCIS's organizational transformation depends on other key supporting practices, such as having a comprehensive and integrated transformation plan (goals and schedules) and results-oriented performance measures. With respect to USCIS's near-term A-Files automation effort, known as the Integrated Digitization Document Management Program (IDDMP), effective planning is not occurring. In particular, USCIS has not developed a plan governing how it will manage this program and its contractors, and it has not developed an evaluation plan for its ongoing digitization concept of operations pilot test, even though it has either awarded or plans to award contracts totaling about $20 million for this pilot. In addition, USCIS officials told us they do not yet know which A-Files immigration forms will be scanned. Without a defined scope and adequate planning, this program is at risk of falling short of expectations.
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GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies' major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, issued soon after transmittal of the President's budget, provide a direct linkage between an agency's longer-term goals and mission and day-to-day activities. Annual performance reports are to report subsequently on the degree to which performance goals were met. The issuance of the agencies' performance reports, due by March 31 of each year, represents a new and potentially more substantive phase in the implementation of GPRA--the opportunity to assess federal agencies' actual performance for the prior fiscal year and to consider what steps are needed to improve performance, and reduce costs in the future. NASA's final performance plan was provided to the Congress on July 17, 2001. NASA's mission encompasses human exploration and development of space, the advancement and communication of scientific knowledge, and research and development of aeronautical and space technologies. Its activities span a broad range of complex and technical endeavors--from investigating and evaluating the composition and resources of Mars; to working with international partners to complete and operate the International Space Station; to providing satellite and aircraft observations of earth for scientific and weather forecasting purposes; to developing new technologies designed to improve air flight safety. This section discusses our analysis of NASA's performance goals and measures and strategies the agency has in place, particularly strategic human capital management and information technology, for accomplishing the outcomes. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which the agency provides assurance that its reported performance information will be credible. NASA revised its strategic goal and most of its objectives for this key outcome in its fiscal year 2002 performance plan. We based our assessment on the strategic goal to observe, understand, and model the Earth system to learn how it is changing and the consequences of change for life on this planet. The previous goal was to expand scientific knowledge by characterizing the Earth system. NASA's performance plan does not explain why it adjusted its previous strategic goal and objectives, nor does it explain why it developed newly formulated annual performance goals and supporting indicators for fiscal year 2002. In discussing the reasons for these changes, NASA officials told us that changes in goals and measures were necessitated by the formulation of new strategic science questions for the Earth Science Enterprise and a refocused strategic plan. In our view, providing this explanation in the plan would have been useful. The performance plan includes a chart that displays annual performance goals and associated performance assessments for fiscal years 1999 to 2002, to help demonstrate cumulative progress towards achievement of strategic goals and objectives and to facilitate performance trend analysis. However, explaining changes in goals and measures over time would improve the performance trend analyses, and clarify the reasons for the new measures. On the other hand, by changing its performance goals annually, NASA could hinder its ability to make comparisons between fiscal years and effectively analyze trends in performance. Generally, NASA's fiscal year 2002 annual performance goals for this outcome appear to be objective and help to measure progress toward achieving it. Specific ways to measure the performance goals are established through two or more indicators that in many cases provide specific, quantifiable values that increase the measurability of the performance goal. An example of such an indicator is: "Increase the coverage of space-based maps of coral reef distribution by 25 percent beyond current estimates using remotely sensed imagery." NASA added discussions on how each performance goal would benefit the public, as recommended by the NASA Advisory Council in its evaluation of NASA's fiscal year 2000 performance report. In some cases these discussions clearly articulate the benefit to the public; in other cases they only provide descriptive or background information. For example, one performance goal calls for increasing the understanding of stratospheric ozone changes, as the abundance of ozone-destroying chemicals decreases and new substitutes increases. The public benefit statement, "Reduction in atmospheric ozone amounts leads to an increased flux of ultraviolet radiation at the Earth's surface, with harmful effects on plant and animal life including human health," explains the effect of reduced ozone amounts rather than how the goal will benefit the public. NASA indicates that it will consider many of the Earth Science goals as fully met if a specified number of the supporting indicators (such as 3 out of 4) are achieved in fiscal year 2002. NASA officials told us that this approach allows for some flexibility in rating success. Specifically, since research and development by its very nature is unpredictable, these officials believe that, for example, not meeting all indicators still implies significant progress in achieving scientific goals. NASA could fully explain in the plan why it does not believe it has to meet all supporting indicators. This would put its actual performance in the proper perspective. The following is one example of such a goal: "Annual performance goal - Increase understanding of global precipitation, evaporation and how the cycling of water through the Earth system is changing by meeting at least 3 of 4 performance indicators. Combine analysis of global water vapor, precipitation and wind data sets to decipher variations (and possible trends) in the cycling of water through the atmosphere and their relation to sea surface temperature changes. Analyze data from polar and geostationary satellites in a consistent fashion over at least two decades to evaluate whether the detectable moisture fluxes are increasing beyond the expected ranges of natural variability. Determine the time and spatial variability of the occurrence of strong convection regions, precipitation events, and areas of drought to assess whether or not there are discernable global changes in the distribution of moisture availability useful to food and fiber production and management of fresh water resources. Establish passive and active rainfall retrievals of zonal means to establish a calibration point for long-term data records of the World Climate Research Program, Global Precipitation Climatology Project (GPCP)." Concerning interagency and crosscutting activities, we note that within this outcome, NASA does not include annual performance goals and indicators that reflect programs or activities being undertaken with other agencies in fiscal year 2002 for the strategic goal covered by our review, even though NASA's latest Strategic Plan identifies 16 federal agencies that contribute to this goal. These agencies include the departments of Defense and Commerce, the National Oceanic and Atmospheric Administration, and the Federal Emergency Management Agency. If NASA has planned collaborative efforts related to the performance goals and indicators for this outcome, these are not identified in the performance plan. The performance plan provides an opportunity to evidence coordination among crosscutting programs and reflect the expected contribution of other agencies toward related goals. NASA states that its implementation strategy for Earth Science research programs is focused on a set of strategic science questions directed at understanding how the Earth system is changing and the consequences for life on Earth. The plan indicates that these questions can be addressed effectively with NASA's capabilities, which include observational programs, research and analysis, modeling, and advanced technology. In general, the plan provides clear and reasonable information technology. One annual performance goal within this outcome is to successfully disseminate Earth Science data to enable NASA's Earth Science research and applications goals and objectives. To achieve this goal, NASA set several specific performance indicators, such as increasing the number of distinct NASA Earth Observing System Data and Information System (EOSDIS) customers by 20 percent compared to fiscal year 2001; increasing scientific and applications-data products delivered from the Earth Observing System (EOS) Distributed Active Archive Centers (DAAC) by 10 percent compared to fiscal year 2001; and increasing the number of favorable comments from DAAC and other users over fiscal year 2001 and decreasing the total percentage of order errors by 5 percent over fiscal year 2001. These indicators provide specific, quantifiable ways to measure increases in output from NASA's EOSDIS and DAACs. Based on NASA's reported success in meeting similar indicators for fiscal year 2000, these indicators appear to be reasonable for fiscal year 2002. In some instances, NASA revised or added strategic goals and objectives, and annual performance goals within this outcome for fiscal year 2002. For example, the agency added (1) a new strategic goal to provide commercial industry with the opportunity to meet NASA's future launch needs, including human access to space, with new launch vehicles that promise to dramatically reduce cost and improve safety and reliability and (2) a new strategic objective to develop new capabilities for human space flight and commercial applications through partnerships with the private sector. Furthermore, most of the annual performance goals are either new or revised from targets in NASA's prior year performance plan. Further, NASA does not provide any rationale or reasons for the changes in the plan. NASA officials told us that, generally, the changes were made to (1) improve NASA's ability to assess progress toward achieving goals and objectives; (2) reflect commitment to safety and privatization efforts; or (3) reflect the broader scope of programs and activities and shifts in Enterprise responsibilities. Again, providing such explanations in the performance plan, in our view, would have been useful. NASA displays its annual performance goals and associated performance assessments for fiscal years 1999 to 2002 to help demonstrate cumulative progress towards achievement of strategic goals and objectives and to facilitate performance trend analysis. As emphasized earlier, changing performance goals annually could hinder NASA's ability to make comparisons between years and effectively analyze trends in performance. NASA generally presents performance goals that appear to be objective and help to measure progress toward this outcome. The agency also explains how each performance goal will benefit the public. The strategies for achieving the performance goals are generally clear and reasonable. However, there are some exceptions. For example, one performance goal involves developing and testing - on the ground and in space--competing technologies for human missions beyond low earth orbit in cooperation with international partners. One indicator related to this performance goal involves organizing and conducting an "international forum" at which preliminary concepts, plans, and technology options for future human/robotic exploration and development of space would be reviewed. However, the indicator does not address the testing of competing technologies. Also, NASA has a performance goal to engage the commercial community and encourage non-NASA investment in commercial space research by meeting at least three of four performance indicators, but the plan does not state why all of the supporting indicators will not be achieved. Since the selected key outcome of deploying and operating the space station safely and cost effectively is not included in NASA's fiscal year 2002 performance plan as a specific strategic goal or objective, we based our assessment of it on a related strategic objective in the plan--to operate the space station to advance science, exploration, engineering, and commerce. NASA set four annual performance goals for this outcome for fiscal year 2002. The performance goals are new, but the plan does not provide any rationale for the changes. This is an important omission, because as pointed out earlier, explaining changes in goals and measures over several years would improve performance trend analyses and clarify why such changes were made. In discussing the reasons for these changes, NASA officials told us that for the International Space Station, the fiscal year 2001 goals and objectives relied on milestones that were reported as either complete or incomplete, with no provision for reporting progress toward completion. The improved goals and objectives for fiscal year 2002 are tied to milestones that allow reporting of progress in terms of the percent of the milestones completed. Thus, the new measures will provide greater visibility and improve NASA's ability to assess progress toward achieving goals and objectives. In our view, providing this explanation in the plan would have enhanced NASA's discussion on this outcome. Also, similar to the previous outcomes, NASA displays performance goals and associated assessments for fiscal years 1999 to 2002 to help demonstrate cumulative progress towards achievement of strategic goals and objectives and to facilitate performance trend analysis. However, changing performance goals annually could hinder NASA's ability to make comparisons between fiscal years and effectively analyze trends in performance. Generally, NASA's four annual performance goals and supporting indicators for the space station outcome appear to be objective and help to measure progress toward this outcome. In addition, the agency explains how the goals will benefit the public, stating how completing them successfully will provide many benefits of space research through new discoveries and improved technological applications in areas such as medicine, industrial processes, and fundamental knowledge. One performance goal addresses space station safety. Specifically, the goal is to demonstrate space station on-orbit vehicle's operational safety, reliability, and performance. The goal has an indicator that provides for zero safety incidents (such as no on-orbit injuries), which appears reasonable. The other indicator is not articulated understandably, making it difficult to ascertain its relationship to the performance goal or to assess its measurability. (The language is phrased as: "Actual resources available to the payloads measured against the planned payload allocation for power, crew time, and telemetry.") Also, the plan does not clearly indicate the means or strategies NASA will use to ensure that the safety performance goal is achieved in fiscal year 2002. Similarly, the plan does not provide clear strategies for achieving the remaining three performance goals of (1) demonstrating space station progress and readiness at a level sufficient to show adequate readiness in the assembly schedule, (2) successfully completing 90% of the space station's planned mission objectives, and (3) demonstrating progress toward space station research hardware development. NASA does not address space station cost control as part of this outcome. However, within its commercialization of space outcome, NASA set a performance goal in fiscal year 2002 to develop and execute a management plan and open future ISS hardware and service procurements to cost-effective innovation through competition, including launch services and a non-governmental organization for space station research. NASA's indicator for the management plan includes reforms that (1) strengthen its headquarters involvement, (2) increase communications, (3) provide more accurate assessment, and (4) maintain budget accountability. NASA reports that the benefit to the public of the management plan and reforms is to ensure that future space station costs will remain within the President's fiscal year 2002 budget plan. In our view, NASA's discussion of the proposed management plan is minimal and lacks specificity. While the management plan will reportedly include ISS budget accountability reforms, NASA does not elaborate on the nature of such reforms or indicate to what extent this plan will address space station cost growth, a long-standing management problem. Furthermore, NASA does not acknowledge anywhere in the performance plan that space station cost control is a major management challenge, although it has done so for some of the other challenges. In past years and as recently as January 2001, we have identified the need to control space station costs as a major management challenge for NASA. We believe that the agency has the opportunity to use the completed management plan to facilitate the development of space station cost control measures in future annual performance plans. The lack of performance measures that address space station cost control is a shortcoming that we have identified in our previous reviews of the agency's annual performance plans and reports. For the selected key outcomes, this section describes major improvements or remaining weaknesses in NASA's fiscal year 2002 performance plan in comparison with its fiscal year 2001 performance plan. It also discusses the degree to which the agency's fiscal year 2002 plan addresses concerns and recommendations by the Congress, GAO, NASA's OIG, and others. NASA's fiscal year 2002 performance plan differs in several significant ways from the prior plan. First, NASA portrays its planned efforts to verify and validate performance information more comprehensively than in 2001, providing greater confidence that the performance results will be credible. In our review of NASA's 2001 plan, we criticized the agency for not explicitly describing those efforts and for not addressing data limitation issues and problems. The 2002 plan includes specific agency data bases and describes methods NASA will rely on to support the credibility of reported performance information. For example, the plan references the NASA Personnel Payroll System, Incident Reporting System, Financial and Contractual Status of Programs System, and NASA Environmental Tracking System as specific data bases that will be used to verify and validate performance data. The plan describes specific processes in place to support performance claims associated with NASA's Integrated Financial Management System, performance-based contracts, contracts awarded to small and small disadvantaged businesses, and information technology. And it describes a broad array of methods to verify and validate reported performance data such as monthly reports from NASA field centers, Web statistics, count of publications, and NASA's Education Computer Aided Tracking System. Despite improvements in addressing data verification and validation methods, NASA still does not acknowledge data limitations that could hinder performance measurement. We continue to believe that NASA can further enhance the credibility of its verification and validation procedures and the usefulness of its performance data by disclosing the expected limitations of its performance data in its annual performance plans. A March 2001 NASA Office of Inspector General report identified limitations in NASA's fiscal year 2000 performance data and indicated that NASA would discuss anticipated data limitations in its performance planning beginning with its fiscal year 2002 final performance plan. However, we reviewed the final version of the plan, and such a discussion is not included. Second, several added features help to enhance the format and/or content of the fiscal year 2002 plan. NASA's use of "annual performance goals" in the plan characterizes its annual performance measures more clearly than the "annual performance targets," used in previous plans. The addition of discussions on how annual performance goals benefit the public helps to better understand the linkage between the goal and the expected results, although in some cases additional clarification could even better convey the actual benefit to the public. Value is added to the plan by NASA's display of annual performance goals and associated performance assessments for fiscal years 1999 to 2002, to help demonstrate cumulative progress towards achievement of strategic goals and objectives and facilitate performance trend analysis. However, changes in performance goals over many years could hinder NASA's ability to make comparisons between years and effectively analyze trends in performance. Also, this year's plan includes an agencywide strategic objective to invest in the use of human capital. NASA set two annual performance goals for fiscal year 2002 as progress towards this objective: (1) align management of human resources to best achieve agency strategic goals and (2) attract and retain a workforce that is representative at all levels of America's diversity. However, there are no human capital initiatives specifically linked to the outcomes or annual performance goals and indicators that link to specific programs, such as the space shuttle program. (See details under management challenges.) Third, NASA could explain in the plan what procedures it has used to characterize its performance goals as fully achieved when it has not met all of the supporting indicators for those goals. This is particularly true for the Earth Science outcome. Providing such an explanation would put the actual performance in the proper perspective. Fourth, similar to the prior plan, the fiscal year 2002 plan still does not provide a clear rationale for how information technology-related strategies and programs will contribute specifically to achievement of NASA's goals or show any allocation of information technology-related dollars and personnel to performance goals. Goals for managing information technology are generally stated in terms of broad categories for improvement, such as increased capability and efficiency and enhanced security, and include few quantitative measures. One exception is the goal of increasing dissemination of Earth Science data, which is accomplished through EOSDIS. The plan sets several specific goals for increasing the volume and distribution of Earth Science data and products. Lastly, in our review of NASA's fiscal year 2001 plan, we suggested that NASA document in its annual performance plans and reports, the rationale for establishing new performance targets to clarify the reasons for adding such targets. We had noted that while many of NASA's annual performance targets were new each year, there was no stated basis for the changes. In its fiscal year 2002 performance plan, NASA has formulated new annual performance goals and has changed many of its strategic goals and objectives without including the reasons for doing so. We continue to believe that providing the rationale for these changes will clarify the reasons for the new goals and measures and augment the value of performance trend analyses. Also, the plan does not indicate whether or not achieving any specific goals would be negatively affected by external factors. However, like the prior plan, the fiscal year 2002 plan states that successful execution of NASA's strategic goals and objectives depends on receipt of its requested appropriations, as well as provision of funds, materials, or services, that have been committed to the cooperative agreements or partnerships which are referenced in the performance plan. We have identified two governmentwide high-risk areas: strategic human capital management and information security. Regarding strategic human capital management, NASA's fiscal year 2002 performance plan contains a strategic objective and annual performance goals and indicators directly related to human capital. Concerning information security, NASA's performance plan contains a strategic objective, an annual performance goal, and indicators directly related to this management challenge. The plan states that safety and security is one of four areas on which NASA's information technology planning is focused. The fiscal year 2002 plan is an improvement over the 2001 plan, which did not include quantifiable measures for improving information security. However, the plan's performance goals do not fully respond to the recommendations we made in 1999 when we reported that the agency lacked an effective agencywide security program. For example, the plan sets a performance indicator of completing 90 percent of information technology security plans for critical systems. However, we recommended that all systems be formally authorized before they became operational and at least every 3 years thereafter. In addition, we have identified three major management challenges facing NASA: (1) correcting contract management weaknesses, (2) controlling International Space Station costs, and (3) effectively implementing the faster-better-cheaper approach to space exploration projects. We found that NASA's performance plan contains an annual performance goal and indicators directly related to the problem of contract management. It is important to note that until NASA's Integrated Financial Management System---which is central to providing effective management and oversight over its procurement dollars--is operational, performance assessments relying on cost data may be incomplete and full costing will be only partially implemented. While NASA's performance plan contains an annual performance goal and an indicator that indirectly addresses the challenge of controlling space station costs, it does not indicate the extent that NASA will address space station cost growth. As we discussed in our January 2001 report, the International Space Station Program continues to face cost control challenges. As with contract management, until the Integrated Financial Management System is operational, NASA may lack the cost information needed to control space station costs. Further, NASA's performance plan did not directly address the challenge of effectively implementing the faster-better-cheaper approach to space exploration projects. In January 2001, we also reported that NASA faces significant challenges as it attempts to create highly reliable missions and foster open communications under the budget constraints of the agency's faster-better-cheaper space exploration strategy. In addition, the real success of this strategy will require a comprehensive integration of lessons learned from failures on an agencywide basis. Until NASA resolves these problems, its financial resources are vulnerable to inefficient use. Appendix I provides detailed information on how NASA addressed these challenges and high-risk areas as identified by GAO and NASA's Office of Inspector General (OIG). As agreed, our evaluation was generally based on the requirements of GPRA, guidance to agencies from the Office of Management and Budget (OMB) for developing performance plans (OMB Circular A-11, Part 2), previous reports and evaluations by us and others, our knowledge of NASA's operations and programs, our identification of best practices concerning performance planning, and our observations on NASA's other GPRA-related efforts. We also discussed our review with NASA officials and with officials of NASA's OIG. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member of the Senate Committee on Governmental Affairs as important mission areas for NASA and do not reflect the outcomes for all of NASA's programs or activities. The major management challenges confronting NASA, including the governmentwide high-risk areas of strategic human capital management and information security, were identified in our January 2001 performance and accountability series and high risk update, and by NASA's OIG in December 2000. We conducted our review from August 2001 through October 2001 in accordance with generally accepted government auditing standards. We provided copies of a draft of this report to NASA for its review and comment. In written comments on the report, NASA generally agreed with the information presented in the report and noted several improvements it would make. Concerning our suggestion that NASA could fully explain in its performance plan why it believes it is not necessary to achieve all performance indicators to demonstrate annual performance goal achievement, NASA stated that it would provide a statement containing the supporting rationale for this approach in its fiscal year 2003 performance plan. In responding to our observation that the fiscal year 2002 plan lacked sufficient detail on the nature of the ISS's budget accountability reforms or how the reforms will address longstanding and ongoing management problems, including cost growth, NASA commented that the reforms are contained in its Program Management Action Plan that will be referred to in the fiscal year 2003 performance plan. We note that the ISS Program is being restructured in response to a potential cost growth of $4.8 billion. The restructuring has raised widespread concerns about the potential science benefits to be realized by the United States and international partners. For this reason, we believe it is increasingly important for NASA's performance plan to provide a clear path showing how NASA intends to implement the needed reforms and how the reforms will add credibility to future ISS budgets and resolve the uncertainties concerning the utility of the ISS. NASA also commented on a statement in our draft report that the agency does not provide a clear rationale for how IT-related strategies and programs will contribute specifically to achievement of its goals or show the allocation of IT-related dollars and personnel to performance goals. According to NASA, the IT service delivery metric in the plan aggregates each major IT service, such as NASA's Integrated Services Network. Remaining IT investments are embedded in each NASA project and managed as part of the project. While this statement may be true on the individual program level, it does not address GPRA objectives to demonstrate how IT-related strategies and programs contribute specifically to the achievement of agency goals or show the allocation of related resources. Finally, in response to our observation regarding NASA's lack of explanations in the 2002 plan for annual performance changes, NASA agreed that including such explanations in the plan would be useful and that it would characterize reasons for annual performance changes in its 2003 performance plan. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to appropriate congressional committees; the NASA Administrator; and the Director, Office of Management and Budget. Copies will also be made available to others on request. If you or your staff have any questions, please call me at (202) 512-4841. Key contributors to this report were Richard J. Herley, Shirley B. Johnson, Charles W. Malphurs, Christina Chaplain, John de Ferrari, Diane G. Handley, and Fannie M. Bivins. The following table identifies the major management challenges confronting NASA, including the governmentwide high-risk areas of strategic human capital management and information security. The first column of the table lists the management challenges that we and/or NASA's Office of Inspector General (OIG) have identified. The second column discusses the extent to which NASA's fiscal year 2002 performance plan includes performance goals and measures to address the challenges that we and the OIG identified. Of the agency's fifteen major management challenges, its performance plan has (1) goals and measures that are directly related to thirteen of the challenges; (2) a goal and measure indirectly applicable to one challenge; and (2) no goals and measures directly related to one of the challenges. Some of the NASA performance plan's goals and measures we discuss may not track specifically with the key considerations of NASA OIG's management challenges since the challenges themselves were presented in a broad context. GAO has performed reviews affecting a number of the areas mentioned. This appendix highlights the results of our assessments, where applicable.
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GAO reviewed the following key outcomes in National Aeronautics and Space Administration's (NASA) fiscal year 2002 performance plan: expanding scientific knowledge of the Earth's system, expanding the commercial development of space, and deploying and operating the International Space Station. GAO found that NASA has improved its fiscal year 2002 performance plan and responded to recommendations by GAO and others to make its plan more useful--particularly by providing more comprehensive explanations of how it plans to verify and validate performance data and by better explaining how its performance goals will benefit the public. NASA's annual performance goals appear to be objective and should help to measure progress toward the outcomes. However, the plan still does not explain the reasons for changes in performance goals. Not having these explanations could hinder assessments of NASA's performance.
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DOE has taken several steps to implement the ATVM program. First, it set three goals for the program: increase the fuel economy of U.S. passenger vehicles as a whole, advance U.S. automotive technology, and protect taxpayers' financial interests. In that regard, EISA calls for the program to make loans to provide funding to automobile manufacturers and component suppliers for projects that re-equip, expand, or establish U.S. facilities that are to build more fuel-efficient passenger cars and light-duty trucks. According to DOE, the program's goals also support the agency's goals of building a competitive, low-carbon economy by, among other things, funding vehicles that reduce the use of petroleum-derived fuels and accelerating growth in advanced automotive technology manufacturing, and protecting U.S. taxpayers' financial interests. DOE, in its interim final rule, also set technical, financial, and environmental requirements that vehicle and components manufacturers must meet to qualify to receive a loan under the program. For example, an established vehicle manufacturer--one that was manufacturing vehicles in 2005--must demonstrate that the adjusted average fuel economy of the fleet of vehicles it produced in its most recent model year was at least equal to that of the fleet of vehicles it produced in model year 2005. Similarly, a manufacturer that was not producing vehicles in 2005 must show that its proposed vehicles' adjusted average fuel economy will at least equal that of established manufacturers for a similar classs of vehicles for model year 2005. For applicants deemed eligible, DOE also uses statutorily based technical criteria to determine which projects are eligible. For example, proposed vehicles must achieve at least 125 percent of the average fuel economy achieved by all manufacturers' vehicles with substantially similar attributes in 2005. In addition, DOE established criteria for ATVM staff, aided by experts from within and outside DOE, to judge and score the technical and financial merits of applicants and projects deemed eligible, along with policy factors to consider, such as a project's potential for supporting jobs and whether a project is likely to advance automotive technology. Finally, the Credit Review Board, composed of senior DOE officials, uses the merit scores and other information, including Office of Management and Budget's approved subsidy cost estimates for projects, to recommend loan decisions to the Secretary of Energy. To date the ATVM program has made about $8.4 billion in loans: $5.9 billion to the Ford Motor Company; $1.4 billion to Nissan North America; $529 million to Fisker Automotive, Inc.; $465 million to Tesla Motors, Inc.; and $50 million to The Vehicle Production Group LLC. About 62 percent of the funds loaned--$5.2 billion--are for projects that largely enhance the technologies of conventional vehicles powered by gasoline-fueled internal combustion engines. These projects include such fuel-saving improvements as adding assisted direct start technology to conventional vehicles, which reduces fuel consumption by shutting off the engine when the vehicle is idling (e.g., while at traffic lights) and automatically re- starting it with direct fuel injection when the driver releases the brake. According to DOE's analysis, the projects will result in vehicles with improved fuel economy that will contribute in the near term to improving the fuel economy of the passenger vehicles in use in the United States as a whole because the conventional vehicles are to be produced on a large scale relatively quickly and offered at a price that is competitive with other vehicles being offered for sale. DOE used data from the borrowers to estimate the fuel economy in miles per gallon (mpg) of the enhanced conventional vehicles that were considered for ATVM loans. According to our calculations using DOE's estimates of fuel economy, these projects are expected to result in vehicles with improved fuel economy that exceed both the program's eligibility requirements and the CAFE targets that will be in place at the time the vehicles are produced --by, on average, 14 and 21 percent, respectively. The remaining 38 percent of the funds loaned--about $3.1 billion-- support projects for vehicles and components with newer technologies. Fisker's loan is for two plug-in hybrid sedan projects--the Karma and the Nina. Tesla's loan is for an all-electric sedan, the Model S, and Nissan's loan is for the LEAF, an all-electric vehicle classified by DOE as a small wagon. The Vehicle Production Group's loan is for a wheelchair-accessible vehicle that will run on compressed natural gas. Finally, a portion of the Ford loan supports projects for manufacturing hybrid and all-electric vehicles. In addition, there are two advanced technology components projects: Nissan's, to build a manufacturing facility to produce batteries for the LEAF and potentially other vehicles; and Tesla's, to build a manufacturing facility to produce electric battery packs, electric motors, and electric components for the Tesla Roadster and vehicles from other manufacturers. In contrast to the projects supporting enhancements to conventional vehicles, DOE's and the borrowers' analyses indicate that the projects with newer technologies will result in vehicles with far greater fuel economy gains per vehicle but that these vehicles will be sold in smaller volumes, thereby having a less immediate impact on the fuel economy of total U.S. passenger vehicles. According to our calculations using DOE's fuel economy estimates, the projects for vehicles with newer technologies, like the projects for enhanced conventional vehicles, are expected to result in improved fuel economy that exceeds both the program's eligibility requirements and CAFE targets--by about 125 percent and about 161 percent respectively. The loans made to date represent about a third of the $25 billion authorized by law, but the program has used 44 percent of the $7.5 billion allocated to pay credit subsidy costs, which is more than was initially anticipated. The $7.5 billion Congress appropriated was based on the Congressional Budget Office's September 2008 estimated average credit subsidy rate of 30 percent per loan ($7.5 billion divided by $25 billion equals 30 percent). However, the average credit subsidy rate for the $8.4 billion in loans awarded to date is 39 percent--a total of roughly $3.3 billion in credit subsidy costs. At this rate, the $4.2 billion remaining to be used to pay credit subsidy costs will not be sufficient to enable DOE to loan the full $25 billion in loan authority. These higher credit subsidy costs were, in part, a reflection of the risky financial situation of the automotive industry at the time the loans were made. For DOE to make loans that use all of the remaining $16.6 billion in loan authority, the credit subsidy rate for the loans would have to average no more than 25 percent ($4.2 billion divided by $16.6 billion). As a result, the program may be unable to loan the full $25 billion allowed by statute. As of May 9, 2011, DOE reported that 16 projects seeking a total of $9.3 billion in loans--representing $3.5 billion in credit subsidy costs--were under consideration. The ATVM program has set procedures for overseeing the financial and technical performance of borrowers and has begun oversight, but at the time of our February report the agency had not yet engaged engineering expertise for technical oversight as called for by the procedures. To oversee financial performance, staff are to review data submitted by borrowers on their financial health to identify challenges to repaying the loans. Staff also rely on outside auditors to confirm whether funds have been used for allowable expenses. As of February 2011, the auditors had reported instances in which three of the four borrowers did not spend funds as required. According to ATVM officials, these instances were minor--the amounts were small relative to the total value of the loans-- and the inappropriate use of funds and the borrowers' practices have been corrected. The ATVM program's procedures also specify technical oversight duties, a primary purpose of which is to confirm that borrowers have made sufficient technical progress before the program disburses additional funds. To oversee technical performance, ATVM staff are to analyze information borrowers report on their technical progress and are to use outside engineering expertise to supplement their analysis once borrowers have begun constructing or retrofitting facilities or are performing engineering integration--that is, designing and building vehicle and component production lines. According to our review, several projects needing additional technical oversight are under way but the program, as of February of 2011, had not brought in additional technical oversight expertise to supplement program staffs' oversight. For example, ATVM officials identified one borrower with projects at a stage requiring heightened technical monitoring; however, ATVM program staff alone had monitored the technical progress of the project. ATVM officials told us that the manufacturer has experience with bringing vehicles from concept to production so additional technical oversight expertise has not been needed, despite the procedures' calling for it. Further, according to documents we reviewed, at the time of our report, four borrowers--rather than the single one identified by ATVM--had one or more projects that, according to the program's procedures, had already reached the stage requiring heightened technical monitoring. Because ATVM staff, whose expertise is largely financial rather than technical, had so far provided technical oversight of the loans without the assistance of independent engineering expertise, we found that the program may be at risk of not identifying critical deficiencies as they occur and DOE cannot be adequately assured that the projects will be delivered as agreed. At the time of our report, according to ATVM staff, they were in the process of evaluating one consultant's proposal to provide engineering expertise and were working with DOE's Loan Guarantee Program to make that program's manufacturing consultants available to assist the ATVM program. DOE has not developed sufficient performance measures that would enable it to fully assess whether the ATVM program is achieving its three goals. Principles of good governance indicate that agencies should establish quantifiable performance measures to demonstrate how they intend to achieve their program goals and measure the extent to which they have done so. These performance measures should allow agencies to compare their programs' actual results with desired results and should be linked to program goals. Although the ATVM program has established performance measures for assessing the performance of ATVM-funded vehicles relative to the performance of similar vehicles in model year 2005, the measures stop short of enabling DOE to fully determine the extent to which it has accomplished its overall goal of improving the fuel economy of all passenger vehicles in use in the United States. The measures stop short because they do not isolate the impact of the program on improving U.S. fuel economy from fuel economy improvements that might have occurred in the absence of the program--by consumers investing in more fuel efficient vehicles not covered by the program in response to high gasoline prices, for example. In addition, the ATVM program lacks performance measures that will enable DOE to assess the extent to which it has achieved the other two goals of the program--advancing automotive technology and protecting taxpayers' financial interests. In our February 2011 report, to help ensure the effectiveness and accountability of the ATVM program, we recommended that the Secretary of Energy direct the ATVM program to (1) accelerate efforts to engage sufficient engineering expertise to verify that borrowers are delivering projects as agreed and to (2) develop sufficient and quantifiable performance measures for its three goals. DOE's Loan Programs Executive Director disagreed with the first recommendation, saying that the projects were in the very early stages of engineering integration and such expertise had not yet been needed for monitoring. However, at that time, three of the four loans had projects that had been in engineering integration for at least 10 months, and the fourth loan had at least one project that was under construction. We maintained that DOE needed technical expertise engaged in monitoring the loans so that it could become adequately informed about technical progress of the projects. DOE's Loan Programs Executive Director also disagreed with the second recommendation. He said that DOE would not create new performance measures for the agency's three goals, saying that performance measures would expand the program and did not appear to be the intent of Congress. We maintained that by not setting appropriate performance measures for its program goals, DOE was not able to assess its progress in achieving what it set out to do through the program; furthermore, it could not provide Congress with information on whether the program was achieving its goals and warranted continued support. Chairman Bingaman, this concludes my prepared statement. I would be pleased to answer any questions that you, Ranking Member Murkowski, or other Members of the Committee may have at this time. For further information about this testimony, please contact Frank Rusco at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Karla Springer, Assistant Director; Nancy Crothers; Carol Kolarik; Rebecca Makar; Mick Ray; Kiki Theodoropoulous; Barbara Timmerman; and Jeremy Williams made key contributions to this statement. 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In the Energy Independence and Security Act of 2007, Congress mandated higher vehicle fuel economy by model year 2020 and established the Advanced Technology Vehicles Manufacturing (ATVM) loan program in the Department of Energy (DOE). ATVM is to provide up to $25 billion in loans for more fuel-efficient vehicles and components. Congress also provided $7.5 billion to pay the required credit subsidy costs--the government's estimated net long-term cost, in present value terms, of the loans. This testimony is based on GAO's February 2011 report on the ATVM loan program (GAO-11-145). It discusses (1) steps DOE has taken to implement the program, (2) progress in awarding loans, (3) how the program is overseeing the loans, and (4) the extent to which DOE can assess progress toward its goals. DOE has taken several steps to implement the ATVM program. First, it set three program goals: increase the fuel economy of U.S. passenger vehicles as a whole, advance U.S. automotive technology, and protect taxpayers' financial interests. DOE also set technical, financial, and environmental eligibility requirements for applicants. In addition, DOE established criteria for judging the technical and financial merits of applicants and projects deemed eligible, and policy factors to consider, such as a project's potential for supporting jobs. DOE established procedures for ATVM staff, aided by experts from within and outside DOE, to score applicants and projects. Finally, the Credit Review Board, composed of senior DOE officials, uses the scores and other information to recommend loan decisions to the Secretary of Energy. The ATVM program, as of May 2011, had made $8.4 billion in loans that DOE expects to yield fuel economy improvements in the near term along with greater advances, through newer technologies, in years to come. Although the loans represent about a third of the $25 billion authorized by law, the program has used 44 percent of the $7.5 billion allocated to pay credit subsidy costs, which is more than was initially anticipated. These higher credit subsidy costs were, in part, a reflection of the risky financial situation of the automotive industry at the time the loans were made. As a result of the higher credit subsidy costs, the program may be unable to loan the full $25 billion allowed by statute. The ATVM program has set procedures for overseeing the financial and technical performance of borrowers and has begun oversight, but at the time of our February report it had not yet engaged engineering expertise needed for technical oversight as called for by its procedures. To oversee financial performance, staff review data submitted by borrowers on their financial health to identify challenges to repaying the loans. Staff also rely on outside auditors to confirm whether funds have been used for allowable expenses. To oversee technical performance, ATVM staff are to analyze information borrowers report on their technical progress and are to use outside engineering expertise to supplement their analysis, as needed. According to our review, projects needing additional technical oversight are under way, and the ATVM staff lack the engineering expertise called for by the program's procedures for adequately overseeing technical aspects of the projects. However, the program had not yet engaged such expertise. As a result, DOE cannot be adequately assured that the projects will be delivered as agreed. DOE has not developed sufficient performance measures that would enable it to fully assess progress toward achieving its three program goals. For example, DOE has a measure for assessing the fuel economy gains for the vehicles produced under the program, but the measure falls short because it does not account for, among other things, the fuel economy improvements that would have occurred if consumers purchased more fuel-efficient vehicles not covered by the program. Principles of good governance call for performance measures tied to goals as a means of assessing the extent to which goals have been achieved. GAO is making no new recommendations at this time. In the February report, GAO recommended that DOE (1) accelerate efforts to engage engineering expertise and (2) develop sufficient, quantifiable performance measures. DOE disagreed with the recommendations, stating that such expertise had not yet been needed and that performance measures would expand the scope of the program. GAO continues to believe that these recommendations are needed to help ensure that DOE is achieving its goals and is accountable to Congress.
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The Runaway and Homeless Youth Act, as amended, authorizes federal funding in the form of discretionary grants for three programs to assist runaway and homeless youth. These programs are administered by the Family and Youth Services Bureau (FYSB) within HHS's Administration for Children and Families (ACF). The three programs--the Basic Center Program, Transitional Living Program, and Street Outreach Program-- enable local public and private organizations and shelters in all 50 states and the U.S. territories to compete for grants that allow them to serve runaway, homeless, and sexually exploited youth who may be on the streets and in need of shelter or longer-term support. The Basic Center Program provides temporary shelter, counseling, and other services to runaway and homeless youth under the age of 18. Basic Center grants are awarded competitively to providers and may be awarded for a period of up to 3 years. The Transitional Living Program provides homeless youth ages 16 through 21 with longer-term residential services for up to 18 months. These services include such things as counseling and education in basic life skills, interpersonal skills, educational advancement, job attainment skills, and physical and mental health care. Transitional Living grants are awarded competitively to providers and may be awarded for up to 5 years. The Street Outreach Program provides education, treatment, counseling, and referrals for runaway, homeless youth under the age of 18 who have been subjected to or are at risk of being sexually abused and exploited. Street Outreach grants may be awarded for up to 3 years. See figure 1 for key aspects of these three programs. For fiscal years 2002 through 2009, funding for these programs has been just over $100 million in total, with Basic Center funding representing the largest dollar amount authorized of the three grant programs. Funding for these programs over the past several years is shown in table 1. HHS's grant award process for Runaway and Homeless Youth grants is comprised of several major steps. HHS's Family and Youth Services Bureau, which is referred to as the Program Office, and the Grants Management Office are responsible for carrying out and overseeing this process. Some of the steps in the grant award process are performed by contractors on behalf of the agency, and one step in the process is performed by panels of peer reviewers selected by the agency to evaluate grant applications. The grant award process consists of the major steps as illustrated in figure 2. Grant Announcement: Each fiscal year, the agency develops and publishes a grant announcement for each grant program. Announcements provide the information potential applicants need to determine if they are eligible to apply and the instructions on how to complete and submit their application. In addition, they include the criteria used to evaluate applications. Technical Assistance: Each announcement lists the technical service providers responsible for providing technical assistance to potential applicants to help them understand the announcement requirements. Technical assistance can be provided through a webinar, seminar, information on the Web, or upon request. Application Submission: Applications may be submitted electronically via Grants.gov or by hard copy via mail or other delivery service. Applicants may also hand deliver their application to the agency's contractor responsible for receiving the applications. The deadline for submitting applications is usually 45 to 60 days after an announcement is published. Application Pre-Screening: Applications are prescreened to determine whether they meet two requirements. Applications are eliminated from review if they are received after the deadline or if they request more funding than the maximum amount specified in the announcement. Peer Review of Applications: Applications remaining after pre- screening are submitted to peer review panels. A panel generally consists of three peer reviewers, who apply the evaluation criteria contained in the announcement to applications and score the applications, and a panel chair responsible for facilitating consensus of the peer review panel. Peer reviewers assign points to each application, based upon specific criteria that are outlined in the announcement. The points are added up and the applicant's average score is derived. This score, ranging from 0 to 100, becomes the basis for the ranked listing of applicants which the agency uses in its award decisions. Because applicants whose score places them below the total available funding limit may be denied a grant, a single point can make a difference between awarding a grant and denying a grant. Final Grant Award Decisions: Taking into account peer review panel scores and comments for each application and, in some cases, other factors, the Program Office and the Grants Management Office make the final award decisions. These decisions are documented in the final funding award decision memos, which contain the listing of all applicants, ranked by their scores, and the final award decisions. Notification of Award Decisions: Each applicant is sent a letter that communicates the grant award decision. Successful applicants are notified before letters are sent to unsuccessful applicants. application, including those for Runaway and Homeless Youth Grants, must receive an objective, "...advisory review...by a minimum of three unbiased reviewers with expertise in the programmatic area for which applications are submitted." To meet this requirement, the agency relies on the peer review process, in which three reviewers convene to evaluate and score applications based on the criteria outlined in the announcement. The peer reviewers are defined by the agency as experts in the field of runaway and homeless youth programs. Figure 3 provides an overview of the peer review process. HHS awarded grants to about one-quarter of the applicants that applied in 2007 and 2008, as shown in table 2. Based on the grant announcements we reviewed and our observation of the peer review process, the criteria upon which grant applications would be evaluated were not clearly defined in a single location in the announcement. Rather, we found that criteria were scattered throughout various sections of the announcement, had multiple labels, and were not presented in an orderly manner in a single location. For example, for the 2009 Street Outreach Program grant competition, grant applications were evaluated and scored based on how well they addressed criteria contained in three different sections of the announcement. First, applicants must address the "Program Requirements," found in Section 1 of the announcement. Second, applicants must address the "Project Description," found in Section 4. Third, applicants must address the "Evaluation Criteria" found in Section 5. However, only the "Evaluation Criteria" section of the announcement explicitly described how their responses would be evaluated and scored. Because the applicant must address criteria contained in different sections of the announcement, if applicants focused primarily on responding to the "Evaluation Criteria" they may not have adequately addressed information in the other sections. If the applicants focused only on the "Evaluation Criteria," these applicants could have received lower scores, which would have decreased their likelihood of being awarded grants. Figure 4 represents the various locations where we found descriptions of criteria. Additionally, peer reviewers we interviewed noted that consolidation of criteria in the announcement into a single location would aid them in their evaluation of applications by reducing the time it would take to review the application because they would not need to look in multiple places in the application for information. During our observation of the 2009 Street Outreach Program grant competition, we found that the agency provided detailed guidance to peer reviewers to help them evaluate and score applications. This guidance, which was not available to applicants, consolidated information from various sections of the announcement. The federal officials instructed reviewers to focus on specific information when evaluating and scoring applications. Because applicants did not have this detailed guidance, which combined information from various parts of the announcement, applicants may not have had full knowledge of what information was critical to receiving a high score. Table 3 shows examples of the guidance provided to peer reviewers during the 2009 Street Outreach Program grant competition. ACF provides technical assistance to potential applicants for runaway and homeless youth grants, as required by statute. Technical assistance is generally defined as providing expertise or support to applicants and grantees for the purpose of strengthening their capabilities for providing shelter and support services for runaway and homeless youth. In fiscal years 2006 and 2007, the agency provided technical assistance to potential applicants through its regional network of 10 providers, and listed these providers in its announcements. However, beginning in September 2007, ACF centralized its technical assistance in order to provide more consistent technical assistance for all applicants, regardless of where they were located. At that time, the agency entered into cooperative agreements with the University of Oklahoma to provide technical assistance nationwide. Through its providers, the agency coordinates technical assistance, which generally consists of a pre-application conference (webinar) covering the application requirements such as the project description, eligibility, and the evaluation criteria, among other things. After the conference, a recording and transcript is posted on the agency Web site. Potential applicants may also ask specific questions of the contacts listed on the announcement. These contacts include the Program Office officials and technical assistance providers. If the technical assistance providers cannot answer the questions, they coordinate with agency staff to obtain responses that are then posted to the Web site. The technical assistance providers also arrange seminars on broader topics related to runaway youth, such as mental health, crisis intervention, and skills training. Most of the applicants we interviewed who received technical assistance under both systems reported that they found it helpful. For example, 17 of the 20 applicants who sought technical assistance were satisfied with the help they received. However, three of these applicants said they prefer the technical assistance provided by their regional providers because of such things as the regional assistance being more "hands-on," the regional staff being more responsive and accessible, and the regional staff being more knowledgeable of local programs. Agency officials noted that the agency has moved toward centralized approach to gain a more consistent approach to the technical assistance it provides. ACF's process for determining which grant applicants will be awarded grants is primarily based on the results of the peer review process, which has weak internal controls to ensure that applications are evaluated consistently. According to GAO standards, internal controls should provide reasonable assurance that the agency's objectives, such as providing grants to the most qualified providers, are being achieved. Ideally, internal controls should be continuous, built-in components of the agency's processes, and should provide reasonable assurance that the grant award process works as it is designed to work. Our review of ACF's grant award process found that, while the agency has a number of internal controls in place to help ensure consistent application of evaluation criteria across reviewers and across panels, some of these controls are limited in their effectiveness. For example, we found weaknesses in four out of six internal controls related to the grant award process, as shown in table 4. First, ACF does not always select peer reviewers whose qualifications comply with the standards outlined in HHS policy. The policy states that each application for runaway and homeless youth grants must receive an objective, advisory review by a minimum of three unbiased reviewers with expertise in the programmatic area for which applications are submitted. Furthermore, the announcements we reviewed stated that grant application reviewers should be experts in the field of runaway and homeless youth programs. However, we found that HHS considered students, school teachers, business consultants, and television and media workers as qualified peer reviewers. Our review of resumes of all the peer reviewers and chairs for 2009 Street Outreach Program grants found that many had professional and volunteer experiences that were not always directly related to runaway and homeless youth programs. Based on the resumes of 76 peer reviewers, we found that 26 peer reviewers had direct experience with runaway and homeless youth programs listed on their resume, and another 31 had indirect experience, such as social work, teaching, or grant reviewing. However, 19 did not appear to have any of the relevant knowledge and expertise in runaway and homeless youth programs required by HHS policy. Three of these 19 reviewers were identified as "youth reviewers" in their resumes. One agency official responsible for the grant review process during 2009 explained that HHS interprets its policies governing peer reviewer qualifications broadly and accepts all related experience. He also noted that HHS encourages the use of "youth reviewers" for its peer review panels. Second, during our observation of the 2009 Street Outreach Program grant competition, we found that the meetings for peer reviewers and chairs were not mandatory. These meetings included an orientation session, panel chair meetings, and new reviewer meetings. Meetings for panel chairs are particularly important for helping to ensure consistent evaluations across panels because in these meetings, all panel chairs agree on how to apply the evaluation criteria. However, we observed that some panel chairs did not attend these meetings, and, therefore, their panels may not have applied the evaluation criteria in the same manner as panels whose chairs had attended the meetings. Similarly, new reviewers were permitted to miss the new reviewers' meetings and still participate in the reviews, which could also increase the risk of inconsistent application of evaluation criteria. Third, we observed that the agency provided detailed guidance to peer reviewers to aid them in evaluating applications. The detailed guidance provided to reviewers explaining the evaluation criteria has led to variation in application of criteria by review panels. For example, when we observed peer review panel deliberations for the 2009 Street Outreach grants, we found that peer review panels varied in the way they applied the criterion for evaluation of emergency evacuation plans. The announcement's "Evaluation Criteria" section contained the following evaluation criterion related to emergency plans: The application "describes the emergency preparedness and management plan by addressing steps to be taken in case of a local or national situation that poses risk to the health and safety of program staff and youth." At the panel session, agency officials told panels that they should also apply all of the information in the detailed guidance they were given, which included information in the "Program Requirements" section of the announcement. Federal officials advised peer reviewers that they should score the application on the following information: "Grantees must immediately provide notification to FYSB when evacuation plans are executed." As a result, peer review panels that followed the guidance gave lower scores to applicants that did not specifically indicate that they would notify the agency when an evacuation occurred. One peer review panel we observed, however, did not give lower scores when this was not specified in an application. These peer reviewers said that they did not think it was fair to assign lower scores in these cases because the more detailed information about evacuation requirements was not listed in the "Evaluation Criteria" section of the announcement. Additionally, we interviewed peer reviewers who participated in panels for 2008 runaway and homeless youth grants. Three of the six peer reviewers we interviewed told us they observed variations in the way panels applied the criteria. Reviewers said that the 2008 Transitional Living Program announcements contained evaluation criteria requiring applicants to provide background checks for all staff members who would be working with youth. However, the peer reviewers told us that the guidance provided to peer reviewers by the agency during that review process further specified that these background checks must be conducted in accordance with local, state, and national requirements. According to the peer reviewers we interviewed, this could have led to variation in how this aspect of the application was evaluated by different panels. Given that the peer review score is the key factor in determining grant awards, inconsistent evaluation criteria across panels can have a significant impact on whether an applicant is awarded a grant or not. The fourth control weakness we observed during our review of the 2009 Street Outreach Program grant competition was that agency officials did not keep a permanent record of their comments and feedback to peer review panels during their oversight of the peer review process, which introduced further potential for inconsistent application of evaluation criteria. Agency officials review the panel's scores and narrative comments for each application during the peer review process before they are finalized. The officials visit panels as peer reviewers deliberate and respond to their questions, and provide feedback to chairpersons on their panel's evaluations. Agency officials told us their review and feedback is meant to ensure that all panels apply the evaluation criteria in the same way. However, the federal officials we observed did not record this information in a permanent record. Instead, the officials provided their feedback to the chair via comments written on post-it notes. This lack of permanent documentation of federal official feedback to peer review panels makes it difficult for the agency to ensure that it is providing consistent guidance to panels and responding to problems across panels in the same way during the peer review process. No weaknesses were apparent in two of the six internal controls--(1) the provision of standard training materials to peer reviewers prior to panel sessions, and (2) the presence of federal officials on site during panel sessions to respond to questions from, and communicate on a daily basis with panels. Final funding decision memos used to internally document grant award decisions for 2007 and 2008 did not contain supporting information regarding why applications with high scores were not funded. Final decisions regarding grant awards are determined by HHS's Program Office and Grants Management Office, taking into account the review panels' scores and narrative comments for each application. According to HHS policy and guidance, the agency has the discretion to deny a grant to an applicant who would otherwise receive one based on the results of the peer review score alone. The agency is permitted to use its discretion to deny grants based on other reasons, such as the agency's concerns about the applicant's program or about the concentration of service providers in the applicant's location, which is referred to as concerns about "geographic distribution" of services. However, the agency does not always clearly document the rationale for its decision to deny a grant based on "geographic distribution" of services. When grants were denied for geographic reasons in 2007 and 2008, we found that the final funding decision memos did not clearly describe the details surrounding such denials, such as the number of other programs that exist in the same locale, the services they provide, or the numbers of youth they serve. Such details could support or justify a denial for geographic reasons. Without fully documenting and permanently recording its rationale for exercising its discretion to deny grants to highly scored applicants, the agency decision-making process is not transparent. Grant award decisions are not always communicated in a timely manner, which may present planning challenges for some applicants. According to one ACF official, successful applicants are generally notified at the end of the federal fiscal year. Based on our review of grant documents for fiscal years 2007 and 2008, we found that for all but the 2008 Transitional Living Program grants, this was true, regardless of when the announcement closed or when the funding decisions were made. For example, applications for the 2008 Basic Center Program were due in February 2008 and were evaluated and scored in March; however, applicants were not notified of their award status until September, 6 months later. HHS policy does not indicate when notification letters should be distributed to applicants, but according to an ACF official, awards to successful applicants are made by September 30 because most new programs are expected to start on or before October 1. Given the proximity of the notification date to program start date, some successful applicants with new programs we spoke with told us that the September notification timeframe did not allow enough preparation time to hire staff and secure the resources needed to provide services. See figure 5 for the timeline of dates for key events for the fiscal year 2007 and 2008 grant award process. Notification delays also create planning issues for ongoing programs that are not awarded new grants and, as a result, need to develop contingency plans for continuing or discontinuing services. Since unsuccessful applicants are notified of their grant award status after successful applicants have been notified, an applicant whose previous grant is about to expire may experience planning problems if notifications are delayed. Delays in notifying unsuccessful applicants may not give applicants adequate time to react to not being awarded a new grant. In the event that funding is denied or discontinued, earlier notification of award decisions could help providers properly plan. According to an ACF official, there is nothing in policy that prohibits notifying an applicant as soon as award decisions have been made. The official told us that delays in sending out notification letters are linked to the timeliness of writing and issuing the announcement. According to this official, announcements must be reviewed by many departments within the agency, and, therefore, the turnaround time is not as timely as it could be. However we found that even after the announcements were published and closed, applicants were still not notified of their award status for several months. For example, for the 2008 Transitional Living grant, regardless of when the announcement was published, applicants were not notified of their award, until close to 4 months after the panels had completed evaluating the applications. Similarly, notifications of decisions related to 2008 Basic Center grants were not sent out until about 7 months after the panels. In addition to the challenges applicants experienced due to notification delays, the agency created additional planning challenges for applicants when it unexpectedly changed the timing of the funding cycle for the Transitional Living Program in fiscal year 2008 without notifying applicants of this change in a timely manner. The announcement stated that ACF anticipated making grant awards in the first quarter of fiscal year 2008, which would have been from October through December of 2007. However, the grant award start date was changed to March 2008 after this announcement was published. According to an agency official, the original start date was moved in an effort to spread out the timing of peer review panels for each of the three runaway and homeless youth programs and other activities that were scheduled to occur around the same time during the summer months. As a result of moving the cycle start date--from October to March--some successful applicants were without federal funding for several months between the end of the previous grant cycle and the new grant award start date. Runaway and homeless youth service providers have also raised concerns to their congressional representatives about the timeliness of notifications. Specifically, we reviewed nine complaint letters that were sent to congressional representatives regarding runaway and homeless youth grants applications in 2007 and 2008. One letter, representing six providers, stated that notification delays created planning problems for service providers who were not able to develop contingency planning for either the continuation or discontinuation of their programs. ACF responded to the complaint by noting that it offers funding for successful applicants to recoup some of the costs that programs incurred due to the delay. In addition, the National Network for Youth, an organization that represents providers of services to youth and families also noted that the timeliness of notifications has been an issue of concern for its membership. In particular, some service providers have raised issues about the difficulties receiving timely communications from ACF concerning grant awards. All of the successful applicants we spoke with felt that their notification letters were clear and contained sufficient information; however, unsuccessful applicants were not all satisfied with the clarity and completeness of the information presented in their letters. The standard letter to unsuccessful applicants may list several possible "other factors" for the denial, beyond their peer review panel score, without any indication of which of the reasons listed in the standard notice applied to their application. See appendix I for a standard letter. The "other factors" include: "comments of reviewers and government officials," "staff evaluation and input," "geographic distribution," and "audit reports and previous program performance." Some unsuccessful applicants told us the letter did not contain enough information for them to understand why their application was denied. In particular, some applicants told us that they did not understand what the agency meant by geographic distribution, which was the basis for denying grants to at least eight applicants during fiscal years 2007 and 2008. Officials told us that "geographic distribution" means that an applicant was denied because the geographical area their program would serve is already served by another runaway and homeless youth service provider. The agency does not keep a record to document detailed information that would support or justify a denial for geographic reasons, such as the number or names of programs that exist in the same locale, the services these programs provide, or the numbers of youth they serve. As a result, it is not possible to verify that denying a grant based on "geographic distribution" was justified. Applicants who want further explanation of their award decisions may request additional information along with their scores from ACF through a Freedom of Information Act request. An ACF official told us that it would be difficult to provide all unsuccessful applicants more information supporting the denial decision based on other factors such as "geographic distribution" in notification letters because of limited resources. However, the resources needed to provide such information may be small, given that "geographic distribution" was the basis for denying grants to only a small number of applicants during fiscal years 2007 and 2008. Moreover, based upon our review of decision notices sent to applicants who were screened out of the competition due to late submissions or improper funding requests, we found contradictory language that may confuse applicants. Specifically, the letter states that "the limited availability of funds permitted us to select only the highest scoring applications that also met all of the eligibility requirements," leaving the impression that the application, in these cases, had been evaluated and scored by a peer review panel. However, applications that are screened- out of the process before the peer review session are not evaluated or scored. When we pointed out this statement to the agency, officials agreed the language could be confusing to applicants. The runaway and homeless youth grant programs provide much needed services to a vulnerable population and the number of applications far exceed the number of grants that can be awarded with available funding. To ensure that ACF awards these grants to the most capable applicants, its award process must be fair and transparent. Without clearly organized evaluation criteria in grant announcements, applicants can have difficulty determining what their applications will be evaluated on. Furthermore, without consistent evaluation of applications in the process, there cannot be a level playing field for all applicants. All peer reviewers must have the required programmatic expertise, or not all applicants are evaluated by their peers. Additionally, unless all peer reviewers attend meetings at panel review sessions; these meetings cannot help ensure consistent evaluation of applications. Without documentation of ACF comments to peer review panels during the review process there is also a risk that the evaluation process will not be consistent. Moreover, without fully documenting the rationale for denying grants to highly scored applicants, agency grant award decisions are not transparent. Once the grant award decisions are made, it is incumbent on ACF to notify applicants of decisions in a timely manner and provide them with clear and specific information about, in particular, decision not to grant awards. Without such notification, applicants may experience planning challenges and not fully understand the reasons they were denied grants. To enhance transparency and fairness in the grant award process, and improve grantees ability to plan for services, we recommend that the Secretary of Health and Human Services direct the Assistant Secretary for the Administration for Children and Families to take the following seven actions: Clearly identify in grant announcements all the criteria that peer reviewers will use to evaluate and score applications, and ensure that peer reviewers use only those criteria during the peer review process. Select peer reviewers with expertise in the programmatic area for which they are evaluating grant applications. Make all meetings for peer reviewers, including those for new reviewers and chairs, mandatory. Document and maintain records of ACF comments to peer review panels during the review process. Document the specific reasons for denying grants to high-scoring applicants in favor of other applicants for the agency record. Provide clear information to applicants about the specific reasons their applications were not approved. Notify applicants about the outcome of their applications as soon as grant award decisions are made. We provided a draft of this report to the Department of Health and Human Services for review and comment; these appear in appendix II. In its comments, HHS disagreed with our recommendation to review and revise announcements to ensure that all evaluation criteria listed be clearly labeled as evaluation criteria and be contained in a single section of the announcement. HHS maintains that all of the criteria used to evaluate and score applications are contained in section 5 of the announcement. However during the peer review process we observed, in addition to evaluating and scoring applications based on criteria specified in the "Evaluation Criteria" section of the announcement (section 5), some of the panels evaluated and scored applications based on criteria from two other sections of the announcement. Given the difference between the agency's response to our recommendation and what we observed, we are revising our recommendation to highlight the need to ensure that the all criteria used to evaluate and score applications are clearly identified to applicants and peer reviewers, and that peer reviewers use only those criteria when evaluating and scoring applications. With regard to our recommendation to select peer reviewers with expertise in the program for which they are evaluating grant applications, HHS commented that the agency has elected to accept reviewers who are knowledgeable of the risk factors faced by runaway and homeless youth, and that many professional disciplines often intersect with runaway and homeless youth. However, we found that in the past the agency has used individuals that would not be expected to have relevant expertise, such as television and media workers. Noting our concern in this area, the agency indicated that they plan to take steps to ensure that all reviewers possess the knowledge and expertise in the particular program for which they are reviewing grant applications. In the event of a shortage of reviewers, the agency intends to staff panels with at least one peer reviewer with extensive relevant knowledge, which would continue to differ from the current policy that grants must receive an objective, advisory review by a minimum of "three" unbiased reviewers with expertise in the programmatic area for which applications are submitted. We agree that professionals in varied disciplines could have sufficient expertise to serve as reviewers and recognize that it may be difficult for the agency to find enough reviewers with expertise in a particular program. As a result, we are clarifying our recommendation to include those that have expertise in the programmatic area for which they are evaluating grant applications, and not a specific program. Regarding our recommendations to make peer review meetings mandatory, HHS indicated that all meetings for peer reviewers and chairs are already mandatory but due to unforeseen factors, it is not always possible for all reviewers to attend. Indeed, during our observation of a peer review session, not all reviewers and chairs attended the meetings. Moreover, at the time, agency officials told us that attendance at these meetings was not explicitly mandatory, but highly encouraged. They also indicated that attendance was not enforced and attendance records were not maintained. In response to this recommendation, the agency indicated that they plan to officially notify all reviewers and chairpersons participating in future reviews that all training is mandatory. In the event some reviewers and chairpersons are not able to attend the mandatory training sessions due to unforeseen circumstances, the agency intends to offer "make up" sessions. HHS did not provide comments on our recommendation to maintain records of ACF comments to peer reviewer panels during the review process. However they agreed with our recommendation to document the specific reasons for denying grants to high-scoring applicants in favor of other applicants. HHS commented that the agency plans to include more details concerning geographic distribution in the letters to applicants who are denied grants for this reason. While these efforts would be in line with our recommendation; the details supporting such decisions must be consistently documented in the agency's records to support the information provided to applicants in their letters. In response to our recommendation to provide clear information to applicants about specific reasons their applications were not approved, HHS stated that in accordance with ACF policy and procedures, every unsuccessful applicant is entitled to an explanation of why their application was not funded. In addition, the agency noted that, upon request, the Program Office will provide a debriefing to applicants. However, letters sent to unsuccessful applicants should clearly note that applicants may request a debriefing by the Program Office regarding specific reasons why their application was not funded. Currently, letters to unsuccessful applicants do not include this information. In addition, it is important to revise the language in letters to applicants that are screened out of the grant competition that implies their application was evaluated and scored. Finally, HHS agrees with our recommendation to notify applicants about the outcome of their application as soon as grant award decisions are made. As part of the grant application process, the agency plans to explain to applicants that final grant decisions depend on the results of the grant award negotiations between ACF and the prospective grantees. We recognize that these grants are discretionary and that final award decisions involve negotiations that may take time. However, every effort should be made to complete negotiations and notify both successful and unsuccessful applicants as quickly as possible. To enable applicants to efficiently and effectively manage their programs, it is important for applicants to receive their notices in a timely manner. HHS also provided technical comments, which we incorporated into the report as appropriate. We are sending copies of this report to the Secretary of HHS, relevant congressional committees, and other interested parties. In addition, the report will be made available at no charge on GAO's Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact Kay E. Brown at (202) 512-7215 or [email protected]. GAO staff who made major contributions to this report are listed in appendix III. In addition to the contact named above, Clarita Mrena (Assistant Director) and Jacqueline Harpp (Analyst-in-Charge) managed all aspects of the assignment up to report production. Anna Kelley managed the report production and Vernette Shaw made significant contributions in all aspects of the work. Lisa Fisher and Jennifer McDonald also made significant contributions to this report. Additionally, Walter Vance and Minette Richardson provided technical support in design and methodology. James Rebbe provided legal support and Susannah Compton assisted in message and report development. James Bennett assisted with visual communications.
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The Department of Health and Human Services (HHS) awards grants to provide shelter and services to runaway and homeless youth through the Basic Center, Transitional Living and Street Outreach Programs. In response to a mandate for a review of the grant award process for these programs in the Reconnecting Homeless Youth Act of 2008 (Pub. L. No. 110-378), GAO examined (1) grant announcements and application requirements, (2) technical assistance for grant applicants, (3) how grant award decisions are made, and (4) notification of grant award decisions. GAO reviewed requirements, documents, and records associated with this process for fiscal years 2007 and 2008, observed the grant evaluation portion of this process, and interviewed applicants, peer reviewers, and agency officials. Based on GAO's review of past grant announcements for these programs, GAO found that the criteria upon which grant applications were evaluated were not clearly identified or presented in a single location in the announcement. Rather, GAO found that criteria were scattered throughout various sections of the announcement, had multiple labels, and were not presented in an orderly manner. As a result, applications that did not address the criteria from all sections were likely to receive lower evaluation scores, decreasing their chances of receiving a grant. HHS provides technical assistance to potential applicants for runaway and homeless youth grants, as required by statute. Of the 20 applicants GAO interviewed who sought technical assistance, 17 were satisfied with the help they received. Grant award decisions are primarily based on the results of the peer review process, and internal controls in place to ensure that applications are evaluated consistently were not always adequate. GAO found weaknesses in four out of the six procedures the agency relies on to ensure consistent evaluation of applications. For example, although HHS policy requires peer reviewers to be experts in the field of runaway and homeless youth programs, about one- quarter of the reviewers who evaluated applications for 2009 Street Outreach grants had little or no experience in this area. With regard to notification of grant award decisions, GAO found that they have not always been communicated to applicants in a timely manner, which can delay the start of new programs and present planning challenges for existing ones. GAO also found that the information in notification letters to applicants who were not awarded grants was not always clear or complete.
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Medicaid is a joint federal-state program that finances health care coverage for low-income and medically needy individuals. In fiscal year 2014, Medicaid covered on average an estimated 65 million beneficiaries at an estimated cost of over $500 billion. States pay for Medicaid- covered services provided to eligible individuals under a federally approved Medicaid state plan, and the federal government pays its share of a state's expenditures. States that wish to change their Medicaid programs in ways that deviate from certain federal requirements may seek to do so under the authority of an approved demonstration. Section 1115 of the Social Security Act authorizes the Secretary of Health and Human Services to waive certain federal Medicaid requirements and to allow costs that would not otherwise be eligible for federal matching funds--through "expenditure authorities"--for experimental, pilot, or demonstration projects that, in the Secretary's judgment, are likely to assist in promoting Medicaid objectives. The demonstrations provide a way for states to test and evaluate new approaches for delivering Medicaid services. To obtain approval, states submit applications for section 1115 demonstrations to HHS for review. Upon approval, HHS issues an award letter to the state and an approval specifying the Medicaid requirements that are being waived, the expenditure authorities approved, and the special terms and conditions detailing the requirements for the demonstration. HHS typically approves a section 1115 demonstration for a 5-year period that can be amended or extended. Under HHS policy in place since the early 1980s, section 1115 demonstrations should be budget neutral to the federal government. In other words, the Secretary should not approve demonstrations that would increase federal costs for the state's Medicaid program beyond what the federal government would have spent without the demonstration. To have a budget-neutral demonstration, generally a state must establish that its planned changes to its Medicaid program--including receiving federal matching funds for otherwise unallowable costs--will be offset by savings or other available Medicaid funds. Once approved, each demonstration operates under a negotiated budget neutrality agreement that places a limit on federal Medicaid spending over the life of the demonstration, typically 5 years. According to HHS's policy, demonstration spending limits are based on states' projected costs of continuing their Medicaid programs without a demonstration. The higher the projected costs without a demonstration, the more federal funding states are eligible to receive for the demonstration. HHS's policy calls for establishing a spending base using a state's actual historical spending from a recent year and projecting spending over the course of the demonstration using certain growth rates established in policy. HHS approved expenditure authorities for a broad range of purposes beyond expanding Medicaid coverage to individuals, including state- operated programs and funding pools. However, how these programs and funding pools would further Medicaid objectives was not always apparent from HHS's documentation. Recent approvals highlight the need for specific criteria and clear documentation to show how demonstrations further Medicaid purposes. In our April 2015 report examining recent demonstration approvals in 25 states, we found that HHS had approved expenditure authorities allowing 5 states to receive federal Medicaid matching funds for state expenditures for more than 150 state-operated programs. Prior to the demonstrations, these programs were not coverable under Medicaid. The 5 states were approved to spend up to $9.5 billion in Medicaid funds (federal and state) for these programs during their current demonstration approval periods, which ranged from 2.5 to 5 years. The state programs were operated or funded by a wide range of different state agencies, such as state departments of mental health, public health, corrections, youth services, developmental disabilities, aging, and state educational institutions. Prior to being included in the demonstrations, these programs could have been financed with state or non-Medicaid federal funding sources, or a combination of these, such as state appropriations or non-Medicaid federal grant funding. Under the demonstrations, states must first allocate and spend state resources for programs to receive federal Medicaid matching funds. The federal matching funds received could replace some of the state's expenditures for the programs, freeing up state funding for other purposes. For example, states could use the freed-up state funding to invest in health care quality improvement efforts or health reform initiatives or simply to address shortfalls in states' budgets. The expenditure authorities for state programs supported a broad range of state program costs that would not otherwise have been eligible for federal Medicaid funding. Although many of the programs offered health- related services, such as prostate cancer treatment and newborn immunizations, not all were necessarily income-based. In addition to programs providing health-related services, other state programs authorized to receive funding included those providing support services to individuals and families, for example, to non-Medicaid-eligible individuals; those providing access to private insurance coverage for targeted groups; and those funding health care workforce training programs. Overall, state programs that were approved for federal Medicaid funds appeared to be wide ranging in nature. How funding for these state-operated programs would likely promote Medicaid objectives was not always clear from HHS's approval documents. We found that the documents did not consistently include information indicating what, specifically, the approved expenditures for state programs were for and, therefore, how they would likely promote Medicaid objectives. State programs approved by HHS were generally listed by program name in the special terms and conditions of each state's approval, but often without any further detailed information. Examples of state program names listed in the approval documents included a healthy neighborhoods program, grants to councils on aging, childhood lead poisoning primary prevention, and a state-funded marketplace subsidies program. A full listing of the state programs funded by expenditure authorities we reviewed is included in appendix I. Further, we found that several state programs approved for federal Medicaid funds appeared, based on information in the approvals, to be only tangentially related to improving health coverage for low-income individuals and lacked documentation explaining how their approval was likely to promote Medicaid objectives. For example, the purposes of some programs approved included funding insurance for fishermen and their families at a reduced rate; constructing supportive housing for the homeless; and recruiting and retaining health care workers. For two of the five states we reviewed, HHS's approvals included additional details beyond the program names about the programs--including program descriptions and target populations--in the special terms and conditions. Such information can help explain how the programs may promote Medicaid objectives; however, we found that even when such information was included, HHS's basis for approving expenditure authorities for some state programs was still not transparent. For example, one state received approval to claim matching funds for spending on a state program that issues licenses and approves certifications of hospitals and other providers in the state. While the terms and conditions delineated the program's mission and funding limits, it did not explicitly address how the program related to Medicaid objectives. The approvals for the other three states, accounting for nearly half of the more than 150 state programs in our review, lacked information on how the state programs would promote Medicaid objectives, such as how they would benefit low-income populations. We also found that HHS's approvals varied in the extent to which they provided assurances that Medicaid funding for state programs would not duplicate any other potential sources of non-Medicaid federal funding. In two of the five states we reviewed, the terms and conditions identified all other federal and nonfederal funding sources for each state program and included specific instructions on how states should "offset" other revenues received by the state programs related to eligible expenditures. The approval for a third state did not identify other funding sources received by each program but included a general program integrity provision requiring the state to have processes in place to ensure no duplication of federal funding. In contrast, the approvals for two states did not identify other federal and nonfederal funding sources for each program and lacked language expressly prohibiting the states' use of funding for the same purposes. Another major type of non-coverage-related expenditure authority that HHS approved allowed states to make new kinds of supplemental payments--that is, payments in addition to base payments for covered services--to hospitals and other providers. In our April 2015 report, we found that HHS approved expenditure authorities in eight states for pools of dedicated funds--called funding pools--amounting to more than $26 billion (federal and state share) over the course of the current approvals, which ranged from 15 months to over 5 years. These expenditure authorities allowed states to receive federal Medicaid funds for supplemental payments made to providers for uncompensated care or for delivery system or infrastructure improvements. In addition, some states had funding pools approved for other varied purposes, such as graduate medical education. Funding pools for hospital uncompensated care costs. In our April 2015 report, we found that HHS approved expenditure authorities in six states to establish or maintain hospital uncompensated care funding pools for a total of about $7.6 billion (federal and state) in approved spending. Funding pools for incentive payments to hospitals. HHS also approved new expenditure authorities in five states for funding pools to make incentive payments to promote health care delivery system or infrastructure improvements for nearly $18.8 billion (federal and state share) in spending. These expenditure authorities were for payments to incentivize hospitals or their partners to make a variety of improvements, such as lowering hospitals' rates of adverse events or incidence of disease, improving care for patients with certain conditions, and increasing delivery system capacity. As with approvals of expenditure authorities for state programs, we found that HHS's approvals of expenditure authorities for funding pools also did not consistently document how expenditures would likely promote Medicaid objectives. The approvals of incentive payment funding pools we reviewed established a structure for planning, reporting on, and getting paid for general, system-wide improvements--for example, increasing primary care capacity or lowering admission rates for certain diseases--but most provided little or no detail on how the initiatives related to Medicaid objectives, such as their potential impact on Medicaid beneficiaries or low-income populations. Further, the criteria for selecting providers eligible to participate in incentive pools were not apparent in most of the approvals we reviewed. HHS's approvals typically listed eligible providers but with no additional information about their role in providing services to Medicaid populations. For example, none of the terms and conditions for the five states' demonstrations that we reviewed established a minimum threshold of Medicaid or low-income patient volume as the basis for participation; however, three of the five states' approvals required that the payment allocations be weighted in part on measures of Medicaid or low-income patient workload. We also found that the approvals for incentive payment funding pools varied in the extent to which they provided assurances that Medicaid funding for these initiatives would not duplicate other sources of federal funding. The terms and conditions for only one of the five states required the state to demonstrate that its funding pool was not duplicating any other existing or future federal funding streams for the same purpose. Two other states' terms and conditions required hospitals to demonstrate that incentive projects did not duplicate other HHS initiatives. The extent to which approvals for uncompensated care pools included protections against potential duplication of federal funds was somewhat mixed. The approvals placed some limits on the potential overlap between payments to individual providers from the uncompensated care pool and Medicaid's Disproportionate Share Hospital program, which provides allotments to states for payments to hospitals that serve a disproportionate share of low-income and Medicaid patients. We found that HHS consistently included a requirement that when states calculate their Disproportionate Share Hospital payment limits for individual hospitals, they include as offsetting revenue any payments for inpatient or outpatient services the hospitals may have received from the uncompensated care pool. Aside from instructions about the Disproportionate Share Hospital program, however, the approvals generally did not explicitly prohibit other potentially duplicative sources of funding, such as grants awarded under other federal programs. While section 1115 of the Social Security Act provides HHS with broad authority in approving expenditure authorities for demonstrations that, in the Secretary's judgment, are likely to promote Medicaid objectives, as we reported in April 2015, according to HHS officials, the agency has not issued explicit criteria explaining how it assesses whether demonstration expenditures meet this broad statutory requirement. HHS officials also told us that for a demonstration to be approved, its goals and purposes must provide an important benefit to the Medicaid program, but they did not provide more explicit criteria for determining whether approved demonstration expenditures would provide an important benefit or promote Medicaid objectives. HHS officials also said that it is not in the agency's interest to issue guidelines that might limit its flexibility in determining which demonstrations promote Medicaid objectives. Given the breadth of the Secretary's authority under section 1115--the exercise of which may result in billions of dollars of federal expenditures for costs not otherwise allowed under Medicaid, we recommended in April 2015 that HHS issue criteria for assessing whether section 1115 expenditure authorities are likely to promote Medicaid objectives. HHS partially concurred with this recommendation, stating that all section 1115 demonstrations are reviewed against "general criteria" to determine whether Medicaid objectives are met, including whether the demonstration will (1) increase and strengthen coverage of low-income individuals; (2) increase access to, stabilize, and strengthen providers and provider networks available to serve Medicaid and low-income populations; (3) improve health outcomes for Medicaid and other low- income populations; and (4) increase the efficiency and quality of care for Medicaid and other low-income populations through initiatives to transform service delivery networks. HHS was silent, however, as to whether it planned to issue written guidance on these general criteria, and we maintain that these general criteria are not sufficiently specific to allow a clear understanding of what HHS considers in reviewing whether expenditure authorities are likely to promote Medicaid objectives. For example, although each of HHS's four general criteria relates to serving low-income or Medicaid populations, HHS does not define low-income or what it means to serve these individuals. In our April 2015 report, we also emphasized the importance of HHS documenting the basis for its approval decisions and showing how approved expenditure authorities are likely to promote Medicaid's objectives. Without such documentation, HHS cannot provide reasonable assurance that it is consistently applying its criteria for determining whether demonstration expenditures promote Medicaid objectives. We recommended that HHS ensure the application of its criteria for assessing section 1115 demonstrations is documented in all approvals, to inform stakeholders--including states, the public, and Congress--of the basis for its determinations that approved expenditure authorities are likely to promote Medicaid objectives. HHS concurred with this recommendation, stating that it will ensure that all future section 1115 demonstration approval documents identify how each approved expenditure authority promotes Medicaid objectives. Finally, we recommended that HHS take steps to ensure that demonstration approval documentation consistently provides assurances that states will avoid duplicative spending by offsetting as appropriate all other federal revenues when claiming federal Medicaid matching funds. In response, HHS said it would take steps to ensure approval documentation for state programs, uncompensated care pools, and incentive payment pools consistently provides assurances that states will avoid duplication of federal spending. HHS's policy and process for approving state spending on Medicaid demonstrations lack transparency and do not provide assurances that demonstrations will be budget neutral for the federal government. Longstanding concerns support the need for budget neutrality policy and process reform. GAO's prior work has found that HHS's policy and process for determining state demonstration spending limits lack transparency related to the criteria and evidence used to support state spending limits, and the most recent written policy, issued in 2001, does not reflect HHS's actual practices. Spending limits are based on states' estimated costs of continuing their Medicaid programs without the proposed demonstration. According to HHS policy, demonstration spending limits should be calculated by estimating future costs of baseline spending--using actual Medicaid costs, typically from the most recently completed fiscal year-- and applying a benchmark growth rate (which is the lower of the state- specific historical growth rates for a recent 5-year period and estimates of HHS officials reported that their policy and nationwide Medicaid growth).process allow for negotiations in determining spending limits, including adjustments to the growth rates used to project baseline costs. For example, if there are documented anomalies in historical spending data, adjustments can be made so that projected spending is accurate. However, HHS's policy does not specify criteria and methods for such adjustments or the documentation and evidence that are needed to support adjustments. GAO, Medicaid Demonstration Waivers: Approval Process Raises Cost Concerns and Lacks Transparency, GAO-13-384 (Washington, D.C.: June 25, 2013) any adjustments. But HHS officials did not have documentation for the agency's process or policy on when estimates are allowed or an explanation for what type of documentation of adjustments is required. Between 2002 and 2014, we have reviewed more than a dozen states' approved comprehensive demonstrations and found that HHS had not consistently ensured that the demonstrations would be budget neutral. We found that HHS has allowed states to use questionable methods and assumptions for their spending baselines and growth rates in projecting spending, without providing adequate documentation to support them. In particular, HHS allowed states to make adjustments that allowed for cost growth assumptions that were higher than growth rates based on historical spending and nationwide spending, without adequate support for the deviations from these benchmarks included in its policy. HHS also allowed states to include costs in the baseline spending that the state never incurred. In some cases, these practices allowed states to add billions of dollars in costs to their projected spending. For example, in our 2013 report, we found that One state's approved spending limit for 2011 through 2016 was based on outdated information on spending--1982 data were projected forward to represent baseline spending and state-specific historical spending growth for a recent period. Had baseline expenditures and benchmark growth rates been based on recent expenditure data that were available, the 5-year spending limit would have totaled about $26 billion less, and the federal share of this reduction would have been about $18 billion. Another state's approved spending limit for 2011 through 2016 included hypothetical costs in the state's estimate of its baseline spending; that is, costs the state had not incurred were included in the base year spending estimate. These costs represented higher payment amounts that the state could have paid providers during the base year, but did not actually pay. For example, the state base year included costs based on the state's hypothetically paying hospitals the maximum amount allowed under federal law, although the state had not paid the maximum amount. We estimated that had the state included only actual expenditures as indicated by HHS's policy, the 5-year spending limit would have totaled about $4.6 billion less, and the federal share of this reduction would have been about $3 billion. Allowing questionable assumptions and methods increases projected spending and allows for significant increase in federal costs. We have found that had HHS developed demonstration spending limits based on levels suggested by its policy, spending limits would have been tens of billions of dollars lower. For example, for five states' demonstrations we reviewed in our 2013 and 2014 reports, we estimate that had HHS used growth rates consistent with its policy and allowed only actual costs in base year spending, demonstration spending limits would have been almost $33 billion lower than what was actually approved.The federal share of the $33 billion reduction would constitute an estimated $22 billion. (See table 1.) Our concerns with HHS's process and criteria are long-standing, and our recommendations for improving HHS's policy and process have not yet been addressed. On several occasions since the mid-1990s, we have found that HHS had approved demonstrations that were not budget neutral to the federal government, and we have made a number of recommendations to HHS to improve the budget neutrality process, but HHS has not agreed. Specifically, we have recommended that HHS (1) better ensure that valid methods are used to demonstrate budget neutrality, (2) clarify criteria for reviewing and approving demonstration spending limits, and (3) document and make public the bases for approved spending limits. In 2008, because HHS disagreed with our recommendations--maintaining that its review and approval process was sufficient--we suggested that Congress consider requiring the Secretary of Health and Human Services to improve the department's review criteria and methods by documenting and making clear the basis for approved spending limits. In 2013, we further recommended that HHS update its written budget neutrality policy to reflect the actual criteria and processes used to develop and approve demonstration spending limits, and ensure the policy is readily available to state Medicaid directors and others. HHS disagreed with this recommendation, stating that it has applied its policy consistently. However, based on multiple reviews of Medicaid demonstrations, we continue to believe that HHS must take actions to improve the transparency of its demonstration approvals. In conclusion, section 1115 Medicaid demonstrations provide HHS and states with a powerful tool for testing and evaluating new approaches for potentially improving the delivery of Medicaid services to beneficiaries. In using the broad authority provided under section 1115, the Secretary has responsibility for the prudent use of federal Medicaid resources, including ensuring that demonstration expenditures promote Medicaid objectives and do not increase overall federal Medicaid costs. Our work has shown, however, that it has not always been clear how approved demonstration spending relates to Medicaid objectives. For example, several state programs that were approved for Medicaid spending that we reviewed appeared, based on information in the approvals, to be only tangentially related to improving health coverage for low-income individuals. HHS's approved expenditure authorities can set new precedents for other states to follow and raise potential for overlap with other funding streams. Similarly, we have had longstanding concerns, dating back decades, that HHS's policy and process for approving total spending limits under demonstrations have not always ensured that spending under demonstrations will not increase federal Medicaid costs. As section 1115 demonstrations have become a significant and growing proportion of Medicaid expenditures, ensuring that demonstration expenditures are linked to Medicaid purposes and are budget neutral is even more critical to ensuring the long-term sustainability of the program, upon which tens of millions of low-income beneficiaries depend to cover their medical costs. Without clear criteria, policies, appropriate methods for developing spending limits, and improved documentation of the bases for decisions, HHS's demonstration approvals affecting tens of billions in federal spending will continue to lack transparency and to raise concerns about the fiscal stewardship of the program. Chairman Pitts, Ranking Member Green, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions that you might have at this time. If you or your staff have any questions about this testimony, please contact Katherine Iritani, Director, Health Care at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Catina Bradley, Assistant Director; Tim Bushfield, Assistant Director; Christine Davis; Shirin Hormozi; Linda McIver; Roseanne Price; and Emily Wilson. From June 2012 through mid-October 2013, five states received approval from the Department of Health and Human Services (HHS) for section 1115 demonstrations that included expenditure authorities allowing funding for state programs. Table 2 shows examples of the names of the state programs funded in the terms and conditions of each state's approval documentation. Often there was no further detailed information regarding the approved programs. Medicaid Demonstrations: Approval Criteria and Documentation Need to Show How Spending Furthers Medicaid Objectives. GAO-15-239. Washington, D.C.: April 13, 2015. High-Risk Series: An Update. GAO-15-290. Washington, D.C.: February 11, 2015. Medicaid Demonstrations: HHS's Approval Process for Arkansas's Medicaid Expansion Waiver Raises Concerns. GAO-14-689R. Washington, D.C.: August 8, 2014. Cost Savings - Health - Medicaid Demonstration Waivers. GAO-14-343SP. Washington, D.C.: April 2014. Medicaid Demonstration Waivers: Approval Process Raises Cost Concerns and Lacks Transparency. GAO-13-384. Washington, D.C.: June 25, 2013. Medicaid Demonstration Waivers: Recent HHS Approvals Continue to Raise Cost and Oversight Concerns. GAO-08-87. Washington, D.C.: January 31, 2008. Medicaid Demonstration Projects in Florida and Vermont Approved under Section 1115 of the Social Security Act. B-309734. July 27, 2007. Medicaid Demonstration Waivers: Lack of Opportunity for Public Input during Federal Approval Process Still a Concern. GAO-07-694R. Washington, D.C.: July 24, 2007. Medicaid Waivers: HHS Approvals of Pharmacy Plus Demonstrations Continue to Raise Cost and Oversight Concerns. GAO-04-480. Washington, D.C.: June 30, 2004. SCHIP: HHS Continues to Approve Waivers That Are Inconsistent with Program Goals. GAO-04-166R. Washington, D.C.: January 5, 2004. Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver Projects Raise Concerns. GAO-02-817. Washington, D.C.: July 12, 2002. Medicaid Section 1115 Waivers: Flexible Approach to Approving Demonstrations Could Increase Federal Costs. GAO/HEHS-96-44. Washington, D.C.: November 8, 1995. 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 long-term sustainability of the $500 billion joint federal-state Medicaid program is important for the low-income and medically needy populations that depend on it. Section 1115 of the Social Security Act provides the Secretary of Health and Human Services with broad authority to waive certain Medicaid requirements and to authorize federal and state expenditures that would not otherwise be allowed under Medicaid, for experimental or pilot projects likely to promote Medicaid objectives. Spending under section 1115 demonstrations has increased rapidly from about one-fifth of Medicaid expenditures in fiscal year 2011 to close to one-third in fiscal year 2014. Expenditure authorities in approved demonstrations have been used by states to expand Medicaid coverage to individuals and for other purposes. HHS policy requires that demonstrations not increase federal costs for the Medicaid program. This testimony addresses (1) the types of expenditure authorities HHS has approved for non-coverage-related purposes and whether the approval documentation shows how they promote Medicaid objectives, and (2) HHS's policy and processes for ensuring demonstrations are not likely to raise federal costs. The testimony is based on GAO's April 2015 report on expenditure authorities in demonstrations approved from June 2012 through mid-October 2013 ( GAO 15 239 ) and several GAO reports issued from 2002 to 2014 addressing HHS's policies and practices for ensuring demonstrations are budget neutral. In April 2015, GAO found that under Medicaid section 1115 demonstrations--experimental or pilot projects to test new ways of providing services which account for nearly one-third of Medicaid expenditures--the Department of Health and Human Services (HHS) had authorized expenditures not otherwise allowed under Medicaid for a broad range of purposes beyond expanding coverage. How these expenditure authorities promoted Medicaid objectives was not always apparent. In the 25 states' demonstrations GAO reviewed, two types of non-coverage-related expenditure authorities--state-operated programs and funding pools--were significant in the amounts of spending approved. GAO found that HHS allowed five states to spend up to $9.5 billion in Medicaid funds to support over 150 state-operated programs. The programs were wide-ranging in nature, such as workforce training, housing, and public health programs, and operated by a wide range of state agencies, such as educational institutions, corrections, aging, and public health agencies, and could have received funding from other sources. HHS allowed eight states to spend more than $26 billion to establish capped funding pools through which states could make payments to hospitals and other providers for a range of purposes, including payments to incentivize hospital infrastructure or other improvements. How the approved expenditures for the state-operated programs and funding pools would promote Medicaid objectives was not always clear in HHS's approval documentation. For example, some state programs approved for funding appeared to be only tangentially related to health coverage for low-income individuals. Although section 1115 of the Social Security Act provides HHS with broad authority in approving expenditure authorities that, in the Secretary's judgment, are likely to promote Medicaid objectives, GAO found that HHS has not issued specific criteria for making these determinations. In multiple reports, issued from 2002 to 2014, GAO also found that HHS's policy and process for approving state spending limits under demonstrations have lacked transparency and have not ensured that demonstrations will be budget neutral to the federal government. The criteria and methods used to set spending limits were not always clear or well supported, such that approved spending limits for some demonstrations were billions of dollars higher than what was supported. For example, for five demonstrations GAO reviewed in 2013 and 2014, using assumptions suggested by HHS's policy, GAO found that spending limits would have been $33 billion lower than what was actually approved. In its 2015 report and prior work, GAO has made multiple recommendations to HHS aimed at (1) improving the transparency of approved spending and how it furthers Medicaid purposes and (2) ensuring Medicaid demonstrations do not increase federal costs. HHS generally agreed to improve its expenditure authority approval documentation, but did not agree with several other recommendations aimed at improving its approval policies and processes and transparency. GAO maintains that, unless HHS takes the actions necessary to implement GAO's prior recommendations, tens of billions of dollars could be at risk.
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DOD, Medicaid, and Medicare Part D use different methods to pay for prescription drugs dispensed in retail pharmacies based on program design differences and statutory requirements. Specifically, DOD reimburses retail pharmacies directly for drugs dispensed to its beneficiaries, state Medicaid programs reimburse pharmacies and then receive federal matching funds for a portion of these expenditures, and Medicare Part D pays pharmacies indirectly through plan sponsors. Under the Medicare Part D program, beneficiaries may choose from competing prescription drug plans offered by plan sponsors (primarily private health insurers), and those plan sponsors are responsible for paying pharmacies. In addition, DOD and Medicaid are statutorily entitled to certain refunds or rebates from drug manufacturers for drugs dispensed to their beneficiaries, while Medicare Part D plan sponsors negotiate with manufacturers for rebates and other price concessions. In fiscal year 2011, DOD provided prescription drug coverage to about 9.7 million beneficiaries through retail pharmacies, its military treatment facilities, and its mail order pharmacy. Active duty service members (including activated National Guard and Reserve members) are not charged for covered prescriptions. For all other beneficiaries, the beneficiary-paid amount (i.e., the amount they pay to the pharmacy when filling a prescription) varies based on the type of medication and where the prescription is filled. For certain drugs dispensed to beneficiaries at retail pharmacies after January 28, 2008, DOD is statutorily entitled to pay the federal ceiling price (FCP), which also pertains to its directly-purchased drugs. In practice, DOD obtains these prices through post-purchase refunds paid by the manufacturers of certain drugs--primarily brand-name drugs. In fiscal year 2011, DOD's prescription drug spending totaled about $7.48 billion, according to DOD officials, representing about 8.9 percent of federal spending for prescription drugs. In fiscal year 2011, Medicaid provided prescription drug coverage to about 71.5 million low income beneficiaries. Prescription drug coverage is an optional benefit under federal Medicaid law that all states and the District of Columbia provide. States establish and administer their own Medicaid programs within broad federal guidelines. Thus, Medicaid programs vary from state to state. Most states require a nominal beneficiary copayment for prescription drugs. State Medicaid programs reimburse retail pharmacies for drugs dispensed to Medicaid beneficiaries and then report these payments to CMS. The federal government provides matching funds to state programs to cover a portion of these costs. Federal law requires manufacturers to pay rebates to state Medicaid agencies for drugs dispensed to Medicaid beneficiaries. These statutorily mandated rebates are calculated based on two prices manufacturers must report to CMS--the average manufacturer price (AMP) and the "best price." For brand-name drugs: the rebate equals the greater of 23.1 percent of the AMP or the difference between the AMP and the best price. If the AMP rises faster than inflation as measured by the change in the consumer price index, the manufacturer is required to provide an additional rebate to the state Medicaid program. The rebate is capped at 100 percent of AMP. For generic drugs: the rebate equals 13 percent of AMP. Best price is not a factor and there are no additional rebates or caps. In addition, most state Medicaid programs negotiate additional rebates-- known as state supplemental rebates--from drug manufacturers. In fiscal year 2011, total federal and state Medicaid net spending on prescription The federal share was $8.6 billion, accounting drugs was $13.7 billion.for about 10.3 percent of federal drug expenditures. In 2011, about 33.2 million Medicare beneficiaries were enrolled in the Medicare Part D program. Medicare beneficiaries can obtain coverage for outpatient prescription drugs by choosing from multiple competing plans offered by plan sponsors--primarily private health insurers--that contract with CMS to offer the prescription drug benefit. The plan sponsors are responsible for reimbursing retail pharmacies for drugs dispensed to Medicare Part D beneficiaries. Drug plans may differ in the premiums charged to CMS and beneficiaries; beneficiary deductibles and copayments (i.e., beneficiary-paid amounts); the drugs covered; pharmacies available to beneficiaries for filling prescriptions; and the drug prices, rebates, and other price concessions negotiated with manufacturers and pharmacies. Although Medicare Part D plans can design their own formularies, CMS generally requires that each formulary include at least two drugs within each therapeutic class and has also designated six categories of clinical concern for which plans must cover all or substantially all of the drugs. As we previously reported, plan sponsors have indicated that these formulary requirements limit their ability to negotiate lower prices for some drugs. Medicare Part D beneficiaries fill prescriptions at retail or mail order pharmacies affiliated with their plans; these pharmacies then submit claims to the plan sponsors for reimbursement. Plan sponsors often negotiate point-of-sale and post-purchase rebates and other price concessions with manufacturers and pharmacies; these must be reported to CMS each year at the national drug code (NDC) level in the DIR reports. In 2011, federal spending on Medicare Part D totaled approximately $55.2 billion, accounting for about 65.9 percent of total federal drug expenditures. Medicaid paid a lower average net unit price--that is, the price after subtracting any beneficiary-paid amounts and post-purchase price adjustments--than DOD and Medicare Part D across the entire sample of 78 prescription drugs and the subsets of brand-name and generic drugs. Specifically, Medicaid's average net price for the entire sample was $0.62 per unit, while Medicare Part D paid an estimated 32 percent more ($0.82 per unit) and DOD paid 60 percent more ($0.99 per unit). (See fig. 1.) Similarly, Medicaid's average net price for the subset of brand- name drugs in our sample was $1.57 per unit, the lowest among the three programs, while DOD paid 34 percent more ($2.11 per unit), and Medicare Part D paid an estimated 69 percent more ($2.65 per unit). Medicaid also paid the lowest net price for the subset of generic drugs in our sample ($0.28 per unit), while Medicare Part D paid 4 percent more ($0.29 per unit) and DOD paid 50 percent more ($0.42 per unit). When we examined the net prices that each program paid for the individual drugs in the sample after subtracting all reported beneficiary- paid amounts and post-purchase price adjustments, we found that Medicaid paid the lowest prices for 25 brand-name and 3 generic drugs, while DOD paid the lowest net price for 5 brand-name and 22 generic drugs, and Medicare Part D paid the lowest estimated net price for 3 brand-name and 20 generic drugs. We found that multiple factors affected the net prices paid by each program, including the amount of post-purchase price adjustments each program received, the gross prices paid to pharmacies, the beneficiary- paid amounts, and market dynamics. Of these, a key factor for the entire sample and for the brand-name subset was the amount of manufacturer post-purchase price adjustments received. (See fig. 2.) On average across the entire sample, these price adjustments ranged from about 15 percent of the gross price for Medicare Part D to about 31 percent for DOD, and nearly 53 percent for Medicaid. For the brand-name subset of the sample, these rebates ranged from about 19 percent of the gross price for Medicare Part D to nearly 39 percent for DOD and 62 percent for Medicaid. The statutory framework allowing each program to obtain post-purchase price adjustments contributes to the wide range of percentages observed. Medicaid's federally mandated rebates apply to virtually all drugs, while DOD's refunds only apply to certain drugs (i.e., primarily brand-name drugs). Furthermore, we found that even when DOD received a refund for a given drug, DOD's per-unit refund amount was less than Medicaid's per-unit rebate for most of the drugs in our sample even though we applied only the federally mandated (i.e., URA-based) rebates for the calculation of Medicaid net prices. If we had been able to accurately apply the Medicaid state supplemental rebates, the per-unit Medicaid rebate amounts would be even larger (i.e., a greater percentage of the gross unit price) than we report. Finally, we found that Medicare Part D obtained the lowest per-unit price adjustments among the three programs. In contrast to the statutory authority allowing DOD and Medicaid to collect specific refunds and rebates, Medicare Part D plan sponsors rely on independent negotiations to obtain price concessions from drug manufacturers. As we have previously reported, plan sponsors have noted limitations on their ability to negotiate price concessions for some drugs due to formulary requirements set by CMS, lack of competitors for some drugs, or low utilization for some drugs that limit incentives for manufacturers to provide price concessions. The gross unit prices paid to retail pharmacies by each program and the magnitude of beneficiary-paid amounts also contributed to the differences in net prices, although to a lesser degree than post-purchase price adjustments. As shown in figure 2, each of the three programs paid the lowest gross unit price to pharmacies for one of the groups of sample drugs: Medicare Part D for the sample as a whole, DOD for the subset of brand-name drugs, and Medicaid for the subset of generic drugs. These different gross unit prices act as a "starting point" for determining net prices paid by the programs--a lower gross price negotiated between the program and the pharmacy makes it easier for the program to achieve a lower net unit price after accounting for beneficiary-paid amounts and post-purchase price adjustments. Beneficiary-paid amounts also affected the net prices paid by each program; larger beneficiary payments contributed to lower net prices paid by the agency. The average beneficiary-paid amounts varied across the three programs; for example, on average for all 78 drugs in our sample, beneficiaries paid nearly 19 percent--or $0.23--of Medicare Part D's gross price per unit, while DOD beneficiaries paid about 7 percent--or $0.12--of DOD's average gross price per unit. Beneficiary-paid amounts also varied depending on the category of drugs examined. For the subset of brand-name drugs in our sample, beneficiary-paid amounts ranged from 6 percent of the gross price for DOD to 17 percent for Medicare Part D, while for the subset of generic drugs these amounts ranged from 14 percent of the gross price for DOD to 21 percent for Medicare Part D. Market dynamics--such as manufacturer responses to offset discounts, the number of competitors for a given drug, and varying utilization of specific drugs by different programs--can also affect the net prices paid by these and other drug programs and thus the amount of savings the programs might be able to achieve. For example, the DOD, Medicaid, and Medicare Part D drug programs theoretically could have achieved savings had they been able to pay the lowest price for each of the drugs in our sample through having access to the post-purchase price adjustments available to the program with the lowest net price for each drug. However, market dynamics, such as manufacturer responses, likely would offset at least some of the savings. Previous reports by GAO and the Congressional Budget Office have noted that making rebates or other discounts available to federal programs could provide savings for the newly eligible programs but could result in higher prices for other programs--including those already eligible for the discounts--as drug manufacturers respond by raising their prices to offset the change. The magnitude of these potential offsetting price increases could depend on a number of factors. For example, if a large federal program with many beneficiaries became eligible for the discounts, manufacturers might choose to raise prices by a greater amount than they would if a smaller program with fewer beneficiaries became eligible. Manufacturers might choose to raise prices more for drugs with fewer competitors than for drugs with many competitors. Furthermore, because federal prices are generally based on prices paid by nonfederal purchasers such as private health insurers, manufacturers would have to raise prices to those purchasers in order to raise the federal prices. The magnitude of these potential effects would vary by drug and would depend on a number of factors, including the relationship between the specific federal price extended to newly eligible programs and the price paid by nonfederal purchasers. Other factors that may affect the magnitude of savings, if any, which could be achieved by DOD, Medicaid, and Medicare Part D include differences between the programs with regard to: programs' formulary practices--for example, in exchange for price concessions, a program may offer a reduced copayment or preferred placement of a manufacturer's drug in the formulary to encourage beneficiaries to choose that drug rather than a similar alternative. In addition, programs may differ in their ability to exclude certain drugs from their formularies, which can limit their ability to negotiate; for example, DOD officials told us that they must cover all drugs within a class. number of beneficiaries enrolled--that is, a program or plan with more beneficiaries can generally negotiate lower gross prices with pharmacies and more rebates from manufacturers through offering greater anticipated utilization of drugs than a program with fewer beneficiaries. utilization practices based on differences in beneficiary populations--for example, Medicare Part D's predominantly elderly population is likely to use a different mix of drugs than a program such as Medicaid, which serves a younger population, and these utilization differences can affect each program's ability to obtain discounts on certain drugs based on volume. copayment structure--for example, one program may achieve lower net prices on certain drugs by charging beneficiaries a higher copayment for the drug. type of pharmacy--for example, the Medicare Part D net prices we are reporting include data from prescriptions filled at mail order pharmacies used by the plans, which typically charge the plans less overhead than retail store-based pharmacies, while DOD prices are limited to prescriptions filled at store-based pharmacies; if the mail order prescriptions were excluded, the average Medicare Part D prices would likely be higher than those we report. We provided a copy of the draft report to DOD and the Department of Health and Human Services (HHS) for comment. DOD stated that it had no comments. HHS provided a technical comment, which was incorporated. We will send copies of this report to relevant congressional committees and other interested members. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-7114 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 members who made key contributions to this report are listed in appendix II. In this appendix we describe our data sources, the selection of the drug sample, and calculations of gross and net unit prices paid by the Department of Defense (DOD), Medicaid, and Medicare Part D for prescription drugs dispensed to their beneficiaries at retail pharmacies. We obtained prescription drug claims data from DOD and the Centers for Medicare & Medicaid Services (CMS) for the third calendar quarter of 2010. Specifically, we obtained Pharmacy Data Transaction Service (PDTS) data from DOD covering prescription drugs dispensed to its beneficiaries by non-DOD retail pharmacies and we obtained Medicaid Analytic eXtract (MAX) data and Medicare Part D Prescription Drug Event (PDE) claims data from CMS. For each data source, we excluded claims with third-party payments; we also excluded physician-administered outpatient prescription drugs and items that are not traditionally considered drugs such as bandages, syringes, needles, diabetes test For Medicaid, we excluded Arizona and Delaware strips, and saline.because claims from those states did not include third-party payment data. We included only fee-for-service Medicaid claims because claims paid under a capitated managed care plan or similar methods would not provide an accurate picture of drug prices actually paid. We also excluded Medicaid claims for beneficiaries who were also eligible for Medicare because retail prescription drugs for those beneficiaries are covered by Medicare Part D. We excluded Medicare Part D claims from plans that restrict enrollment, such as employer plans, Program of All- Inclusive Care for the Elderly (PACE) plans, and demonstration plans. We used Red Book data from Truven Health Analytics to determine the brand-name or generic status of each drug. We reviewed agency data for reasonableness and consistency, including screening for outlier prices and examining possible reasons for inconsistencies between the data sources. We also reviewed documentation and talked to agency officials about steps they take to ensure data reliability. We determined that the data were sufficiently reliable for our purposes. We determined utilization using units of each (for drugs measured in discrete units such as tablets, capsules, vials, or kits), milliliters (for drugs measured in liquid volume), and grams (for drugs measured by weight). When calculating expenditures, we used the sum of the programs' payments for each drug plus any reported beneficiary-paid amounts (e.g., deductibles and copayments). Cleaned and validated Medicaid data for 2010 were not available at the time that we selected our sample. Therefore, we used only DOD and Medicare Part D data to select our sample. However, such data became available later and we were able to use these data to determine Medicaid gross and net unit prices. To select the highest utilization and highest expenditure drugs for the sample, we aggregated the utilization and expenditure data at the drug level (i.e., drug name, strength, and dosage form) separately for DOD and Medicare Part D. For example, all national drug codes (NDC) corresponding to 10 mg tablets of Lipitor reimbursed by DOD on behalf of its beneficiaries were aggregated and the associated utilization and expenditures were summed and compared to other brand-name drugs, while NDCs corresponding to 10 mg tablets of atorvastatin (the generic equivalent of Lipitor) reimbursed by DOD were aggregated separately and compared to other generic drugs. Because we encountered difficulty in identifying and removing outliers from the Medicare Part D PDE data due to issues with the reliability of the "Quantity Dispensed" field, we narrowed the drugs considered for inclusion in the sample by first using DOD utilization and expenditure data to rank the top 150 brand-name and top 150 generic drugs in each category (high utilization and high expenditure). We were then able to clean the data by identifying and removing outliers from the much smaller subset of PDE claims corresponding to these drugs. We ranked the brand-name and generic drugs based on utilization and expenditures for Medicare Part D. We then combined the DOD and Medicare Part D rankings to determine the top brand-name and generic drugs that were reimbursed by both agencies. The drug sample was selected to include the top 50 brand-name and top 50 generic drugs; 25 of the brand-name drugs and 25 of the generic drugs were selected on the basis of the combined DOD and Medicare Part D utilization ranks, and the other 25 brand-name and 25 generic drugs were selected on the basis of the combined DOD and Medicare Part D expenditure ranks. After accounting for drugs that were in both the high-expenditure group and the high-utilization group, the final sample contained 33 brand-name drugs and 45 generic drugs and accounted for at least 25 percent of utilization and 25 percent of expenditures for both DOD and Medicare Part D retail prescriptions filled by beneficiaries in the third calendar quarter of 2010 (see table 1). (See table 2 for a list of the drugs in the sample.) After selecting the sample, we calculated gross unit prices paid to pharmacies by DOD, Medicaid, Medicare Part D, and their beneficiaries for all individual drugs. We calculated gross unit prices by first adding the program-paid and beneficiary-paid amounts for each drug, then dividing these expenditures by total utilization. For Medicaid, we were unable to include beneficiary-paid amounts because CMS does not collect these data. Therefore the Medicaid gross prices we report are somewhat lower than the actual gross prices would have been had beneficiary-paid amounts been included. However, beneficiary-paid amounts for Medicaid are generally nominal and it is likely that they would be smaller than corresponding amounts for DOD and Medicare Part D. We also calculated gross unit prices for the entire sample, the subset of brand- name drugs, and the subset of generic drugs by dividing the total expenditures for all relevant drugs by the total utilization for those drugs. All three programs (DOD, Medicaid, and Medicare Part D) obtain refunds, rebates, or other price concessions from drug manufacturers for at least some drugs dispensed to their beneficiaries by retail pharmacies. In order to more accurately calculate reimbursement prices paid to pharmacies by each program, we accounted for these post-purchase price adjustments by calculating program-paid net unit prices. To calculate these prices for DOD, we obtained post-purchase refund data from DOD for prescription drugs dispensed to its beneficiaries at non-DOD retail pharmacies.These refunds were subtracted from the NDC-level gross unit prices to determine net unit prices paid by DOD for each NDC. We then aggregated these net NDC-level prices as appropriate to determine average net unit prices for each individual drug in our sample, for the entire sample, for the subset of brand-name drugs, and for the subset of generic drugs. Manufacturers are required to provide rebates (which are calculated on the basis of URA data) to state Medicaid agencies for covered drugs. See 42 U.S.C. SS 1396r-8. States may also negotiate supplemental rebates directly with manufacturers for drugs dispensed to Medicaid recipients. These supplemental rebates are reported in Form CMS-64, a standardized quarterly expenditure report that states submit to CMS documenting payments and rebates or offsets in various medical categories, including prescription drugs, to obtain federal matching funds to which states are entitled. each individual drug in our sample, for the entire sample, for the subset of brand-name drugs, and for the subset of generic drugs. For Medicare Part D, plan sponsors may negotiate rebates and other price concessions from manufacturers for drugs dispensed to their beneficiaries. Beginning in 2010, the annual total of all such price concessions at the NDC level must be reported to CMS on the annual Medicare Part D Direct and Indirect Remuneration (DIR) Detailed Report. However, because plan sponsors have several options for allocating DIR to the NDC level, calculation of the net drug price using the NDC-level DIR data provides only an estimate of the net prices paid by plan sponsors. We also evaluated the impact of point-of-sale (POS) rebates as reported in the PDE data to our calculation of net prices for Medicare Part D and determined that POS rebates were insignificant in comparison to DIR amounts; we therefore ignored POS rebates in our calculation of net prices. To estimate program-paid net prices for Medicare Part D, we obtained the 2010 DIR Detailed Report from CMS. To calculate the total DIR for each NDC, we added the "rebate" and "all_other_dir" variables. Because the DIR report includes annual--rather than quarterly--data on price concessions, we estimated the proportion of Medicare Part D price concessions applicable to our sample by determining the proportion of 2010 expenditures that occurred in the third calendar quarter for each NDC in our sample. We multiplied this result by the total amount of price concessions reported in the 2010 DIR Detailed Report for a given NDC to estimate the proportion of each NDC's DIR (in dollars) to apply to our analysis. We divided this result by the NDC-level utilization and subtracted the resulting per-unit price concession amount from the Medicare Part D gross unit price for that NDC. We then aggregated the results for the appropriate NDCs to determine average net unit prices for the entire sample, the subset of brand-name drugs, and the subset of generic drugs. We interviewed DOD and CMS officials and reviewed literature describing factors that affect drug prices. The results of our analyses are limited to the 78 high-utilization and high-expenditure drugs in our sample for the third calendar quarter of 2010 and are not necessarily applicable across all drugs or any other time periods. In addition to the contact named above, key contributors to this report were Robert Copeland, Assistant Director; Zhi Boon; Karen Howard; Laurie Pachter; and Carmen Rivera-Lowitt.
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In 2011, federal spending for prescription drugs by DOD, Medicaid, and Medicare Part D totaled $71.2 billion--representing about 85 percent of all federal prescription drug expenditures--for about 114.4 million beneficiaries. Each program reimbursed retail pharmacies for outpatient prescriptions filled at these pharmacies by their beneficiaries. GAO was asked to compare prices paid for prescription drugs across federal programs. This report compares retail reimbursement prices paid by DOD, Medicaid, and Medicare Part D for a sample of prescription drugs and describes factors affecting these prices. Using agency data for the third quarter of 2010 (the most recent data available at the time of GAO's analysis), GAO selected a sample of 50 high-utilization and 50 high-expenditure drugs; after accounting for overlap between the two groups, the final sample contained 78 drugs. GAO calculated average gross unit prices paid to pharmacies by each program by adding total program-paid and beneficiary-paid amounts and dividing by total utilization for each drug, the entire sample, and the subsets of brand-name and generic drugs. GAO calculated net unit prices paid by each program by subtracting all agency-reported beneficiary-paid amounts, rebates, refunds, and other price concessions from the gross unit prices. GAO also interviewed DOD, Medicaid, and Medicare Part D officials and reviewed literature describing factors affecting drug prices. GAO found that Medicaid paid the lowest average net prices across a sample of 78 high-utilization and high-expenditure brand-name and generic drugs when compared to prices paid by the Department of Defense (DOD) and Medicare Part D. Specifically, Medicaid's average net price for the entire sample was $0.62 per unit, while Medicare Part D paid an estimated 32 percent more ($0.82 per unit) and DOD paid 60 percent more ($0.99 per unit). Similarly, Medicaid paid the lowest net price for the subset of brand-name drugs in the sample, while DOD paid 34 percent more and Medicare Part D paid an estimated 69 percent more. Medicaid also paid the lowest net price for the subset of generic drugs, while Medicare Part D paid 4 percent more and DOD paid 50 percent more. GAO found that multiple factors affected the net prices paid by each program. Specifically, a key factor for the entire sample and the brand-name subset was the amount of any post-purchase price adjustments, which are the refunds, rebates, or price concessions received by each program from drug manufacturers after drugs have been dispensed to program beneficiaries. These price adjustments ranged from about 15 percent of the gross price for Medicare Part D to about 31 percent for DOD, and nearly 53 percent for Medicaid across the entire sample. The gross prices each program negotiated with pharmacies and the magnitude of beneficiary-paid amounts also contributed to differences in net prices paid by the three programs, but to a lesser degree. GAO provided a copy of the draft report to DOD and the Department of Health and Human Services (HHS) for comment. DOD stated that it had no comments. HHS provided a technical comment, which was incorporated.
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TSA is the primary federal agency responsible for overseeing the security of surface transportation systems, including developing a national strategy and implementing security programs. However, several other agencies, including DHS's Federal Emergency Management Agency (FEMA) and the Department of Transportation's (DOT) Federal Transit Administration (FTA) and Federal Railroad Administration (FRA), also play a role in helping to fund and secure these systems. Since it is not practical or feasible to protect all assets and systems against every possible terrorist threat, DHS has called for using risk-informed approaches to prioritize its security-related investments and for developing plans and allocating resources in a way that balances security and commerce. In June 2006, DHS issued the National Infrastructure Protection Plan (NIPP), which established a six-step risk management framework to establish national priorities, goals, and requirements for Critical Infrastructure and Key Resources protection so that federal funding and resources are applied in the most effective manner to deter threats, reduce vulnerabilities, and minimize the consequences of attacks and other incidents. The NIPP, updated in 2009, defines risk as a function of three elements: threat, vulnerability, and consequence. Threat is an indication of the likelihood that a specific type of attack will be initiated against a specific target or class of targets. Vulnerability is the probability that a particular attempted attack will succeed against a particular target or class of targets. Consequence is the effect of a successful attack. In May 2007, TSA issued the Transportation Systems Sector-Specific Plan (TS-SSP), which documents the risk management process to be used in carrying out the strategic priorities outlined in the NIPP. As required by Executive Order 13416, the TS-SSP also includes modal implementation plans or modal annexes that detail how TSA intends to achieve the sector's goals and objectives for each of the six transportation modes using the systems- based risk management approach. To address the objectives and goals laid out in the TS-SSP, TSA uses various programs to secure transportation systems throughout the country, including Visible Intermodal Prevention and Response (VIPR) teams and Surface Transportation Security Inspectors (STSI). VIPR teams employ a variety of tactics to deter terrorism, including random high- visibility patrols at mass transit and passenger rail stations using, among other things, behavior-detection officers, canine detection teams, and explosive-detection technologies. STSIs, among other things, conduct on- site inspections of U.S. rail systems--including mass transit, passenger rail, and freight rail systems--to identify best security practices, evaluate security system performance, and discover and correct deficiencies and vulnerabilities in the rail industry's security systems. In August 2007, the Implementing Recommendations of the 9/11 Commission Act (9/11 Commission Act) was signed into law, which included provisions that task DHS and other public and private stakeholders with security actions related to surface transportation security. Among other things, these provisions include mandates for developing and issuing reports on TSA's strategy for securing public transportation, conducting and updating comprehensive security assessments for public transportation agencies, and ensuring that transportation modal security plans include threats, vulnerabilities, and consequences for transportation infrastructure assets including mass transit, railroads, highways, and pipelines. In March 2009, we reported that TSA has taken some actions called for by the NIPP's risk management process, but has not conducted comprehensive risk assessments across aviation and four major surface transportation modes. In 2007, TSA initiated but later discontinued an effort to conduct a comprehensive risk assessment for the entire transportation sector, known as the National Transportation Sector Risk Analysis. Consequently, we recommended that TSA conduct comprehensive risk assessments for the transportation sector to produce a comparative analysis of risk across the entire transportation sector, which the agency could use to guide current and future investment decisions. DHS and TSA concurred with our recommendation, and in April 2010 TSA identified planned actions, including integrating the results of risk assessments into a comparative risk analysis across the transportation sector. TSA officials stated in April 2010 that the agency has revised its risk management framework, TS-SSP, and modal annexes. They added that these documents are undergoing final agency review. In addition, we have previously reported that while TSA has collected information related to threat, vulnerability, and consequence within the surface transportation modes, it has not conducted risk assessments that integrate these three components for individual modes. For example, we reported in June 2009 that TSA had not conducted its own risk assessment of mass transit and passenger rail systems that combined all three risk elements, as called for by the NIPP. Thus, we recommended that TSA conduct a comprehensive risk assessment that combines threat, vulnerability, and consequence. DHS concurred with this recommendation, and in February 2010, DHS officials said that TSA had undertaken a Transportation Systems Sector Risk Assessment that would incorporate all three elements of risk. In April 2010, TSA stated that this risk assessment is under review. Similarly, the Administration's Transborder Security Interagency Policy Committee (IPC) Surface Transportation Subcommittee's recently issued Surface Transportation Security Priority Assessment recognized that assessing transportation assets and infrastructure and ranking their criticality would help target the use of limited resources. Consequently, this subcommittee recommended that TSA identify appropriate methodologies to evaluate and rank surface transportation systems and critical infrastructure. We have also identified other opportunities to improve TSA's risk management efforts for surface transportation. For example, in April 2009, we reported that TSA's efforts to assess security threats to freight rail could be strengthened. Specifically, we noted that while TSA had developed a freight rail security strategy, the agency had focused almost exclusively on rail shipments of toxic inhalation hazards (TIH), such as chlorine and anhydrous ammonia, which can be fatal if inhaled, despite other federal and industry assessments having identified additional potential security threats, such as risks to bridges, tunnels, and control centers. We reported that although TSA's focus on TIH has been a reasonable initial approach given the serious public harm these materials potentially pose to the public, there are other security threats for TSA to consider and evaluate as its freight rail strategy matures, including potential sabotage to critical infrastructure. We recommended that TSA expand its efforts to include all security threats in its freight rail security strategy. DHS concurred with this recommendation and has since reported that TSA has developed a Critical Infrastructure Risk Tool to measure the criticality and vulnerability of freight railroad bridges. As of April 2010, the agency has used this tool to assess 39 bridges, some of which transverse either the Mississippi or Missouri Rivers, and intends to assess 22 additional bridges by the end of fiscal year 2010. Further, we reported in June 2009 that the Transit Security Grant Program (TSGP) risk model includes all three elements of risk, but can be strengthened by measuring variations in vulnerability. DHS has held vulnerability constant, which limits the model's overall ability to assess risk and more precisely allocate funds to transit agencies. We also found that although TSA allocated about 90 percent of funding to the highest-risk agencies, lower-risk agency awards were based on other factors in addition to risk, such as project quality. For example, a lower-risk agency with a high-quality project was more likely to receive funding than a higher-risk agency with a low-quality project. We recommended that DHS strengthen its methodology for determining risk by developing a cost- effective method for incorporating vulnerability information in its TSGP risk model. DHS concurred with the recommendation, and in April 2010 TSA stated that it is reevaluating the risk model for the fiscal year 2011 grant cycle. Further, TSA is evaluating the feasibility of incorporating an analysis of the current state of an asset, including its vulnerability, in determining fiscal year 2011 grant funding. Additionally, we are currently conducting an assessment of TSA's efforts to help ensure pipeline security; the resulting report will include an evaluation of the extent to which TSA uses a risk management approach to help strengthen pipeline security. Our preliminary observations found that TSA has identified the 100 most-critical pipeline systems in the United States and produced a pipeline risk assessment model, consistent with the NIPP. Furthermore, the 9/11 Commission Act requires that risk assessment methodologies be used to prioritize actions to the highest-risk pipeline assets, and we found that TSA's stated policy is to consider risk when scheduling Corporate Security Reviews--assessments of pipeline operators' security plans. However, we found a weak statistical correlation between a pipeline system's risk rank and the time elapsed between a first and subsequent review. In addition, we found that among the 15 highest risk-ranked pipeline systems, the time between a first and second Corporate Security Review ranged from 1 to 6 years for those systems that had undergone a second review. Further, as of April 2010, 2 systems among the top 15 had not undergone a second review despite more than 6 years passing since their first review. TSA officials told us that although a pipeline system's relative risk ranking is the primary factor driving the agency's decision of when to schedule a subsequent Corporate Security Review, it is not the only factor influencing this decision. They explained they also consider the geographical proximity of Corporate Security Review locations to each other in order to reduce travel time and costs, as well as the extent to which they have worked with pipeline operators through other efforts, such as their Critical Facility Inspection Program. Better prioritizing its reviews based on risk could help TSA ensure its resources are more efficiently allocated toward the highest-risk pipeline systems. We expect to issue this report by the end of this year. TSA has developed several initiatives to improve coordination with its federal, state, and private sector stakeholders. However, we have previously reported that TSA's coordination efforts could be improved. For example, we reported in April 2009 that federal and industry stakeholders have taken a number of steps to coordinate their freight rail security efforts, such as implementing agreements to clarify roles and responsibilities and participating in various information-sharing mechanisms. However, federal coordination could be enhanced by more fully leveraging the resources of all relevant federal agencies, such as TSA and FRA. For example, we reported that TSA was not requesting data on deficiencies in security plans and training activities collected by FRA, which could be useful to TSA in developing regulations requiring high-risk rail carriers to develop and implement security plans. To improve coordination, we recommended that DHS work with federal partners such as FRA to ensure that all relevant information, including threat assessments, is shared. DHS concurred with this recommendation and stated that it planned to better define stakeholder roles and responsibilities to facilitate information sharing. Since we issued our report, DHS reported that TSA continues to share information with security partners, including meeting with FRA and the DHS Office of Infrastructure Protection to discuss coordination and develop strategies for sharing relevant assessment information and avoiding duplication. In addition, we reported in January 2009 that although several federal entities, including TSA and the U.S. Coast Guard, have efforts underway to assess the risk to highway infrastructure, these assessments have not been systematically coordinated among key federal partners. We further reported that enhanced coordination with federal partners could better enable TSA to determine the extent to which specific critical assets had been assessed and whether potential adjustments in its methodology were necessary to target remaining critical infrastructure assets. We recommended that to enhance collaboration among entities involved in securing highway infrastructure and to better leverage federal resources, DHS establish a mechanism to systematically coordinate risk assessment activities and share the results of these activities among the federal partners. DHS concurred with the recommendation. In February 2010, TSA officials indicated that the agency had met with other federal agencies that conduct security reviews of highway structures to identify existing data resources, establish a data-sharing system among key agencies, and discuss standards for future assessments. The Administration's Surface Transportation Security Priority Assessment also highlighted the need for federal entities to coordinate their assessment efforts. That report included a recommendation to establish an integrated federal approach that consolidates capabilities in a unified effort for security assessments, audits, and inspections to produce more thorough evaluations and effective follow-up actions for reducing risk, enhancing security, and minimizing burdens on assessed surface transportation entities. We also reported in February 2009 that TSA, which has the primary federal responsibility for ensuring the security of the commercial vehicle sector, had taken actions to improve coordination with federal, state, and industry stakeholders with respect to commercial vehicle security. These actions included signing joint agreements with DOT and supporting the establishment of intergovernmental and industry councils. However, we also reported that additional opportunities exist to enhance security by more clearly defining stakeholder roles and responsibilities. For example, some state transportation officials stated that DHS and TSA had not clarified states' roles and responsibilities in securing the transportation sector or communicated to them TSA's strategy to secure commercial vehicles, which in some cases has caused delays in implementing state transportation security initiatives. Industry stakeholders also expressed concerns with respect to TSA communicating its strategy, roles, and responsibilities; leveraging industry expertise; and collaborating with industry representatives. As a result, we recommended that TSA establish a process to strengthen coordination with the commercia vehicle industry, including ensuring that the roles and responsibilities of industry and government are fully defined and clearly communicated, and assess its coordination efforts. DHS concurred with this recommendatio n and in April 2010 reported that its TS-SSP Highway Modal Annex is under s review and is expected to delineate methods to enhance communication and coordination with stakeholde rs. In accordance with Executive Order 13416 and requirements of the 9/11 Commission Act, DHS, through TSA, has developed national strategies for each surface transportation mode. However, we have previously reported the need for TSA to strengthen its evaluation of the results of its efforts through the use of targeted, measurable, and outcome-based performance measures. Our prior work has shown that long-term, action-oriented goals and a timeline with milestones can help track an organization's progress toward its goals. The NIPP also provides that DHS should work with its security partners, including other federal agencies, state and local government representatives, and the private sector, to develop sector- specific metrics. Using performance measures and an evaluation of the effectiveness of surface transportation security initiatives can help provide TSA with more meaningful information from which to determine whether its strategies are achieving their intended results, and to target any needed improvements. For example, in January 2009, we reported that TSA's completion of a Highway Security Modal Annex was an important first step in guiding national efforts to protect highway infrastructure, but it did not include performance goals and measures with which to assess the program's overall progress toward securing highway infrastructure. As a result, we recommended that TSA establish a time-frame for developing performance goals and measures for monitoring the implementation of the annex's goals, objectives, and activities. Similarly, in June 2009, we reported that TSA's Mass Transit Modal Annex identified sectorwide goals that apply to all modes of transportation as well as subordinate objectives specific to mass transit and passenger rail systems, but did not contain measures or targets on the effectiveness of operations of the security programs identified in the annex. As a result, we recommended that TSA should, to the extent feasible, incorporate performance measures in future annex updates. DHS concurred with both of these recommendations. In February 2010, TSA indicated that the updated annex would incorporate performance measures among other characteristics we recommended, and as of April 2010, the annex is under review. We will continue to monitor TSA's progress in addressing these recommendations. We also reported in April 2009 that three of the four performance measures in TSA's Freight Rail Modal Annex to the TS-SSP did not identify specific targets to gauge the effectiveness of federal and industry programs in achieving the measures or the transportation-sector security goals outlined in the annex. We also reported that TSA was limited in its ability to measure the effect of federal and industry efforts on achieving the agency's key performance measure for the freight rail program, which is to reduce the risk associated with the transportation of TIH in major cities identified as high-threat urban areas. This was because the agency was unable to obtain critical data necessary to consistently calculate cumulative results for this measure over the time period for which it calculated them--from 2005 to 2008. In particular, some baseline data needed to cumulatively calculate results for this measure were historical and could not be collected. As a result, the agency used a method for estimating risk for its baseline year that was different than what it used for calculating results for subsequent years. Consequently, to help ensure the strategic goals of the modal annex are met and that TSA is consistently and accurately measuring agency and industry performance in reducing the risk associated with TIH rail shipments in major cities, we recommended that TSA ensure that future updates (1) contain performance measures with defined targets that are linked to fulfilling goals and objectives; and (2) more systematically address specific milestones for completing activities and measuring progress toward meeting identified goals. We further recommended that TSA take steps to revise the baseline year associated with its TIH risk reduction performance measure to enable the agency to more accurately report results for this measure. DHS concurred with these recommendations and has indicated that it will incorporate them into future updates of its Freight Rail Modal Annex, which will be designed to more specifically address goal-oriented milestones and performance measures. In April 2010, TSA stated that the agency has revised its modal annexes and that these documents are undergoing final agency review. In addition to developing performance measures to assess the success of its security strategies, we have also identified the need for TSA to develop or enhance its performance measures for specific programs such as the TSGP, VIPR program, and pipeline security programs. Specifically, in June 2009, we reported that the TSGP lacked a plan and milestones for developing measures to track progress of achieving program goals. While FEMA--which administers the grants--reported that it was beginning to develop measures to better manage its portfolio of grants, TSA and FEMA had not collaborated to produce performance measures for assessing the effectiveness of TSGP-funded projects, such as how funding is used to help protect critical infrastructure and the traveling public from possible acts of terrorism. We recommended that TSA and FEMA collaborate in developing a plan and milestones for measuring the effectiveness of the TSGP and its administration. DHS concurred with our recommendation, and in November 2009, FEMA stated that it will take steps to develop a plan with milestones in coordination with TSA. Likewise, the Administration's Surface Transportation Security Priority Assessment discussed the importance of establishing a measurable evaluation system to determine the effectiveness of surface transportation security grants and recommended that TSA coordinate with other federal agencies, including FEMA, to do so. In June 2009, we reported that TSA had measured the progress of its VIPR program in terms of the number of VIPR operations conducted, but had not yet developed measures or targets to report on the effectiveness of the operations themselves. TSA program officials reported, however, that they were planning to introduce additional performance measures no later than the first quarter of fiscal year 2010. They added that these measures would gather information on, among other things, (1) interagency collaboration by collecting performance feedback from federal, state, and local security, law enforcement, and transportation officials prior to and during VIPR deployments; and (2) stakeholder views on the effectiveness and value of VIPR deployment. In April 2010, TSA reported that the VIPR program introduced four performance measures for fiscal year 2010; these measures will be reported quarterly. TSA has also stated that it has identified performance targets for these measures, which it will revisit when baseline program data is available. As part of our ongoing review of TSA's efforts to help ensure pipeline security, we are assessing the extent to which TSA has measured efforts to strengthen pipeline security. While our work has not been completed, our preliminary observations have identified that TSA has taken actions to measure progress as called for by the NIPP, but could better measure pipeline security improvements. More specifically, our preliminary observations have identified that effective performance measurement data could better inform decision makers of the extent to which pipeline security programs and activities have been able to reduce risk and better enable them to determine funding priorities within and across agencies. Also, developing additional performance measures--particularly outcome- based measures--that assess the effects of TSA's efforts in strengthening pipeline security and are aligned with transportation-sector goals and pipeline security objectives could better enable TSA to evaluate security improvements in the pipeline industry. Our upcoming report that will be issued later this year will provide additional details. Over the past two years, TSA has reported having more than doubled the size of its Surface Transportation Security Inspection Program, expanding the program from 93 inspectors in June 2008 to 201 inspectors in April 2010. Inspectors have conducted baseline security reviews that assess, among other things, the overall security posture of mass transit and passenger rail agencies and the implementation of security plans, programs, and measures, and best practices. However, TSA has not completed a workforce plan to direct current and future inspection program needs as the program assumes new responsibilities associated with the implementation of certain provisions of the 9/11 Commission Act by passenger and freight rail systems. Since establishing the inspection program in 2005 to identify and reduce vulnerabilities to passenger rail and ensure compliance with passenger rail security directives, TSA has expanded the roles and responsibilities of surface inspectors to include additional surface transportation modes-- including mass transit bus and freight rail--and participation in VIPR operations. For example, TSA reported that as of April 2010 its surface inspectors had, among other things, conducted security assessments of 142 mass transit and passenger rail agencies, including Amtrak, and over 1,350 site visits to mass transit and passenger rail stations to complete station profiles, which gather detailed information on a station's physical security elements, geography, and emergency points of contact. However, we also reported that TSA faced challenges in the following areas: Balancing aviation and surface transportation priorities: We reported in June 2009 that TSA has reorganized its field unit and reporting structure since establishing the inspection program, and surface inspectors raised concerns about its effect. These reorganizations placed TSA's surface inspectors under the command of Federal Security Directors and Assistant Federal Security Directors for Inspections--aviation-focused positions that historically have not had an active role in conducting surface transportation inspection duties. According to TSA, these changes were designed to support its pursuit of a multimodal workforce and ensure a more cohesive and streamlined approach to inspections. However, we noted that surface inspectors raised concerns that these changes had resulted in the surface transportation mission being diluted by TSA's aviation mission. Among these concerns is that the surface inspectors were being assigned airport-related duties, while aviation inspectors had been assigned surface responsibilities that had affected performance in conducting follow-up inspections to determine progress mass transit and passenger rail systems had made in addressing previously- identified weaknesses. TSA officials reported that they had selected their current command structure because Federal Security Directors were best equipped to make full use of the security network in their geographical location because they frequently interacted with state and local law enforcement and mass transit operators, and were aware of vulnerabilities in these systems. Workforce Planning: At the time of our June 2009 report, TSA did not have a human capital or other workforce plan for its Surface Transportation Security Inspection Program, but the agency had plans to conduct a staffing study to identify the optimal workforce size to address its current and future program needs. TSA reported that it had initiated a study in January 2009, which, if completed, could provide TSA with a more reasonable basis for determining the surface inspector workforce needed to achieve its current and future workload needs. However, in March 2010, TSA officials told us that while they were continuing to work on the staffing study, TSA did not have a firm date for completion. Mr. Chairman this concludes my statement. I look forward to answering any questions that you or other members of the committee may have at this time. For further information on this testimony, please contact Steve Lord at (202) 512- 4379 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 Jessica Lucas-Judy, Assistant Director; Jason Berman; Martene Bryan; Chris Currie; Vanessa Dillard; Chris Ferencik; Edward George; Dawn Hoff; Jeff Jensen; Valerie Kasindi; Lara Kaskie; Daniel Klabunde; Nancy Meyer; Jaclyn Nelson; Octavia Parks; Meg Ullengren; and Lori Weiss. 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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Terrorist attacks on surface transportation facilities in Moscow, Mumbai, London, and Madrid caused casualties and highlighted the vulnerability of such systems. The Transportation Security Administration (TSA), within the Department of Homeland Security (DHS), is the primary federal agency responsible for security of transportation systems. This testimony focuses on the extent to which (1) DHS has used risk management in strengthening surface transportation security, (2) TSA has coordinated its strategy and efforts for securing surface transportation with stakeholders, (3) TSA has measured the effectiveness of its surface transportation security-improvement actions, and (4) TSA has made progress in deploying surface transportation security inspectors and related challenges it faces in doing so. GAO's statement is based on public GAO products issued from January to June 2009, selected updates from September 2009 to April 2010, and ongoing work on pipeline security. For the updates and ongoing work, GAO analyzed TSA's pipeline risk assessment model, reviewed relevant laws and program management documents, and interviewed TSA officials. DHS has taken actions to implement a risk management approach but could do more to inform resource allocation based on risk across the surface transportation sector--including the mass transit and passenger rail, freight rail, highway, and pipeline modes. For example, in March 2009, GAO reported that TSA had not conducted comprehensive risk assessments to compare risk across the entire transportation sector, which the agency could use to guide investment decisions, and recommended that TSA do so. TSA concurred, and in April 2010 noted planned actions. GAO has also made recommendations to strengthen risk assessments within individual modes, such as expanding TSA's efforts to include all security threats in its freight rail security strategy, including potential sabotage to bridges, tunnels, and other critical infrastructure. DHS concurred and is addressing the recommendations. TSA has generally improved coordination with key surface transportation stakeholders, but additional actions could enhance its efforts. For example, GAO reported in April 2009 that although federal and industry stakeholders have taken steps to coordinate their freight rail security efforts, TSA was not requesting another federal agency's data that could be useful in developing regulations for high-risk rail carriers. GAO recommended that DHS work with its federal partners to ensure that all relevant information, such as threat assessments, is shared. DHS concurred with this recommendation and recently stated that TSA has met with key federal stakeholders regarding sharing relevant assessment information and avoiding duplication. TSA has developed national strategies for each surface transportation mode, but using targeted, outcome-oriented performance measures could enable TSA to better monitor the effectiveness of these strategies and programs that support them. For example, GAO reported in June 2009 that TSA's mass transit strategy identified sectorwide goals, but did not contain measures or targets for program effectiveness. Such measures could help TSA track progress in securing transit and passenger rail systems. GAO also reported in April 2009 that TSA's freight rail security strategy could be strengthened by including targets for three of its four performance measures and revising its approach for the other measure, such as including more reliable baseline data to improve consistency in quantifying results. GAO recommended in both instances that TSA strengthen its performance measures. DHS concurred and noted planned actions. Preliminary findings from GAO's ongoing review of pipeline security show that TSA has taken some actions to monitor progress, but could better measure pipeline security improvements. GAO expects to issue a report by the end of 2010. GAO reported in June 2009 that TSA had more than doubled its surface transportation inspector workforce and expanded the roles and responsibilities of surface inspectors, but faced challenges balancing aviation and surface transportation priorities and had not completed a workforce plan to direct current and future program needs. TSA has initiated but not yet finished a staffing study to identify the optimal size of its inspector workforce.
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Recognizing the critical need to address the issue of nuclear waste disposal, the Congress enacted the Nuclear Waste Policy Act of 1982 to establish a comprehensive policy and program for the safe, permanent disposal of commercial spent fuel and other highly radioactive wastes in one or more mined geologic repositories. The act created the Office of Civilian Radioactive Waste Management within DOE to manage its nuclear waste program. Amendments to the act in 1987 directed DOE to investigate only the Yucca Mountain site. The Nuclear Waste Policy Act also set out important and complementary roles for other federal agencies: The Environmental Protection Agency (EPA) was required to establish health and safety standards for the disposal of wastes in repositories. EPA issued standards for the Yucca Mountain site in June 2001 that require a high probability of safety for at least 10,000 years. NRC is responsible for licensing and regulating repositories to ensure their compliance with EPA's standards. One prerequisite to the secretary's recommendation was obtaining NRC's preliminary comments on the sufficiency of DOE's site investigation for the purpose of a license application. NRC provided these comments on November 13, 2001. If the site is approved, then NRC, upon accepting a license application from DOE, has 3 to 4 years to review the application and decide whether to issue a license to construct, and then to operate, a repository at the site. The Nuclear Waste Technical Review Board (the board) reviews the technical and scientific validity of DOE's activities associated with investigating the site and packaging and transporting wastes. The board must report its findings and recommendations to the Congress and the secretary of energy at least twice each year, but DOE is not required to implement these recommendations. DOE has designated the nuclear waste program, including the site investigation, as a "major" program that is subject to senior management's attention and to its agencywide guidelines for managing such programs and projects. The guidelines require the development of a cost and schedule baseline, a system for managing changes to the baseline, and independent cost and schedule reviews. DOE is using a management contractor to carry out the work on the program. The contractor develops and maintains the baseline, but senior DOE managers must approve significant changes to cost or schedule estimates. In February 2001, DOE hired Bechtel SAIC Company, LLC (Bechtel), to manage the program and required the contractor to reassess the remaining technical work and the estimated schedule and cost to complete this work. DOE is not prepared to submit an acceptable license application to NRC within the statutory limits that would take effect if the site were approved. Specifically, DOE has entered into 293 agreements with NRC to gather and/or analyze additional technical information in preparation for a license application that NRC would accept. DOE is also continuing to address technical issues raised by the board. In September 2001, Bechtel concluded, after reassessing the remaining technical work, that DOE would not be ready to submit an acceptable license application to NRC until January 2006. DOE did not accept the 2006 date. Instead, it directed the contractor to prepare a new plan for submitting a license application to NRC by December 2004. DOE's current plan is that, by the end of September 2002, Bechtel will develop, and DOE will review and approve, a new technical, cost, and schedule baseline for submitting a license application to NRC in December 2004. Moreover, while a site recommendation and a license application are separate processes, DOE will need to use essentially the same data for both. Also, the act states that the president's recommendation to the Congress is that he considers the site qualified for an application to NRC for a license. The president's recommendation also triggers an express statutory time frame that requires DOE to submit a license application to NRC within about 5 to 8 months. The 293 agreements that DOE and NRC have negotiated address areas of study within the program where NRC's staff has determined that DOE needs to collect more scientific data and/or improve its technical assessment of the data. According to NRC, as of March 2002, DOE had satisfactorily completed work on 38 of these agreements and could resolve another 22 agreements by September 30 of this year. These 293 agreements generally relate to uncertainties about three aspects of the long-term performance of the proposed repository: (1) the expected lifetime of engineered barriers, particularly the waste containers; (2) the physical properties of the Yucca Mountain site; and (3) the supporting information for the mathematical models used to evaluate the performance of the planned repository at the site. The uncertainties related to engineered barriers revolve around the longevity of the waste containers that would be used to isolate the wastes. DOE currently expects that these containers would isolate the wastes from the environment for more than 10,000 years. Minimizing uncertainties about the container materials and the predicted performance of the waste containers over this long time period is especially critical because DOE's estimates of the repository system's performance depend heavily on the waste containers, in addition to the natural features of the site, to meet NRC's licensing regulations and EPA's health and safety standards. The uncertainties related to the physical characteristics of the site center on how the combination of heat, water, and chemical processes caused by the presence of nuclear waste in the repository would affect the flow of water through the repository. The NRC staff's concerns about DOE's mathematical models for assessing the performance of the repository primarily relate to validating the models; that is, presenting information to provide confidence that the models are valid for their intended use and verifying the information used in the models. Performance assessment is an analytical method that relies on computers to operate mathematical models to assess the performance of the repository against EPA's health and safety standards, NRC's licensing regulations, and DOE's guidelines for determining if the Yucca Mountain site is suitable for a repository. DOE uses the data collected during site characterization activities to model how a repository's natural and engineered features would perform at the site. According to DOE, the additional technical work surrounding the 293 agreements with NRC's staff is an insignificant addition to the extensive amount of technical work already completed--including some 600 papers cited in one of its recently published reports and a substantial body of published analytic literature. DOE does not expect the results of the additional work to change its current performance assessment of a repository at Yucca Mountain. "lthough significant additional work is needed prior to the submission of a possible license application, we believe that agreements reached between DOE and NRC staff regarding the collection of additional information provide the basis for concluding that development of an acceptable license application is achievable." The board has also consistently raised issues and concerns over DOE's understanding of the expected lifetime of the waste containers, the significance of the uncertainties involved in the modeling of the scientific data, and the need for an evaluation and comparison of a repository design having a higher temperature with a design having a lower temperature. The board continues to reiterate these concerns in its reports. For example, in its most recent report to the Congress and the secretary of energy, issued on January 24, 2002, the board concluded that, when DOE's technical and scientific work is taken as a whole, the technical basis for DOE's repository performance estimates is "weak to moderate" at this time. The board added that gaps in data and basic understanding cause important uncertainties in the concepts and assumptions on which DOE's performance estimates are now based; providing the board with limited confidence in current performance estimates generated by DOE performance assessment model. As recently as May 2001, DOE projected that it could submit a license application to NRC in 2003. It now appears, however, that DOE may not complete all of the additional technical work that it has agreed to do to prepare an acceptable license application until January 2006. In September 2001, Bechtel completed, at DOE's direction, a detailed reassessment in an effort to reestablish a cost and schedule baseline. Bechtel estimated that DOE could complete the outstanding technical work agreed to with NRC and submit a license application in January 2006. This date, according to the contractor, was due to the cumulative effect of funding reductions in recent years that had produced a "...growing bow wave of incomplete work that is being pushed into the future." Moreover, the contractor's report said, the proposed schedule did not include any cost and schedule contingencies. The contractor's estimate was based on guidance from DOE that, in part, directed the contractor to assume annual funding for the nuclear waste program of $410 million in fiscal year 2002, $455 million in fiscal year 2003, and $465 million in fiscal year 2004 and thereafter. DOE did not accept this estimate because, according to program officials, the estimate would extend the date for submitting a license application too far into the future. Instead, DOE accepted only the fiscal year 2002 portion of Bechtel's detailed work plan and directed the contractor to prepare a new plan for submitting a license application to NRC by December 2004. Bechtel has prepared such a plan and the plan is under review by DOE. Although we have not reviewed the entire plan, we note that the plan (1) assumes that the program receives the $525 million in funds requested by the Administration for fiscal year 2003, which would be more than $100 million above the funds provided for fiscal year 2002, and (2) work on 10 of the department's 293 agreements with NRC would not be complete by the target license application date of December 2004. Under the Nuclear Waste Policy Act, DOE's site characterization activities are to provide information necessary to evaluate the Yucca Mountain site's suitability for submitting a license application to NRC for placing a repository at the site. In implementing the act, DOE's guidelines provide that the site will be suitable as a waste repository if the site is likely to meet the radiation protection standards that NRC would use to reach a licensing decision on the proposed repository. Thus, as stated in the preamble (introduction) to DOE's guidelines, DOE expects to use essentially the same data for the site recommendation and the license application. In addition, the act specifies that, having received a site recommendation from the secretary, the president shall submit a recommendation of the site to the Congress if the president considers the site qualified for a license application. Under the process laid out in the Nuclear Waste Policy Act, once the secretary makes a site recommendation, there is no time limit under which the president must act on the secretary's recommendation. However, when the president recommended, on February 15, that the Congress approve the site, specific statutory time frames were triggered for the next steps in the process. Figure 1 shows the approximate statutory time needed between a site recommendation and submission of a license application and the additional time needed for DOE to meet the conditions for an acceptable license application. The figure assumes that the Congress overrides the state's disapproval of April 8, 2002. As shown in the figure, Nevada had 60 days--until April 16--to disapprove the site. The Congress now has 90 days (of continuous session) from that date in which to enact legislation overriding the state's disapproval. If the Congress overrides the state's disapproval and the site designation takes effect, the next step is for the secretary to submit a license application to NRC within 90 days after the site designation is effective. In total, these statutory time frames provide about 150 to 240 days, or about 5 to 8 months, from the time the president makes a recommendation to DOE's submittal of a license application. On the basis of Bechtel's September 2001 and current program reassessments, however, DOE would not be ready to submit a license application to NRC until January 2006 or December 2004, respectively. DOE states that it may be able to open a repository at Yucca Mountain in 2010. The department has based this expectation on submitting an acceptable license application to NRC in 2003, receiving NRC's authorization to construct a repository in 2006, and constructing essential surface and underground facilities by 2010. However, Bechtel, in its September 2001 proposal for reestablishing technical, schedule, and cost baselines for the program, concluded that January 2006 is a more realistic date for submitting a license application. Because DOE objected to this proposed schedule, the contractor has now proposed a plan for submitting the application in December 2004. Because of uncertainty over when DOE may be able to open the repository, the department is exploring alternatives that might still permit it to begin accepting commercial spent fuel in 2010. An extension of the license application date to December 2004 or January 2006 would likely preclude DOE from achieving its long-standing goal of opening a repository in 2010. According to DOE's May 2001 report on the program's estimated cost, after submitting a license application in 2003, DOE estimates that it could receive an authorization to construct the repository in 2006 and complete the construction of enough surface and underground facilities to open the repository in 2010, or 7 years after submitting the license application. This 7-year estimate from submittal of the license application to the initial construction and operation of the repository assumes that NRC would grant an authorization to construct the facility in 3 years, followed by 4 years of construction. Assuming these same estimates of time, submitting a license application in the December 2004 to January 2006 time frame would extend the opening date for the repository until 2012 or 2013. Furthermore, opening the repository in 2012 or 2013 may be questionable for several reasons. First, a repository at Yucca Mountain would be a first- of-a-kind facility, meaning that any schedule projections may be optimistic. DOE has deferred its original target date for opening a repository from 1998 to 2003 to 2010. Second, although the Nuclear Waste Policy Act states that NRC has 3 years to decide on a construction license, a fourth year may be added if NRC certifies that it is necessary. Third, the 4-year construction time period that DOE's current schedule allows may be too short. For example, a contractor hired by DOE to independently review the estimated costs and schedule for the nuclear waste program reported that the 4-year construction period was too optimistic and recommended that the construction phase be extended by a year-and-a- half. Bechtel anticipates a 5-year period of construction between the receipt of a construction authorization from NRC and the opening of the repository. A 4-year licensing period followed by 5 years of initial construction could extend the repository opening until about 2014 or 2015. Finally, these simple projections do not account for any other factors that could adversely affect this 7- to 9-year schedule for licensing, constructing, and opening the repository. Annual appropriations for the program in recent years have been less than $400 million. In contrast, according to DOE, it needs between $750 million and $1.5 billion in annual appropriations during most of the 7- to 9-year licensing and construction period in order to open the repository on that schedule. In its August 2001 report on alternative means for financing and managing the program, DOE stated that unless the program's funding is increased, the budget might become the "determining factor" whether DOE will be able to accept wastes in 2010. In part, DOE's desire to meet the 2010 goal is linked to the court decisions that DOE--under the Nuclear Waste Policy Act and as implemented by DOE's contracts with owners of commercial spent fuel--is obligated to begin accepting spent fuel from contract holders not later than January 31, 1998, or be held liable for damages. Courts are currently assessing the amount of damages that DOE must pay to holders of spent fuel disposal contracts. Estimates of potential damages for the estimated 12-year delay from 1998 to 2010 range widely from the department's estimate of about $2 billion to $3 billion to the nuclear industry's estimate of at least $50 billion. The damage estimates are based, in part, on the expectation that DOE would begin accepting spent fuel from contract holders in 2010. The actual damages could be higher or lower, depending on when DOE begins accepting spent fuel. Because of the uncertainty of achieving the 2010 goal for opening the Yucca Mountain repository, DOE is examining alternative approaches that would permit it to meet the goal. For example, in a May 2001 report, DOE examined approaches that might permit it to begin accepting wastes at the repository site in 2010 while spreading out the construction of repository facilities over a longer time period. The report recommended storing wastes on the surface until the capacity to move wastes into the repository has been increased. Relatively modest-sized initial surface facilities to handle wastes could be expanded later to handle larger volumes of waste. Such an approach, according to the report, would permit partial construction and limited waste emplacement in the repository, at lower than earlier estimated annual costs, in advance of the more costly construction of the facility as originally planned. Also, by implementing a modular approach, DOE would be capable of accepting wastes at the repository earlier than if it constructed the repository described in the documents that the secretary used to support a site recommendation. DOE has also contracted with the National Research Council to provide recommendations on design and operating strategies for developing a geologic repository in stages, which is to include reviewing DOE's modular approach. The council is addressing such issues as the (1) technical, policy, and societal objectives and risks for developing a staged repository; (2) effects of developing a staged repository on the safety and security of the facility and the effects on the cost and public acceptance of such a facility; and (3) strategies for developing a staged system, including the design, construction, operation, and closing of such a facility. In March 2002, the council published an interim report on the study in which it addresses a conceptual framework for a generic repository program. The Council plans to issue a final report this fall, in which it intends to provide specific suggestions for incorporating additional elements of staged repository development into DOE's repository program. As of December 2001, DOE expected to submit the application to NRC in 2003. This date reflects a delay in the license application milestone date last approved by DOE in March 1997 that targeted March 2002 for submitting a license application. The 2003 date was not formally approved by DOE's senior managers or incorporated into the program's cost and schedule baseline, as required by the management procedures that were in effect for the program. At least three extensions for the license application date have been proposed and used by DOE in program documents, but none of these proposals have been approved as required. As a result, DOE does not have a baseline estimate of the program's schedule and cost-- including the late 2004 date in its fiscal year 2003 budget request--that is based on all the work that it expects to complete through the submission of a license application. DOE's guidance for managing major programs and projects requires, among other things, that senior managers establish a baseline for managing the program or project. The baseline describes the program's mission--in this case, the safe disposal of highly radioactive waste in a geologic repository--and the expected technical requirements, schedule, and cost to complete the program. Procedures for controlling changes to an approved baseline are designed to ensure that program managers consider the expected effects of adding, deleting, or modifying technical work, as well as the effects of unanticipated events, such as funding shortfalls, on the project's mission and baseline. In this way, alternative courses of action can be assessed on the basis of each action's potential effect on the baseline. DOE's procedures for managing the nuclear waste program require that program managers revise the baseline, as appropriate, to reflect any significant changes to the program. After March 1997, according to DOE officials, they did not always follow these control procedures to account for proposed changes to the program's baseline, including the changes proposed to extend the date for license application. According to these same officials, they stopped following the control procedures because the secretary of energy did not approve proposed extensions to the license application milestone. As a result, the official baseline did not accurately reflect the program's cost and schedule to complete the remaining work necessary to submit a license application. In November 1999, the Yucca Mountain site investigation office proposed extending the license application milestone date by 10 months, from March to December 2002, to compensate for a $57.8 million drop in funding for fiscal year 2000. A proposed extension in the license application milestone required the approval of both the director of the nuclear waste program and the secretary of energy. Neither of these officials approved this proposed change nor was the baseline revised to reflect this change even though the director subsequently began reporting the December 2002 date in quarterly performance reports to the deputy secretary of energy. The site investigation office subsequently proposed two other extensions of the license application milestone, neither of which was approved by the program's director or the secretary of energy or incorporated into the baseline for the program. Nevertheless, DOE began to use the proposed, but unapproved, milestone dates in both internal and external reports and communications, such as in congressional testimony delivered in May 2001. Because senior managers did not approve these proposed changes for incorporation into the baseline for the program, program managers did not adjust the program's cost and schedule baseline. By not accounting for these and other changes to the program's technical work, milestone dates, and estimated costs in the program's baseline since March 1997, DOE has not had baseline estimates of all of the technical work that it expected to complete through submission of a license application and the estimated schedule and cost to complete this work. This condition includes the cost and schedule information contained in DOE's budget request for fiscal year 2003.
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The Department of Energy (DOE) has been investigating Yucca Mountain, Nevada, as a possible repository for highly radioactive nuclear waste. In February, the Secretary of Energy endorsed the Yucca Mountain site, and the President recommended that Congress approve the site. If the site is approved, DOE must apply to the Nuclear Regulatory Commission (NRC) for authorization to build a repository. If the site is not approved for a license application, or if NRC denies a construction license, the administration and Congress will have to consider other options. GAO concludes that DOE is unprepared to submit an acceptable license application to NRC within the statutory deadlines if the site is approved. On the basis of a reassessment done by DOE's managing contractor in September 2001, GAO believes that DOE would not have enough time to obtain a license from NRC and build and open the repository by 2010. DOE lacks a reliable estimate of when, and at what cost, a license application can be submitted or a repository can be opened.
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